Uncertain future? That’s us. 

One of the major tradeoffs in life is between the short term and the long term. Another way to think about it is the tradeoff between the urgent (usually short term) and the important (usually longer term). If we devote too much time to the urgent we get a lot of activity, but not much accomplishment.

A useful tool to help with this dilemma is the time skeleton. The end of the year is a particularly good time to make one. I call it a skeleton because while there are many ways to change how fit your body is and how you look, you can’t change your skeleton. This is a way to make a skeleton for the year of the things you need to do that are important for long term success. Then as you go through the weeks and months, all the other things hang off this skeleton – like your muscles and skin hang off your bones.

Step One – Get a Calendar For the Year

You want something that fits on one page (or at most two). You only need one small box for each day but it needs to have at least a little room to write. Here are some pictures of what I mean. This one came from PDFCalendar.com. Tell it to put 52 weeks per page.

The next morning, the fog is gone, the sun shines bright and you see where you really are. You are indeed on top of the mountain, just not the mountain you wanted to be on. Off to the north is a higher mountain – the one you really wanted to reach. But between here and there is a valley. You have to go down to reach the higher peak.

How did you get here?

You focused on making every step count, but the fog kept you from seeing where you were truly headed. You never took a step down but ended up on the little peak.

This is called the “Local Maximization Trap” And entrepreneurs fall into it all the time without even knowing it. Why?

Because Entrepreneurs are good at what they do.

Entrepreneurs are smart, thrifty and opportunistic. That means we’re “scrappy.” We can make it where others can’t. And it leads us to take maximum advantage of our situation. That usually means making sure each step is a step up. We cut costs, work longer, drive harder, and surround ourselves with a team that does the same. We squeak out every bit of production from our equipment, our facilities, and our people. We have our eye on the bottom line and it works. Then one day, the fog lifts and we find we’ve reach a local maximum.

Rick’s Local Maximum

Let me give you an example of one of my clients. We’ll call him Rick. He runs a manufacturing operation, started by his Dad 50 years ago. He’s been at the helm for a number of years, but still calls on Dad for advice on a regular basis. They get along very well. The company actually grew in the past few years despite the recession. They did $5.8 million in business last year and are closing in on 6.5 million this year. 12% growth.  Profit is climbing as well.

Rick wants to build his company to $10Million in sales and he thought he was on track. At 6.5 million he thought he was two thirds of the way up a $10 Million dollar mountain peak, with nothing but climbing ahead.  That’s where the green star is in the picture.   But he was wrong. He’s really on top of a localized peak – where the pink star is.

He’s actually such a good entrepreneur, that in fact he’s floating in the air above that peak. What I mean is he’s on top of a hill that’s maybe 6.3 million high and he’s milking almost 6.5 out of it. He’s that good. He can jump but he can’t fly. He’s going to have to go down to go up.

How do I know this?

I recently did an Orchestra Analysis of Rick’s company. What’s an Orchestra Analysis? It’s where we consider the company as an orchestra, with the CEO as conductor. We look at all the “instruments” in the company and see what notes they’re playing. There are a set number of instruments every company needs. What’s surprising to many people is that every company no matter how big or small needs all the same instruments. They just play louder or softer, or faster or slower in some companies than others.

To do an Orchestra Analysis we plot what notes all the instruments are really playing against the notes they should be playing to make the music the conductor wants, and see where the differences lie. Here’s some of what we found in Rick’s company.

When we looked at his sales operation we found most of the instruments were sitting idle. Rick doesn’t have any outgoing sales operation. He’s doing some advertising and giving quotes as the RFP’s come in. That’s how he’s growing. This is one reason he’s optimized his profit – his local maximum – because his sales costs are very low. But that has two serious ramifications. One is he’ll need to spend money building a real sales organization, one that reaches out, if he wants to grow. It also explains why even though the past few years have been good, profit in years before that has been erratic. He’s been at the whim of the market and not able to see changes coming in time to adapt.

There were other indications of a local maximum as well. His manufacturing space is maxed out. This also increases profit but limits growth.
Most critically, there is no in-house training program to develop line employees or
managers. This lowers his costs in the short term, but it keeps Rick trapped on the shop floor and not able to get out and move the company to the next level. That’s probably the biggest thing keeping him from growing the company the way he wants.

And the final indicator of a local maximum? Rick is turning down business, because he can’t fit it into the production schedule. This is a direct result of lack of investment in floor space, and developing employees.

At first he was turning down business he didn’t really want – C and D level customers. Loosing C and D customers is always a good thing. But he’s turning away some A’s as well. He estimates he turned away $200,000 in sales and $50,000 in profit so far this year. That’s a local maximum.

Local maximums aren’t all good

They can be – if you’re maximizing the right things and that’s where you want to be. But you can reach a maximum that feels like a pit if you’re maximizing the wrong things. You can maximize profit, for example, at the expense of cash flow; or market share at the expense of profit. That’s why before you do an Orchestra Analysis, figure out what song you want the orchestra to play.

In Rick’s case, he’s been closing in on this maximum for a while. Right now he’s maximizing profit, but that hasn’t always been the case. His frustration is that he’s maximizing his short term situation but sacrificing the sense of accomplishment and the money he sees in having a $10Million dollar organization.

Local maximums happen when you’re good at what you do and you move ahead one step at a time, without a good map of the territory. It’s not necessarily a bad thing if that’s the peak you want to be on. But in Rick’s case it’s not high enough. Here’s what I recommend if you’re in a similar situation.

Make a Map

Instead of moving ahead one step at a time, develop a map of where you are and where you want to be. Figure out how deep the valley is between the two. In Rick’s case that means figure out what kind of sales force he needs and what it will cost to develop one. Define what his training program should look like for managers and line employees. Understand how long will it take before he sees results from this. And decide what he should do about the lack of space, machinery and room in the schedule.

These things will all take investment. That’s what I mean by going down before you go up. He needs to have the resources, and the will, to cross that entire valley. If you don’t know how big it is, you can’t be sure you’ll make it to the other side. That’s why a good map is so important.

Takeaways:

• If you’re at a local maximum decide if you’re happy there or not. It might be fine.
• Don’t move forward till you have a map of how deep the valley really is and the resources to make it all the way across.
• If you’re not at a local maximum, with a good map you may be able to avoid one altogether.

All value created in any organization is the end result of a lengthy sequence of steps – a value stream.

These steps must be conducted properly in the proper sequence at the proper time.

The flow of value toward the customer is horizontal, across the organization.

All organizations … are organized vertically by department … because this is the best way to create and store knowledge and the most practical way to channel careers.

He goes on to say that managers are judged by metrics that apply within their departments. But no one is actually responsible for the horizontal flow of value [toward the customer]. This is the problem big companies face.

So why are small companies better than big ones?
Because you have your hand in everything. YOU (the owner/founder/entrepreneur) are responsible for the horizontal flow of value.

So why are small companies worse than big ones?
Because you have your hand in everything. When the company grows to the point where some organization by department is useful, the owner/founder/entrepreneur is better at building the product than building the company. So emergencies, inefficiencies, and other stuff happens which takes you away from managing the value flow. So you end up with the worst of both worlds. No departmental support and a poorly managed value flow.

Takeaway:

• As your company grows, either learn to become a manager/CEO or hire one.
• Lean Thinking by James P. Womack and Daniel T. Jones is a good read. More of their stuff is here

[tags]Lean Thinking, Small Business, Entrepreneur, Management, CEO Skills[/tags]

This hurts business in two ways – the added costs we have to charge make it harder to sell but don’t profit us any. And the added costs we have to pay decrease our bottom line. And who benefits? Not you, not your customer. Exxon is the one with record profits last quarter. But I don’t blame them (at least not for that). This is a problem with political roots. The world system of depending on oil has to change. And this kind of thing has happened before. Europe was powered (or at least heated) by wood hundreds of years ago till they burned all the forests down. So they figured out how to use coal till oil was put to use.

We knew this was coming and decided to go for short term, immediate comfort/profit rather than long term gain. Some of you are old enough to remember gas lines and no-gas-on-Sundays back in 1973. Then President Carter proposed we allocate some resources to developing alternative fuels and to conservation. As a country we didn’t really give it anything but lip service.

And we went back to business as usual. We justified it by taking comfort in those intervening years when oil was $10 a barrel. But that just allowed us to wallow in our denial. Even at $10 a barrel, oil pollutes the atmosphere. We enjoyed our denial about the environmental effect of oil addiction. And our denial about the control over our economy we were giving to foreign leaders who weren’t (and aren’t) exactly working in our bests interests – either economically or in terms of our values: freedom, democracy, human rights etc.

So we played along, ignoring the obvious consequences of our action (or inaction) and now we’re shocked, SHOCKED! that we have to pay 75% of what the rest of the world pays for gas instead of the 50% we’re used to paying. Just wait till we have to pay as much as Europe has been paying for years. And I’m just counting the pump price – not the price in lives lost to air pollution, or war, or _____________ (you fill in the blank).

But it’s human nature to go for short term solutions instead of long term ones. Somehow we believe that going for the long haul makes it less pleasant in the present. And it’s true in many areas (weight loss, quitting smoking, saving for a car instead of borrowing for one). But here’s the real tragedy. It’s not always true in business.

We’ve all read about companies that were forced to put restrictions on their pollution output only to find they could make a profit from chemicals they recovered. Or that were forced to treat employees better only to find they got improved productivity or lower turn over. Is it really so hard to believe that had we put as much effort into energy conservation and alternative fuels in the 1970’s as we did toward the moon shot in the 1960’s that not only would we be better off now, but we’d have been better off by 1976 (say) and the 1980’s and 90’s would have been even better than they were? Carter of course wasn’t as personable as JFK so it was harder for him to get support. Jimmy seemed more of a wimp to us than Jack (or Ronald). And it’s un-American to follow wimps – even when they’re right.

Can you imagine the new products and technologies American ingenuity would have developed? How many high paying jobs that we would have created? How much better our air and water and global warming situation would be? How much it would have affected our trade balance to be exporting that kind of stuff all over the world? Not to mention the effect on peace, if the oil producers had been made as economically and politically impotent as say the buggy whip industry?

Instead we took the short term route and look at the fine mess we’ve gotten ourselves into. It doesn’t take much to figure out which politicians are trying to prolong the status quo when it comes to oil, the environment etc. Unfortunately the ones who want to change things don’t show enough balls or leadership as I’d like to see. But let’s support them anyway. It may be too late, but our only hope is to vote and work as if it’s not.

Takeaways: The political takeways are the same as the business takeaways.

• Vote for (and support) leaders with a vision for the future that’s based on facts – not someone with a nice personality.
• Don’t ignore the facts because they are unpleasant and the consequences aren’t immediate.
• Don’t assume that working for a long term solution – one that’s supported by the facts and the science, even if unpopular – will always mean a long time of sacrifice. You have to be willing to sacrifice for the truth, but when you are, it might turn out better – sooner than you think.
• There’s a real problem with how most businesses think they are affected by politics. It’s too short sighted and hurts them in the long run.

I’ve distilled his ideas into suggestions that will work for any company of any size. Scobel’s post will give you some context and explanation. For that reason I’m listing my ideas in the same order as his. One other note, my use of the word “public” may be interpreted to mean, just internally (or not) depending on your situation.

Takeaways:

• Create a vision that inspires.
• Give every employee top of the line tools to do their jobs.
• Allow for public understanding of who’s moving ahead, who’s not and WHY. Or at least public discussions of which ideas are moving people ahead or holding them back.
• Make the rules and systems serve progress. Incorporate a system that reviews and revises them. Make public input to that system easy.
• Explain marketing decisions publicly and allow for comments. You might want to expand this beyond marketing decisions – at least to employees.

However, there are times when the larger issues do have an impact, but small companies don’t usually take time to consider them. Here is an exercise to solve that problem.

 

Financial Impact Grid
From The Star Bulletin by Ralph Perrine,

SOMETIMES I sit with business decision-makers and draw what I call an Impact Grid. In the middle square we put the company. In the next square we put the company’s clients. In another, the client’s customers.

In adjacent squares we put the company’s partners and vendors. We talk about what impacts these squares. It helps business leaders think about the impact of economic factors: employment, interest rates, and so forth.

It also reveals lines of impact for specific scenarios: If client A’s customers are hit with a shock (hurricane, bird flu, rising energy costs), then client A is going to experience a downturn in sales. That in turn will have other implications. 

Far be it from me to doubt the veracity of that statement. The problem was I was thinking of the commercial as a way to get new customers when actually it was a way to communicate with their existing ones – Preaching to The Choir. It all came together this morning as I put on a tee shirt to run (OK walk) on the treadmill. The shirt said, in big letters “I LOVE YOU MAN” and had a Budweiser logo. Remember that ad campaign? I doubt that it, or the talking frogs (or was it lizards?) got anyone to order a Bud for the first time. But it probably gave those already in the Bud flock something to feel good about and a reason not to stray.

Leaving aside the question of why women feel good about clothes and men about grunting amphibians, let’s look at the concept of Preaching to The Choir. Seth Goodin would probably argue that if your product is so bland that you have to resort to an animated swamp to differentiate it then commercials are a horribly wasteful way to do this. I don’t disagree. However, the need remains to connect with your customers after the sale. Another way to say it is, give your customers some reason to have a relationship with you that goes beyond the product.

Relationship beyond the Sale
This is why companies give out hats with their logo on them, why companies invite their best customers to an annual golf outing or such. If you think the relationship ends with the sale, you’re being very short sighted. For two reasons. First, it’s usually cheaper and easier to make your next sale to an existing customer than to a new one. Second, some percentage of those customers will become promoters for you if you give them a reason to.

Harley’s got it’s HOGS – Apple computer has evangelists – Jimmy Buffet has his Parrot Heads. Who do you have? I know, you’re going to tell me that you make ball bearings, which don’t exactly lend themselves to a lifestyle choice; or that you install wood floors and your customers only buy from you once; or that all this hoopla is too expensive. Well OK if you say so – let your competition get all the goodwill and referral business.

Personalize it
With a little imagination, and personalization, preaching to the choir can reap huge rewards. None of these ideas will appeal to all your customers. You can’t do a mass media thing. But that’s the beauty of a small company – you can get to know your customers and develop ideas that may only apply to some of them.

• Some people do like hats – or golf for that matter, but a lot of people like to be asked their opinion.
• Can you invite some folks to a forum or a dinner where they help you design your next product, or improve your customer interaction?
• Can you host a blog where people write in with stories of how they’ve used your stuff?
• Stew Leonard’s grocery store has a bulletin board where they post pictures people send in holding up a Stew Leonard’s grocery bag in places that range from in front of their RV or campsite to in front of the Eiffel Tower or the Pyramids. I always wanted to send one of my holding their bag in front of Kroger’s or Stop & Shop, but I doubt they’d put it up.
• Lexus dealers in various cities have been known to chip in together and buy premium parking slots at local sports events. For free (or cheap) Lexus owners get to park there. It’s a visible advertising thing as well to others who walk by. They also have free barbecue and other giveaways.
• When I was in sixth grade, my friend Johnny Salkin was some kind of tester for the Life Saver Candy company. He got new experimental flavors to evaluate and tell them what he thought. Man, did I want to be on that mailing list. I still remember it when I buy their candy.

Takeaways:

• Do something extra for your customers.
• A gift is nice, but better is to set up something they can contribute to or be a part of.
• The key word is not preaching or choir – it’s relationship.

I think one thing that sets big companies apart from small companies are how they use measurement in their decisions. Big companies get it wrong because:

• A) they measure the wrong things – we’ve all heard stories of call centers giving bonuses based on shorter call times which result in operators ending calls quickly, but not necessarily successfully.
• or B) they measure things that are easy to measure and assume that makes them true. How often have you had to fill out a survey where you rate things from stongly disagree to strongly agree. You know that even if you’re diligent and honest the very nature of the questions give a skewed impression of what you really think and how many are honest and diligent when they fill these out?. Multiply that by the hundreds or thousands that get averaged into a report, and it’s no wonder executives make decisions that don’t fit the market.

Small companies get it wrong because measuring things is expensive and time consuming so they just don’t. I think this is one of the leading causes of small company failure.

Seth Godin had a couple of posts on the subject: Measure that  and don’t measure this.

To which I respond: Effort (and results) skew toward what you measure and often they skew away from something else.

If you measure widgets per hour you’ll likely get more efficient – more widgets per hour. But perhaps you’ll be sacrificing quality. If you measure quality (say defects per batch) you’ll get better quality but perhaps you’ll be sacrificing efficiency.

The trick is to put in place the right set of complimentary measurements. Measure both efficiency and quality understanding that they are both important but may tend to be mutually exclusive. So you want to hit that sweet spot in the middle.

I learned this from Andy Grove’s book “High Output Management.” It may be a partial solution to the dilema shown by Robert Austin in his book “Measuring and Managing Performance in Organizations” His point (I’m paraphrasing here) is that it’s impossible to actually define, let alone measure, all the important things in an organization. Hence whatever measurements you make will be an imperfect representation of what you want (like a blue print is a representation of a house, but you can’t live in the blue print.) And  whenever you measure performance, people learn to game the system and do more of what’s measured at the expense of something that may not be measureable but is important.

All this shows (to me anyway) how important is the job of management – not just leadership - in an organization. It’s the job of management to develop systems whereby people are encouraged and supported to do their best in the direction of the organization doing more as a unit than people can do independently. What to measure and what to do with those measurements is a big part of this.

Takeaways:

• Figure out the few things that are important to measure in your company right now.
• Put in the effort to measure them properly. Then use those measurements.
• Realize that what you measure doesn’t tell the whole story.

Technology is like that. Besides knowing how to use it, you have to know what to use it for. For most businesses that means you’re going to have to change the way you work in order to get the benefit of new technology. And you’re going to have to change your mind set. Buying the newest technology won’t do that for you. Ten years ago, many small companies didn’t adopt new technology for that reason. Today that would be a death sentence.

Put Data in Only Once -Use it Often
Here’s a small example in the field of IT – information technology. One of the principles of ideal IT design is that you only have to capture data one time in one place, then you can use it everywhere. This means its much cheaper and easier to use the information you have than it would be if it were only captured on paper.

For example, I know a guy who owns several title companies that do real estate closings. Each time they get a new file, they capture a lot of info including the name of the person who sent the file. In the real olden days, those files were paper. so even though each file had a source, there was no easy way to aggregate that information and learn who had been sending over the most files every month. Or who was sending over the most profitable files, or if there was a pattern of whose files tended to have more problems.

That was the olden days. Putting that information on a computer helped a bit. But unless you changed how people put that information in, you still couldn’t get it out right. Some would put it in a spreadsheet, some in a word processing document. different people might get business from the same source but spell the name differently or one would use a first name and last name and one would use the last name and the company name.

But when the operating procedures (ie the ways people work) are adapted to use the tools, then data goes in the system correctly. Once that data is in the system it’s relatively easy to get it out for all kinds of new uses. This makes it cheap and easy to do things like:

• Reward people who send the most business
• Reward people who send the best business
• Educate people who send problem business
• Search out and build a better relationships with people who don’t send very much business

However, the owner of the companies that I was telling you about is from the old school. He wasn’t raised on technology, and while he does use it, he’s never been shown how to get the best use out of it. So he didn’t think of all the things he should be able to do with it.

But if you want to survive you’d better get with the program – your competition is, and your customers demand it. Back when I did my one and only roofing job, many knowledgeable roofers still used a hammer, not an air gun. None do today.

Takeaways:

• If a salesperson tries to sell you solutions – RUN AWAY! They are selling tools.
• Learn how to use the tools – and that means changing the way you work and the way you think.
• Have a technology audit – get someone to come in and look at the way you and your people use technology. The result should be changes to the way you work – not just sales of more stuff.