The Business > Starting up > Business models Part One: ‘Help, we’re shrinking!’
Business models Part One: ‘Help, we’re shrinking!’

July 2009

Walking the tightrope

The main economic problems we face at the moment are that:

  • Credit is less available.
  • Business confidence is low and the economy is shrinking – there is less money going around to feed people who want to earn it.

Businesses therefore need to walk a tightrope:

  • On the one hand they must do their best not just to keep market share but to increase it just to keep levels of business up;
  • On the other hand, they need to manage, and if necessary reduce, their overheads and their reliance on borrowing.

In more normal times, a push to increase market share would usually coincide with increased borrowing and investment. It might involve a business acquisition strategy. It would certainly usually involve an increase in sales and marketing costs.  It would also usually go arm in arm with increased business levels and increased investment in production, distribution and other costs. But this is not necessarily so much the case in a shrinking economy! The priority at the moment is to keep levels of business up to keep existing assets utilised and to cover existing costs.

At the moment there is certainly less traditional M&A activity in terms of companies take over others as their way of growing their business – buyers’ and sellers’ price expectations are different. This is caused or exacerbated by the shortage of availability of and the increased cost of funding, and by the lack of certainty as to what things are going to be worth in the future. Ironically, whilst ‘M&A’ stands for ‘mergers and acquisitions’ people generally only think in terms of acquisitions, whereas perhaps there may be more opportunities for genuine mergers out there, as businesses (and business owners) join forces.

It’s noisy out there!

The marketplace is shrinking in another way as well – in a way which isn’t just temporary like the current state of the economy. Many businesses which previously might not have had to think too hard about where their revenue was coming from are now discovering that the world has changed when it comes to methods of going about finding new business.

The internet is making the world a smaller marketplace which everyone can compete in. It is getting harder and harder to grab people’s attention in the middle of all the other ‘noise’ being thrown at them. It is a smaller marketplace but there are a heck of a lot more stalls.

With so much competition it is more important than ever to invest in engaging with your customers so that you don’t lose them once you’ve got them.

But also, you need to think carefully about where you get your new customers from. Traditional marketing methods such as advertising, direct mail and cold calling are in many cases becoming less effective. The best way to make more noise than the competition is to raise your SEO rankings. But does this make the right noise for your business? Aren’t all businesses the same anyway? How do you differentiate yourself from your hundreds of competitors? About half the revenue of all SMEs (small and medium sized enterprises) now comes from word of mouth marketing/networking, ie in effect relying on your ‘engaged’ customers and on other people in your social and business communities to act as your ‘outsourced’ salesmen. What works best for your business?

Recessions breed entrepreneurs

Of course, in a recession many people are losing their jobs. They and many others are looking to start new ventures in which they will have more ownership and control.

‘So what can we do?’

In these new conditions, what can businesses do to survive and thrive? One thing is clear – taking a ‘same old same old’ approach is less likely to cut the mustard.  Those businesses which are more willing and able to adapt and adopt new ideas are better positioned than others. Many SMEs have the management structure, drive and operational flexibility to enable them to identify and take advantage of the opportunities that are available. This gives them an edge over larger and more cumbersome businesses.

The current economic conditions provide plenty of opportunities and incentives for all sorts of strategic initiatives. Look at your business models, by which I mean both the way in which the ownership and management of your business is structured, and the ways it goes about business.
Take the time to do the following:

Sort out your business structure

  • Look at your management structure.
    • Is it going to give you the edge?
    • Are all the right people in the right roles?
    • Do you have the best possible lines of communication and decision-making?
  • Look at your business operations and assets.
    • Is your business too unwieldy and unfocused?
    • Could it be broken into different more stream-lined businesses?
    • Are some parts of it more successful than others?
    • Are there some parts of it you could get rid of so you can focus your resources on other parts?
    • Can you reorganise your business so that the failure of one part won’t bring the rest down?
    • Would it be easier to raise investment or new finance by separating attractive areas of your business from riskier parts?
    • Would it be sensible to protect some valuable assets by ring-fencing them?
    • With values down, now is a good time to be thinking about restructuring your business – ask any accountant!

 

Make the most of what you’ve got

Explore ways of doing business which might extend and increase the market in which you sell your goods or services.

    • Do you have a brand or intellectual property rights which have a potential value which you could be exploiting?
    • Could you licence other businesses to promote their goods or services using your brand or IPR?
    • Could you franchise your brand and business processes?
    • Could you create other new sales channels?
    • Can you appoint and incentivise sales agents or distributors rather than manage and fund the entire process yourself?


Do you have a receptive customer base which you could leverage by promoting other goods or services to them, perhaps ones which are complementary to your own goods or services?
Do you know any businesses which provide such goods or services and could you team up with them? And conversely could you also be working with them so that you can promote your goods and services to their receptive customer base?

Explore ways to reduce overheads or financial exposure without compromising on activity.
Can you cost-effectively outsource any business needs which you currently employ as a fixed cost or buy in from time to time as an unnecessarily expensive resource? For example IT infrastructure and support, marketing resources, accountants, lawyers, HR expertise?

It’s not what you do; it’s what the customer wants

  • What are your target customers really looking for? Is this the same as what you provide?
    • Could your selling proposition be stronger if you combined it with the selling propositions of one or more other businesses to address your target customers’ real needs?
    • Could you create combined packages which might be attractive to customers? Customers don’t want to have to find multiple different suppliers to service what they see as one business requirement. Can you create a one-stop shop for them by venturing with or sub-contracting to other businesses?
    • Could you be working with complementary businesses to target new customers or to increase sales to existing customers by servicing other needs of theirs?

 

Why go it alone?

You will have got the message by now that quite a lot of what I’m talking about involves what can be done by teaming up with other people and other businesses. Why not explore ways to combine forces/share resources or opportunities with other businesses? The more you optimise the use of available resources on any venture the more likely it is that the venture will succeed. If your business does not have the best resources for what you want to do, then consider whether you can team up with another business to share its resources.

  • Are there any resources which you could be sharing with others?
  • Could you second resources to each other (eg staff, equipment, premises?)
  • Are there any advantages of scale in teaming up with them?
  • Could you club together to invest in new marketing or sales channel initiatives?
  • Could you spread the risk of tentative new business initiatives by sharing them with other businesses?
  • Could you club together in some way for extra buying power?


Don’t be afraid of talking to the opposition. If you are both relative minnows in your market, explore ways of working with each other to become slightly bigger fry, particularly if you have complementary products or services, or simply complementary management skills – you might have the best organisational skills, the other might have the best sales skills.

Explore alternative ways to fund your business.

As well as looking to joint venture with other businesses for the increased marketing capabilities and sharing of resources, it can of course also help to team up with other businesses to take advantage of their financial strength.

With banking and venture capital finance being in short supply, many business owners with balance sheet or cash flow problems will be looking at friends and family as a source of finance. Can you create an attractive investment proposition for them? Privately owned businesses are not generally the best form of investment vehicle for investors who are not actually involved in running them, hence the expression is usually ‘friends, family and fools’! But with most other investments currently offering very low interest rates, now is as good a time as any to invest in a private company. Whether this is as a straight loan or an equity investment, the investor should look for appropriate protections.


What business model can we use?

Once you’ve decided on entering into some kind of venture, you need to decide how to go about it. There are numerous different business models or structures which you can put together. You could consider any of the following or any combination of them:

  • Partnering/joint venturing:
    • Joint venture companies
    • Partnerships/LLPs
    • Contractual arrangements
    • ‘Members’ organisations
      • companies limited by guarantee
      • mutual societies
      • trade associations
      • consortiums, clubs, networks
  • Licensing/franchising
  • Distributor/agency
  • Outsourcing
  • Sub-contracting
  • Lending/ share subscription
  • Mergers



Over the next few issues of The Business I hope to provide some more detailed checklists of the kinds of issues which you should be thinking of when setting up any of the above structures. Many of them overlap, and many business ventures involve a combination of them. But hopefully I can set out the basics of each one reasonably clearly. I am hoping that by the time I get to the last one – mergers – the economy will have shifted a bit and I will be able to focus more on issues arising in traditional acquisitions and disposals!

Conclusion

This is a good time for taking risks, for thinking about new opportunities to protect your market share in the current shrinking marketplace and to be best positioned when we come out the other side. Try to find ways which don’t drain your resources too much, so you don’t go bust first!

 

 
 
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Andrew James