“I went to a bookstore and asked the saleswoman, ‘Where’s the self-help section?’ She said if she told me, it would defeat the purpose.”
― George Carlin
Every business is different. Businesses differ in scale and performance. They differ in what they do and how they do it. Despite the exclusive character of each business there is an underlying principle that each and every business must conform: The Fundamental Business Purpose (Business Purpose). Failing to satisfy this fundamental purpose will result in business failure. This design applies to every business regardless of whether it is a sole practitioner or a multi-national enterprise; whether a start-up technology company or a local pizza parlor; whether for profit or not for profit.
The Business Purpose requires a business to convert revenues and capital into customer satisfaction and return on invested capital. This commonsense idea is tempting to dismiss as obvious and trivial. Doing so, however, will result in failure. The idea of the Business Purpose is illustrated with an everyday analogy – the internal combustion engine.
Every internal combustion engine converts fuel and oxygen into power and exhaust. No matter the size. No matter the application. All internal combustion engines do the same thing. A lawn mower engine does exactly the same thing as the engine found on a Formula One race car. The difference is the application of the engine and the infrastructure required to satisfy the application. No one would confuse a lawn mower engine with the engine found in a Formula One race car. Nevertheless, both engines do the same thing; just very differently.
Independent of the Business Purpose, each business has an intention – what it intends to do to make money – whether producing a product or delivering a service. Business intention is unique and complicated. Business purpose is not. The infrastructure required to satisfy the business intention successfully is tailored to each business. Both topics, business intention and business infrastructure, will be discussed separately in future issues of The Business Odyssey.
THE IMPORTANCE OF THE BUSINESS PURPOSE
The simplicity of the Business Purpose does not undermine its importance and significance. The business that fails to satisfy customers will see its revenues eventually disappear. Similarly, the business that does not pay its capital providers for the use of the capital invested will eventually find itself without capital.
Businesses use revenues and capital to produce customer satisfaction and a return on invested capital. The Business Purpose is an essential context for making decisions and is easiest to think of as a diagnostic test. This test applies to any and all business decisions. This test is applied by demanding that all business decisions clearly identify their contribution to customer satisfaction and return on capital.
It is misleading when revenue is confused with customer satisfaction or profit with return on invested capital. Revenue together with capital work together to create customer satisfaction and produce a return on the capital used. Customers trade revenue for satisfaction. Customers don’t pay for a product (or a service); customers pay to solve a problem or satisfy a need. The ideas behind creating customer satisfaction are presented in numerous business books and publications. To explore this topic in more detail I recommend my favorite authors Clayton Christensen, W. Chan Kim, Renée Mauborgne and Geoffrey Moore. When a lender, equity investor, founder (sweat equity), or a provider of intellectual property contributes capital they do so because they expect to be rewarded with a return.
Some years ago I worked with a client that had developed a very sophisticated method of performing advanced numerical analysis. This method was used when designing a structure, such as a combat jet, to simulate and analyze its response to all different types of operating conditions. These conditions included mechanical loads, different thermal conditions, or any other kind of physical conditions. The company was staffed with very capable engineers, mathematicians and scientists producing breakthrough methods.
Strategically the company was focused on developing the most advanced numerical methods that could be used in structural simulation and design. The company believed it could monetize its methods by selling a software package to analyze structures. They believed that anyone from aerospace engineers to architects would buy its software package.
Like so many companies I advise, the only thing preventing them from success was more money (There seems to be an uncanny coincidence that all struggling businesses suffer from the same problem, a shortage of money – at least according to operating executives. I can’t help but wonder if there exists a rampant addiction to OPM (Other Peoples’ Money)).
As a consultant or any outsider, it is tempting to point out the obvious at the onset. To do so, however, sidesteps the real value derived from retaining an outsider to provide surgical and temporary guidance. As consultants, my job – the customer satisfaction I need to create — is enabling my client to successfully perform in the future, long after I’m gone. In this case I needed to guide the executive team and the board of directors to think about their business differently. And nothing aids perspective better than the right questions.
Rather than analyze the company’s cash flow or marketing plans or operating budget or capital requirements I started by asking “what is the customer satisfaction you are creating?” This seemingly innocent question turned out to be difficult to answer. The first attempts exposed the executives’ confusion with a description of a market: aerospace companies. Aerospace companies are not the buyers or the users. Aerospace companies employ buyers and users as well as adopt systems prescribing institutional criteria for procurement. My client-executives then identified design engineers and analysts, individuals who would use the product but not necessarily make the decision to buy. With persistent guidance, the executives eventually understood the distinction between the “buyer” (who makes the decision to buy), the “end-user” (who uses the product) and the “influencer” (specialists who influence the decision to buy). In this case a sale would require navigating a complex network of buyers, end-users and influencer (IT department).
Armed with a more accurate understanding of the “customer”, we tackled the concept of satisfaction. Satisfying the IT specialists would require confidence that the software purchased would integrate with other existing systems as well as satisfy reliability, documentation, support, and security requirements. The buyer needed satisfaction that a better product was not available and they were getting the best price. Satisfying the user, on the other hand, would require a user environment that included a graphical interface, the ability to easily use legacy data, and other software utilities. Additionally, my client needed to demonstrate that its technology performed significantly better than current systems and was worth the time necessary to learn to use.
Rigorously working through these questions, the executives began to see that selling the product (creating customer satisfaction) was far more involved than writing software code, and it required satisfying many different kinds of conditions. Creating customer satisfaction was clearly more complicated and costly than forecasting revenues.
This discussion naturally led to the equally important second half of the Business Purpose equation: creating a return on invested capital. The more complete understanding of customer satisfaction exposed the need for significantly more capital than anticipated originally. A detailed financial analysis was not needed to show that satisfying investors’ expectation of a return on capital would be impossible pursuing the original strategy.
Requiring coherence between the Business Purpose and the current strategy exposed the deficiencies of their orthodoxy; or generating the revelation, as I like to say that “we can’t get there from here.” This analysis did, however, reveal a strategy that would be successful: Sell the technology to a company that already had the missing pieces. This strategy not only made sense; it also worked.
The above example is all-too-familiar to many readers. It is a common scenario with an obvious solution, unless of course you’re completely invested in an established strategy. The example shows how testing the fidelity to the Business Purpose reveals not just the land mines but also the feasible solution. The best results are a product of the right questions. And the right questions start with the basics – The Business Purpose.
Hindsight is clearer than foresight, tempting one to think that a strategy of positioning for acquisition is unattractive as a starting point. Had the company considered fidelity to the Business Purpose in its early strategy deliberations it would likely have deployed its capital and its efforts very differently. With no doubt this may have resulted in the need for less outside capital, reduced risk, accelerated the time to a liquidity event, and produced a much better return on capital and fewer sleepless nights.
Executives and directors have a responsibility to ensure that the business satisfy its Fundamental Business Purpose. Doing so with serious and rigorous determination will steer the business on a course away from many of the dangers that can lead to failure and towards a destination of success.