Fronteza

The Business Efficiency

Today we will talk about the business efficiency. What is the business efficiency? Let’s try to answer these and other questions.

What is the business efficiency? To answer this question we have to remember the goal of any business. Is it to earn money? Yes. How do you earn money? By manufacturing goods and providing services. Who buys your goods and pays your bills? The consumers. Why do they do that? To improve their lives, feel safe and secure.

And so, what is the goal of the business? It is to earn money by manufacturing goods and providing services which allows for the improvement of life conditions of the consumers and make them feel safe and secure. In other words, you improve and develop the society. So, the ultimate goal of any business is to earn money by improving and developing the society. This is it.

What are three basic things which each of us wants to have? Good living conditions, safety and stability. They allow for the certainty. If you lack one of them, it creates the psychological pressure and gives rise to the uncertainty. What consequences does it have on your life? The frustration and depression.

Now we can derive three key characteristics which allow for defining the business efficiency: the value, the quality, the safety. When the business is efficient? It is when it creates the value for the society by manufacturing high-quality and safe products.

Don’t you see the money here, do you? If your products and services will be poor, who will buy them? If your products and services do not create the value for the society by improving the life conditions, the society is underdeveloped. If the society is underdeveloped, it is poor. If it is poor, how can you increase your profits and earn more money? By improving and developing the society. This is it.

Now we have three characteristics of the business efficiency: the value, the quality and the safety. What is the value? Fiscally, it is expenses. You expense time, materials and money and use equipment and instruments to produce goods. You earn by requesting a premium – the added price (I use the word “price” to distinguish the meaning), let alone accounting stuff.

Economically, it is taxes and duties. You pay them to the government and they should use them to improve living conditions, social and business environment… hopefully. Socially, it makes us feel good and satisfy our key needs: the improvement of living conditions, the sense of safety and stability. Also, it is salaries and bonuses.

The task of the business is to satisfy current needs and gradually develop them, because, according to the law of growing expectations, when an individual gets to the satisfaction point A, she does not stop – she wants more. And the social responsibility of the business in this case is to not feed the society with “unhealthy” or low-quality quick-made stuff, but to gradually develop the new needs by introducing the appropriate high-quality goods and services.

Finally, who is a value-added investor? It is the investor who has the comprehensive, long-term investment strategy which is coherent with the local economic specifics and facilitates the development of the society through the development of the relevant businesses.

Some remarks on the numbers. Basically, the value-added investments cannot return [in real money] annually much more, than the annual economy growth measured as the [value-added] GDP [growth], let alone paper profit and unrealized capital gain. Imaging, you are sitting in a car. Can you move faster than the current speed of the car? No, unless you change the car or force up the engine power. How do you force up the engine? You improve it by investing in the relevant parts.

The ethereal returns provided by hedge funds and other investment funds which commit financial investments have the purely speculative or bubble nature. They simply try to move faster than the car which they have took and elaborate different sophisticated speculative approaches to do this, without forcing up the engine power. Can it be risk-free? Try to experiment with your own car. Why do they fall out of the car so often? They forget to fasten seat belts.

Evaluating Investment Projects

Recently I chatted with a student, who studies finances and looks forward to become an investment manager. During our conversation he asked a good question: what should you start from, when evaluating an investment project? I think this is a good question to answer it here with a bit more details.

Actually, the answer is very simple and we already know it. The answer is people. Any governance system, any business, any project is executed and run by the humans. That is why everything must start from the assessment of the humans, of their psychological qualities. The same is true for any investment project – everything starts from the people.

Do individuals have the passion and the desire to do the project? Do they have the will to overcome obstacles, both business and psychological obstacles? From my humble experience I know that the psychological strength of an individual plays the key role in the success or failure of an initiative.

If you ask me, your obedient servant, how many times I have experienced the disappointment, the frustration and other negative feelings? I have experienced them every day! And no wonder, because nothing makes you get frustrated more than the uncertainty. The uncertainty about the future, about the things you do, about results, about your abilities to get to the finish, etc. Do you do the right things which will bring your closer to the next milestone? Or you just mill the air? Every activity must have some feedback, must bring some tangible result. This is true not only in the business, in the life as well.

And every venture project, every value-added investment is the uncertainty. But what does not kill us makes us stronger. And the psychological strength of an individual allows for that. It is well known that you start doing business in order to obtain the financial freedom, first of all. But the path to the freedom can be covered with thorns, in particular if the environment is harsh.

Paraphrasing Thomas Edison’s wording: the talent is 1% inspiration, and 99% perspiration. The talent is created by the development of personal qualities, first of all. Do not believe those who say that the talent is an inborn quality. Everything depends on you, on your burning desire and focusing.

The very first step, when evaluating an investment project, is to evaluate the individuals. The very first meeting must be the psychological bombing. What you have to bring out of the first meeting is the feeling that each individual in the project has the desire, the passion and the will to walk the way… together. You must elaborate your approach of the psychological bombing.

Even 100 % successful business or project can be destroyed by the incompetent management and weak-willed managers. Even if a project PROMISES perfect numbers, even if it has perfect projections and the environment is mild, those numbers and projections must be materialized. Who will materialize them?

After you have got the feeling that you can trust the individuals and that they are ready to walk the way, you have to evaluate all other stuff:

1. Environment (economic state, market and competition) of a country, where the project will be implemented;
2. Project goals and milestones;
3. Competence of the management team;
4. Production plans and operating models;
5. Marketing strategy;
6. Manageable project risks;
7. Financial projections, including the investment allocation plan.

Strategic Vision, Roadmap and Value-Added Investors

Recently I have been informed about the prospects of value-added investments in Crimea and it was said that negotiations have been clamped up by the lack of vision about the peninsula’s development strategy. We need to talk about it.

The elaboration of the strategic vision and appropriate development roadmap on the paper is not a hard task, if we don’t make it such. Its realization does. We have the recipe of the soup, which we have to prepare.

There are many ways to develop the strategic vision. For example, you can use your imagination. But your fantasy must have the firm ground. It must be based on some knowledge which you have about the object of your fantasy. Let’s fantasize together. So, what we know about the Crimea?

What natural potential it has? It has potential in tourism, agriculture, fishery and viniculture.

What industrial potential it has? It has potential in shipbuilding and food processing.

What additionally do we need to develop the potentials? We need modern transport and energy infrastructure.

Here it is. We have the strategic vision. You can formulate some wording or leave it at that – it does not matter. The main thing is that you have been understood.

Now we are ready to draft the roadmap (grinding with a pencil). The main principle, which must be taken into account when drafting the roadmap, is to have answers to three simple questions:

1. Where we are now?
2. Where we want to be?
3. What we have to do to get there?

The roadmap allows for answering the first two questions. But the preliminary due diligence is required in order to answer these questions. It is where the fantasy becomes the reality and the optimism becomes the realism. The last question can be decomposed to:

1. What we have to change, improve and modernize?
2. What we have to develop from scratch?

Answering these questions allows for compiling the list of investment programs and projects. After the questions have been answered and investment projects have been identified… forget about them for a couple of days. Then get back to them and review once again. Believe you or not, but your subconciousness must digest the information and the best way to engage it – forget about the subject for a while.

Once you have the list of the investment projects you are ready to prepare project summaries and presentations. Here I want to make a remark about the business plan. In my opinion, in this particular case, there is no need to elaborate detailed business plans at once. My arguments are as follows.

One thing, if you are a single entrepreneur who has one venture project. But it is absolutely different if you have dozens of venture projects. Saying this, I take the position of the value-added investor (as I did when I was talking about the strategic vision above). Each value-added investor, financial investor as well, has the investment ideology, roadmap and strategy. If s/he does not, then s/he is a dumb gambler.

Taking this into account, you can spend a year to elaborate detailed business plans but the business environment and conditions can change to that time. Moreover, the value-added investor can have specific investment requirements which you have to take into account when creating business plans. The development of complete business plans must be fulfilled by both the value-added investor, or his/her team, and the projects’ owner.

The value-added investor must bring in not only the money but the expertise, knowledge and skills. Otherwise s/he is either a financial investor or a dumb gambler. Thus, the first step of the projects’ owner is to elaborate the strategic vision and roadmap and prepare the list of investment projects together with summary and presentations. The latter are required to identify the intent of interest from the value-added investors. The next step is to conduct the preliminary negotiations in order to come up with a collaboration agreement sealed with terms sheet.

Creating the Strategic Roadmap of the Industry Development

Continuing the topic of the previous post, I want to talk about the development strategy or the strategic roadmap of the association which can be established in order to stimulate the development of the agriculture sector. Again, my thinking process has been engaged by the appropriate question from the Ukrainian entrepreneur. It’s the general roadmap. It must be treated respectively and must be refined in order to create the relevant strategic roadmap of the industry development.

So, here we go. I was asked to suggest the answer to the question: “What do we want?” To answer this question, we need to decompose it in order to come up with the itemized roadmap. The main thing to remember is that we have to think global but act local. We have to hurry slowly. We have to proceed with well-regulated movements, fixing each milestone.

Everything starts from “Who we are?” Like I said, I assume establishing of the association of entrepreneurs and business owners. So, we are the association. Now we have to answer the question “What we are?” To put in other words: what is our mission?

That could be, for example “The development of the agriculture sector of the Ukraine and the improvement of its competitiveness by means of”:

1. The restructuring, modernization and creation of the modern competitive environment;
2. The integration and adaptation of the modern and advanced practices of doing business;
3. The stimulation of innovations and the facilitation of their integration and commercialization;
4. The development and integration of modern models of the individual enterprises and farms pooling, to improve their competitiveness, reduce operating expenses, increase profitability, improve products’ quality and allow for creating the positioned brands;
5. The attraction of foreign investments in the industry to allow for the modernization, expansion and improvement of the existing production capacities; to allow for the development of new business lines and segments;
6. The improvement of the quality control system.

Now we can try to answer the question: “What do we want?” To put in other words: what are our goals?

Based on the aforementioned mission, that could be as follows:

1. Environment:
   1. The development of trustworthy and reliable relationships with ministries and government authorities to allow for the creation of the transparent tax and legal base, which will incorporate world practices and standards;
   2. The development of trustworthy and reliable relationships with foreign associations and organizations to allow for the collaboration on the legal and trade matters;
   3. The creation of the trade exchange with the set of standard trade contracts and the quality control and counterparty protection system to allow for the single point of entry and control;
   4. The creation of rules of the fair competition and the protection of business from unfair competitors and raiders’ attacks.
2. Education and training:
   1. The establishment of the center of excellence of the industry, to allow for the accumulation of the knowledge and expertise, which will provide entrepreneurs and business owners with the consultancy on the legal, tax, financial and investment issues;
   2. The creation of the knowledge base with the world expertise and knowledge in doing and developing the agribusiness to allow for their adaptation and implementation locally;
   3. The creation of the central data base of the industry with information about companies and products;
   4. The organization of periodical exhibitions and seminars of the theme;
   5. The improvement of qualification of business owners and entrepreneurs in the subject of doing business in the modern competition environment.
3. Technologies and innovations:
   1. The creation of new and modernization of existing laboratories to allow for the improvement of the quality control and R&D;
   2. The creation of target development R&D programs to allow for the quality improvement of products and the development of new business lines;
   3. The creation of target programs to allow for the commercialization of the R&D products;
   4. The creation of the legal base to allow for the intellectual property protection;
   5. The creation of research groups attached to chairs of the appropriate universities and R&D centers to allow for the stimulation and attraction of young people to the innovation activities.
4. Finances and investments:
   1. The development of target investment programs to allow for the modernization of production capacities;
   2. The development of target investment programs to allow for the expansion and creation of new production capacities;
   3. Ensuring investors and entrepreneurs with the support on all stages of the investment project development, from the inception to the go-live;
   4. The creation of the central knowledge base with the information about investment projects;
   5. The development of trustworthy and reliable relationships with financial institutions and banks to allow for a smooth crediting of the industry and to secure a reliable trade financing;
5. Clients:
   1. The improvement of the legal and regulatory base and of the quality control and consumer protection system;
   2. The establishment of the center of excellence and consumer protection to provide consumers, private and corporate clients with the consultancy on the appropriate issues.
6. Organization:
   1. The creation of the investments committee to allow for the development, approval and control of the target investment programs;
   2. The creation of the supervising committee to allow for the accountability of the association;
   3. The creation of the competition committee to allow for the elaboration of the code of fair competition and negotiation of the legal, tax and regulatory issues.

Then we can detail and decompose each goal to 5-6 sub-goals. Thereafter we can answer the question: “How will we realize it?” with laying down the appropriate programs and forming the appropriate implementation projects.