Financial Clarity for Entrepreneurs

The Limits To (Entrepreneurial) Growth

Those of you of a certain age, or with a knowledge of history, know that The Limits To Growth, published in 1972, was a dire prediction of food and raw materials shortages caused by population growth.  In the almost 30 years since, world population has increased almost 85% and the dire predictions have proven to be unfounded.

What the authors of The Limits To Growth neglected to take into account is that human beings are not only consumers of resources, but are sources of innovation as well.  We have a tremendous ability to overcome limitations through creativity, increases in scientific knowledge and the application of technology. 

The real limit to growth is the lack of imagination – both for the world and for our businesses.

What’s Holding Your Business Back?

In my work with entrepreneurs I come across numerous surface reasons for limited growth and I’ll be posting about some of them in the future, but more and more I think there’s a deeper problem: the lack of a repeatable, scalable, sufficiently unique business model.

This is an area I started writing about in Rethinking Your Business Model, but I’ll get down to a more fundamental level here.

What Is a Business Model?

For a thorough background on business models go here, but for our purposes a business model is how you create value for customers in a way that they will be willing to pay a sufficient price, and you can deliver at a cost, that allows you to make a profit.  After all, if you can’t make a consistent profit, you don’t stay in business.

An effective business model will take into account these elements:

– Key Partners – suppliers, logistics, IT, etc.

– Key Resources – intellectual property, raw materials, employees

– Customer Segments – which portion of the entire universe of consumers or businesses you are targeting

– Key Processes – manufacturing, design, marketing, sales, etc.

– Distribution Channels – direct to end-user, retailers, VAR’s

– Pricing and Value Proposition – can you deliver value that a customer can recognize

– Cost Structure – fixed and variable

– Overall Business and Political Environment

An Effective Business Model Is Repeatable

Simply put, an effective business model doesn’t need to be changed constantly.  If you’re doing these:

– Constantly looking for new suppliers

– Always looking for the magic target market that will appreciate your offering

– Experiencing high turnover or chronic underperformance among key employees

– Constantly putting out fires

– Competing on price

– Frequently looking for ways to cut overhead to preserve profitability (or keep losses manageable)

This is evidence your business model is not repeatable.  And it’s not repeatable because it wasn’t adequately designed in the first place.  If you can’t come into work every morning and know what you’re going to do, for whom, with whom and with what resources it’s time to take a good hard look at your business model.

An Effective Business Model Is Scalable

It’s popular in the world of software business to talk about scalability in terms of geometric increases in revenue and linear increases in costs, and that’s appropriate for a business with high upfront development costs and low or negligible marginal costs.  For the rest of us scalability means overhead doesn’t have to grow as fast as revenue. 

The rate of growth in overhead doesn’t have to be dramatically slower than revenue, but it needs to be at least a little.  Unless, of course, you’re building out the infrastructure now to support significant growth in the near future – but that’s a once-in-awhile event and shouldn’t be constant.

If you’re experiencing revenue growth and increases in gross profit but net income is not increasing, this is evidence of a problem with your business model.

An Effective Business Model Is Sufficiently Unique

Being unique doesn’t have to mean you have a bunch of patents like an Apple or Microsoft, but it does mean you can’t be the third coffee shop on the block or the 45th printer in town doing business cards and letterhead.  If you don’t have a value proposition for your customers sufficiently different from your competitors, you will be fighting a constant battle for growth and profits.

So if you don’t have a portfolio of patents, look at these areas for uniqueness:

– Can you get an exclusive relationship with a valuable vendor?

– Can you uncover an underserved customer segment and bring to them your value proposition?

– Can you redesign internal processes to make your cost structure lower than your competition?

– Can you find distribution channels your competitors aren’t using?

– Can you find new value propositions for existing customer segments by bundling and unbundling your offerings?

These are just some of the questions to ask yourself as you look for ways to differentiate your business and create a unique business model.

The ultimate aim for an entrepreneur is to create value for themselves, their shareholders, their customers and their employees.  Ineffective business models destroy value, while effective business models create value.  What can you do today to start on the path to creating value?