Business Sense Exercising Management's Five Freedoms by Dan Thomas

The Five Freedoms:  Choose the right business  Create the right strategy  Develop the right systems  Design the right organizational Structure  Get the right people

Choose the Right Business 1.Start by defining what business you are in  A company that both sells and services cars is in two businesses.  Check by considering potential multiple businesses:  Do the products substitute for each other?  Are the Competitors the same?  Are the keys to success the same? Yes = one business, No = multiple businesses Yes and No means merging or diverging businesses: Example of Merge: Gas Stations and Convenience Stores, Example of Diverge: Cookie stores from bakeries Freedom 1

Choose the Right Business 2.What is potential for GROWTH, PROFIT, and DIVERSIFICATION of each business GROWTH POTENTIAL  Where is it in its Life Cycle?  What type of change is it facing? Seasonal Cyclical Structural Revenues Time Freedom 1

Choose the Right Business 2.What is potential for GROWTH, PROFIT, and DIVERSIFICATION of each business  PROFIT POTENTIAL  Profits come from Operations, Ownership Rights, or both  Operations examples: manufacturing, and service businesses  Ownership Rights example: Land Speculator, Stock trader  Profit Potential is like a chess game:  Existing and new products  Multiple moves ahead Freedom 1

“The Chess GAME” Features FewerSameMore Price Lower 80/20 features meet “must’ haves. Price Battle, must be L.C.P. Price Battle, must be L.C.P. Differentiated Big Winner SameLoserExecution is Key Differentiated Winner HigherBig LoserLoser Must have features people will pay for Freedom 1

Choose the Right Business 2.What is potential for GROWTH, PROFIT, and DIVERSIFICATION of each business  DIVERSIFICATION POTENTIAL  Diversification can happen in three ways  Take on new markets with existing technology  Modify existing products for new uses  Meet other needs of existing customers  It’s easiest to diversify during growth and profit Freedom 1

And if the answers are completely discouraging (i.e. “lousy”)? There are really only four alternatives 1.Pretend business is good (deny the evidence) 2.Try to get the best results possible with other freedoms 3.Evolve into a new better business 4.Sell to someone who has a different opinion Freedom 1

Create the Right Strategy Freedom 2 What is current Strategy? What is future of the industry? Competition Trends (tech) Customers How good is strategy? What are the alternatives? Choose Mission/Vision Statements

Example Key Strategic Elements  Marketing Strategy  Product/Market  Pricing  Distribution  Promotion  Production Strategy  Facilities  Integration  Capacity  Quality  Technology  Operations Control  Workforce Management  Financial Strategy  Capital Structure  Cash flow  R&D Strategy  Basic/Applied Research  Product Innovation  Process Innovation  Leader/Follower Freedom 2

Forecasting by Interaction MarketsCompetitorsTechnologiesEconomicsLegal/Regulatory Markets Competitors Technologies Economics Legal/ Regulatory

Definitions  Mission tells what you do as a business. It can be measured by everyone. Railroad example: To meet customers’ needs by being the best at moving goods on time, safely and damage free  Vision is a word picture of what you will become as you successfully accomplish your mission …First in service, quality and safety; environmentally responsible; and financially stable Freedom 2

Develop the Right Systems  A system is an automated business process  A good system brings the right information to the right people at the right time to allow appropriate decisions, consistent with the strategy. Freedom 3 ProcessesSystems Information Incentive Decision Making

Design the Right Organizational Structure Freedom 4 1. Entrepreneurial 2. Functional 3. Matrix4. Divisional

Get the right people  Do the other four freedoms right and brilliant people will flock to you (Microsoft attracts top talent at 30% less than competitors salaries)  Define the required job skills  Screen people with six important meta-programs:  Direction (Away from vs. towards risks or challenges)  Reason (Analysis vs. instinct)  Work Preference (types)  Working Style (environment)  Management Direction (themselves vs. others)  Relationships (people vs. things or systems) Freedom 5

The Five Freedoms:  Choose the right business  Create the right strategy  Develop the right systems  Design the right organizational Structure  Get the right people