Building Business Value | Corporate Management Strategies

Manage Your Risk

This is the fourth in a five part series on decision making.

Risk is one of those words that is hard to quantify yet we all have an instinctive feel for the need to manage risk.  The focus of the leadership team should be only on the elements of the business that have an impact on business value at a risk level you can live with.  Your business may decide that in order to really increase the business value of the company, you'll need to shorten the amount of time it takes to bring a product to market by ninety days.  Your design team has found a way to integrate an extreme program management technique and you'll be able to shorten the gestation period for new products by three months with very little risk.  This is obviously a ‘no brainer' and an initiative you would implement right away.

On the other side of the risk scale is the substitution of your three major suppliers.  In your building value analysis, you've discovered you can increase your business value significantly by switching to low cost suppliers.  Your operations team is very uncomfortable with this move because of the lack of track record with the new suppliers and the potential to actually increase the product development lifecycle times even though you were initially lowering costs.  In this case, you may decide the risk is not worth the potential positive return.

Speak With One Voice

This is the third in a five part series on decision making.

In the best of times, leadership teams may be able to survive while lacking a single purpose.  When budgets are tight and companies have little room for error, a leadership team at odds with the CEO's vision is fatal.  Independent thinking among the leadership team is fine during the strategy formulation state, but when it comes to implementation, there must be one voice.  Leaders must learn to focus on what drives value for the collective good of the company.  But it goes beyond the CEO and her leadership team.  To survive in the 'new, new' economy, everyone in the company must buy into the vision.  During a Gary Hamel interview at the 2008 Management Summit Lab, Google CEO Eric Schmidt suggested that one of Google's reasons for success was in the "wisdom of crowds." Not every company goes through the exhaustive decision making processes and involves as many people as Google does, but every leader can benefit from building consensus on their direction.  It's not just that every issue finds the best outcome, it's that every issue has the best outcome based on the best data available and a decision that's implemented in a timely manner.  In other words, facts based decisions made by smart people with deadlines.

Just the Facts

This is the second in a five part series on decision making.

Steven Covey  asks us to ‘seek first to understand, then to be understood.'  The first step the leadership team needs to do is collect the information necessary to make the right decision.  This is no time for seat of the pants leadership, or gut feeling management or even doing it "like we did in the 90's."  This is a time to find out exactly where you are making and losing money and what drives value in your company.  Every market and every company has a set of value drivers that impact its business value.  Talk with a valuation expert, poll your leadership team, and take the time to think through the top ten value drivers for your company.

One way to look at value drivers is to think of your company from an internal and external perspective.  Internal value drivers are things like your financial performance, asset base, product and service development, service delivery, leadership and human resources and management controls.  External value drivers are your sales management, your product and service offerings, pricing, your customer base and customer support.  Rate each of these areas and ask yourself "what area should rate the highest in order to be a leader in our market?"  What two or three areas can separate you from the rest of the pack?  Knowing what really drives business value in your company will allow you to narrow your decision making focus.  Get the facts first.

Don't Just Sit There ... Do Something!

Decision making during the best of times can be challenging for many of us.  Change the environment a bit by introducing a tight credit market, skittish consumer behavior, and schizophrenic suppliers and decision making can literally put us in a deep freeze.

This is the first of a five part series to help executives break through the ice and begin making the tough decisions that need to be made.

Are you just sitting there these days?  Isn't that how we all feel.  Waiting for things to get better.  Credit is tight, unemployment is as high as it has been in thirty years and all of a sudden, consumers are saving; the perfect recipe for a long stormy business cycle.  During this economic tsunami, employees are looking to the bow of the boat to see if their captain has seized the situation and is shouting out orders like Russell Crowe in "Master and Commander" or cowering below deck and frozen by the gravity of the situation like Humphrey Bogart in "The Caine Mutiny."

During the burst of the dot.com bubble, a CEO friend of mine running a mid sized IT company said that every decision he made during that tough period was at least a quarter too late.  His entrepreneurial enthusiasm, that base emotion so necessary to build a company was actually clouding his judgment.  No matter what he did, it seemed like it was a day late and a dollar short.  So the question is, did the lessons we learned in 2000 give us any insight to the best way to navigate our current recession?

Today, business leaders have almost no room for error.  The effects of making a late decision or making no decision at all are penal.  If you think you may need to cut your overhead next month, you probably should have done it last quarter.  Most CEO's are very good at making decisions, that's not the problem.  The challenge leaders face today is not their inability to make decisions, it's their ability to make informed decisions quickly.

During the last decade, you could make a few mistakes along the way and still find yourself able to compete.  You could hire the wrong sales VP, roll out a product that fell flat or overpaid for a new financial system.  None of these decisions would have been fatal.  You didn't have to have what business authors Kim and Mauborgne call a "Blue Ocean Strategy."  Demand was high and you could work yourself out of many poor decisions.  I don't have to tell you that times have changed.  You may only have one chance now to make the right decision; why leave it to chance?

You may have heard the adage, "you can have it all, you just can't have it all at the same time."  This is the hard reality we live in now.  After years of managing in a world of abundance, it is very difficult for leaders to make the switch and prioritize their decisions.  Which area of the business requires the most focus?  Where should you spend your limited resources and where is the best bang for your buck? How much risk is associated with each potential investment?  Maybe I can't invest in all these initiatives at the same time!

Executive decision making during troubled economic times have dramatic results.  As Teddy Roosevelt reminds us, "the credit belongs to the man (or woman) who is actually in the arena."  Faced with increases in energy costs and lower demand for their products and services, businesses are operating on thin margins.  Battling with cautious bankers over lines of credit and short-term debt is forcing leaders to operate on existing cash flow.  It has never been more important to make the right decisions.

Over the next four blogs we'll talk about specific techniques that can put you on the track to decisiveness!

Do you have "I'd like to thank the Academy" sydnrome?

It's great when companies get awards - everybody feels good. The problem is that the red carpet fever can infect the leader. When business leaders get awards like "Entrepreneur of the Year" or "Top 40 Executives under 40" or an invitation to the Young Presidents Organization or similar groups, they have an unfortunate tendency to believe that they accomplished single-handedly all of their company's success. This is a sure way to alienate the team. One suffocating ego is all it takes to destroy an otherwise successful business.

A quick test of your leadership narcissism is to visit your web site.  Image you are a prospective customer or employee.  Are there lots of pictures, video testimonials and references from your employees about what a great place this is to work?  Are there success stories from your client base?  Are there compelling reasons why someone should do business with you?

Company awards are wonderful, but if they are not team awards, how meaningful are they really?  Being voted as a great place to work, or the greenest company or fastest growing all says something about the entire business entity.  Individual awards at times have a negative impact on the workplace culture.

The Top 10 "Keep your mouth shut quotes" of all time

Well that headline is a bit of a teaser but bear with me a bit.  This morning I had a breakfast meeting with a couple of friends and we stumbled on the topic of "when it is best to keep you mouth shut."  You know, those times when you'd wished you'd kept quite and things may have worked out better. 

The best leaders are also the best listeners.  The best followers have the ability to listen, comprehend and act.  We are all leaders and followers so we all need to know when to listen and when to engage the big hole below our nose.  I'm sure we could add a thousand more to this list, but here is a start!

1. "Even a fool, when he holds his peace, is counted wise: and he that shuts his lips is esteemed a man of understanding."
 Proverbs 17:28 American King James Bible

2. "It's better to remain silent and be thought a fool than open ones mouth and remove all doubt" ­­- Mark Twain (attributed)

3. "Always keep your mouth closed when a meeting is going really well or deteriorating into Dante's inferno" - unknown

4. "When you know you're full of bull, keep your mouth shut" - Will Rogers

5. "Look at me, never rat on your friends and always keep your mouth shut" - Jimmy Conway character from "Goodfellas"

6. "If you keep your mouth shut, the flies won't get in" - Spanish proverb

7. "Don't take another mouthful before you have swallowed what is in your mouth" - African Proverb

8. "The closed mouth catches no flies" - 1742 B. Franklin, Poor Richard's Almanac

9. "If A equals success, then the formula is A equals X plus Y and Z, with X being work, Y play, and Z keeping your mouth shut." - Albert Einstein

10. "I like to listen. I have learned a great deal from listening carefully. Most people never listen." - Earnest Hemingway

Are we always in it to make a buck ... a history lesson.

I first came across the term of production capability in the Steven Covey book "Seven Habits of Highly Effective People".  I could easily relate because at that time, our company was in the middle of a brutal stretch where we were overworking nearly everyone in the firm.  We were running on empty, stressing the golden goose, making hay when the sun shines and burning both ends of the candle all at the same time.  Whatever you'd like to call it; we were certainly taking advantage of robust market opportunities with little regard to our future production capability.

So why don't all firms think long term? Why aren't we all investing in the future?  At times it is shortsightedness.  In some instances it is greed.  But sometimes ensuring future production capability runs smack dab into the expectations, and in some cases, the legal rights of your shareholders.

Let's have a look at our corporate history book.

In 1916, the Ford Motor Company had accumulated a capital surplus of $60 million and the company's president and majority stockholder, Henry Ford, sought to end special dividends for shareholders in favor of massive investments in new plants that would enable Ford to dramatically grow the output of production, and numbers of people employed at his plants, while continuing to cut the costs and prices of his cars.  In defense of this strategy, Ford declared:

"My ambition is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business."

While Ford may have believed that such a strategy might be in the long-term benefit of the company, he told his fellow shareholders that the value of this strategy to them was not a primary consideration in his plans. The minority shareholders, including John Francis Dodge and Horace Elgin Dodge, who owned 10% of the company, objected to this strategy.  They wanted their special dividends now (turns out they were planning to start their own rival company).

The Court was called upon to decide whether the minority shareholders could prevent Ford from operating the company for the charitable ends that he had declared.

I often wonder had Ford framed his argument in terms of future production capability, would he have been better off in the courts.

But the Court held that a business corporation is organized primarily for the profit of the stockholders, as opposed to the community or its employees. The discretion of the directors is to be exercised in the choice of means to attain that end, and does not extend to the reduction of profits or the nondistribution of profits among stockholders in order to benefit the public, making the profits of the stockholders incidental thereto.

Because this company was in business for profit, Ford could not turn it into a charity. The court therefore upheld the order of the trial court requiring that directors declare an extra dividend of $19 million.

This case is frequently cited as support for the idea that "corporate law requires boards of directors to maximize shareholder wealth."

Who knows if Ford wanted to deny the Dodge brothers their special dividends to avoid a new competitor.  Who knows if he really did want to reinvest for the future of mankind.  What we do know is that the courts ruled that publicly traded companies must run to make a profit to benefit their shareholders.

It is a great reminder that once your firm goes public, you have certain fiduciary responsibilities that go beyond those of a privately held company.  The grass isn't always greener!

Ten New Year's Resolutions

Wikipedia defines a New Year's Resolution as a commitment that an individual makes to a project or the reforming of a habit, often a lifestyle change that is generally interpreted as advantageous.

I'm actually not sure that New Year's resolutions even work.  Quitting bad habits, loosing weight, calling Mom more often and getting to church from time to time are all laudable resolutions.  By no means should you forget about these.

But I'd like to plant a seed for those mid market executives that are beginning to think about 2010.

Here is my list of potential New Year's Resolutions for the mid market executive.

1. Drop Uncle Joe as Chairman of the Board.

The best mid-market companies leverage their resources, including their Boards of Directors and Boards of Advisors.  They use these business-savvy individuals as sources of wisdom and as sources of new business.  All too many small and mid-market companies tend toward Boards of Directors consisting of friends and family.   Your Uncle Joe may have great fishing stories to share at the board meetings, but he cannot offer the mentorship for the leadership team when tough, challenging business decisions must be made.  Outside directors give businesses the opportunity to close the books every quarter, position the company for the future, talk about plans and leadership development and generally act like the big boys.

2. List the top 5 value drivers for your company.

The question middle market CEOs get asked all the time is "How big is your company?"  In American business, size matters.  Beyond the preoccupation with numbers and size is a much more important question, one that is rarely asked:  "What impact does your company have in the marketplace?"  Meaning, is the company a bit player, a role player, or the "leading man" in that space?   Make sure you know what really makes your company valuable to the marketplace.

3. Schedule a vacation.

I did work recently for a company that maxed out after fifteen years in business at the $25 million mark.  The three founders still can't take vacations, because they haven't figured out how to build effective teams, replicate themselves, or take other important steps in the value-building process.   Like a lot of midmarket leaders, they struggle when it comes time to let things go.  They have a deep fear that the company will go to pieces if they don't handle everything themselves.  Letting go means the ability to take a vacation, to bring in new leadership, and when the time is right, to leave.  But that's a tall order for most executives.

4. Make your strategy known.

You've got a new mission and direction as a result of your most recent offsite.  Great!  But how are you going to get word out to your thousand employees?  Are you getting posters designed to illustrate your new mission/vision/purpose?  Are you stuffing paycheck envelopes with a document listing the five new goals of the organization?  Most mid-market companies don't do these things.  If there is a vision, the CEO fails to share it with others.  Or if he does try to get the word out, he does so in what the Reverend Bill Hybels of Willow Creek Community Church calls the "Mt. Sinai approach."  Moses came down from Mt. Sinai with the two tablets denoting the Ten Commandments.  That top-down approach might have worked for Moses, but it doesn't work in today's business climate.  Keeping the strategy a secret is another recipe for trouble.

5. Make sure your company is structured correctly.

If you're formed as an S corporation, you'll have options when it comes time to exit.  C-Corporations and Limited Liability Company (LLC) formations can be the right formation for your company but my preference is still Subchapter S.  At exit time, you'll have the option for what the IRS calls a 338(h)(10) election.  This is a fancy term you may want to get smarter on, because it could save you big bucks.  It is really important to make sure your legal and accounting teams walk you through this, because the benefits and burdens of a Section 338 may seriously affect the economics of a deal and may change your tax situation.

6. Identify your 3 key processes and make sure they are world class.

Far too many companies can't figure out how to repeat what they did well.  When you ask them how they won, they have no idea.  They rarely run a post mortem of their winning or loosing bid with the objective of building a ‘lessons learned' knowledge base.  There are key processes that have to hum in order for you to be successful.  Take a very critical look at each of the processes that are absolutely critical to your success and make it a priority to make each a differentiator.

7. Ask yourself if you'd rehire each member of your leadership team.

In Good to Great, Jim Collins offers the outstanding analogy of having the right people on the bus - the best possible mix of managers, tech people, sales and marketing folks, and so on.  It's not just about having the right people on the bus.  It's making sure that they're also in the right seats.  Ask yourself if you are settling.  Look at the key positions in your company and ask yourself if you'd rehire each person on your team!

8. Think Big.

Recently, I worked with a company that was considering the purchase of a second business that would double its size.  The founder of the target company wanted to retire, and it was extremely important to him to find a home for his staff.  The work of the two companies was compatible, and as long as the target company's owner ended up with his dream beach house in South Carolina, he was ready to take the deal.  The deal represented a big risk for the buyer, though, not just financially but also in terms of his thought process.  Excellence and comfort are usually enemies, and the owner of the acquiring company had to expand his consciousness, if you will, to allow for a new enterprise double the size of his current one.  He was able to step up and make the acquisition, which was good.  The problem is that post-deal integration doesn't always get done.  Business owners must have the courage to step up and make a strategic acquisition when appropriate, and they also need the skills to integrate the two companies after the deal has closed.

9. Build and execute a plan to scale the business.

It's ironic - few people plan to fail, but even fewer plan to succeed.  Companies have great ideas for success but they never ask, "What if this goes well?  What infrastructure will we need?  What about collateral for the sales force?  What kind of credit line will we need?"  Companies need to be able to scale processes, people, technology, the product or service they offer, and methods of delivery.  Look at your leadership team.  Can it scale?  How about your channels of distribution?  Your sales team?  Your supply chain?  We are not going to be in this recession forever and you've got to be ready to win.

10. Reinvent some part of your business.

Jack Welch once said that we all have to "eat change for breakfast."  This means that the only constant in the business world is continuous change.  And yet, all too many companies try to live in the old world, and play by the rules that might have been in effect a decade or more ago.  It just doesn't work.  Ever tried to impose a hierarchical corporate structure on employees in their twenties, today referred to as "Millennials" or Generation Y?  It's not going to work.  Along the same lines, it's easy for a non-tech-savvy CEO to say, "We don't need to be on on LinkedIn or FaceBook or YouTube.  I don't even know anybody who goes on those places, aside from my kids."  I'll tell you who goes on those places - your customers.