by Bill McBean
Trying to manage a successful business without taking this concept into account is like playing a baseball game without knowing what inning you are in, if you are winning or losing, where you rank in relationship to other teams, or how far into the season you are. But if you understand the business life cycle, you are able to look at your company and determine where you are, how far you have to go, and what you have to do to get there. Having this understanding also helps you define what success means to you, determine appropriate objectives and goals, plan and strategize to achieve those goals, measure your efforts, and make adjustments and improvements as necessary. Finally, it makes it possible for you to see threats as well as opportunities, recognize options for overcoming the threats, and take advantage of the opportunities you might have otherwise missed. Unfortunately, though, the vast majority of business owners operate without this understanding. And there is no doubt, at least in my mind, that this lack of understanding contributes significantly to the extremely high failure rate of American businesses.
The fact is that, whether you are aware of it or not, every successful business inevitably passes through five levels over the course of its lifetime:
1. Ownership and Opportunity
2. Creating Your Company’s DNA
3. From Survival to Success
4. Maintaining Success
5. Moving on When It’s Time to Go
The first level, Ownership and Opportunity, is the one in which individuals seek out or create an opportunity in a market because they believe their ownership skills can produce a reasonable profit based on their investment. At Level 2, Creating Your Company’s DNA, owners create processes and procedures that determine how the company will be run on a day-to-day, month-to-month basis, which in turn dictate how employees will perform their jobs and how they will interact with each other and the company’s customers in order to create the expected outcome. These first two are essentially planning levels, although owners also have to refer back to them as their companies go through the business life cycle.
The third level, From Survival to Success, is the period during which those day-to-day processes are put into effect, results are measured to make sure that what’s accomplished is what was expected, and steps are taken to modify them if necessary. During Level 4, Maintaining Success, owners protect their businesses from threats and create or seek out additional opportunities in order to solidify the company’s foundation and build on its success. Finally, at Level 5, owners finalize and implement their plans for winding down their careers, and if they’ve done it right, exit the business on their own terms and with maximum payout. Levels 3, 4, and 5, then, are action levels in that at these levels the company is actually in operation.
These five steps in the business life cycle, the five levels of business success, are successive in nature. That is, a business must successfully complete Level 1 before it can go on to Level 2, Level 2 before going on to Level 3, and so on. In this respect it’s very much like going through school. You can’t go to middle school without first having gone to elementary school, attend high school without having finished middle school, or enroll in college without having completed high school. In addition, in the same way that the information you gather and the skills you develop in the lower grades continue to be used in the higher ones, everything you learn at the various levels of the business life cycle continues to be used as you move through it. That is, rather than leaving the levels behind, you actually bring them with you, and expand and improve as you go from one level to the next.
It’s important to remember, too, that even though you use the same skills in school from one grade to the next, you don’t necessarily use them in the same way. For example, you learn how to read in elementary school, but as you go through middle school, high school, and college, you use that skill to read different kinds of things. Similarly, you start to learn arithmetic in first grade, but by the time you’re finished with your schooling, you’ve learned how to solve much more advanced mathematical problems. The seven Facts of Business Life work exactly the same way. That is, although the facts—the skills you develop—remain the same from one level to the next, the way you apply and implement them changes as your business moves through the life cycle. Take, for example, Fact 4, “Planning Is About Preparing for the Future, Not Predicting It.” At Level 1, Ownership and Opportunity, most of the plans you make will be concerned with the overall profitability of the opportunity, how long it will take to become profitable, and how much cash you’ll need to get the business up and running. However, at Level 4, Maintaining Success, the plans you make are much more likely to be strategic and tactical in nature, and focused on market share and profit. In other words, the skill remains the same, but its use changes. And that’s why the level a business is on at any given moment—that is, where it is in its life cycle—has a significant impact on how it operates and what its owner’s role is.
There is also, however, an important distinction that needs to be made among the various levels. In his book, The Seven Habits of Highly Successful People (Free Press, 1990), Steven Covey discusses how everything is essentially created twice—first as a mental concept and then as a physical concept. This is true of the business life cycle as well. Levels 1 and 2 represent the mental creation of the business—that is, thinking and preparing—while Levels 3, 4, and 5 represent the physical creation of the business—that is, taking action to implement those thoughts and preparations. The truth of this will become clearer as you learn more about the Facts of Business Life and how they are implemented at the five different levels.
While in a perfect world every owner would begin at Level 1 and move easily on to Level 2, Level 3, and so on, life in the business world is seldom perfect. While most businesses do basically move from one level to the next, there are always instances in which, for one reason or another, they have to temporarily return to earlier levels. For example, if a company at Level 3, From Survival to Success, finds that one of its competitors has developed a better way to deliver its product to customers, it would be in the company’s best interests to go back to Level 2, Creating Your Company’s DNA, and reconfigure its own process for delivering its product, thereby keeping up with a competitor’s challenge. Similarly, if a company at Level 4, Maintaining Success, decides to expand its business, it has to go back to Level 1 to analyze whether the proposed expansion will be profitable, and, if so, return to Level 2, Creating Your Company’s DNA, to rework its processes to handle the expansion. In fact, it’s only by going back and forth from one level to another that companies can continue moving successfully through the business life cycle.
In order to provide a clear and concise overview of each of the five levels, I have divided the discussion of each one into five general areas: (1) Leadership, (2) Management, (3) Planning, (4) People, and (5) Marketing and the Customer. Although there are other, more specific aspects of running a business, I’ve chosen these five because I feel that together they represent the basic elements of business ownership and that by reviewing them you will get a good idea of what happens at each level.
Level 1: Ownership and Opportunity
The owner’s objective at Level 1 is essentially to determine if an opportunity exists—or can be created—that would be attractive based on how much profit it can generate and how much cash will be needed to do it, the owner’s criteria for success, and the owner’s tolerance for risk. Notice that I use the word risk here. Ownership and opportunity is a “risk versus reward” proposition and has nothing to do with the generally accepted belief that going into business for yourself is a gamble. Gambling is what happens when a potential owner goes into an opportunity without proper research. However, if you do your homework and understand what needs to be done to make money, and how much money the opportunity will require, it becomes a risk versus reward decision.
As I mentioned earlier, although Level 1 is where every business starts, since you bring each level with you as your company moves thr
ough the life cycle, you must continue to execute the tasks at Level 1 even as you move on to succeeding levels. That is, these tasks don’t have to be done only when a prospective owner first researches the market for his or her product or service. They are also required when a current owner wants to determine whether market factors have remained the same. All successful owners know they have to keep on top of the market and are constantly visiting Level 1 so they can stay ahead of competitors by keying on market shifts, trends, and opportunities.
Leadership at Level 1
One of the most important skills of leadership is self-analysis, but it is particularly critical at Level 1. This is especially true for the first-time owner because not everyone is cut out to own his or her own business. But it also applies to current owners who are thinking about expanding their companies or starting new businesses. That’s because even though a great opportunity may present itself, it may not be the right opportunity for you and your situation. And unless you take the time to analyze yourself and your abilities realistically, you won’t be able to make an informed decision about pursuing it. So, particularly at this level, you need to stop and think about who you are and who you want to be, and you need to do it before you sign a bank note or negotiate a purchase.
Management at Level 1
The first thing any businessperson needs to know about management is that it always comes after leadership. Leadership points the way, but it’s management that gets you where you’re going. Once you’ve analyzed yourself and determined that you are ready to pursue an opportunity, management takes over. At Level 1, the primary task of management is to gather information and develop financial forecasts in order to determine if an opportunity exists, what the potential profits are, if the market is expanding or growing, the possibility for additional opportunities in the market, and the possible threats to achieving the desired results.
The information you will need to gather includes market size, the strengths and weaknesses of your competitors, potential sales, ease of competitor entry, market demographics, typical gross profit margins in the industry, typical expenses, and expected profits as a percentage of sales. By the time you have gathered all this information, you will have essentially become not only an expert on the market but will also have developed an understanding of both national industry trends and future prospects for the industry. Once you have this information, you will be able to produce realistic financial forecasts detailing “most likely” sales, gross profits, expenses, and net profits. You will also be able to determine cash flow, cash burn, working capital, and the total amount of investment required. All of this will, in turn, lead to a return on investment (ROI) number and indicate how long it will take the company to become debt free on the operating side.
Finally, ownership and opportunity decisions should always be based entirely on up-to-date facts or, at the very least, educated assumptions. Emotions, guesses, dated information, uneducated assumptions, or what you imagine life as an owner might be like should never be part of any business decision. And the simple truth is that the better the information you gather, and the better you analyze it, the more likely the decision you make will be the right one. This process is the same regardless of whether it’s the first business being bought or the fifteenth. The only difference is that the more you do it over the years, the better you get at it.
Planning at Level 1
At this level, as at every level, planning addresses the question of how you are going to accomplish what you’re expecting to accomplish. But at Level 1, planning’s primary purpose is to determine if the financial forecast you’ve completed is realistic, and if it isn’t, what that means for the future of your potential business. Of course, every business plan is different, both because markets are different and because every owner’s definition of success is different. There are, however, some elements that are common to every successful plan.
The first of these are goals and objectives. Goals are where you ultimately want your company to be, and objectives are the intermediate steps you have to attain before you can get there. At Level 1, for example, you might set a goal of increasing sales by 10 percent. In order to achieve that goal, you could set up a series of objectives such as increasing sales by 5 percent a year for two years; increasing inventory, marketing, and advertising by 5 percent a year; hiring additional employees to handle the increased volume; increasing employee training; buying new equipment; or updating processes to handle the expected sales increases.
The next common element in a successful business plan is the analysis. The goal of this analysis is to determine if what needs to be done in order to be profitable is realistic. In other words, it’s one thing to put numbers down on a piece of paper, but it’s quite another to make it happen. Such an analysis should consist of several key questions, including:
What is the size of the overall market?
What percentage of the market will I have to capture and keep in order to make a profit?
Is the market growing or contracting, and how will this affect profits in the future?
What will happen if the business doesn’t perform up to my expectations?
Do I have enough cash to last through some unforeseen difficulties?
Do I have the talent and experience to lead my business to success?
Is the expense structure likely to support the expected results?
Answering these questions is particularly important because they “slow” you down; that is, they remove emotion from your calculations and force you to focus on the facts and the realities of the situation.
The last of the common elements of a successful business plan is the development of strategies. Strategies are, simply put, the means by which you will accomplish the goal and objectives you’ve set for the company. That means, for example, if one of your goals is to capture the business of one of the market’s top-volume customers, you might develop such strategies as assigning a specific employee to handle their business, fast-tracking their orders, or perhaps setting special pricing or discounting for certain products or for purchasing in specific volumes. Similarly, if one of your goals is to increase gross profit margins, your strategies would have to include increasing your selling price, lowering your product cost, or some combination of the two. You might supplement this with a short-term objective of increasing training for your salespeople, and a long-term goal of eliminating some of your competition by buying or squeezing them out in order to dominate the market.
Planning at Level 1, as at all levels, is essentially a step-by-step process that enables you to determine if and how you will be able to attain whatever goal you have set for your company. At Level 1, though, it is also about preparing yourself for what may occur if you decide to move toward ownership or expansion, and to provide you with more information on which to base that decision.
People at Level 1
Employees are not only a major part of any business but also, in most companies, one of the largest expense categories—if not the largest. Owners accordingly want to get their money’s worth by hiring the best people they can find. Unfortunately, there is a limited number of such people, and even if you can find them, they may not want to work for you. And even if they did, you probably wouldn’t be able to afford all of them. However, since you aren’t actually hiring anyone at this level, you have time to identify these people, recruit them, and work their cost into your expense structure.
When you are thinking about employees at Level 1, there are essentially three issues you must take into account. The first is their overall cost, including payroll taxes and benefits. Because employees constitute such a large expense, their cost will have a major effect on profits, which means that estimating the cost correctly is important as it can affect the opportunity decision, either positively or negatively. The second issue is that every business has key positions, and it’s essential to identify these key jobs and make sure they get filled first. The fact is that not every job is equally
important, so it’s best to know which ones are vital, identify some candidates for those jobs, and be realistic in terms of the salary and benefits they will demand. The third issue concerns training. In any new opportunity, training is important, and sometimes employees have to be hired even before the first customer walks in the door. For that reason, the cost of training has to be taken into consideration, especially if processes have to be designed and coordinated with each other. The bottom line, so to speak, is that setting a limit on personnel expense is a tool you must use at this level if you want to be able to make an informed opportunity decision.
Marketing and the Customer at Level 1
After you’ve done all the research and analyses you need to determine if a particular opportunity is right for you, there is one last area on which you need to focus—who your customers are and how you can reach them. As an owner you have to get this right, because if you don’t, even if you do everything else right, your chances for success will be slim at best. Of course, at this level the opportunity is still a mental concept rather than a physical one, and you have yet to fight any real marketplace battles. But marketing and the customer have to be one of your focal points, both before and after you start your business, because without customers there is no business. And if you don’t know your customers, you will never be able to reach them to tell them that you exist and are ready to fill their needs.
Once you know who your customers are, assigning and developing a marketing budget should become your focus. Like employee salaries, marketing and advertising can be a major expense, so your estimate of its cost has to be realistic. It also has to include the cost of getting the word out about your business as well as keeping it in front of your potential customers. Marketing is one of those expenses owners tend to minimize, especially at this level, and my suggestion would be to first determine what you consider a realistic budget, and then add a certain percentage to cover unforeseen marketing opportunities.
