It doesn’t matter whether you measure income or expenses or marketing effort or profitability or inventory costs or wages (or anything else), businesses never operate along a straight line. There’s a fluidity of peaks and valleys and (in many cases) an upward trend as the business grows. This generalized graphic illustrates what I mean and can refer to any of the above potential measurement points:
When a business operates in the mid-range, everything is usually okay. Things buzz along and there’s a nice interplay between all aspects of the business. But sometimes, as a result of internal or external factors, the business hits a peak or a valley. It could be that the business’ marketing has paid off and they suddenly have more customers than they can manage; or it could be that the business’ expenses have hit an all-time high and threatens to strip away profitability; or perhaps the manufacturing plant has surpassed orders and has a huge overstock. Those are peaks. Valleys are similar concepts.
These situations are common across all businesses. Now here’s the problem: Businesses wait until the highest point on the peak before they act. In many cases (although not all cases) the action they take helps to bring the business off of the peak. I’d suggest that this is similar to the “herd mentality” that exists in the stock market. At the highest point of investor exuberance, everyone is investing.
The same holds true for the lowest point in the valley: Businesses wait until they are there before they act. By then, it’s often too late. Again, I’d compare this to the stock market where investors try to time the bottom (although that’s an ineffective investing technique).
Here’s the solution I would recommend: Businesses should consider acting slightly sooner. It will soften the dramatic impact of the peaks and valleys of business and keep the measured line toward the middle, which is a more predictable (and usually more profitable) place to be.
But the question is: How do businesses know when to act “early”? The answer is something I call “Triggers™”. Triggers™ are indicators that hint at an upcoming peak or valley. I’ve illustrated them below, in orange, and you’ll notice that they appear along the measured line before the early action point.
A Trigger™ is a lot like a leading indicator in the economic cycle. Leading indicators in the economy (like housing starts or interest rate changes) hint at changes in the economic cycle, which moves in a similar peak-and-valley format. Your business has leading indicators, too. What the indicators are will be different for every industry and business model, and the specific numbers will be different from one business to the next. In future blogs I’ll talk more about Triggers™ and explore the concept of integrating them into your business so that you can anticipate these dramatic shifts and prepare for them before they occur.