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.
You don’t need to hire every position with the same approach. Sure, some companies have the same hiring process for everyone, and it often involves spending 6 months on each hire and only hiring A+ people. In theory, that’s what you should do, but in practice, there are some hires that deserve more effort and some that deserve less.
How do you tell when to invest more or less? I’ll be talking about that on my webinar this month – the 3 different approaches to hiring, and when each one is appropriate.
For this column, I want to focus in on the highest-investment approach.
When does a hire deserve a heavy investment? The primary drivers are (a) the impact the position can have on the organization, and (b) the experience your company has with hiring that specific type of position. In other words, you should invest more heavily in your recruiting process when you’re hiring:
- Executive or key manager positions – because the impact of that position will be a multiple of the costs of even an elaborate hiring process
- New positions – because you don’t know what you’re looking for, and because you need to train your organization on what the new position will do
What does it mean to invest heavily in a hiring process? You should spend more time…
- Planning the position before even starting the recruiting process
- Choreographing the hiring process – who to include when
- Building a bigger candidate pool
- Interviewing candidates
- Confirming your final choice
It’s OK not to go all-out on every hire. What’s important for growing companies is having the wisdom to know when a more extensive recruiting process is needed, and having the discipline to invest the time needed when it is required.
If you do that, you’ll avoid the costs of a bad hire, which can be dramatic – around 2-3x the person’s compensation for a manager, and 5-10x the person’s compensation for an executive.
Did you ever see the Reese’s Peanut Butter Cup ads that showed one person with a chocolate bar, and another with a tub of peanut butter. They run into each other, and discover that chocolate and peanut butter are “Two great tastes that taste great together.”
Click here to see one of the ads.
Those ads remind me of budgeting and strategy – two great processes that go great together!
Now, if you’re an early Stage 2 company, you may not be doing either. If that’s the case, you have a chance to leapfrog over many later-stage companies, because many do either budgeting or strategy, but not both.
Strategy is a qualitative process in which you assess your situation and draw conclusions about what parts of your business have the best opportunities to develop or worst problems to fix. Budgeting is a quantitative process of allocating resources based on the conclusions you draw in your strategy process.
If you have strategy without budgeting, then you haven’t really determined how you will handle all the commitments you want to make. Later, when it comes time to spend money, there will be other things that also need money. If you haven’t decided during your budgeting process what gets money and what doesn’t, then you will make a tactical decision. If you’re lucky, it will still be a good investment. If you’re not lucky, you’ll find you’ve spent your money on the wrong thing.
If you have budgeting without planning, then you will just get more of what you’ve always had, which is usually 10-20% better…until one year you realize that it’s not 10-20% better, and you’re not sure why, and you’re not sure what to do about it. If you haven’t decided in your strategy process what deserves investment, you’ll find yourself realizing too late that “more of the same” only works for a limited time. If you’re lucky, you’ll find a new path without too much investment. If you’re not lucky, the weak area of your business will become a quagmire that costs you a lot of money.
Just as the Peanut Butter Cup combines chocolate and peanut butter in one convenient package, the Business Case combines strategy and budgeting. They’re not hard, but they’re not easy either – there are a few tricks to making business cases work for a Stage 2 company.
My sons love Legos. They love building the kits based on the instructions that come with them – and they love building their own creations out of a bin of parts that is the resting place of all those well-made sets.
When my son is building a triple-winged rocket, or an army base, it’s very clear that the creation process is not connected at all to the sales process. Yet, for some reason, when we are working on an innovation in our business, for some reason it’s much easier to think that the creative process is inherently connected to the commercialization process.
But it isn’t.
Being a business owner, I sometimes think as I watch my son and his Legos, “What would it take to make this little hobby a business?” My mind first goes to customers – their feedback, engagement, and money. And then it goes to logistics – managing the schedules, inventory, work flow.
You need creativity, customers, and control to commercialize innovations. The creativity part comes easily for Stage 2 companies – but if you don’t have customers and control, you’re just playing with Legos. Which, I can tell you from watching my sons, is engrossing and rewarding…but is not a sustainable business model.
As your company grows in Stage 2, you should use your sales process to drive more value – yes, for your company…but also for your customers. The only sustainable growth comes from win-win sales, so your sales process will benefit you and your customers.
One of the most important ways that your sales process can increase the value you bring to and get from your customers is by uncovering what the real need is. Oftentimes, customers don’t know what they don’t know, and by managing the sales process well, you can help them realize what they really need. In doing that, you also make sure that you’re paid for any premium value that you give them.
Price is a function of value, and the surprising fact that you need to know is that value is established when the need is defined, not when the solution is defined. If a customer comes to you and tells you what they need, then they have already set the price in their mind. On the other hand, if a customer comes to you and asks you to help define what they need, then you create the value together.
If you’re like most Second Stage companies, it’s hit or miss whether you’re talking to customers about the answer or the problem. It takes a clearly-defined market strategy, and a disciplined sales process, to ensure your conversations consistently focus on the need. That takes some work, but it’s also the best way to grow your small business in Stage 2.
As a small business emerges from the start-up phase, and becomes a Second Stage company, the sales process can and should be formalized.
It can be formalized because you now have enough experience with sales to know some standard steps that you usually follow.
It should be formalized because you need to start building consistent expectations with your customers, you need more consistent information for your team, and you need to start to build up systems around your sales that will need some standardization.
I’m not suggesting you go overboard on this – just some general guidelines or steps that you’ve learned help you.
How do you create a (somewhat) standard sales process?
As a first step, think about the customers or orders that your team handles smoothly. What usually happens when those orders come in?
Then, think about the customers or orders that are a hassle. What usually happens with those orders – and what do you notice doesn’t happen with those.
When I asked these questions of a 20-person manufacturer last year, they realized that most of their sales followed 4 basic steps – but also that complex, unclear orders (which happened to be their highest-value work) needed a different process. They outlined the two different processes, and when I met with them 3 months later, they said, “We’re handling all of our orders much, much better. And the customers are a lot happier.”
If your small business has grown into a Second Stage company, your team and your customers will appreciate you starting to understand and standardize your sales process.
Once you have segmented your customer base, the question is, “What can I do for my best customers that will drive value for them and us?”
The answer to that question should be captured in an Account Plan, which outlines the relationship and opportunities you have with a key customer.
Here’s what I recommend you include in the Account Plans you write for your Second Stage company:
– History and highlights of the relationship
– Background on relevant people you know at the company
– Description of why they work with your company and why they think you’re valuable
– Immediate and next-year opportunities that you’ve identified, as well as the 3-5 year potential for the relationship
– Likely relationship and engagement for the coming year
– Plan for additional activities to expand or enhance the relationship and engagement in the coming year
You’ll be surprised at how much you learn about your customer and yourself when you write an account plan.
I’m working with a $2MM firm right now to build in a performance-based aspect to their compensation program.
Usually, I would follow a process of compensation strategy (guiding principles for how we make comp decisions) > compensation framework (the components that go into comp decisions) > performance framework (the specific definitions of performance). (If you want a full description of the process, you can get it from my book, The Stage 2 Owner’s Manual.)
But with a small firm, we’ll be able to skip the comp framework step. That’s the step where “What does it take for you to stay in the game?” changes to “What is the right amount to pay you?” It looks at things like market pay rates, and what the role of the person is.
If you’re a small Second Stage Company, the most important things to address when you upgrade your compensation program is why you pay people what you do – the overarching principles that are at play, and the specific performance drivers you look at. When you get bigger, or when compensation starts causing you problems, you can fine-tune your pay program based on some more sophisticated thinking about what makes up employee compensation. But that’s a short-cut that, in most cases, is fine to take when you’re smaller.
Stage 2 management focuses on getting approximate answers, not precise ones – and then using judgment to realize when an answer can be more approximate, and when it needs to be more precise.
Have you ever thought about the impact of over-paying, or under-paying, the staff in your Second Stage company?
If you are over-paying, then you are taking resources away from other parts of the business that would give you a higher ROI. Over time, you’ll under-invest in the areas of the business that make your company stronger, and the result is a company that is paying its employees relatively well while weakening the business.
If you are under-paying, the opposite is true. You are “mining” your employees for the value they create, and if they don’t feel rewarded, you will be faced with a triple-whammy – you’ll lose someone who was providing more value to the company than you realized, you’ll have turn-over costs, and you’ll have to spend more than you expected to replace that person.
Compensation is about aligning the rewards that employees get with the value that they create for the business. As your business gets more complex in Stage 2, that alignment gets harder, and more important.
You’ll never pay someone exactly the right amount, but making sure you’re close is important for you, your business, and your employees.
I was reading the blog post Top Compensation Planning Mistakes (And How to Avoid Them) and there were a couple that stood out as particularly important for Second Stage Companies:
Saying one thing and doing another, which the blog says can be avoided by “avoiding secrets…and reducing exceptions.” The particular challenge for Stage 2 is that most leaders who are emerging out of the start-up phase don’t have expertise in compensation, and don’t realize how complicated it gets in Stage 2, and so they hide how they make compensation decisions in a “black box.” This usually works fine for some period and then starts to break down as they add people. In Stage 2, it’s especially important to think through a comp strategy so that you can avoid secrets and reduce exceptions.
Not preparing managers to talk about compensation, which the blog says can be avoided through training and scripting answers to key questions like “How does the organization set salaries?” and “Why did I only get this much money?” The particular challenge is that most Stage 2 managers don’t have expertise or experience dealing with compensation – and in fact what experience they have is with the start-up phase’s “What do you need to stay in the game?” approach. One of the most important aspects of a compensation program for a Stage 2 company is the messages that it communicates about how the company creates value and how performance is measured. If those messages don’t make it to employees – or, worse, if the wrong messages are communicated – much of the power of the compensation program is lost.