How to think about your business

Mar 2, 2020 | Governance, Leadership, Management

 

Business is simple, in principal.

Sell something for more than it cost you to produce or acquire it, recognising that the buyer needs to understand that the value they will derive from the product is greater than the cost they incur in buying it.

Simple.

Einstein said everything should be as simple as possible,  no simpler, and his E=MC2 is the simplest  equation that explains (somehow) masses of complicated stuff. It is the best example ever of Occam’s Razor, named after William of Ockham, a 13th century philosopher which encourages decision making to the broken down by progressively removing those outcomes that are based on beliefs and ideas rather than facts. When you have all the beliefs removed, you are left with the facts.

Often however, not so simple after you go one or two levels down the burrow to figure out just how you go about that process of removing all the biases and beliefs that masquerade as facts.

Charlie Munger, offsider to Warren Buffett in creating billions of value for Berkshire Hathaway shareholders over 50 years spoke about Mental Models in a speech in 1994.  His premise was that you need a ‘lattice’ of mental models that apply to the different  perspectives that apply to any question being faced in order to distil the ideas and wisdom that applies to your situation.

I agree absolutely with the idea.

It is simple, but as complex as you choose to make it.

As someone who helps small and medium manufacturing businesses improve the economic performance, there are numerous mental models at work simultaneously.

Strategic models: There are many strategic frameworks or models for business planning. Porters 5 forces, Boston consulting’s 4 quadrant,  game theory,  the old favourite SWOT, and many others. Profoundly important and often missed  at this point, is consideration of the business model being employed. 

Operational models: Lean thinking, 6 sigma,  shift sequencing, the mix of technical, support and operational staff, deployment of technology, interaction of technology and those at the work face,  on and on, you have the opportunity to use the wisdom of others to sort the relevant from the  not so relevant.

Financial models: the standard accounting forms of cash flow, P&L, and balance sheet, together with a break even analysis, and decisions about the type of costing models to be used, ratios to be calculated, and formats in which the information will be communicated. To properly understand the operational mechanics of a business, you need more than the standard financial reporting. Their limits are a view of what has happened to the money, little about why and how it happened, and certainly very little about what may happen in the future.

Marketing and sales models: where do I start?  Ideal customer profiles, value proposition, digital Vs analogue, differentiators, marketing toolbox and the multiplicity of tools to deliver leverage, ROI of marketing investment, Account based selling,  selling models such as BANT, sales funnel, conversion rates, anchoring a negotiation, and thousands more.

How do you sort all these options into a few that will deliver results that are worth the investment?

  • You start with the end in mind, the strategic and commercial objectives, the why. I call this process ‘hindsight planning’
  • You break down the challenges into sequential ‘chewable chunks’
  • You focus on the important more than the urgent.

Behavioural models: These usually emerge as a group of expected behaviours, collectively called ‘Culture’. The best example I can think of is the 10 commandments, common to the 3 Abrahamic religions (Islam, Christian and Jewish) that sets a wide framework of the few things you must not do, leaving the rest up to you. Together, in their own environment, they provide a ,macro framework for behaviour, which we then break down further into the components that we seek to live by in a community.

When you need some help sorting this out, call me.

 

 

How to make better decisions, more often.

Feb 13, 2020 | Governance, Management, Strategy

 

 

A decision is a choice, made in the face of a problem.

Problems, at their core, have only two sources:

Uncontrollable events.

Flawed processes and their application.

These two sources have entirely different paths to a solution.

Flawed processes need to be subjected  to some sort of continuous improvement program, resulting in a clearly articulated process that can be taught. This improvement process can become a normal part of activity, given the appropriate leadership and focus. A key part of the improvement process is the application of critical and creative thinking. Having a highly optimised process is not the same as having a truly effective one.

Uncontrollable events are entirely different, by their nature, are very difficult to unable to be forecast. They emerge with little if any warning, generally from the outside of an enterprise, so the solutions need to be arrived at in an entirely different manner.

Two factors contribute to the options facing us as we set out to address these random events:

  1. People put far more weight on the problem directly facing them, than even a much more serious problem that has little short term impact. It is also true that most people have a better idea of the dimensions of a problem that directly impacts on them, than others that may carry more corporate clout, but are do not directly affect them.
  2. We can only deal with a very few problems at once, we simply do not have the cognitive bandwidth to deal effectively with a number at the same time.

Therefore, considering these two factors, it makes sense to democratise the manner in which we deal with problems. In other words, enable those who face the problems to deal with them by giving them the resources and responsibility to do so, within clearly understood boundaries.

Two mental models to consider.

The first is a pyramid, full of problems. If the only person who has the power to address the problem, is the one or two at the top, only a few will be addressed at all. Democratising the power to address them enables others at lower levels to address those problems they directly face, so it follows that many more will be addressed. There may be some stuff ups on the way through, but overall the outcome will be beneficial. However, most corporate cultures make this very challenging, built as they are on a hierarchical structure.

The second is also a pyramid, but turned on its head. In this case, the base of the pyramid is facing outwards, towards the customer and various elements in the supply chain with whom the operating personnel have contact. This is where most of the operational problems occur, so give them the resources and power to fix them.

Do these seemingly simple things, and those usually seen as the bottom of the hierarchy have the opportunity to address the emerging problems as they are molehills, before they turn into mountains. It does however necessitate the devolution of power from the top of the organisations structure, and all the way down through and across the functional silos. This may be a scary prospect for most, but it enables the enterprise to be agile and efficient.

The impact of this sort of culture shift cannot be underestimated. It does however take a special and unusual strength of leadership to enable the change to evolve.

US general Stanley McCrystal achieved  stunning results in Iraq with one of the most rigidly hierarchical of organisations, the military, so you should be able to do it. General McCrystal’s experience is recorded in his book ‘Team of Teams’ which is a compelling account of a culture being turned on its head.

 

How do you reconcile conflicting statements by geniuses?

Feb 10, 2020 | Governance, Strategy

 

‘If you cannot measure it, you cannot manage it.’ Peter Drucker.

‘Not everything that can be counted counts, and not everything that counts can be counted.’  Albert Einstein.

How can both be true?

The first is half true, the second is absolutely true, which leaves us with a problem, if it is not measured, how can we manage it?

A lot of things cannot be measured, good parenting, the enjoyment you get from watching a great game of football, business culture, the likelihood of a new product succeeding in a non-existent market.

Take that game of football, the statistics tell one story, the game as watched may tell another entirely. The stats do not reflect the quality of the game.

What about the future, how do you measure that?

Tough call.

You cannot measure what has not happened, but you can draw inferences from all sorts of variables, quantitative and qualitative.

Digital has driven a bias towards quantitative, all we hear about is A/B testing to the point where we feel diminished if we do not do it. However, this mad reliance on the quantitative is a nasty illusion,  a mirage, leading many astray. Qualitative has a huge place in telling the future,  it is a way to fill in the behavioural blanks, to imagine what may happen  in a given situation.

Qualitative research can be an aid to the intuition born of experience, and domain knowledge, factors not able to be quantified. It is also a great way to surface the questions that need to be asked in a following quantitative process, which is useless without the questions that go to the heart of the drivers of the behaviours being quantified.

Qualitative research when done well, and unfortunately I have seen it done poorly more often than well, digs into  the psychological and motivational aspects of behaviour. Not just what we do, but why we do it, and what might we do in the future.

The missing ingredient in most ‘future-telling’ exercises, usually called ‘forecasting,’ is the wisdom born of experience. Frederico Fellini once quipped that ‘experience is what you get while looking for  something else’.

It seems to me that wisdom, and the insights that emerge from that wisdom, come from a lot of experience.

 

The single best financial measure on which to focus improvement initiatives: Cash Conversion Cycle.

Feb 3, 2020 | Governance, Management, Operations

 

 

How long does it take you to convert your products into cash?

This is one of the most important but overlooked measures in most businesses I see. It goes to the manner in which you manage all the processes  and resources it takes to turn ideas, products and services into cash, the lifeblood of every enterprise.

Your Cash Conversion Cycle, (sometimes called cash to cash cycle) is the time from the order of raw materials, in the case of a manufacturer, to the payment of the invoice related to a sale. In other words, days inventory (which includes raw materials, Work In progress, and finished goods), plus days debtors outstanding, minus days creditors outstanding.

Reducing your cash conversion cycle time can be a huge competitive advantage.

There are a number of well understood ways to reduce your CCC, the catch is, that it is a delicate balancing act between differing functional responsibilities.

In the pre-deregulation milk industry in NSW, my then employer, Dairy Farmers, paid the dairy corporation for its milk, as all production was vested in the corporation, in 30 days. We sold to milk vendors, the monopoly distributors, on 7 days terms. This gave us a -23 day cash conversion cycle. On the day of deregulation, from which retailers could buy from whoever they wished, that cycle changed radically. We paid the dairy farmers, our suppliers, in effect, C.O.D., and supermarket retailers paid us 90 days. Our cash cycle went from -23 days to +90 days for supermarket sales, a 113 day turnaround overnight, which cost in the region of 60 million dollars in working capital.

It was a big pill to swallow.

So, what are the strategies that can be employed to improve your cash cycle time?

Reduce inventory.

Physical inventory in a service provider is not a consideration, as there is none beyond consumables. However, in most cases of service businesses, there is some sort of project involved, which takes time to deliver. In this case, time can be considered as inventory, and the quicker the ‘inventory turnover rate’ the better.

A manufacturing business generally has inventory in three parts: raw material, Work in Progress (WIP) and finished goods. While it is tempting to manage each separately, the downside is the potential impact on customer service, so they must be managed together.

  • Purchase reduction. Too many times I have seen a Purchasing Manager instructed to reduce inventories, which is easily done by simply reducing purchases. However, done in isolation, this almost always leads to manufacturing shortages, and angry customers.
  • WIP reduction. Similarly, WIP is often seen as relatively easily reduced by doing longer manufacturing runs. The unfortunate consequence of which is usually increases of finished goods inventory of slower moving lines. When there is a multi-stage manufacturing process, longer runs also leads to WIP build-up in front of slower manufacturing sub-processes.
  • Finished goods reduction. Finished goods are the most expensive inventory items, as you have added time, labour and the input materials to produce them. Nevertheless, being out of stock when a customer orders is never good. Alternatively, depending on your business model, putting their order on a future delivery date can be managed, but the longer the delivery lead time, the more likely the customer is to go elsewhere.

The upshot is that inventory can be reduced, often by substantial amounts, but it takes leadership, functional collaboration, and appropriate performance measures to be successful while retaining customer service.

Decrease debtor days

Debtor days are a function of both your trading terms and diligence in collecting debt as it becomes due. A strategy that usually works, is a polite reminder that the invoice is due to be paid in a few days. It is too easy to leave debtors to pay their bills as and when they are able.  A bit of friendly, polite pressure applied might see your invoice  go to the top of the pile, at least over those who do not actively and politely follow up. Diligence, and being a very polite ‘squeaky wheel’  pays.

Another useful way to reduce debtor days is to split payment. When selling some items you can reasonably have as a part of your trading terms a deposit, and partial payments over the period between order and final delivery. This happens when you build or renovate a house, there are stepped payments in line with project milestones. Think creatively about how you might introduce similar stepped payments, your cash flow will love you.

Manage creditor days

Managing creditor days is not just a matter of delaying payment, although this is the most common reaction. Your suppliers are in the same situation you are, setting out to reduce their cash cycle time, and if you are a recalcitrant debtor to them, they will tend to reduce their levels of service, demand C.O.D., or even simply refuse to supply. Secondary to a shortened cash cycle is a reliable cash cycle. If your suppliers know from experience, and negotiation,  you will pay the invoices on a given day, they will tend to leave you alone, or even agree to an extension of terms. In effect they are exchanging a shortened cycle for a reliable one. Experience tells me paying exactly to the terms agreed is the best strategy, as it enables renegotiation of those terms.  

Management of cash is an essential discipline for success, and the time it takes to convert an order into cash is about the best measure there is to proactively manage your procurement, manufacturing and sales demand planning processes. Out of measuring the cash conversion cycle time will come a number of contributing measures that will together make the enterprise more competitive, resilient,  and agile.

This is all pretty simple to say, but like most things in life, much harder to do. When you need an experienced hand, give me a call.

 

 

Australia Day, January 26, 2020.

Jan 24, 2020 | Governance, Leadership

 

Sunday is Australia Day, and the bushfires consequences, and the possibility of more in the next short period, is at the forefront of peoples minds.

In recent days however, we have had dust-storms that have been truly frightening, and intensive storms, including damaging hail, some in areas still smouldering. Now we have the farce of the Libs buying votes with grants to sports clubs prior to the last election. (In the interests of full disclosure, I chair a sporting body that had an application in to replace some critical infrastructure that was, now still is, on its very last legs.  We were pretty confident of being successful, as it fitted the guidelines like a glove, but we failed to account for the fact that the club concerned is in a safe Labor seat)

There will be substantial political and commercial fallout from all this.

From the various climate induced calamities, insurance rates will go up, politicians will be held accountable. Those with capital to be invested  will demand that action be taken, and they will vote with their money by not investing in areas they see as subject to the uncertainty of climate change. Larry Fink, chairman of Blackrock, the largest money manager in the world ,has written an open letter to CEO’s informing them of Blackrock’s revised assessment of the risk profile of investments it makes based on climate change risk. His is a voice that carries huge weight, and Blackrock putting their trillions where Larry’s mouth is, will have a significant impact. If the commercial funding of the revised Adani project needed another nail in the coffin, I suspect Mr Fink just supplied it.

Mr. Morrison will be haunted by photos of his stunt bringing a lump of coal into parliament. It has become a parody of the inability of this government, and to be fair, those that preceded it, to develop a framework to manage the impacts of climate change. I wonder if the Greens in their quiet moments now look back on their decision to scuttle the Rudd governments carbon pricing scheme as the greatest blunder they have ever made? I did hear Richard Di Natale defending the decision on radio a couple of weeks ago, and he sounded like a kid caught stealing money from the church fete. 

Rudd’s comment that ‘climate change   is the great moral challenge of our generation‘ is proving  right, unlike much of the other stuff he said. He was right and every government, including his, has failed to step up to that challenge.

I wonder if the fires might start a serious consideration of  the manner in which we replace the infrastructure destroyed? We have the opportunity to experiment with technology, capital equipment, and organisational processes, rather than just running out and replacing the destroyed infrastructure with more of the same. Perhaps not: that tactic may reduce the headlines and openings to use as photo ops, as well as risking partisan criticism in the inevitable event an experiment does not work as ‘advertised’.

The economy is in the shitter. The GDP figures for the April quarter when released in about September, will show increases in activity and our gormless Treasurer will mount his soapbox blathering about the plan, when the increased activity is just about replacing assets lost in the fires. Nothing will be done about our manufacturing productivity, which long term is the core of the economic growth we would like to see. Supporting that are basic items  like the technical education and  apprenticeships, the hard, on the ground skills needed to keep up in a digitising world.

I suspect tourism, one of our biggest industries and employers will be hit hard, not just by the impact of the fires,  but by the uncertainty that prevails. It will put off many travellers, and spending a few million on reactive advertising is about as useful as pissing on a bushfire. Better than nothing I guess, but about as useful.

The impact of the financial services royal commission are yet to be worked through the system, but to me it seems like not a lot will change. There have been a few heads chopped, a few of the protagonists in the debacle promoted, and a few new regulations proclaimed, intended to fill the obvious holes,  which will more than likely just require more administration, and inevitably costs will increase. Just in the past week, we have had AMP caught, again, with its hand in customers cookie jars. Will these amoral pricks ever learn?

The current Royal Commission into the treatment of the aged, will I suspect, throw some more explosive material into the public forum, and we will be demanding quick and effective action, neither of which the government will be likely to deliver. If the fires, storms, and sporting grants rorts do not destroy the prospects of another term for this lot, the anger from the baby boomers whose parents it is that are suffering should be enough to tip them into oblivion. This is assuming of course there is a credible alternative. If not, hopefully Morrisons invisible friend who has been notably absent these last 4  months will turn up to assist.

Exactly a year ago today, I expressed concern that we would be ‘molested’ by politicians seeking election. Well, that happened, but then as we got closer to the day, the polls clearly showed a win for Labor, which failed to eventuate. Nobody was as surprised as our then, and now current Prime Minister who said in his acceptance speech: ‘I have always believed in miracles.’ As a result he floated along doing nothing beyond making ‘how good was that’ speeches and having a restive, and in some cases stupid back bench, sitting on a one seat majority, but grasping the trappings of power. I suspect the year coming will be entirely different, as the mood of the electorate seems to me to be pretty ugly. The question is have Labor recovered sufficiently from losing the election they thought was in the bag to be an effective and contributing opposition, or will they remain hiding under the table. A good start may be to propose a unity ticket to develop a  long term policy response to the climate and energy challenges we face.

Whoops, there goes another heavily made up pink pig flying past.

Have a good Australia Day, hug your family, friends and neighbours, and batten down the hatches.

 

3 factors creating an existential crisis.

Jan 19, 2020 | Change, Governance, Leadership

 

I recently found myself in the position of refereeing a ‘debate’ over lunch on climate change between 2 zealots, one from either side.

One who was a passionate advocate of the argument that it was real, and would kill us unless we did some challenging things, the science was in 30 years ago, and we have barely moved. Our public institutions have displayed, and continue to display, criminal negligence in that inaction.

The other, was a passionate advocate of the ‘why bother’ story. As Australia is a tiny contributor to global warming, unless the rest of the world did something, destroying our way of life was an irrelevant act of self -immolation. 

Thinking about it later, three things came to mind, that reflect the barriers to any major change in the way we work and live.

Denial. It is not happening, we cross our fingers and hope it goes away. Through history this has never worked, it is the ‘peace in our time’ solution.

Money.  Making the change will  not make any money, just impose unnecessary and unrecoverable costs. This assumes that tomorrow looks just the same as today, which is always wrong, we just cannot see the potential. Steve Ballmer dismissed the first iPhone as an expensive toy that would  never work,  Blockbuster did not see the potential in Netfliks, and Kodak, who invented digital photography, failed to commercialise it. With the short term  dominant in our institutional and public governance, the immediacy of money being generated  is a powerful argument for inaction, despite the evidence to the contrary.

Optimisation. We have optimised our current organisations, they are good at running exactly what it is now, and change is messy, expensive, risky, and dangerous to the personal advancement of those who advocate for it. In addition, the short term prospect of generating a return on investment is low, so our institutional risk aversion kicks in, often on steroids. Both time frames have their costs and benefits, quantifiable with significantly variable degrees of certainty. On balance, my money is on the ‘do something’ button, as history suggests those who do not change in the face of undeniable  change around them,  get run over by those who take the prizes. IBM and Olivetti used to own the typewriter business, Kodak owned photography, Hoover owned vacuum cleaners, all optimised businesses for the maintenance of the status quo, and none survived.

As I write this, the east coast of Australia, gripped by drought, has been on fire. We are only in the early part of what is usually called the  ‘fire season’, so things could easily get worse, although there may not be much left to burn. I suspect the views of both sides of the debate my lunch colleagues had will not have changed much as a result, a microcosm of the policy problem facing us.

However, every problem is accompanied by opportunity.

Climate change is a problem for everyone, a challenge for policy makers faced with the reality of short term populism to keep their jobs, and an opportunity for the few who see the problems as challenges to be solved.