How to do business

I believe that business occurs in pre-defined stages. Growth occurs rapidly and organically between them but when a company hits the next barrier, it has to start behaving differently before it can move on.

We're bounded by our animal origins and hunter gatherer ancestry. This affects how we behave in business. Left to themselves, businesses seem to cluster at key preferred sizes due to natural interpersonal dynamics.

Most small businesses only employ the founder - these individuals are often loners who don't really want to work with others.

The next stage is for 2 people to work together and this can be a very productive association as shown by the many husband and wife companies.

Then there's a gap. 3 and 4 people are unstable numbers - with 3. 1 person gets left out - with 4 you get 2 little gangs of 2 and conflict is endemic in the structure.

Then we reach the sweet spot - the traditional 5-12 person hunter gatherer band. It's easy to lead a team of this size on your own - everyone knows what they should be doing & you can keep most of the important stuff in your head. But you need a basic structure to create a base-load income stream.

Getting past 10 employees is a real problem. In the UK only 1600 companies a year go from employing less than 10 to more than 10. Barclays Bank tells us that thinking time is a real problem for companies with 10 - 20 people.

Why is this so hard? Mainly because of the time taken in managing relationships. Every new person that joins brings in another layer of relationships that need managing. By the time you get to 14 people it uses all the strategic planning time.

Getting past this means adopting something like Mike Southon's 4 cornerstones model. This lets you recrystallise at about 20 people and gives the management to take the business up to the 70 person, £5-10 million mark when it can be sold.

To go past 70 it's necessary put in a layer of middle management - a real change of behaviour.

The final barrier seems to occur at around 150 when the leader runs out of head space to directly model the relationships between all the other people in the business. This is called the Dunbar number - after the work of Professor Robin Dunbar. It's no accident that the military - who have the most experience in practice - use the Company of around 120 men as their key tactical unit.

To break through these barriers you have to change the way you behave - and that's hard.

The world of business doesn't stand still - the market is always changing and market opportunities only have a certain shelf life.

Companies who want to develop have to choose how to do it. The options are shown in the matrix diagram. You can either do more of the same harder, sell new stuff to your existing customers or find new customers for your existing products.

What do people do in practice? 3 times as many companies try to find new markets for their existing products as look at developing new products for their existing customers. The key issue is how much it costs to acquire a customer. Research shows it costs 7-10 times as much to create a new customer as to sell to an existing one.

So it's often cheaper and better to find or develop new products for your existing customer base than to conquer new markets.
In essence new product development is a 4 stage process
1. Talk to the customers
2. Find out what they want
3. Work out how to do it without going bust
4. Do it

The actual product that the customer buys is often a joint creation between someone knowledgeable in their team and someone on ours. All we have to do is to make this more systematic. Start by a picking a small selection of your customers. Ring them up and say you want to improve the quality of your products and could you have a chat. You can do this on the phone but its better to go and see them.If you do it yourself as the business owner they will nearly always see you.

Have a checklist of 6 areas and go and talk to them. See what comes up; are there any common themes. Afterwards brainstorm around the ideas and filter them according to

1 How easy is it for you to do (and how extensible is the product idea)
2 How big is the potential market
3 How well it fits with your existing market postioning and branding.

Ring a sample of your customer base. If you have 50 customers ring them all up - if you have thousands then talk to a sample. Pick 2 - develop one and buy in one to kick start the process.

Focus on the customer's needs - particularly how they use your product - you may get some surprises. Then talk about how you could develop the product or service - new materials, new processes, and new features to deliver some real benefit to the customer.

If you make the most of your existing customer relationships to clarify what your customers expect or want from you, you may save your self a fortune prospecting in ne