The 23 Most Important Questions In Business Pt 1

BY: Brett Nelson

What you are about to read is for anyone trying to make money, create a job or get a better one.

If you’re losing sleep over your livelihood, here’s some comforting news: As much and as fast as the world changes, the fundamental reasons for success and failure endure. To reckon with them, you have to ask the right questions.

I know, you’ve heard that line before and almost smacked the condescending jerk who said it. The truth is, though, “asking the right questions” is much more difficult, constructive and wallet-nourishing than it sounds.
Below is a modest stab at assembling the most important questions in business. After 14 years at Forbes studying companies young and old, with various business models and in a host of industries, I can safely say that, if you dig deep enough, nearly every strategy, tactic and in-the-trenches decision stems from the answers to these questions. Each case study has its nuances—business is ultimately about people, and no two are alike, let alone entire management teams, client lists and corporate cultures. Yet it turns out, as in fiction, that there are only so many plot lines to go around.

In an age when vast fortunes are amassed in a heartbeat (see Instagram,an 18-month-old photo-sharing service, bought in April by Facebook for $1 billion), it’s easy to forget that prospering over the long haul demands relentless focus on the fundamentals. This list is your reminder, your companion and your conscience.

The questions are grouped into three sections: “Under The Hood” deals with seminal issues like strategy, competitive advantage and financing; “Eyes On The Road” focuses on operations, management and personnel; and “New Gear” gets into growth, and what it takes to maintain it.

The logic here: Addressing the fundamental questions often involves wrestling with many aspects of business at the same time, so to group them by functional discipline (such as marketing, finance or HR) somewhat misses the point. (Note: I did not address obstacles like intractable corruption, violent currency swings and excessive government regulation—plagues essentially beyond anyone’s control, other than deciding where to do business, playing the futures market and hiring a lobbyist. Likewise, and with all due respect to Malcolm Gladwell, I’ve also ignored the-being-at-the-right-place-at-the-right-time effect which, while real enough, isn’t much of a strategy.)

Many of these questions should be familiar, but don’t get complacent: If the answers come too easy, you probably haven’t thought about them hard enough lately. Keep pushing and I promise that you will be a greater asset to the company you work for, the company you hope to start, or the company you already run.

Have great questions to add? Please comment on this post.With any luck we’ll assemble the definitive road map, grow out of our gaping fiscal hole and sleep better at night. After all, business is hard enough—even when you know the right questions to ask.

Here are 23:

Under The Hood

1. How committed am I?

This one trumps all the rest, and getting to a meaningful answer involves some serious self-honesty.

Commitment comes from motivation—the fuel you need to get really good at something. One of my mentors liked to say that working journalists had to publish 100,000 words (that’s roughly 140 one-page stories in Forbes) before they got the hang of their craft. Analysts at investment banks suffer two years of 80-hour weeks learning to build financial models; neurosurgeons slog through 12 years of training; Yo Yo Ma has practiced cello for something like 50,000 hours thus far (nearly 14 years worth of 10-hour days). Michael Jordan is so competitive that, during his Hall Of Fame induction speech in 2009, he chided his coach for playing teammate Leroy Smith ahead of him on the varsity squad—and invited Smith to the speech for good measure.

What motivates you? Funding your kids’ education? A second home near salt water? The need to make a difference? Sheer pride? There are no feel-good answers, only authentic ones.

2. What’s my value proposition?

This article began by identifying its audience and what they stood to gain from reading it. That’s what business-school types call a “value proposition”—fancy wording for “why the hell you should spend money and time on my product or service.” Every company, project and employee should have a value prop—preferably a clear and measurable one—though plenty are wanting. Chew on yours a bit. In question No. 5 I’ll show you why the answer may not be what you think it is.

3. Am I clearly communicating my value proposition?

You should be able to explain—in three sentences your senile grandmother could understand—why customers need what you’re selling. If you can’t, you’re in big trouble: The reality is (and don’t take it personally) no one really cares about what you do. You have to make them care. This is as important as offering something worth caring about, which is why it’s not folded into the previous question.

PowerPoint presentations are nice (actually, most aren’t), but you should know your value prop so cold, and be able to deliver it so compellingly, that you can grab someone’s attention in the amount of time it takes to ride an elevator with them. Whatever you do, don’t freight your elevator pitch with meaningless jargon like “robust solution,” “leveraging best practices,” and other gobbledygook found here: The Most Annoying, Pretentious And Useless Business Jargon.

Matt Hunckler knows the power of a good, quick pitch. Three years ago he founded Verge to connect tech startups in Indianopolis with software developers and investors. Every month Hunckler organizes a 200-person gathering, sponsored by tech companies and venture capital firms, where entrepreneurs make their case. (Attendance fee: $10). Presenters get all of five minutes to cover their value prop, the size of their potential market, any unique technology they’ve developed, and the quality of their management team. Says Huckler: “If the presenter is still talking at the 5-minute mark, all 200 people start a slow clap” to move them off the stage.

4. Is my product/service a real business?

What’s better: one hundredth of 1% of a $100 billion market, or 25% of a $40 million market? Of course they’re the same in dollar terms, but for whatever reasons capturing that thin slice of a massive pie might be much harder and less profitable than owning a fatter slice of a small one. As John De Puy, CEO of Oaktree Ventures, a San Diego-based venture capital firm, put it: “Define and dominate—that’s the secret sauce.”

The not-so-secret sauce is “scale.” Scalable businesses produce the next widget at minimal additional expense. Think software: Once Microsoft developed the code for its Windows operating system, the incremental cost of distributing each additional copy was miniscule. Service businesses, on the other hand, aren’t as scalable because the need for people generally increases with each additional client.

The lust for scale led to the tech wreck of 2000, but hope and hype are alive and kicking. The latest headline stealer: Pinterest, a social media site that lets visitors collect and share images on virtual pinboards. In nine months the site has attracted 18 million unique visitors per month; such scale is truly remarkable considering that new users have to bother requesting an invite to start pinning. While Pinterest has yet to demonstrate a viable business model (the site is free), that didn’t stop it from luring $27 million in venture capital last October.

5. What differentiates my product from the competition?

This one and the three that follow—all having to do with understanding and maintaining competitive advantage—come from the playbook of Michael Porter, professor at Harvard Business School and famed corporate strategist.

Having an advantage means delivering more value than your competitors do, in the form of lower prices (Wal-Mart), better design (Apple), instant gratification (Google), or some other tangible benefit. If someone tells you his company has no competition, that person is 1) naïve, 2) stupid, or 3) insane.(That’s why, as part of last year’s search for “America’s Most Promising Companies,” Forbes asked contenders to provide descriptions of up to three major competitors; companies that didn’t answer were discounted or discarded. For the full methodology behind the selection process, click here.)

Back to the warning in question No. 2: While your product may sell, what you think makes it special may have little to do with what customers actually crave. Misdiagnosing that mismatch can lead to all sorts of bad strategic decisions. Clayton Christensen, another Harvard guy, demonstrates this point beautifully. In this video clip below, Christensen explains how he helped a fast-food chain sell more milkshakes by figuring out why people were buying them in the first place. It turned out that the answer had nothing to do with how thick and delicious the shakes were; it had to do with the “job” the shakes were being “hired” for.

6. How much power do my customers have?

Customers are good; crutches are not.

Delphi Automotive, the giant auto parts supplier, went bankrupt in 2005 despite generating $26 billion in annual revenue. A big reason: It served a few large customers who held so much sway that they could demand price cuts each passing year. (Delphi has since reorganized and went public last November.)

Movie theaters have enjoyed more pricing power. As Business Insider pointed out last August, ticket prices have outpaced inflation by more than half since 1999. (Manhattan moviegoers will pay $17 to see the new 3-D version of Titanic.) One reason for the surge: Large, disaggregated audiences can’t easily organize and object en masse (the same reason shareholders in public companies have trouble quashing rich executive-pay packages). Now, thanks to video-on-demand and other services, the party may be slowing down: Annual box office receipts, not adjusted for inflation, fell the last two years, according to Box Office Mojo. That hasn’t happened in 20 years.

7. How much power do my suppliers have?

As with buyers, the more you rely on any one vendor, the tougher the terms he’ll eventually extract. That’s why America’s widening trade deficit with China is a big concern. China “supplies” the U.S. with capital so that Americans can keep buying its exports. If that trade gap grows large enough, the cost of renting that capital will spike, crimping America’s ability to pay for other stuff like education, infrastructure and scientific research. (This is worth losing sleep over.)

8. Does my business have a moat around it?

When investors use this expression, they want a sense of how easy it might before new competitors (as opposed to existing rivals) to steal your customers. Their concern cuts to capitalism’s core: If you’re smart enough to spy a profitable business opportunity, rest assured competition isn’t far behind. Or, instead of a direct competitor, maybe a substitute technology will come along (think what digital film did to Kodak). Some moats—patented technology, a storied brand—are more difficult to cross than others, but someone will always find a way to do the job faster, cheaper and better.

9. What’s my appetite for risk?

There are all kinds of commercial enterprises, from modest lifestyle businesses to publicly traded behemoths. The larger they are, the greater the risk—in dollars, time, reputation and ego. Be honest about how much you think you can stomach without making emotionally charged decisions or developing an ulcer.

A nasty recession didn’t stop the founders of EMM Group from building a luxury nightlife empire in New York City. In 2006 Eugene Remm and Mark Birnbaum opened Tenjune, a swanky nightclub in Manhattan’s Meatpacking District. The next year, as the economy started to unravel, Tenjune pulled in $12 million in revenue. But rather than take their money and run, the pair doubled down. On Sept. 15, 2008—the day Lehman Brothers filed for bankruptcy—they put down $2 million (their entire savings) for a three-floor restaurant-and-club space a block from Tenjune; with renovations and permits, the tab would climb to $7 million (they raised the other $5 million from Tenjune regulars). By April 2010 EMM Group was pulling in $30 million in revenue—including restaurants, lounges and a luxury concierge service—and hasn’t looked back. (For more, see “The New Kings Of New York Nightlife.”)

Not a swashbuckler? That doesn’t mean you can’t build a sizable business. Just ask Maryjo Cohen, chief executive of National Presto Industries, eclectic manufacturer of kitchen appliances, bullets and diapers. For years Cohen hoarded cash and government bonds—in 1999, as oceans of cheap money sloshed about, National Presto’s cash and securities accounted for 80% of its assets. When stock analysts pressured Cohen to hit quarterly earnings targets, she told them to get lost. “For all her wealth, Cohen lives with her mom in the three-bedroom, poured-concrete house in Eau Clair [Wisconsin] where she grew up,” reported Forbes in October 2009. “She flies coach, stays at Holiday Inns…and has yet to upgrade from dial-up service for her home computer.” Cohen got the last laugh: When the market turned, National Presto’s pristine balance sheet allowed it to make timely acquisitions and add equipment (see “National Presto (Finally) Opens Its Wallet”). In the last 12 months the company netted $48 million on $431 million in sales; since 1999 its stock price has doubled, to $72 a share, while the S&P 500 advanced just 4%.

Whatever your appetite for risk, there will be setbacks. Expect them, adjust and move on. As the saying goes: “If your uniform isn’t dirty, you didn’t play.”

10. What’s the smartest way to fund my operation?

Not all investment capital is created equal. Generally, using your own is expensive but clean; using someone else’s is cheaper but messier. (President Obama aims to make the second way easier by passing the new Jumpstart Our Business Startups Act, which eases financial disclosure rules for small companies looking to sell shares to the public—we’ll see how that pans out.)

Getting the most out of limited capital takes brains, imagination and chutzpah. Brad Harlow, chief executive of Physiosonics, maker of blood-flow monitors in Bellevue, Wa., nearly folded up shop twice a few years ago. To keep his startup afloat, Harlow pitted his investors—including two giant medical-device rivals, Johnson & Johnson and Medtronic—against each other in the capital pecking order and gave neither first rights to buy him out. Now that’s brash. (Read the full story here: “Awkward Bedfellows”.)

Then there’s Alan Martin, fresh-faced founder of CampusBookRentals.com (a member of Forbes’America’s Most Promising Companies list). In the teeth of the 2008 financial crisis, Martin quit his job and loaded up six credit cards—simultaneously, so the card companies wouldn’t balk—to raise $250,000 to launch an online textbook-rental company. (Oh, and his wife was 4-months pregnant at the time.) Last year CampusBookRentals was on pace to do $29 million in annual revenue. Here’s a video of Martin taking a lesson on growth strategy from pet-food titan Clay Mathile, who sold Iams Co. to Proctor & Gamble for $2.3 billion in 1999.)

Gavin McClurg liked captaining sailboats but didn’t want the hassle of selling weekly charters; he also didn’t have the money to buy a vessel. So a few years ago he created a floating time-share resort aboard a $1.2 million, 57-foot catamaran. Investors in Offshore Odysseys put up $20,000 to $30,000 per share, plus annual fees; McClurg took a cut of the fees and kept a slice of equity in the cat, named Discovery. Good work if you can get it, and he did. (For a complete breakdown of McClurg’s business model, check out Offshore Odysseys Is No Typical Timeshare Operator.”)

There are textbooks galore on the merits of debt, equity and everything in between. The point of these examples and countless others: Where there’s a will, there’s a financial way.

SOURCE: www.forbes.com