Are you in growth mode, or survival mode?
I have some clients who are growing, some who are hanging on – and some who are transitioning from one to the other. Although most businesses would like to be in growth mode, the point isn’t to say that one is right and the other is wrong – it’s to understand that different situations call for different approaches. And that can be an issue when transitioning from one situation to the other.
HOW GROWTH MODE AND SURVIVAL MODE DIFFER
I did a chart recently for a client of the differences that their company would see as it switched from survival mode to growth mode. There were 15 different areas that would see changes!
In survival mode, your “strategic horizon” (the timing you take into account when making decisions) is the next quarter. In growth mode, that horizon stretches out to 3 years.
And a lot of areas can be “good enough” in survival mode – but need to be tightened up when growing. Those areas include accountability, processes, and hiring. And the inverse is true, too – things that need to be tightly managed in growth mode should be loosened up in survival mode. (Why would you want less accountability or process? Because that takes time, and in survival mode, that time can be better spent talking with customers.)
THE IMPORTANCE OF FRAMING
When you’re having strategic discussions, one of the most important steps is to pick the right “frame” for the discussion. A more tangible way of saying that is, you have to know the right question to ask. This is something that you can do intuitively most of the time. But when companies are going through change, picking the right frame is much harder. And picking the wrong frame can be very costly.
Here’s a simple example. I can create a very different conversation, and a very different outcome, if I ask the question, “What should we do more of next year?” rather than, “What do we need to do differently next year?” The first question is appropriate for a company continuing in the same mode it was in the prior year – baked into the question is the idea that we already know the right “model” of how we do things, we just need to pick areas to emphasize. The second question is appropriate for a company in transition – and in that case, doing more of something you’re already doing may actually hurt you more than help you.
(And, yes, it often makes sense to ask both of those questions in your annual planning.)
As a leader of strategic discussions, you need to be aware of what frame you’re using for each discussion, and you need to build your toolkit of frames, so that you can bring the right one to bear in whatever situation you find yourself in.
One of the precepts of the EOS program is, “The answer is in the room.” It’s a phrase that’s used to emphasize the importance of discussion in addressing important issues, and I am a full supporter of that idea.
The problem is, the phrase itself is not quite right.
WELL…SOME KIND OF ANSWER IS IN THE ROOM
A more accurate phrase would be, “An answer is in the room.”
And it’s the job of the CEO to know whether it’s the answer or an answer that is in the room – whether your team has the right stuff to understand and evaluate the issue and the options for solving it…or not. Because if they don’t, but they think they do, then you are wading into dangerous territory.
It’s not that dangerous if the issue is minor. But if it’s a major strategic decision…having the wrong answer is a big problem.
EVALUATING THE QUALITY OF YOUR TEAM’S ANSWER
So, how do you gauge whether you are getting an answer (a poor or bad decision) or the answer (a good decision)? Here are some questions you can ask:
- Have we seen this situation before? Or something similar? Or has someone on our team?
- Can we come up with a list of risks that would make our banker (or some other knowledgeable skeptic) proud for how pessimistic the list makes us appear?
- Can we come up with 3 strong options for handling the situation?
- Is there more than one person who is worried that the answer may not be in the room?
A CAUTIONARY TALE
Let me talk more about that last one. The biggest business mistake that I have witnessed was when a client decided that the answer was not in the room for them. They hired me to write a plan for a new initiative, discussed and agreed to the plan as a team…and then 2 weeks later the CEO came up with an alternative “short cut” approach.
That short cut ended up costing the company between $2MM and $10MM, depending on how much you count the indirect impact that decision had. At the time the leadership team was discussing the short cut, there were 3 members of the team who said, “We just paid for a plan, and we all said we liked the plan – why are we not following the plan? Why do we think we have a better answer than the plan now?” (Which is another way of saying, “The answer is not in the room.”)
HOW THEY GOT IT WRONG
Why did most of the team change their minds? Because the CEO had a long history of running and building the business, and the majority of the leadership team said, “If you think this is the right thing to do, we trust you.” What they missed was that the CEO had not pursued a strategy like this before – it was a new area for him, and it was more complicated than anything he’d worked on before.
The team needed to listen to the skeptics more – and there’s a lesson there for you, dear CEO, if you find yourself in a similar situation.
YOU BE THE JUDGE
If you’re a CEO listening to your team debate a topic, you have another role you need to play – you need to raise yourself above the discussion, and look down on it, and critique whether the sophistication of the discussion matches the complexity of the issue and the quantity of the resources you’re going to commit to the answer.
What do I mean by prioritizing your priorities? Why is it important? Why is it hard?
It’s fairly easy for any business to come up with a dozen ideas for improvement – and most businesses wouldn’t stop there, generating dozens of possibilities. The challenge for any leadership team is to pick the right priorities to focus extra attention on among all those many options.
It’s easy to say, “You should have 3 big rocks that you focus on.” It’s muuuuch harder to say, “These are the 3 rocks that will give you the best outcome.” Why is it harder? Because there are many variables to consider in coming up with the answer. I’ll highlight 2 as examples:
- What’s the balance between financial outcomes and intangible outcomes? You could work your staff hard for two years, get your financial results up, and then sell your business for great personal gain. But many small companies have more connection to their employees, and so are willing to support work-life balance at the expense of financial performance. In that case, you can’t just decide on priorities based on financial ROI.
- What if short-term success and long-term gain are not aligned? Often they aren’t! Short-term, it almost never makes sense to upgrade your systems. But if you never upgrade systems, that will eventually undermine your results. How do you balance those competing interests? How do you decide whether long-term payoff is the right thing to aim for now?
So this is a hard task. Why not just avoid it?
Because focus is a key part of success. Spread yourself too thin, and you won’t have the energy to see your initiatives through to success. As we all know, juggling 6 balls is far harder than juggling 3 balls.
Although there are tools that can help you prioritize your priorities, this is not something that is driven by tools. A SWOT or Gap analysis will not solve this problem. A 1-page sheet that puts long-term vision, annual goals, and quarterly objectives…will not solve this problem.
The center of this solution is wisdom and judgment. It takes experience, insight, creativity, foresight, and thoughtfulness to prioritize your priorities. Whereas operating a business is more akin to an industrial “assembly line” process, guiding a business is a craft that has as much art as science. That’s why venture capital looks foremost at people when considering an investment.
One of the great things about working with Stage 2 companies is that there is usually a strong team operating the business, and any gaps they have in operations can usually be filled with a toolkit from EOS or e-Myth or Rockefeller Rules. Whether they are a strong team leading the business depends a lot on their ability to prioritize their priorities and pick the right things to choose on.
I’ll be posting a self-assessment soon for you to gauge how your team is at leading your business. So…well…this is just the placeholder until I get that! But if you’re reading this and are interested, send me an email – or give me a call and I’ll share what I have in draft form.
AI and machine learning have exploded onto the business scene in 2017. If you haven’t gotten an email asking you if you want to learn how IBM’s Watson can help your business, you will be soon. And we’re just getting started.
The bots are coming, and if you’re thinking your business is immune, I don’t think you’ll feel the same way by 2020.
What should you be doing in 2018 to prepare?
Many small companies are not going to have the budget needed to use AI. But if you’re in a small company, you should still learn about what it can do and how it can be used. By hearing how AI is being used in your sector, you can make your offerings better and your operations more efficient – even if you don’t spend a dollar on AI technology itself.
You should also figure out your company’s algorithms. AI works through algorithms – coded logic about how to interpret data. You may not have Big Data to work with, but you have algorithms operating in your company…like which customers are better to work with, what products help with what needs that a customer has, and which of your staff to assign to which types of projects.
Back in the old days, this was called Experience, or Tribal Knowledge. Now…we call it Algorithms.
Your algorithms will probably start simple – like which customers are better to work with. But that’s just the start. The real power comes when you think about branches that you can build to make the thinking more complex. For example, once you identify what services help with what needs, then you can identify if customers of one service are more likely to buy another service you offer. Where are the connections and patterns in your business?
Many of the small businesses I work with know these algorithms intuitively – they’re operating all the time in the heads of the staff who have been there more than 10 years. Often the first reaction I get when I bring up the idea of capturing the company’s algorithms is, “Oh, we don’t need to do that. We know that already…in our heads.”
Which is great…but right now, someone is working on coding into a computer the algorithms that are needed to run your type of business. It’s happening. Right now. Believe me.
And the need to document your algorithms will be much clearer – and more urgent – when your staff person is competing with a machine that costs less than a month of that person’s salary and doesn’t need health care. When that happens, you’re going to wish that you’d asked your staff to outline how they make the decisions that run your business. And that staff person is going to wish that they’d been thinking about how to build value on top of their knowledge, rather than clinging to the knowledge itself as the differentiator.
What do you do when knowledge and experience are no longer differentiators? What will the differentiators be? I have some guesses, that I’ll outline another time…
So, I don’t know how all of this will play out. I’m sure bots, at some point, will be able to do most of what we rely on workers to do now…and that there will be needs that bots can’t handle. But while we’re waiting for that to play out, you can use the thinking of AI designers to make your business better and be in better control of your destiny. And you can do that whether you can afford the actual AI technology or not.
Pretend that you’re designing your own bots, give them fun/interesting names (Watson! Alexa! Siri!), and have some interesting discussions with your Leadership Team about the algorithms driving your business.
My daughter is a huge Harry Potter fan, and she has been smitten by the frenzy of the release of Harry Potter & The Cursed Child. So last week I found myself watching Harry Potter 7 Part 2 with her. And in it, Hermione was recommending that she, Ron & Harry be more careful and plan out their return to Hogwarts, since that journey was likely to lead to a conflict with the forces of You-Know-Who.
Ron, feeling some urgency, dismissed Hermione’s request, saying:
“Hermione, when did any of our plans work? We plan, we get there, and then all hell breaks loose.”
Fortunately Harry, who is an intuitive strategist like most of the Second Stage owners I know, comes up with a short-term plan….”We’ll figure it out when we get there and we see what we’re working with.”
Let’s highlight some of the lessons about strategic planning that are contained in that little scene:
– Planning doesn’t work on its own, because things won’t happen the way you expected them to
– A good plan starts with an assessment of the current situation – assets, needs, opportunities
– There are times when good execution is more important than good planning – specifically, when a lot is uncertain, or you don’t have a lot of resources that you can put toward a plan (this is why planning is less important in start-ups bootstrap start-ups)
There are also some undercurrents to Ron’s statement – the stuff we can read “between the lines”:
– Planning helps get you ready for the battle, even if the plan doesn’t work
– People who fight the battle can use that experience to develop better plans – and do them faster
– When you’ve gone into enough similar experiences, you can rely on your intuition more than needing a plan – it’s likely that the situation will mostly look like something you’ve dealt with in the past, and the stuff that is new will be minor enough that it won’t overwhelm you
You Second Stage muggles have your own version of wands and spells – the experience you have that enables you to solve problems as if you were waving a wand, the insight and service you give your customers that can (truly) be like a spell, all the assets and resources you have built up to solve some of the world’s problems in a way that (if you step back from it) can seem magical to someone new to it. And all of those things will be made better, and more powerful, with the right amount of planning.
There’s a cost to growth
Here’s a universal truth that doesn’t get enough airtime among business leaders – and that many leader teams, therefore, don’t fully appreciate:
Growth must be funded.
I started working with a company recently that developed a BHAG of doubling in size over the next 5 or so years. The first year went well – but last year was rough, and they’re now feeling pulled between the commitment they made to their BHAG, the desire they have to distribute profits at a level they’re accustomed to, and the need they have to correct some operational issues.
They have a newfound appreciation for the fact that the decision to grow often comes at the expense of the ability to harvest profits.
What does it mean that growth must be funded? Here are a few of the things that you’d need to invest in to grow – that you wouldn’t need (or wouldn’t need as much of) if you weren’t growing:
- Expanding your training and talent development efforts
- Developing new marketing programs
- Hiring more salespeople or programmers – and if they’re hard to find or need training, then you need to hire them before you have the revenue to support them
- Expanding into new facilities or adding equipment
There can be many more, but you get the idea.
On top of those tangible investments, you’d have two more hidden costs: the time that your team spends solving issues associated with the growth, and the inevitable inefficiencies you’ll have the first time you do things.
This isn’t to deny the wonderful benefits of growth, which include more people and customers to make your stuff better, more resources to solve problems and offer rewards, and more impact and influence on your markets and community.
But as you develop your BHAG, realize that you’ll also benefit from having a Big Heavy Accessible War Chest. And that’s why I often recommend that the first 2 years of a growth strategy focus on increasing your profitability and building your reserves. The path to your BHAG will be a lot more fun and manageable if you have the money to deal with the challenges you’ll face.
Use your budget to juice your strategy
A few years ago I wrote an article about why it’s important to do both strategic planning and budgeting. It even has a link to a fun old Reese’s commercial.
So let’s look at what is involved in an annual budgeting process.
There are 4 basic components:
- The revenue forecast
- The baseline budget
- The strategic investment portfolio
- The profit allocation
For those of you in my Strategic Leader and Rising Leader programs, we’ll be talking about how to do each step in upcoming webinars. But for now, let me give a quick overview of them.
The reason most people don’t do a revenue forecast is because of the uncertainty of trying to predict future sales. That uncertainty is pronounced in small businesses – though revenue starts to get more predictable in Stage 2, and that’s why a revenue forecast starts to become a good idea. But a poor revenue forecast is better than no forecast at all, and you’ll get better each year you do them. (Warning: if you have a poor forecast, do not rely on it for major spending decisions!) If you just end up with a range of “between $1.2MM and 2.0MM” or an observation of “our forecast only gets us to 40% of this year’s revenue level,” those are still useful in charting your strategic course.
The baseline budget has all the costs that are involved in continuing your business. The easiest way to start to come up with the baseline budget is to take last year’s budget and replicate it. I suggest you group expenses into meaningful categories – it’s more useful to know your combined spending on rent, insurance, utilities, and other basics is, say, 30% of the budget, than to have each of those items listed separately.
The strategic investment portfolio comes out of your strategic planning – it’s the investments needed to accomplish the goals you’ve set. That information should come from business cases you do for each of the major goals you have. (Detailed instructions for a business case are part of our Strategy Toolkit that is included in our Starter Kit.)
Finally, the profit allocation divides the profit that’s left over into 3 buckets that show how much is actually free and available, and how much is reinvested in the business.
Remember that these steps can be adjusted to be simpler or more sophisticated for your business. To turn an old phrase…it’s the budgeting, not the budget, that matters.
Stage 2 companies must already have a clear and compelling value proposition if they’re successful enough to have grown out of start-up, right?
Well, yes and no. They do have enough traction in the marketplace to show that they have a value proposition that works. But it’s actually unlikely that the company has a systematic way to communicate the value proposition. And if that is the case, it will find that revenue growth is harder and harder to achieve – and in a competitive market, the company may start to lose ground to other companies who are communicating their message better.
What should a value proposition look like? When I started out in marketing, I worked with an excellent marketing agency, who explained that the “brand positioning statement” should follow a classic formula of, “For [market segment], Our Brand is the [product category] that [customer benefits] by [points of differentiation].”
So, for a clear and compelling value proposition, you need:
– A clearly defined target market segment or customer profile – is it marketing directors who work with global brands, or owners small businesses in cities, or…
– A definition of the product category – the marketing agency I worked with explained that orange juice could be defined as a breakfast drink or as a health drink, so picking the product category has a big impact on how the product itself is perceived
– A description of the customer benefits – what are the pains you alleviate (lost revenue, production downtime, etc.) and gains you enable (new revenue sources, talent retention, etc.)
– The points of differentiation – choosing from all the ways that your product works or the ways you deliver your service, what are the ways that set it apart from the competition?
Once you have your value proposition, make sure you reinforce it with everyone in your company, and you use it to focus your marketing and sales messages.
Sometimes I’m asked to help companies find the right path for their next 3-5 years – which qualifies as “long-term” strategy for a Stage 2 company. Other times, my strategy work focuses on short-term performance. In either case, it’s useful to have some way to measure progress and check to make sure we’re on the right track – to have a dashboard or scoreboard.
In designing a dashboard, there are 2 main factors: (1) what you will measure, and (2) how you will measure it. I would rather have a precise description of the business driver and an imprecise metric than an imprecise description of the business driver and a precise metric. In other words, it’s more important to understand what to measure than to have a top-quality measure itself – it’s not much help to have an accurate measure of something that doesn’t matter. Or, said even another way, you should not pick your metrics by what is easy to measure – you should focus on what will drive your business, and then do the best you can to approximate a metric if there isn’t one easily available.
As for the business drivers, when you’re measuring short-term performance, the first job is to decide what’s important to track – what’s going to move the needle. In general, the items to track to improve short-term performance are going to be either revenue or costs/productivity. However, I recommend you come up with more specific metrics that zero in on exactly how you’re going to drive those areas. Examples would be:
- Revenues from our top 20 customers
- Revenues from new customers
- Revenues from a particular product line or market sector
- Costs or productivity of non-customer-related activities
- Costs or productivity in the areas of your largest expense areas
For a situation where the short-term performance is OK and the focus needs to be on medium- and long-term initiatives, there are a broader range of areas that are usually represented in a dashboard. Examples of long-term programs include:
- Development of new products
- Diversification into new markets
- Building a new way to acquire customers
- Changing the sales process
- Training and developing your people in general, or the skills in a particular part of the business
- Developing partnerships
So, what do you do if you don’t have a precise metric available? I’ve found that Green/Yellow/Red works fine as long as (a) there is a clear owner of the area that is being tracked, and (b) there is discussion about the status. The benefit of having an actual metric is that good data leaves little open to interpretation. (“Data ends discussions.”) If you’re not working with good data, but instead using something like a color scheme, then you’ll have to make sure you spend time understanding and interpreting what’s going on.
I’ll have some more specific recommendations for designing dashboards during my upcoming Monthly Strategy Hour – register to hear more and ask any questions you have.
Many of you reading this post are 10%ers. And there’s something in the back of your mind eating away at your conscience. You know there’s something not quite right about it, but you tell yourself that 10% has always served you well.
And you might be right. You’ve probably gotten along well enough with your 10%. Then again, you may feel like it no longer has the same effect that it used to. So let’s take a look at your 10% and see if it’s still serving you.
I’m inspired to write about 10% because I met with a guy last week who said, “It’s just what I’ve always done. I don’t really have a reason for it, and sometimes I wonder if it’s what I should be doing. But I’ve never known how else to do it.”
Later on, after our discussion, he said, “Yes, that’s what I want – that would help me, and it would help my team. They’ve always been a bit confused and defensive about the 10%.”
What am I talking about? Let me use his words, “We did a strategic plan back in 2008, but we’ve never updated it. It was helpful and we did some things because of it. But for the last 5 years, I’ve just said that we should grow by 10% next year. And that’s what I say at the start of each year. I kind of know that I could or should have more to my goal, but we’ve been OK just trying for that 10%.”
It’s something I’ve heard many times before. So, let’s look at the good, the bad, and the ugly of the “Let’s grow 10% next year” approach to strategic planning.
The good is that it’s an easy way to communicate that you want to grow, but not too much. It says, “Let’s get better at what we’re doing.” It’s also quick – most leaders who use 10% as a goal (I just can’t bring myself to call it a strategy!) need about 1 second to access their intuition and come up with that number. And it’s also good that most leaders who use 10% don’t enforce it – some years they’ll decline 1%, and others they’ll grow 20%, and both are received equally.
The bad is that 10% doesn’t tell anyone how to achieve 10% growth, and, since the person who used it likes a planning process that only takes 1 second, they usually won’t commit the time to strategy and planning to figure out how to get the 10%. And so, they just react to whatever the marketplace offers. That’s not good, but often times 10%ers are bailed out by a strong market, and so reacting is bad but OK.
Which brings us to the ugly, which arrives when a 10%er is managing a business in a market that is seeing substantial change. If that’s the situation, 10% is of no use, and in fact may be counter-productive. Because at the heart of 10% is “let’s change, but not more than we’re comfortable with.” And that can breed complacency that appears to be fine…until it’s too late for any small adjustments to work. And if the only goal you’ve ever had is 10% growth, you and your team are not going to be prepared when you need to lead your company outside your comfort zone.
So, if you’re a 10%er, you have a choice – to be passive or active. Either keep enjoying that comfortable feeling until you’re forced to do more…or lead your team to have a new set of discussions that develop your company’s ability to identify opportunities a little outside your comfort zone, go after them in smart ways, and stay ahead of the market.