September Topic: Strategy for Value Creation

The company's value will be higher when serving customers is consistent and scalable.

Overview

Every business needs a goal and a plan to reach it. Successful businesses place service to the customer at the center of that plan. When serving customers is consistent and scalable it becomes both profitable and transferable, thereby strengthening the company’s overall value. The following summaries highlight the key areas that should be developed into a strategy to support this idea. These are:

1.     Career paths

2.     Independent new business generation

3.     Technology systems

4.     Concentration risk

There are two main concepts to value: (1) all value is the present value of future cash flow. The future cash flow is valued at present value by applying a discount which increases based on risk factors (some of which are addressed by the four points highlighted). (2) value must be identifiable and transferable. Even if the cash flow can be identified, if it cannot be transferred to a buyer, the value cannot be realized. Following is a summary of four areas to strengthen the transferability of the company cash flow.

Career Paths

In larger companies the corporate ladder is well defined: new members start at the bottom and work their way up as others leave or new positions are created, then the bottom replenishes and repeats. The culture associated with the ladder isn’t always desirable, but the model of a structured career path is.

Many small or young businesses only hire employees to fill immediate needs. It is common that the entrepreneur is too busy to plan proactively, and the company does not have a growth plan which shows future employee growth opportunities. However, retaining the best employees requires that the business provide opportunities for growth. If a company is successful and grows, it will require the original hires to become leaders who guide the new hires in the areas they have mastered. The entrepreneur needs to teach the original hires to grow in their capacity so the cycle can repeat and expand.

The strategic planning and training process is facilitated by a clear internal career progression plan. People want to work where they are continuously encouraged to grow and to take on more responsibility. The ability to show a new hire who they can become two, five, and ten years down the road within the organization does great things for employee retention and motivation. Career paths equip the team to deliver consistent, scalable service to customers.

Sometimes a plant outgrows its pot and needs to be placed in a new one.

Independent New Business Generation

Many entrepreneurs begin the business by leveraging their relationships to secure key customers.  If the business runs this way for too long, the entrepreneur’s time will become the bottleneck of growth. Operating in this manner creates a large detractor to future value. Companies with “founder’s syndrome” risk failure if the current owner were to be no longer involved.

The remedy is for the owner is to develop people and processes that generate new business independently of the owner. This shift requires trust and may take time and investment, but it unlocks the ability to grow exponentially.

Technology Systems

Technology is always evolving, and innovative business applications disrupt industries regularly. Businesses rise and fall based on success or failure to implement technological innovations. A focus on customer service helps to avoid technology pitfalls. Technology additions are generally made to improve customer service, enable scalable customer service, reduce overhead and production costs, or safeguard against risks.

Technology enables efficient, repeatable service at scale. For example: Implementing a modern ERP can help automate business processes and operations while a refreshed CRM can help to optimize customer interactions and insights. A workflow automation tool could simplify complex tasks and save valuable time while reducing errors.

Prior to implementing technology/automation it is important to document the tasks that need to be done. Investing without the proper planning can result in a long and expensive failed rollout. On the other end of the spectrum, delayed planning introduces the potential heightened difficulty of initiating new technology in a mature company. As with all elements of the business, use prudence when integrating new technology systems. Technology additions may be in tension with the goal of maintaining low overhead costs. Each decision must be made case by case.

Concentration Risk

Another major factor to value is concentration risk. This risk emerges when too much of a company’s revenue, customer base, or supplier base is concentrated in a small number of sources. It is common for companies to focus on revenue concentration regarding concentration risk, but it is important to apply it to suppliers too. Reliance on a single supplier or a small group of key employees to maintain operations leaves the company susceptible to pricing pressure and turnover risk.

The key strategy for reducing concentration risk is diversification. Businesses that proactively expand their customer base, develop multiple supplier relationships, and share knowledge across teams are better positioned to serve their customers reliably over time.

A common way to test how much concentration is present within a business is to compare the production generated from the largest customer with the total production from all customers. A general goal is to receive less than 10% of total gross profit from any one customer. This benchmark does not consider industry or company specific intelligence that may shift the goal. Many businesses tend to do this analysis based on revenue, but gross profit will provide more insight into what drives profitability by factoring for how costly each customer is to serve.

A possible way to diversify is to consider the pricing strategy towards new customers. It may be worth pricing services at a discount to attract new customers (see the Startup Curve topic). This will help with diversification immediately, and additionally over time as the quality of work is proven and prices eventually are raised to market rates.

Summary

Each of these strategies is designed to build and sustain the value of your business. Career paths turn inexperienced employees into key contributors, independent new business generation reduces reliance on the entrepreneur, technology creates advantages over competitors, and diversification creates consistent, predictable profitability.

By keeping customer service at the center of the strategy and by implementing these ideas purposefully, the business can deliver exceptional service that is consistent and scalable. This makes the company more profitable and ensures that its value can be maintained and transferred across people, teams, or even ownership structures. Together, these strategies create a resilient, scalable, and attractive company that commands higher valuations and long-term success.