“The first rule is, you must not fool yourself. And you are the easiest person to fool.”
~ Richard Feynman
How does an enterprise make money?
I submit that a business derives economic value (profit) through a combination of value for labor, intellectual value (skill/strategy), and chance (luck, good or bad), nothing more, and nothing less. Further, I submit that labor and chance are essentially the same for any enterprise, making intellectual value the only variable that is not constant.
Thus;
V=L+I+C
One might counter that he could skew the chance part of this equation through superior strategy, but would this not go under intellectual value? Another might counter that his labor value is higher than another's, but again, would this premium not instead be a part of intellectual value? The only possible exception to this non-variability might be geographic, as labor, for convenience and infrastucture (to include language and culture) reasons, is different in one place than in another. Regardless, I'd submit that labor is constant (and low) in any particular geographic region, such that one can ignore the difference for different regions without compromising the integrity of the concept.
A quick note while I'm discussing labor. I'd submit labor value is not defined by minimum wage, but instead is some other number, likely lower than minimum wage (otherwise there would be no need for a minimum wage law). The difference between the true labor value and minimum wage is essentially a redistributive tax, which is another subject to itself. This "tax" effectively slightly stacks the odds against a business as one must overcome this "tax" to make a profit.
So what does one do with this, if anything? If one manufactures a gumball machine with a dispensing rotor powered by a 400 horsepower engine, does it make it a better gumball machine, or it more a case of misplaced horsepower? Is the business and/or industry you are in one that optimally uses your team's horsepower, or is it more of a case of a Ferrari engine on a economy car transmission? If the latter, is there something you could do differently (perhaps some complete other version of your business) from the way you do it now that would improve the efficiency of your transmission? Finally, are you in the right industry to begin with, or should you leave it for the economy car engines engines of the world?
Wednesday, October 27, 2010
Friday, November 13, 2009
Valuing a Customer Transaction - PRI
I was recently discussing with someone how he values a prospective customer. Interestingly, this individual uses a matrix with different variables specific to his industry and business model. This brought me to the idea that there might be a universal way to consider the value of a customer relationship or transactioon. The outcome of this is what I call PRI.
PRI - Profit, Risk, & Influence
Seemingly any customer transaction is a function of these three things, with these being described and considered a bit different for any business.
Profit in most cases would be gross margin contribution. For a retail sale, this is just sales less Cost of Goods Sold. With construction, it is simply revenues less direct costs. In some cases, however, there may be a slight modifation of these, in that one may have to incur some type of expense not generally considered direct in order to do the business. For example, you might need to more into a larger facility with a multi-year lease in order to service a customer. Purely considered, profit is whatever you want it to be, for consideration purposes. It is up to you how you consider it.
Risk could be considered as a actuarial negative adjustment to one's profit. For example, say you may $10,000 on a transaction, but for every 100 similar transactions you will be sued at a cost of $1 million. This loss of $1 million divided by 100 is $10,000 per transaction, making it a transaction that generates no gross margin when risk is accounted. The reality is, however, that most businesses tend only to consider gross margin at its nominal value, thus adding value to considering risk separately in this PRI concept.
Influence is a subjective assessment of future business expected from this customer, whether from the same customer or referrals. This is commonly referenced with customer relationships with comments like "she'll do a lot of business with us over time" or "he's likely to send us lots of referrals." Influence is entirely subjective, but nonetheless important.
In combination, considering any customer transaction or relationship in terms of PRI PROFIT, RISK, and INFLUENCE) in whatever makes sense for your business allows you to do so in a seemingly more meaninful and comprehensive manner. I submit that simply putting the three words on a white board or evaluation sheet, either with subcategories defined or with just room for commentary, can help you consider each important customers or transactions in a more efficient and meaningful manner.
PRI - Profit, Risk, & Influence
Seemingly any customer transaction is a function of these three things, with these being described and considered a bit different for any business.
Profit in most cases would be gross margin contribution. For a retail sale, this is just sales less Cost of Goods Sold. With construction, it is simply revenues less direct costs. In some cases, however, there may be a slight modifation of these, in that one may have to incur some type of expense not generally considered direct in order to do the business. For example, you might need to more into a larger facility with a multi-year lease in order to service a customer. Purely considered, profit is whatever you want it to be, for consideration purposes. It is up to you how you consider it.
Risk could be considered as a actuarial negative adjustment to one's profit. For example, say you may $10,000 on a transaction, but for every 100 similar transactions you will be sued at a cost of $1 million. This loss of $1 million divided by 100 is $10,000 per transaction, making it a transaction that generates no gross margin when risk is accounted. The reality is, however, that most businesses tend only to consider gross margin at its nominal value, thus adding value to considering risk separately in this PRI concept.
Influence is a subjective assessment of future business expected from this customer, whether from the same customer or referrals. This is commonly referenced with customer relationships with comments like "she'll do a lot of business with us over time" or "he's likely to send us lots of referrals." Influence is entirely subjective, but nonetheless important.
In combination, considering any customer transaction or relationship in terms of PRI PROFIT, RISK, and INFLUENCE) in whatever makes sense for your business allows you to do so in a seemingly more meaninful and comprehensive manner. I submit that simply putting the three words on a white board or evaluation sheet, either with subcategories defined or with just room for commentary, can help you consider each important customers or transactions in a more efficient and meaningful manner.
Thursday, October 8, 2009
Fear Fear
I was listening to a story the other day of a man who didn't do a deal 20 years ago, seemingly mostly out of fear of the unknown. It was proposed that he merge his company into another, a company that became one of the most successful companies ever. Had he overcome his fear and gone with the proposal, he likely would have 100 times the net worth he has today.
This rang true with me. I believe lots of people, myself included at times, have passed on opportunities out of a fear of the unknown, and more likely a fear of not being perfectly right as opposed to being dramatically wrong, more ego protection driven that rationale driven. Thus I came up with a profound piece of wisdom:
"Fear fear."
~ James Hawkins
This is along the lines of "we have nothing to fear but fear itself," words spoken by Roosevelt in trying times. However, this statement simplifies the message into the least amount of words possible, elegantly suggesting that of the things to fear, fear itself should be on the list.
This rang true with me. I believe lots of people, myself included at times, have passed on opportunities out of a fear of the unknown, and more likely a fear of not being perfectly right as opposed to being dramatically wrong, more ego protection driven that rationale driven. Thus I came up with a profound piece of wisdom:
"Fear fear."
~ James Hawkins
This is along the lines of "we have nothing to fear but fear itself," words spoken by Roosevelt in trying times. However, this statement simplifies the message into the least amount of words possible, elegantly suggesting that of the things to fear, fear itself should be on the list.
Wednesday, September 2, 2009
PCM - A Simple Tool for Considering any Business Venture
In a preceding column, I discuss how a simple tool may be more effective when making complicated organic level judgements, in that case that of considering the value of employees. Here I suggest a different tool, one for considering the potential success of a business venture I call PCM.
CPM stands for PEOPLE, CONCEPT, and MONEY, which I submit comprehensively covers the potential success of any venture. Do you have the right PEOPLE to make it happen? Is your CONCEPT valid? How will the MONEY flow?
People are generally the most important factor; a good team with an average idea is generally preferable to a poor team with a great idea.
Nevertheless, a concept must be valid to begin with. For example, a business to represent convicted felons as housesitters is seemingly a failure conceptually. One would certainly think so.
With regard to the money flow, this refers not only to the entity but the capital structure. For example, a business that one might expect, based on the concept and people, to make $1 million in its second year might sound good. However, if you had to invest $5 million for 10% (making your portion of these earnings owned $100,000) it then makes the flow of money to you not so great. Thus the flow of money is meant to refer not only to operationally, at the entity level, but to the person considering any participation. Considering money flow at only the operational level is more of a consideration of the probability of ongoing viability than to how well one might individually do with a participation.
I've used this to quickly consider a number of business opportunities, sometimes finding the answer is a resounding yes, but other times finding that one of the three pillars, P,C, or M, has a weakness. I believe this methodoloy has made me a bit more effective at quickly considering business opportunities.
CPM stands for PEOPLE, CONCEPT, and MONEY, which I submit comprehensively covers the potential success of any venture. Do you have the right PEOPLE to make it happen? Is your CONCEPT valid? How will the MONEY flow?
People are generally the most important factor; a good team with an average idea is generally preferable to a poor team with a great idea.
Nevertheless, a concept must be valid to begin with. For example, a business to represent convicted felons as housesitters is seemingly a failure conceptually. One would certainly think so.
With regard to the money flow, this refers not only to the entity but the capital structure. For example, a business that one might expect, based on the concept and people, to make $1 million in its second year might sound good. However, if you had to invest $5 million for 10% (making your portion of these earnings owned $100,000) it then makes the flow of money to you not so great. Thus the flow of money is meant to refer not only to operationally, at the entity level, but to the person considering any participation. Considering money flow at only the operational level is more of a consideration of the probability of ongoing viability than to how well one might individually do with a participation.
I've used this to quickly consider a number of business opportunities, sometimes finding the answer is a resounding yes, but other times finding that one of the three pillars, P,C, or M, has a weakness. I believe this methodoloy has made me a bit more effective at quickly considering business opportunities.
The Success Vortex - A Better Way to Consider a Company's Divisions
As a multi-faceted entreprenuer involved in various ventures and activities, I found myself increasinly uncomfortable with the traditional/typical bracketed system showing divisions with activities or subdivisons underneath them. I have found that different parts of a company support each other. For example, without good operations one has nothing to market, and without good marketing their are no operations.
To illustatrate this, I developed the concept of a Success Vortex. At the center, in the case of seemingly any company, is "PEOPLE," as this is the key to any successful organization. Around this is different divisions or activities, each with an arrow pointing to one side of the middle in a manner to appear as to push the core. Behind these are other sub-activities or divisions, in their case with an arrow point to one side of the middle of the divions they support in a manner such as to rotate them (the divisions they support) in the same direction.
Behind all of this, in the back 4 corners, are the 4 winds of success, each pointing as if to provide a back wind to the rotation of the Success Vortex. These are ATTITUDE, WISDOM, EFFORT, and, of course, LUCK. Luck never hurts.
I've found this to be more conceptually comfortable as it more accurately portrays the mutual effort to drive the business, while not completely ignoring the distinct contributions.
Copyright James Hawkins 2009
To illustatrate this, I developed the concept of a Success Vortex. At the center, in the case of seemingly any company, is "PEOPLE," as this is the key to any successful organization. Around this is different divisions or activities, each with an arrow pointing to one side of the middle in a manner to appear as to push the core. Behind these are other sub-activities or divisions, in their case with an arrow point to one side of the middle of the divions they support in a manner such as to rotate them (the divisions they support) in the same direction.
Behind all of this, in the back 4 corners, are the 4 winds of success, each pointing as if to provide a back wind to the rotation of the Success Vortex. These are ATTITUDE, WISDOM, EFFORT, and, of course, LUCK. Luck never hurts.
I've found this to be more conceptually comfortable as it more accurately portrays the mutual effort to drive the business, while not completely ignoring the distinct contributions.
Copyright James Hawkins 2009
ARC - A Simple Formula for Management Success
Putting together a solid management team is no easy feat. It is more of an organism as opposed to an object, and thus is difficult to consider in a more quantitative manner.
Given this, I've come to the conclusion that a simple tool can be more useful in making managment evaluations. This allows ones powerful mechanisms, whether you want to call it intuition or unconscious thought, to make less clouded, and hopefully better, judgments.
The tools we have developoed, and which we use regularly, is ARC, which stands for Attitude, Reliability, and Competency. We submit that different forms of these characteristics, with different expectation levels for different positions, in combination are one way to consider the value of an individual to an organization.
Attitude is simply a subjective measure of how positive the individual is. Reliability is simply a subjective measure of whether you can count on the employee. Finally, competency is a subjective measure of how well an individual performs his duties. Note that competency is not general, but job specific, thus a competent janitor may not be a competent controller, and vice versa.
We have used this so much we tend to refer to people's ARC score with an organization wide understanding of its meaning. For example, "he's a 10-9-9" would mean his attitude is a 10, his reliability is a 9, and his competency is a 9. One's ARC quickly comes up when we discuss an employees prospects with the company, and is an integral part of our weekly comprehensive strategy meeting.
I know it is simple, but believe me, it works. Again, I submit that keeping it simple gets the tool out of the way of the truly powerful tool that we all have - our brains.
Copyright James Hawkins 2009
Given this, I've come to the conclusion that a simple tool can be more useful in making managment evaluations. This allows ones powerful mechanisms, whether you want to call it intuition or unconscious thought, to make less clouded, and hopefully better, judgments.
The tools we have developoed, and which we use regularly, is ARC, which stands for Attitude, Reliability, and Competency. We submit that different forms of these characteristics, with different expectation levels for different positions, in combination are one way to consider the value of an individual to an organization.
Attitude is simply a subjective measure of how positive the individual is. Reliability is simply a subjective measure of whether you can count on the employee. Finally, competency is a subjective measure of how well an individual performs his duties. Note that competency is not general, but job specific, thus a competent janitor may not be a competent controller, and vice versa.
We have used this so much we tend to refer to people's ARC score with an organization wide understanding of its meaning. For example, "he's a 10-9-9" would mean his attitude is a 10, his reliability is a 9, and his competency is a 9. One's ARC quickly comes up when we discuss an employees prospects with the company, and is an integral part of our weekly comprehensive strategy meeting.
I know it is simple, but believe me, it works. Again, I submit that keeping it simple gets the tool out of the way of the truly powerful tool that we all have - our brains.
Copyright James Hawkins 2009
Friday, January 9, 2009
When Fair Can Be Unfair
I once read of a study with primates that seemed to prove that they demand fairness in the interactions. Certainly among humans, being fair is a part of our social contract with each other.
In managing, however, what seems to be fair on the surface is not only ineffective, but when one thinks it through, unfair. I'm speaking of consequences that vary by individual.
Good managers realize that different types respond differently to different stimuli. Thus they may reprimand one employee seemingly more harshly than another for the same offense. I submit that this is more fair than responding similarly.
Why? The ultimate objective, if not responsibility, of a manager is to help an employee be successful in his position. If a manager does otherwise, it is unfair. Is it not? Thus, in using the tool, in this case the type of reprimand, that a manager deems to be most likely to be successful given the individual, then the manager is being more fair.
In managing, however, what seems to be fair on the surface is not only ineffective, but when one thinks it through, unfair. I'm speaking of consequences that vary by individual.
Good managers realize that different types respond differently to different stimuli. Thus they may reprimand one employee seemingly more harshly than another for the same offense. I submit that this is more fair than responding similarly.
Why? The ultimate objective, if not responsibility, of a manager is to help an employee be successful in his position. If a manager does otherwise, it is unfair. Is it not? Thus, in using the tool, in this case the type of reprimand, that a manager deems to be most likely to be successful given the individual, then the manager is being more fair.
Subscribe to:
Posts (Atom)
Posts
