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Rob's Blog
February 1st, 2008
If you haven’t noticed, just about everything has changed in business this decade. We have entered the Conceptual Age, which requires businesses to own and leverage their intellectual capital to compete globally and create value. Frankly, most Main St. business owners are not stepping-up to this new challenge. Owners are currently faced with an adult decision: to either get strategic about their businesses or to get out as soon as possible.
The Conceptual Age began soon after 9/11. The combination of the terrible tragedy of the Towers, which brought the US fully into global politics, and China entering the World Trade Organization, ushered in the global economy. These two events occurred in a technology-enabled environment, with the Internet and logistics providing the speed. We now work in an Age where operating excellence is the ante and strategic thinking is a value-added requirement.
One by-product of the Conceptual Age is that change is now exponential. Geometric change can either be an enemy or a friend. For instance, it’s an enemy of those who refuse to adapt to the new rules of business (see Airbus – which still employs a command-n-control culture); whereas, it’s a friend to those who change (see Boeing, which moved to a collaborative business model several years ago). Tremendous business wealth is now being created in short periods of time by those who adapt.
A further challenge to owners is the uncertain US economy. Actually the economy tipped to the dark side toward the end of 2007. The sub-prime meltdown was mainly the result of too much money chasing too few quality borrowers. Therefore, risk was not fully considered and returns must now suffer during a reset period. All valuation is an attempt to balance risk and return, so when risk finally bears its fangs, returns must fall to re-establish equilibrium (think of it as a risk/return teeter totter). And we are only just beginning to get the teeter totter balanced for that asset class.
A number of other asset classes are also out of balance. For instance, credit card portfolios, private equity and hedge funds also have had too much money for their own good. These classes, which represent trillions of dollars, will be reset over the next 3-4 years, making the sub-prime thing seem like a drop in the bucket.
So what’s an owner to do? First of all, read my 2007 article, “Now is the Right Time to Sell a Business.” This article describes the 10 year transfer cycle that keeps repeating in the US. Basically, the first few years of every decade (think 1980-83, 1990-93, and 2000-2003) are down years for the private capital markets (i.e., recessionary). The 4th year of every decade is a transition year to profitability. Years 5 into year 8 are the go-go years; the private markets are open for business. During these years we feel the need to over-build, over-leverage, and over-just about everything else. Apparently our business memories extend only a few years. The economic house-of-cards starts falling in the 8th year (see 2008), and finally totally flattens by the end of the decade. The article concludes by saying that business owners have until the 2nd quarter of 2008 to sell out, or they will need to hold their companies until 2015 or so before they can maximize a sale. Yikes!
Business owners need to implement a conceptual business model – now. This means that all process steps based on intellectual capital are owned, and all other steps are outsourced. The typical business has 12-15 process steps, of which only 3-4 usually represent intellectual capital. So get busy outsourcing. Once the process chain has been “rationalized,” owners need to identify strategies that leverage their know-how. A good goal is to leverage intellectual capital by at least a 5:1 ratio. For example, a 1:1 leverage means that you earn a living, say $100,000 per year. A 5:1 leverage increases this five-fold, and so on. Top-performing companies around the world leverage their IC by more than 50:1. You’ve got work to do.
What strategies can possibly generate such results? Midas strategies. These are the strategies used by super-successful business owners (Midas Managers). Let’s consider just one such strategy here. As the economy continues to sink into the muck, many competitors will weaken, to the point of almost giving their businesses away. You want to be on the other side of the table and consolidate their businesses into your own. Midas Managers call this playing the Consolidation Math game. The more you play, the more you can win.
So the choice is easy: either change the way you do business immediately (rationalize your process chain – implement leveraging strategies) or sell out. Because the Conceptual Age and global economy aren’t going away, lifestyle businesses are going the way of the Dodo, and the transfer cycle beckons. You still have a few months to sell-out before the nasty economic front settles in. We’re about to face capitalism at its coldest.
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September 13th, 2007
The question to consider here is: how can someone leverage their intellectual capital (IC) by at least 5:1 in order to create wealth? The answer is surprisingly simple: employ a business model that supports the leverage you wish to create.
Let’s back up and discuss business models. A business model is how you organize to meet your business goals. Obviously it helps your cause if you have a goal of creating wealth via your business. Most owners do not have this simple goal; rather, they get into business for more personal reasons (to control their own destiny; to stick it up the $#@$ of the man; to prove something to themselves or others, etc.). Little wonder that most owners of private businesses are not creating wealth.
Assuming you want to create business wealth, what kind of business model will enable you to leverage your IC? The answer: a conceptual business model. In a conceptual business model you own only your IC and outsource nearly everything else. Or another way of saying this: you own the process steps that involve IC, and outsource the process steps that do not.
You didn’t expect creating vast wealth would be easy, did you? Actually, with the right framework, it is not as hard as you’ve been making it.
Most companies have 10-12 process steps in their process chain. This just means that there are typically 10-12 unique steps in delivering their product or service to a customer. Usually no more than 3-4 of these steps are intellectual capital. For example, in the world of investment banking, the first couple of steps of the process chain are intellectual capital: edu-market the client; negotiate the fee agreement. These must be owned. The middle steps, such as: create Memorandum; identify prospects; run the auction; can be outsourced.
Even the big boys have seen the wisdom of moving to conceptual models. Example: Boeing chose to be a system integrator for the new Dreamliner jet. Boeing designed the plane, but most of the engineering and modules were outsourced. Final assembly was completed at Boeing’s facility in Seattle. Apple Computer has done the same thing with iPods and the iPhone.
Conceptual business models are scalable, meaning they enable you to do more with fewer resources. The result is a virtual, variable model that can generate oversized results. In other words, these models let you leverage your IC a multitude of times – which should result in gigantic wealth being created in relatively short periods of time.
What’s stopping you from converting to a conceptual business model?
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August 23rd, 2007
I’m often asked: What is the secret to creating wealth via private business ownership? I guess it’s human nature to look for singular simple solutions to complex multi-variable problems. Most of us think in linear terms – so searching for the holy grail of business success as a one-stop shop comes naturally.
Somewhat surprisingly, there is one thing all Midas Managers have in common: they leverage their know-how (also known as intellectual capital or IC). Let’s examine this further.
We all know how to do certain things. Even people who sleep-walk through life learn how not to fall over while in a stupor. Most people, however, learn a variety of value-added skill sets as they get older. These skills are not learned in school; rather, life’s experiences add to the skill set inventory. I’ve met few successful business owners who didn’t possess at least 6-7 skill sets. At some point the skill sets get mixed in life’s Cuisinart – and voila – you have intellectual capital!
Imagine you own only one skill set. For example, you mow a really mean yard. There is almost no way to leverage a single skill set. So you will forever be a worker bee, and earn a living that is commensurate with your skills.
What can happen if our mower develops 4-5 skill sets around landscaping? For instance, they learn how to manage a crew of mowers; they learn how to landscape, etc. Our empowered mower should earn a much more substantial living with multiple skills. If these skills merge into intellectual capital, our mower can become a successful business owner. But…
The mower will NOT create wealth until he/she learns to leverage their intellectual capital – by at least a 5:1 ratio, and preferably at least 10:1 (btw, leveraging IC is the secret behind business success). What does this mean – to leverage IC?
Leveraging your IC means that you generate some multiple of result or throughput from your actions. For example, someone who leverages their IC ten-fold is able to create ten times the effect as opposed to leveraging just 1:1. Let’s describe this quantitatively.
Someone with multiple skill sets should be able to earn at least $75,000 per year. If this same person learns to harness these skill sets into IC, they should be able to earn at least $125,000 per year. If they learn to leverage their IC on a 10:1 basis, they should be able to earn or create wealth of more than $1 million per year. This is what Midas Managers do.
So how does one leverage their IC to this degree? Stay tuned….
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November 28th, 2006
I think about the Matrix movies all of the time. In fact, I think most Americans, and more specifically, most business owners, live in a Matrix of denial.
I recently spent a day speaking to more than 100 owners and managers of private businesses. While this is my favorite activity, it was also typically disconcerting.
The majority of the attendees were not doing well in a globalized economy. This is to be expected, since most came to the seminar to receive whatever help was available.
The good news: almost all of the attendees “got it” in terms of understanding the need to reconceptualize themselves and their business models. The group engaged and challenged me to prove that a different, better path existed.
The bad news: even in the face of declining results, the vast majority of the attendees have no intention of changing their behavior or their business models. Time and time again they told me that they understood what they needed to do; however, they were too tired, too old, too poor, etc. to make any meaningful changes. In effect, they intend to keep drawing a salary until they are forced to shut the business down.
Wow.
Since the private capital markets represent about 60% of the GDP, and about 80% of the owners will not fight back, this puts nearly 50% of the U.S. economy is at risk. This strategy of denial can end only one way for most of those in the Matrix. And it’s not warm-and-cozy.
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