Structuring a Business for Flexibility
STRUCTURING A BUSINESS FOR FLEXIBILITY
For a business to be successful it needs to develop a revenue stream by providing a product or service that customers will buy. The criteria for this customer proposition are to:
• have a product or service that meets a specific need for a customer such that they will want to buy it;
• provide the product or service better than a competitor so the business will be chosen in preference to others;
• Charge a price that offers value to the customer yet enables the business to earn a profit.
These criteria are difficult to combine in practice. A product or service that is better than a competitor’s is, because of its differentiating factors, likely to cost more to provide. However, the additional cost may not be able to be passed on to the customer in the price, and this will reduce the profit. The investment of cash in assets and staff will define the flexibility that a business will have in responding to a changing business environment. A rapid increase in the need for assets and staff can be difficult to meet, particularly if they are specialist in nature. The assets may need to be built by a manufacturer and the staff may need to be trained. A business with non-cash assets will find it difficult to adjust to a decrease in sales volume; for example, in the aftermath of terrorist events airlines have not found themselves owning assets they could neither fill with passengers nor sell. A business with high staff costs may be able to respond more quickly to a downturn by laying off people, particularly if it has employed staff on short-term contracts (for example, the software industry where programmers are often hired on short-term contracts), but labor laws can make this costly. In seeking greater flexibility to cope with changing circumstances, businesses may choose to outsource parts of their operations, particularly non-core activities. This is the process of letting another business acquire and operate the assets,
For a business to be successful it needs to develop a revenue stream by providing a product or service that customers will buy. The criteria for this customer proposition are to:
• have a product or service that meets a specific need for a customer such that they will want to buy it;
• provide the product or service better than a competitor so the business will be chosen in preference to others;
• Charge a price that offers value to the customer yet enables the business to earn a profit.
These criteria are difficult to combine in practice. A product or service that is better than a competitor’s is, because of its differentiating factors, likely to cost more to provide. However, the additional cost may not be able to be passed on to the customer in the price, and this will reduce the profit. The investment of cash in assets and staff will define the flexibility that a business will have in responding to a changing business environment. A rapid increase in the need for assets and staff can be difficult to meet, particularly if they are specialist in nature. The assets may need to be built by a manufacturer and the staff may need to be trained. A business with non-cash assets will find it difficult to adjust to a decrease in sales volume; for example, in the aftermath of terrorist events airlines have not found themselves owning assets they could neither fill with passengers nor sell. A business with high staff costs may be able to respond more quickly to a downturn by laying off people, particularly if it has employed staff on short-term contracts (for example, the software industry where programmers are often hired on short-term contracts), but labor laws can make this costly. In seeking greater flexibility to cope with changing circumstances, businesses may choose to outsource parts of their operations, particularly non-core activities. This is the process of letting another business acquire and operate the assets,