Years ago, a young man, let’s call him D, with whom I had once gone to summer camp followed his dream and opened a meat restaurant. They had great big burgers, flaming wings, fresh onion rings and fries, a meat-lovers dream. Not only did I enjoy going there, but when a group of friends helped me move apartments before I got married, I took them there for a “thank-you” dinner. Everyone felt it was a great trade!
Over time, as the business grew, investors made D a great offer for his restaurant. With its strong reputation and high customer loyalty, it had reliable revenues. In other words, its product, or revenue-side, was excellent. A little bit better management on the operations, or cost-side, could improve cash flow significantly. So they bought him out, and proceeded to improve the operations… along with cutting costs everywhere else.
Soon enough, the service level dropped. Portions shrank in size. The taste began to drop as the quality of the ingredients dropped ever so slightly. For some period of time, the lower costs for the same price meant higher profits. As their reputation caught up to them, though, revenues plummeted. At this point, the original flagship location is no more, and of the many other locations, only a few remain.
At first glance, the failure is obvious: short-sighted profit focus starved the goose that laid the golden eggs.
At a deeper level, though, why did smart investors fail so miserably?
The Two Faces of Business
Running a successful business has many parts, but, at heart, it involves looking in two different directions at once: market and operations.
To be successful, you need to:
- Provide the right product or service…
- … to the right customers…
- … at the level expected by the customer…
- … at a cost acceptable to the business.
The first two elements – knowing what service or product to provide, to whom, at what price, in what package – are all about the product and market.
The last two elements – delivering the right service level and quality, in a timely manner, with customer service, while making a solid long-term profit – are all about operations.
The balance between the two creates a successful long-term business:
Market + Operations = Profit
The seductive nature of these, however, is that it is very easy to slip on one in the short term and inflate profits, seemingly satisfying the Board and investors. Like all seductions, however, the piper must be paid, and sooner than you expect. For example, you can deliver a cheaper, i.e. shoddier, product for some period of time, reducing costs for the same revenue and thus “goosing” profits. Eventually, though, customers realize the quality has slipped and shy away from your product, dropping your revenues and therefore the amount of margin you have to cover fixed costs. Conversely, they might accept the lower quality product as a new “cheaper” version, but demand it at a cost that matches its quality. Employees, as well, notice the “corner-cutting” and treat the customer and management in the same fashion.
If your business is not performing as you expect – insufficient growth, high customer churn, low profits, unhappy employees – somewhere you have a mismatch between the product customers expect and the operations to deliver it.
But it isn’t your fault.
Every executive or business owner comes from a specific background, either on the “revenue” (product) side or the “cost” (operations) side. It is hard to see the cost delivery mismatch if you are an Uber Sales person. The smart ones recognize that bias and strengthen their other side by bringing in people with experience on both sides of the fence to help them.
Is your business in balance? Contact us to learn how to “bridge the gap”.