By Maurie Cashman
You need to be re-allocating resources in your business much as you would in an investment portfolio. The resources you have available in your business include products, facilities, management, employees, and overhead. These need to be adjusted periodically in response to business performance, competition, customer needs, industry and economic changes, business strategy and your ownership transition strategy.
If you have an investment portfolio and possibly an investment advisor, you have probably read a lot about asset allocation. In investing, asset allocation is the balancing of a portfolio between various asset classes such as cash, bonds, equities and real estate. The idea is to insure that you have the correct percentage of your portfolio in each of these classes in relation to your return expectations and risk tolerance. You should periodically review this allocation as some classes will outperform others and your risk tolerance may change with your circumstances.
I have experienced this throughout my career. I liked to tell people that I reported to that they needed to keep me busy or I would break something just so I could fix it. It was kind of a smart-alec remark at the time but I have come to embrace it as an important strategy. As we built various businesses it became important to constantly re-assess the businesses we were in and how we were deploying resources to succeed in those businesses. The results of re-allocating were extreme and the more often we re-assessed, the more we honed in on increased profitability while reducing risk.
A study by McKinsey&Company bears out the results:
Re-Allocating Your Resources
Products and Services. When was the last time you looked at the product and/or service you are offering? It is not only possible but probable that what you were doing five years ago is not what you should be doing today. Have you talked to customers about what new products you could be adding to your line or what services you could be offering? Chances are you could make an adjustment here that would not require large investment.
Management. Management often falls into the trap of the 80/20 rule, spending 80% of their time on the 20% of the business generating the least return but the most problems. By focusing on aligning management on the areas of the business that can grow profitably, you are likely going to see the problematic parts of your business die a natural death. Sometimes that can be difficult but necessary.
A second area of management that should be examined is whether you have the right people working on the right opportunities. Many owners are reluctant to move managers into different parts of the business. It may mean challenging someone to move out of their comfort zone. It may mean moving someone into an area in which they may not feel they have any skillsets. Donâ€™t underestimate what people will do when asked to rise to a challenge.
I was challenged with shifting from a role as a Controller (accountant) to that of Business Development early in my career when we were positioning for a major push into a new industry. I felt that I had little in the way of skills to take on such a challenge, but my boss either felt otherwise or thought he had no other choice. The result was that we grew to a top 10 national business very rapidly and we were able to hire a better controller than I ever wanted to be.
Finally, if you are building your business so that it may be attractive to a successor, you had better believe that those potential successors are going to be very interested in the depth of your management team. Underestimating this is one of the biggest mistakes I see business owners make.
Capital. As you re-allocate resources it is often necessary to adjust your capital structure. In order to finance a push into a new product line it may be important to invest capital in that business. So where does that capital come from? It may involve re-allocating from planned capital spending in existing business lines into those new, higher potential lines. It may also involve divesting of certain parts of your business to allow you to invest in the areas you believe has the most potential. There may also be non-traditional sources of capital for your strategic moves. If those new products/services are important to your customers, they may be willing to cooperate with you to finance that strategic move. Turn over all the rocks.
Risk. As in investment portfolio management, managing risk is an important and evolving subject in any business. Risk may come from new products being offered by competitors. It may come from changes in your industry. There was a huge feather duster factory in my home town, it is now a retirement home. It may come from economic changes from within or outside your industry. Look at what is happening right now in the agricultural production industry. As the industry ramped up production it bid up the cost of inputs. Now demand has collapsed and there is a painful adjustment to a new reality underway. Those who watched their resource allocation in the good times are positioned to leverage them. Those who did not are in danger of forced re-allocation.
I have been working on the allocation of my business resources recently, as well as those of several of my clients. What I have found is that by listening to some of my more trusted business partners, I uncovered a service that I have been providing that could be expanded significantly if I devoted more resources to it. Watch for more about that service in the coming weeks. For now, it is an important strategic move that can take advantage of an existing business model that I have had in place for years but am now going to be able to take to a new level by slightly re-allocating my existing resources.
You likely have opportunities like this as well. Start with what you are good at. Are you putting enough resources in those one or two areas? Or are you continuing to be all the things to everyone that you have always been?
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