Publication: The Boston Globe
"We only make a penny on every product we sell, but we make it up by selling in volume."
When Richard Z. Gooding hears that sentence tumbling off the tongue of an entrepreneur, he immediately jumps to two conclusions. First, the company owner doesn't break out numbers in enough detail to know how the business actually does make money. And second, "the company probably doesn't even make a penny a unit in the first place," adds Gooding, who teaches strategic planning at Arizona State University in Tempe.
Gooding contends most entrepreneurs find themselves at the helm of stalled or rapidly shrinking businesses because, on some basic level, they haven't thought through how their businesses make money.
"They don't think about why people buy from them," he says. "The right competitive strategy can make up for a lot of errors."
But the wrong competitive strategy - namely, none - is often reflected in the sort of insights entrepreneurs share with Gooding, who is also a consultant. If you've uttered one of the following rationales, your company may need more attention than you realize:
- "Of course we're doing well; we're growing at 20 percent."
While the momentum of sales growth is certainly more desirable than its opposite, Gooding believes the real measure of any company's health is its market share. "You have to know how you are doing in relation to competitors and to the industry as a whole," he says. "If you are growing at 20 percent, while the industry is growing at 40 percent, you are going to have problems."
The severity of that problem won't show until circumstances change: A new competitor enters, for example, or market conditions take an ugly swing. Gooding recalls the sobering words offered by the chief executive of an appliance-making company that was flattened during the recession earlier this decade: "We thought we were a great company, until we realized we had been in a housing boom."
- "Our best customers? They're the ones who buy the most from us."
Well they are good customers, no question about it. But spend a day analyzing purchasing records, as Gooding advises, and you may find that they aren't your most profitable accounts. "It amazes me that so few entrepreneurs look through their product lines or their customers to see what the revenue and profit split is," Gooding says. "They just make assumptions."
The nearly bankrupt owner of an optometry shop once sought Gooding's help steering away from serving customers covered by Medicare or Medicaid. Upon examination, though, it turned out they were two or three times more profitable than customers who were shelling out their own money. The optometrist, according to Gooding, now regularly offers free eyeglass adjustments at nursing homes and advertises in publications aimed at seniors.
- "We've got more work than we can handle."
Start-up entrepreneurs in particular tend to measure their venture's prospects by the steady whirring (of machines) or humming (of people) they hear around them.
As a result, they end up taking any jobs that come along, even those inconsistent with their company's ostensible strategy. "They get sidetracked by hand-to-mouth survival, which is a reality that just becomes habitual after a while," says Gooding. To differentiate itself, a company needs discipline. "Figure out the spot in the market where you can make money," he says, "then go for 80 percent of that niche."
- "My competitors don't even know I'm here."
While it takes unhealthy levels of optimism to start a company, too many entrepreneurs adopt an aura of invincibility. "They think their competitors, especially the big ones, as dumb and slow," Gooding says.
One tactic that often takes such entrepreneurs by surprise: "A big company will drain a little one out of cash by filing a lawsuit for something like patent infringement," Gooding says. "Then they'll cut their prices and wait."
Often, it doesn't take long to bring the smaller company crashing down. "By then, it'll be too late for the entrepreneur to figure out what should have been figured out at start-up," Gooding says. "It's what you always need to know: how your company is going to generate revenues."
Used with author's permission.