Do your business operations need a boost? You can do this easily by getting a good handle on the fundamental rules of business.
A few weeks ago I wrote about one of these fundamental rules: that you must convert inputs into more valuable outputs.
As I had mentioned, converting inputs into more valuable outputs (let’s just call this a key rule) can be applied to all different disciplines of business.
If you apply this concept to all of your operations, you will learn how they can be improved, or how many options you really have to work with.
Converting inputs into more valuable outputs has a definite application to pricing. One clear one: the use of premium pricing or cheaper pricing.
You can either charge a higher price and gain a greater profit margin at the expense of reduced sales, or you can sell at a cheaper price and sell more units at the expense of making less margin per unit.
This key rule never specifies which pricing strategy is the preferred method, since as long as the inputs are converted into an output of ANY greater value, the rule has not been broken.
Both strategies meet this goal, they just use two different ways to generate greater output value. It is important to remember this so you can consider both strategies as viable options when designing your marketing strategy.
Whenever you use less inputs to gain the same level of outputs as your competitor, you have the advantage.
If you are spending less advertising dollars, losing less customers, producing at a cheaper price, reducing fixed costs, etc… while earning the same level of revenue (or more), you are the stronger competitor. You are making it harder for your competition to gain an advantage on you since you are utilizing your resources more efficiently.
Think about it–less customers lost, less advertising dollars spent to sell the same amount of product, cheaper cost of goods sold all means more money for your business to spend on even better client retention, improved products and services and greater advertising.
This is why it might not be a bad idea to survey your competition in terms of what resources they have to work with, so you are well aware of an advantage when you have one.
A simple business model
See my article: The Power of a Simple Business Model for my explanation on how this applies to this key rule of business.
Having a simplified business model is advantageous on many counts:
- Cheaper operations
- Ease of running
- Ease of managing
- Ease of adaptation to change
- Ease of expansion
- Greater leeway to add complexities without becoming too bloated
The list can go on and on.
Other than being lean, flexible and saving money, a simple business model also has competitive implications as well. Whenever you have a simpler business model than your competition, you are better equipped to adapt to change or weather difficult environments than your competition is.
In the face of difficult change, you are smoothly gliding through the difficulties, while your competition is much more apt to get tripped up and twist their ankles.
Gains can be evaluated in multiple ways other than cash
Keep in mind that this key rule never says that you have to use cash to evaluate increased value.
If you are able to barter services or products for others much easier than paying with cash, it might be advantageous to do so. It could save you money, staffing expenses, equipment, etc…
The important thing to remember is to keep an open mind when considering how you can increase value and save money for your company.
Time, productivity and value per hour
This is probably the most obvious of applications. Ensuring that your employees output is more valuable than their salary expenses is very important.
Consider their productivity and their output. If things can be sped up without lowering morale, do it. Sometimes increasing productivity can even raise morale.
Ultimately, you want to consider if each of your employees are adding value to your company. Again, this doesn’t have to be in terms of cash. Ensure you consider each’s impact on your business and provide incentives accordingly.
Waste and defectives
Another obvious application. Defective products are expensive. Wasted materials are also expensive. They provide no value for your business, yet take up time and money to handle.
Thus, the output is less valuable than the input. The objective here is to eliminate as much waste as possible as well as ensuring that there are as little defective products as possible.
Ensure you are implementing quality inspections on the production line and that wasted materials are reused whenever reasonable.
No value is being produced during downtime. This is a black hole for value generation for your business. Minimize downtime whenever you can.
For example, if you run a retail store, and the store is presently empty with no customers, find something else for your staff to do, even if it is something simple like stuffing envelopes.
The important thing to remember here is you want your staff producing value for the business as much as possible without ruining morale or disrupting motivation.
It is rare to have as many managers as employees. Usually there is a ratio of one manager to several employees. This is for a reason. One manager successfully managing multiple employees meets the objective of our key rule, but it can be taken a step further.
You will need even less managers if your employees learn to self manage and self motivate. This can easily be done by creating an energizing and empowering culture. Giving your employees autonomy and the willingness to self manage will mean you require even less managers.
This means that the input (managers) will be even less and the output (employees managed) will be even greater. The benefit here is increased productivity and motivation and less manager salary expenses.
Advertising and marketing
The greater response rate to an advertisement, the better. If you have one ad that can be made that much more effective without increasing the ad cost, you have met your goal.
This is why it is vital to constantly test and improve your ads and marketing whenever possible. Greater conversion rates means increased sales without increased marketing expense. Therefore you should always test and tweak your ad copy for optimal results.
Less ad costs = more cash. More sales = even more cash!
Recruiting and training is expensive. Retention will save you a lot more money. While at least some turnover is good for your business, you want a high employee retention rate.
Hiring a new employee costs 5 times the salary of an existing one due to recruiting costs, training costs and loss of productivity.
Utilize your HR inputs (recruiting efforts) as efficiently as possible by minimizing turnover rates and keeping the outputs (employee retention) to higher levels.
You can do this by ensuring during the hiring process that there is a good candidate, job and culture fit. You don’t want the job or the culture to chase the candidate away, nor do you want a candidate who can’t perform or mesh with the culture, and who ultimately gets them-self fired.
Investments in assets and equity
Any investments you make, be it in new equipment, loans, real estate, anything, you want to be as certain as possible that your rate of return will be an attractive one.
Choosing an attractive rate of return is up to you and beyond the scope of this post. However, taking some risk while having a good understanding of the investment you are considering taking on is very important.
Being educated about the investment decision you might take will ensure that your investments will yeild attractive returns as often as possible.
Are there any other useful applications to this key rule of business? Any thoughts on these applications?