The 70/25/5 rule of business turnarounds

The 70/25/5 rule of business turnarounds

Mar 14, 2017 | Change, Management, Small business

Most of my time is spent working with medium sized manufacturing businesses that for one reason or another, and usually many reasons combined, find themselves struggling.

The people running these businesses are often reluctant to spend money on consulting. Understandable, not just because it can be expensive in a cash challenged environment, but because they have been burnt before.

They became successful by being good at what they do, the product manufactured, the service delivered, and the admin and ‘soft’ management stuff just took care of itself.

Unfortunately, those days are gone.

In a variation on the Pareto 80/20 rule which holds true in every case, I find myself using what has become the 70/25/5 split in the things that receive attention.

Having done the analysis to determine the 20% of things that will deliver the 80% of the value,  and be able to leverage from the effort to be made, the improvement task is to focus the effort where it will turbo charge the results.

This is where the rule comes into play.

70% of the effort goes into improving the current operations.

20% goes into spreading the current, and now improving operations into related, or adjacent areas.

5% goes into new stuff, experimenting, going right outside the comfort zones.

It also tends to follow that sequence.

Let me give a generic example.

My point of engagement is usually a perceived problem with sales and/or marketing. They need to generate more revenue, and usually quickly, so call in an expert.

Typically I find a tangle of current practises and issues that are sub optimal, that are not generally seen as ‘Sales’ issues. There are poor delivery lead times, inconsistent quality, poorly understood costings, lack of cash management, a reactive and undertrained sales force, poor customer service, and so on. All current activities and processes that require work before much that is ‘sexy’ which is what consultants usually sell, can be implemented. For example implementing a sales training package will not deliver value if the product quality is questionable, or the lead times longer than customer expectations.  It will just be an expensive holiday for the sales staff.

This is the 70%, the early grind of improving the existing  processes and priorities. It is usually a process of planting a nurturing a variety of improvement seeds in all sorts of corners of the business, rather than applying a silver bullet solution, and it does take time.

When the seeds are becoming seedlings, and some improvement is becoming evident, and often it is anecdotal, as the accounting systems typically look behind, rather than in front so the numbers are usually lagging, it may become time to apply the next 20%.

Continuing the Sales analogy, you can now reliably manufacture and deliver products that stand up competitively, you know your margins and capacity constraints, so you can start to focus more effort on increasing your share of wallet, engaging new customers in your priority markets, and entering adjacent markets perhaps with a marginally altered product to better meet the specific needs.

By the time the  20% gathers some momentum, the business is usually becoming prosperous, so can afford to start investing some resources in the really new stuff. The 5% effort spent on new products, the next technological development, and perhaps building scale by merger or acquisition.  It is here that the exciting stuff happens, the next breakthrough in performance, and the payoff for long suffering managers, staff, and shareholders.

Decision time for manufacturers of ‘disposable’ items.

Decision time for manufacturers of ‘disposable’ items.

Mar 8, 2017 | Branding, Change, Small business, Strategy

I have used the term ‘disposable’ to mean that the consumers investment is low, so purchase risk is limited. Buy one and find it does not deliver, and little is lost.

Over the weekend I had a casual conversation with an acquaintance who runs a small business selling such a line of disposable consumer products into a niche via specialist chain retailers, many branches being franchised, so are somewhat independent.

His problem is that he is being overrun by the scale of the retailers who take his ideas and have them fabricated in China under another brand at prices he is having increasing trouble matching.  In any event, they also control shelf space, so he is at their mercy.

Not an uncommon problem.

My rather glib response was that he was trying to sell to the wrong people. His current customers, the retailers, were not actually his customers, in fact they were more like adversaries. His real customers were the ones who had a need that his products fulfilled, and the retailers were just a logistical barrier to be managed and overcome.

The retailers see the only value in his products as a range they should carry as an occasional addition to the customer basket  at the cheapest price that meet their margin requirements. For them there is no investment in the success of the product, and little downside.

To the real consumers however,  the question of whether they outlay $8 or $11 for the items is largely irrelevant once the buying decision, often impulse, has been made. There is little brand awareness or preference involved, there has been only modest marketing investments made, the sales come from demonstrating the utility of  the product.

My advice: Set up an online shop, and actively market to the identifiable groups of customers who would benefit from using his products.

As he has a limited budget, and little brand recognition, this is potentially a make or break decision, not to be taken lightly.

Retailers will be even more disinclined to stock his products when they see him actively competing with them on line, but on the other hand, his sales volumes have been dropping steadily for some time, and the costs of doing business are increasing, so the end game is in sight.

The flip side is that the product is ideally suited to selling on line, the value is demonstrable, it is easily sent via the post, and the margin freed up by selling direct would be considerable.

A change of this nature would be uncomfortable, but I suggest the only way the business will continue to prosper, and have any value when the current owner decides it is time to retire.

Does yours fit the consumer definition of ‘Disposable?”

If so, what are you doing about it?

 

4 foundation ideas for business improvement.

4 foundation ideas for business improvement.

Mar 3, 2017 | Change, Small business

Having spent many years involved in one way or another in business improvement, as you may expect, I have some thoughts.

Primary amongst them is the dismay I feel when I meet another medium sized business owner  who has had a bunch of expensive Lean or Six Sigma consultants, or now coming to the fore, ‘Agile’ consultants in their business who have achieved little beyond mouthing clichés and scraping the coffers.

All these branded and marketed improvement processes are just toolboxes that contain a set of pretty common ideas that are dressed up to sound like the next coming.

There are no silver bullets, no easy solutions to difficult problems, no template that covers even a significant amount of ground. There are just tools that can work when used in the right context by people who know what they are doing, and/or are prepared to learn as they go.

However, in the fast moving world we live in there are a few foundation disciplines that go beyond the individual tools.

Identify the problem. Improvement comes from  identifying and solving problems. The identification and articulation of the problem to be solved should be the first, and continuing priority. No improvement project I have ever seen solves just one problem, there are always a series of smaller ones when you dig deep enough.

Collaboration.  Collaboration is the core of getting things  done that  ‘stick’. In other words, they change the status quo in some way that sustains itself, becoming the new status quo. Unless change is accepted by those affected, it will simply not last.

In parallel. Sequential change takes too long, and inevitably leads to unintended consequences that do not become evident until the damage has been done. Working in parallel offers the opportunity to improve and problem solve in real time as the project proceeds. The days of sequential improvement programs are gone.

Anticipate risk. Managing risks at the beginning of a project by anticipating, and allowing for them makes way more sense than just barging in. Once you get towards the end of a project, there are sunk costs, and often corporate momentum and egos involved, all of which are very hard, sometimes impossible, to shift.

Almost 20 years ago I worked with a group of fine wool growers frustrated by being price takers. They were on the end of a long sequential supply chain that delivered them no information at all on any topic beyond the price of their greasy wool on auction day. We gathered all the processing steps from sheep to the fancy suit around a table, and turned a 2 year opaque, price driven supply chain into a collaborative demand chain that took 15 weeks from the sheeps back to the suit on the rack, and delivered better margins to all players. That collaboration is still delivering returns to growers, by solving the industry structural problems in a way that remaiins almost unique. The inventory savings made through the chain were just the cream

Cartoon credit: Tom Fishburne

How SME’s can get invaluable feedback, insight and coaching, almost for free.

How SME’s can get invaluable feedback, insight and coaching, almost for free.

Mar 1, 2017 | Collaboration, Small business

As kids, most of us told each other our secrets when we were in a safe place. In the tree-house,  in a tent in the backyard, under the house, wherever it was, we tended to open up with our fears and dreams.

It felt good to confide, to open up and get the responses from those we trusted.

As adults, being able to open up like this seems both confronting and dangerous to self image.

As business owners, it is even harder, we are never sure who will find out about our deepest commercial secrets. We also know and find really hard, is to ‘work on our business not just in it’. The most common reason is used is  ‘where do I get the time? The only answer is to make it somehow, and the rewards will be substantial.

Large enterprises have a number of options to be a part of various round tables that set out to re-create this safety felt in the tree house. Operations like The Executive Connection (TEC) do it well, putting together groups of business leaders from non competitive businesses into a regular moderated forum in which they can be coached, and encouraged by their peers and learn from each other. It requires a commitment of time as well as the finances, to both attend the meetings and to do the ‘homework’ that emerges, but I have seen spectacular results from the commitment.

For the owners of SME’s the financial and time commitment to be a part of these sort of groups is substantial, and most do not take the step. However, increasingly there are options emerging as a part of local networks of like minded and non competitive owners meeting regularly to share experiences. The value that can come from the advice and support of such a group is substantial and should not be missed.

The usual rules for constructive conversation apply. Everyone needs to be given a voice by the moderator, and there needs to be a depth to the conversation that enables both deep analysis by the group, and by its very nature, builds trust. ‘They would not have said that unless they trusted me’ and trust recieved, begets trust given

My thanks to Scott Adams for the Dilbert cartoon.

 

What return should I expect?

What return should I expect?

Jan 23, 2017 | Governance, Management, Small business

This is a common question I get from the owners of businesses with whom I interact.

There is  no right answer, but when you consider that putting your money in a bank term deposit at no risk will currently generate you about 3%, and a diversified share portfolio held over the long term will earn 7-10%, you have to consider the risk/reward you are prepared to accept.

The question should really be expanded into two:

  • What is the financial return on the capital needed in the business
  • What is the personal return that might accrue.

Dealing with the financial return, it is a simple equation:

EBIT/Net Assets = Return on Capital employed (ROCE)

EBIT, or Earnings Before Interest and Tax  is a good measure as it reflects the true costs of running the business. Definitions do vary a bit, but usually it includes depreciation, a cost of replacing productive assets, but before the externally imposed Tax and interest which have little to do with the operations of the business.

Net assets is simply the result of subtracting Liabilities excluding equity, from the total assets of the business.

Businesses that have even moderately sophisticated financial management have usually reflected on the rates they see as acceptable, but as a rule of thumb, most manufacturing businesses  should have an explicit minimum hurdle rate not less than 15% before new investments can be approved.

A business that has very few fixed assets, such as a consulting practice, could reasonably expect a far greater return on the assets employed, simply because there needs to be so few of them, the key asset is knowledge. The calculation here is more about the return on time spent rather than fixed assets, way harder to measure, but directly related to revenue.

Clearly the type of business has a profound impact on the numbers, so commercial context is important.

Dealing with the second perspective, the risk/return of being your own boss is a highly personal equation, resistant of any useful quantification, so my advice is always to do what ‘feels right‘ to you.

 

 

 

How do you set your prices

How do you set your prices

Jan 16, 2017 | Marketing, Small business

Most times people set prices as a function of three things:

  • What their costs are,
  • What margin the budget demands,
  • What the competition is charging.

All are the wrong way to go about it.

Prices should be absolutely dependent on what customers are willing to pay.

This bears no relationship whatsoever to your costs, or what the boss wants by way of margin, but has a lot to do with what the competitors are charging, assuming your product is substitutable.

The challenge therefore is to ensure that there are no substitutes for your product.

In many categories, perhaps most, this is a real challenge, one that makes marketing all that much more important, as marketing should be focussed on the delivery of value.

Most businesses set out to deliver all the bells and whistles, and the reasoning is that they are trying to help customers by giving them as much as possible, and some choice. However, looking at a product feature by feature and figuring out which ones customers are willing to  pay for, and which are just in the way, makes more sense.

The better you know your customers, it follows, the better you will be able to determine which features they are prepared to pay for, and how much they are worth to them. It also follows that the more specific the niche you are in, the easier it becomes to understand their purchase motivations. Nobody can be all things to all people, choices simply have to be made.

There is an electrician in my local area with a strong proposition.

In an environment where we do not expect tradies to come on time, and when they do turn up, they tramp through your home, and leave a mess behind them. This bloke makes several promises:

He will be there at the nominated time, + or – 15 minutes, or you do not pay him,

He leaves the work area at least as clean as he found it, or you do not pay him.

He will give you the price before he starts the job, and it is a fixed price, it will not change.

He charges a premium rate, and the biggest problem for a potential customer is the waiting list. If you cannot wait, or do not like the hourly rate, he does have the numbers of others he will give you, without any guarantee of performance.

Many people in the area would not use him, as he ‘charges too much’. They are the ones who see little value in the propositions that make him different, and he is fine with that. In fact, he seems to enjoy directing potential customers elsewhere, as it highlights the fact that he is really busy, and has become a price setter, not a price taker.

Back to the challenge of price setting.

When the cost of provision of something that adds value is less than the value customers see, then it makes sense to provide it. In my electricians case, he leaves himself some spare time to ensure he can make good on his promises, and he charges for the privilege, simply because the certainty offers great value to his client base.

Simplicity is a key, the simpler the better.

Simple to explain, deliver and understand.