You need to take an extended vacation. No, seriously, you do.

You need to take an extended vacation. No, seriously, you do.

Not only do you need a vacation, but it needs to be at least two weeks, and preferably longer. I have given many CEOs and business leaders this advice over the years, and I believe in it. 

Why a minimum of two weeks? Well, you need the first week to unwind and let work “go.” The second week, you truly relax, the tension of work and all its issues leave, but the brain continues to work in the background. After two weeks, I start to see the forest for the trees. The problems that were prominent in my life no longer are as relevant as I thought they were. Turning to my navigate sage power, I turn to my elder self to look back and see what is essential and what I should be focused on rather than that what has my attention.

Now I am unwinding

However, like the old saying, “Physician heal thyself,” I have failed to heed my advice until two weeks ago. I am now sitting in NE Spain, enjoying a quieter time and relaxing with good friends, food, and wine. To ensure my disconnection, I have adopted the following rules:

  • Limit email activity to 15 minutes a day.
  • Disconnect from Facebook (well, I effectively did that a couple of years ago) and all social media other than LinkedIn. 
  • Post to LinkedIn, but according to a plan, it takes about 5 minutes a day.
  • Avoid the news and television.
  • Reading lots but no business books.
  • At least 30 minutes of meditation a day.
  • Walk at least 5 miles a day.
  • Swim as often as possible in the ocean.

These rules are not complicated, but we are so conditioned to remain connected and tuned in that it takes effort to disconnect.

As I relax, I remember that I, like my clients, need to take an extended vacation to recover from the low-level stress of COVID over the last eighteen months. COVID has taken a toll on me, and more than I realized. While I have been active during COVID, I recognized that I have been reactive more than proactive. Now, not only do I want to change this behavior, but I am framing it around what I want to accomplish in Q4 2021 and 2022. 

The benefits for you

Sitting in quiet squares or overlooking the ocean, the focus has gotten more precise, the planning more effortless, and many things are just getting crossed off the list or deleted. Also, I am finding that I can better help my clients as my mind declutters.

I am focusing on achieving my long-term goals and not get distracted by what is in front of me. By refocusing, I realized much of what I was doing was not relevant to the long-term goals and thus a distraction.

Now, I can’t say that everything will be done and perfect at the end of this. But I will have more energy, be much better mentally to deal with what lies ahead, and cope with winter.

The benefit for your business.

Taking a minimum of two weeks off provides additional benefits too. You can see how your business operates without you. You will have answers to the following questions:

  • Does my leadership team function well in my absence? Are they aligned, and Is there conflict?
  • Do my team and company understand its mission, strategy, and purpose?
  • Does the organization continue to hit its KPIs for the quarter?
  • Do my clients need to deal with me, or can my team handle the clients’ needs?

I have asked many clients how their business would perform if they were unavailable for three to six months, and the answer is usually “Fine.” However, if you cannot go away for two weeks and disconnect, is that true?

If your business cannot operate without you, you don’t have a business; you have a job! To successfully leave your business, you have to make yourself redundant. Only by creating your own redundancy can you sell it, pass it on, or assume a non-executive position. I realize for many business owners, this isn’t easy, as their identity is tied up in their business, but to create a more significant legacy, ensure it operates without you.

So when did you last leave?

As I said earlier, with COVID, I hadn’t taken a vacation in 18+ months. Not only that, but with WFH, I had, like many others, increased the amount of time I was working which typically included at least one full day of every weekend. All of this took a toll.

So when did you last take a “proper” vacation for at least two weeks? Did you disconnect, or were you on calls and emails all the time, putting out fires and saving the company? The stress of the last eighteen months has taken a mental toll on all of us. If you don’t take a break and let yourself recover, you will be ill-prepared for what is ahead. While none of us know what is ahead, we can be sure that labor, supplies, and demand will be unpredictable. 

COVID and its effects are not done. I feel like we’re just finished the first half, but there is another half to go, and the opposing team that emerges from the locker room has a new strategy.

If it has been a while since you took an extended vacation, take one now, you will be amazed at how much you and your business will benefit.

 

Copyright (c) 2021, Marc A. Borrelli

 

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A small Scottish company shows how being famous for something works

I recently discussed how you must be famous for something. If you’re famous for something it is easier to:

  • focus on what you can be the best at, 
  • find your “tribe,” 
  • tell people what you do, 
  • get referred, and 
  • define your core customer 

While we all know of companies like Apple and Tesla, not only can large companies achieve this, but small companies have achieved the same thing by carefully defining their niche and what they want to be famous for. An example is Linn Products Limited, a Scottish engineering company that manufactures hi-fi and audio equipment and is renowned for reproducing music neutrally as possible. In 2020, Linn’s revenue was about £20MM, so it is not an Apple or Tesla. For clarity, I am an owner of some Linn products, and the picture above is my LP12 with a Naim power supply.

What Linn Was Originally Famous For

Linn became famous with its initial product, the Linn Sondek LP12 turntable, introduced in 1973. The company’s logo is the simple geometric representation of the ‘single point’ bearing, which was the unique selling point of the LP12. 

What did Linn achieve with the LP12? Hi-Fi Choice reviewers voted the LP12 “the most important hi-fi component ever sold in the UK,” and The Absolute Sound ranked it the second most significant turntable of all time in 2011. Hi-fi reviewers sometimes use it as a reference turntable, and Robert Harley said, “It’s impossible to imagine the high-end industry without the LP12”.

The company’s controversial founder, Ivor Tiefenbrun, has defined its philosophy – there are only two ways of doing things – the “Linn way” and the wrong way. The Linn way believes in the primacy of “the front end” (that the quality of the source was crucial for hi-fi music reproduction). Once the information was lost, distorted, or corrupted, it was gone forever and could never be retrieved. Basically, “garbage in garbage out.”

Whether you accept the Linn way determines whether or not you are part of the Linn tribe – “Linnies.” Linnies are committed to the Linn way and are true believers. Whether or not it is true is irrelevant; Linnies are the tribe that is the focus of the company’s marketing and products. To have such a dedicated tribe of customers and followers is indeed the ambition of many B2C companies. Now many others believe that Linn’s doctrine is prone to “propaganda, brainwashing, historical revisionism and other ways of interpreting reality.” 

Technological Excellence

While a hi-fi company, Linn has relied on technological excellence to maintain its reputation. All its equipment is impressive, with the fit and finishes reflecting the product’s price point. The products are built to minimize unwanted electrical and mechanical interactions that could degrade the performance. Casework is damped to reduce the impact of external vibrations. When products are sent to Linn for repairs, they are returned with:

  • a copy of the diagnostic analysis of the problem:
  • photos of the problem areas;
  • how it was fixed;
  • pictures of the replaced components; and 
  • all signed by a specific engineer. 

This service further creates the image of technical excellence. The company invests between 10% and 20% of its revenue in R&D to maintain its technological leadership.

Today’s Strategy – Digital

Over the years, the company has introduced new products, speakers, amplifiers, CD players (no longer), and digital streamers while still sticking to its philosophy. In 2007 the company’s strategy switched to supporting digital music playback of 24bit/192 kHz studio master quality recordings using a digital stream over a home network with digital technology. 

The company launched its first digital streamer in 2007, and since then, it has launched several others. Linn’s commitment to digital music has continued. In October 2010, Linn Records was awarded Label of the Year by Gramophone magazine because of the company’s commitment to improving the quality of the recording process and distributing music online at studio master quality. Since then, Linn provided its digital music players with internet access to lossless music streaming services (TIDAL & Qobuz) which provide access to a CD-quality library of over 60 and 50 million audio tracks, respectively.

Exact Technology

In 2013 it launched its Exakt technology, which in line with the company’s philosophy, was designed to eliminate many of the sources of music loss inherent in analog hi-fi chains. The company sought to prevent the signal loss by keeping the 24-bit lossless signal in the digital domain to the loudspeaker and converting it to analog at the latest possible stage. In 2014, the company launched speakers with the Exakt technology, which effectively turns the speaker into an intelligent, network-connected, software upgradeable product. According to the company, inside each Exakt loudspeaker is a proprietary digital platform that eliminates phase and magnitude distortion and offers room optimization. These speakers have the amplifier inside, shortening the distance from the amplifier to the speaker to prevent signal loss, and they received high critical acclaim

The LP12 Is Still Going Strong

The Sondek is still in production today and is benefiting from vinyl’s resurgence. There have not been any radical changes to the turntable’s design since its introduction. However, Linn has not sat still; the LP12’s sound quality has been improved through retrofittable upgrade kits, which consist primarily of refinements in materials used and improved manufacturing tolerances.

Initially, Linn manufactured the LP12 itself but relied on other manufacturers to provide components such as tonearms and cartridges. Supex cartridges, Grace and Sumiko tonearms, and Naim Audio amplification were the ones that filled that gap. Today, Linn produces its cartridges, tonearms, and amplification. However, one of the attractions of the LP12 is that owners can still use other components with it.

Linn currently offers four versions of the LP12 – Majik, Akurate, Klimax, and “build it yourself.” The differences between the versions are improved components to improve sound quality. Linn now offers a system that takes a feed straight from the tonearm base and digitizes the music in line with its strategy. The LP12 signal is converted to the 24bit/192 kHz stream and kept there until it gets to the amplifier.

How Linn Feeds Its Tribe and Creates Stickiness

While the Linn range of products has changed over the years, I believe that one of the ways it has kept its followers is by:

  • Staying constant in its philosophy;
  • Providing a range of its products so that it is easy for owners to understand the improvement paths;
  • Providing upgrades for many of its products; and
  • Moving with the times.

An excellent example of this is the discussions I see online, where someone who has always wanted an LP12 will find an old one that they can upgrade for less than the purchase of a new one. Thus, the company gets new acolytes who will buy products from them over time but are not driven away by the high cost of entry.

With its latest technology, the company is increasing the stickiness of its products. Those with Exact speaker technology, as mentioned before, have upgradable software systems, which provides more ways to offer upgrades to uses, as Tesla does. In addition, those with Exact speaker technology are tied to the company because if they want to change systems, they need to buy new amplifiers as the amplifiers are built into the speakers.

So How Does this Help Linn

As I mentioned in my previous piece, being famous for something is crucial. How has it worked with Linn?

  • Linn is famous for producing excellent HiFi equipment through engineering excellence.
  • Linn’s job is to capture music at the source as accurately as possible and reproduce it with minimal loss and as neutrally as possible.
  • Why does it exist? To providing musical reproduction excellence through engineering, attracting both customers and employees who believe in its vision.
  • People know what you do. Anyone who is an audiophile knows about Linn. Either they believe in it or not, but it is easy to find those that do or could and then refer them to the company. Those who don’t believe in the “Linn way” or want value amplifiers are not interested.
  • The tribe. The famous Linnies are in multiple Facebook groups and other online forums. At my reconning, there are over six thousand members, which, while not a lot, is ideal for a company whose strategy is low volume high margin. You will not find Linn’s products on Amazon or any discount sites. The company emphasizes using its dealer for all installations and equipment.
  • Selling value. Linn focuses on selling the “value” it provides. Its ranges – Majik, Akurate, and Klimax – have different price points, but its latest product, the Linn Klimax DSM (Digital Music Streamer Preamplifier), retails at nearly $40k.

For what are you famous?

If Linn, a small Scottish company, can achieve this, what stops you from being famous for something? 

Start with your Why? and At what can you be the best in the world? Jim Collin’s Hedgehog concept asks you to consider what would happen if you focused your energy and effort on one main thing. What could you become the best in the world at? Not that you are setting a goal to become the best at something; you understand with certainty what you can become best at. Most importantly, you also understand what you cannot become the best at.

From there, it becomes easier. If you would like help, contact me.

Copyright (c) 2021, Marc A. Borrelli

 

 

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In a meeting last week, one of my Vistage members discussed his expansion into a new business area and how to price his services. The way he described the new market was comprehensive. As usual in Vistage, this lead to a great discussion challenging his assumptions followed up with some excellent ideas. However, several of us, including myself, asked the critical question, “What precisely are you offering your clients.” I believe everyone needs to ask this question and drill down to the micro-level, because as a coach once told me, “You have to be famous for something!”

Why You Need to be Famous for Something

When I started my M&A business, I didn’t appreciate this concept, and our response to any question about what we can lead to the answer, “Yes, we can do that.” When starting, I am sure many entrepreneurs will take any business offered because they need revenue to survive. However, this dilutes the understanding of what you do to everyone. 

People need to precisely understand your services or products and whom you serve to refer you business. If your definition is too encompassing or vague, they don’t know whom to refer to you, so they don’t.

What is the job to be done?

When thinking about what you do, I always return to Clayton Christensen’s “The Job to be Done.” As Christiansen says, people buy your services or products because they hire you or your product to do a job. If you or your products do a good job, they will rehire you. Here is a video of Christensen explaining the “Job to be done.”

So the critical question is, “What is the job to be done?”

When I ask CEOs, “What is the job you are hired to do?” I often get rambling answers as they cover all the things they do for clients. For example, I have had a CEO tell me that his company:

  • implements software solutions; 
  • delivers timely reports;
  • helps clients understand their spend on external consultants;
  • manage relationships with external consultants, and
  • the list goes on,

But is that the job to be done? I have challenged this CEO, “What do your clients Google when looking for your services.” What is the overarching problem they want to solve? We have all heard the statement, “No one buys a drill; they buy holes.” So if you are telling me all about the “drill,” I want to know what are the clients’ “holes” they need. 

My Definition

Today, I am a coach; however, what services do you think I offer given that role? The answer could cover any of the following:

  • Life Coach
  • Sales Coach
  • HR Coach
  • Financial Coach

So, I have narrowed the definition of my services and probably need to narrow them more. 

“I am a growth business coach focused on working with CEOs and Leadership teams of companies with revenues from $5MM to $50MM who are looking to build a growth engine for dramatic profitable growth.”

I am working to refine it further to make it very clear what I do.

However, I do many things within that job description, including team alignment, strategic planning, understanding core drivers, and financial improvement, but they are all about “creating a profitable growth engine.”

Now figuring out what job your client hires you to do, is not always easy and can take a while working with your leadership team to get the answer right. However, the benefits are enormous.

It feeds Jim Collins’ BHAG.

In discussing your BHAG (“Big Hairy Audacious Goal”), Jim Collins says one of the things you need to identify is “What can we be the best in the world at?” Understanding this answers the old question of “Why do you exist?” and helps frame your passion. Without these answers, it is harder to develop your BHAG and set your strategic vision. With them, you get clarity for much of what you do!

People know what you do.

If you can easily describe what job you do, everyone precisely knows what you do and why they should use you or refer others to you. Also, when they hear someone discussing a problem or issue they are facing, they can easily understand if you provide a solution to that problem.

To frame this, think of how specialized medicine has become. Today we have oncologists who specialize in medical, surgical, and radiation solutions. The surgical specialist doesn’t do radiation. If you say you are looking for a surgical oncologist, no one recommends a radiation specialist.

You can find your Tribe.

A sales consultant told me years ago, “Find your Zebras.” He meant that if you were a lion, zebras were the best thing to eat. So who are your zebras? Where do you find them, and what are their identifying characteristic and behavior?

That is what I mean by finding your Tribe. Your Tribe is the collective group of your Core Customers which have specific characteristics. However, it is easier to identify your “Tribe” if you are specialized because by being specialized, you narrow the size of the Tribe. Once you know your Tribe, you can then start to determine:

  • How they buy.
  • Where they get information for their buying decision.
  • Who are their influencers?
  • What are their characteristics – size, revenue, budgets, etc.

With this information, you can now target your marketing towards them with a great deal of accuracy. You can ensure that your Brand Promise will appeal to them, and finally, any offers you make will entice the correct response.

If you focus on a “job,” you can do it well.

However, with that specialization comes increased skills, which leads to better recognition within the field. Keeping with oncologists, the radiation oncologist probably knows a lot about surgical oncology, but that is not “the job to be done.” With the focus, they probably attend many seminars and read journal articles on how to improve their services better. They become the best in their field and achieve better results.

If you cannot distinguish your services or products from the competition, you are in the commodity business, and with all commodity businesses, it is a race to the bottom in terms of price. So, you don’t want to be in the commodity business if you are selling services or manufactured products.

If done well, you sell “Value.”

If you are better than average and in the top quartile of the “job to be done” in your market, then the value you provide your clients is no longer based on the time taken to do the job but the value you provide. As discussed in How do you price your products and services?, once you deliver value, your pricing is now independent of time and materials but is based on the client’s BATNA (Best Alternative to A Negotiated Agreement) – what other options does the client have.

With value-based pricing, you can improve your margins and invest in maintaining your leadership position. Through Kaizen, you keep your leadership position and recognition as a leader in your market. 

So what do what to be famous for? 

Determining this often takes time and lots of work, but as I said above, the effort provides a massive return if the job is done. It helps to get a coach like myself, to facilitate the discussion among the team. However, whether or not you engage a coach, figure what you want to be famous for. 

Copyright (c) 2021, Marc A. Borrelli

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Recently I have been addressing this issue with many clients. It appears for many that the model is either (i) some hourly rate that covers costs with a markup; or (ii) some markup over costs. Does this fit with your model? However, there are many models concerning your pricing, and I challenge you to think differently.

I think the key is to start from two points:

  • What is the value that you are providing: and
  • What is the customers’ BATNA (Best Alternative To a Negotiated Agreement)

The first is to identify the value you provide, and the second is the customers’ next alternative to you. Your pricing needs to fall between these, but even within this space, there are many options.

Here are a few examples.

Selling products on the web.

If you are selling products on the web, what is the value you provide your customer? If there is no value other than a low price, then your customer’s BATNA is whomever else is selling the same products. Now you are competing on price, availability, and shipping costs. If their BATNA is Amazon, how much margin do you have if you match Amazon’s prices? Probably not much. Therefore you need to find a way to distinguish yourself so that you are not competing on price. 

Some companies provide lots of information on the products they offer so customers can make more informed decisions. We have all seen Amazon’s reviews being increasingly filled with fake reviews. The company provides more value by providing this information; however, how does it ensure customers purchase through it versus using it for information and then buying from Amazon.

Stopping customers’ switching is especially hard if they are Prime customers or this is not an impulse buy. In many cases, having got the information, whether on the website or through a phone line, the time to switch to Amazon and find the same product may not be worth it, and so they will purchase from such a company’s site. However, I am sure many sales are lost because the customer reverts to the company they know or look at the price and, having obtained the information, no longer value it to justify the price difference.

If the information is on the company’s website, that may be a cost of doing business. However, if there is an option to phone a support line and get advice on determining the appropriate product, maybe this service can be sold on a subscription basis. If customers pay for the advice line, they may become more “sticky,” preferring to buy from a company that provides excellent advice rather than purely on price. Also, since they are tied into the advice line, they may go there more often, increasing the volume of repeat business for the company.

Selling Knowledge

Recently talking with a company, “Z,” with a great deal of expertise in the manufacturing sector, Z is often retained by customers to solve their problems. However, once provided with a solution, the customers use other lower-priced manufacturers to produce the product. The company was struggling to price this service because using an hourly metric, the rate seemed excessive to get the return on their expertise. 

Returning to the two points I mentioned above, the value this company provides is enormous. Their customers’ BATNA may be six months of delay and thousands in costs to correct the production process. In such a case, it is hard to justify an hour rate, but in such cases, I am constantly reminded of the story of Neils Bohrs.

“A company’s machine breaks down. The company’s owner, an old school friend of Niels Bohr, calls in the physicist to help fix it. Bohr examines the machine. He draws an X on the side and says, “Hit it right here with a hammer.”

The company’s mechanic hits the machine with a hammer. It springs into action. The company’s owner thanks Niels Bohr profusely and sends him on his way.

A few days later, the owner receives an invoice from Bohr for $10,000 and gets on the phone with him immediately: “Niels! What’s this $10,000 invoice? You were only here for 10 minutes! Send me a detailed invoice.”

A few days later, the company’s owner receives this from Bohr:

INVOICE  
Drawing X on the side of your machine $1
Knowing where to put the X $9,999
Total $10,000

So do you price your services because you know where to put the “X.” In discussion with a company on this point, they were concerned that charging the value of their knowledge on where to place “X” would put off the customer. However, it is critical in such moments to realize the customers’ BATNA. If a six-month production delay would cost them $100,000 on top of $150,000 of costs in getting the production process right, then the customer profits from any option less than $250,000.

Realizing that in such a case, even a price of $225,000 might cause the customer to walk, price it differently. If the cost to produce the product is $20, then charge 25c per product made. The cost would increase production costs by 1.25%, which barely moves the needle. However, provided the customer is expected to produce more than a million of them, it is better for the expert and maybe more palatable for the client.

Selling Vistage

As a Vistage Chair, I am often asked by possible members how to justify the membership price. What they are looking at is a monthly fee that equates to about $20,000 per annum. However, what we are providing is value, and the BATNA is very large.

Members are CEOs of companies with revenues of $5 million and up, so my response is, “What is the value of your average decision?” If, as CEO, you decide on new ERP systems, hiring key executives, determining strategy, then I would argue that those decisions have a value of at least $200,000 or more. 

So to make a better decision, the CEO would either have to hire a consultant or go with what they know. Assuming they hire a consultant, the cost comprises:

  • time required to find the consultant who doesn’t gain from the decision (i.e., the consultant is not selling you the system or getting the recruitment fee);
  • time required to brief the consultant on the issue; and 
  • the consultant’s fee.

I estimate that this cost would be $40k to $50k. Therefore, your Vistage group provides you with an answer for 50% or less of the consultant’s price. Not only that, but you can have the group help you with many such decisions during a year. So your ROI on your Vistage membership is probably 200% or more. Where else can you get such a return on investment?

So what are you going to do?

For all CEOs and salespeople, the answer is to slow down and look at what you provide to the customer. What is the value of that product or service, and what is their BATNA. Determining this may take time, but it is well worth it. Because once you have completed this exercise, you can price your products and services in such a way that maximizes your margins while providing profit improvements for your customer.

So, sit down with your product team and salespeople and start brainstorming on the value and BATNA. You may find opportunities to increase your pricing or realize that a particular product or service is not worth offering as it is a commodity.

If you want help with pricing better and increase your margins, contact me, and I can help you.

 

(c) Copyright 2021, Marc Borrelli

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I recently facilitated a workshop with several CEOs where we worked on the dramatic business growth model components. One of the questions that I had asked them beforehand was, “What is Your Profit/X?” The results showed that there this concept is not clear to many. So I will try to provide some clarity below.

What is Profit/X?

Jim Collins, in Good to Great, said,

“The essential strategic difference between the good-to-great and comparison companies lay in two fundamental distinctions. First, the good-to-great companies founded their strategies on a deep understanding along three key dimensions; what we came to call the three circles. Second, the good-to-great companies translated that understanding into a simple, crystalline concept that guided all their efforts … one particularly provocative form of economic insight that every good-to-great company attained is the notion of a single ‘economic denominator.'” 

The economic denominator is Collins refers to is “X.” So if you could pick just one “profit per X” ratio to increase over time systematically, what “X” would have the most significant and sustainable impact on your business?

Whatever it is, it is your single, overarching KPI, and to achieve that status, it needs to meet the following:

  • Everyone in the business knows it.
  • It is the factor by which all significant, strategic decisions are measured.
  • It has a positive impact on revenue and is cost-effective
  • More “X” is desirable.
  • It is tightly aligned with your long-term vision.
  • It is unique within your industry.
  • It should improve your team’s discipline and focus.
  • It should decrease the likelihood of spending on initiatives that end in failure or don’t align with your strategy.
  • It can always tell you whether you are trending forward or backward? 
  • Everyone understands their role in driving its improvement.

How do you determine it? 

Again from Good to Great, “The denominator can be quite subtle, sometimes even unobvious. The key is to use the question of the denominator to gain understanding and insight into your economic model.”

So, determining your “profit per X” is not just choosing what appears to be the most obvious answer, as many do. Instead, you need to understand your company’s economic model. Don’t just accept any denominator, but figure out what is the strategy to increase it.’

However, determining your “profit per X” is difficult! It requires an investment of time and effort and will be the source of many debates and disagreements. Not only that, but once you do agree on your unique KPI, it needs to be managed, which is also tricky. Finally, it requires the discipline to review and monitor it continually; otherwise, it won’t provide helpful insight.

Determining your unique economic denominator is difficult. Because it’s complicated, many companies are unwilling to invest the time and effort required for this exercise to succeed. 

Remember, what works for one company may not work for yours!

Those who struggle to determine it?

Some of the CEOs I asked struggled to develop their “profit per X.” What is apparent is that those companies are not clear on their core customer and marketplace, so they cannot clearly articulate what problem they’re solving and for whom.

A CEO didn’t have the data on their profitability per client, so without that, they couldn’t determine effectively who their core customer is. However, he informed us that the larger customers were the most profitable. Suppose the data shows that is the case. In that case, they are probably over-servicing their smaller clients and making barely any money from them.  If the company lost all these smaller clients, they would be only marginally worse off.  It would be better for them to focus most of their resources on our higher value, larger customers, which will lead to exponential growth.

It needs to align with your strategy.

It is critical that “profit per X” is tightly aligned with your long-term vision. Many companies either pull a random number out of thin air or align it to a vague aspiration statement. That will not work! Your strategy and “profit per X” must support each other, and your strategic goals should be measured in the same units as “X.”

Some of the CEOs I mentioned said “gross profit per FTE” and another revenue per FTE with a general assumption on profit levels. The latter fails the test above because no one in the company knows it, gets behind it, and it’s not measured regularly. Gross profit per FTE reflects efficiency, but does it align with the strategy and drive growth? If the strategy is to be the most efficient in the industry, maybe. But if your strategy is to grow to $XMM in revenue and be the market leader, probably not. Using up valuable management cycles and energy to improve efficiency will distract from your growth objective. Instead, find a “profit per X” that drives revenue growth.

Unique within your industry.

When discussing this concept recently, someone mentioned that they didn’t believe it needed to be unique to your business. However, suppose the key driver in your economic engine is the same as your competitions’. In that case, you are all focused on pursuing the same outcomes from the same market. The result is that you are viewed as a commodity rather than differentiated from your competition. Once you’re a commodity, it is a race to the bottom.

Also, a good “profit per X” can provide an advantage to your business even during an economic downturn by differentiating the company from the competition and focusing on revenue and costs containment. It can help a business succeed, even if it’s in a dying sector.

Here are some examples of how uniqueness can enable your business to scale dramatically.

Walgreens. In Good to Great, Collins uses Walgreens chemists as an example. The industry model was profit per store, so to increase “profit per store,” the trend was fewer larger stores. Instead, Walgreen adopted the Starbucks model of profit per customer visit. As a result, they focused on opening lots of smaller stores instead of a few big ones. With more (conveniently located) stores, customers’ likelihood of coming to one of their stores increased. Since the customers were no longer visiting for a single purpose, customers’ spend per visit increased.

Southwest Airlines. The world’s most profitable airline. Southwest identified that their core customer was someone who would otherwise get the bus or drive. They weren’t solving the problem of a Fortune 1000 executive who needs to fly from the US to Europe on a flatbed. With customer clarity, their “Profit per X” was profit per airplane. They made their money while their planes were in the air. They identified their competitors, not as other airlines, but bus companies. So, their business was focused on price. They stripped out food and assigned seats to increase profit per airplane and only used one model – the 737.

Autopia car wash. Like many companies, it was focused on “profit per customer.” While they offered car wash memberships, the “profit per customer” metric showed membership customers were less profitable. They took up more admin time to update credit card details than single-transaction customers. 

However, looking at the data and examining the company’s economic engine, the CEO realized membership customers were ten times more valuable, not the inconvenience he perceived. The company pivoted its model to focus on memberships, making customer satisfaction and member benefits central to the strategy.  Profit per membership card became the new “profit per X,” the one metric that drove the company’s growth. (Thanks to Doug Wicks, a Scaling Up coach, for sharing this story).

New System Laundry. New System Laundry serviced the hospitality industry, picking up and delivering laundry. Again their “profit per X” was profit per customer. However, given their core customer, they could only scale the business by increasing business per customer or prices. They re-examined their business and economic model. Changing their “profit per “X” to “Gross profit per truckload” enabled them to focus on reducing cost per delivery through more efficient delivery routes and schedules, customer clustering, and core customer locations. They added new customer locations strategically, and the business grew dramatically! 

A jewelry design firm. Their initial “profit per X,” like many, was profit per customer. However, looking at the data, it was apparent that many showroom customers were not profitable as they took up too much time and didn’t spend enough. As a result, the owner closed the showroom and moved into a studio, taking customers by appointment only. Taking appointments on weekends and offering champagne and hors d’oeuvres while customers shopped, revenue per appointment increased over 400%. As a result, “profit per X” is now “profit per appointment.” By optimizing appointments, the business can scale dramatically. (Thanks to Glen Dall, a fellow Gravitas coach, for sharing this story.)

So what is your “profit per X?”

As I have tried to show above, profit per X is different for everyone. It needs to align with your strategy and drive dramatic growth. What works for one company doesn’t necessarily work for you. 

Below are some examples to get you and your team’s imagination going about what is the unique economic denominator for your company:

  • Profit/customer visit or interaction
  • Profit/customer
  • Profit/employee
  • Profit/location
  • Profit/geographic region
  • Profit/part manufactured
  • Profit/division
  • Profit/sale
  • Profit/purchase
  • Profit/life of the customer
  • Profit/plant
  • Profit/brand
  • Profit/local population
  • Profit/invoice
  • Profit/market segment
  • Profit/store
  • Profit/square foot
  • Profit/fixed cost
  • Profit/recurring revenue client
  • Profit/seat
  • Profit/plane
  • Profit/product line

If you would like help determining your “profit per X” and dramatically scaling your business, contact me.

(c) Copyright 2021, Marc Borrelli

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  • the people
  • the issues
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  • the processes; and
  • the data

I am a supporter of EOS in that I believe all companies should have some system to improve their performance. However, as I have worked with clients who have implemented EOS, I found that it is just that, an Operating System and not a business model that enables the organization to grow!

As defined by Wikipedia, an Operating System is “the software that supports a computer’s basic functions, such as scheduling tasks, executing applications, and controlling peripherals.” So for a business, I defined it as “a model that supports the company’s primary functions, such as identifying a vision, getting the right people in the organization, improving meetings, defining goals (rocks), etc.” At the risk of upsetting EOS Implementers®, I think EOS satisfies these metrics to a varying degree, but in most cases, doesn’t enable the company to build a growth engine.

Here is what I believe is missing to develop a growth model.

The Hedgehog Concept

In Good to Great, Jim Collins talked about the Hedgehog Concept named after Isaiah Berlin’s essay, “The Hedgehog and the Fox,” which divided the world into hedgehogs and foxes. The theme is based upon an ancient Greek parable where “The fox knows many things, but the hedgehog knows one big thing.” Collins found that those companies who became great followed the Hedgehog Concept. Those companies which didn’t tend to be foxes never gaining the clarifying advantage of a Hedgehog Concept, being instead scattered, diffused, and inconsistent. 

The Hedgehog Concept is based on the questions prompted by the three confluence of questions. 

  • What can you be the best in the world at?
  • What are you deeply passionate about?
  • What drives your economic engine?

The EOS Model® doesn’t focus on the hedgehog concept, and so many companies using EOS have goals and strategies based on bravado than from understanding.

Knowing your hedgehog concept will keep the organization focused on something that aligns its passion with what it can be the best at. Being good at something means you are only good and indistinguishable from many others. If you are the best at something, then you stand above the crowd. Finally, the economic engine keeps the company focused on a metric that drives profit.

Vision

While the EOS Method® works to develop a ten-year goal, I find that is not as compelling as Jim Collins’ BHAG. A BHAG, Big Hairy Audacious Goal, is a clear and persuasive statement and serves as a unifying focal point of effort with a defined finish line. It engages people, is tangible, energizing, highly focused, and often creates immense team effort. People “get it” right away; it takes little or no explanation. 

A visionary BHAG is a 10-25 year compelling goal that stretches your company to achieve greatness. It should be a huge, daunting task, like climbing going to the moon, which at first glance, no one in the company knows how on earth you will achieve.

As Collins’s noted, the best BHAGs require both “building for the long term and exuding a relentless sense of urgency: What do we need to do today, with monomaniacal focus, and tomorrow, and the next day, to defy the probabilities and ultimately achieve our BHAG?”

Profit/X = Economic Engine

The BHAG’s economic engine is the concept of Profit/X. In Good to Great, Jim Collins defines this strategic metric as “One and only one ratio to systematically increase over time, what x would have the greatest and most sustainable impact on your economic engine?” Unfortunately, too many companies don’t have an economic engine, so they fail to deliver hoped-for profits. This metric is not easily identified; however, Collins noticed that the companies that took the time to discuss, debate, and agree on one key driver for their economic engine are the ones that went from good to great.

Profit/X how you choose to make money; it is a strategic metric, not an operational one. This ratio is a key driver in your financial engine and when you make decisions about how to spend money. When developing your Profit/X, you need to have that is unique and not the industry average because if you choose the latter, then everyone will be pricing and driving costs the same way to maximize it. Like the BHAG, a correctly defined Profit/X will promote teamwork as everyone can focus on their role to drive the metric, from how many people to hire, where to open new operations, etc.

Here are some examples of Profit/X.

  • Profit/customer experience or customer visit
  • Profit/customer
  • Profit/employee
  • Profit/location
  • Profit/geographic region
  • Profit/part manufactured
  • Profit/division
  • Profit/sale
  • Profit/brand
  • Profit/local population
  • Profit/invoice
  • Profit/market segment
  • Profit/store
  • Profit/plant
  • Profit/purchase
  • Profit/square foot
  • Profit/fixed cost
  • Profit/recurring revenue client
  • Profit/seat
  • Profit/plane
  • Profit/product line
  • Profit/life of the customer

To frame this in a real-life context.

Southwest Airlines: Profit per plane

Walgreens: Profit/Customer Visit

New System Laundry: Profit/Delivery Truck Load

I think the EOS Method® ignores the following areas, but to me, they are part of the Hedgehog Concept. If you are doing something with clarity and focus, you need to have clarity and focus on these areas.

Value Creation

It is said, “A Business That Doesn’t Create Value for Others is a Hobby,” so what value does your organization create? Value creation is part of what you can be the best at. However, organizations need to know, “What is the problem they are seeking to solve for their customers.” Christian Claytonson defined this as “What is the job your customer is hiring you or your products to do?” Too many organizations define the job to be done as what they do, e.g., “We integrate your systems.” While that is what they do, that is not the job they are hired to do. The job they are hired to do may depend on the client but could be, “Provide information from across the organization to make better-informed decisions.” Knowing the job to be done enables your marketing and sales efforts to focus on the customers’ needs rather than on what you do. No one cares about what you do; they care if you can solve their problem. I don’t see the EOS Model®’s focus on this crucial question, but it is central to a company’s growth.

Core Customer

Who is the company’s core customer? I have discussed this before, and many companies can identify their core customer. However, most haven’t analyzed their customers from the point of view of Profit/X. If Profit/X is the driving metric of the organization’s profitability, then failing to know which customers meet and exceed it is crucial in defining your Core Customer. There is little point focusing on a Core Customer that doesn’t meet your economic engine’s critical financial metric, hoping that somehow you will magically capture the lost profit elsewhere. Furthermore, if you don’t know your Core Customer, your marketing and sales activities will be directed towards the wrong groups, further weakening your performance. 

Brand Promise

What is your Brand Promise, and how is it measured? This question is one that the EOS Model® doesn’t address. However, it is crucial.

  • It is what convinces your targets to buy from you. 
  • It is what you stand for and promise to deliver. 
  • It is the metric against which you will be measured.

Some organizations do have a brand promise, but it is not measurable. In that case, it is “valueless” because if it is not measurable, no one knows if you are delivering it, and in that case, it has no value to prospects or clients.

Value Delivery

Value delivery is vital for knowing how customers value the performance of the organization. While the EOS Model® discusses many metrics, this one does not get enough focus. Companies need to understand if their customers are satisfied with their performance. Recently, I spoke with a CEO who said that 80%+ of their customers were “Very Satisfied.” However, on further investigation, I discovered:

  • It was just a guess as they didn’t measure it.
  • 7 – 10% of their customers had complained in writing about their product and delivery in the last year.
  • None of their clients had recommended them.

Here is wishing over reality. I would expect that the company had a “Very Satisfied” score of less than 25%, and they should be working hard to improve their delivery and start collecting customer satisfaction data.

Critical Number and Counter Critical Number

The EOS Model® deals with goals (Rocks) and meetings, and that is one area that I think it does very well. However, I notice that the Rocks are not aligned to improving a critical number for the quarter. The Rocks should seek to improve some Critical Number each quarter. Without a Critical Number, you are once more a Fox, not focused. Those that use Scrums know the importance of the Critical Number. 

Rocks are great, but they need to improve a single business area to have the most significant benefit. As the saying goes, “You cannot defeat ten soldiers by sending in one soldier every day for 100 days.” For example, if our Critical Number is Customer Service in a Call Center, then the Rocks could relate to:

  • Hold time
  • Time on the call
  • Customer satisfaction at the end of the call
  • Percentage of calls resolved in one call
  • Employee satisfaction.

The Counter Critical Number is essential to preventing the critical number from overwhelming the company and leading to adverse effects. For example, if our Critical Number is project completion, then a Counter Critical Number would be customer satisfaction. This metric would counter the attempt to deliver incomplete or defective products or projects.

Focusing on a Critical Number and Counter Critical Number for the 13-Week Sprint is essential to developing focus and alignment within the organization.

Team Alignment

The EOS Model® does a great job of looking at the “Right People” in the “Right Seats.” However, what it doesn’t look at are alignment among the leadership team and employees’ satisfaction. Is your leadership aligned around the company’s direction or not? Culture will bring them to agree on values, but not necessarily alignment.

Your employees may all have the correct values, which is crucial, but if they are not engaged or dissatisfied with the leadership, cultural values will not prevent them from leaving or, worse, showing up but not there. Companies need to survey their leadership teams for alignment and their employees for satisfaction to ensure everyone is working in the same direction and committed to its success.

Conclusion

Thus while I like the EOS Model®, I think it doesn’t deal with many of the key things involved in the Hedgehog Concept. This failure enables companies to perform but not grow at an optimum rate. I am not ignoring many of his other areas of focus in Good to Great; however, this refinement of the Hedgehog brings an additional guide that the EOS Model® doesn’t. 

The above model is most of Gravitas 7 Attributes of Agile Growth® model, and if you add in the rest, you have a model that will propel you to growth while keeping your operations running smoothly. The 7 Attributes of Agile Growth® focuses on:

  • Leadership
  • Strategy
  • Execution
  • Customer
  • Profit
  • Systems
  • Talent

making it a more encompassing system. If you want to start your transition to an agile growth company as a certified Gravitas Agile Growth coach, please contact me.

 

 

Copyright (c) 2021, Marc A. Borrelli

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