Want business success? Create value!
This article appears in the July/August 2013 issue of Business Franchise Australia & New Zealand
There was a time when a business ably competing on the basis of quality, price and/or services, could expect reasonable prospects of success.
Growth came from scaling up, and as the business became more complex adding a manager or two, an operations manual and a good accountant was all the infrastructure needed to run smoothly at a profit.
Business owners know conditions are tougher now and operating successfully requires wider expertise: marketing, social media and sourcing for instance. And it is more complex: more legislation, more red tape. Trying to compete on value is almost impossible when everyone else is competing on price including international players with lower cost structures.
Seeking advice often adds to the confusion. Do you need a business plan? A strategic plan? Hire a business coach? Start a Facebook page? Train staff? Add an incentive program to make sure trained staff don’t leave? Just finding the time to do this is a task in itself.
To compete without going broke in the process needs a different solution to 20th century management methods because business has changed. Not understanding this change not only means your business leaves ‘money on the table’ from unrealised value, but you risk being out-managed, out-performed and out-grown by your competitors. With a business structure adapted to the technology-facilitated knowledge economy you can:
• Add as much as 80 per cent to the business’ total valuation i.
• Increase productivity (doing more with the same resources) without straining the business ii.
• Achieve revenue increases by as much as 20 per cent on a shift-by-shift basis iii.
• Achieve above-average performance in all financial measures including EBITDA (by 2.2 times), growth in value (by 1.8 times) and income to sales ratio (by 1.5 times) iv.
Intangible assets have been around for as long as there have been businesses, but it is only since early 2000s that their ability to create value has really been recognisedv. An analysis of the US economy shows while intangible assets accounted for 30-40per cent of growth throughout the 1900s 90 per cent of all growth in the US between 2001 and 2003vi was created through intangible assets.
Broadly classified in three categories: legal intellectual property (IP) (trademarks, copyright, patents, etc.); trade secrets (such as software, new product development, market research and activities to create brands); and organisational intellectual property (business models, corporate cultures and structures and expenditure on firm-specific training), there are two sources of intangible asset creation: people and how they are organised (you often hear of ‘knowledge capital’ and ‘social capital’ being the new sources of competitive advantage).
Franchisors are particularly aware of the value of intangible assets. The very business of franchising is based on licensing intellectual property however franchisees may be old-school operators who think they are investing in bricks and mortar, equipment and stock.
In a traditional company physical assets were everything: premises, machinery, uniforms, equipment, factories, warehouses; even labour was treated as a physical asset (‘human’ resources) and managed as part of production. As the business could afford it, another person was hired, another outlet added, stock levels increased – they generated the business returns. Today returns come not from physical and operational investment alone but from simultaneous investment in intangible assets.
Although every good manager intuitively understands that the right people doing the right things at the right time is essential for a successful business, they rarely do much about it, relying mostly on their own skills and knowledge in people and organisational management. They think of organisations as charts, people as labour, managing them as ‘soft skills’, and expect unrealistic results from leadership training, corporate team building and other ‘people initiatives’.
Ignorant to the fact that it is organisational intellectual property that realises returns from investment in the business, it has been estimated that for every dollar spent on intangible assets, one dollar is lost in unexploited benefits. No company would spend $100 on stock and allow half of it to spoil, yet this is exactly the situation with intangible assets.
To create value and improve performance there are several things a business can do.
1. Get the employment basics right. It is not enough for a franchisor to give franchisees ‘the manual’ and then be on standby should something go wrong. Poor employment practices are a fast-track to demotivated workers who do less, make more mistakes and take more sick days. Managers playing catch up with staffing concerns or compliance issues are a major distraction to the business.
2. Create and prioritise your own recipe for your unique approach. Looking for the frustrations in your business is a good place to start. If you copied your systems and procedures from another business or have adopted the ‘normal’ standards, all
you have is a recipe for mediocrity.
3. The same goes for structure. Find ways to grow and manage an expanding workforce to suit your goals. Hierarchies are expensive to run and are responsible for most wasted efforts. Consider: vii
• Carrots and stick incentives are least effective of the options commonly used to motivate and encourage workers to perform and stay with a company.
• KPIs and the like (such as performance contracts) are among the least satisfactory options for improving accountability.
• The detailed strategy and plan is far from the most fruitful way to set company direction.
• Command-and-control leadership — telling people what to do and checking on them to see that they did it — is among the least effective ways to direct the efforts of people.
4. Train managers to coach and insist that they do it. Managers who coach are not only perceived to be more trustworthy, better communicators and more sincere by workers, but their people will typically improve performance by four-fold compared to those who were trained but not coached.
5. If using professional services for recruitment, training, operational improvements or any other function that impacts people and their work environment, ask for their credentials in creating sustainable organisational value.
Otherwise you will pay twice: once for the services, and again when you miss out of the benefits of intangible assets not maximised.
Franchisors and franchisees both benefit when better organisational practices are implemented: for the franchisor there is more ‘bang’ for its brand buck; and for the franchisee, better management processes give them more confidence for achieving better organisational results.
i Standard & Poor’s 500 valuation of tangible to intangible assets, 2010 (of the Nasdaq Index companies, 85% of their valuation lies in the intangible assets)
ii UK Commission for Employment and Skills, Skills and economic performance: The impact of intangible assets on UK productivity, Evidence Report 39, October 2011
iii For example, Wharton University of Pennsylvania’s Dr Adam Grant Call Centre Research, January 2013
iv McKinsey & Company, Organizational health: The ultimate competitive advantage, June 2011
v In 1999, by the OECD in their report, The Knowledge-based economy: A set of facts and figures, Paris.
vi Robert J. Shapiro and Kevin A. Hassett, The Value of Intellectual Property, 2005
vii Keith Leslie, Mark A. Loch, and William Schaninger, Managing your organization by the evidence, August 2006
Meta Management has been working with clients since 2003 to create value from their organisation’s intangible assets using practical solutions designed for businesses with limited time and resources.