The Three Legs of an Enduring Business

Screen Shot 2013-12-30 at 11.08.20 AM While I am an advocate of an annual planning process, there is often a common mistake made with strategic initiatives-they focus too often on the programs and ignore the most important strategy of all-ensuring it has the foundational elements of what builds an enduring business.

Camping with my dad when I was young provided me the framework to understand this. The campsites we stayed at rarely had level surfaces and demonstrating with a portable campstool, my dad showed me how a three-legged stool always finds its level. Sure enough, as I tested the campstool I found that no matter how uneven the ground, it did not rock when I sat on it. The analogy of the three-legged stool has stayed with me over the years and having since experienced the turbulent and often uneven landscape of the free market in the aim of building an enduring business, I have found that it applies here as well.

There are three principles that are crucial to enduring businesses, that when well understood and internalized by the organization, will allow the business to withstand any economic climate. They are as follows:

  1. Purpose - A well-understood and communicated explanation of why the business exists (which by the way, is not about the money), and more important, why it matters, both to the business owner and to the customer. One could even argue that the latter is more important than the former. To underscore this, consider the following: Koch Industries built the largest privately held business in America based on the principle that understanding what creates the greatest value for their customers is the most important thing. The first and most important element of its MBM® (Market Based Management) Framework is, "where and how...the organization can create the most long-term value for customers and society." If it is good enough for Koch in building a $100B+ business, it is good enough to work in our businesses as well. Notice the emphasis on the long-term...something that often is lost in the noise of deal making.
  2. Competence - The business must be great at what it does, and by my definition is the combination of talent, learned skills, and scar tissue from surviving a fire walk-leading the organization through a brush with mortality. To gain competence in your business, you must first be willing to sacrifice for it, be skilled enough to run faster and smarter than the competition, and then have the good fortune of having lived through the fire walk before you truly acquire competence.
  3. Business model - This one is the most fickle of the three. While the first two can endure for the life of a business, the business model may not. Some stand the test of time, many don't. A good model one year can be extinct the next, and often for reasons that are beyond the control of the entrepreneur.

To illustrate this point, I'll draw on an example of a good friend who had opened a retail PC business in his rural hometown about ten years ago. As a savvy engineer and self-proclaimed technology geek, he enjoyed helping people make technology decisions for their personal and business use. The small town he lived in did not have a local PC store or a reliable resource for setting up and troubleshooting home and small business networks. Thus, he opened a retail outlet for both and was soon enjoying a growing patronage. Not long after, a greeting card shop opened next door and he watched curiously to see how long the business would last. As his business continued to build, he began experiencing all the implications of a retail business; warranty returns, damaged product and an occasional fussy customer, the last of which, by his own admission, he was wholly unprepared.

All of this put pressure on the slim operating margins of the PC's that also depreciated quickly on the shelf due to the short lifecycle of the rapidly changing PC technology. Adding to this the hassles of hiring, firing and managing employees, he began to question whether he had it in him to keep it going. As he had also shared, the business was never intended to be end-all, but rather a means to provide a lifestyle he could enjoy while the operation ran largely on its own momentum. It was about that time that he noticed the traffic next door had grown to a steady stream. Staring at his own inventory of expensive computers that were already being discounted, he experienced the proverbial epiphany by 2x4-he didn't have the right business model.

Unlike his PC and service products that were expensive, complex, and prone to failures or repeated service calls, the card shop next door had inexpensive product, virtually non-existent failures, higher margin and long shelf life.

"I finally had to admit that no matter how well the business was managed," he said soberly, "if I don't have the right model, I'll never get to where I want to go. And I didn't have it."

As he realized, defining the right strategy for your business must include an assessment of your business model, under harsh light of what Jim Collins (Built to Last, Good to Great) calls, "the brutal facts of reality." If you do not have the right business model, you must come to terms with that. No amount of wishing or good intentions, or IT initiatives will change the reality of that situation. My friend sold his business within six months of realizing what was missing in his strategy.

Best understood by performing a Strategic Alignment Assessment, there are some questions, however, that can be answered to begin understanding whether your business has these three foundational elements: 1) Do you or your organization understand what it is passionate about? Do your customers know it? Why does it matter? Again, this is not about how much money the business is making. 2) Is the business good at what it does? Has it defined its Circle of Excellence? Has it learned to say no, to focus on what it can say yes to? Has it experienced a do-or-die moment and lived to tell about it? 3) Does the business accelerate with scaling? Are the margins defendable? What is the strength of its position between the supply and demand? Does it have high capital requirements? A Porter's Five Forces analysis can also be very helpful here.

However you or your organization arrives there, the combination of the three foundational principles will ensure you are building an enduring business to stand the test of time.