Part 1: When your business hits the wall and what you can do about it!

The wallThere are moments when your business is going to hit the wall – costs getting out of hand, competitors becoming a major nuisance, staff squabbles take your focus and margins are starting to fall.  An all too familiar scenario? What can you do?

There is no silver bullet but one tool I always trusted is the old Activity or Value Chain Analysis – a tool often underrated yet it has proven very powerful in my work to date  – and it keeps delivering.

Activity/Value Chain Analysis – what is it?
An activity/value chain is a set of interlinked processes – The notion is: each step in the process chain adds a certain amount of value assuming that the input factors produce a higher quality output good.
The analysis simply investigates these interlinked activities/processes within an organisation.

Why and how would you use this tool?
The analysis of in-house processes enables you to pinpoint obstacles of internal interfaces such as waiting and lead times between progress steps or receiving and storing goods.

In order to reduce (usually costly) obstacles and to optimize the process chain, performing a detailed analysis is recommended.

An activity/value chain analysis is particularly suitable as part of a realignment of the internal logistics as this analysis will expose ineffectiveness and inefficiency with brutal clarity.

Why would this help you to control costs and/or be more competitive?
Activity/Value Chain Analysis typically identifies the following:

  • Identifies strengths and weaknesses → Enhance strengths, eliminate weaknesses
  • Taps unused potential
  • Identifies alternative processes or structures
  • Reduce throughput times

Furthermore it assists with the:

  • Coordination of the departments or business units
  • Improved communication between the processes actors
  • Clearer definition of roles and responsibilities

Activity Chain Analysis considers the contribution that each individual activity and step within the process chain adds to the total process – subsequently the value it delivers to the customer.

This is Part 1 of the series “When your business hits the wall and what you can do about it!”

Join me tomorrow for Part 2 – ‘How do I carry out an Activity/Value Chain Analysis.’

I read enough – please contact me asap!

 

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Watch me grow – Why there is no alternative for companies to grow

ffjyjgie6zvttpqGrowth is the measure of all things for most, if not all companies – I hardly know a company that wants to pursue a shrinking strategy.

More market share, more sales, increased profit are the common targets.

But why is it like that? Why is that not enough that has been achieved? Why must it always be bigger?

1 Growth as self-preservation

Companies exist to make a profit, so they can continue to exist tomorrow. They can only do that if they compete better than their competitors – this implies: be better, faster, bigger, more profitable than the competitors. Like any living being a company has a self-preservation instinct – it must grow and adapt to survive.

“In this country you have to run as fast as you can to stay in the same place. And if you want to go somewhere else, then you must run at least twice as fast.”
(Lewis Carroll, Alice in Wonderland)

2 Growth driving increased profitability

In principle growth leads to economies of scale and smoothens the learning curve thus delivering more profitability. If a company sells 1,000 steel widgets per year, the company needs  to buy the steel, have a factory with a machine and a operator.

The profit from the sale of 1,000 steel widgets must cover the cost for the purchase of the steel, the factory, the machine, the operator and some margin for the owner.

If the company is able to sell all 2,000 steel widgets, the costs are distributed over 2,000 instead of 1,000 steel widgets – assuming no additional unit costs for the steel for another 1,000 steel widgets and the machine can also produce 2,000 steel widgets.

The same applies to the learning curve – the more the company performs a particular activity, the easier and more efficient it becomes the more routine is embedded and the company can thus work more productively and profitably.

3 The market share of today determines the market position of tomorrow

Especially in a growing market, it is crucial how quickly the company can grow. Growing slower than the competitors, its market share may decline – growing faster than the market, the market share rises.

Once the market growth stagnates or decreases, it may ignite a ‘cut-throat’ competition (like we can observe with the petrol companies such as BP, Shell). The companies that have grown in the past most have the largest market share and thus in the best position to assert themselves in the cut-throat competition.

4 Growth as a threat to small and medium sized companies

For some companies fast, rapid growth may be seen as a threat – a owner-managed small or medium-sized company may choose not to grow as the owner does not want to be a CEO of larger, more international company.

In summary, growth is not a bad thing – almost inevitable if a company wants to survive. However, a company must remain viable and most importantly manageable.

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bf4z.storyEvil twins or blood brothers? Process optimisation and process costs.

One of the most exciting elements of business process analysis is certainly process optimisation with the process cost calculation at its core.

Optimisation 

  • Processes in a company are sequences of main and secondary activities.
  • Every business process needs a certain amount of time and binds a certain number of resources.
  • The goal is to reduce costs through processes optimisation.

Firstly, all processes that take place in the company are determined. These may be of course only repeating activities such as production, purchase orders, customer service etc., but not singular actions such as the planning of the annual Christmas party.

The aim for each repeat of the process is to reduce time taken/better resources allocation/reduce production costs and thus to create a sustainable (competitive) advantage.

Read my recent post on activity chain analysis – the power of in-depth review of business processes to gain competitive advantage Read more

Process costs

Let’s walk through an example that we all have to deal with on a daily basis: the treatment of spam emails and examine why such a trivial issue especially in the business arena can be of significance:

Employees: 20
Spam treatment per day: 3 minutes.
Lost working time: at least 200 hours per year

This example shows how a small ‘time waster’ per day over the entire year may amount to over one month salary. These costs are not direct production cost – but nevertheless have an impact on the productivity throughout the company.
Productivity could be increased for example by spam filters, so the time spent on spam email is ideally reduced to 0 minutes per day.

Soft process costs

The process cost calculation is ultimately only a model with each resource assigned a (cost) value.

In this example, the time is uniformly assessed and a simplification, but not too remote from reality. The biggest issue is that this time could be used productively – the bigger the company, the more you have this ‘wow’ effect.

This analytical process uses cold hard facts, however even greater productivity could be generated with ‘happier’ employees as they are able to focus more on value adding activities (compared to value detracting activities such as spam elimination). One danger of setting the spam bar too high is that important emails may also be filtered out.

The same applies to other, not always tangible activities such as smoko breaks – these may actually contribute to increased productivity and it could indeed be counter-productive if smoko breaks were eliminated or drastically reduced.

In summary – the process cost calculation is a very powerful tool to provide core data but we need to continue to ask questions what lies beneath – in any event the optimisation of processes and process costs go hand in hand and together form a powerful platform for potential benefits to bottom line profitability.

Contact me for more

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5-easy-steps to start your Risk ManagementDecember 27, 2015 | Markus Schwarzer

IMG_4519-1200x800Risk management refers to all measures of control, monitoring, and assessment of business risks.

To Identify, assess and mitigate risks can be a high mountain to climb for some business owners – daunting and challenging!

Clearly, the task of risk management is a major thing – estimating and calculating the risks for the company, the owner and the people in it rely on a thorough risk assessment.

Risk management, especially for small and medium-sized companies, remains a task for the business owner to protect their assets, also for an eventual decline of the company and the personal risk for liability –  risk management is a good way to protect your assets and your existence.

Risk assessment
Statistics show that especially mid-sized companies are aware of risk and deal intensively with these. 81% of all medium-sized companies in a survey say that risk management is of vital importance to them.*

The financial crisis a few years ago has helped to alert business owners that something major can go wrong which may not be under their direct control.

However, the survey also showed that very few companies are really satisfied with their risk management process, because most find that longer-term planning would achieve better results and mitigate risk more adequately.

Typically, the risk analysis of risks covers only 1-2 years out,  so risks in some distant future find no or very little attention and quickly fall off the planning table.

There are many SMEs for example that need to catch up on online security and the risks involved – many rely on external servers and the World Wide Web for storing their data. There are lots of security holes that may put the stored data at risk and thus the entire viability of the company.

5-easy-steps to start risk management: 

1 First, risks must be identified.

2 Next follows the causes and possible effects of the risk identification – add the likely probability to the risk occurring – then calculate, review and re-calculate.
For example is it quite unlikely that the Internet will no longer exist, and that the stored data is lost. A hacker attack or server crash occurring is a lot more likely and must therefore be considered.

3 Dealing with (potential) threats – some risks are predictable and can be dealt with quickly – others, however, are more serious and require closer inspection.

4 Once the concrete risks are identified and validated through deeper analysis, then they need to be monitored, so that current and also long-term risk in particular can be factored in.

5 Lastly, all identified risks and their analysis should be documented. The results should be transparent and followed up by ongoing reviews in order to ensure a more precise assessment can take place.

In summary: a sound risk management system not only protects your assets and your very existence – it also contributes positively to the bottom line profitability.

Please comment on my post – I look forward to your feedback.

 

The middle-class and its banks, a survey conducted by the Commerzbank, 2014

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Blowing bubbles 1

Most Small Medium Enterprises (SME’s) face tough choices on how-to-grow:
keep ticking over and consolidate the current business but be limited by own funding access or seek investors to grow into new markets and/or develop new products and services.

Seeking, and eventually accepting investors, means ‘giving up’ control. This may be hard to swallow for business owners. On the other hand a pro-active investor may bring highly sought after expertise into the business.
This decision point is a tricky one for business owners – I would recommend to consider the following 5-steps before embarking on finding investors:

1 Set your goals

What is your ambition? Are you prepared to relinquish some control?
I have worked with businesses that sought investors but were not quite clear why they were considering getting investors on board. To fix negative cash-flows or reducing debt may not be the best motivation to engage investors.

Set 2-3 main goals on why you want to get investors on board, e.g. do you want to set up business in a different location because you believe (and can demonstrate) that you can create value with your unique business proposition? Or do you want to develop more digital products and need an investor with expertise in that particular field so you can complement your non-digital value proposition?

2 Be clear on your strategy

Position your business clearly by naming your 3-5 key strategies going forward based on your performance to date.

The investor of today does not profit from yesterday’s growth”  W. Buffet

State what was achieved so far and what the future may hold – point out the growth potential and support this with research and a suggested marketing strategy.
This will ensure that any potential investor can see that you have thought about the future and that it is build on a solid foundation and market research. It is vital to convey confidence in your value position and this in turn will give any potential investor a level of comfort too.

3 Do your housekeeping

‘Housekeeping’ is often underestimated – meaning getting your internal processes in order, e.g. fully understand your internal activity chain, streamline your financial reporting, fine tune your business dashboard (if you use one) and your personnel management.
Once a potential investor is showing interest in your proposition, you want to put your ‘best foot forward’ and and demonstrate that your to date performance is no fluke – your business processes are ok. Sure they can be improved but they are good enough for now.

Again, you are more confident and the investor is also getting more confident in you and your business.

Price is what you pay. Value is what you getW. Buffet

Be realistic when you value your business – There are many approaches in establishing an accurate valuation for your business. Finding the best method for your business will provide you with the best measure of value.

4 Sell the dream

Now you are ready to add a little passion to your investment proposal – you have the foundation work done and are now getting into marketing mode.
Stay away from clichés such as ‘unique opportunity’ and ‘once in a life time…” etc., bring your own flavour or secret sauce into it – Convey the energy that made you set up the business in the first place, including the sacrifice, struggle, the joy and commitment and of course the future opportunities.

5 Have an exit door

Always leave the exit door ajar – an investor will jump on the wagon  or may jump off.
Consider you own future in the business. Perhaps you wish to reap the benefits of your
hard work and increase your personal liquidity, or maybe you would like to retain a minority interest as a shareholder and hand over the management.

Think about the 5-steps before thinking about getting investors on board.

Want to know more ?

 

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