Predicting Your Business Future

Strategic planning has become an annual administrative rite. Every year, contractors brush off last year’s plans and doggedly seek to update their contents. Once completed, the task, like filing tax returns and conducting employee reviews, is checked off for another year. What value do you really get from your current planning process?

When done correctly, strategic planning is a dynamic and invigorating process. New market opportunities are explored and competitive threats vanquished. A true strategic plan however is not an annual event. It is an activity that is tied to your business cycle – a period for contractors that extends for approximately five years.

The business cycle is a series of five phases each with a predictable time duration. Contractors are literally able to predict business booms and busts with a high degree of accuracy and craft effective strategic plans to achieve desired results. Understanding your business cycle is the key to unlocking your strategic advantage.

The “R” Cycle

Before you can exploit the business cycle, you need to understand its components. Enter the “R” Cycle.

1. Every business cycle begins with the Research Phase. During this phase contractors and suppliers develop new products and services, test these offerings in the marketplace and identify specific tactics to ensure offering success. Referred to as the strategic phase of the cycle, the primary success characteristics are high levels of market savvy and competitive intelligence. The typical duration for this phase is approximately six months.
2. The second phase of the business cycle is the Release Phase. This phase, referred to as the “market bet,” is characterized as the period when new offerings are released to the entire target market population. Aggressive marketing and sales campaigns are enacted – spending all or most of the available funds of the business. The typical duration for this phase is six to 12 months.
3. The favorite phase of every contractor is the Reward Phase. Lasting approximately two years, this phase is characterized by sharp increases in revenues (but not always profits!). This phase is marked with high levels of owner euphoria that, in some cases, creates a false sense of never-ending success. However, because the business is in a cycle, this phase eventually does come to an end – much to the chagrin of every owner!
4. Revenues generated from the Reward Phase are used to start the Reinvest Phase – the next phase in the business cycle. Flush with cash and high levels of owner confidence reinvestments are made to the infrastructure, employee base and, in some cases, other businesses are acquired. Investments during this phase are expected to strengthen the overall business structure, extend the euphoria of the Reward Phase, and begin to position the business for the last phase of the cycle. The duration of this phase is approximately one year.
5. Every business cycle concludes with the Rework Phase. At this point in the cycle, revenues have dropped off – usually quite dramatically from the Reward period. Business transformation is necessary to ensure an effective transition to the next business cycle. During this phase, contractors reinvigorate strategic planning efforts and carefully explore industry paradigm shifts. The duration of this phase is approximately six months.

Your Competitive Transformation

Where is your industry evolving? What customer needs are not being met? What other “industries” are beginning to impact your business activities? How does your business need to change to take advantage of your evolving market?

These are the questions that you, the contractor, face as you enter the Rework Phase of the business cycle. This is the phase where transformation must occur to successfully enter the next business cycle. This is where your competitive advantage is born. Business transformation can occur vertically or horizontally. Vertical transformation relies on maintaining a sub-set of your existing customer base and “adding” niche offerings that satisfy a smaller, more unique, customer type. This vertical transformation approach refines the business’ offerings, reduces the number of potential customers and increases the service rates.

Horizontal transformation occurs when businesses look “sideways” to those industries that are performing services that fit under a broader umbrella of customer service. During recessionary periods, it is a common practice to acquire “related” businesses as a means to expand a customer base, diversify a scope of offerings and increase the size of the employee workforce. Businesses that practice horizontal transformation during a recessionary period often achieve exponential growth during the subsequent business cycle.

In a typical contractor business, you must transform your business at least every five years to remain competitive. Business stagnation places you at a competitive risk – where other businesses will evolve beyond your current offerings.

Leveraging Your Customer’s Position

Knowing where your customer resides in their business cycle provides you with a competitive edge as purchasing decisions change based on the prevailing phase. During early phases of the cycle, potential customers have very little discretionary cash making sales a long and expensive process. In fact, attempting any form of new customer acquisition while a targeted customer is in the initial phases of their business cycle is usually met with failure – regardless of your value proposition.

Later, as your customer evolves into the Reward and Reinvest Phases, purchasing decisions are often expedited with lower levels of vendor scrutiny. It is during these phases that new customer acquisition is most successful. Flush with cash, customers are more open to examining value proposition messages and incorporating vendor promises into their “expansion” plans. You become part of your customer’s growth solution.

Customers acquired during the Reward and Reinvest Phases can be extended as paying relationships through every other phase in the business cycle. The key is to refine your product and service offerings to match your customer’s needs as they evolve through their business cycle.

Exploiting Your Competitor’s Cycle

The competition is constantly working to take your customers away. Successful businesses use the “R” Model to pinpoint a competitor’s cycle position and, subsequently, implement strategic counter tactics leveraging the weaknesses inherent in every phase.

If your competitor is in the initial stages of its business cycle, capital resources are being used to introduce new offerings to the market. You have an ability to “piggyback” the efforts of your competitor by following a “me too” market strategy. Under a “me too” market strategy, a business relies on the research results of the competitive firm and follows their lead into the marketplace. The business saves the costs of conducting their own research but also runs the risk of not having any tangible results to support their market strategy.

When your competition is in the Reward or Research Phase, there is still an opportunity to beat them – even during this cycle peak. Businesses that are enjoying the spoils during these phases often start to take their customers for granted. Customer service begins to fall off as these businesses seek to increase their customer base. Lower-tier customers, frustrated by a lack of attention, seek alternative businesses to satisfy their requirements. Referred to as “low-hanging fruit,” these unhappy customers make ideal additions to a business that is not enjoying the benefits of the Reward and Research Phases.

Getting Stuck in the Cycle

Failure to effectively execute the requirements of each business cycle phase can stop a business dead in its tracks. While each phase has its own evolutionary characteristics, trying to operate your business outside these confines can derail even the very best businesses.

It is not uncommon for some businesses to never evolve beyond the Release Phase. For entrepreneurs or small contractors that constantly feel like they are starting over every year, the problem is not with the cycle. The issue is that the product and service offerings are perceived to be of limited, if any, value by the marketplace. The initial phases of the cycle are being short-changed.

Most contractors try to extend the Reward Phase of the business cycle. Unfortunately, the Reward Phase is only a single component of the cycle that will, eventually come to an end. Contractors caught up in this phase miss the importance of the Reinvest Phase and, ultimately, are unable to effectively position themselves for the Rework Phase – the most important phase to ensure your business’ success for the next business cycle. As a result, it is commonplace to see businesses only remain in operation through a single business cycle.

The business cycle is a predictable event that can be leveraged for your competitive advantage. The key is to realize that each cycle phase can be used to increase customer rosters, defeat competitors and strengthen your own business. The “R” Model is a powerful tool that identifies phase characteristics and indicates when a phase is coming to its natural end. When used correctly, the “R” Model predicts the future of any business.

Brad Dawson is an internationally-recognized business strategist and growth-oriented financial management consultant. He is a frequent speaker at business events and serves as a contributing writer to several international management and leadership publications. He can be reached at BLDawson@LTVdynamics.com

More Future Predictions

Want to hear more from Brad Dawson’s thoughts on strategic business planning? Don’t miss Brad’s Webinar where he’ll reveal a custom Corporate Value Calculator Tool that will show business owners how to determine their current business value and, by developing various growth scenarios, see the impact of those decisions on their business value. Log on to www.benjaminmedia.com/webinars/index.php to register.