Past Lessons for Fu­ture Growth

Re­view­ing prior aca­demic and in­dus­try re­search can un­veil com­pelling in­sights on how to suc­ceed now, Glenn G. Kautt says.

Financial Planning - - CONTENT - By Glenn G. Kautt

Re­view­ing prior aca­demic and in­dus­try re­search can un­veil com­pelling in­sights on how to suc­ceed now.

Think of your busi­ness as an in­vest­ment port­fo­lio, where you’re striv­ing to po­si­tion it on the edge of the ef­fi­cient fron­tier.

TWO DIF­FER­ENT YEARS-OLD RE­PORTS from in­dus­try re­searchers and the aca­demic world of­fer pre­dic­tions and analysis that are sur­pris­ingly suited for to­day’s world. And the cur­rent gen­er­a­tion of de­ci­sion-mak­ers would be wise to heed those lessons.

Har­vard Uni­ver­sity busi­ness his­to­rian Al­fred Chan­dler wrote “The Vis­i­ble Hand” in 1977, tak­ing his cue from the in­vis­i­ble hand con­cept Adam Smith in­tro­duced in the “Wealth of Na­tions” two cen­turies ear­lier.

Chan­dler’s book de­scribed how the de­fin­able, con­trol­lable fac­tor of man­age­ment ex­erted a more pow­er­ful in­flu­ence than free-wheel­ing, in­vis­i­ble mar­ket forces. He showed that man­agers run­ning large en­ter­prises ex­erted greater in­flu­ence in de­ter­min­ing size and con­cen­tra­tion in Amer­i­can in­dus­try than cap­i­tal or mar­ket forces.

With Chan­dler’s find­ings in mind, I re­searched our in­dus­try and con­sid­ered my busi­ness fu­ture. First con­sid­er­a­tion was an­other re­port from a mu­tual fund called Undis­cov­ered Man­agers that fore­cast a de­cline in profit mar­gins and con­sol­i­da­tions. (Undis­cov­ered Man­agers sought out un­ap­pre­ci­ated busi­nesses ini­tially, and has evolved into the Undis­cov­ered Man­agers Be­hav­ioral Fund, which se­lects small-cap stocks based on be­hav­ioral fi­nance fac­tors.)

I was struck by sev­eral things in their re­port. First, the prin­ci­pal au­thor was bright, fo­cused and well-ed­u­cated. Also, the re­port’s mes­sage was in agree­ment with the find­ings of a long line of re­search on busi­ness evo­lu­tion, in­clud­ing Chan­dler’s as­ser­tion about the power of man­age­ment in deal­ing with busi­ness chal­lenges.

Still, the re­port ig­nited a firestorm of con­tro­versy at the time be­cause it stated profit mar­gin com­pres­sion, firm con­sol­i­da­tion, the emer­gence of niche prac­tices and a host of fi­nan­cial woes for small prac­tices were com­ing. To­day, the same forces are still at work.

Undis­cov­ered Man­agers fol­lowed up a year later with a pre­scrip­tive re­port, in­clud­ing their recipe for suc­cess: Find a niche or get big. The whole thing sort of dis­ap­peared after that, but that does not mit­i­gate the over­all mes­sage for to­day’s busi­nesses.

AN­A­LYZ­ING PROFIT MAR­GINS

A sub­stan­tial amount of busi­ness re­search shows max­i­mum prof­its de­pend on busi­ness strat­egy, or­ga­ni­za­tional struc­ture and where the firm fits in the mar­ket­place.

But know­ing the dif­fer­ence be­tween strat­egy and op­er­a­tions is key. At­tempt­ing to im­prove ser­vice qual­ity and re­duce the cost of that ser­vice fall un­der op­er­a­tional ef­fec­tive­ness (mov­ing from A to B on the Strat­egy vs. Op­er­a­tions chart). On the other hand, the de­ci­sion to of­fer high-qual­ity ser­vice at a high price or lower qual­ity ser­vice at a lower price is a strate­gic po­si­tion­ing choice (mov­ing from P to Q on the chart).

Think of your busi­ness as an in­vest­ment port­fo­lio, where you’re striv­ing to po­si­tion

it on the edge of the ef­fi­cient fron­tier. Some de­ci­sions move you around, to­ward that fron­tier or away from it. Sim­ply put, you can’t op­er­ate two very dif­fer­ent busi­nesses op­ti­mally us­ing the same op­er­a­tional model.

Ex­pect­ing higher prof­its with­out un­der­stand­ing where you are in your mar­ket­place is a waste of time. An­a­lyz­ing profit mar­gins must be done in the con­text of your or­ga­ni­za­tional struc­ture and prof­itabil­ity drivers. Dif­fer­ent or­ga­ni­za­tional mod­els with dif­fer­ent profit mar­gin struc­tures will work fine — if you know which one is right for you.

Com­pe­ti­tion will force the in­ex­orable drift from firms that once prac­ticed cut­tingedge op­er­a­tion to be­com­ing com­modi­tized. If your firm con­tin­ues to do the same thing year after year, you’ll find your­self be­com­ing less com­pet­i­tive and prof­itable. Here’s what we de­cided at our firm:

• Study­ing in­dus­try sur­veys, we rec­og­nized we were above av­er­age mar­gins for our in­dus­try.

• We con­firmed how we op­er­ate in the fi­nan­cial plan­ning mar­ket: an es­tab­lished, knowl­edge­able firm based on a com­par­i­son of our com­pany’s op­er­at­ing prac­tices and fi­nan­cial char­ac­ter­is­tics.

• We un­der­stood we could not com­pete with the high-vol­ume/low-mar­gin firms un­less we changed or­ga­ni­za­tion­ally to be ex­actly like them.

• We re­al­ized we could not com­pete as high-mar­gin or high-vol­ume us­ing the same or­ga­ni­za­tion.

• We saw that do­ing noth­ing would start our drift to be­com­ing com­modi­tized. After that bit of self-analysis, here was our re­ac­tion. We made a long-term strate­gic de­ci­sion to stay in the fore­front of the in­dus­try tech­ni­cally and in­tel­lec­tu­ally. Our ad­vi­sors would be­come ex­perts, pub­lish­ing pro­fes­sional contributions in jour­nals and white papers based on solid re­search.

Then we’d share our ex­per­tise by writ­ing and speak­ing about it. We made clients and prospects aware we were rec­og­nized ex­perts, back­ing that up with prac­ti­cal ap­pli­ca­tion of our skills. And we added more ser­vices such as 401(k) ser­vices and tax prepa­ra­tion as stand-alone profit cen­ters, and less-costly/less-so­phis­ti­cated ser­vices for smaller clients in an­other profit cen­ter.

GET REAL

Our in­dus­try con­tin­ues to change. Th­ese changes are typ­i­cal of ev­ery ma­tur­ing in­dus­try, and there’s not much you can do about the big trends. But, there is plenty you can do with your busi­ness to take ad­van­tage of th­ese changes if you re­al­ize where you fit in the mar­ket­place and op­er­ate ac­cord­ingly.

To do so, you need to get very real with your busi­ness. Hire an ex­pert to help de­ter­mine where you are in the mar­ket­place and where you should be head­ing.

Next, con­sider how to get there. “Should you be mov­ing from a Q to a P firm, or fo­cus on mov­ing from A to B on the chart? Should you con­sider com­bin­ing with an­other firm to change more quickly?

And bear in mind, it is your to­tal prof­its, not profit mar­gins, that are im­por­tant. Take a les­son from the past: How you in­crease prof­its de­pends on com­pany or­ga­ni­za­tion, which de­pends on your strate­gic goals and vi­sion for your busi­ness.

If your firm con­tin­ues to do the same thing year after year, you’ll find your­self be­com­ing less com­pet­i­tive and prof­itable.

Max­i­mum prof­its de­pend on busi­ness strat­egy, or­ga­ni­za­tional struc­ture and where a firm fits in the mar­ket­place.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.