Wall Street’s sour grapes shouldn’t set Main Street’s teeth on edge

“The fathers have eaten sour grapes and the children’s teeth are set on edge.”

When Jeremiah and Ezekiel so prophesied 2600 years ago, it was to offer hope for a time when the Children of Israel would stop having the sins of their fathers visited on them. As a student of the evolution of American capitalism over the past half century, recent observations have moved me to paraphrase the ancients with a new marketplace maxim that I pray will not become prophetic:

“Wall Street has eaten sour grapes and Main Street’s teeth are set on edge.”

Alas, my passage is not about hope for a sweeter time, but rather, a lament of concern for the opposite.  My perspective is informed by three periods of time: The Reagan Boom, post 2008 financial crisis, and post 2016 election. I’ll split the latter into bookends around the other two.

Post 2016 Election
When we awoke on Wednesday, November 9, 2016 to the shocking Electoral College tally showing Donald Trump had preempted the anointing of Hillary Clinton as president, the Dow Jones was already in record territory at 18,323.  By closing bell that day, the Index was up 265 points. Since then, the “Trump Bounce” has driven the Dow Jones through the once-mythical 20,000 level on the way to 21,000, the fastest 1,000 point run in history.

Meanwhile, out here on Main Street, the 44-year-old NFIB Index of Small Business Optimism reported its own historic spike in that sentiment since the election. But a small business can’t eat optimism, and my recent online polling indicates less than a third of our respondents are seeing customer enthusiasm actually ringing a cash register. After a tough decade, unlike investors, consumers are more measured than manic, so it’s likely to take months of sustained optimism to manifest as Main Street sales growth.

The Reagan Boom
Once upon a time, small businesses benefited from an exuberant stock market.

Beginning in the third quarter 1982, the Dow Jones caught a rocket to a 52% increase over the next four quarters, to 3071. And with the exception of a correction or two along the way, including the 1987 “Black Monday” crash, Wall Street didn’t look back until the turn of the new millennium when it closed at a record high of 11,722 on January 14, 2000.

Main Street businesses had much to be excited about because in those days it was an article of faith that “the stock market was a leading indicator of the national economy.” During that same period, as it had always done, the rising Wall Street tide raised Main Street boats too. Indeed, in that 18-year economic expansion, plus a shorter one from about 2002 to 2007, the old “leading indicator” dynamic between Wall Street and Main Street was made manifest during what has been called the “Reagan Boom.” As Wall Street reached new records, annual GDP growth, the favored indicator for small firms planted in the ground, averaged a beautiful 3.5%.

Post Financial Crisis
American macro-capitalism changed significantly beginning in 2007 with the Great Recession, which overlapped the financial crisis of 2008. In the process of surviving those two gut-punches, Corporate America and Wall Street shifted their business practices by focusing inward more than ever before. Inward, meaning investing less in the Main Street economy, to the extent that the once-dependable maxim, “Wall Street is a leading indicator of the economy,” morphed into my observation that Wall Street is now merely a leading indicator of itself – Main Street is on its own. Here’s my evidence:

  • While the U.S. economy was experiencing essentially a lost decade (2007-2016), with GDP growth averaging 1.4%, including barely 2% annually for the seven years following the end of the recession, the stock market spent the last five years setting new records.
  • For three years running, in the first quarters of 2014, 2015, and 2016, two things happened simultaneously that had only happened before in Bizarro World:
    • GDP went perilously negative in 2014 (-2.9%), 2015 (-2%), and achieved only .5% growth in 2016 (U.S. Dept. of Commerce).
    • The Dow Jones reached new record highs in all three first quarters.

Again I ask, what’s wrong with this picture?

Back to the future
There’s been no corporate earnings performance since November 8 to justify spikes of 15% for the Dow Jones and 11% for the S&P. Where’s the fundamentals evidence one would expect to cause equities to wander into unicorn territory? It’s true: The hope of a more business-friendly government is raising optimism in all sectors of the marketplace. But unlike Wall Street, a small business can only spend what it takes in by serving customers. Our top line manna falls from customers, not mania or manipulation.

Smarter people than I are forecasting a stock market correction if, for example, there’s no tax reform this year. My “sour grapes” concern is that having already “clipped its coupons” on the post-election exuberance, a correction this year for any reason it will set the economy back abruptly, derailing Main Street’s bounce before it ever happens.

No one on Main Street begrudges the success of Wall Street. But right now the disconnect between the two once-symbiotic sectors is at once illogical and unsustainable. When the irrational exuberance of Wall Street ultimately reconciles with reality, that event should not cause Main Street to become collateral damage before the latter ever gets to play in the game.

Write this on a rock … When Wall Street eats sour grapes, it should not set Main Street’s teeth on edge.

Take on the law of numbers with grit and fundamentals

A rabbit was being chased by a hungry fox. Running for his life, he hopped over a turtle as he made haste across a small stream. Tucking himself safely inside his shell — not wanting to become collateral damage in the rabbit’s emergency — the turtle inquired about his anxious neighbor’s prospects, “Hey, Mr. Rabbit. You gonna make it?” To which Mr. Rabbit replied over his shoulder, “I GOTTA make it.”

When small business owners wake up in the morning, they often feel like Mr. Rabbit. But why are so many operating so close to the edge of survival? Why is every challenge or opportunity so momentous? Why are their circumstances so much more dramatic than for their Big Business cousins? The answer is found in the law of numbers. Let’s look at just three key examples:

Customers
Big businesses have lots of customers, so losing one is usually not a big percentage of their customer universe. A small business’s customer universe looks more like a list, on which each name represents a much larger percentage of the total. Losing a sale or customer takes a bigger mathematical bite out of the future viability of any small business.

Employees
When an employee leaves a big business, there are probably three replacements ready to be promoted off the bench to that single assignment. But even if there is a bench on a small business team, it isn’t deep. And since there are more jobs to do in a small business than people to do them, every employee is a key employee who’s difficult to replace.

Capital
Big businesses are blessed with multiple capital options, including the equity and debt (bonds) markets. A small business is the stepchild of the capital markets – sometimes more like an orphan. Other than bank loans and whatever retained earnings that can be held onto after taxes, the best way to describe other capital acquisition options is found in the names of the twin brothers of desperation, Slim and None. And even when outside capital is found, it often comes at a prohibitive premium.

With the law of numbers and perilous percentages against them, translating into limited options, small business owners survive by calling on a special kind of “I GOTTA make it” resolve. But, alas, resolve alone isn’t enough. To overcome the reality of their numbers and operate with less desperation they have to combine their grit with a focus on operating fundamentals that address the exposures. For instance:

  • Customers: Know what each expects from you and deliver that within an inch of their lives. This is part of your special sauce and one of your advantages over a big business.
  • Employees: Hire only those who could one day be promotable off of your bench.
  • Capital: Build and maintain good relationships with at least two banks, and retain earnings like your business’ life depends on it. It does.

During The Second Punic War (218 BC), Hannibal crossed the Alps with 35,000 men and a squadron of elephants. When snow blocked their progress, scouts reported the way forward was impossible. Sensing disaster in the eyes of his men, and realizing that this was a test of his leadership, the great Carthaginian general is said to have uttered those words that small business owners say to themselves, and their people, every day: “We must either find a way – or make one.”

Write this on a rock … Like rabbits and generals, small business owners GOTTA make it with a combination of grit and fundamentals.

Four things you must know before buying a franchise

Over the years, I’ve met many people who want desperately to own a business, but 1) just don’t know what it should be; or 2) lack the entrepreneurial vision and/or desire to start a business from scratch.

Enter one of the great inventions America has given to the world: the franchise.

Purchasing and operating a franchise is entrepreneurial coloring inside of the lines.If you don’t have a problem playing in a sandbox someone else built, a franchise may be just the ticket for you.

The franchise universe is broad and diverse, with arguably thousands of options, which is both good and bad news - so many choices begets lots of intimidation. But fortunately, the fundamentals you apply to conduct franchise acquisition research, regardless of the one you choose, are basically the same.In his excellent book, Franchising and Licensing, my friend Andrew Sherman identifies a number of key components in any relationship between a franchisor (the developer of the franchise), and a franchisee (the purchaser of the franchise). From Andrew’s list I’ve chosen what I think should be the first four to help you narrow your search, followed by my thoughts.

1. A Proven Prototype
When you lay money down for a franchise, the model must be proven to work, because you’ll have to replicate the product over and over. Indeed, the prime expectation of any customer seeking out a franchise product is that it’s a known quantity. McDonald’s may not have the best hamburger in the world, but whether you’re in Moscow or Moline, it’s supposed to taste just like the one you had in Meridian.

2. A Strong Management Team
When you buy a franchise, not only will you need to seek periodic advice and instructions from the franchisor’s staff, but you want to have confidence in that support. There should be virtually nothing you can ask that they haven’t experienced and anticipated. Here’s a tip: If you aren’t getting overwhelmed with support and answers when considering a particular franchise, don’t expect much more once they have your money. I’d move on.

3. Comprehensive Training Program
In order to make that “hamburger” look and taste just like the last one you delivered, you must be able to learn how to do it yourself and teach your people how. That training MUST come from the franchisor. They will demand that you follow their rules, so you have a right to demand the best training.

4. Sufficient Capitalization
Franchisors are just like all other businesses in that they must have the capital to: a) Grow - you want your franchisor to expand their footprint; b) Innovate - to continue to offer relevant products and services every year; and c) weather the inevitable marketplace storms. When they ask about your financial condition, tell them “I’ll show you mine, if you’ll show me yours.”

Before you buy a franchise, you must talk with two people: 1) Someone who’s operating a franchise like the one you’re considering - ask what it’s like doing business with your franchisor prospect; 2) Someone who’s failed with a franchise - ask what happened and what they wish they knew before they started.

Remember that while owning a franchise is operating a business based on someone else’s idea, it’s still running a business. Other than being a single parent, there is no harder job. If you don’t love working, if you don’t value sweat equity, if you don’t appreciate deferred gratification, if you don’t have a lot of energy, if you like to sleep late, or if you’re a whiner, don’t buy a franchise - or start any business. And if you aren’t good at coloring inside the lines, like me, don’t buy a franchise.

Finally, in addition to Andrew Sherman’s book mentioned earlier, I also recommend one by another friend, Joel Libava, Become a Franchise Owner.

Write this on a rock … Franchising isn’t for everyone, but it might be for you.

Eight questions and four fallacies about business growth

Giant sequoia redwood trees grow very tall. Bradford pear trees, not so much. It’s all in the genes.

But there’s no genetic code for a business. While a Bradford pear can’t decide to compete with a redwood, a business can become whatever its owner makes it. And that last fact creates two questions we go to sleep asking ourselves and wake up trying to answer:

1. Should I grow my business?
2. How big should I grow my business?

In his book, Warp Speed Growth, my friend and Brain Trust member, Peter Meyer, lists four fallacies of growth which every business owner should consider. Here they are, each followed by my comments.

Fallacy 1. You can grow out of organizational problems.

In a state of denial or ignorance, small business owners sometimes think getting bigger will fix management and organizational shortcomings. If a tree is bent, fertilizing it won’t make it grow straighter – only faster in the wrong direction. If you have organizational challenges, don’t grow until they’re resolved.

Fallacy 2. Growth equals profitability.

Yes, increased sales volume can help you improve vendor discounts and therefore, gross margins. But that doesn’t mean your organization can manage the extra activity well enough to convert discounts to the bottom line. One of the rudest awakenings an owner can have is when projected sales growth is achieved, but profit is no better, or perhaps worse, than a period of lower sales. Remember Blasingame’s Growth Razor: “It’s not what you make, it’s what you keep.”

Fallacy 3. Profitability improves when every customer is yours.

Being the market leader is overrated. Peter cites research showing only 29% of market leaders were also profit leaders. Not only are you not going to sell every customer, you don’t want every customer. Many customers, and some customer profiles, aren’t profitable. Remember, you don’t spend sales.

Fallacy 4. If you grow, customers will benefit.

Peter says focusing on growth is focusing on yourself. Every minute your company focuses on itself is a minute diverted away from focusing on the customer. One of the classic examples of a company’s self-absorbed focus on growth is when it uses the term “fastest growing” in marketing material, as if this benefited customers. What makes you think customers don’t like the size that you are? What makes you think they’ll like your next size?

Don’t get me wrong: I’m the last person to say growth is bad, or that you should be happy with the current size of your company. I’m a capitalist, and capitalists LOVE growth. But I do encourage you to make sure that when you grow, it’s because you’ve thought about why and how. Here are six growth reality checks, each followed by a slap-in-the-face question to ask yourself.

• The marketplace is pretty full already. Is there a real opportunity to grow?

• Growth requires capital. How will I fund the growth I am planning?

• The rewards of growth are typically delayed. Can my organization wait that long for the payoff?

• Growth takes a company into unfamiliar operational territory. Do I have the staff and systems to blaze that trail without creating a casualty list?

• Being a business owner should be a source of happiness. Will I be happy with a larger business?

• Every business has corporate values, good or not so much. If our values are good, can we scale them? If they aren’t, why would we scale them?

Ask the growth questions and answer them as Polonius instructed Laetres in Shakespeare’s Hamlet: “This above all, to thine own self be true.”

Write this on a rock … Just because you can grow your business doesn’t mean you should.

How to connect with global prospects – and get paid

In case you haven’t heard, the seven billionth Earthling was born recently.

For the global marketplace, seven billion prospects is exciting. But 96% of those folks live outside the U.S.

Once, small business growth meant expanding across town or the next county over. But new technologies and demographic shifts have made expanding outside America’s four walls increasingly compelling. It’s also produced three elemental global business questions: Who are my prospects, how do I connect with them, and how do I get paid? Let’s focus on the “Who” first, with these global stats from National Geographic, plus my editorializing.

  • Nineteen percent of Earthlings are Chinese, 17% are Indian and 4% are American. By 2030, the first two will invert.
  • In a historical shift, just over half of Earthlings are now urbanites. Remember, city folk use different stuff than their country cousins.
  • Globally 40% of us work in services, 38% in agriculture and 22% in industry. This means different things to different industries, but it means something to all businesses.
  • English is the international language of business, but is the first language of only 5% of global prospects. When doing business outside the U.S., be culturally sensitive and patient with the translation process.
  • Breaking news: 82% of your global prospects are literate. If you can read and write you can improve your life, which explains the growth of the middle class in emerging markets. A growing global middle class means millions of new, affluent consumers each year.
  • Computers are luxuries for most Earthlings, but mobile networks are exploding across the globe. Soon billions who never owned a computer or used the Internet will do both with a smart phone. What does your mobile strategy look like?
  • For American small businesses, export opportunities abound in our own hemisphere without crossing an ocean, especially Canada, Mexico, Panama, Columbia and Chile, where trade agreements are in place. But keep an eye on the Trump trade tactics, part of which may manifest in tax reform.

The good news is there are two government agencies standing by to answer questions about your export strategy. Each one provides digital information, human assistance and global networks designed to help a small business maximize its opportunity to create and execute a successful export strategy.

U.S. Commercial Services

The, “How do I connect with global prospect?” question can be answered by this agency, and it should be your first stop for education on finding and converting global prospects into customers. It’s a virtual one-stop shop for developing and executing your export strategy: a great website (Export.gov); a toll-free number (800-872-8723) answered by a real person; over 100 offices around the U.S., plus dozens more around the globe you can walk right into and ask for help; and their book, “A Basic Guide to Exporting,” which includes an excellent tutorial and several case studies. It’s all free except for the book and any direct expenses they incur on your behalf.

Export-Import Bank

This is where you get the “How do I get paid?” answer. Part of the U.S. government, Ex-Im Bank (exim.gov) will assist with the financial elements of your export sale. They’ll coordinate with the banks on both sides of the transaction to transfer funds, provide loan guarantees, and even pre-delivery working capital for you and post-delivery financing for your customer.

For generations, big firms owned the franchise on global business. But shifts in technology and demographics are making the global marketplace more compelling and feasible for small businesses. And for all the government agencies that gets in our way, these two will actually help you.

Write this on a rock … The global marketplace – and 7 billion prospects – are waiting for you.

Four new marketplace truths every small business must know

What is our value proposition?

For 10,000 years, during a period I call the Age of the Seller, answering this question was the focus of every business as it went to market. Indeed, customers refined their search for products and services down to the semi-finalist sellers based almost entirely on components of the classic competitive value proposition: price, product, availability, service, etc.

But then something happened.

The Age of the Seller was subducted by The Age of the Customer. In this new era, where value is now presumed, the prime differentiator is no longer competitiveness, but rather relevance. Today the question every business must focus on when they go to market is: What is our relevance proposition?

So does this mean sellers no longer have to be competitive? Not at all—no one will pay you more than they should. But consider four new marketplace truths:

  1. With value now presumed, customers expect to find what they want, at a price they’re willing to pay, from dozens of sellers.
  2. They don’t care if they do business on Main Street or cyber-street.
  3. Prospects are self-qualifying themselves and pre-qualifying a business based on relevance to them before a competitive position has even been established.
  4. Prospects are doing all of this before you even know they exist.

That last point is perhaps the most breathtakingly disruptive development in the shift to the new Age. As this shift plays out, two types of sellers—Hidebound and Visionary—currently exist in parallel universes, but not for long. Which one are you?

Hidebound Sellers
These companies are so invested and entrenched in the old order of control that they deny the reality in front of them. They can be identified by the following markers:

Misplaced frustration: As performance goals get harder to accomplish, frustration makes those who deny the new realities think their pain is caused by a failure to execute.

• Bad strategies: It’s said that armies prepare for the next war by training for the last one. So it is with Hidebound Sellers. While Age of the Customer pressure makes them think they’re being attacked, they persist in using Age of the Seller countermeasures.

• Destructive pressure: Convinced of execution failure, pressure brought to bear by management results in an employee casualty list and a shrinking customer list.

• Equity erosion: Defiance in the face of overwhelming evidence sustains the deniers until they run out of Customers with old expectations, and their equity and access to credit are depleted.

Visionary Sellers
These sellers are adjusting their plans to conform to the new reality of customers having more control. Visionary Sellers are identified by these markers:

• Acceptance: They accept that customers have new expectations about control and make adjustments to this reality.

• Modern sales force: They hire and train their sales force to serve increasingly informed and empowered customers.

• Technology adoption: They offer technology options that allow customers to find, connect, and do business using their expectations and preferences.

• Relevance over competitiveness: They recognize that while being competitive is still important, it’s been replaced in customer priority by the new coin of the realm: relevance.

• Special sauce: They combine and deliver high touch customization with high tech capability.

In The Age of the Customer, Hidebound Sellers are dinosaurs waiting for extinction. Visionary Sellers are finding success by orienting operations and strategies around a more informed and empowered customer seeking relevance first.

Write this on a rock … What’s the verdict? Are you Hidebound or Visionary?




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