Three Circumstances

Let me tell you about three leaders who find themselves in three different places.   All are real leaders; all are current circumstances.  I will offer no commentary.  Take from their stories what you will.

The first leader is feeling very good.  Not so long ago, she recognized that her successful business needed to change, to grow and mature.  She undertook a process that helped her organization make this change, and it wasn't necessarily fun.  While there were signs of hope along the way, and she believed in what she was doing, much of it was uncomfortable.  It often alternated between nerve-wracking and just plain boring.  But she persevered, and she's glad she did.  Today the business is vastly improved.

The second leader is not feeling very good.  He recognizes that his successful business needs to change, to grow and mature.  He is starting a process designed to help his organization make this change, and it is painful.  The company's methods and expectations, some long-cherished, are under the microscope.  The team has identified some things as areas for improvement, which means some current practices are now implicitly labeled "inferior."  New practices - logical and hopeful but unproven, and therefore scary - will have to take their place.

The third leader is a bit apprehensive.  Every year his organization delivers superior results.  The line on the chart just keeps going up.  But he wonders if they're doing the best they can... or just better than they did.  He is concerned that they could be complacent in their success, and underperform relative to their potential.  He plans to undertake a process to stretch the organization further, to evaluate their practices and expectations in order to identify greater opportunities.  He is aware that discomfort lies ahead.  He believes that any significant change - no matter how good the intent - will feel threatening, or exhausting, or frustrating, or even boring somewhere along the way.

In which of these three circumstances do you find yourself today?  And if you're feeling good, how long until you begin the cycle again?

8 Blocks Is Almost Here

First, though, a reminder of the second law of thermodynamics.

The natural state of everything is decay.  That includes business.  So we shouldn't be surprised when our processes get sloppy, our products look old, and our enthusiasm for doing more of the same dims.  But we can't allow it - we have to keep advancing, renewing, rebuilding.  The only way for a business to thrive long term is to keep pressing uphill.  And the goal that forces us holistically uphill is Growth.

That is reason enough.  But many of us have additional reasons to strive for growth: expectant investors, unprofitable operations, poor cash flow, a boss who Says So, or just the compelling belief that we can do better.  The net effect is that the fundamental challenge for most leaders in business is to achieve profitable, sustainable growth.

I've had the chance to work - both from the inside and the outside - with a diverse range of businesses.  Whether they were publicly-traded or private, young or old, conservative or aggressive, they were pursuing growth.  They had the core objective in common, but not much else.  They had different cultures, employed different models, served different markets, used different strategies and tactics... and experienced different levels of success and failure.

As I watched and worked with such companies, two things became clear:

  1. Just doing something was no guarantee of growth.
  2. Doing what had worked for someone else was no guarantee of growth.

You have your own examples of businesses that spin their wheels trying to grow.  They're trying, but their effort is wasted.  And you also know companies - maybe your own - that can't replicate some other organization's success.  You're working with different context, so you can't just do what Steve Jobs did.

Every business has its own unique reality, I realized, and that reality is comprised of invisible but powerful forces that define the unique shape of its opportunities.  The better we understand our reality, the more we align our efforts with that reality, the more effective our actions.  Now how can we go about doing that?

We need some kind of tool or framework that helps us figure it out.  And since our goal is to grow, not to think about growth, it needs to make sense, promptly, so we can get from thinking about our unique situation to taking action.  Enter 8 Blocks: The Critical Realities For Growing Any Business.

8 Blocks, which arrives December 7th from GamePlan Press (Arlington, VA), is based on a very pragmatic framework that I developed and use with my clients.  Four of the realities are internal - they're about the business.  Four are external - they're about the markets we serve.  Looking at our unique reality in these eight ways allows us to identify our best opportunities, and define actions that give us our best shot at growth.

8 Blocks also gives us tools to figure out how we're doing along the way.  When we understand why we chose the actions we did, and how we expect them to work, we can better evaluate our progress.  If our efforts haven't paid off yet, we know whether they deserve more time, or that it's time to change course.  When a course change is necessary, we can evaluate the moving parts in our assumptions and plans to figure out how to adapt our efforts.

The book is new, but the concepts stand the tests of time and diversity of application.  Over and over I've seen businesses fail to grow because their efforts are incongruent with one or more of these critical realities.  Those that succeed do so because they work - whether by luck or design - within the unique shape of their constraints and opportunities.

If you're striving for growth, I hope you find 8 Blocks to be a powerful resource.  To pre-order a copy, visit Amazon or GamePlan Press.

Inevitable

It's an existential question: can a business thrive without growing?

Public companies may have a pat answer.  Their masters expect always-appreciating share value, or else.  But is growth natural?  Is unceasing growth realistic?  Or is the drumbeat of Onward, Ever Upward really just a form of tyranny?

I've wrestled with this.  Living in Public Company Land for a long time, I used to think that the optimal situation was a private enterprise with no external masters demanding incessant growth (though this would rule out most private equity owners, as well as founders' families with ever-more-expensive tastes).  Leaders in such businesses could make more reasoned decisions about what was healthiest for the company... and even the market.

But could they really thrive long term by finding a nice, healthy position in the market and staying there, without growth?

The problem is physics.  I think often of the second law of thermodynamics as it relates to business, and not because I know the zeroth (yes), first or third laws.  The second law explains that nature itself is at odds with a thriving, long term business.  It states, in my paraphrase, that the natural state of everything is decay.  And the only alternative to decay is to renew, rebuild, advance.  Max DePree, of Herman Miller, made this point years ago in his book Leadership Is An Art, and it stuck with me.

Muscles are either being built up or atrophying.  Our minds are either expanding or calcifying.  Our products are either aging or being remade.  Our aesthetic designs are either slipping behind the times or being reworked to stay ahead.  There is no sitting still.

If we take the path of least resistance, we choose decline.  And that is why growth is necessary for businesses to thrive.  Growth requires that we keep pressing uphill.

To grow, at least in the long run, we have to advance.  We have to understand our market better, we have to serve our customers better, we have to operate better, we have to work with our vendors better, we have to manage our cash better, and we have to deliver ever-better products.  (Apple is expected to announce shortly the next version of the iPhone 6.  Didn't the first iPhone 6 launch just a year ago?  Yes.)  When we adopt a growth mindset, we rule out the perspective that leads inevitably to decay: "We've arrived."

I'll admit that the implication can be daunting.  We're acknowledging that the only good path is a career set against the grain.  But it is what it is.  The most magnificent house or company or country, left alone, will crumble.  The only alternative is constant renewal, rebuilding and improvement.

That's why we keep working on ourselves and others.  It's why we try to stay educated, healthy and invigorated.  It's why we develop the people around us, and the people coming behind us: to bring new energy and fresh perspective to the task.  It's why I've put away the false notion of a privately-held utopia, where the employees hum happy tunes while delivering the same lovely profit each year.

Of course, if we accept the mantle of Onward, Ever Upward, we recognize the fundamental importance of this question: what does growth require?  Do we just have to try harder, everywhere?  Or is there a way to evaluate our business and the market to know where and how we most need to advance?

If you're interested in those good questions, watch this space.  Soon after Apple's Sept. 9th press conference (I wouldn't want to step on their toes), I'll be ready to announce an exciting project that gets right to the heart of how we grow.

Channel Changers

A man and his daughter cleared the field, built the bleachers, sowed the grass, put up lights, raked the dirt... and one night a long line of cars began arriving.  And they're still coming, in real life, to visit the Field Of Dreams in Dyersville, Iowa.

But they're not coming just because someone built it.  They're coming because the place has a channel - a movie that reaches millions of potential visitors with a touching and inspiring message (offset only a little by Kevin Costner's slightly awkward pitching motion).  And over the years, the movie channel delivered enough momentum so that the word of mouth channel is now strong.

Product, innovation, differentiation, messaging - they all get a lot of press.  But the biggest challenge for many businesses is not having something worth buying, or even knowing how to talk about it. For many, their biggest hurdle is channel.  It's figuring out how we're going to get in front of the right people at the right time to fill a pipeline with enough good prospects to reach our goals for growth or stability or even just survival.

When we're trying to develop new business - whether a new product line, a new market, or an entirely new model - we usually look first for existing channels.  Salespeople are expensive, and it's hard work to develop relationships that lead to transactions, so naturally we hope to find some channel that gives us pre-established access to the right kind of customers.  But this works only when certain conditions are present.

The channel must have access to the right people.  This seems obvious - a B2C company wouldn't try to advertise to dads in Redbook, even though the dad may find himself near a copy of Redbook while he eats his breakfast cereal - but in B2B and B2G markets it's easy to try to convince ourselves that an available channel is close enough.  The trouble is, established channels know what they know and do what they do.  So they may call on industrial plants, but if their relationships are with the maintenance department and we need to get to the plant manager, we're probably in for disappointment.  Or maybe they call on Code Enforcement at municipalities, but we need to get to the Water Department.  Sure, they're often just down the hall.  Our channel partners won't even have to park in a different lot to make that call, but there's an invisible moat that many channel partners won't cross.

The same is true when it comes to product.  If they're calling on the right people, but aren't comfortable with our kind of product, we won't see much progress.  It could be the difference between a one-time system sale and an ongoing subscription service, or an OEM component sale versus an integrated system.  The channel partner has to be comfortable with the nature of the product - its scope, the technology, the sales process, the pricing method.

The final condition is productivity fit.  The existing channel is already selling something to customers.  Assuming they're the right customers for us, and the product suits the channel, the channel still needs to experience adequate financial and psychological benefits to add our product line to the mix.  It has to be worth their time.  This is a deceptively-easy equation for us.  We think, "Hey, every sale of our product is money they don't have today.  Who wouldn't want to make a few extra bucks?"  But the equation for channel partners is much more complex.

They're thinking about how much they'll have to learn, how strongly they believe in the value proposition of the new product, how much more transactional work they will undertake due to the new product, and how the new product will affect their customer relationships.  And for the savvy channel partner, opportunity cost is always present.  Sure, they could spend a little more time with a customer to talk about our product.  But they could also spend a little more time cultivating relationships to sell existing products, or they could spend that time promoting other new products (a good channel is always in demand).

Here's the most dangerous part.  These conditions are often not necessary for us to sign channel partners.  Channels are opportunistic.  So when we offer an opportunity for them to collect demand, they think, "Why not?"  But that's where our roads diverge.  We sign an agreement and see visions of dancing sugar plums, in the form of channel partners out in the marketplace, beating the bushes on our behalf.  The channel partners just see another thing they can say Yes to if someone asks for it.

Does Amazon want access to my e-book? Yes.  Will Amazon generate demand for it?  Probably not, unless the title is Why Amazon Is Right For Your Product.  The risk is that we'll sign a bunch of channel partners who are happy to put up our logo/brand, but not invest any effort.  It can take precious months - if not years - for our hope to drain away, until we finally realize that we need to try again elsewhere.

These conditions are necessary for action.  Get them right and you might even see results way out in Dyersville.

Eggs In Baskets

There are no guarantees in business.  The innovative product, the next five years' economy, the new CEO... is never a sure-fire thing.  No matter how careful, thoughtful and diligent we are, life is too complex for certainty.  The best leaders recognize this and proactively spread out their risk.

So let's count baskets, some more obvious than others.

Macroeconomic: if one sector of the local or global economy took a sharp downturn for a while - if people stopped building houses (a not-so-distant memory), or oil prices plunged (that never happens), or if the Euro weakened against the dollar (I see a pattern here) - could your business survive?

Markets: closer to home, could you survive if demand plummeted in a single market - say, for horizontal drilling rigs or traditional taxis?

Customers: does any one customer represent more than 20% of sales, and what would it do to your bottom line if that customer disappeared?

Technologies: how much of your business relies on a certain technology not becoming obsolete?  This is a two-sided risk; the technology may be market-facing (everyone uses light bulbs) or inherent in your operational design (we use the byproducts of coal-fired power plants).

Regulations: if, thanks to the pen of a lawmaker or the loss of funding, a key regulation vanished, how much of your business would vanish with it?

Ideas: do all your ideas come from the same sources (the same people, the same activities, the same media)?  Are they tried-and-true sources, or do you need fresh thinking?

People: when you hire, are you merely deepening the inbred gene pool?  Are all your new people from the same background, industry, race, gender?  Remember, the healthiest dogs are mutts.

Knowledge: how much of your critical know-how resides in one person's head?  Do you let that person go hang gliding (or eat fried foods)?

Suppliers: if that one supplier went out of business, or dropped you for another (bigger) customer, or lost its discount on a key commodity, how badly would it hurt?

Applications: if customers changed how they accomplished a key objective - if they found a different way to get it done - would you have any customers left to serve?

Channels: if one of your channels found a better product for its customers, what would you have left?

We can't eliminate risk.  And we can't have multiple baskets for every kind of egg - not every business model can establish multiple interchangeable suppliers for its core component, for example.  But by considering our concentrations, we can evaluate the risk and lead proactively.  We can diversify where realistic, mitigate where possible, and know which indicators we need to watch closely.

I suspect that whoever first said "Don't put all your eggs in one basket" clearly knew the disappointment - and maybe the harshness of hunger - that comes from suddenly, unexpectedly losing everything at once.

A Plan With Sincerity

For experienced business people, the topic "How to write a business plan" can lead to excessive yawning.  Articles on the subject are often uninspiring, formulaic, elementary and textbook-ish.  Also, I'll have the dry toast, thanks.

But we never leave behind the need for business plans.  They're not just for startups ("we're going to disrupt the sock industry!").  Every business that is pursuing a distinct opportunity needs a plan.  And it doesn't have to be boring.  In fact, a good plan is compelling because it shows us an invigorating path with the right balance of assumptions and unknowns.  You could even call a plan that strikes the right balance a map for adventure.

A trumped up mission statement is not adequate to the task.  We can't know if it's a realistic plan, and we can't evaluate the risk/reward.  That's too adventurous for a business that has to make payroll.

At the other end of the spectrum, we sometimes try for blueprint-esque plans, with every shrub and all electrical conduit laid out with precision.  But they're usually a waste of time, and an exercise in self-deception.  No one knows blueprint-level detail in the business planning stage.   And when we start with a faux blueprint, we can be too rigid in the journey ("my blueprint says...") when we really need to adapt to new information and situations along the way. 

A useful plan answers five basic questions:

  • Where are we?
  • Where are we going?
  • Why does it matter?
  • How will we get there?
  • What is the general context for the path (risks, threats, milestones)?

All are important, but the third question (Why does it matter?) is the litmus test for the sincerity of the plan.  It's the difference between plans that produce and plans that peter out.

There are just two fundamental reasons for a business plan (for embarking on that kind of adventure):

We're vulnerable.

We're dissatisfied.

If we don't really believe that this plan addresses a critical vulnerability, or reduces a key dissatisfaction, we won't do much with it.  We may create a snazzy presentation, with intriguing graphics and just the right font.  We may spend hours on pro forma estimates.  But when the dust settles, we'll find ourselves back on the same old path.  The plan lies unused because we don't really believe in it.

Find the compelling reason to bother in the first place, and you'll find the ideas and momentum to act.

First, The Market

I was working recently on a divestiture where the company's return on assets was pitiful.  The infrastructure (overhead) in the business was just too large for its volume.  This led to the obvious questions:

  • Should we continue to deploy those assets?
  • Should we sell or discard some of the assets?

It's natural at that point to turn to numbers, to percentages and amortization and incremental cash flow.   After all, Return On Assets is a financial metric, right?

But all the really important questions are market-based questions.  It is the only source of value in business.  Everything inside the organization is cost, and those costs only deliver a return when they are organized in a way that brings adequate satisfaction to an adequate number of customers.  This means that all internal financial metrics are derived from the amount of money a certain number of people outside the business are willing to give us for the satisfactions we offer them.

When our numbers are weak (however we define that), it's fundamentally due to one of three things:

  1. Our opportunities in the market are inadequate.  There just aren't enough people out there willing to pay enough for what we offer.
  2. We are underperforming relative to our opportunities in the market.  We aren't reaching enough of those people, in the right way, with the right offer, and delivering it the right way.
  3. We are enduring a temporary lag as we prepare, transition or build to pursue more opportunities in the market.

Depending on which of these situations we believe to be true, we might address the Return On Assets problem - or any other financial problem - in very different ways.  The important first step is deciding, consciously and coherently, which it is.

Allow me to generalize about what happens when we don't evaluate the situation consciously and coherently.  Faced with a persistent financial challenge, Finance people default to #1: we must not have enough opportunity... so we need to cut.  Visionaries default to #3:  we just need to get around this corner (and there's always another corner).

But the reality is more likely #2, particularly in a well-established business.  The market presents adequate opportunities.  We need to get with its program.

Alignment

Altruism is not sustainable.

I would love to see humans acting more out of unselfish concern for others, no doubt.  But as a component of transactional relationships, whether a buyer/seller relationship or business partnership, altruism betrays us.  It is the ingredient that prevents the cake from rising.

It is productive to focus on self-interest for one simple reason: self-interest is the only reliable motivator in the long run.  So the objective in establishing a good business relationship - whether with a customer, a partner, or even a vendor - is the successful alignment of self-interest.

The alternative approach, and a common one, is to expect others to act partly from self-interest and partly from altruism, particularly when their altruism is required to satisfy our own interests.  This is the mindset that leads to whining about fickle customers ("I've been taking care of them for years and they're just going to drop us?!"), and it leads to doomed partnerships.

When establishing a new business relationship, I don't feel confident until it appears to have excellent potential under the assumption that each party is going to act ruthlessly from self-interest.  Any altruistic behavior is upside.  Much of negotiation therefore ought to be an attempt to understand each party's interests so we can align them.  And when we evaluate the market potential of a product or service, we're just fooling around until we get clear insight into how the offering satisfies a customer's most valued interests.

Working from this reality can lead to more opportunities than we would otherwise guess.  More than once I've seen a business profit substantially from a customer that "should" have bought a competing product from its sister division within their large corporation.  But the corporate parent hadn't gotten around to making it the interest of the division to support its peers.  And I've consistently seen buyers find additional value when they pay attention to the interests of the supplier (for important vendor relationships, my question is always, "What would it look like for us to become your best customer?").

In The Wealth of Nations, Adam Smith said it this way:

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."

It's not cynical or soul-less.  To insist that we build relationships founded on self-interest is simply good business.

Business By Choice

How much of your business is good business?  And what are you doing about the rest?

Good business meets three conditions:

  1. It's profitable.  There's oxygen in that air.
  2. It's sustainable.  There's a future in doing more of it.
  3. It's satisfying.  It doesn't run down your organization's morale.

I've been in startup mode twice in my career.  Startups often take transactions that meet none of these conditions - any business looks like good business.  But the longer we hang on, the more discriminating we have to be.  And in well-established companies any significant portion of the business that doesn't meet all three conditions is a threat to our long term health.

It's not always easy to identify bad business.  It may appear profitable based solely on Cost Of Goods, until we consider the less precise opportunity cost of the organization's time and focus.  It may be difficult to discern the dynamics (market, supply chain, technology) that would show us a dim future for that kind of business.  And we may not even be inclined to consider the level of satisfaction our people derive from the business.

 But most companies have a chunk or two of bad business in their book.  Some are riddled with it.  Manycan identify it, if they put a little thought forward, but then face the biggest challenge: figuring out how to deal with it.

The problem is risk, particularly when the bad business is (ostensibly) profitable.  Let's assume the cliche is literally true:  a bird in the hand is worth two in the bush.  If so, then we can't afford to decline bad business unless the good business we intend to replace it with is 1) real, 2) acquirable, and 3) worth more than double our current bad business.  Considering the uncertainty, it's no wonder we hang on so tightly to the bird in hand.

But there's an incremental path that can help us transition to more good business with reduced risk.  Instead of just saying "no" to bad business, we can say "Yes, as long as..."

  • ...the price is better.
  • ...the terms are more favorable.
  • ...the expectations are clearer.
  • ...the timing suits our schedule.
  • ...the product mix changes.

When we do this, we're essentially offering the bad business a chance to become better business (there's a bureau for that).  Usually some will make the transition, and some won't.  But it's psychologically and financially more palatable than the all-or-nothing dilemma of "Do we stop accepting those orders?"

It's particularly transformative when we combine a more discriminating approach to bad business with an intentionally more encouraging approach to good business.  We do this by making our people more available to good customers, or adjusting our terms to better suit them, or reducing pricing for potential orders with ideal product mix and timing, or bundling additional value with the right kind of order.  By increasing the friction on bad business and reducing the friction on good business, we can edge our way into a much better position one transaction, one customer at a time... at whatever speed is appropriate to the intensity of the threat.

There's still risk and discomfort, no doubt.  Some of our people will balk at any threat to current business.  But for intentional leaders, the approach is both feasible and necessary.

So back to the core questions:

How much of your business is good business?

What are you doing about the rest?

Generosity

Let's call him Mike.  He worked in production - he built stuff.  I was new to the business, and a very young leader.  At Christmas that year I visited the production floor and handed out candy bars (full size candy bars, like the celebrity neighbor at Halloween) as a way of saying Thanks for your work.

For various reasons, I didn't see much of Mike after that.  But one day, eleven years later, I found myself in a conversation with Mike on that same production floor.  Can you guess what he wanted to talk about?

You gave me a candy bar that one Christmas.  That was probably the coolest thing anyone has done for me around here.

Generosity is one of the most potent forces in breaking down relational barriers, our innate limiters of trust and camaraderie.  And it is rare enough that generous leaders stand out.

I know a leader who very often will surreptitiously pick up the tab for employees and customers when he sees them at a restaurant.  When that gift is given to an employee having dinner with her family, how might it influence her response when that leader pushes for difficult change?

Generosity is not limited to tangible actions.  Leaders who liberally spread the credit for successes exhibit generosity of spirit, as do leaders who take on a disproportionate share of blame for failures, as do leaders who put faith in an employee's unproven ability.  And their people notice.

One of Abraham Lincoln's most striking and effective characteristics was his magnanimity, his willingness to assume better about a person than perhaps was warranted.  That, too, is generosity.  And consider the nature of your "networking" experiences.  You may have acquaintances who bring you joy and create goodwill.  They probably do so because they take a genuine interest in you and generously share whatever compliments and insights they have to offer.  You probably have others who seem interested only in reciprocal arrangements.

We're always looking for anomalous investments.  We want to find the opportunity that has big upside with minimal risk.

For the long term leader, here is that opportunity.