What are the key factors to look for when considering the environment an organisation operates in?
This has been a recurring question arising from my recent conversations with CEOs and managers, and one worth exploring further.
In our PURPOSE, PEOPLE & PERFORMANCE model – the very first step is to consider the Environment (the other two are Comparative Core Competence & Value Creation).
Environment Analysis can take various forms – but from a commercial view point there are three key factors that I look for to help with decision making.
It is worth noting that this is a very simplified model and from quite a narrow perspective.
Secondly, a one-dimensional pursuit of profit can be dangerous when determining organisational PURPOSE. As Peter Drucker so eloquently put it, organisations do not exist to make a profit, rather they make a profit so they can exist.
Noting the above, when considering the organisation and the environment, the simple three factor test I use is: Recurring Revenues; Sustainable Earnings; and Under-Managed Industry or Organisation.
1. Recurring Revenues
An operational model that has recurring revenues is far more attractive than one-off transactions with its customers. This makes scale easier, allowing for foundational development and constant growth.
As an example, even in the sporting industry, one of the fundamental improvements we focused on was recurring revenue. Whilst game-day ticket sales are good, even better is revenues from memberships including in the corporate division.
Not only because recurring revenue is reliable, but, uniquely in sport, provided you satisfy your customers – they rarely leave…and almost never switch teams!
Understanding this led us to not just focus on recurring revenues such multi-year options for our corporate customers but to offer our non-corporate customers an indefinite almost monthly membership model – something that better reflected their fan-engagement and importantly ensured reliable revenues.
2. Sustainable Earnings
By sustainable earnings, we refer to margin. This again is quite simplistic, but high-earnings are preferable to low-earnings. Where an industry or market has potential for high-earnings, it gives you the ability to better service your customers and provide for your staff and the organisation.
Going deeper, if the margins are lower than desirable, consider what can be done through innovation and efficiencies to reach a sustainable level of earnings. In other words, can we develop comparative competence internally to increase earnings or can it be outsourced to those that do?
3. Under-Managed Industries or Organisations
Finally, under-managed organisations or industries, offer opportunities for good management to excel.
There are many ways to profile an environment or organisation to test for under-management or even worse bad management – limited entities or competitors in a market, qualitative factors such as low NPS (net promoter scores with customers) are good starting points. As a rule, I also consider the non-customer for insights.
Consider the furniture industry for example, not long ago, buying a lounge meant going into a showroom, picking something you like and then waiting weeks, if not months, for delivery. The industry was under-managed – it could not stock volumes of inventory due to costs and fear of changing trends. Then came IKEA with an innovative solution – pick up immediately as a flat-pack and assemble it yourself…alternatively IKEA can provide someone to deliver and put it together for you.
Taking this even further, IKEA is now trialing a variance on the model where you simply pay a monthly fee for your furniture for as long as you need it. A solution for the very transient needs of many of its customers, environmentally responsible and unsurprisingly, a source of recurring revenue!
When considering PURPOSE for a new organisation such as a start-up, an existing organisation that is under-performing, a turn-around project, or even a merger/acquisition, this three-factor model has proven invaluable with my decision-making.