It’s more than 50 years since Night of the Living Dead established a template for the modern-day “zombie” genre of horror movies. Hundreds of films have since relied on much the same plot devices, which are essential as follows.
First, something must give rise to the zombie hordes. In other words, there has to be a trigger of some kind. Night of the Living Dead plumped for radiation from a returning space probe. All the while, many successors have opted for bizarre viruses.
Second, the zombies must assume an air of invincibility. Despite their obvious flaws – rotting flesh, limbs falling off and so on – they have to keep staggering on, seemingly defying all efforts to halt their advance.
Finally, the zombies’ vulnerability must be exposed and exploited. It might turn out that they’re susceptible to a blow to the head, that they can be electrocuted or that they’re terrified of water. Traditionally, there’s a first kill – a sort of grotesque eureka moment – and then they all get their just desserts.
You may well be wondering what any of this has to do with entrepreneurship. The answer is that there are countless “zombie companies” – and for many the days of somehow stumbling on could be numbered.
Let’s take a look at how zombie companies come about, how some of them survive for so long and why the hordes are likely to thin out in the near future. Hopefully, what follows will help you appreciate whether you’re in danger of joining the business world’s living dead.
The Birth of a Zombie Company
Some years ago, early in my consultancy career, I met the managers of a new technology company. They were working on an innovative means of collecting information from utility meters.
It was standard practice at the time for a meter reader to visit premises in person. The company planned to replace this costly and time-consuming routine by setting up a network of radio beacons on telegraph poles.
It’s important to remember at this point that this was an era when no one had even heard of wi-fi. The idea of automatically logging on to a meter and reporting back to a billing authority qualified as state-of-the-art stuff.
Even so, with the calamitous dot-com collapse of 2001 still fresh in my memory, I was notably cautious about anything touted as the Next Big Thing. I, therefore, asked the managers about the company’s single-user economics.
This is a term that describes the single-case model for a value proposition. To put it another way: how much money does a business save each customer in comparison to the amount it spends on delivering its product or service?
The managers appeared stumped by my line of questioning and instead highlighted their working growth plan. I made my excuses and left, convinced I had just witnessed a classic trigger for a zombie company.
Understanding Value and Viability
I couldn’t find any trace of the business when I attempted to look it up a few years later. This came as no great surprise since I suspect to this day that it had made a mistake all too common among new enterprises.
In short: it had very likely produced a growth forecast without genuinely understanding its value proposition. The problem with such an approach is that a forecast might show expected sales, costs and profits.
This is where single-user economics can be so useful. It’s a method that can help you analyse why customers might be motivated to choose your particular service or product – and recognise how financially viable your proposition is.
Crucially, single-user economics can take account of the situation today and the situation at some stage in the future. This should improve your grasp of whether your offering will have continued value – for example, once a market matures or when economies of scale come into play.
If the results of the exercise are positive then you can feel relatively confident about charging a price higher than the costs you incur. You should have a solid basis for a business that’s both profitable and sustainable.
On the other hand, if the results of the exercise are negative then it’s time for a rethink. And if you ignore such results – well, you can expect trouble further down the line.
How Some Zombie Companies Stagger On
Alarmingly, there are many businesses with negative single-user economics. They represent the zombie companies I mentioned earlier, and – as with the villains of so many films – it’s vital not to be fooled by their apparent staying power.
In effect, these companies carry on trading – and even growing – despite being technically insolvent. Their liabilities exceed their assets, yet somehow they lurch on. So how do they do it?
Let’s first settle on a straightforward definition of making a loss: it’s a situation where costs are higher than sales. A growth forecast might paint a happy picture in this regard, but what demands close attention is the timing of costs and sales.
For instance, imagine a supplier makes a sale to a customer, for which the customer pays. Then imagine the associated costs are higher than the sale itself but don’t have to be paid out until the next month.
Now imagine the supplier makes two more sales before the first payment is due. This provides sufficient money to cover those initial costs. As well, the costs of the subsequent sales won’t be due for another month.
The supplier can maintain this innately perilous pattern for as long as there’s growth. As soon as sales slow and plateau, though, negative single-user economics will enter the reckoning – usually to devastating effect.
Beyond the Zombie Apocalypse
This is the business equivalent of a zombie movie’s eureka moment. It’s the dreaded day when negative single-user economics come back to haunt a company built on flimsy foundations.
The air of invincibility is duly exposed as a sham. A long-concealed weakness is suddenly there to be exploited. And the end is nigh.
We’re likely to see substantial evidence of zombie companies’ inherent vulnerability amid the economic challenges that abound today. Many are going to find the current storm extremely hard – if not impossible – to weather.
In the face of economic slowdown and the threat of recession, they’re likely to discover they can totter only so far before at last collapsing. This is because the bottom line – literally and figuratively – is that their model is unsound.
The fact is that these businesses, like their flesh-eating film counterparts, are ultimately rotten. They can’t go on shuffling from one near-miss to the next in perpetuity. For the simple reason that their single-user economics just don’t stack up.
This is why any entrepreneur truly committed to the long term should embrace single-user economics from the outset. The resultant insights could be pivotal to knowing whether your proposition is really fit for the future – especially in difficult times.
David Falzani MBE is a Professor at Nottingham University Business School’s Haydn Green Institute for Innovation and Entrepreneurship (HGIIE) and president of the Sainsbury Management Fellowship.
Images courtesy of Depostphotos
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Nottingham University Business School specialises in developing leadership potential, encouraging innovation and enterprise, and developing a global outlook in its students, partners, and faculty. It is recognised as one of the world’s top business schools for integrating responsible and sustainable business issues into its undergraduate, MBA, MSc, PhD, and executive programmes and has unrivalled global reach through Nottingham’s campuses in the UK, China, and Malaysia. The School holds a Small Business Charter Award in recognition of its important role in supporting small and medium enterprises. It is accredited by both the Association of MBAs (AMBA) and the European Quality Improvement System (EQUIS) and ranks among the UK’s top ten for research power.