business value drivers e-book

Business Value

Drivers

By James Price, BBM

2 jpabusiness.com.au +61 2 6360 0360

Table of Contents

Business Value Drivers .................................................................................................... 3 What are the key value drivers in business? ..................................................................... 3 How to build value with customers ....................................................................................... 4 How to build value with suppliers ......................................................................................... 7 Tips for managing relationships with suppliers .......................................................................... 9

How to build value with your people ................................................................................. 11

Disclaimer: The information contained in this e-book is general in nature and should not be taken as personal, professional advice.

jpabusiness.com.au +61 2 6360 0360 3

Business Value Drivers By James Price, BBM

In this e-book we take a look at Business Value Drivers:

• what they are; • why you need to focus on them, and • how to ensure you’re business is not just successful today, but that it

builds value over time.

What are the key value drivers in business? Value comes in two different ways:

1. During the course of operations, and 2. At the end, when the owner sells or passes on the business.

Many people run successful and efficient businesses, but don’t take the time to sit back and ask ‘what is actually driving the value in my business?’

Understanding those value drivers and focusing energy on them is the difference between having a business that runs efficiently today, and one that builds value over time.

So, what are the value drivers in business? They relate to three key parts of the business:

• Customers • Suppliers • Your people


How to build value with customers Driving business value in relation to customers means ensuring you have a quality customer base.

You need to consider:

1. How often do clients purchase from you and what is the ticket size of their purchase? The more often a customer purchases and the larger the ticket size in isolation, the higher the quality of that customer.

2. How diverse is your customer base? A firm with $1M revenue and 10 customers is a much stronger proposition than a firm with $1M revenue and three customers.

3. To what extent do those customers pay for what they buy? A quality customer is one who pays on time. If half of your customers are in arrears 90 days you have to question whether you have a quality customer base.

4. What market are your customers operating in? It’s no good having customers in a market that is suffering, unless you have a proposition that can make money in that situation. You must look at both the quality of the customer and the quality of market they operate in.

Now that we can recognise a quality customer base, how do we get one?


Don’t take the customer for granted

There is a risk that people in business will just sit back and expect customers to come to them.

For a start, no one has to deal with you, so don’t take the customer for granted. That’s old business economics.

Secondly, by sitting back and thinking ‘business is good – I’m busy – I’m servicing customers’, you’re not designing the outcome you want. You’re allowing the customers to design the outcome they want.

It’s important that customers’ needs are met, but it’s also important that the business’s needs are met.

Planning

The key is to have a deliberate strategy for building a quality customer base. Ask yourself:

• What is my business providing to the market? • What’s the size and geographic spread of each market? • What are the customers’ needs in each market? • What’s the special thing I’m bringing that no one else can bring i.e.

what’s my point of difference – service, product, etc…?

Now do a mud map of the potential customers that would see value in your proposition.

Consider how you can penetrate that market, but don’t seek market share for the sake of it. It must be profitable market share.

Once you’ve figured out what your customer portfolio needs to look like, you need to figure out what business model will deliver to that.

Building a customer base is about business development, but it’s also about understanding customer needs. It’s about delivering service; under-promising and over-delivering.


Think strategically

When you’re building a customer base, you’re building a portfolio. That portfolio needs to provide you with a return in the short term, medium term and longer term. It needs to contain customers of different sizes and shapes and from different markets, that can offer a portfolio of different revenue streams.

As a business owner you must take the time to sit back and look at your customer base analytically. You may see ‘I’ve got a gap here’, or ‘I’ve got business lines a, b and c, but all my customers are in business line c – how do I add diversity?’

This sort of thinking makes you more attuned to the environment and the markets you’re working in, rather than the business you’re working in.

It’s about being deliberate in getting a diversity of quality customers.


How to build value with suppliers Suppliers is another key value driver in business.

Suppliers make up a large part of the cost of doing business, but more importantly they assist in providing consistency of whatever product or service you deliver.

The degree to which you’ve got that continuity locked down will allow you to drive more value in your business. If you’re servicing a customer and you know you can be predictable and deliver at a certain time, then you’re much better at pitching to that customer against a competitor.

Critical as a business driver of value is to have a set of suppliers who are:

• predictable; • provide quality, and • deliver to a specification. (That ‘spec’ might be price based, time

based or quality based, or it might be all of those.)

Some businesses can consider supply as simply a cost game. For example: ‘I want X amount of cardboard boxes to pack my product in to send overseas. As long as I have them here every month I don’t care what they look like.’

But for other businesses, such as those involved in distribution, supply continuity is critical. If they can’t rely on supply then they can’t service the customer according to the proposition they put in front of them.

Ensuring predictability of supply

There are a couple of ways to ensure consistency and predictability of supply. One is to have a diversity of suppliers but, if this is not possible for your proposition, then it is critical to develop relationships with your suppliers.


Diversity

If you choose to have a diversity of suppliers then you’re not beholden to anyone.

You may choose to focus on sales and distribution rather than quality, and secure your product from three or four manufacturers in different markets, locations or based on competitive sourcing agreements.

This way you are managing your supply to protect against market and geographic risk and to secure volume to distribute.

Develop relationships

Another approach is to develop relationships with single suppliers. This relationship will be much more than simply a transactional situation with a supplier, where you say ‘I want X and I’ll pay Y and that’s it’.

It’s a deeper relationship where over time that supplier gets to know your requirements and there is predictability about how to deliver to your needs.

If you have predictability on supply then it’s easy for you to provide predictability for customers. If you don’t have predictability on supply side, then you have to make all sorts of decisions to ensure your customer is not burned from bad experience.

For example, if you have no predictability about dealing with your suppliers, then typically you will hold stocks of components because you can’t rely on your manufacturer to deliver them on time.

Holding stocks means you have to put working capital value in those stocks in order to satisfy your customers’ needs. You will then have to cost the amount of those stocks into the price that you’re passing on to your customer.


So the customer loses and you lose, but the manufacturer still does whatever they want.

That’s an unbalanced value chain, because you haven’t dealt with the value driver relating to suppliers.

You’ve chosen as a business owner to take on the risk yourself rather than saying ‘Right Mr Supplier, how can we reach an arrangement where we share the risk on this? You give me more predictability and for that predictability I may be able to share some of the cost of holding stock.’

Tips for managing relationships with suppliers

Size matters

Some suppliers are easy to deal with and as a private business person you can develop that relationship over time. Other suppliers are big multinational companies that you, as a business, don’t mean much to. So you’ll be able to manage your relationship depending on the size and shape of the supplier and your history with them.

Lock it in

It’s very important that you document any supplier relationship that is significant in terms of what your business provides to customers. It may not be a heavy duty contract, but it is an understanding of the continuity you need in terms of the product you’re providing to your customers.

Mind your supplier’s business

If your business is beholden to one supplier and that supplier is having difficulty, then you can leverage the strength of that supplier by taking a closer interest in what they do.


If you’re a significant part of that supplier’s business, then you may be able to influence and even control what’s going on with that supplier.

Often poor supply issues are left unaddressed because the old adage in business is ‘focus on what you can control, not on what you can’t’.

But with supplier relationships you can leverage them if you develop a relationship and look at ways of balancing the risks between the supplier and your business.


How to build value with your people I don’t wish to prioritise the key value drivers of customers, suppliers and people, but if I had to, I would say that ‘people’ is number one.

Why?

Because ultimately every business relies to varying degrees on humans. And that’s a good thing, because it is human innovation and ingenuity that provides point of difference.

Building value within a business is about ensuring that your internal resource capability – your people – is able to meet your customers’ expectations ongoing, regardless of a change in ownership.

People are critical in driving value in a business, but they can also be critical in detracting from business value.

Succession planning

Family businesses are very common models but often families don’t think about – or talk about – succession.

For example: ‘If I as a family member was to get a life-threatening illness, or if I had to spend all my time on personal issues because someone else was sick, how would I be replaced and what impact would that have on the business?’

These hard and confronting questions are often put at the back of the filing cabinet and not discussed or resolved.

But as a value driver for the business, they are critical questions.


Management is not the answer

The strength of small and medium-sized business within Australia often comes down to single or joint owners that drive the business themselves.

So I’m not suggesting that every business has to be under management, that the owners shouldn’t work in the business, or that they should sit aside and hypothesise about the future while their businesses are managed, because many, many successful businesses are driven by owners.

But the key issue is how do you get the value driver of people in balance so that the business is not solely dependent on that owner?

An imbalanced people portfolio

If you’re the main honcho controlling and driving your business, you need to look around and say: ‘Right, if I wasn’t here, who could I rely on to drive this on my behalf?’

If the answer is ‘I don’t have anyone’, then you have an imbalanced people portfolio. (And you’re not alone – it’s a common problem in small and medium-sized businesses.)

You either accept that you’re devaluing the business in the long term – even though you may be getting value today – or you find someone.

Sometimes there is an existing staff member who can be developed, not to replace you, but to take account of the things you do to drive the business.

Identify the gaps they need to have filled and develop a professional development and training program that allows them to develop their expertise so they can be the second line of defence.

It’s a positive for your staff member and it should be positive for the value of the business, because you’re focusing on a value driver.


A second line of defence

Creating a second line of defence requires you to think about the culture you’ve created around considering people’s roles and responsibilities and how they’re measured, managed and developed within the business.

If you’re business is large enough, you may be able to develop a team who can ensure the activity of the business can be maintained if you are suddenly taken out of the picture.

It doesn’t mean that every person working in the business has to be a jack of all trades, but it means there is a second line of defence in the event that a critical role becomes vacant.

The term ‘team’ also needs to be considered in the broadest sense, because often that team involves suppliers, contractors, people associated with the business but not necessarily working in it, and of course staff.

Write it down

In many small businesses there are various procedures and manuals and ways of doing things, but all too often these procedures are not codified and documented within the business.

Often they are codified and documented within key people’s heads!

Think about the buyer’s perspective

When it comes to selling your business, one of the first things a prospective buyer will ask you is: ‘And what do you do?’

This is a critical pressure test for value in the business and a critical factor in the buyer’s decision to invest in your business.


The buyer is thinking: ‘If I buy this business and walk in tomorrow:

• Who will do all the owner’s work? • Will I have to recruit people to cover off on what the owner was doing

or is there a team in place who can drive the business? • If the owner leaves what’s going to happen to the customers and

suppliers? Do they have relationships with other staff members within the business?

• What’s going to happen to the revenue, the margin, the earnings?’

Again, predictability is critical.

You can’t give the prospective buyer a guarantee that revenue will stay the same, but you can show them the quality of your business value drivers: the quality of your customer portfolio, the quality of your supplier portfolio and the quality of your people portfolio.