Strategic Leadership

Business Model Blunder or Net Flame-Out?

A series of Wall Street “Coke Moments”  has Netflix CEO  Reed Hastings showcasing his ongoing 20/20 hindsight .

After a market maneuver that forced them to reacquire shares at premium rates and a now text book classic botched attempt to re-engineer the company, Netflix was then forced to sell shares at a deep discount to shore up cash holdings.

The company is burning through cash at a time that his vendors and content owners are demanding exorbitant prices and many are getting ready to launch streaming services of their own.

Net result – management miscalculations have reportedly managed to destroy 2/3 of the company’s value in 3 months. Do all the king’s horses and all the king’s men even have a shot here?

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How To Run A Business Effectively

Fighter pilots will tell you that at high speed and altitude, it is actually quite easy to wind up flying upside down unless you have gauges to tell you what you are actually doing. Driving your business is no different.  Watching the numbers is not quite the adrenaline rush that the daily gunfight brings but in these uncertain times, it has to be a critical part of your business strategy and business growth plan! So what is the best way to start and run a business or simply to grow a business?

 

Best Business Practices

Like a car’s instrument panel, data presented in simplified graphic form is easier to evaluate than pages of financial statements.  Many large businesses view this as one of the key Best Business Practices.  As accounting systems become more accessible, an increasing number of small business CEO’s are adopting the approach of using a dashboard representing Key Performance Indicators (KPI’s) to manage their business.  This is also a great tool to present at a business round table, advisory board meeting or mastermind group since a consistent format will allow your group to quickly understand your situation and help you to make better decisions though giving you good business advice.

 

KPI’s sound grand and intimidating but these are simply aspects of your business that are critical and are best kept in plain sight.  For instance a plane has a fuel gauge where a business could have a gauge showing how full of prospects or contracts the sales pipeline is.  The implication is the same if either runs out.  Just knowing where you are and what the reading should be tells us a lot.

 

Cash flow sinks more small businesses than any other factor. For many businesses the balance is simple – track income vs. expenses, so why not track them on a dashboard?  A big part of what I do in my executive coaching sessions and the CEO groups is to push to develop these (and other) measures as KPI’s.  Putting them on a dashboard pulls all of this together and gives a great overall perspective in an instant.

 

Most CEO’s view KPI’s as relating to the current business’ operation and management information as being defined by their financial statements.  Since most of this information is retrospective, this is like trying drive a car at high speed using only the rear view mirror.  Truth is that like adding a GPS to the instruments, effective KPI’s are necessary for effective ongoing business growth and development through consistently realizing your strategic plans.

 

Business Growth

Knowing how your business is performing is fine, but knowing how it is likely to perform in the coming months or quarter is far more powerful.  Best business practices are therefore to develop some forward looking KPI’s that will give you the best possible visibility on trends that influence your business and that will raise all the right flags in good time to allow you to make the necessary adjustments instead of most small business CEO’s standard response – “What The Heck Was That?!”

 

Sales pipeline is what most CEO’s feel constitutes best practices.  And that does give some visibility but few businesses I know can really get a clear vision of more than 2-4 weeks ahead.  That is indeed a very foggy windshield, which in a volatile environment is nullified by the lag on the biggest part of your information system, so at best it really does nothing more than tell you what you already know. So you really do need to find a couple of leading indicators that you can track which will give you visibility on your likely market trends. Resolving your data into market segments also tells and interesting story.

 

Executive Coaching

A statement I get all the time from CEO’s is “That is great – BUT this does not work in my industry!”  And my reply is – that is most certainly does, but like anything worth having, you have to broaden your mind and work at it.  For instance cement sales are a good leading indicator of how the construction industry is tracking and I have seen it used as a KPI for a steel based prefabricated building company.  It may not be exact but if the correlation is good, it can (and is) be used quite effectively to track trends in just about any building related product market.  Often you can use a counter-cyclic trend or one that has a reliable lead/lag relationship like that between the commercial and residential property market.

 

You just have to be creative and seek things that run in parallel to your market.  For instance how many people would like to know what mortgage rates are going to do over the next couple of years?  If you look at the 30 year bond rate, it moves lockstep with mortgage rates. Since 30 year bond rate forecasts are quite easy to come by – there is a quick and dirty answer right there.

 

As far as real time KPI’s since we are the boss, we can have some fun and simply make KPI’s up and nobody has anything to say about it.  For instance I have a client whose business involves multiple deliveries of varying sizes. To measure the relative (cost and time) effectiveness of his drivers on various routes we tried tracking miles driven per revenue dollar delivered.  This effectively combined the sales order value with a productivity measure and related it to the variable cost base (mileage).  This showed up some really interesting trends.

 

The main thing here is not to rely on any one indicator and to work to find KPI’s that you can become confident is as giving a reliable indicator.  If you feel a KPI is simply not doing it for you, keep pushing to find something else that will!

 

Lastly in terms of leadership development, always remember that your job is actually to run the people that run the systems.  Delegate the compilation of the dashboard.  A big part of your job is to beware of becoming complacent and continually challenge the Status Quo (and data).

Mastermind Group

Something to think about: join a mastermind group.  CEO Groups bring an interesting dimension to managing a business.  However many CEO’s are not comfortable sharing their dashboard data with an open group. This is where being part of a professional CEO group or true peer group has the distinct advantage.  Members are in non-competing industries, are business owners like you, who are serious and interested to grow their businesses aggressively and most of all with whom you have developed a strong trust relationship.  Once they become familiar with you and your company, peer mentoring becomes a real force multiplier that can help you with your business growth and development.

How To Cope With Business Cycles

saleschart How To Cope With Business CyclesIt does not matter how customer or service oriented you are, any business owner will tell you that as much as you try to even flow things, some law of the universe seems to dictate that business always comes in spurts. Welcome to the roller coaster ride of being a business owner. There will be dips and there will be peaks and one thing is for sure, the ride will never be boring so take your Dramamine and hang on to your hat.

Ideally you should not have much idle capacity so you need to aim at setting your business up to run pretty smoothly at between 75 – 115% of target capacity. This is generally seen as an operations management challenge but actually this is a strategic planning and management issue first and foremost. The real aim is to try to level out the bumps before they happen through strategic sales and marketing planning. The ideal would be to construct a portfolio of products which would be at different stages of maturity and use the cash generated by the cash cows to subsidize the growth of the emerging products.

Unfortunately small businesses by their nature tend to focus on a narrower range of possibilities based on their technical competencies, so they tend to compete more fiercely within narrower markets and rarely have the luxury of being able to construct a product portfolio. What they can do however is to seek diversity within product markets which may take the edge off but any options here are most likely subject to the same cyclic influences. If you are having difficulty dealing with the cyclic nature of the markets, you need to examine every aspect of your business model to find a creative solution.

Your business model is simply a map of all of the processes and resources required by your business in order to market, sell, produce, deliver and get paid for, what you do. Not forgetting that the aim is to make a profit when all is said and done. By looking at your business model it will give you a clearer idea of your core competencies, which are the combinations of skills, resources and processes, that generate a sustainable competitive advantage. Look for unoccupied market spaces that might offer some relief.

Regardless of your efforts to smooth out the bumps, all businesses have to deal in varying degrees with seasonal variances. For many the summer is a problem. Business slows down and things get funky because customers are on vacation and also your staff want to take vacation time too so they are getting paid but you are losing income and their contribution to the workload. If you plan is simply to complain about the slow times then you will not get very far. Your business plan has to take account of the slow times too, as well as the busy ones and it is your job to make sure that it does and that you have the resources to work through.

Your P&L breaks down into fixed and variable costs. Highly geared businesses are ones where the fixed costs are high and variable costs low. The total cost line will be high but relatively shallow – which means profit margins are high but a small variance in volume results in a huge variation in profitability. Low gearing is where your variable costs are high and fixed costs are low. Profit margins are much smaller but far less sensitive to changes in volume. The trick then is to see how we can balance fixed and variable costs to get a good margin yet minimize gearing.

So here are some ideas to deal with the problem:

1. Manage your customers better. The ideal situation we see every day is the customer queue. Your local McDonalds has a finite capacity yet experiences a huge rush around mealtimes. The way they deal with this is to queue the customers. This is fine as long as you manage their expectations – just look at what they do at Disneyland.

2. Discounting is also a great way to attract customers into off peak times however don’t be fooled. Your business base may well be finite and while you may attract additional price sensitive customers, what you don’t want to do is suck your sales pipeline dry at marginal rates.

3. For most small businesses their staff comprises a major part of their costs. In theory, staff are a variable cost but in practice it rarely works out that way. Hourly paid staff will fill their time with whatever work they have. At least half of your staff have to be directly involved in production of your goods or service so how about piece rates. This makes their costs directly variable.

4. Make employees share the pain. Really this is a continuation of point 1 but if you are up front about the variation and pay accordingly, it is then up to them to ensure that they can endure the slow times. This is also an issue in a general slowdown. Your mandate is to make a profit and most small businesses simply cannot endure any sustained loss. Plus you never know what lies around the corner so you have to work on the information in front of you and the knowledge that reacting sooner than later is better. Unpaid time off is a good temporary solution but if you feel that the downturn will be sustained it is far better to lay people off and keep the remaining staff as best employed and paid as you can. Staff will put up with a lot of adversity if the quality of the job is good – so that has to be your aim too.

5. Creative PTO banking. Paid Time Off banking is a concept that is gaining traction around the country. Many larger companies are faced with the headache of having to reconcile all of the different state’s labor law’s. Arizona has substantially less prescriptive labor laws than say California. The golden rule is that if you are going to do something, it has to be applied uniformly across your workforce. I know of companies in Arizona that have been running PTO banks but there are lots of nuances so you should check with an HR professional before getting too far down this road.

6. Many companies take additional counter-cyclic work to balance the load. For instance, if you are a roofing company or landscaper with a strong field presence, but things slow down in the dry season. You might consider an additional complimentary product that is counter-cyclic like pest control, to even out the bumps. The danger is that you are diluting your brand and as good of an idea as this sounds, the trick will be to manage quality in the broader sense. So unless you are absolutely certain that you can do both extremely well, this is not always the best option. It may be worth launching it as a separate service and brand or to form an alliance with another company already occupying that space but have your crews do the work to keep them busy.

Bottom line is that there are some cyclical factors that you simply cannot influence or work around. They fall into two categories: Ones that are bigger than you and ones that you are bigger than them.

The choice is yours as to which one you will let it be.