Most people recognize that markets don’t stand still. Customers, competitors, and technology are constantly changing.
Although most people recognize that, many don’t appreciate the imperative that that dynamic places on them as leaders. The simplest way I’ve learned to describe that imperative is this…
Your business model is a depreciating asset.
In other words, the way you do business – whether that’s how you find customers, how you produce what you offer, how you deliver what you sell – is losing value every day.
Like other depreciating assets you have – your house, car, refrigerator, computer – you have to maintain it simply for it to keep working the way it’s supposed to. And you have to more-fundamentally change or replace it on some kind of predictable cycle – 3-4 years for a computer, 5-10 for a refrigerator.
How quickly your business model depreciates is mostly a function of the degree of change in your market. And, since there’s more change in every market these days, we all need to put our leadership teams on notice that we’re going to have to reinvent our business model sooner than we’re used to. Rule of thumb: the cycle is probably half what it used to be. (So if the model used to last 10 years, it’s best to plan for it to last 5.)
If your leadership team is skeptical when you tell them this, offer the following true story. I know a smart, tech-savvy teenager who has a nose for online businesses. He found an opportunity last Fall that he liked. Here’s how that played out:
- Week 0 – discovered opportunity
- Week 1 – supply chain set up
- Week 2 – open for business
- Week 5 – profits to date: $200K
- Week 11 – profits to date $500K
- Week 13 – rejected offer to purchase business for $100K
- Week 16 – competitors raise cost of advertising to a level that the economics no longer work, business model no longer profitable, business closed
To summarize, that’s a business model that was able to net $500K in 4 months – I know $15MM businesses that aren’t generating that profit for the year – but whose value depreciated to $0 in that same 4 months.
If you talk about markets changing, it seems like something “out there” that may not impact you. If you talk about your business model depreciating around you week by week, it gets much clearer that you need to act with some urgency.
Small businesses are often dealing with situations in which performance has not met expectations. It’s not really a failure, per se, but there has to be a change. A restart.
It might be the European division, or the HR department, or the implementation of the new CRM. When the gap between where the initiative is supposed to be, and where it actually is, is big enough, a restart is needed.
(Hmmm, you say, how will I tell if my situation is “big enough” to merit a restart? The answer is different for every situation, but basically, it comes down to whether the business can handle the underperformance for however long into the future you want to look. A failing overseas office in one company might continue to bump along if the rest of the business can prop it up, while a similar office in another company is a crisis because it’s sucking too much cash that other parts of the business also need.)
When I’m faced with this situation in one of my clients, I work along 4 paths to do the restart:
– A credible though possibly uncertain understanding of our value, and an informed belief that people want what we offer, and a vision for why it makes strategic sense to “play that game” as opposed to focusing on something else
– A leader or leaders who can inject the energy needed to change things and break new ground
– The funding needed for the plan…and the mistakes we’ll make as we learn the flaws with the plan
– A story that refocuses the team from the failure and the pain, to the vision and the hope
As a leader, you know what these kinds of situations are like. Not clear. Not simple. Not easy. But if you have those 4 pieces, you’re well on your way to a successful restart, even if the results don’t come right away. And if you don’t have those 4 pieces…then that’s the first thing you need to work on!
Not all strategic decisions need the same amount of analysis. This is something that many founders understand intuitively. But it’s also something that becomes more complicated as a company grows.
Why? Because the decisions get bigger and more complicated, what worked for a Big Decision in the past often doesn’t work for the Big Decisions of a bigger company. In addition, the “decision environment” gets more complicated, with more potential participants and more dynamics among them. Who do you include? When? How? Who provides input and who participates in the decision? How is the decision actually made?
What qualifies as a Big Decision? Something where the payoffs are extraordinary – say, it could have an impact of 20% or more of a company’s revenue, or it could impact more than a third of the employees – and/or where the risks are extraordinary – say, it could take 20% or more of a company’s discretionary resources to implement.
Decisions fall on a continuum – as the stakes rise, so does the need to treat the decision more seriously.
And how do you do that? As the decision gets bigger, you should add more information, more structure and process, and more focus and energy on the decision before its made. If you don’t, you can be pretty sure you’ll be spending more time than you’d like or expect after the decision.
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.
Hammering a screw …
Baking a cake in your dishwasher…
Pedaling your car…
One of the most common ways that small business owners get stuck is to have the wrong mindset for a problem. This happens a lot when companies emerge from start-up and move into Stage 2 of their development.
What does it take to be successful as a start-up? A high-quality product or service, quick reflexes, responsiveness, experimentation, frugality.
But those same qualities work against you when your business moves to Stage 2. With the right mindset, you stay in control of new opportunities and problems; without the right mindset, you struggle and waste time with solutions that don’t work.
There are many ways that business is different in Stage 2. Let’s look at a few…
Focus on ROI, not cost. In Stage 1, it’s important to manage your costs so that you can get to a point of profitability. In Stage 2, it’s important to focus on your investment returnsand the best and fastest way that you can get results. Often times in Stage 2, the best answer – the one that will get you the best results – is not the cheapest. But many Stage 2 leaders can’t break the frugal mindset, and are stuck in a cycle of underinvestment that never gets them where they need to go.
Focus on markets, not customers. Success in Stage 1 is a built on one-to-one sales, and that intimate contact is important to win early adopters. In Stage 2, though, making sales customer-by-customer is not scalable. What’s needed is the ability to sell to a market. The change from sales-driven to marketing-driven is a big one, and if a Stage 2 leader thinks she can just do “more of the same,” she’ll never be able to scale the business beyond her ability to add good sales people. (And we all know how hard that is.)
Spend more time on strategy and communication. Stage 1 businesses are not simple – but Stage 2 businesses are much more complicated. In fact, as a business grows, the complexity grows exponentially – but many Stage 2 leaders are thinking that it’s only growing linearly. Because the business is more complicated, it needs more time invested in strategy (which is how you coordinate and direct all the different parts) and communication (which is how you align all the different parts). Many Stage 2 leaders think that the decisions they have to make are simpler than they actually are, and are stuck in a reactive mode because they don’t spend enough time thinking about their situation to develop (more complicated) action plans.
What can you do if you’re stuck because of your mindset?
- Honestly assess whether you’ve been as successful in Stage 2 as you were in Stage 1
- Find someone with experience in your situation, who can help you understand the right mindset
- Ask your team what frustrates them – they usually have a good sense of how well you are managing, communicating, and planning
- Get trained on management and strategy, which are going to be key to your success in Stage 2
Earlier in the summer, I wrote about Stage 2 leadership. If you don’t have time to look at that post now, here’s an important excerpt:
For someone with profit and loss responsibility, traits that are assets for an individual are liabilities for the company. What that means is the things that make you strong as a leader – your ability to design a product, sell, motivate others, make quick decisions…whatever your unique strengths are – at the same time create vulnerabilities in organizations you lead. Why? Because organizations need balance, and your strengths create blind spots – and your blind spots create imbalance.
So, as a Stage 2 leader, your job is to counter-balance your strengths! The opposite of what your job was in Stage 1!
Since leaders often have to change their style as the business goes from Stage 1 to Stage 2, I promised to give some tips for how Stage 2 leaders can manage that change based on the work that I’ve done with Stage 2 executives. Here they are:
Motivate: Change is hard – if it weren’t, we’d be doing it already. You need to have a good reason to go through all that effort. So, to change, you need to clarify why you want to do it – what’s the bigger purpose? As part of that process, clarify what you want the outcome to be – what success looks like and how that will contribute to your bigger goals. Lastly, have reasonable expectations. Moderate change takes three-to-six months of effort. Deep change should take a year or two (or longer), though you should start to see meaningful progress in three-to-six months.
Assess: Our most important liabilities are the ones that are blind spots, so it is important to get an independent view about yourself. This could be an assessment that shows your style in an objective framework. (I mentioned the assessment from Perth Leadership Institute in my last post, but there are many out there, and I work with several). It could be you asking for feedback from your peers, colleagues and subordinates – and really listening to that feedback, non-defensively. It could be talking with a coach. If you are not used to working on your own development, then the assessment may be challenging for you, so pick whatever method you are most comfortable with.
Change your “mental model”: For us to change, we have to think of ourselves, or our situations, differently. We can’t create a solution for a problem until we think of the problem differently! For more on mental models, see my post earlier this summer called Axes, Chain Saws, and Mental Models.
Get help regularly: To make an important change in yourself, you are going to need repeated, consistent help from someone else who has the mental model that you need to change to. This could be a co-worker or a coach. It could also be a CD that you listen to in the car, or a book that you refer to regularly.
Keep at it: Repeat the activities I listed above on a quarterly or semi-annual basis. Re-motivate yourself by connecting back to the higher goals, reassess where you are (looking for the progress you’ve made) and recommit to the help you’re getting.
Or…don’t change – just have someone else do it. Some change we have to do ourselves – we’re going to be on the stage and have to get better at speaking, or we’re going to be leading and have to have a clearer idea of where we’re headed.
But change is hard, and often times it is better to get someone else to do whatever it is we need to do – someone who is built differently than us and finds it easy to create the result we want. Hire the extrovert to sell, hire the introvert to market, hire the analytical person to make better decisions, hire the grounded realist to slow things down. They’ll do it with an ease and success that will amaze you. The big idea for you to remember here, though, is that you have to give up some of your control to that person for it to work.
There is a great book on change called Change or Die, by Alan Deutschman. He boils the change process down to Reframe (change your mental model), Relate (get help regularly from someone who has the new mental model you want), Repeat (keep at it) – so if you want a simple summary of my thoughts above to take with you, I think those three words sum it up well.
Stage 2 Leaders: Reframe, relate, repeat – and your businesses will be stronger.
Read more posts like this on Crain’s Detroit Business.
I bought a new car recently, and to start it, I just have to press a button. As a management consultant, this small change has been fascinating to experience first-hand. It started out as a small adjustment, but ended up with a complete mindshift.
For the first week with the new car, I would walk to the car with my keys in my hand, open the door with my keys in my hand…and then put the keys into the cup holder because I couldn’t put them in the ignition (where I wanted to put them).
The following week, after I locked the front door, I put my keys right in my pocket, walked to the car, got in and pushed the button to start it up (with a slight feeling of liberation).
By the next week, I realized that I only needed to touch my keys when I am dealing with my house or my office, and even then, only when I have to lock up or unlock. So, I now think of my keys completely differently. Before, they were a constant companion, kept ready for action whenever I was moving. Now, there are days when I put them in my briefcase in the front hall in the morning and take them out in the front hall at night – without touching them in between. I no longer need to touch my keys to go places (even now that sounds strange to say).
My experience reminds me of last month’s great Crain’s article on the transitions that family businesses go through. It described changes large and small made by next-generation leaders of family businesses. The whole article is worth reading, but a quote from Mike Kotsis of Atlas Wholesale Food Co. stands out:
“Old habits” are one of Atlas’ biggest challenges, Mike Kotsis said. “Some people here have done business the same way for more than 20 years,” he said. “Every time we implement a new process, employees tend to get stressed and revert to the old process.”
I have clients who are 10, 25, 50 and 100 years old. Tomorrow, at a 25-year old client that is going through a leadership transition, I will be facilitating a strategy session with about 25 members of the leadership and middle management teams where we will revisit the vision that was created when the new leader came in two years ago. As can be expected, the company is having its bumps as it goes through the transition, so we need to talk about the vision again – maybe to change it, maybe just to re-understand it with more experience under our belts.
In tomorrow’s session, we’ll use techniques from The Art of Engagement, in which one of the lessons learned at the end of the book is, “People don’t need help in starting new actions; they need permission to stop the old ones.”
Given my experience with the push-button start on my car, I’d say it a bit differently: People need help in starting new actions and permission to stop the old ones.
And in helping people start new actions, it’s important to have the right expectations. In the coaching I have given and received, it’s not unusual for it to take months for people to make a change so that they consistently act in a new way. During that time, they don’t understand completely, make mistakes, backslide into old behaviors and get discouraged.
With help, they also usually make good progress that, over time, gets the company and its people to a better place.
Read more blog posts like this on Crain’s Detroit Business.
Crain’s Detroit Business, which is now devoting regular coverage to southeast Michigan’s Second Stage companies, recently carried an article about forming a Board. Having just formed my own Board of Advisors, let me make a few recommendations that I wasn’t able to make in my comments in the article.
Start with your current advisors. The best place to look for initial members of a Board of Advisors is the cadre of informal and formal advisors that you already have. Simply formalizing the process, and bringing the advisors together, is a substantial step forward, and adding new (unknown) people into the mix is just as likely to undermine the purpose as help it. In addition, you will likely have some trial and error as you develop the Board, and it will be helpful to work through that with people who already know and like you.
Work with the Board to define its purpose. There is usually a general sense of how and why the company leader would like to use a Board. However, a Board is going to be most active and valuable if its members are fully engaged – and to get that, it is best to have the Board discuss how they think they can contribute, and what they would like to get from the experience.
Let the Board stretch you. Good advisors provide perspective that you don’t have on your own, and are effective at helping you counter-balance your strengths and weaknesses. If you put a group of advisors in the same room, the message is often times stronger and even more challenging for you. Check your ego at the door, remember that even leaders have weaknesses, keep an open mind, and do your best to accept and use the advice.
Manage group dynamics. Just because your advisors are all good on their own doesn’t mean that they will work well together. The topic of group dynamics should be part of the Board discussion from the start, and you should openly acknowledge that the chemistry of the Board is going to be important. You should also include team-building events or discussions that will help develop the chemistry.
Prepare to improve. Establish with the Board that its role and mechanics are likely to evolve as you learn more about how it works and how to use it. Involve the members in the improvement process, and solicit (and use!) their input about how the Board can be more effective.