The Power of the R5 Business Model

In today's business climate, strategic planning has become an annual administrative exercise for upper management. Every year, business owners brush off last year's plans and doggedly seek to update their contents. Once completed, the task is checked off their list for yet another year, swiftly relegating the plan to an office bookcase. Under these circumstances, the value management hopes to glean

In today's business climate, strategic planning has become an annual administrative exercise for upper management. Every year, business owners brush off last year's plans and doggedly seek to update their contents. Once completed, the task is checked off their “to-do” list for yet another year, swiftly relegating the plan to an office bookcase. Under these circumstances, the value management hopes to glean from the strategic planning experience typically gets lost.

When done correctly, however, strategic planning is a dynamic and invigorating process. New market opportunities are explored and competitive threats vanquished. Contrary to popular belief, a true strategic plan is not an annual event. Instead, it's an activity that's tied to your business cycle, which is the natural lifespan of your business, ranging from three to 10 years in duration.

Due to changes in your industry, it's necessary to modify your business practices on a cyclical basis to remain competitive in the market. Ignoring your natural business cycle erodes profitability, revenue growth, and, eventually, your customer base. Conversely, leveraging each phase of your natural business cycle ensures significant growth, prompts more profitable operations, and serves as a deterrent to competitive threats. Understanding your business cycle is the key to unlocking your strategic advantage.

What is the business cycle?

The business cycle is comprised of five distinct phases, each of which has a predictable duration. The good news is that the duration of your business cycle has already been determined — it's a function of your industry and business size. Dynamic businesses that are forced to adapt to changing business conditions quickly (and small businesses) have relatively short business cycles (e.g., technology product and media companies have three-year business cycles). More mature and larger businesses that are not swayed by rapidly changing conditions (e.g., law firms) may have business cycles that extend up to 10 years.

Electrical contractors typically have a five-year business cycle. Certainly, this time frame can be rocked by extraordinary circumstances, such as changes to licensing requirements or interactions with utility companies. However, this expected duration does provide a stable foundation for creating an effective strategic plan.

There are innumerable ways to identify each phase in the business cycle. This article will take a look at what's known as the R Model.

The power of R

With the R Model, every phase of the business cycle begins with the letter R. Let's take a detailed look at each step in the process.

  1. Research phase — Every business cycle begins with the research phase. During this strategic phase, businesses develop new products and services, test offerings in the marketplace, and identify specific tactics to ensure success.

    For electrical contractors, the burgeoning energy conservation market has resulted in the development of new product and service offerings. From simple activities like retrofitting lighting or instituting “soft-start” controls, electrical contractors are on the forefront of leading the energy conservation charge. For diversity, some are becoming security experts, using their low-voltage skills to implement closed-circuit TV monitoring devices.

    The duration of the research phase is approximately six months. Many business owners seek to extend the duration of this phase to find “work-arounds” for product and service offerings that “test” poorly in the market. In nearly every case, under-performing product and service offerings are a result of poorly constructed value propositions — literally being unable to communicate to customers why they should buy something. When this occurs, you should eliminate the offering or work diligently to find the quantitative rationale for customers to buy it.

  2. Release phase — The second phase of the business cycle is the release phase. Referred to as the “market bet,” this phase is characterized as the period when new offerings are released to the entire target market population. Aggressive marketing and sales campaigns are enacted during this phase — spending all or most of the available funds of the business.

    As opposed to a singular focus, electrical contractors need to have a diversification of offerings. Of great concern are those contractors that focus exclusively on a single offering or market. This approach is risky, as economic conditions can quickly change, negating the value of any single focus. For many small contractors, slowed housing starts in the residential market have resulted in general business pain and a frantic scurrying to replace lost revenues. The better approach is a diversity of offerings, ensuring multiple cash flow sources for the business where business continuity can be assured — even in a down market.

    The typical duration of this phase is six to 12 months. Sometimes, this period represents the end of a contractor's business cycle. Contractors who are constantly compelled to “restart” their businesses every year or so may be suffering from an inability to effectively complete the release phase.

  3. Reward phase — The favorite phase for every business owner is the reward phase, characterized by sharp increases in revenues (but not always profits) and high levels of owner euphoria. It is the primary reason you went into business in the first place — to make money. Key indicators of this phase include double-digit revenue growth, high levels of customer acceptance, and a frenetic work pace.

    The duration of this cycle is approximately two years. Because high levels of owner euphoria mark this phase, it creates a false sense of never-ending success. But, just as every other phase of the cycle has a predictable duration, the reward phase is no different. Unfortunately, it will eventually come to an end.

  4. Reinvest phase — Revenues generated from the reward phase are used to start the reinvest phase. Flush with cash and high levels of owner confidence, investments are made to the infrastructure, employee base, and, in some cases, new acquisitions. Investments during this phase are expected to strengthen the overall business structure, extend the euphoria of the reward phase, and position the business for the last phase of the cycle.

    To ensure the longevity and growth of your business, it is prudent for electrical contractors to invest in training programs for existing employees and demonstrate proactive participation in apprentice programs. But it doesn't end here. Electrical contractors must constantly be climbing the technology learning curve just to remain abreast of the current products available. Obviously, this knowledge comes at a cost.

    The duration of this phase is approximately one year. The double-digit revenue growth experienced during the reward phase will have subsided by this time, and many project awards will once again be based on commodity pricing standards — where low price wins the project. Faced with only incremental revenue gains, owners become more cautious regarding infrastructure improvement projects that extend beyond the one-year horizon. The owner understands that ready cash will be necessary to weather the next phase of the business cycle.

  5. Review phase — Every business cycle concludes with the review phase. At this point, revenues have dropped off quite dramatically from the reward period. Business transformation is necessary to ensure an effective transition to the next business cycle. During this phase, business owners reinvigorate strategic planning efforts and carefully explore industry paradigm shifts.

The duration of this phase is approximately six months. Many business owners make the mistake of trying to invigorate sales efforts to recapture the glory of the reward phase. While there may be a short-term “blip” associated with a higher concentration of sales resources, the resulting revenues are costly and not sustainable. Just like every other phase of the business cycle, the review phase comes to a logical end.

Leveraging the business cycle

Because every business goes through all five phases of the cycle, you can leverage that knowledge to your benefit.

  1. Exploit your competitor's cycle — Your competitor is your business enemy. Successful businesses use the R Model to pinpoint a competitor's position and implement strategic counter tactics leveraging the weaknesses inherent in every phase.

    If your competitor is in the initial stages of its business cycle, capital resources are being used to introduce new products to the market. You have an ability to piggyback the efforts of your competitor by following a “me-too” market strategy. Under this approach, a business relies on the research results of the competitive firm and follows its lead into the marketplace. The business saves the costs of conducting its own research but also runs the risk of not having any tangible results to support its market strategy.

    Burger King is a prime example. A competitor to McDonalds, Burger King did not have the same level of capitalization to embark on exhaustive location surveys. Instead, Burger King watched where McDonalds was building each new restaurant and relied on their market data to support building a competing restaurant in the same proximity. Burger King was able to save substantial market research monies and benefit from its competitor's activities.

    Electrical contractors have a similar paradigm: working with alternative energy sources. Recent surveys indicate that the majority of contractors remain on the sidelines — watching how their peers fare in the alternative energy markets. Their strategy is to wait for the early adopters to formalize specific offerings to market, learn from their colleagues' mistakes, and, subsequently, move to offer differentiated yet more perfected alternative energy offerings. The cost of market entry and the painful lessons learned will be borne by the early adopters and leveraged by those who choose to wait.

    When your competition is in the reward phase, there is still an opportunity to beat them — even during this cycle peak. Businesses that are enjoying the spoils during this phase often start to take their customers for granted. Customer service begins to fall off as these businesses seek to increase their customer base. Frustrated by a lack of attention, lower-tier customers seek alternative businesses to satisfy their requirements.

  2. Leverage your customer's position — Knowing where your customer resides in its business cycle provides you with a competitive edge as purchasing decisions change based on the prevailing phase. During early phases of the cycle, potential customers have very little discretionary cash, making sales a long and expensive process. In fact, attempting any form of new customer acquisition while a targeted customer is in the initial phases of its business cycle is usually met with failure — regardless of your value proposition.

    Later, as your customer evolves into the reward and reinvest phases, purchasing decisions are often expedited with lower levels of vendor scrutiny. It is during these phases that new customer acquisition is most successful. Flush with cash, customers are more open to examining value proposition messages and incorporating vendor promises into their expansion plans. You become part of your customer's growth solution.

    A growing area where electrical contractors are making headway is working with customers in the area of product selection. With plans and specifications becoming more vague, electrical contractors are in an ideal position to increase their efforts in persuading customers to modify their product selection alternatives.

  3. Your own business transformation — Business transformation can occur vertically or horizontally. Vertical transformation relies on maintaining a subset of your existing customer base and adding niche offerings that satisfy a smaller, more unique customer type. Businesses are looking to extend their customer relationships by offering services that address every phase of the customer's business cycle.

For electrical contractors, vertical transformation is occurring with the inclusion of the following services:

  • Harmonic distortion and power factor correction services,

  • Power utilization audits that identify and resolve lost power problems, and

  • Longer-term maintenance programs that monitor the condition of electrical equipment (i.e., the use of infrared scanning tools to monitor electrical equipment before damage occurs).

This vertical transformation approach refines the company's offerings, reduces the number of potential customers, and increases the service rates.

Horizontal transformation occurs when businesses look sideways to those industries that are performing services that fit under a broader umbrella of customer service. For example, some electrical contractors provide low-voltage installation services. While still electrical in nature, these services allow contractors to install closed-circuit TV monitors and wire computer data centers. Under horizontal transformation, the electrical contractor has now moved in the both the security and data center industries, respectively. Over time, as the electrical contractor further develops his business, these initial entry points may further morph the business into providing separate and direct services under the auspices of these differentiated industries.

The bottom line

Electrical contractors must transform their businesses at least every five years to remain competitive. The key is to realize that each phase of the business cycle can be used to increase customer rosters, defeat competitors, and strengthen your own business. The R model is a powerful tool that identifies phase characteristics and indicates when a phase is coming to its natural end. When used correctly, the R model predicts the future of any business and is a necessary component to any effective strategic planning activity.

Dawson is the managing director of LTV Dynamics, an international sales, management, and business consulting firm located in the suburbs of Washington, D.C.

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