Wayne Wilson on Companies in Transition

Guess and guess again

One of the difficult tasks of management is identifying when a strategy needs to change. While managements use brainstorming and other techniques, which rely on the wisdom of crowds (the notion that two or more heads are better than one), in strategy development, they often fail to regularly re-assess the various underlying economic and market assumptions on which the strategy was based.

The assumptions underlying a strategy are guesses about what market and competitive conditions will be during the relevant period. Assumptions about current actual conditions can be improved through market and competitive research, but future conditions cannot be known in advance and therefore assumptions about them are in reality guesses.

Recent research, reported on by The Economist, suggests that the wisdom-of-crowds notion may also work at the individual level. The average of two guesses made by an individual at two different times was more accurate than either of their separate guesses, although not as accurate as the average of guesses made by multiple individuals. [i] Multiple people making multiple guesses over time might also improve the accuracy of their composite guesses.

How can owner/CEOs employ these concepts to improve their business performance?

• Conduct more frequent reviews of the key assumptions underlying strategies
• Expand the set of associates who participate in the development of key assumptions
• Document and average the arrays of estimates underlying key assumptions at each review and over time
• Adopt a rolling forecasting and strategy tweaking process versus the traditional fixed annual operating plan

The objective of this process is to detect likely market changes more quickly and accurately and therefore improve the organization’s ability to respond to those changes on a timely basis.

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[i] “[The research] suggests that the brain is constantly creating hypotheses about the world and checking them against reality.” The crowd within, The Economist, June 28, 2008, p. 89.

Innovate; don’t just renovate!

A recent news story about the renovation of Home Depot highlights the difference between renovation and innovation. While Home Depot’s stores probably could use some fixing up, no amount of renovation is likely to return Home Depot’s stock price to its former lofty heights.

The stock market loves accelerating growth stories, but when a retail concept reaches market saturation, it inevitably gives way to the next big thing and no amount of tweaking is likely to change that outcome.

Clearly distinguishing between renovation and true innovation may be critical to success for owner/CEOs of companies in transition.

Innovation involves:

• Radical change
• Creating something significantly new and different
• Dramatically reducing the cost of a product or service

Renovation is more about:

• Re-enforcing sagging structures,
• Face lifts, and
• Other cosmetic changes

A business can only capture value for its shareholders when it creates real value for its customers. Renovation may well improve market value marginally, but true value creation lies in innovation – meeting an unmet need or solving an old problem in a new and more elegant fashion.

Finding Opportunity in Economic Adversity

The old saying about stock market volatility creating opportunity reminds me of a story from one of my law firm clients. During a steady economy, he complained about the lack of revenue growth at his firm. I ask, “How can that be when times are reasonably good?” His response, “We make our money during times of boom and bust, and we struggle in the middle. Boom times generate lots of capital raising activity and bust times result in workout and bankruptcy work.”

Opportunity indeed abounds when times get tough. For market leaders, tough times enable you to:

• Focus on key customers and associates – they are critical to your current success and will be less likely to desert you when the economy booms again.
• Consolidate your position – every company over-extends a bit when times are good. Now is the time to trim weak performing operations and consolidate overhead spending. Companies that move quickly will be better positioned than competitors who delay taking action.
• Stake out new territory for future growth – calculated bets now could well disadvantage competitors later. Invest aggressively for the future.

For market laggards, the handwriting is on the wall:

• Streamline operations while there is still time – many market watchers are predicting an extended period of economic difficulty.
• Recognize reality by re-tooling your business model – for many businesses, there is an opportunity to better match your products and services to current market conditions.
• Look for greener pastures – as competitors react to a slowing economy, the number of market spaces with under served customers will increase. Re-position your business now for future success.

Carpe deum (seize the day).

The Perfect is the Enemy of the Possible

Most of us are living dichotomies. For example, earlier in my career, I was often criticized for being a perfectionist. And yet, a valued colleague when pressed to offer a critique of my management style commented, “you often settle for less than you want.”

In more recent years, I have become a firm proponent of the 80/20 rule as in 80% of your revenue comes from 20% of your customers. Personal effort works the same way: 80% of your success will often result from only 20% of the things you do.

When it comes to perfection, the 80/20 rule translates into the just good enough rule. Your performance need not be perfect; it just needs to be good enough to make the sale, win the account, or accomplish your goal. Use the balance of your time and energy to expand your awareness of the possibilities available to you.

A hundred years ago, even the very best buggy whip manufacturers went out of business with the advent of the automobile.

Business is a Balancing Act

The average life of a business is often quite short; I have seen estimates ranging from 5 to 8 years for small businesses up to 15 - 20 years for larger companies in the S&P 500. 100+-year-old companies like GE are clearly in the minority. Why is that?

Fast Strategy, a new book by Yves Doz and Mikko Kosonen, offers a few clues:

• Today’s clear vision may become tomorrow’s tunnel vision – Vision is useful, even essential, but it may turn out to be a mirage: appealing to the eye but not grounded in reality.
• Proven leaders may become overconfident and resistant to new ideas – Lost wars frequently result from generals fighting the last war, whereas the enemy is constantly testing your defenses looking for vulnerabilities.
• Strong customer relationships may blind you to a coming market upheaval – In the stock market, one of the best ways to ensure a poor portfolio performance is to buy last year’s top performing companies.
• Clear targets closely linked to compensation may inhibit cooperation – People are really good at doing what they are incented to do.
• Robust business systems and processes become inflexible – So-called enterprise resource planning (ERP) systems are a great example: industrial strength in scale and efficiency, but very difficult to modify.

Successful owner/CEOs pro actively apply Schumpeter’s [i] creative destruction to their own businesses. They do not wait for competitors or other market forces to up end their companies.

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[i] Joseph Schumpeter, Capitalism, Socialism and Democracy, Routledge, 2006.

What are your odds of success?

Would be entrepreneurs frequently fail because they:

• Lack experience in their chosen business

• Underestimate the time (and money) it will take to become successful

• Speculate rather than research what customers might want

• Compete head to head with industry veterans

Successful owner/CEOs on the other hand:

• Play to their own strengths

• Carefully weigh the risks and calculate the costs

• Study their markets relentlessly

• Look for niches, which they can dominate

If you don’t like your odds, change your formula.

Copying Kinko’s

Stories about entrepreneurs overcoming great obstacles to achieve success offer useful role models as well as hope that you too may become successful. Paul Orfalea’s recent book [i] about the building of Kinko’s is a testament to the power of such stories.

Orfalea’s lessons could boost the fortunes of most owner/CEOs. They include:

1. Take care of your people – happy employees are more likely to produce satisfied customers. While Orfalea talks up employee benefit packages, other factors (flexibility, autonomy, incentive pay, etc.) may be more important to the success of your business. Figure out what your employees want and give it to them!
2. Don’t take yourself too seriously – this is a key corollary of lesson number 1. Businesses rarely succeed because of the efforts of one person. Success usually requires a team. Younger people especially shy away from stuffy or controlling environments. You as the owner/CEO must provide vision and direction, but don’t get carried away.
3. Make do with what you have – few people have all of the skills or resources necessary for success. But everyone has some unique talent or attribute on which to build or some handicap, which leads to outsized effort. Orfalea’s was hyperactive dyslexia. In a fight, you pick up whatever weapon (stick, rock, etc) is available. Business is no different.
   

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[i] Paul Orfalea, Copy This! Workman Publishing Company, 2007.

“Never mistake a clear view for a short distance.”

– Paul Saffo

Vision is a wonderful thing. It gives us purpose and life meaning. We are enthralled and energized by it. Which is fortunate because the path down the hill, through the valley and up the mountain to our goal is often winding, hidden, and sometimes treacherous.

Business transitions suffer from the same maladies. Things always seem to take twice as long and cost twice as much as you had thought they would.

Owner/CEOs of companies in transition can improve their odds of success by:

• Planning for extended delays

• Conserving cash or raising extra funding

• Practicing patience

Effective action requires a sense of urgency, but the results only come with patience.

Planning for Profitable Growth – How do you make it all happen?

The final key to profitable growth is execution – making it all happen.[i] According to an old saying, inspiration (figuring out what to do) is 5% of success, and execution (doing the work) is the remaining 95%. To those two, I would add leadership and teamwork.

Effective business plan execution requires that the owner/CEO:

1. Engage the entire organization in the campaign,
2. Lead from the front, and
3. Hold everyone accountable for goals and actions plans.

Here are a few examples:

• A large data storage company is renowned for its get it done, make the numbers sales culture. No one from the CEO to the local sales reps lets up until the goal is achieved. Consequently, the company has grown into a multi-billion dollar enterprise.

• The owner of a mid-range computer systems dealer personally led the company’s sales team, weighing in with key customers and vendors to ensure that deals got done. The sales team functioned with the focus and frenzy of a brokerage house trading desk. The ultimate prize was the sale of the company to a larger dealer for over $24 million.

• The top sales representative for a large distributor was completely dedicated to her customers 24 hours a day, seven days a week. No customer problem was too small: calls were handled quickly, proposals rendered creatively, and nothing was left to chance when coordinating the work of other departments. As a result, her team generated many millions of dollars in sales, which were a multiple of the next highest producer.

In business as in football, nothing else matters if you cannot push the ball over the goal line.

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[i] This is the seventh and final article in a series illustrating techniques used in planning for profitable growth.

Planning for Profitable Growth - How will your people know what to do?

Once you have defined your mission, vision, strategies, goals and action plans, an integrated communications plan becomes the glue binding everything together.[i] Bringing your entire organization into the process allows everyone to share in the responsibility for your success.

A well-designed communications plan can be simple or complex depending on the needs of your organization. The plan should:

1. Include everyone in the organization 
2. Assign someone responsibility for each group, department or constituency
3. Identify the themes, concerns and likely questions to be addressed
4. Define the methods to be used (letters, emails, meetings, etc) and time lines

Here are a few examples:

• An information technology services company used email announcements, followed by a company-wide meeting to announce a new strategic direction and related management re-organization. The themes from that meeting were re-emphasized in subsequent departmental gatherings.

• As a chief operating officer, I used regular open forum appearances before departmental gatherings to answer employee and managerial questions about the company’s performance, strategy and direction. The Q&A format is a great way to get feedback while focusing directly on associates’ concerns.

• A medical devices company used an external public relations consultant to choreograph internal and external communications for a major merger announcement. The internal action plan addressed management organization, strategy, and other personnel-related matters necessary to keep associates focused on customers.

Constant communication improves your ability to work as one team.

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[i] This is the sixth article in a series illustrating techniques used in planning for profitable growth.

Planning for Profitable Growth – How do you organize the work?

Driving profitable growth requires continuous, concerted effort on the part of everyone in your organization. And everyone must share in the responsibility to ensure that all necessary tasks are carried out.[i] New initiatives especially require focused effort. Action plans can provide that focus.

Action plans should:

1. Identify specific objectives to be accomplished 
2. Identify the person(s) responsible for each objective 
3. Set target dates for achievement
4. Define required activities and resources

Here are a few examples:

• A technology reseller identified its top five vendor relationships, assigned a senior manager as the key person responsible for each relationship, and then developed separate action plans to grow their business with each vendor. The vendor targets included sales and profitability goals, which were shared with and reconciled to the vendors’ own targets.

• A professional services firm decided to expand its practice in several specific industries. The firm appointed national practice leaders to lead strategic marketing groups composed of existing senior practitioners in each industry. Each group developed an action plan identifying prospective clients, preparing maps of existing relationships and likely business needs for each target client, and launching communication and relationship building activities (seminars, newsletters, etc.) which would highlight the firm’s ability to help solve the target clients’ problems.

• A life sciences company needed to upgrade the talent pool from which new associates were being hired. The company developed an action plan to hire two top tier graduates from each of several area business schools. The head of human resources owned the overall plan with another senior manager assigned to each school. The action plan addressed faculty relationship building, company advantages, time lines and required resources.

Action Plans become the paths leading to your success.

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[i] This is the fifth article in a series illustrating techniques used in planning for profitable growth.

Planning for Profitable Growth – What will your success look like?

Goal setting and measurement provide accountability for your mission and vision. Goals help you to visualize what your success will look like as well as providing signposts along the way.[i]

The best goals are:

1. Relevant to your mission and vision
2. Achievable with effort
3. Measurable

Here are a few examples:

• A retail distributor energized its management team by setting and pursuing goals to match the quarterly and annual sales growth rates of its largest competitor. Achievement of the goals led to a successful initial public offering (IPO) of the company’s stock.

• An information technology professional services company expanded its market share by establishing specific sales goals for a new product line supported with resource allocations and targeted bonus plans.

• The vice president of a distribution center reduced lost time accidents and improved labor productivity by setting specific targets for improvement and reinforcing them with group incentive bonus opportunities. As targets were reached, the staff celebrated with progress meetings at which bonus payments were distributed.

Goals are like torches in the dark – they light the way.

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[i] This is the fourth article in a series illustrating techniques used in planning for profitable growth.

Planning for Profitable Growth – What is Your Path to Success?

Once you know where you are and where you want to go, you can get down to the business of trip planning. In business planning language, we call trip planning developing a strategy.[i] A business strategy is nothing more than the broad plan of action by which you expect to accomplish your goals.

To be effective, a strategy must:

1. Be relevant to your goals – executing the strategy should move you toward your goals.
2. Be affordable and executable with current or available resources – a great strategy that your business cannot execute is worthless.
3. Be defensible – if competitors can quickly copy or otherwise trump your strategy, you will not likely make much headway.

Here are a few strategy success stories:

• A technology reseller implemented a rapid delivery strategy by moving its distribution center to the operations hub of its principal shipper. While competitors eventually copied the strategy, the company was the first and only overnight delivery supplier for several years.

• A professional services firm became the premier provider of merger & acquisition services to several early private equity firms by dedicating a team of specialists to each of a few key clients. Whether there was a deal in process or not, each team was assigned solely to its client. When a deal arose, the dedicated team marshaled the necessary resources from throughout the firm to turn on a dime and deliver its services in rapid fashion.

• A medical devices company gained a dominant two-thirds market share for a diagnostic test by developing a best in class product, which virtually displaced existing competitors and limited the success of new entrants to the market.

First, find the path and then move out quickly to seize the advantage.

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[i] This is the third article in a series illustrating techniques used in planning for profitable growth.

Planning for Profitable Growth – Who are you and What are you trying to accomplish?

Rather than mission and vision, let’s talk about what you want to be when you grow up.[i] The key questions to consider here are:

 

1. What does or can your business do to make a difference in the lives or success of your customers?
2. What will your success look like if you can satisfy those customers needs and wants?

Here are a few examples.

• A technology reseller had grown by selling boxes and billing hours. But hardware margins alone no longer supported the business and billing hours required hiring more expensive staff. The new strategy involved delivering integrated technology solutions. Customers were crying for help and customized solutions effectively reduced competition.

• A professional services firm had long relied on delivering compliance services but increasing price competition was eroding margins. The firm shifted its marketing and service delivery focus to helping clients solve pressing operational problems resulting in more relationship driven new work at higher rates with little or no competition.

• A regional architectural services firm narrowed its focus to designing and building health care facilities and became the go to specialist in its market, thereby accelerating its revenue growth and improving its profitability while limiting its exposure to the more volatile commercial office market.

Mission drives the business. Vision lights the way.

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[i] This is the second article in a series illustrating techniques used in planning for profitable growth.

Planning for Profitable Growth – Do you know where you are Right Now?

Any journey must begin from where you currently are Right Now. Yet, many owner/CEOs struggling with business transformations frequently fail to really understand their current situation.[i]

The first step in any transition is a proper and realistic assessment of your current situation. Here are some examples of poor assessments.

• The new president of a software company believed that the path to success lay in the company becoming a systems integrator. But the company lacked the staffing and resources to take on such project work. The company’s roots, skills and reputation were in developing innovative software, which was then sold through value-added resellers (VARs).

• A sales-driven technology company saw higher profit margins in services but struggled to make money. The senior managers lacked experience in project or program management, which is essential to successfully completing complex projects.

• A real estate developer building retirement communities was cash flow negative while owing income taxes on its sales. Management did not understand the cash flow and tax implications of using land leases to keep unit prices competitive.

If you don’t know where you are, you won’t get to where you want to go.

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[i] This is the first in a series of articles illustrating techniques used in planning for profitable growth.

Do you have enough players on your team?

“We’ve got enough football players to compete. If you can compete, you can win.” – David Cutcliffe

Businesses are in a war for talent. Our economy continues its shift from manufacturing and making things to knowledge-based businesses, which in turn rely on highly skilled and well-educated employees and associates. They provide the value.

Owner/CEOs seeking to drive new revenue growth must bring new and additional players on to the team. This requires that:

• Recruiting for new talent must be continuous – the best hires come opportunistically, not just because you have a slot to fill.

• Look for flashes of brilliance and desire – you need smart people but they must also be hungry for success.

• Winning will come through consistent execution – Be there when your competitors stumble while never allowing them inside your own customers’ doors.

Avoiding recession slump the IBM way

Every owner/CEO wishes he/she had IBM’s problems.

In the face of mounting recession pressures, IBM this week reported strong first quarter profit growth and raised its earnings forecast for the balance of the year. According to IBM CEO Palmisano, the company has several advantages operating in its favor:

1. Global reach and scale
2. Strength in profitable growth segments
3. Strong recurring revenue and profit streams
4. Products and services that create real value for clients
5. Discipline, financial strength, and flexibility to adjust its business model, as conditions require

While global reach and scale may not be possible for most middle market companies, growth segments, recurring revenue, products that create value, and discipline and financial strength represent value creating strategies for businesses of any size.

Planning for Profitable Growth

The April issue of our periodic email newsletter to clients and friends has been posted to our website at Companies in Transition - April 2008. The theme of this issue is planning for profitable growth and includes the following articles:

• 7 Keys to Planning for Profitable Growth - The business planning process is really about clearly defining who you are, what you want to do or accomplish, how you’re going to do it and by when, and with what result. It’s a process of asking yourself and your management team a few simple questions; thinking about, researching and agreeing on a set of answers; and then getting on with whatever those answers suggest you should do. Remember the old saying, “If you fail to plan, you are planning to fail.”

• Do you have too many good ideas? - In the rush to create new products and services, solve problems, and improve operations, companies sometimes create too many good ideas. How can that be?! 

• Crafting Effective Manager Compensation Plans - Many owner/CEOs struggle to develop effective managerial employee compensation programs that don't also break the bank. Here are some thoughts.

Later this week, we will begin a series illustrating through case examples some of the keys to planning for profitable growth.

Enter your email address to receive future issues of our Email Newsletter

Recession drumbeat continues, but the sun still shines

The WSJ’s Real Time Economics blog reported yesterday that “Leaders at the nation’s top companies have flat business expectations over the next six months, [according to] the latest quarterly Business Roundtable CEO outlook survey…. The index reflects sales, capital expenditures, and employment estimates for the next six months.”

While more talk of recession can become a self-fulfilling prophecy as businesses and individuals pull in spending and expansion plans, most owner/CEOs cannot afford to be the only one left standing without a chair if and when the music stops. On the other hand economic volatility and downdrafts create opportunities.

Here is my two-part formula for business success during turbulent times:

1. Always run your business prudently conservative – sails trimmed, skirts tucked, cash in the bank.
2. Be ready to pounce when opportunity presents itself. Then move ahead as others flail about.

Following this formula will not often produce moon-shot windfall profits, but it will help you dramatically reduce the chances of flaming out or going bankrupt.

The economic environment will be tough for a while

The public hand ringing of politicians anxious for a quick end to our current economic difficulties may be unrealistic. Like physical objects obeying Newton’s law of inertia, economic forces set in motion tend to stay in motion unless acted upon by equal or greater counterbalancing forces. Interest rate cuts and government spending are not likely to be a match for the forces roiling the economy today.

The only real cure for a severe debt hangover is abstinence and the passage of time, and we have yet to embrace either one. What are the implications for owner/CEOs?

The fundamental economic assumptions underlying many business models and plans need to be re-thought. Every business plan is predicated on some explicit or implicit outlook about the economic and market environment. In a period of prolonged economic stability, business owners and planners start to assume that such stability is the natural order of things and it may well be – for a while. Then things change – often very quickly.

The technology industry run up to Y2K is a good example. In the late 1990’s, many people thought that computer technology sales would boom forever. Then, in the fourth quarter of 2000, the sales run rate fell off a cliff, and it has yet to recover. I doubt that it ever will.

And here is a current example. Need I say more?

Greenspan: We’re in a recession.

The former Fed chairman was interviewed on CNBC earlier today. “We’re in the throes of a recession,” he said. For owner/CEOs and other entrepreneurs, economic volatility and change create opportunity as well as risk and pain.

Look for opportunities to:

• Help customers and suppliers – partners during tough times will be remembered later

• Take advantage of competitor weakness and other difficulties – these are classic times for re-ordering markets

• Strengthen your own operations – trim the sails and squeeze out excess costs

Be wary of:

• Slow-paying or difficult customers

• Taking on more debt than absolutely necessary

• Expanding operations without a clear path to profitability

Opportunity is where you find it!

Is it midnight yet in the credit crisis?

I am reminded of the old line and song title the darkest hour is just before dawn, and wonder whether we have even reached midnight in the credit crisis. The signs are not good:

• Additional mortgage-backed securities write-downs appear imminent

• Analysts are reducing earnings estimates for banks and other financial institutions

• The tidal wave of home mortgage delinquencies and foreclosures is building with no crest in sight

For business owner/CEOs, financial prudence would seem to be the order of the day – leverage from borrowed money is not your friend. While banking relationships are critical for any growing middle market company, think seriously about:

• Whether you could operate with lower or no debt

• Whether your business partners (suppliers and customers) can provide financial support

• Whether you could reduce the scale of your business quickly if borrowed funds were not available

Now is the time to financially stress test your business model in case the credit crunch becomes much worse.

If only you believe…

Today’s posting by ACG-Boston’s Gail Long on TheDealMaker.org (We’re Off to See the Wizard) reminds us how important belief is to confidence and confidence is to success. The current crisis in the credit markets is largely a crisis of confidence. Market players have plenty of liquidity; they just do not know whom to trust and are therefore hesitant to take any actions which might be at all risky until two things happen:

• Risk exposures become more transparent – which actions and counterparties truly represent high risks and which do not, and

• Investment pricing includes appropriate premiums for the real underlying risks.

What are the implications for owner/CEOs of companies in transition?

• We are in the midst of an historic credit market reset - Credit availability and credit pricing will be unfavorable to borrowers for a long time to come.

• Bankers’ three Cs of lending (credit, character, and collateral) will re-assert their dominance of middle-market lending.

• Your personal and professional credibility with lenders has never been more important – promise only what you can deliver; always deliver what you promise; and always tell your lenders the whole truth – the good, the bad, and the ugly.

What to do when your banker slams the door

When your bank tells you to go somewhere else, they may give you time to find another bank. Or they may not – they may simply slam the door by calling your loan. Now what?

Don’t wait for the door to slam – start getting ready now. Bank loan officers are often not very good negotiators – they are sales people. When the word comes from bank senior management to pull in their horns, your loan officer may become a chameleon or they may turn your loan over to the work out group. Neither outcome is in you interest.

Get some help – negotiating with bankers under difficult circumstances requires specialized help. You need assistance from someone who knows what bankers do better than they do – hire a work-out specialist before you become a work out.

Here are some success stories:

• Heavy equipment dealer – the business was well run with a strong finance team. When the bank said “go somewhere else,” the CFO quickly approached another bank that liked the business and took over the loan.

• Retail distributor – the company had its first money losing quarter and almost panicked. A work out consultant helped management prepare a revised business plan with financial projections which bought management time to address the problem.

• Nursing home operator – the owner had over-leveraged the business with outside purchases of real estate. When the company’s loan wound up in the work out unit of a failed bank, a work-out consultant was able to negotiate a restructuring of the loan which enabled the owner to keep the business while shedding the outside real estate.

What to do when your banker says it’s time for you to leave

Banks are often fickle. During the last big recession / credit crunch in the early 1990’s, several large regional banks politely, or not so politely, told many long-time middle market companies to “go somewhere else.” Some of these companies were struggling but others simply happened to be in businesses which the banks no longer wished to lend to. Go figure.

Finding a new bank was very difficult for many of these companies. For some it was impossible. Bankers are generally risk averse – no banker wants to take on another bank’s problems. What to do?

• Trim the sails now – start with the operational actions suggested in yesterday’s post.

• Request additional credit from suppliers – they still need your business.

• Look for bankers who favor your industry – banks that specialize in your industry will be more likely to stay the course in turbulent times.

• Don’t wait for the call – continuously develop relationships with other prospective bankers.

• Consult with a work-out specialist before you need one – they are experts at negotiating with banks.

Above all, maintain a tight rein over your own operations to reduce your dependence on bank borrowings, as well as to strengthen your position should your banker call with unpleasant news.

Surviving the coming credit crunch

A full-fledged credit crunch appears to be on the way in 2008. Housing and mortgage securities related losses are causing a broad tightening of credit wariness among the large Wall Street and commercial banks. It’s just a matter of time before the crunch is felt on Main Street.

Now is the time for all owner/CEOs to get their houses in order:

• Tighten up receivables collections – if the money is in your customers’ pockets, it’s not in yours.

• Trim inventories – if it’s not moving, send it back or dump it.

• Squeeze out non-essential spending – conserve cash wherever possible.

• Review the terms of your borrowing agreements and your company’s performance against those terms – those companies not in compliance with their bank loans will likely be the first to feel the squeeze.

• Hug your bankers, frequently – by that, I mean communicate pro-actively. Keep your bankers abreast of all developments in your business including the good, the bad, and the ugly. Let them hear it from you first.

• Make the tough decisions about operations and personnel now - don’t wait; it will only be more difficult later.

Building companies is a good thing

Amidst the on-going grinding of this year’s credit crunch, an article in today’s Wall Street Journal about Jamie Dimon (CEO of J.P. Morgan Chase) quoted him on his management philosophy:

“Our job is to build a company, build it relentlessly, build it over time, [and] the stock will do fine and take care of itself.”

Dimon’s statement represents the essence of value creation for all owner/CEOs:

• Value creation results from building something that will last.

• Value creation comes from fierce dedication and lots of hard work.

• Value creation requires time and patience; it doesn’t happen overnight.

• Value creation will eventually be rewarded by the marketplace.

But that value can only be created if what you do creates value for your customers. The real question for owner/CEOs is whether you are focused on businesses which truly add value for your customers. If you are, keep rowing. If not, maybe you should look for another row boat.

Are your revenue targets realistic?

Many companies and their CEOs today are experiencing relentless pressure to grow their revenues. Public companies must meet quarter to quarter earnings guidance, and the owner/CEOs of private companies often worry about whether their businesses are growing fast enough to attract the selling-out valuations they desire.

Personally, I am a big believer in big goals, audacious goals, and even big hairy audacious goals. Big goals cause us to think bigger, to stretch ourselves, to constantly work to improve our performance. Regardless of whether we actually achieve a specific goal, people tend to achieve more than they would have had they not set big goals.

But those goals need to be realistic; they need to be achievable. Take revenue goals for example. A business’ revenue can only grow as fast as the market will allow it to grow. Pushing and shoving may extract a few more dollars or pull some sales forward from a later period, but that extra revenue will not be sustainable.

The challenge is to understand the market and develop the best possible marketing and product plans to maximize revenue opportunities without putting the organization under such stress that it becomes dysfunctional.

Does your business plan defy the laws of physics?

Over the years, I have seen many intelligent-sounding business plans which:

1. Were based on fantasy or otherwise not grounded in reality;
2. Were out of date before the ink was dry; or
3. Went into someone’s desk drawer never again to see the light of day.

In one way or another, most of these business plans defied the laws of physics. Here are some examples.

• The Law of Inertia – bodies at rest tend to stay at rest. This category includes plans based on wishful thinking: “We want revenues to grow at 20% per year. If we write it down, maybe it will happen.” As in physics, a business requires net new energy to be applied to speed it up or move it in a different direction.

• The Law of Gravity – what goes up must come down. Or my favorite variation, “trees don’t grow to the sky.” Many companies especially favor a revenue forecast that looks like a hockey stick with the handle pointed up and to the right. “If we can just get this [whatever] off the ground, it will take off like a rocket.”

• The Law of Entropy – like a toy spinning top, a business left to its own devices will eventually spin down. It requires periodic injections of net new energy to keep it going.

Where does this energy come from?

Management initiative, innovation, and investment. Starting and growing a business is hard work. It requires focused energy and lots of it.

Confident, upbeat consistency will more likely carry the day.

Confidence, Optimism, Consistency – These are essential traits for the owner/CEO or manager who would successfully transform a company or any other organization.

Employees, like voters, recognize that their personal fates often depend on the actions of their leaders. They are constantly looking for signs that:

• You know what you are doing (confidence),

• You are optimistic that the plan or goal can be achieved (sunny disposition), and

• Your consistency of words and action demonstrate that you really do have a well thought out plan which might actually work (consistency).

In one of my prior lives as a corporate COO, one of the most productive (and enjoyable) parts of the job was getting out and talking to employees and associates. They need to see you, hear you, test you (through there questions), and go away confident that you and they are in it together.

When employees and associates are confident about your leadership, they are more likely to then go do their part to make it happen.

Excessive risk taking comes home to roost.

The news these days about the economic woes resulting from the subprime mortgage mess illustrate the truth of the old adage about chickens coming home to roost – the financial industry’s excessive risk taking has come home to roost on them, and on many other people as well.

Entrepreneurial capitalism clearly depends on risk taking, but when the downsides of the risks are very large or will be borne by people other than the people making the decisions to take the risks, perverse things can happen. (Management theorists refer to this phenomenon as agency risk.)

How can owner/CEOs balance these two challenges?

• Successful risk takers do more homework and think more about the potential negative / unintended consequences of their bets before making them. As a result, the risks they take are much smaller than they at first appear to be.

• Risk taking which could lead to “betting the farm (business)” should be weighed even more carefully.

• Risk taking delegated to subordinates must be closely supervised to avoid nasty surprises.

Has your company reached a "strategic inflection point"?

Andy Grove, co-founder and former CEO of Intel, once defined “strategic inflection point” as “a time in the life of a business when its fundamentals are about to change.” The fundamentals may be changing because of:

• New competitors,

• Emerging technologies,

• Maturing markets, or

• A host of other reasons.

But the key challenges for the owner/CEO remain the same:

• Recognize that the fundamentals are changing (better yet, anticipate the changes)

• Identify the ways in which they are changing

• Figure our what skill sets are necessary to respond to the changes

Strategic inflection points often require very different managerial capabilities from those which previously made the organization successful. The companies which adapt quickly will more likely survive and prosper.

If you get things right, good things happen.

Mark Hurd, CEO of Hewlett-Packard Co., on the remarkable three-year turnaround he has led at H-P,

• If you “get the strategy right,’

• “get the operating model right,”

• “get the people right,”

• then “good things happen.” [1]

During those three years, Hurd has reportedly been a heads-down executive focused on understanding and running the business. How does he do it?

• Sticks to his knitting – Hurd is an intense operational CEO

• Challenges every dime of spending – slashing costs in all areas

• He makes the decisions – “The more you leave the kids in the room to figure it out on their own, the more trouble you’re going to get.”

Every turnaround situation is different, but they all require strong leadership and clear direction.

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[1] Quoted in Connie Guglielmo, Hurd Rebuilds Hewlett-Packard by Debating Every Dime, Bloomberg.com, February 8, 2008.

Did you know that you were in sales?

When asked about my professional background, I frequently answer that I have had four careers and that I plan to have at least one more. That statement sometimes surprises people but not as much as the next one: my first career was in sales and sales management in the life insurance business.

Now my sales career was not particularly stellar (I survived), but more importantly, I learned skills which have served me enormously well over the ensuing years. When you boil it all down, sales skills are really people skills – establishing and maintaining relationships, brokering compromises, and influencing outcomes.

With this post, we begin an occasional series by guest author, Christopher Thompson, founder and president of Catch 22 Solutions, a sales performance consulting company. For more information, visit www.catch22solutions.com.

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This article originally appeared as “Life is Selling,”
in the Union Leader – NH Sunday News, November 10, 2007.
Copyright 2007 Catch 22 Solutions – All Rights Reserved

Throughout our life, we are taught all of the critical skills that will enable us to be successful in a competitive world. We are taught how to read, write, make decisions and effectively communicate. As we attend school during our childhood and teen years, we are given a foundation of knowledge that will allow us to choose our own destiny and select a career that we are most interested in.

Unfortunately, I have never heard of a course prior to higher education that teaches one of the most important skills every person needs to succeed in life: selling skills. I strongly believe the absence of sales training in general studies is a disservice to everyone and there is one major reason. Everything we do in life is selling.

Feedback drives performance

Owner/CEOs, themselves frequently entrepreneurs, sometimes struggle to provide key employees with timely, meaningful performance feedback. And yet, performance feedback is critical to sustaining and improving performance.

A structured performance appraisal program can provide significant business benefits by:

• Providing constant feedback about areas in which an individual excels as well as areas which need improvement

• Developing consistent performance through the formalization of the employee’s job description coupled with regular assessments against those criteria

• Integrating career development into the feedback process to aid in the retention of your best and brightest employees

• Empowering employees to collaborate in the goal setting process

• Improving the efficiency of the employee management process allowing more of your time to be spent on growing the business

The timely, thoughtful care and feeding of key employees, frequently your most valuable assets, will pay big dividends.

Black boxes often lead to bigger profits

I must confess – after selling, or running a company selling, quasi-commodity products and billing professional services by the hour, I’ve become very jealous of investment bankers and software companies. Why? The pricing power of the black box.

What’s a black box? It’s a technical term for a device, system, product or service which is viewed primarily in terms of its input and output characteristics and whose inner components, logic or processes are not available for inspection. [1] Think about it – as long as you can pay, almost no one quibbles about:

• The investment bankers’ fee in an IPO [2]
• The price of the software which solves a problem stalling your company’s growth
• The price of the miracle drugs holding your cancer at bay

As a buyer, the best defense against black box pricing is direct head-to-head competition by multiple vendors offering essentially the same product or service or based on a pre-defined request for quotations. But this only works if there are multiple providers of the same or similar products or services.

But as a seller, you want to avoid such pricing comparisons whenever possible by:

• Creating unique products or services
• Pricing based on value delivered not costs
• Becoming the pre-imminent specialist in your business or industry

Black box pricing is not easy to develop, but the return in improved profit margins is usually worth the effort.

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[1] Paraphrased from Wikipedia.
[2] Initial public offering