Figuring out what areas of your business need the most investment is easier said than done. Follow these tips to meet the challenge.
The most successful companies are the ones that innovate.
Unfortunately, innovation often comes with a hefty price tag. 'You have to build the capability to be innovative,' says Michael Hitt, a professor of management at the Mays Business School at Texas A&M University, and co-author of Strategic Management: Competitiveness and Globalization. 'Whatever is required in your particular industry or for your particular firm to be innovative, you have to invest in it and build it.'
That's where your business investment strategy comes in. We've outlined steps to help you figure out where you need to invest to keep your business one step ahead of the competition.
Determining Your Business Investment Strategy: Set Long-Term Goals
Your business investment strategy is your plan for deciding how and what to invest in to meet your long-term goals. It's a natural extension of the original company vision you outlined when you wrote your first business plan.
'The first thing you need to do is ask yourself where you want to be five years out and what you're doing to make that successful,' says Dave Lavinksy, president of Los Angeles-based business development consulting firm Growthink. 'Then you can reverse engineer from there.'
For instance, many entrepreneurs are building a company with the hope of one day selling it. If so, look at potential acquirers, Lavinksy says, and see why they would purchase your company. Is it because you have a great infrastructure? Creative employees? A strong brand name?
Knowing your long-term goals will help you decide where to invest your funds. For example, if you're hoping to create a recognizable brand, your investment strategy will be heavily focused on ramping up your marketing department.
Dig Deeper: How to write a great business plan
Determining Your Business Investment Strategy: Take Stock of Your Business
Of course, it's difficult to plan for five years out without assessing where you currently stand.
'Before you step out of the box into something else, you have to have a sustainable business in the market you're currently in, because profits from your current business will finance your investment in future business opportunities,' says Bill Warner, a managing partner at Paladin and Associates, a business development consulting firm based in Wake Forest, North Carolina.
This exercise entails more than just looking at your company's financials. You need to examine your current marketing programs, Warner suggests, to see if you're reaching potential customers, and your sales department, to see if you're meeting closing goals. If these areas are not meeting your metrics for productivity, it's a good sign that they should be a focus of your investment strategy.
Also consider your strengths and weaknesses as a company. If a particular revenue stream is strong, it's a good indication that you should continue allocating funds to support it. However, if you find that a particular revenue stream is underperforming, but still costly, it might be time for a readjustment.
Dig Deeper: How to track your company's critical numbers
Determining Your Business Investment Strategy: Involve Your Customers
Setting an investment strategy doesn't happen in a boardroom meeting just between company leaders. The customer should also be a key participant. (That doesn't mean you should physically invite them into the boardroom; rather, you should solicit and include their input in your decision making.)
'At the end of the day, your customers are geniuses,' Lavinksy says. 'They know exactly what they want. It's a matter of spending time with customers to see how they interact with your products and services and what they like or dislike. It's more than just doing a survey or focus groups—you have to spend time with them to understand what's driving their decision making.'
Dig Deeper: Do you really know your customers?
Determining Your Business Investment Strategy: Do Your Research
Conducting competitive research will also point you in the right direction when deciding on a business investment strategy. 'Firms have to know their industry and know their competitors as well as they know themselves,' Hitt says. 'I don't care how large or how small the company is. If they don't do this and still do well, then it's just luck.'
Keep a lookout for potential competitors, not just the companies already in your market. Take the example of Priceline.com, which, when it entered the marketplace, was the market leader in online airline ticket sales. However, the company failed to foresee potential new competitors, who were nimble enough to quickly imitate Priceline's technology and provide value-added services such as rental car and hotel booking functions.
'You have to know continuously what's going on inside and outside of your industry to know what you have to do inside your firm to either sustain or obtain a competitive advantage,' Hitt says. 'Once you know how, then you can define the functions and capabilities inside the firm in which you have to invest.'
