6/2016 – Is your business model viable?

by Tan Thiam Hock

Saturday, 16 April 2016

THERE is a saying that “there is a first time to anything in business”. You will never find out until you actually do it. You just hope and pray that the end results justify your impulsive actions and shallow thinking. Or you will end up looking amateurish and feeling slightly foolish

So I have decided to try out a Dear Mentor format for this column and only for this week. The following questions are real life situations that I have been asked to advise/comment on. Please do not send any questions or problems to our StarBiz editor unless you plan to annoy him no end. Here goes…

Dear Mentor

You have been advising the importance of high/appropriate gross margins in business models in your articles. Can you please elaborate?

– Puzzled

Dear Puzzled

Whenever I am asked to look into the potential of any business, my first instinct is to study the viability of its business model. Is the model competitive and sustainable vis a vis its main competitors in that particular industry?

When I set up my cosmetic business, I studied the profit and loss account of the two leading cosmetic companies in the world, Loreal and Estée Lauder. After deducting cost of goods from the sales revenue, both companies had pretty similar gross margins. That analysis pretty much determined my sourcing strategy – the cost of goods that I must have after confirming my listed retail price if I need to have similar gross margins like them.

Similar gross margins as a percentage of sales will allow me to sustain similar percentage spendings on advertising and promotions, hire smart and experienced managers and recruit sufficient sales promoters to compete and hopefully incurring lower operating expenses since I do not have expatriate overheads.

All I did was to follow successful and sustainable business models of industry market leaders. Then I adjust certain strategies according to the strengths and weaknesses of my local set up.

Another example will be food and beverage (F&B) since everybody is into setting up restaurants and cafes. For restaurants with full kitchen, food cost should not be more than 30% of the menu price. You will need 70% gross margin to cover the high cost of maintaining a team of chefs, cooks and kitchen help. Beverages will have gross margins of 50%-70% as supplementary income.

For those of you restaurant operators whose gross margin for food is only 50% and despite having good traffic, you will most likely be breaking even and seem puzzled as to why you are not making any profits. Just check out the gross margins of the profitable restaurants and you will discover the secrets of their success.

Dear Mentor

I am 26 years old and have been working in a bank since I graduated four years ago. Every time we meet, my friends will talk about startup ideas. They all sound so cool and clever. No matter how hard I try, I can’t seem to think of a smart idea for a start up. Can you please help?

– Wannabe founder

Dear Wannabe founder

It sounds like your friends are very keen to be entrepreneurs. Just like millions of other Gen Ys and millennials around the world. All inspired by success stories of the likes of Zuckerberg and Jack Ma.

Sounding cool and clever will not get them far. In fact, if they only validate their ideas amongst friends and decides to launch after a few cafe sessions, generally 10 out of 10 fail. Realising their solutions to imaginary pain points are not real, they will seek out experienced industry experts for advice. It might be a bit too late and realising their folly, they will pivot their business model or they get out of it completely when they realise it was not such a good idea after all.

Since you have no smart ideas, I suggest you stay put in your current job and invest as a co-founder in your smart friend’s ventures. If the “idea” turns out to be a viable business model, quit your job and be the supporting act, helping out with operations and finance. Think Eduardo Saverin..

Great entrepreneurs are dreamers. And they need a reliable and dependable supporting act to realise their dreams. Co founders enjoy smaller fortunes but it is still a fortune.

Dear Mentor

I am 40 years old and I have been working in this big MNC company for many years. I feel like I am ready to be an entrepreneur. Can you recommend to me a business that I can invest in?

– Inspired

Dear Inspired

Dude, not able to help you there. Refer to above case for inspiration.

Dear Mentor

My brother and I have been working in the family business since 30 years ago. Since my father passed away 10 years ago, my brother has changed and caused much friction in our working relationship. I am now 62 years old and was looking at introducing our children to take over the family business. Since his children had no interest, my sons have expressed an interest to work for us. But my brother has made it difficult for them by simply refusing to change the old ways of running the business. Since our shareholdings are deadlocked at 50:50, I have offered to let him take over the business completely but he has refused. Neither is he willing to let me take over the business in a buy out. I am torn between preserving our family business and a complete break with him. Please advise.

– Torn and tormented

Dear Torn and tormented

Family fallout is the most difficult problem to solve and there will never be a “right” solution. Most fights start when there is a need for succession planning.

In your case, you have to decide between keeping your brotherly relationship or your family business. Since you are both financially comfortable, my advice would be to keep your brother and let go of the business even though you have promised your dad to keep the family business name intact.

Just sell the physical assets and divide the proceeds. Then give him the business and let him have complete control irrespective of whether he will be able to keep the business afloat. If he comes to his senses, he might just realise that the business is better off managed by you. If not, so be it. You still have a brother to grow old with.

Dear Mentor

We are a young startup in a logistic and transportation business. As we are young founders, we hired experienced ground supervisors to help us manage the operations which seems to serve us well in our early months. As we are growing at a fast pace in this digital world, these experienced older staff refused to change their old ways and we find it difficult to change their mindset and habits. What can we do as we feel their experience is still needed in managing our ground staff and operations?

– Exasperated

Dear Exasperated

I started my first trading business before I was 25 years old. All my employees were older than me. My greatest learnings were from experienced sales reps and warehouse supervisors. In the market place, the big wholesalers were the toughest to deal with as most of them started as van sales reps and they have eaten more salt than you have eaten rice as the Chinese saying goes.

What I learnt is to stay humble and to treat them with respect. Ask for their opinions and advice and they will reciprocate with truthful answers and genuine willingness to work harder for you.

Your real problem starts when your business grow at such a pace until you need to hire qualified managers to oversee them. If not handled right by the younger managers, they will feel displaced and unwanted and you will lose them as the attrition process starts. That will be a big loss for you.

Try to find a place for them in your growing set up and let them continue to be productive meanwhile sharing their experiences for the benefit of the young team. If they feel that they are still needed, they can be the most loyal staff that you will ever have. And staff loyalty never runs out of style, not even in this digital era.

Dear Mentor

Does stress at work caused terminal diseases? I have been troubled by this thought since my former secretary was diagnosed with stage four cancer slightly over two years ago when she was just 40 years old.

She was hired as a junior secretary when she was newly married and just turned 28 years old. When I realised that she learnt fast and had great work ethics, I promoted her rapidly to personal assistant and then to assistant office manager. Besides office responsibilities and helping to look after my family affairs, she had two boys of her own and a lovely supporting family. Despite increased workloads and responsibilities, she still managed to cope with the stress and worked well with her colleagues. She left the company upon discovery of her medical condition to undergo medical treatments and spending time with her young family.

I myself have since moved to my own office and I have been keeping her desk vacant hoping that she will recover and come work with me once more. If not full time, then part time or anytime she wants to. I have not bought her chair as I thought she might want to choose her own. Looks like her desk will not have a chair now. She passed away yesterday after a tenacious battle as expected of her.

Could I have done more for me by letting her do less all these years?

– Sad and heartbroken

Dear Sad and heartbroken

I am at a loss for words. Rather than worrying about what should have been, just hold on to the beautiful memories of the joy of having worked with a great colleague and a good friend.

Life is unpredictable and unforgiving. Live and let live.

Sarah Looi was my personal assistant from 2002 till 2014. She was well loved by my family and her colleagues at Alliance Cosmetics. Our heart goes out to her close and loving family especially to Davey, Shawn, 12 and Shane, eight. May she rest in peace. Amen.

Published: http://www.thestar.com.my/business/business-news/2016/04/16/is-your-business-model-viable/

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