Wayne Wilson on Companies in Transition

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.

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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.