“Measure What?”
“What gets measured gets managed”. A quote attributed to Peter Drucker.
Managing a business requires a broad set of skills and attention to all parts of the business. Many CEO’s are good at making or selling “things” (goods and service offerings) but some don’t spend enough time monitoring the overall health of their business. Keeping close tabs on the performance of the business is critical, particularly as our economy works its way through this recovery. The easiest things to monitor are sales and cash in the bank, but that is only part of the picture. Positioning the company for growth requires additional effort to understand and monitor not only sales but also those activities that impact profitability and cash flow. A key to successfully growing the business is identifying a set of key metrics that provide the visibility to help chart the course for the company’s growth, let’s review “What to Measure:”
Margins - The first step is to understand your gross profit margins (sales minus cost of sales). Begin by segmenting sales into groups of products or services that are similar, such as product families. Segment the cost of products and services into those same groups or product families. This will enable the monitoring of margins by product family and make decisions about pricing and position you to monitor costs in each product line.
Expenses – Next, monitor those costs that create and market the products and services, such as research and development, marketing and sales expenses. To the extent possible, group the costs to design and market products so that those costs can be compared to the margins generated by the sales of those products to facilitate decisions about continued and new investment.
Receivables – Once the products and services are sold and the quicker the receivables are collected, the sooner the cash is available for supporting the business. Speeding collections starts with taking orders accurately, invoicing correctly and following up with customers to ensure that all steps have been done by the company to support the customer’s approval process. Measuring these key steps will help reduce issues and speed collection resulting in better cash flow and reduced write-offs and increased profits
Inventory – If the company creates or buy products for resale, measure how quickly the overall inventory turns (inventory used or sold), and if the company has a process that supports it, measure how quickly groups of inventory turn. Every dollar tied up in inventory is a dollar in cash unavailable for other operating needs.
Operations – Look for operational metrics such as employee counts, number of hours billed, square footage, etc. Besides looking at those operational metrics, try to combine financial metrics with operational metrics to provide a fuller picture of the business.
Measurement steps – Create a scorecard using a spreadsheet or by purchasing a scorecarding product. In either case, look for a balance between the level of effort to collect the data and the frequency of providing the information. Start at a higher level of information and keep it simple. Add more complexity as additional areas are identified that warrant more analysis. Look at the trends in the metrics over several years to get a big picture view about where things are improving and where attention is warranted. Also, check with the bank to get industry standards so that a baseline can be established for comparison purposes.
By frequently measuring the important trends in any business the management will be in a better position to control the growth of the business.
“but we are different”
I met with a company that was having severe operating problems. They were experiencing increasing order backlogs; excess component inventories; high expedite cost of out-of-stock components; and very poor communication between internal departments. When I explored their processes and asked a few questions about why they did not do things differently in a particular area, they answered “but we are different”.
I use to discount that response, “but we are different”, because I knew that they were not different when looking at the “required” activities needed to correct their situation. However, after many years of working on many different operating and performance challenges for organization, I have come to the conclusion that they probably are different, but how?
Like people, organizations are like “snowflakes”, no two are exactly the same. Even identical twins are not identical in every way say clinicians. Why would an organization be treated as if it were the same as another?
Have you ever seen two organizations with the same exact cultures? Cultures evolve over time based on leadership influences, operating practices, environmental factors, and results (positive or negative).
Have you ever see two organizations with the same exact operating processes? Operating characteristics are created from external influences and proprietary methods and practices that have proven to generate the results required by the organization.
Have you seen any two organizations treat their customers in exactly the same way? Customer relationship management is not a computer system, but a reflection of the respect that the organization has for their customers, and the customers respect they have for the organization and its products or services.
So what is the significance of knowing that no two organizations may be the same? It is important NOT to prematurely classify a company or its workforce as having the same issues or initiatives as others that may be in their same market, industry or organization type. This means internally and externally to the enterprise.
If you’re a CEO, don’t make the mistake of trying to clone your new assignment into an exact copy of your previous assignment, no matter how successful you were. You have a new environment that may need changing, but your success will depend on how you integrate new activities with the existing operation and culture. It all takes time and patience.
If you’re a sales person, you better do your homework on the prospect and not assume they are like your last sale, they are not. Your techniques may be the same, but their need for your product or service will probably be for different reasons than you last client. Get to know them, understand them and serve them—then you will have a loyal customer.
If you’re a vendor or supplier, don’t assume that your customers require the same type of service. They may require the same level of service, but delivered in different ways. Your objective it so know them well enough and to care enough about them to meet their requirements for uniqueness.
No matter what your connection is to an organization, do not overlook the importance of having a trusted relationship with that organization. It is this trusted relationship that will make that connection between the organization and yourself a more successful one.
Four Failures from Uncertain Times
The economy may be slowly recovering but those I talk with are still very uncertain about the future. That uncertainty can produce failures that can have devastating results for your organization. If we cannot see the trees because we are focused on the forest, the results can be an unwanted surprise.
I see four areas of failure that have an impact on organization because they are unsure of what the future holds. Looking out into the future trying to predict what actions to take, without keeping focused on the near term, the organization may encounter four key failures:
- Failure to execute
- Failure in focus
- Failure in confidence
- Failure in trust
Failure to execute is an issue during both certain and uncertain times. If the organization cannot translate their strategies into tactics and act on those tactics, the organization will continue to operate on daily activities as they occur (Parkinson’s Law), whether or not they are the correct actions. Execution goes beyond planning and strategizing, it takes a work plan and a willing workforce to implement the plan.
Failure in focus comes from being so concerned with the unknown, that there is a paralysis of the leadership and a shortage of direction. This inability to chart a course and take action is a symptom of an organization that is unwilling to take risk. The enterprise will move forward, but the wasted resources from a lack of direction can take a lasting negative financial impact.
Failure in confidence points to the level of uncertainty experience within the organization. If financial strength is an issue and a lack of focus, then the confidence that the direction will produce the desired results is weak. Without confidence, risk becomes a major issue that cannot be easily overcome. If a lack of confidence lingers, it can have a long term impact on the organizations culture.
Failure in trust causes operating activities to slow and the cost related to wasted resources to rise. Internally this factor shows up on inter-departmental turf wars and office political power plays. Externally the impact is a lack of cooperation, delayed deliveries, incomplete communication and an increased reliance on contractual measurement of performance. The end result is a lack of cooperation and performance.
Look at these four failures as the trees and the level of uncertainty as the forest. Knowing how to see the benefit of focusing on the trees will make the forest of uncertainty much less daunting.
Word Of Mouth Marketing-What?
Obtaining and retaining loyal customers is about developing relationships. Companies spend $millions annually on advertising, hoping to influence the buying habits of their prospective customers.
Advertising does not build relationships, it only hopes to influence the moment and convert those few seconds into a buying decision for a product. Word of Mouth (WOM) is the best and most reliable method of promoting a product.
A Testimonial from one person to another brings with it a level of positive bias and a tested experience. These endorsements or referrals are provided from one trusted person or company to another. It is the trusted relationship that makes the recommendation more credible.
Word of Mouth (WOM) relationship building is growing rapidly due to wider use of social media applications (e.g. blogs, facebook, myspace, twitter). How can your company use a WOM approach to expand your loyal customer base? I am working with an organization that has some new and innovative ways to use this technology to help businesses grow – I will be writing more about this approach next month. To provide a little more introduction and background to WOM, I am offering you a FREE look at an e-book that is the first of a series on how to use digital applications to expand your presence in your market.
Click here for your FREE eBook access: http://wom10.com/Pages/business-tools-book
Grow Your Company with PR
In 2005 I consulted for a start-up that was owned by an entrepreneur who had a public relations back ground. I learned the value of good Public Relations (PR) and since then I have always consider it the next best form of advertising. I believe the best form of advertising is word of mouth.
PR if done correctly can be a game changer for an organization. PR can also backfire if not taken seriously and can have a negative impact on your image with prospects, customers and your industry. I recently read a blog post on bNet that outlined the 10 Breakthrough PR Techniques from a Master. The interview with Lou Hoffman, President and CEO of Hoffman Agency, provides an excellent set of techniques and examples of how to use PR to maximize its effectiveness.
Click here for the interview: http://blogs.bnet.com/ceo/?p=3620&tag=content;col2
What are your experiences, positive or negative, with PR?
Are your new products failing and you don’t know why?
We conducted a survey of several Puget Sound companies asking them which area of their business caused them the greatest concern. The issue rated the highest was the failure to introduce successful new products. When asking these companies to explain why they see this issue as their greatest challenge, the responses were as diverse as the companies themselves. Most attributed a portion of the problem to the recession, yet many couldn’t help noticing that other companies in their industry were introducing new products with some degree of success. If a company is experiencing this issue, there are probably multiple reasons why.
Here are five common reasons why new products fail:
1. Lack of market knowledge- Whether a company is new or established in a market, a common mistake is underestimating the impact of market change. Markets change for a variety of reasons, and if a company does not stay connected with their market, they may begin operating under obsolete assumptions. This leads to poor performance and often enterprise failure. A few examples of market change are as follows:
- Lower customer demand- Customers are not interested in the product or service. Three levels of consumer demand are based on the customer’s needs, wants and desires. Depending on how the customer views the importance of the product will determine if they are going to change their buying pattern. Companies that do not know how their customers view the company’s product will probably not be conscious of the reasons for the customer demand drop-off.Recessionary times tend to impact those products that customers view as wants or desires. These are usually products that entertain or follow trends, and are purchased with discretionary income (electronics, trend clothing, high-end cars, etc.). Needs are those products that are more commodity items and are thought to be indispensible (food and personal items, telephone service, public transportation, etc.).
- A change in customer preference- Customers are migrating to other products. Customer buying decisions can change for several reasons. These reasons can be due to product differences, technology developments, advertising and brand influences, regulatory requirements, and perceived value increases. Knowledge of current and upcoming market changes is critical to any company’s ability to respond and sustain operations.
- A change in sales and distribution methods-Customers want to purchase their products in a different way. The Internet has changed the buying habits of much of the world’s economy. How has it impacted your products in your market? Brick-n-mortar stores are still strong points-of-sale for products if they provide a positive buying experience. Most business-to-business and retail organizations have added Internet stores to sell their products in addition to their brick-n-mortar stores. Wholesalers and distributors are expanding and contracting in many markets, depending on the product type. If the company’s strategy is not to have a large sales force to distribute your product, then the Internet, wholesalers and distributors may be helpful. However, the wholesale/distribution route may not be the best approach if your company wants strict control over the sales and service process, and a strong relationship with your end customers.It all comes down to how the customer wants to buy your product.
2. Lack of product differentiation-The customer cannot see the value of the product being introduced. This lack of differentiation can be between your competitor’s and/or your own product. If you’re releasing a new version of an existing product, how are the two products different? Why would a customer purchase a new version, if the older product still provides value? How different is your new product when compared to the competitor’s? Differences that are valued by the customer will influence their buying decision. Look at your product’s quality and performance from the customer’s perspective.
- Quality-How does the product hold up in comparison to previous products or the competition? Consider how durable, flexible and adaptable the product or service appears to your customer base.
- Performance- How does the product perform? Take into consideration speed, usability, features, functions and how well it does what it is supposed to do.
3. Lack of brand recognition-The customer does not identify the new product with your company or prior products. Companies that are not concerned about creating brand awareness are making a critical error. It is important to balance brand recognition with the cost of creating the brand. Brands evolve over time as the customer’s perceived value from the purchase of products or company services increases. The objective is to have customers identify the purchase of your product and/or company with their most positive buying experiences just by seeing the brand (name, logo, motto, song, etc.).
4. Lack of customer support-The customer cannot get the level of support they want. A company that is only focused on the sales side of their product or service may fail to build strong customer relationships resulting in a loss of customer loyalty. Without loyalty, there is nothing to keep the customer from switching to your competition without notice. A company that is focused on developing a long term sustainable operation knows that it is imperative to develop strong relationships with their customers. This is accomplished by offering effective sales and customer support. Except for on-line Internet sales, the front line customer care effort should come from the sales force, even after the sale is closed. Customer care organizations, departments and services can help satisfy the customers when there are issues that must be resolved, but the sales person who closed the sale should still be involved. We all know it costs more to get a new customer than it does to save one. New products that are launched without a customer support effort in place are destined for problems.
5. Lack of product development process- Many new products never get to market because the company does not have a product development process. Product development should be viewed as a process, and not an ad hoc event. The process starts with an idea. The more innovative the organization the more ideas. The idea gets tested as to viability in the market. Market viability means that the company knows their customers and their buying habits. The idea gets a development assessment. The company must then determine how practical it is to create the product out of the idea. The idea then gets a value test (i.e. what is the value to the company (revenues/profits, market share, etc.) and to the customer (performance, quality, price, availability, etc.). If the idea passes all tests and assessments, then a project is chartered, prioritized and funded. A company without a process for product development is taking a significant risk of having the new product effort terminated before reaching the market.
The 12 Steps of effective businesspeople
- Do your work before you play.
- Always do more than others expect of you.
- Never quit trying to become better at something.
- Be willing to do the things you don’t like to do in order to achieve what you want.
- Be willing to accept failure and disappointment as a part of learning.
- Recognize that there is no easy or quick way to gain experience.
- Take time to appreciate the things you usually take for granted.
- Be honest in everything you do and honor your word when you make a promise to do something, EVEN if it is inconvenient.
- Respect the feelings and property of others.
- Have a desire and take action to help others.
- Never stop learning.
- Recognize that situations in life are never as bad or as good as they may seem and that you are never alone.
Where are the VC’s?
A question I hear often is “how do I find a VC to invest in my company?” First, there are many different institutional equity investors, both private and public. Venture Capital companies are best known by start ups and early stage companies, because VC’s are most likely to be found investing in these riskier ventures. With the dot.com bubble bursting and the current recession, it is much harder to find the VC we remember from the past decade. The reasons they are harder to find is that many of them have subtly lowered their interest in ventures (vC) or have dropped it all together and now look more like a merchant bank. If you approach one of these “new breed” vC’s, you will find them wanting evidence of an existing, sustainable customer base, revenues and patent office action on all intellectual property. For the legacy VC’s who are still willing to take more risk and keep the capitalize “V” in VC, you will probably find them looking for the following key elements before they’ll take a meeting with the entrepreneur; a solid product idea that is scalable, a prototype or working model of product or service, good chemistry with entrepreneur and or management team, and the entrepreneur and/or management teams who are willing to share in the risk (having skin in the game with their own dollars or willing to take less ownership). Most VC investors state that the value they bring to the company is operating/development capital (money), leadership (in the form of a majority of your board of directors) and contacts to help move the business forward more effectively. They are very good at the first two offerings, but don’t expect them to do the third very well (my experience anyway). Remember, bringing an equity investor into your company is the process of selling large portion of your company to someone who is looking to get at least a 10X multiple on their investment with 3-7 years depending on the opportunity.
25 Attributes of Effective Teams
If you take a magnifying glass and hold it up to most organizations recognized for their effectiveness, you will see that they have two characteristics in common; they have effective Leadership and they operate through effective Teams. If you believe the chicken came before the egg, then you would agree that it takes effective leadership to establish effective teams. Many organizations understand the value of teams and may even experiment with them when it comes to small projects, but I suspect this is still an ad hoc practice with no design or long term purpose. Companies in their early stages of growth or more mature organization losing growth momentum should assess how effective they are at nurturing and using teams to move their enterprise forward. If they do not focus on a team oriented culture, their quest for success will certainly be a more challenging one.
Let’s explore the attributes of effective teams:
Definition of an effective team- An effective team “is a small group of people who are mutually accountable to achieve a common purpose and performance goals through their collective talents and collaboration.” (Kristiina Hiukka, BigAgendaCoaching.com)
8 Attributes of an effective team leader:
- Creates a compelling mission for the team
- Knows the priorities: 1. team mission, 2. team, 3. individual members and 4. themselves
- Communicates concisely, clearly and openly (communication occurs when both sides understand what the other is trying to convey–until then it is just talking)
- Encourages feedback
- Supports and encourages diversity
- Supports members by mentoring and coaching
- Delegates authority and accountability
- Selects members for their skills and desire to participate
- Promotes continuous improvement
- Fosters a positive team culture
7 Attributes of an effective team member:
- Strong discipline skills
- Good communicator
- Proponent of working in teams
- Enjoys collaboration with other member
- Self motivated
- Strong work ethic
- Self-directed within team roles and responsibilities
10 Attributes of an effective team:
- Clear purpose
- On-going supportive leadership (coaching/mentoring)
- Enabling processes and structures
- Supportive organization
- Members possess the “right” skills
- Commitment and trust of members
- Clear roles and responsibilities
- Clear team ground rules and protocols
- Open communication
- Performance goals and accountability
- Adequate resources
- Support group diversity
- Members are us-directed
- Self-directed
- Driven to continuously improve
Entrepreneur or “PermopreneurTM”? Which are you?
Entrepreneurs are heralded by the business community as key contributors to the success of the US Economy; probably one of the most resilient economies in the world (even in a recession). New products, technologies and business ideas are the objectives of millions of aspiring Entrepreneurs throughout the world. Yet, there is an 80% failure rate in the first five years of a new business’s life in the United States. Much has been written about the reasons for such a high failure rate. Let’s consider just one factor – maybe they are not Entrepreneurs at all.
My definition of an Entrepreneur is an individual or group of individuals that take an idea, and develop that idea and manage their business to the point where it becomes sustainable. A sustainable business is an enterprise that can generate cash flow levels that support itself on a going-forward basis. It is no longer depending on investor funding or credit to support its operations. Investors that have believed in an idea, invested in an “Entrepreneur” and eventually saw their investment disappear due to company failure, know exactly what sustainability or the lack of it means to them. More than likely that Entrepreneur may have not been an Entrepreneur at all, they may have been a PermopreneurTM.
What is a “PermopreneurTM”? They are those individuals or groups that take an idea and create a business based on that idea, but are unable to generate enough cash flow to sustain their operation on its own. There are two types of PermopreneursTM; The first type are those that are blessed with the gift of turning ideas into business opportunities, and are very secure in their abilities to know when to turn the business over to professional leaders and operators. They usually employ professional operators to help raise additional funding and direct the company to sustainability. The second type of PermopreneurTM is either intentionally or unintentionally headed toward failure. They are very skilled at convincing investors to finance their idea or technology, skilled employees to join their company, and they believe they can operate their way to sustainability. Unfortunately, they don’t have the leadership ability and operating skills to keep the company from eventual failure. The end result is another failed business with a bewildered promopreneur wondering what happened with a following number of devastated investors and employees. A more sinister version of the PermopreneurTM has no intention of taking the company to sustainability. Their “rush” comes from raising money to support a luxury life-style while they look for the next idea, and the cycle is repeated. They have no intention of taking the company to cash flow sustainability. They know there are plenty of investors that fail to do a proper job of due diligence and are greedy enough to feed the PermopreneurTM ego with lots of opportunities.
I have had experience with Entrepreneurism for many years, having worked with Entrepreneurs and I have held the title myself. I have tremendous respect for those Entrepreneurs and PermopreneursTM that have successful track records for creating sustainable businesses. If you consider yourself an Entrepreneur, it would be worth your time to do a self-evaluation to honestly determine if you have the skills (not just the desire) to direct your business idea all the way to the goal line -cash flow sustainability. If you are not sure, then look for the right time to hand off the company to a skilled leader and operator and consider yourself a successful PermopreneurTM.