Archive for the 'Management Fundamentals' Category

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 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?

Two reasons quality service can take you down

Successful customer service is the process of delivering value to customers in exchange for payment.

Surely this is the prime directive of any business. But that process isn’t truly successful unless the relationship can be sustained, and only quality produces sustainability.

But what kind of quality?

“Quality service” is a 20th century term that businesses use to declare a commitment to diligent customer support. But customers typically associate it with, and businesses too often tolerate it as promptly addressing a problem. Unfortunately, here’s what quality service often sounds like:

“We’re sorry we delivered the wrong size part. But we’re committed to quality service, so one of our trucks will be there in an hour with the correct part.”

It’s true. Sometimes quality service like that impresses the customer – and businesses even like to brag about delivering it. But while prompt attention is admirable, it’s not optimal because it has a negative impact on sustainability in at least two ways:

  1. The customer was inconvenienced by inaccurate service – you screwed up!
  2. Allowing an avoidable problem to occur is the worst kind of profit-eating inefficiency.

In the 21st century, successful small businesses have converted their problem-fixing “quality service” to the profitable and sustainable “quality process.”

Put simply, executing a quality process is serving customers correctly the first time. Accomplishing a quality process ranges from the very basic, accurate order filling, to the more complex, integrating into your operation only those vendors that share your quality process commitment. It shouldn’t be breaking news that your large business customers have been doing this for a couple of decades, to eliminate weak links in their supply chain.

The optimal goal of your quality process is sustainable customer relationships. That means 1) you did it right the first time; and 2) you made a profit and didn’t squander any of it on mistakes. Such sustainability is in evidence when customers return to find your profitable business still there, ready to serve them again with your quality process.

So why would anyone live with profit-eating quality service instead of managing with a quality process? Because cash is a drama queen and profit isn’t.

Delivering quality service is practiced by crisis managers. The crisis comes when you could lose a sale – possibly even a customer – because an order was filled incorrectly, creating a hit to your cash flow so quickly and dramatically that it takes your breath away: “OMG, get out there right now and fix this!”  Lots of drama for everyone.

Having a quality process is a commitment to profitability, requiring disciplined, long-view professional management. You’ll recognize it by the sound of no drama experienced by you or your customers … crickets.

Professional small business CEOs know that focusing on a quality process – doing it right the first time – takes a commitment to quality hiring, efficiency training, and a focus on what customers want, not just what they need. These practices produce sustained profitability and, in time, will eliminate your noisy cash flow drama.

Remember, the quality service you’ve been so proud of may seem admirable, but when delivered in response to something that was avoidable, it assaults profitability, threatens sustainability and ultimately will put you out of business.

Write this on a rock … Convert quality service into the more profitable – and sustainable – quality process.

Four letters from your big customers

Consider the ancient proverb: “Any chain is only as strong as its weakest link.” This is about four letters with this proverb in mind, sent to small businesses from their corporate customers – two that have been sent and two that will be.

1. Quality

The first letter was born in the 1950s, when the ideas of the godfather of the 20th century quality process, Edwards Deming, reversed “Made in Japan” from a metaphor for cheap into a mark of quality. During the 1980s, after American industrial competitiveness fell behind global competitors, quality processes like ISO and Six Sigma were adopted, returning “Made in America” to a mark of excellence.

By 1990, with their in-house quality act now together, big businesses realized they needed similar commitments from the small business vendors that had increasingly become more like integrated partners. As such, big business needed to know that the support from these partners would at least not diminish the quality expectations of their customers. Consequently, small businesses started receiving letters from those big customers requesting evidence of quality process practices, if not certification, without which there would be no continued, or new contracts.

2. Y2K

The seed for the second letter was planted by computer programmers in the 1960s. When these programmers wrote date codes with six digits, as in 121565, for December 15, 1965, they did so to conserve what was at the time very expensive data storage. However, they didn’t realize they were creating the literally ticking Y2K time bomb.

Around 1995, experts started worrying that when the clock ticked midnight, January 1, 2000, zillions of lines of date-sensitive computer calculations would fail by going back a century – 010100 would revert to January 1, 1900 – instead of rolling forward to 2000. Consequently, the codes in millions of programs had to be fixed. By 1998, small businesses started getting letters from their larger customers requesting evidence of their “Y2K compliance,” without which there would be no new contracts with eight-digit dates.

3. Sustainability

The third letter was born in the middle of the 20th century, when we started realizing that the solution to pollution was not dilution. Since then, environmental stewardship has evolved from not polluting to sustainability. That word – sustainability – essentially means doing more with less, and it includes making waste useful – especially water. It turns out that sustainability is not just the right thing to do. Since it’s been proven that it can also contribute to profitability and a positive corporate image, it’s become a 21st century business best practice.

You may not yet have received a sustainability commitment and practices letter from your corporate customers, but it’s coming. And because of that best practice thing, it will be irrespective of the current state of the geo-political climate change debate. So start thinking about resources usage, including energy, consumables, production waste – especially water. Start documenting your efforts, practices and performance in recycling, reusing, conserving, etc., so when a customer hands you their “Sustainability Letter,” you won’t have that “weak-link in the headlights” look.

4. Cyber-security

Does anyone need a review of the multiple and significant cyber-assaults that have been made on digital assets and records of American business and government in the past few years? Whether from cyber-criminals or cyber-spies, the threat is real, comprehensive, determined, unrelenting and, to date at least, very successful – for the bad guys.

Expect the Trump administration to push for increased cyber-defense measures for the government to an unprecedented degree. Because of the massive level of business that corporate America does with the federal government, a cyber-security partnership will logically be forged, as they collaborate on cyber-practices, expectations, tools, innovations, etc. This will be the most comprehensive commingling of efforts and shared goals by business and government since WWII. So expect your large customers to begin requiring cyber-security practices verification, either by a letter, or in the specifications of an RFP. Your corporate customers are not going to let you be their weak link.

Write this on a rock … Take a lesson from the Quality and Y2K letters. Set yourself up for success by taking action on sustainability and cyber-security. Do it now!

Sustained small business success requires two kinds of passion

Over the years, as I’ve talked with many a budding entrepreneur about to start their business, it continues to amaze me how many haven’t conducted anywhere close to a prudent amount of research or due diligence on their baby. Indeed, they often act as if they must get their business going … right … now … or … they … will … just … POP!
This kind of impatience is dangerous.
Doing my best to talk them down off the ledge, I walk the fine line of tough love, between slowing them down to the speed of reason and smacking their entrepreneurial passion into a wall.
When would-be small business owners get that far away look in their eyes at this impetuous stage, they have plenty of passion for what the business does. They can’t wait to sell suits, manufacture plastic parts, bake bagels, or (your baby here). And passion for what they want to do is not only a good thing, it’s essential.
But without a healthy interest in - if not an attraction for - business fundamentals, passion has only slightly more value than a dream. In truth, if the balance between your baby and operating fundamentals gets out of whack, that’s when your dream becomes your nightmare. Trust me. I’ve had to make payments on one or two of my nightmares, after the thrill was gone.
This will be on the test: Success as a small business owner requires two kinds of passion:
  1. The love of what you want to do - your baby. If you haven’t been a mother, this is akin to how a mother loves her newborn, and it’s the easy kind. Spoiler alert!  It’s too easy.
  2. This kind of small business passion is less adorable, but in no way less important. This is passion for becoming an operating professional. It makes you dedicated to learning and practicing management fundamentals. If done right, you’ll actually acquire a peaceful acceptance of a return-on-investment timeline that pushes the deferred gratification envelope beyond what you ever thought possible, let alone acceptable.
See, I told you it was less adorable. The closest kin to this kind of passion is that which is required for parents to love their teenagers - during those times when you don’t like them very much, but you still love them … anyway.
It’s critical for a starry-eyed startup to distinguish between, and be dedicated to both passions, because passion for what you sell won’t be enough when:
  • Payables exceed receivables
  • You’re making payroll and there isn’t enough cash because you didn’t manage the cash (”Is it Friday already?!”)
  • When customers are the most difficult
  • When an employee becomes part of the problem
  • When your bank loan request must have current financial statements, including a 12-month cash flow projection showing how the bank will be repaid
  • Your operating derailment here
Brace yourself! This list is like a “What’s inside!” teaser on the cover of a very thick catalog of abiding small business operating challenges. Fending them off will require you to deliver on the management fundamentals you became good at because you had that second kind of passion: you became a high-performing, professional business owner, not just someone who dreamed of being one. You were passionate about what you do, and just as passionate about how you do it.
Write this on a rock … Sustained business success - year after year - requires passion for what you do, AND for how you do it.

5 year-end steps to take while you’re closing out this year

Fourteen hundred and forty - the number of minutes in a day.

Since we can make more money, arguably the greatest challenge of any small business owner is balancing the demands of the forces that compete for those minutes.

“What is the best use of my time right now?” is the constant management question on Main Street. And in no other part of the year are we more time-management challenged than in December, when we’re faced with allocating time to two very powerful management imperatives: The tactical focus on closing out the sales year as strongly as possible, while simultaneously taking strategic steps to set the business up for a fast and clean start on January 1.

In his book, Blue Highways, William “Least Heat Moon” Trogden said his Osage Indian grandfather once told him, “Some things don’t have to be remembered, they remember themselves.” It’s a natural law that the year-end sales push doesn’t have to be remembered, it remembers itself. But as we come to the two-minute drill in the last quarter of the marketplace game our business plays all year, committing precious time and energy to preparing for the future requires the discipline to remember it ourselves.

There are many areas to focus on this month to help you start the New Year clean and fast.  Here are five to get you started.

1. Throw stuff away

Even if you’re not a pack rat like me, you’ve accumulated stuff you don’t use anymore.  For example, one of the markers of a 21st century office is the digital graveyard. Unused or broken computers, monitors, etc., may have some value, so call a tech recycler and convert it into cash. If you can’t sell it, give it away or throw it away, because it’s in your way.

2. Empower producers - cut the dead wood

Year-end is also a great time to take stock of employees who’ve demonstrated leadership and engagement. Recognizing the performance of those individuals will motivate them to a fast start in the New Year.

The only thing worse than firing someone is letting an unproductive employee hold your team’s performance hostage for another year. A byproduct of identifying those who perform is it also shines a light on those who don’t. You owe productive people the most effective organization possible, which means you have to let the unproductive pursue their careers elsewhere.

3. Classify customers

Classify customers by gross profit into four groups, from the most profitable As to the least profitable Ds. Worship the As, cater to the Bs, encourage the Cs and teach the Ds about self-service. When the cost of a customer’s expectations encroaches on your profit margin too much, allow them to join your unproductive employees - elsewhere.

4. Purge inventory

As with customers, take a new look at your products and inventory by identifying the most profitable As to the least profitable Ds. Stock all the As, a few of the Bs and maybe a couple of Cs. But never let a D spend one night under your roof unless it’s paid for. Remember, profitable inventory management means just-in-time, not just-in-case. And write off obsolete and damaged inventory. Take the hit now.

5. A/R reality

Take another hit by writing off uncollectable accounts receivables now, so you can start January with a clean list. A/R write-offs are tax deductions this year, and if you wind up collecting them next year, it’s gravy. The only thing more troubling to a banker than uncollected A/R is a customer who doesn’t have the discipline to deliver a clean balance sheet.

Each New Year deserves to have the maximum opportunity to be successful, so don’t saddle it with obsolescence, waste and bad decisions. By taking these steps - and others from your own list - you’ll prove to yourself, your team you’re your banker that you have the discipline to make the critical decisions for which successful managers are known.

Write this on a rock … Have the discipline to set up your New Year for a clean and fast start.




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