Secondly, in order to have a truly sustainable, profitable and effective business one should run a lean business. In running a lean business you will minimize slack, thereby increasing the size of the pie, and build higher profits.
Maximize your Customer Value
Your first job as an entrepreneur, then, is to create and manage the way that customers "see" or "perceive" your product/service. This job done well is the key to customer value, and to a profitable business.
Customer value (net buyer benefit) is created when you persuasively communicate to your customers the differences your product/service possesses when compared to others on the market. As customers clearly perceive these differences, gross buyer benefit goes up. As gross buyer benefit goes up, the amount of customer value (net buyer benefit) increases accordingly. When viewed this way, net buyer benefit can be seen in its most simple form. Net buyer benefit exists ONLY because of customer perception.
The difference between the benefit that your customer sees in your product/service (call it gross buyer benefit) and the price that you wish to charge, measures the net benefit to your customer. For ease of reference, this "customer" value is termed net buyer benefit (Ghemawat, 1991).
When the net buyer benefit for your product/service is large, you have room to raise the price if you need to. Here high demand prevents raised prices from decreasing by the quantity sold.
Limit Slack in Your Business
Slack occurs in a venture where the size of the pie is reduced through the actions of economic actors in the "vertical" relationship with the firm. Vertical relationships are the production/distribution relationships. Vertical relationships usually consist of the supplier-firm relationship on one hand, and the customer-firm relationship, on the other.
Suppliers and customers are the two main types of market actor that can "jump your claim" and cut down the overall size of your pie.
Generally, the size of the pie available to all parties in the vertical relationship is larger or smaller, depending upon the amount of waste in the production and distribution process. Where production and distribution has little inefficiency (low scrap, rework, waste etc.) there is little slack. Where scrap, rework, and waste are high, then slack is large and the pie thereby shrinks.
Thus, when a customer mis-specifies an order, and you have to "eat" the correction costs, slack increases. When a supplier wastes material or labor through mismanagement, slack increases. When your advertising department runs ads that don't bring in business, slack increases. When people within the firm waste time, materials or funds, slack increases.
If you are trying to reduce appropriability in an ongoing business, look for the opportunity to reward actors in the vertical relationship for low slack conditions. Begin by looking at your reward systems and then move on to consider the incentives that you offer both suppliers and buyers to eliminate slack.
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Dr. Ronald K. Mitchell is a specialist in entrepreneurial cognition, global entrepreneurship, and venture management. He developed the Entrepreneur Assessment which won the acclaimed Heizer Award for this groundbreaking research. Find out more entrepreneurs at http://www.venturecapital.org/
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