1. What you will learn
This lesson gives you a strategic diagnostic: a way of checking whether your business has a clear customer, a real edge, enough focus, the right resources and a sound way of deciding. You will score five areas, split an invented poultry business into segments, and find which customers really earn once the cost of credit is counted.
2. The idea explained
Before you decide what to change, you need to know where you are strong and where you are muddled. A strategic diagnostic asks five questions. Customer: is it clear whom you serve, and are they the ones who make you money? Edge: do you do something better, cheaper, faster or more reliably than others, in a way customers notice and pay for? Focus: are your resources aimed at a few things or spread across many? Resources: do you have the people, cash, space and relationships to do what you plan? Decision process: do you decide important questions with facts and comparison, or by habit and mood?
Score each area from one to five, with a sentence of evidence. A score is only as good as the evidence behind it. Customers say they love us is not evidence; repeat purchase rate, referral counts and price premiums are.
The most common finding in small businesses is that revenue and profit come from different places. Some customers, products or channels bring a lot of volume and little margin; others bring modest volume and rich margin. If you do not separate them, you may work hardest for the ones that pay least. Segmenting, meaning splitting the business into groups of customers and looking at each, is the first tool of strategy.
Cost of credit belongs in the picture. A customer who pays in sixty days ties up cash for that time, and cash has a cost, whether it is interest you pay or returns you forgo. Ignoring it makes slow payers look better than they are.
A diagnostic should end in a choice of where to look next. It does not tell you what to do; it tells you where a question is worth asking.
Most new ventures do not succeed, and a diagnostic cannot change that. It only makes your effort better aimed. The figures here are invented and no result is promised.
Apply it
3. How to apply it in your own business
Start with the five questions and answer each in two sentences, then score. Ask a colleague to score the same, separately, and compare. Differences are informative.
Then segment. Split your revenue into three to five groups of customers or products that behave differently. For each, compute revenue, contribution margin in rupees, and the time or capacity used. Add the cost of credit: sales value per day times credit days times a monthly cost of money that you state and source, converted to the period.
Compare the segments on contribution per unit of the scarcest resource, whether that is machine hours, van days or your own time. Rank them.
Look for the surprising result: a segment that is large but thin, or small but rich. Ask why. Is the difference from price, cost, credit or service effort?
Write the top three questions the diagnostic raises. Do not answer them yet. For example, should we serve this segment at all, on these terms? Is our edge real for that segment? What would it take to grow the rich segment?
Take the three questions into the next lessons, and use them as live decisions. Repeat the diagnostic every six months, and note what has changed. Share the page with your accountant and one peer, and ask which score they would challenge.
Worked example
4. Worked example
Consider Palani, who runs an egg-farming and distribution business in Namakkal. All figures are invented. He supplies 2,00,000 eggs a week to three groups. Retailers take 1,20,000 eggs at a contribution of 0.42 rupee an egg. Hotels take 50,000 at 0.55. Institutions such as hostels and a canteen take 30,000 at 0.30 and pay after about 60 days.
Weekly contribution: retailers 1,20,000 times 0.42, which is 50,400; hotels 50,000 times 0.55, which is 27,500; institutions 30,000 times 0.30, which is 9,000. The total is 50,400 plus 27,500 plus 9,000, which is 86,900 rupees. Shares of eggs: 60, 25 and 15 per cent. Shares of contribution: about 58 per cent, 32 per cent and 10 per cent.
Cost of credit for institutions. The selling price is about 6 rupees an egg, so weekly sales to institutions are 30,000 times 6, which is 1,80,000. Sixty days is about 8.6 weeks, so receivables average 1,80,000 times 8.6, roughly 15,40,000. At an assumed cost of money of 1 per cent a month, an invented figure, the monthly cost is about 15,400, or about 3,560 a week (15,400 times 12 divided by 52). Net weekly contribution from institutions is 9,000 minus 3,560, which is 5,440 rupees, about 6 per cent of the total. So a group that takes 15 per cent of his eggs gives about 6 per cent of net contribution.
Scores. Customer 3: he knows the groups but has not compared them. Edge 3: retailers say his eggs are fresher, but he has no repeat data. Focus 2: he also sells feed and manure at a small loss of attention. Resources 3. Decision process 2: he set institution terms in a hurry to win a contract.
The three questions. Should he continue institutional supply on 60-day terms, or ask for shorter terms or a higher price? What is the evidence of freshness as an edge for retailers? Could he serve more hotels, the richest segment, given his production limit of 2,00,000 eggs a week? He notes that the cost of money is an assumption he must check with his bank, and that the diagnostic proves nothing about the future.
5. Common mistakes and how to fix them
The first mistake is scoring without evidence. A feeling is not a fact, so write one line of proof for each score.
The second mistake is treating all customers as equal. Revenue and profit come from different places, so segment before you decide.
The third mistake is ignoring the cost of credit. Slow payers look better than they are, so include a charge and state where the rate came from.
The fourth mistake is answering the questions in the diagnostic. Its job is to raise the right questions, so carry them into the next lessons.
Key takeaways
6. Board summary
Score customer, edge, focus, resources and decision process, each with evidence. Segment the business and compute contribution per segment. Include the cost of credit and the scarce resource. End with three questions, not answers. Every figure here is invented.
Check your understanding
7. Practice and self-check
Question 1. What is the weekly contribution from retailers? Answer: 1,20,000 times 0.42, which is 50,400 rupees. Question 2. What is the total weekly contribution? Answer: 86,900 rupees. Question 3. What share do hotels give? Answer: About 32 per cent. Question 4. What are weekly sales to institutions? Answer: 30,000 times 6, which is 1,80,000 rupees. Question 5. What is the credit cost per week? Answer: About 3,560 rupees. Question 6. What is net weekly contribution from institutions? Answer: About 5,440 rupees. Question 7. What share of net contribution is that? Answer: About 6 per cent. Question 8. What share of eggs do institutions take? Answer: 15 per cent. Question 9. Why segment the business? Answer: Revenue and profit come from different places. Question 10. What should a diagnostic end with? Answer: Questions to carry into the next decisions.