A challenge that presents as an strength

Recently I met a valuable business. Valuable because of the skills, talent, and costly capital equipment recently purchased. By recent, I mean before the interest rate hikes of 2022. Capital equipment lends itself well to debt funding, and debt funding secures its returns through interest. Rising rates can burn a business unless you raise revenues too.

What was interesting about this business was its leaders’ mindset. They believed that only they, or people like them, could build the business and grow it beyond their hefty £22.7m annual revenues. Comments like, “What we do is very specialized, and it needs us, hands-on with our teams, to get the job done” and “In our industry, it’s relationships and reputation built by our highly specialized, deep expertise that grow a business”.

In this podcast of the Money Show, Pavlo Phitidis discusses the perception and reality of uniqueness in specialized businesses

Rising inflation, which drove interest rates higher, exacerbated the uncertainty that was fuelling the recession. Unless this business grew, they’d be left with the cost of their capital equipment, an agitated workforce wanting to “engineer” things, and possible demise.

Every business has two pieces that need to be coupled together to succeed. By succeed, I mean increasing revenues and profitability and doing so in a manner that sees the owners free 70% of their time from daily, weekly, and monthly operational activities. It will allow that business to scale, grow and ultimately be sold. They did not meet any of these criteria!

They did have one key element to success: did have a brilliant product or service, as a result of their highly specialized skills and capabilities. To accelerate their products’ and services’ value, they needed to build a second element: a commercial system. The first solves client problems; the second creates an engaging experience for clients. Both are necessary if you want to grow beyond your available time.

After accepting that their specialization was very similar to their competitors, creating no advantage or disadvantage and levelling the playing field, we spoke about what sets a business like this apart.

Like any business, it is about whom you serve (your customers and clients) and what experience you create for them. The experiences I refer to are those that you and I are subjected to every day from suppliers. How do they market their propositions to us and then sell, deliver, and administer the relationship with us? All these elements are articulated by commercial activities, including marketing, sales, operations, and administration. These activities, organized into a sequence that creates the experience, are brought to life by purposeful teams. This was the missing ingredient that saw their brilliance manifest in  £22m revenue, rather than the £60 to £80m revenue performance they should be doing after 32 years in the game.

It’s hard to see when all the habits you’ve developed since being in your business have been formed against your strengths. Engineers make things. Doctors fix people. Vets fix animals. Chefs cook things. Our underlying interest drives our training and vocation. Intellectually, that feeds us.

Developing and deepening your skills in your chosen profession is exciting and influences what business you build as a result. However, this makes us essentially product-centric, when only customer-centric business models promise scale, growth, and premium exits. It can also make us forget to build a commercial system to drive the business and grow it beyond our hands, heads, and hearts.

Finally, after 3 hours of discussion, the engineers agreed!

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