THE BASICS FOR ALL BUSINESSES (for-profit, non-profit and social enterprises) are all the same ... this also includes banks ...
1. Satisfy the customer needs, uniquely better than competitors
* NOTE: THE CUSTOMERS are the ones that pay to have companies solve problems for them ... the price customers pay is perceived by them to create more benefits than what it costs them (price) to acquire the benefits.
- CAPITALISM is focused on identifying and solving problems for society at a price customers are willing to pay and at a profit level that is acceptable for companies operate.
2. Generating cash (operating, investing and financing)
3. Producing a sufficient return on the money invested in the business (ROIC)
4. Growing profitably ... creating "good growth" that is:
- profitable and capital efficient
- organic (comes from what you already offer ... not from the acquisition of another company)
- uniquely differentiated (on the factors important to your customers)
- sustainable (not a one-time event)
TO CREATE SUSTAINABLE BUSINESS VALUE ... a company needs to generate a Return on Invested Capital (Net Income After Taxes / Total Assets) that is greater than their Weighted Average Cost of Capital (what it costs them to finance their assets) ... and the focus is on the medium-to-long-term time horizon.
*NOTE: creating sustainable shareholder (business) value is NOT the same as maximizing short-term profits ... a company's executive leadership team can increase their short-term profits by taking actions that are NOT good for the business in the medium-to-long-term ... FOR EXAMPLE - they could decide to N
OT identify and develop their mission-critical and high-potential employees that are critical to medium-to-long-term strategic success and to business viability.
RETURN ON INVESTED CAPITAL is calculated by taking NET INCOME AFTER TAXES and dividing it by TOTAL ASSETS (INVESTED CAPITAL). Two of the biggest numbers in this calculation are SALES and LONG-TERM ASSETS (PROPERTY PLANT AND EQUIPMENT) ... that is why executives pay attention to these numbers. They are also interested in the highest VARIABLE COSTS (USUALLY DIRECT MATERIAL) and FIXED COSTS (SALES GENERAL AND ADMINISTRATIVE COSTS).
NEED HELP with identifying and developing your mission-critical and high-potential talent? Are you aware that 70% of what people learn in business comes from on-the-job experiences ... being assigned and achieving targets on stretch assignments and/or high-impact team-based strategic initiatives. Many executives and some high-potential employees are concerned about the risk of assigning, or being assigned to stretch assignments and high-impact strategic initiatives. Would you like help with how to reduce the risk and generate financial and non-financial returns, while improving the business knowledge and expertise of your mission-critical and high-potential talent? We at Incline Insights, LLC can help you.
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