Business

What should you be doing in running your business? Just what you always do: Widen the moat, build enduring competitive advantage, delight your customers, and relentlessly fight costs.

There is so much in the above, but it sounds so simple.  I don’t want to overwhelm you with 25 years of experience in running a business, so let’s start with a dose of reality.  Most people thing being an entrepreneur or running a business is a cool thing.  You see it on YouTube, Instagram, and wherever else.

All kinds of people are trying it.

All kinds of people want to do it.

That’s great!  But you should know the vast majority of businesses fail, and the vast majority that don’t fail, people basically invent a job for themselves.  Let me say that again.  They don’t build a business, they build a job.

Here’s how that happens.  It often starts because they are a specialist in a field.  They are a plumber, or baker, or social media personality working for someone else.  One day they wake up and think they can do whatever their thing is better than the people they work for.  So they go off on their own, and do their thing for themselves.  They start a business.

Pretty soon they learn the hard way that it’s not just about executing the task they are good ad, it’s a whole lot more.  It’s not only doing the repairs as a plumber, it’s also attracting customers, paying suppliers, dealing with accounting and paperwork, and a ton of other little things.

All of this ‘other stuff’ bogs people down, and once the fire that caused them to start the business goes out, and they realize it’s just a job with a whole lot more responsibility.  They wake up to find they are spending a whole lot less time doing what they’re good at, and if they don’t have the right habits in place, they struggle for a while then the business fails.

I’m not telling you this to discourage, I’m telling you this so you know what you’re getting into.  This process is described in the e-myth book (the entrepreneurial myth) and he talks about a technician becoming an entrepreneur.  This is one way to think about businesses, and there are more.

Let me start with a few fundamentals about business, so you can start to think about business as something separate from you.  Then break it down bit by bit until you get a good overall picture of how to think about your own business, and planning to make it work.

The first fundamental thing you need to know is businesses is businesses are fundamentally comprised of two things: People and processes.  From a high level, that’s it.  Everything else can be sorted into these two buckets.  You get them right, you’re off to the races.

This is tremendously important as you are starting out.  If you can step back and think about your business as separate from you, and that you have to learn how to manage people and processes, your odds of being successful grow tremendously.  This is one of the fundamental reasons franchise models work.

Think of Subway, or Tim Horton’s restaurants.

They are the same everywhere.  That’s the process.  They do not run by themselves though, they have people, often young people, who run entire businesses earning millions of dollars a year.  That is the strength of a business that is well designed.

Let’s break it out a little more, from these first two things, into four.  The next stage is to think of the business as comprised of people, strategy, cash, and execution.  These four fundamentals are simply expansion of the above two, and are just as important to get right.

In your business, you need to know your strategy, you need cash to fuel and run your business, and you need to execute on your plan.  This can be provided to you, by being a member of a franchise, or you can design it yourself, but without any one of these four things, your business will wither and die.

The next step is to break it down again into a few more stages, the four plus two stages.  Interestingly the 4+2 gives you some options as to what you want to be good at.  This stage breaks down the previous four stages into eight, but you only have to master six of the eight to succeed.  You don’t need them all.

Here’s how this works.  There are four fundamentals that you have to master, or the business will fail.  If you get those right, you also have to get two of an additional four right to succeed.  You don’t need to to all eight perfectly, so you can finally catch a bit of a break.

Here are the fundamentals.  The required four are:  Culture, Execution, Strategy, Structure.  The second four (where you have to do two of the four) are: Innovation, Leadership, Mergers and Acquisitions, and Talent.

Let me expand.  You need to do all four of these well to build the foundation of your business.

You must get all four of those right.

Beyond that, you must do two of these four things as well:

I’ll expand on each in the future, but know if you plan these things out well, you will be the exception and succeed.

But let’s say you have a business already.  What should you be doing in running your business?  Other than mastering the 4+2 above, according to Warren Buffett you just have to focus on four things:

Let’s look at each of these things in turn.

What exactly does that mean?  Think of a castle.  A moat serves to protect it from attackers and invaders.  From a business perspective, a moat could be something like a patent.  This patent protects you from competition.  But it could also be perception.  Gucci or Chanel have a brand moat, because of marketing, they’ve created a defensible position in the marketplace.

There are always competitors attacking you and trying to steal your customers.  An example of a good durable competitive advantage is the Apple app store.  When it came out, along with the cool new tech around the iPod and the iPhone, it created a closed system that Nokia and Motorola customers couldn’t access.  What made it even more advantageous to Apple was once you were on Apple tech, it locked you in.  You had all your music purchases there, all your tech and calendar, and everything you did got linked into your desktop and mobile devices.  This advantage means if you were going to spend money on the next app, or a game, all your money was spent there with them.

The best business examples I can think of is Nordstroms, with the epic story of how they returned and refunded a customer’s tire purchases, even though they don’t sell tires.  Or the shoe company Zappos, who changed the shoe industry by offering free shipping and free returns.  They both delighted customers and got huge as a result.

The last thing, relentlessly fight costs, is something that is easy to measure as a public company, but hard if you don’t know what you’re doing.  There’s an old saying, it doesn’t really matter what you sell it for, it’s what you buy it for that matters.  That is true.  If you can buy your products for 10% less than everyone else, and pass those savings on to your customers (delighting them) then your business will grow.  Your competitors, if they don’t have the same procedures in place, won’t be able to compete.  Love them or hate them, Walmart is an excellent example of this.  They get better pricing from suppliers because of their purchasing power, and they pass them on with everyday low prices.  They are huge because of it.  GEICO insurance is another example.  They keep costs low by selling direct to the consumer, cutting out the entire broker network that Allstate or State Farm have.  This allows them to sell insurance for less than their competitors and they grow every year because of it.

These four things sound simple, but they are far from easy.  If you master them, you’ll win, and that is simple.