[ad_1]
Question: Why do once-successful businesses fail?
Answer: They don’t re-value their core revenue drivers often enough.
If you’ve ever built a business from scratch, you know the early days require intense prioritization. You have to identify the big rocks, the high-level bits and get them right.
As time goes on, you fill in the aggregate around those big rocks to strengthen and support them—keeping your advantage by getting in front of as many future risks as possible. Later, many of those medium-sized pieces of aggregate will become entire departments, each with its own subset of objectives and strategies to further enhance and calcify these supporting structures.
However, no business operates in a completely static, predictable environment. No matter how perfectly your offering matched the environment and buyers back when you started, over time, the white space between those three elements (buyers, environment and offerings) emerges and widens.
This is where value leakage lives.
Of course, you can and should address these changes by continually improving your offerings. But if you were to respond to every emerging trend with the required investment to capitalize on it fully, you would surely go bankrupt. Many of these “trends,” in effect, end up fizzling away into the annals of history. And unfortunately, the trends that truly disrupt an established business are usually identified only in hindsight.
In my experience, being unable to predict the future isn’t a failure. But it is a failure to not re-value your offerings at the moment a new future becomes predictable.
We all love underdog stories, the ones where only a few people saw a disruption coming. And there are, rightfully, cautionary tales of calcified incumbents who never saw a business tsunami coming at all. But it’s easy to be seduced into concluding that everything is predictable and ignore the dynamic nature of the environment in which we conduct business.
Over the past decade, I’ve sat with dozens of Fortune 500 executives as they evaluated and made tough choices for the future. I’ve observed a noteworthy and recent drift firsthand—often to these leaders’ own chagrin and their companies’ detriment. Leaders are spending less and less bandwidth securing the fundamentals of their products and services and more on steering back and forth in an effort to keep up with endless external expectations and internal performance indicators.
In other words, there’s a pull to spend too much time managing perceptions and messaging rather than developing and ensuring the success of their long-term core offerings. This plays out as either attempting to satisfy an unrealistically broad stakeholder base or trying to avoid being seen as the one who got it wrong through the lens of historical hindsight.
As a result, many pursue a multitude of incoherent product strategies simultaneously. In the worst cases, companies knowingly head toward an inconvenient cliff in their business model without fomenting sufficient action among the larger team to correct their course. In previous decades, these “destined to fail” unit economics would have been exposed, but many of these flaws are masked by the rising tide of capital valuations.
Tides cannot rise indefinitely. Sooner or later, receding waters will expose the companies that have chosen to risk swimming naked. Some are already past the point of being able to change their fate.
Unfortunately, even if your business didn’t contribute to this situation, we’ll all face the same challenging environment when the tide finally does go out.
For these reasons, periodic re-valuing is critical. Here’s what’s needed:
1. Distill down the 80/20 of where—and for whom—you create the most monetized value.
Make sure this is empirically validated, not assumed or prescribed.
For example, American Express unabashedly positions its offerings as only being “worth it” for select customers who are valuable to American Express. Though they consistently rank last in the U.S. for the total number of issued credit cards, when viewed from their core revenue driver—total purchase volume—American Express slots in at a close second to top-ranking Chase Bank, despite having less than half the number of cards in circulation.
Or take Mike Bergthold, a highly seasoned turnaround executive. Bergthold chuckles at how, after 30 years, he has yet to find a distressed company that didn’t have low-hanging fruit available just by optimizing its existing customer base.
This is true even in fringe cases, like the restaurant chain whose management insisted there were no common traits among their top customers. After reviewing the largest receipts from a recent weekend at the restaurant’s flagship location, it turned out that 8 out of 10 high-value tickets belonged to “regulars who brought in guests.”
It’s not a question of whether you have an 80/20 distribution in your most valuable customers, but rather, “Does everyone in your business know who they are?”
2. Map the small handful of “what’s required” non-negotiables that deliver your value.
Most teams are constrained due to how they were originally organized. They’re stuck on “How can I make it better?” and not asking, “What do we really need today?”
Legendary microprocessor engineer Jim Keller asked this very question when creating the bottom-up design for Tesla’s autopilot hardware. He has described what he sees as the core challenge:
“People are ‘how’ constrained; I have this thing, and I know HOW it works. And then little tweaks to that will generate something. As opposed to WHAT do I actually want? And how do I figure out how to build it? It’s a very different mindset.”
There are just too many opportunities to make things better, calling for teams’ attention, yet there’s rarely the internal bandwidth or budget to address or optimize them all. However, by discerning the true “whats,” your teams have no other option than to create the value that generates revenue.
3. True up your company operations in areas with large deviations.
Ongoing improvements are often measured in bits. But with re-valuing, if you see an option to save three percent, look harder for where you’re wasting 30 percent. Trust me, it’s there.
Here’s one extreme case: When a young Carl Icahn took control of a struggling company that manufactured rail cars, he fired 12 floors of managers in the New York office after talking to the COO, who oversaw their actual revenue-producing products in St. Louis.
To his great surprise, firing floors of managers had no unintended consequences. It was as if these managers had never produced any value outside the four walls of their own office building.
In modern times, Silicon Valley investors watched a similar situation: Would Elon Musk firing all but 30 percent of Twitter’s staff backfire? It appears it didn’t.
This illustration speaks to what most successful people already know: when you don’t proactively choose to prune off small “perfectly fine” parts of your business on a regular basis, you’re choosing to accumulate deadwood.
Now is always the time to get out in front, catch up from behind, or catch the next wave. No matter how well you manage your business, given time and market pressures, waves of narrowing budgets will inevitably come crashing down on us all. Without periodic and proactive re-valuing of your core revenue drivers, a new future you’re no longer in control of becomes inevitable.
[ad_2]
Original Source Link
