Wayne Wilson on Companies in Transition

Zigging and Zagging

There are a lot of people in the marketplace (including us) offering advice to executives and owner/CEOs about how to run their businesses better. Usually we try to stick to the fundamentals of effective business management – the things that have worked successfully for other owners and managers in the past.

But in addition to those fundamentals, there is one overarching rule – everything changes, sooner or later. Every new management technique (be it process re-engineering or lean manufacturing) will ultimately lose its effectiveness, and something else will arise to take its place.

The challenge for owner/CEOs and other executives running businesses is two-fold:

• Distinguishing between winning fundamentals that have worked in the past and temporary tactics with a limited shelf life, and

• Looking for what will work next

The ultimate skill to which every leader and manager aspires is the ability to see around corners – to be able to anticipate what will happen, what technique will work next, to see the future.

While no one (to my knowledge) can see the future, we can train ourselves to think differently from the crowd – to zig when everyone else is zagging – to seek out the opportunities where no one else appears to be looking.

Taking control of your own destiny - Part 1

The July issue of our periodic email newsletter to clients and friends has been posted to our website at Companies in Transition – July 2008. The theme of this issue is taking control of your own destiny and includes the following articles:

• Preparing for Success - Many owner/CEOs start their own businesses because they want to control their own destiny. An instinctive grasp of some key principles drives their achievements. What are some of these universal success principles and how do they work?

• “Hope” is not a strategy – Hope becomes the mantra when you have failed to put in place the necessary plans, programs, and investments to ensure that your goals can be attained. How can you avoid failing back on hope?

• “Do you believe in magic?” – It truly is magical when a team comes together and executes flawlessly and seemingly without effort. How do they do that?

In coming posts, we will begin a series illustrating with case examples some of the techniques for taking control of your own destiny.

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It’s all in your head!

I first heard about the three schools of thought regarding the benefits of diet and exercise for longevity from a board certified internist.

• The vigilantes – they really do believe that diet and exercise are the keys to a long and healthy life.

• The fatalists – they think it’s all in your genes. Short of being hit by a bus, you’re going to live however long you have been programmed to live.

• The head people – they think it’s all in your head; your mental attitude and outlook on life will be the primary determinant of how long you live.

And where did my doctor come down in this argument? “Somewhere between the fatalists and the head people.”

For owner/CEOs of companies struggling with transitions and turnarounds, this story suggests three principles:

• Start with what you have – your company has a set of cultural and organizational DNA, which will constrain if not determine your company’s ability to succeed. Develop and communicate an explicit understanding of the positive parts of your DNA so that you are leading from a position of strength.

• Develop a winning attitude – a strong, positive mental commitment to success is a necessary (although not sufficient) element of any great success. On the other hand, a negative attitude can become the boat anchor dragging you down. Create a mental vision of what success will look like and then share it with your organization.

• DO something – a great attitude represents potential, but results come only from attitude coupled with ACTION. Your success depends on your taking affirmative actions to move your organization in the direction of your vision. Wishing without action will not make it so.

Your head game is the connecting glue in this process. Every company has opportunities, despite its DNA, and there are always actions you can take to realize those opportunities. The difference between success and failure is all in your head.

Delay is a chronic disease

For owner/CEOs of companies in need of transformation, delay can become a chronic disease. Delay comes in many forms including these:

• You believe the sales decline is temporary.
• You can make the losses up with volume
• You decide to wait until tomorrow / next month to make changes
• You’re afraid you will make the wrong changes
• Changes might upset customers / employees / vendors

The therapy is straightforward, though not easy. Start by:

1. Acknowledging reality
2. Doing something about it NOW
3. Seeking help from others – advisors, associates, trade groups, etc.
4. Recognizing and correcting mistakes as you go

Left untreated chronic delay leads to chronic under performance and, in the extreme, business failure.

Is your business a Growth Business?

• Everyone is looking for growth!

• “The stock market awards the highest multiples to accelerating growth stories.”

Revenue and profit growth or the lack thereof is the nemesis of every owner/CEO of a business in transition. While everyone wants a growth business, the law of averages says that most businesses are not growth businesses since by definition a growth business is growing faster than the average.

So the first question to ask becomes, “Is your business a growth business?” There are three possible answers, each leading in a different strategy direction.

1. If the answer is yes, the strategy revolves around how to make the business grow at a competitive rate. What are competitors doing that you are not? How can you gain competitive advantage?
2. If the answer is no, can you shift to a growth segment? Here, the strategy must address the transformation to a growth business, as well as all of the issues faced in the first scenario. How do you find the right segment? How do you orchestrate and finance the transition?
3. If the answer is no, and conversion to a growth segment is not realistic, the question becomes how can you maximize what you have? Should you narrow your focus? Is there an opportunity to dramatically reduce costs and raise profitability?

Regardless of your goal, the first step is to understand who and where you are.

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.