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Why some businesses lead and some fall behind.

"If I had asked people what they wanted they would have said faster horses." 
- Henry Ford.

I have observed four methods to planning a business.

By planning a business, I'm not referring to a business plan you'd put together for a banker nor an operating plan you might publish for managers and controllers to judge the efficiency of the business. I'm referring to how a company decides what services/products to offer and how the operations team performs/produces them.

Method 1

Management runs the business based on mostly complete financial and operational information. They know run times or they know general job costs, but they don't really know what they do well. There's a general assumption in this type of business that if they scream louder and crack the whip, then then carriage will go faster. No idea what they do well, no idea where the market is, no idea where the market is going. In inefficient markets this method is actually feasible for a while.

Method 2

Management reviews the strengths and weaknesses of their employees and facilities. They accept no work outside of these strengths. This an area where my industry succeeds. They know what they're good at and everything that comes through the door that meets that criteria they take as business. But still, CPA firms are shrinking. In other another industry, the Midwest is full of aging manufacturing equipment that's going unused by companies who knew what they did well. With inefficient markets, this method actually works really well. But only in inefficient markets.

Method 3

Management reviews the current needs of the market and fine tunes their employees and facilities to provide the exact products/services that consumers want. These businesses tend to merely exist. There's nothing outstanding here. They're in tune with their customers, but they are walking a fine line since every time consumer preference changes they go through painful reorganizations, retooling of equipment and mid-year operating plan changes. Remember BlackBerry? I used to love my BlackBerry.

Method 4

This is where I want to be. It's where Henry Ford was when he realized the average American family could afford $1,000 for a car and then mathematically backed into his operating plan. That operating plan later became known as the assembly line.

This is also where Steve Jobs was when he realized the American public wanted a capable phone (like a BlackBerry), but would prefer a more simple and aesthetically pleasing version.

What do both of these innovators and business leaders have in common? They understood not what the market wanted, but what the market would want if given the choice. They predicted the market. Go to where the market will be, there's riches there.

These businesses introduce a new generation of product (or services) before the market is ready so that when the market is ready they've established themselves on the mountaintop. Not only that, but they're reaping profits from prior generations' sales while spending no extra money to implement them.

How to be a method 4 business

To those who aren't Method 4 businesses, it must seem like magic. They wonder, how does their competition always stay a step ahead? Why do they always command higher prices for products/services that we won't be offering till next year?

The answer is simple. Analytical review of empirical data. Sounds scary, I know. But all it means is arranging observable facts in a way that you can identify a trend. You can logically draw a conclusion that will impact your company. Should we increase production? Order more raw materials? Train an additional construction team?

In Review

Ignoring your strengths, weaknesses, and market PREFERENCES will get you slaughtered by the competition.

Only relying on fitting employee skill and machine capabilities will keep the doors open for a short time.

Going to where the market is and therefore retooling your employees and machinery will keep the doors open for a little longer.

Understanding where the market will be and establishing yourself as top provider is the path to riches. Are you surprised a CPA firm can guide you through all this? It's time to rethink what a CPA firm can do for you.