11. b. Continuous improvement
c. Invention
d. Mass customisation
Prevailing wisdom says that these concepts are closely aligned. ‘Tailor Made’ requires
‘Invention’ and ‘Commodity’ requires ‘Mass production’.
The strategy is to break the connection between the two concepts. In the extreme this
means that you setup a mass production environment for a Tailor Made product.
Mass production reduces the cost of the producing the product. Tailor Made maximises the
value of the item. The difference is a maximisation of the gross margin of the product. If you
can keep a mass production environment working the assets have little to no downtime and
productivity ratio will be high.
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13. 3. Hold an open workshop with trusted advisers to rigorously challenge the
assumptions
4. Refine the model and prepare a sensitivity analysis on the key variables
5. Produce a final answer.
It is important to not only validate the written assumptions, but equally or more important,
to validate assumptions that are not there. What has the author missed? What’s not written
down?
If you have an existing business then the model should focus on the planned extension to
the business. In other words could the extension stand on its own merits? If it cannot, you
could be growing revenue but diluting gross margin. If it can, what synergies will you pick up
by merging the new with the existing business?
The answer is really the least of your worries. Do not anticipate it, do not rush it. A rushed
model will provide the answers you want rather than the answer you need.
Once you have the answer you are now in a position to determine your source of funds. I
acknowledge the model will need to include funding options in order to take into account
interest expense. But you should model with a ‘switch’ to turn this option on or off.
If the model indicates stable growth and there is confidence in the assumptions, then debt
is probably the way to go. If it appears that the venture will require a ‘long runway’ to get off
the ground then equity may make more sense, depending whether or not you can fund the
interest payments on debt. My experience is that things always take longer to materialise
than expected and if you go the debt option, allow yourself a good cushion of time.
It must be said that equity is the most expensive form of money. Not in terms of dividends
etc, but when it comes to selling the asset. What at the start seems like a reasonable equity
percentage could become a very big payout figure at the end. A good equity partner should
assist the business and help it grow. Often investors have great management skills and can
bring a lot to the business.
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14.
In closing, to grow shareholder value:
1. Understand your markets
2. Understand how you will create demand from those markets
3. Understand how this demand will improve the Return on Capital Employed
4. Choose a financing methodology that will support your business through the difficult
first years but will not be too expensive when it comes time to exit.
I welcome your comments on the above. If you disagree with me let’s have the debate as it
drives the learning process for both of us.
For further information, please contact Garth Holloway at:
Telephone:
Email:
+61 2 9451 0707
garthh@sixfoot4.com.au
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