Business Opportunity Thinking: Building a Sustainable, Diversified Business

By Robert David Hughes

To build a sustainable, diversified business requires continuous search for ways to parlay available scarce resources into new opportunities for profit. This book describes a framework to identify new business opportunities. Leveraging scarce resources into new business angles can increase profit, improve the sustainability of profits, a

• Language: English
• Publisher: Hughes Consulting Limited
• Release date: Dec 15, 2021
• ISBN: 9780473608347

Robert David Hughes

Robert Hughes has more than 25 years of experience as a strategic management consultant. He is principal of the consulting firm Hughes Consulting Limited and former partner in the multinational business advisory firm KPMG. Hughes Consulting counsel significant organisations in the private and public sectors. Robert holds a Doctorate and professional credentials as a: Management Consultant, Information Technology Professional, Engineer, and Manager. Robert brings experience in information, communications, logistics and infrastructure networks which contribute to, and in turn are affected by the digital economy.

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Business Opportunity Thinking:

Building a Sustainable, Diversified Business

Robert Hughes

A publication in the Creating Business Angles Series.

Business Opportunity Thinking: Building a Sustainable, Diversified Business
by Robert Hughes

Published in 2021 by Hughes Books an imprint of Hughes Consulting Limited NZ Business number 9429038579288 UK Registered number 05067369

www.HughesBooks.info

Alpha Edition © Robert David Hughes 2021

This book is copyright. Apart from fair dealing for the purpose of private study, research, criticism or review, permitted under the Copyright Act 1994, no part may be reproduced by any process without the prior permission of the copyright holders and the publisher.

ISBN 978-0-473-60833-0 (Paperback)

ISBN 978-0-473-60834-7 (Epub)

A catalogue record of this book is available from the National Library of New Zealand Te Puna Matauranga o Aotearoa.

Introduction

Profit is derived from scarce resources and speculation

To build a sustainable, diversified business requires continuous search for ways to parlay available scarce resources into new opportunities for profit. This book describes a framework to identify new business opportunities. Leveraging scarce resources into new business angles can increase profit, improve the sustainability of profits, and diversify the contributors of profit, and thereby increase business value. The scarce resources considered are core competencies, brand, and multisided platforms with positive cross-group effects (MSP+s). The exploitation of other scarce resources such as property rights and natural resources are not considered in the framework.

Profit is the return from an organisation having valuable scarce resources, and successfully engages in speculation. The speculative element recognises the possibility of gains from price changes of contractual commitments in the contributors of profit. While elements of both scarce resources and speculation contribute to profit, in keeping with the uncertainty enveloping speculation, the contributions of each cannot be known with certainty in advance. In practice, it is difficult to establish their relative contribution even after the event. One reason for this is that the understanding and definition of risk is different before and after the event when with hindsight the value of the costs and benefits might be known. These facts may explain why the procedures to measure profit, especially the classifications of cost and revenues in the chart of accounts, is commonly taken to explain the source of profit. The classification may be easy to understand but it does not explain the source of profit. The classification is a dead-end, giving no insights into openings to new business angles.

Scarce resources have the unusual property that their value changes in line with changes in expected profit. For other assets, their price is determined only by demand and supply considerations. An important implication of this is that scarce resources are not a cost to the organisation, as the acquisition of assets and other inputs is, but instead expresses its value. The underlying premise of the framework set out in this book is that the scarce resources underpinning a business angle are the foundation from which new business angles can be built. Core competencies, brand, and MSP+s are scarce resources. A core competency is a set of capabilities and supporting information that enable an organisation to deliver products at a higher unit gross margin than competitors. They are rare and difficult to imitate, because they are derived from accumulated experience and knowhow, and investment in organisational wide systems. Brand is a scarce resource because it provides profit margins per unit that are higher than those of an unbranded product and a higher volume of sales. In addition, brand loyalty confers competitive advantage because it lowers transaction and search costs and increases price elasticity of demand compared to that faced by competitors. An MSP+ facilitates transactions between at least two parties who transact directly with one another through the facilities of the platform. An MSP+ is a scarce resource because it benefits from cross-group feedback effects and declining cost economies. Cross-group feedback effects occur where actions by one group cause change in the actions of another group. Positive cross-group effects positively reinforce the uptake of users to the platform, and this increases the rarity of the platform.

Scarce resources and business value

A business angle encapsulates the perceived business opportunity commercialised through products, and realised through a production process. Business angles can be created in each of the element markets to contribute profit to the organisation. The markets associated with the contributors of profit are:

M1 Product markets by supplying products whose value-for-money is better than alternatives.

M2 Commodity markets by selecting a set of inputs to support a highly productive production process through economical purchase of those inputs.

M3 Asset markets by making valuable scarce resources from a highly productive production process delivering planned outputs.

M4 Markets for other contractual commitments by providing risk mitigants to ensure that business plans are met, and strategic options to provide the resilience to generate on-going profits.

M5 Financial markets by enhancing business value by financial management.

Expectations of the ability to earn profits into the future can be used to estimate the value of an organisation. This is the Free Cash Flow (FCF) method of calculating value which is the net present value of expected income for the expenditure made, over its lifetime. Present value is the value today of a future amount taking into consideration the expected time value of money - the discount rate. Net present value is the sum of the present values of all expected cash inflows and outflows over an organisation’s lifetime. The value of the organisation increases when net cash flow is increased over the planned lifetime, or earned over a timeframe longer than the planned lifetime.

Core competencies increase net cash flow by becoming more valuable, that is by increasing unit gross margin compared to that achieved by competitors. High brand value is associated with higher sales, gross margin, and ability to retain a share of wallet spend in the face of competitive pressures and other factors that influence demand. An increase in revenue and gross margin is an increase in business value. An MSP+ can increase net cash flow by strengthening positive cross-group effects, and realising declining cost economies so as to create core competencies generating higher unit gross margin and sales.

Real options and corporate strategy

The right but not the obligation to undertake some business action is a real option. Buying land for the future construction of a building if conditions are right, creates a real option. There are costs and benefits to holding the option open, for example, having bought land to create an option to build in the future, the benefit is that construction can proceed at a time of the owner’s choice, offsetting this are the costs of owning the land because of the time value of money and other costs incurred while it is vacant – this is the option premium. These cost decline over time as the remaining time before the decision to sell/construct diminishes, and the option ceases to exist when the decision is exercised. The calculation of business value includes the expected cost and benefit of options including the option premiums.

Core competencies can create real options by identifying initiatives to enhance economies that increase gross margin. Brand can provide real options for future growth in the form of initiatives for growth by means of: the use of new formats and additional differentiation; opening up new market segments and geographic areas; and the use of new distribution channels. MSP+s can be used to create real options through initiatives to reduce the