The only way to have a successful business is to have a successful product, and investment in change is crucial.
The economy, stupid” was a famous campaign mantra that helped elect Bill Clinton as the US President in 1992. In the business world, this could be stated as, “The product, stupid”. A viable product or service is what dictates the success of a business, not the sophisticated financial management, the ‘who’s who’ board of directors, the prestigious PR, nor even having classy auditors and lawyers.
As an aside, but related, HQ flagpoles, unrecognisable sculptures in the lobby, advertisements boasting of industry awards, titled parking spaces for management, sponsoring of unrelated prestige events (such as the chairperson’s hobby like opera, horse racing, or arty stuff) are all signs of trouble to come through lack of direction. It was reported that the directors of Enron, the failed US conglomerate, spent a board meeting discussing the interior colours of a new corporate jet. No product development in any of this.
The mantra for business success has never changed, though often unrecognised. Anecdotal evidence from experienced people suggests that a business, even a run-of-the-mill business, should consciously devote specific expenditure equivalent to perhaps 5% of annual sales keeping close to customers and researching the marketplace. This in order to determine quickly and on a continual basis how the product or service can be improved, enhanced or replaced. In other words, spending focused money to stay in business.
The business world moves fast; often very fast. There is hardly a product or service that has a life – without significant change – of more than five years. Obsolescence, technological improvement, environmental concerns, regulatory or legislative demands, changes in consumer or industry habits or a new competing or replacement development – all of these elements are moving at a bewildering pace. Unexpected developments or competition can show up almost overnight in some sectors. Fast, international transport and communication means competition from across the world.
Much of the change is driven by the application of technology. For example, emails supplanting physical mail, high street retail undermined by e-commerce, cameras made obsolete by smartphones, e-books, internet banking; the list is long. Each change further ripples out to underlying suppliers. For example, printing, previously a very major industry, is a hidden casualty of change. Printed directories, cheque books, paper currency, postage stamps, catalogues, magazines, newspapers, airline tickets, diaries etc. are almost obsolete. Conversely, on the other side, retail e-commerce has generated increased demand for packaging. However, this, too, is an industry pressured to change by environmental concerns on waste and use of plastic.
Change can be categorised as evolution or revolution. Evolution is where the underlying product or service is largely constant as to purpose but changes presentation, usage or direction. For example milk is milk, but the end product on the supermarket shelf constantly changes in variety, packaging, food regulatory standards, and so on. Similarly, a truck as simple transport for goods is nevertheless evolving through tracking technology, emission controls, regulatory changes, fuel efficiencies and now electric or hybrid trucks on the horizon. Constant investment in change is always the keynote.
Revolution is where an existing product or service is supplanted or seriously threatened by a new development or way of doing business. Even a simple process such as hiring a taxi or delivering restaurant food has been revolutionised, while services such as Airbnb poses a threat to aspects of the hotel industry as well as distorting residential lettings in cities.
‘Disruption’ has entered the lexicon of business, almost invariably associated with technology. Disruption may be defined as an intrusion, usually unexpected, that impacts on a sector’s way of doing business; or indeed becomes the entire displacement of a product or service. The due diligence when buying or selling a business now keeps a wary eye on vulnerability through disruption.
The leading reason for business failure is an inability to anticipate and address change. Foremost in this is the product or service. The renowned accountant, Laurence Crowley, greatly experienced in business failures and reconstructions, told me that signs of imminent failure – through not addressing change – are always there but not recognised in time.
Directors should watch out for flagpoles and sponsored opera as evidence of losing direction. More importantly, as a simple test, ask yourself when was the last time the executive management made a detailed presentation to the directors as to anticipating and planning the future of the business products or services? In today’s world, financial figures alone don’t tell you the story.
Des Peelo is author of The Valuation of Businesses and Shares, 2nd edition, published by Chartered Accountants Ireland.
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