The Five Forces of Business Acumen – Advice to Founders

This is a column that builds on the topic I raised a while back. It's the topic of how do you, as the founder or CEO of a small business - or any business actually - separate the merely urgent from the truly important. In other words, how do you set priorities - and then actually respect those priorities in order to achieve your objectives. Including the objective of staying in business. This process of knowing what you want the business to do, making a plan to do it, and then ensuring that plan is executed is broadly what I would call "business acumen." If you Google business acumen, you will find that there are about as many definitions out there as there are websites purporting to be able to help you develop said acumen. The definition I use here is very much a personal one - although the "Five Forces" model comes indirectly from one of those websites by way of a colleague, Jim Miller, who has long experience in managing businesses both large and small and with whom I teach periodically at the Telfer School of Business. My working definition of business acumen is the ability to understand where a business needs to go, to make a plan that will get there successfully and to implement that plan consistently until success is achieved. It is important, I think, that the definition includes all three of those elements - the ability to not only formulate a strategy but to turn that strategy into a plan that can be executed and then to execute that plan. Real business acumen requires an understanding of all three of those elements - and how they interact with one another. The question is - how to obtain and deploy business acumen? How do you know if you even have it. Except by finding out that maybe you don't. Which is a sub-optimal strategy when you are trying to run a business upon which your livelihood and many others depends. The "Five Forces" model is a way of trying to put the skills and judgement needed to exercise business acumen into some kind of box or frame so that those skills can be analyzed, understood, and improved against some consistent "system." Having a consistent framework is really the only way to evaluate progress - especially over long periods of time. Now, like any complex skill, there are many ways to acquire business acumen and many ways to evaluate that learning. This is a model that works for me - so let's explore it in more detail. The first point to note about "The Five Forces" is that they are different from "Porter's Five Forces" with you may have some familiarity. The confusion is unfortunate, but these five are unrelated to his five. The five forces of business acumen are: Cash, Profit, Assets, Growth, and People. It is, by the way, very important to list them in this order. The order is important because in this ordering they are listed from Urgent to Important. Which is why this links back to my earlier column. Let me explain. The reasons that these are called five forces is because, as priorities, they are always in tension with one another, and they are always trying to drag you in a direction that will in some way affect your ability to move in the direction of the other forces. For instance, acquiring more assets usually requires using cash. Or an aggressive growth strategy will often come at the expense of profit margins and may require the use of assets that have already been acquired. And attracting and retaining the right people will almost always require some concession on some of the other five priorities. No matter how you arrange things you will never get to a point where all of the forces are completely aligned. Thus, the exercise of business acumen consists of deciding how to reconcile the forces by deciding what to emphasize, by how much, and when. And this is why the order of the forces is important. They are listed with the most urgent forces or needs first. The need for adequate Cash is always going to be the most urgent issue a small business face. When there is not enough cash - obtaining it by any means has to be the priority, since without cash to meet its obligations, the business will cease to operate. But it is not necessary to have more cash than you need. Cash is also the grease the makes everything in a business move. So, one important skill for founders to develop is to know when cash is no longer a proximate problem and how to use that to focus on other priorities - some of which may very well require use of that cash. So, the next most urgent issue for any business to consider is the question of whether it is and, how to continue to be, profitable. It is true that being profitable is different from being cash-flow positive in some very important ways - a topic which is probably worth its own discussion. Nevertheless, unless a company is profitable in the long term, cash will become its dominant concern - until it isn't anymore. By which I mean the company isn't anymore. So, it is possible to decide to be profitable even if it will cost you cash up front. It is also certainly possible to decide focus on profit instead of building an asset base or working to grow the business. Examples of these choices are easy to imagine. Any company that decides to sell out of inventory instead of producing new products to meet customers’ needs is, effectively, choosing profit over asset preservation. Now, given that, in order to build a stock of inventory, that company had likely made building that inventory a priority over being profitable at some point in the past, it is a decision that might make perfect sense, and which might have been the plan all along. What about growth? Well it is also very true that there are lots of ways to grow or scale a company but all of them will require spending cash, forgoing profits, or either selling assets or forgoing the accumulation of assets of some kind. It is important to realize here that assets include intellectual property. For instance, it is not hard to imagine a situation where a company is presented with an opportunity to scale up dramatically - by finding a partner that is interested in leveraging their accumulated intellectual property - which they have likely accumulated at the expense of cash and profit. In other words, selling out or merging with a larger entity that has the resources to fund a company’s growth is a very real possibility for many founders. And, while that may seem like (often is) a desirable outcome it does require an analysis of what is to be gained and whether that benefit is worth what must be sold in order to complete the deal. The point which I am trying to make (or maybe belabor by now) is every business situation, issue, problem or challenge can be described in terms of these five forces (say them with me now): Cash, Profit, Assets, Growth, and People. So learning how to think in those terms - consistently - and almost subliminally - will provide a useful tool for anyone as they learn to make and evaluate business strategies, decisions, plans, and results. So I think in future columns I will explore the implications of the Five Forces and how the model can be helpful in resolving situations in which founders - or really anyone running a business finds themselves in. For now, just learn to repeat the mantra "Cash, Profit, Assets, Growth, People". It will stand you in good stead. I promise.