What are the key factors to look for in your organisation or even when considering acquisitions or growth?
This has been a recurring question arising from our recent conversations with CEOs and managers and one worth exploring further.
In our PURPOSE, PEOPLE & PERFORMANCE model – the very first step – PURPOSE – is to consider the Environment (the other two are Comparative Competence and Value Creation).
It is worth noting that this is a very simplified model and from quite a narrow perspective. Secondly, a one-dimensional pursuit of profit can be dangerous when determining organisational PURPOSE.
As Peter Drucker so eloquently put it, organisations do not exist to make a profit, instead, they make a profit so they can exist.
Considering the above, the Environment test we use looks at: Recurring Revenues; Sustainable Earnings; Under-Managed / Disruptable Industry or Organisation; and Scalability.
1. RECURRING REVENUES
An operational model with recurring revenues is far more attractive than one-off transactions. It allows for foundational development and constant growth.
Recurring revenues are reliable. They shift customer engagement from a transaction to a relationship. When you have a relationship, you have strong communication and feedback loops. Your model is constantly tested and improved. Notably, the recurring model is sticky – churn is lower, and the competitor is disadvantaged.
This model has been more prevalent recently with the ubiquitous growth of micropayments and subscriptions. Whilst this is mostly evidenced online and in digital commerce, the opportunities elsewhere are endless.
2. SUSTAINABLE EARNINGS
By sustainable earnings, we refer to margin.
High earnings are preferable to low earnings. Where an industry or market has the potential for high earnings, it allows you to service your customers better and build agility. High-margin environments attract competitors, and agility is critical to stay ahead of the curve.
Sustainable earnings may also include low-price markets or low-cost products and services targetting the bottom of the pyramid. Whilst it requires a different mindset, such as price-based costing – the principles are the same.
Developing comparative competencies to exploit either of these is the key.
3. INDUSTRIES OR ORGANISATIONS THAT ARE UNDER-MANAGED OR OPEN FOR DISRUPTION
Under-managed organisations or industries offer opportunities for good management to excel.
There are many ways to profile an environment or organisation to test for under-management or bad management – limited entities or competitors in a market; qualitative factors such as low NPS (net promoter scores with customers) are good starting points. As a rule, we also consider the non-customer for insights.
Consider the furniture industry, for example; not long ago, buying a lounge meant going into a showroom, picking something you liked and then waiting weeks, if not months, for delivery. The industry was under-managed – it could not stock inventory volumes due to costs and changing trends. Then came IKEA with an innovative solution – pick it up immediately as a flat-pack and assemble it yourself…alternatively IKEA can provide someone to deliver and put it together for you.
Finally, every organisation must consider scale and earnings growth, especially in the medium and long term.
This may result from Market Penetration (growing current markets with current products/services), Market Development (new markets for current offerings), Product/Service Development (new offerings to the current market) and Diversification (new markets and new offerings).
In all pursuits, however, ensuring sustainable earnings growth must be the ultimate goal. Sometimes, in our work, we do see organisations seeking revenue growth without consideration of long-term profitability.
It could result in declining revenues or, at worst, endangering the organisation if mismanaged.
When evaluating PURPOSE for a new organisation such as a start-up, an existing organisation that is underperforming, a turn-around project, or even a merger/acquisition, this four-factor model has proven invaluable in our decision-making.