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How do you build a business when capable talent is scarce or unaffordable?

Skills are short globally. One of the big issues delaying the Trillion Dollar infrastructure projects in the US is the scarcity of certain skills, such as surveying.

This shortage of skills is not a problem if you don’t want to grow. 

But unfortunately if you’re not growing, you’re dying because your competitors are doing everything in their power to grow. And new competitors are coming in all the time.

As an example, 282 000 people in the USA in the last quarter who lost their jobs through Covid didn’t file for unemployment insurance because they found opportunities to service customers using the skills and gaps they had seen in their previous employment! Many of these are your new competition.

If you want to grow, or understand that you have to grow, then build a business that lessens its reliance on skills that are scarce and expensive. These skills are usually also unreliable because if they are so scarce, they can move on to whoever is willing to pay them the most.

Listen to this podcast from The Money Show where Pavlo Phitidis discusses how to build a business that doesn’t rely on scarce skills and talent.

Structure determines behaviour. This means you must build a business differently to get the result you want. Find out exactly what problem you solve for a clearly defined target market, with a consistent, good experience, then build the systems that deliver that outcome reliably.

A system is a series of activities, in a sequence that can be measured and trained.

You can now hire people, not because they bring some of their own superstar ability to the role, but because they can be trained to operate the system.

This approach, of hiring system operators, rather than mavericks and gurus, has a number of benefits:

  1. Recruitment is simplified as you can assess through simple questions whether someone has the experience or capability to perform the tasks that make up the system.
  2. Your employees are motivated and have purpose as they know what to do, when to do it, to achieve a specific outcome. Their performance can be clearly measured and managed.
  3. Your business becomes less reliant on you, as the systems that underpin it, are documented, trainable and don’t depend on a few superstars to get things done.
innovation

3 strategies to innovate fast, repeatedly, and profitably

If change is the new constant, responding to it will not win the game. Driving change so that competitors must react and play by your rules is a better approach. Put differently, innovate, or die.

Listen to this podcast from The Money Show where Pavlo Phitidis unpacks three strategies to drive innovation in your business.

Innovation shapes itself differently but ultimately offers one of two outcomes. It all begins with the “something”. You are doing something better with what you have or doing something better with something new.

What to innovate?

Here are three simple strategies that you can use to yield the most effective innovation that can and will be implemented, fast in your business every 6 months.

Suck

From marketing to operations, sales to procurement, your employees are active daily. They are performing activities to get their jobs done. Engaging with them to understand what actions they perform and how they perform them opens a conversation on how things can be improved. Often, the tedious, mundane tasks are the first ones your employees will volunteer for improvement. And often, these tasks lend themselves to either digitization or redundancy. Across your business, these conversations yield insights into the many minor process improvements that add up to create a more efficient outcome and motivated team. Imagine one such innovation each month. Then imagine the impact over 2 or 3 years. Besides preventing cholesterol building up in your business systems, you build a culture of accountable innovation that gets implemented as it’s built.

Pull

A growing company in a competitive environment is relevant to its customer’s needs and wants.

  • Needs solve a problem through your product or service.
  • Wants create the experience your customers desire.

They are miles apart! The benefit of positioning your business like this means that your company is built from the customer back to the product or service, not the other way around. Immediately this opens the door for conversations with your customers that go beyond a blow-by-blow product advantage over competitors. It talks more to the problem that your customer has that you solve and the experience they want to support you. When things change, for example, legislation, competitors, technology and other, the status quo of your customers change. The problem might get bigger or appear faster and the experience they would want in return would change too. As the business owner, identify your 5 toughest customers and build a relationship with them personally. Be sure that besides being demanding, they are themselves growing. Tough, awkward conversations become insightful inspirational conversations if they are intentional and enhanced by a genuine investment in relationship. It’s these conversations that identify the earliest signals of change and insights into how the experience your company generates needs to change to keep ahead of them.

Push

Across your supply chain, sort your suppliers into three categories of importance.

  • Vital
  • Important
  • Helpful

Then, within the vital and important categories, arrange to speak and meet with senior managers or owners to set an annual coffee conversation. That conversation must center on you learning more about the product or service your supplier provides you with, what changes are driving innovation in their businesses and how that will change and shape their relationship with your business. What you are looking for is how their innovation can drive yours through your supply chain.

In all three strategies, the relationship-driven engagement will yield the most uncomplicated innovations that you can make with the greatest degree of follow through and execution. If time waits for no-one, and if change is the only constant, innovation needs to lead, not respond to that of your competitors. Develop this system and implement it as religiously as you’d do your month-end billing.

Aristotle said it “We are what we repeatedly do. Excellence, then, is not an act, but a habit”.

Why and how to get outsourcing working

Recently Pavlo was asked: “Business is picking up nicely from last year. I find myself outsourcing more of my business functions to keep up with my delivery. When should I employ more people and insource if the current outsourcing model seems to be working well? Is this strategy sustainable?”

Listen to this podcast from The Money Show where he responds in a discussion how to design a solid outsourcing model that can enhance your business’s growth.

Why did you outsource in the first instance?

The lockdown shock should have forced most businesses to focus on capital preservation and shedding costs as a result. After that, the following action ought to have been resetting the business to meet the new reality. A harder-to-find customer, more apprehensive and skeptical, nervous of spending. Once you get that right, it’s all about rebuilding your business in such a manner that it responds almost instantly to the shifts and changes in your customer behavior. This is all about keeping the focus simple and your business agile. What you used to do in-house that was outsourced to lighten the cost load and risk in the business saw many of us outsource services.

How did you outsource to get it working so well?

We spoke about the onion method on previous occasions. With 3 layers of inner, middle, and outer layers, use it as a framework to outsource. What is core and strategic to your existence, you own and never outsource. What is strategic but not core, you outsource to a matching partner whose service you are buying is core and strategic to them. This requires a medium-term commitment and takes the form of a strategic partnership rather than just a service provider.

Can you correlate your growth to outsourcing?

If your model is working well, why? A good partner is only as good as the service they provide. That service is only as good as you have defined and delineated it and how you empowered your partner to succeed at delivering it.

The entire automotive industry works on this basis through tier 1,3, and 4 suppliers. Using a combination of JIT and Kanban systems, the provider of tires knows precisely when and how to deliver the individual set of tires for a car on the line. Supplying and delivering tires Is outsourced in terms of inventory, storage, delivery, etc. This drops the cost of car manufacturers and keeps that car affordable.

In our business owner’s world, the simpler operating model, due to a tighter and narrower focus on core and strategic activities, a well-defined outsource requirement, and partner selection means that he can keep his eye and attention on fewer moving parts. Simplicity is scalable, and scalability is growth.

Does it affect valuation?

What makes your business special, how it works, what makes it happen, are you growing, and what’s your role? 5 levers drive valuation. A well-designed outsourcing model that great strategic partners service helps each of these levers to support your valuation.

Let’s correlate the outsourcing example to each of them.

  1. Special – a business that is expert in understanding and engaging customers distinguishes itself from it competitors who rely on product and price advantages
  2. Function – fewer moving parts make a simpler business improving its efficiency and productivity
  3. Team – a simpler business allows for a more coordinated and integrated team. Of 10 000 surveyed companies that wanted to grow, 95.4% of their employees were unaware of the growth strategy. Too big means too slow.
  4. Growth – a simpler business means more time leading growth than running operations
  5. Dependence – a simpler business is easier to transfer reliably

In all cases, outsourcing leads to a better final valuation and, as we all know, this is the end game!

Why you must make sure to have your cake and eat it!

Starting, building, growing, and sustaining a business is hard.

Because we have little funding in this process, we do it with a view to secure revenue as fast as possible. But this develops habits that, if we don’t change them, builds a business that generates income for us, but that can’t be sold.

94,6% of businesses started, fail to sell and close.

A life lived successfully building an income generating business, is a life lived poorly when you cannot monetise your years of risk and investment because you cannot sell your business for a capital gain.

Rather, we should have our cake (an income generating business) and eat it (a capital growth business). Both are possible and realising this too late is a costly mistake.

Listen to Pavlo Phitidis discuss how to get this right on this podcast from The Money Show

https://omny.fm/shows/small-business-focus/small-business-focus-building-a-business-that-gene

Think of it objectively:

If you have R1000 and you want to invest in the stock exchange, with a view to hold on to it for 5 years.

You can ear dividends – let’s say R200 per year. At the end of 5 years you’ve enjoyed R1 000.

In your business the income dividends come from a salary, other perks of owning the business and dividends.

In 5 years you now want to realise its capital growth

Let’s say your share is now worth R2000 – you sell it and gain R1000 on your initial investment.

You had your cake and ate it as the R1000 you made in dividends covered the R1000 invested AND you made R1000.

The third element to this is that the share has to be interesting to someone, to buy.

In our businesses, this so often doesn’t happen because the business owner is central to the continuation of the business. Without you there, there is no business.

You need to think with both an operator and investor’s hat as you run and build your business. The sooner you start thinking like this, and behaving differently, in accordance with this, the better your chance of making it into the 5.4% who can sell their business, and secure their retirement, and legacy.

Productivity

How productive is your business and why you should lose sleep over it?

Increasing your productivity should be a key focus as a business owner. It means you leave nothing on the table, maximizing your value all the time.

Pavlo discussed the difference between productivity and efficiency, and how to calculate your business’s productivity in this podcast from The Money Show:

Increasing your productivity should be a key focus as a business owner. It means you leave nothing on the table, maximizing your value all the time.

I recently met a manufacturer in the cosmetics and homecare industry. They make creams, ointments, soaps, and the like.

Looking to exit, a valuation of $20m had been offered and they wanted a view.

Their stunning, clean factory glistened with shiny machinery and equipment and a professional team gleamed with pride. The business owner felt that they could do better than the offer. We got to work.

After a day, we discovered that the business was running at 46% of its productive capability. After another day, we learned that the business enjoyed an 87% efficiency indicator.

What does this all mean?

Efficiency is about doing the same with less, while productivity is about doing more with the same. They are miles apart. Closing the productivity gap would add another $15m to the current offer based on the same valuation multiple. What’s best, is that I could be done in just 2 short years. 

How to calculate it?

Productivity measures the gross value added per worker

Productivity = turnover – consumption costs [(raw materials used in the production process + energy and materials + water + rates and taxes + consumables and packaging) + (services including sub-contractors + plant and equipment hire + tech, marketing, HR, accounting services + rent)]

__________________________________________________________________________________
Divided by workers [owners and employees all active in the business]

How to get it right?

  1. Mindset
  2. Awareness and attitude – a growth mindset is vital
  3. Respect time – invest it or spend it
  4. Leadership – less time doing and more time leading, mentoring, delegating

  1. Diagnosis
  2. Core, strategic vs everything and anything
  3. Outsource expertise
  4. Increase efficiency, and innovate activities

  1. Execution
  2. Team driven to institute
  3. Measured to manage

  1. Change
  2. Culture and ethos of who we are and how we do what we do
  3. Hire for it, fire for it, reward for it
competition

Understanding the competition

No business operates on an island and no business is original or unique.

If you think you are, you are in trouble or protected by a massive bank balance or government license.

For the rest of us, we swim in a sea of competitors and every time they eat, we don’t.

Also, if you are not growing, they are eating your lunch, be sure of it. They might be doing it through product, service, business model or smarts.

Listen to Pavlo Phitidis unpack why knowing who they are and how they are doing matters in this podcast from The Money Show.

Competitive analysis and competition for the big 4 or 5 anything is easy. There is a tonne of data, they are incestuous and have no ability to protect IP and mostly they are listed with public information freely available. Think of any big bank, mobile network or insurer for example!

In the small and mid-tier business segment, besides the tens of thousands of competitors that we face up to daily, there is scant data to do a proper analysis and there are simply too many. So where do most of us begin?

Most of us start our businesses based on an interest, skill and insight. For example, if you are a petrol-head, love cars and develop insight and knowledge on cars, you are likely to find yourself in the auto industry. Perhaps the tyre industry. As you begin your business, you attend trade shows, exhibitions, and events. You subscribe to the TyreWeekly trade magazine. You even take a few courses on rubber and rims.

This creates for each of us a frame of reference against which we see your businesses, the industry and, how we grow and compete. In many ways, we become trapped, much like a person walking the same path daily for years eventually creates a ditch preventing you from seeing left or right. We lose the wood for the trees.

So, out of necessity we do a competitive analysis. We may go to a trade show and see our competitors with their products. In many cases, that competition is evaluated on a feature-for-feature basis. This leads to a feature-for-feature investment to one-up your products or services against those of your competitors. A better tyre, a coloured tyre or a different tread and for a while, you have an advantage, until your competitor has to respond and the battle begins again. It’s expensive and futile and everyone loses. The same goes for price. Competing on price is a never-ending battle until someone runs out of money. When they do, the price has been dropped to such a degree that there is little profit in the industry, making your daily grind, a grind.

If instead of seeing your business as a product, with a price, you saw it differently in relation to a customer, your competitive evaluation works differently and will give you a very different outcome.

It’s hard to get right because everything that moves, needs a tyre, right? If you only have a hammer in hand, everything looks like a nail. But, using this example, the tyre industry is full of differentiation. You have cars, used and driven by many different people for different reasons. The same with vans, trucks and lorries. You have industrial yellow metal, airplanes of different sizes and hundreds of different trailers. The list goes on.

Stepping away from a tyre and looking at your business as a customer begins a very fruitful journey. Since nobody spends anything unless it solves a problem (consciously or unconsciously), picking out 2 or 3 different types of customers in the tyre industry and then deepening your understanding of them takes you out of the product-price cycle and brings you into the problem-experience cycle. For example, in the grain farming industry, you have a few weeks that determine whether you will live or die based on your irrigation capabilities. Understanding that means that the big circular, mobile irrigation equipment has to work. If your tyres have been sitting out in the sun for months, cracking and weakening, and you need to irrigate, is there a cost that you would not pay? Understanding your business like that means you can better identify your competitors, evaluate them more closely and then add the features of service that will get you ahead of them specifically and directly.

Why your team is everything

At an event this week, I was told: “If you want something done properly, do it yourself”. It’s the biggest lie if you want to build a business that can grow and one day be sold. You need people – it’s an absolute fact.

Listen to Pavlo discuss this on this podcast from The Money Show:

https://omny.fm/shows/small-business-focus/small-business-focus-11

Some truths to start:

  • You cannot grow a business without people.
  • You cannot grow a business with people who are not part of a team
  • You cannot grow a business with a team that has no responsibility.

If you are, beware, since you don’t have a business but rather, you have created a job in the shape of a business. It will never be able to grow beyond a certain level and will never be able to be sold for a significant capital gain.

Your team’s impact on growth

We ran a survey across 308 mid-tier businesses (none were Aurik clients) doing between $1m and $10million per year. On average about 88% of these businesses want to grow. Of those, 95.2% had staff that were completely unaware of the growth strategy.

If your people don’t understand your strategy, how can they be aligned to it, to you! A huge part of leadership is communication and getting your team on board and excited about the growth journey.

Your team’s impact on value

There are 5 levers of valuation in a business. The 3rd is all about team – if you can’t delegate and train your team on the system they need to operate, you get caught in the engine room of the business and it gets very hard to see the wood from the trees and to see where your growth opportunities are.

Just hiring more people doesn’t solve your team issues:

It’s not enough to just employ staff, you need to capacitate them, and you need to make them accountable by delegating clearly. If you don’t have their buy in and haven’t given them the training for them to succeed, you’ll still be stuck believing that if you want something done properly, you have to do it yourself!

Digital marketing

Is digital marketing dead?

Digital marketing is about promoting your brand to connect with potential customers using the internet and other forms of digital communication. This includes not only email, social media, and web-based advertising, but also text and multimedia messages as a marketing channel.

A bold statement, specifically for and from the context of Business to Business (B2B) growth businesses with annual revenues R1m-R150m

*Big brands, who can throw the most money at the platforms, tend to win in this space, and business to consumer (B2C) also has a different experience on digital.

Listen to Pavlo discuss his reasons on this podcast from The Money Show:

It’s a broken covenant or we’ve been duped by the giant conglomerates who run these platforms – Google, Facebook and Twitter

In the beginning we were told good content is king, so create good content and the platforms would support your growth by ranking you better and growing your audience and community. Your ads, if created well, would pop and generate response.

Then it all changed, after we’d invested deeply in creating content for our community These platforms listed, and turned from looking at us, the users, to looking at their shareholders, and delivering returns. And the algorithms changed to serve that audience. And for users, they keep changing. You can’t keep up.

Today, we create good content, we build our community, but discover that we’re only reaching a small percentage of our community – and to reach the rest we need to ‘boost’ our ad.

The context: A changing environment

In the old days TV really worked. In South Africa especially, there were only a few options – SABC, eTV and multichoice so you knew if you flighted an ad it would reach millions. But that ad costs millions of Rands so that was only an option for corporates.

Radio used to be an affordable and impactful option for SMEs but it has been hard hit by Covid as fewer people are in their cars, in traffic. Even before Covid,  it had taken a huge knock from audio on demand which has become accessible to almost everyone from Spotify to podcasts to youtube.

Print has been decimated by online, which allows us access to news from millions of sources.

So, who can help us?

It’s become so complex to understand the digital marketing reports and results and so we turn to agencies to interpret the stats, and act on them.

Digital marketing is a long and expensive game, and SMEs are impatient – they want to see results! So the agencies move up the ranks to serve corporates.

In addition, many of the agencies are affiliated to one or more of the digital marketing platforms, and are motivated to use those platforms for your spend.

Where to now?

There are 2 trends that Pavlo sees emerging to get results from digital:

  1. Performance pricing

If you are an agency that is confident digital works – then consider getting paid on the basis of delivering leads.

2. Relationship marketing

Migrating good old fashioned relationship marketing into a digital delivery.

perspective

How you think about your business is how it develops

Reflecting on many business discussions, there is a consistent pattern that correlates the present to the future. 

How you look at the world, shapes the world to that outlook. To use a current example, a combination of cognate dissonance and confirmation bias at work across social media on the issue of vaccines. 

How you understand your business is driven by how you choose to see it. It is a choice. Listen to this podcast from The Money Show as Pavlo Phitidis illustrates this using the example of 2 clients. 

https://omny.fm/shows/small-business-focus/small-business-focus-how-you-understand-your-busin

Both are in the same industry and have similar business metrics. The deal in home furniture design, manufacture, and distribution. Both employ around 80 people, both exist in very competitive markets, and each is having a very different outcome.

Company 1 – Jack

The business owner came out of the supply chain and procurement department of a corporate furniture manufacturer. He found himself there after several years on the manufacturing floor. At 38 he started his own business with a good understanding of the supply chain, relationships.

Company 2 – Jill

She had started this business at 27 out of her parents’ garage. She did so to pay for college and contribute to his family home. She designed the furniture, made it and distributed it mostly through smaller, independent furniture stores. Over the last 3 years, she found access into bigger stores and chain stores too.

When I asked both business owners what made them special, they gave me very different answers.

One said, the materials, fabrics and chassis upon which the furniture is built, the manufacturing process and the factory floor layout with its plant and equipment.

The other said, the sales representatives who had relationships with the customers who bought the furniture. They influenced the design and manufacturer of the furniture.

The one business enjoys steady, consistent sales and the other struggles, finding traction hard to sustain.

When I first met Jack, he took me around his factory and spoke to me about the various fabrics and imitation leather materials. He showed me a cnc lathe that could cut out the fabrics based on his CAD furniture design software.

Jill spent a short amount of time with me at her factory and then took me out visit 4 of her retailers. She had asked that we meet on a Saturday and then spent all the time talking about how the shoppers in the retailers behaved and how that informed all her decisions.

Can you guess who is growing and who is struggling?

Both are smart, experienced, and hard working. Both are determined and well connected.

When I ask Jack what challenges has he faced and how he overcame them, his answers all centred on product. Jill’s all centred on her customers, customer behaviour.

A business exists for only one purpose: To solve a problem for a customer by providing a great experience. When you see and value your product, before you see, understand and value your customer, their problem, and the experience they wish for, all your responses to business challenges will be wrongly orientated.

You can build a better mousetrap, but the world won’t beat a path to your door, if your customers own cats.

unit economics

Understanding your businesses unit economics

In any business, understanding your data and knowing which data is valuable, helps manage risk, performance and value.

Understanding your unit economics begins this process. Unit economics simply evaluates how much profit you make from selling one unit of service or product. It’s easier to calculate in a very early-stage business but much harder in a growing, established business.

Listen to this podcast from The Money Show where Pavlo Phitidis outlines how to calculate your business’s unit economics:

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