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Eureka: The pseudo-science of business
by Joseph Gatt
2017-11-03 08:38:09
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To simplify sales minus operational costs equals profits. Operational costs include production costs, housing costs, transportation and logistics costs, marketing costs, research and development costs, maintenance costs, service costs and of course wages. Let me break all of this down.

In any company or economy you have to produce something to be able to sell it. Production is as elastic as can be. You have smartphone apps for example, where you produce one app and millions can pay to download it. Then you have real estate, whose production costs are high and where there is no guarantee you will find customers. This is where speculation comes into place.

busi01_400Any reasonable company will want speculators to play with the production and the consumption of their product. Real estate is one example, where given the fact that few have the kind of money to pay for housing upfront, real estate developpers get help from banks who loan mortgages to consumers and from speculators who have money, want to invest it, and buy housing with the hopes of selling it for profit. The same could be said about farming land, industrial bases, office space or any field that demands significant investments.

The problem is when companies keep an eye on speculators rather than trying to go to consumers directly. The line between consumers and speculators is blurry and is a matter of semantics. Speculators buy so they can sell the product for a profit, consumers buy so they can make direct use of the product. The problem is when, as in modern economies, speculators buy to sell at a profit, who buy from speculators to sell at a profit, who buy from speculators to sell at a profit ad infinitum. This happens in many countries, I remember a friend of mine in South Korea who was trying to buy an appartment for consumer purposes yet all he found was appartments with walls made of thin wood that were attacked by fungi given the wet weather in the hot summer.

When producers aim to sell to speculators and speculation in any area becomes to dominant form of trade where speculators sell to other speculators, you get housing made of cardboard, or in some cases land that doesn't even exist. When speculators are too busy building their portfolio, you get plots of land sold to three or four people who don't realize the plot of land had multiple owners until they try to sell it.

When speculation fuels production. Let's take four examples of products that can be produced. Let's take shoes, then an unconventional one like paint, then a very conventional one like cell phones, and perhaps a very unconventional one like nail clippers. The same principle applies to all four products. You buy the machinery and equipment, then you send a team of salesmen to try to sign production deals so you can sell the product. You aim for large distributors as in wholesales or megastores that do both wholesales and retail.

Some distributors will pay you upfront, others will want to use intermediaries like banks to make sure they have a neat product delivered. You have regulations, follow the regulations, sign different contracts and deals. Some can be pickier than others. Some will want to test your product, others will try to put it on display first and see how it sells. Some want to hold exclusive distribution rights for your product, in which case you have to make sure you sign a deal for an amount you can actually produce. Of course you need to come up with a good narrative on how your product is different from other available products, and you will have to drive around the nation, perhaps even internationally, to find distributors for your product.

The market offers an interesting, yet dangerous alternative. You can list your company on the stock market, sell shares, collect shareholder money. This alternative can be dangerous because you will collect shareholder money and make mistakes. The first mistake, one I see a lot, is to start production before finding distributors. Another mistake I see a lot is to start production and try to sell the product online rather than going through grumpy and meticulous distributors. Another mistake is to collect shareholder money and have a laid-back attitude about sales because you have enough money to pay your employees. Yet another mistake I see is collecting shareholder money and having your nephew, niece, cousin or brother start a company and sell products back and forth to give the illusion to shareholders that the shoes, paint, cell phones or nail clippers are being sold. In sum, all mistakes are due to a lack of effort and to losing sight of the goal which is to sell production to distributors.

Now to housing costs. Housing your company is a big expense, one that you should take into account in your sales plans. You need to pay for your land and your bills which go in the maintenance fee section. I've seen companies housed in the middle of highways, in the middle of nowhere, like in the middle of a desert or of a forest. I've also seen companies with housing which is inadequate for their production line. So as a bureaucrat, I would try to make sure that companies are housed in adequate, safe zones. Industrial or business housing is also an area victim of speculation, that is people who buy industrial housing so they can sell to people who buy so they can sell such space and so on. The reason I'm not starting a business, among others, is that given the housing costs I don't see how I could break even.

Now to transportation and logistics costs. When you produce shoes, paint, cell phones or nail clippers, you have to ship them to your distributors. A mistake that many businesses do when they try to sell online rather than to distributors, which is, apart from the huge difference in sales volume between selling online and signing contracts with distributors, is that they forget how expensive it is to transport their product from the factory to the distributor. They also forget how expensive it is to keep production stored in a warehouse until distributors buy the product. It's expensive! But many companies only realize that after they sign the contract with the distributor where they start searching for logistics and transportation companies who charge egregious fees, allegedly because gas prices and land prices are very high, and because truck, ship or plane prices have gone up significantly.

Now to the maintenance and service costs. To keep your company up and running you need to pay electricity, water, gas bills, phone bills, internet bills, consultancy and legal fees and other service fees as in machine repair fees or having instructors teach you how to use the machine. That's a lot of fees that many businesses don't always plan for. One mistake is the kind of optimism where they think they can fix it all or learn it all by themselves, another mistake being to think that the machines will never break or that they will never get sued or subpoenad. Unfortunately they always break at some point.

Now to marketing and research and development costs. These have become a buzz word in the 21st century. The French like to remind me that best selling artists Mylène Farmer and Francis Cabrel never do interviews or promote their music, yet have been near the top of sales charts for years. The idea is if you have a good product the marketing will work for itself. One mistake I see, especially with the younger generation, is focusing more on social media and other forms of marketing than on the important aspects of business I just described above. CEOs who spend fortunes on hair cuts and suits when most distributors have been around long enough to know that you don't judge a book by its cover, you judge the book by its content and readability. As for research and development, it's always good to have someone examine distributor and customer feedback and try to come up with better shoes, paint, cell phones or nail clippers. Something a lot of companies overlook.

Now finally to wages. There are two types of employees: permanent employees and consultants. Permanent employees usually work full time and are availble during working hours. Consultants come when and where help is needed and then go. Many companies work exclusively with full-time employees which can be a mistake because getting help from outsiders can be useful and while relying on internal employees is a good thing, sometimes getting a perspective from outside the company is even better. Others work exclusively with consultants which can have harmful effects because your distributors and production line will lack consistency, plus you will waste a lot of time and money training and adjusting consultants to your work mode. The idea is to divide work between category one and category two type of labor. Category one is the type of labor that is vital to the company, say production or sales, perhaps marketing and R&D, but then the size of the company and the production has to be taken into account. Category 2 type of work is work that needs to be done occasionally such as maintenance or services.

Production costs, housing costs, transportation and logistics costs, marketing costs, research and development costs, maintenance costs, service costs and wages have gone significantly up in recent years, meaning that those who saved in the 90s probably could not start a business today. Plus the media has been selling dreams meaning a lot of younger entrepreneurs want to start big rather than start small. It's true that there are a lot of untapped areas in modern business, say cyber security and data recovery being an area that is rather untapped, but a lot of the start-ups fail not only because they misunderstand the nature of the product and its revenue sources, but also because they misunderstand the logistics surrounding sales. Like in French cinema where a lot of movies flop because the Producer is also the Director and main Actor telling the story of his life, a lot of start-ups fail because they aim to control production as well as transportation and distribution. That's crazy! But I've seen a lot of companies buy their trucks and ships and land for their stores, with borrowed money of course, when trying to compete with established brands, sometimes for products that are not even in demand.

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Emanuel Paparella2017-11-03 14:33:38
Eight and a Half is the story of the director of the movie (Fellini) who is also the protagonist of the movie. Creativity and imagination can trump scientific determinism (pseudo or real) can trump scientific determinism but to do that one needs to see the world as a circus of sorts with oneself as a clown playing in it. Alternate reality in today's insane technocratic positivistic universe? One wonders.

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