The Disappearing Niche

Posted on June 20, 2012 by MikeTrup

Most new and growing businesses start out by identifying and serving a niche market. This niche might be a market segment or a geographic area not well served by current offerings. By developing a structure and a process tailored to delivering value to this niche, companies can typically make higher margins and returns.

It is often not that difficult to find a niche. They often occupy market-sizes below the ‘meaningful money’ radar of large companies. Despite the adage ‘Think global, act local’ there is still typically a cut-off point of ‘locality’ below which a large company loses too many economies of scale to really compete with an SME.

The challenge for many SME’s though comes from success.You build a nice and successful business to a certain size and then either the niche becomes interesting to a large company, if you have developed a new market, or you come to dominate it and you struggle to find further growth from it.

Your choices then are either to just accept a low or no growth future (hard to maintain staff interest and career progression), find another niche (difficult to find synergies so complexities of management abound with little competitive advantage) or to grow with the niche into the mainstream marketplace and start to face competition from much large competitors.The challenge of this final option is that big competitors are often ‘inept’ because the scale of their business demands them to be so. ie the demands of large scale process inevitably conflict with flexibility, though there are some exceptions to this. Consequently, the hardest challenge for an SME is to maintain their original differentiator in the face of the economics and operational demands of scale.

McKinsey produced an interesting article on PE ratios and hence market returns. This tends to reflect the fact that companies of similar sizes tend to be structured in similar ways and to produce similar returns, over the long term. It is good for SME’s to be self aware, so that as they grow they resist the factors that will influence their decision-making in the same way as their larger peers for as long as possible. Resistance may be futile but it is vital not to pick a fight head on with a much bigger competitor in a commodity market-place, so work on developing those differentiators that can scale for as long as possible.As Michael Porter said and I paraphrase ‘Be cheap or be different.’

Ooops I failed again!

Posted on May 20, 2012 by MikeTrup

A lot has been written on innovation and how one has to keep failing in order to innovate but failure has a cost and you have to be sure that you are doing your trial justice. You can learn almost nothing in life and business without sticking a toe in the water, but often only a toe is not enough for the trial to stand a chance of succeeding. It probably needs to be a foot (these are in short supply) and the challenge of innovating is to make sure you don’t lose a leg in the process or run out of feet!

I have certainly guilty of trying to test an idea but not giving that test sufficient resources to give it a chance. This is particularly true when evaluating a business start-up idea. When one considers that about 90% of new businesses fail in the first 3 years, depending on country and industry, then one has to ask what chance a new business has when it is not the owners sole activity during the all important first few years.

Within a company, within any new line of business, there has to be at least one person who will live or die (economically at least) on the success or failure of that business. It needs one driving force who wakes up in the morning thinking how they can make this succeed. It sounds obvious but in many fast-growing companies or SME’s, it is not just cash that is a scarce resource but even more so management time. An innovation will probably fail anyway, it’s the nature of the beast, but failing to truly commit required resources from the outset will guarantee failure.

I’ve been made redundant!

Posted on May 4, 2012 by MikeTrup

When people ask me how to build a company, one of the things I say, is that I work all the time to make myself redundant. This sounds facetious and I don’t mean it to be but as CEO in a startup, you inevitably get involved in doing everything. At one time or another, I have done everything in the company from cold-calling (smile and dial), to account management (I’m your friend, buy from me), to marketing (I have some magic pixie dust that might help you!), to book-keeping (1 and 1 makes how many?) to working in the warehouse (should I really be stuck to the box?) to changing the photocopier ink (another pair of trousers ruined).

This is not scalable and not the way I want to live so at ever stage I looked to see which bit of my role I should or could make redundant and hired people with the existing or potential skills to fill fill that role better than me. The first thing that went was accounting and credit control, then warehouse, then sales, then marketing and so on. Now, I am pleased to say as CEO I do very little and I am pretty much redundant on a day to day basis. I am surrounded by good people whose individual skills far exceed my own. So what do I as CEO (or Managing Director in English English) do?

My remaining role really comprises of 4 things:

Refereeing between departments when perspectives or priorities seem to be irreconcilable, which mostly involves acts of translation from sales speak to accounting speak and vice versa. Sometimes, to move forward I have to remind people, ‘This is not a democracy, it is a benevolent dictatorship.’ and just make a decision. Mostly, they sort it out themselves.

Thinking about where the business should be headed and suggesting ideas and experiments to test exactly how bad an idea it is, because then everyone can blame the dumb MD when it doesn’t work.

Making sure we hire the right people, as I have the time and perspective to do it and I will fire myself if we ever allow an HR Department to hire people for line roles, but that is a separate blog

and

Shmoozing customers and suppliers and occasionally our staff, whilst trying not to show my ignorance of the detail of the business.

Being a CEO of a growing SME is a pretty amorphous set of tasks. I suspect I am becoming less good at schmoozing as I get older, so perhaps that will be the next thing to go. We don’t even photocopy as much as we used to so what next for me?

Expanding Internationally

Posted on April 30, 2012 by MikeTrup

One of the issues facing U.K. growth businesses as opposed to similar businesses in the U.S.A., is the earlier stage at which they are confronted with the challenges of internationalisation. Scaling a business is always difficult, but because of its domestic market size, companies in the U.S. do not typically have to tackle internationalising their business until later in their existence. Consequently, they have already developed some economies of scale, have typically retained more profits and have a more mature infrastructure before taking their first international steps.

It is much harder to achieve those economies of scale in Europe, when you are faced with much smaller domestic markets. Selling to Europe you and are then faced with a huge diversity of languages, cultures and numerous regulatory, tax and currency issues in order to address a similar population size, despite the E.U.’s single market policy. This works against some of the benefits of scaling the business as onetraditionally replicates overhead to cope.

If you have a product that is capable of digital delivery however then you can expand more quickly internationally than when faced with the logistical challenges of physical product distribution. At Interactive Ideas, a software distributor, we are using London’s strength as an international hub for budget airlines, its multilingual talent pool and technologies like VoIP telephony, to emulate the U.S. growth experience of S.M.E.s

In the digital world, there is no need for ‘bricks and mortar’ around Europe and the additional costs that creates. Out of our London offices, we can have native-speaking talent working any market as seemlessly as if they were locally based. I experienced this in the financial services industry in London 25 years ago, when I provided account coverage to Scandinavian institutions from London, just with the aid of a phone, a fax and some ‘carry on’ baggage! It is amazing how long this has taken to catch on in other industries.

Local market knowledge remains important. However geographic location is becoming increasingly irrelevant. Businesses need to be constantly revising their options on how to think local and act global. I am not sure that ‘The world is flat.’ but Europe is certainly heading that way.

Business Plans: Gotta love them!

Posted on April 25, 2012 by MikeTrup

I am amazed at the number of small and medium sized businesses who do not have written business plans. (It doesn’t have to be a dissertation it can be a key point summary with numbers). To my mind, trying to grow a business without a plan is like trying to play football without goals. It can be entertaining for a while but you have no idea if you are getting closer or further away from your objectives. Worse still, your employees have no idea where you or the business is going. Written business plans are a statement of clarity of objective and a public statement of commitment to your stakeholders. At the very least, it holds you accountable to yourself.

In my company, we have produced business plans at the beginning of every year since inception, when it was just me and one part-timer. Of course we do not always hit our targets but importantly we ‘know’ we are no longer on target during the year, and this gives us the opportunity to ‘revise our plans in the light of changed market conditions’ or to adjust other resources, such as funding options, staff levels etc. to try to get back on track.

Perhaps even more important than the plan itself is the process of planning. Properly done, it engages staff at all levels, ensures that we ALL understand what we are trying to achieve and the key success factors and measures required. This means that we plan in advance to avoid any bottlenecks, resource constraints etc. It also means we understand all the consequences should some of the many variables of business change, which they always do!

When I worked in Fortune 100 companies, I used to think ‘If we hit the numbers for all the wrong reasons then we are doing well.’ My focus then was too much on the outcome rather than the process. In a SME the planning process is every bit as important as the planned outcomes. It’s the glue that ensures the team functions as one unit.

Relationships and Business

Posted on April 19, 2012 by MikeTrup

Relationships used to mean a lot in business. However, following the 1981 recession (the first white-collar recession) and the rationalisation of business structures to save cost throughout that decade, people began to accept that to progress they would need to change employer with some degree of regularity. This had the effect of severing the trust relationship between customer and supplier as both sides increasingly found that short-term measures were used evaluate performance. The history of trust that might exist between customer and supplier increasingly became replaced by Service Level Agreements (SLAs), Key Performance Indicators (KPIs) and lots of other acronyms.

Today, a loyal customer is one who ‘honestly’ tells you when you are too expensive and gives you the chance to compete, instead of just coldly switching the business. It is a natural consequence of flattened hierarchies and larger scale businesses that we are all run by metrics. In turn, business becomes increasingly transactional. In a company, your boss doesn’t care how much work the supplier may save you or the times when they have ‘helped you out’. Instead, all they are interested in is how your suppliers’ performance contributes to what they are measured by…..and so on up the ladder.

When you are ‘on the outside of a business relationship looking in’ then these kind of transparent, measured relationships are great. The implication is that the relationship is a commodity and you know exactly what you have to compete on to win your way in. However, when you are already ‘ on the inside’, the metrics take away a barrier to entry for your competition and the relationship is increasingly reduced to a commodity.

This is a very American style of business in which history counts for little. On the positive, It makes for competitive dynamism, ensuring maximum economic efficiency. On the negative, it removes much of the fun from business. In the age in which there were many more major owner-managed businesses there was more continuity of employment and decisions could be based on a wide variety of factors and understanding of value.

Still there is no use lamenting the past, the message today is ‘Make sure you understand exactly what is key to your partner giving you business.’ Make sure you give them the best possible deal on those key measures and do not worry too much about giving them anything on top.’ If they won’t pay for it, it’s not value. If you want a friend, get a dog!

Is passion essential to being a CEO?

Posted on April 13, 2012 by MikeTrup

One reads a lot of start-up literature and interviews and they almost all talk a lot about ‘passion’ and ‘vision’. I am not sure either is very useful, unless you are one of that 10% who genuinely has an idea that will change the world. Most of us start businesses because we are not very good at taking orders and we also think we see an opportunity to do something a little better than the competition. There are very few truly original ideas and business success is generally about doing things just a little better than the others.

I think enthusiasm is a better word for what motivates us and what can be contagious for our teams. Enthusiasm is infectious but unlike passion or vision, it does not carry the risk of blindness to the market or to new ideas.

When it comes to growing and managing a business, being dispassionate is one of the most important traits a CEO can have. I spent 10 years in the stockbroking business, and one of our mantras was not to fall in love with yesterday’s decision. It was the fastest way to lose a shed load more money. In business, one needs to regularly ask oneself afresh, ‘Based upon what I know now, would I still make the same decision today that I made in the past?’

Being open to revising your view of the world based on new information, financial data or market feedback is an essential part of a CEO’s toolkit, which is ignored at your peril. Too much vision or passion and you quickly ignore feedback and just shape it into justification of your present strategy. By being slightly distanced from the day to day frontline, you should be open to seeing how these little variations from expectations maybe creating an alternative picture of reality to that of your current strategy, something a line manager can easily miss.