The private business sector is in trouble, and the final showdown is coming. If you're one of the 75 percent of mid-sized companies that's not increasing in value, it's time to adapt or die. Private business guru Rob Slee explains what you need to do right now to stay alive.
Eight Steps Your Company Can Take to Survive It
WE ALL KNOW IT'S COMING. Signs of the apocalypse lurk everywhere: the recent sub-prime meltdown, low consumer confidence, rising energy prices, high unemployment, and so on. Factor in the always-on global economy and all the shake-ups it has caused and it doesn't take a rocket scientist to know your future is precarious. In fact, the (metaphorical) locusts are hovering over your company. If you aren't increasing the value of your holdings --particularly if you're a privately owned middle-market company--your days are numbered. Heck, maybe even your hours.
What are you doing about it?
"As a business owner or manager, you know things are vastly different from the way they used to be," says Slee, author of Midas Managers: How Every Business They Touch Turns to Gold "The old rules just don't apply anymore. Maybe you're floundering desperately for some sort of map, or you're hoping the government will rescue you, or maybe you're simply in denial and on autopilot. Regardless, now is the time to get serious about re-engineering your company to compete in the global economy."
While large publicly held companies are faring well in global markets, mid-level private companies cannot say the same. As a group, they simply aren't globally competitive, even if they do outsource their manufacturing. (If you buy globally and sell domestically, you are at best reaping only half the benefits of a global economy.)
Here's the really bad news: privately owned businesses generate more than 50 percent of America's GDP and account for 80 percent of new jobs. And currently, some 75 percent of owners are not increasing the value of their firms.
Warns Slee: "I've said it before and I'll say it again: if the private business sector fails, America fails."
Scary stuff, for sure. But Slee isn't here merely to be a doomsayer. Yes, he does believe the sky is falling, but he assures us that it won't fall on everyone. And while it's true that you can't save the world --or America, for that matter --you can save yourself.
What you have to do is emulate the business superstars Slee calls "Midas Managers" -- the less-than-one-percent of all business people who intuitively know how to create wealth and who've proven their success is more than luck by repeating it again and again. (Think Warren Buffett, John D. Rockefeller, Andrew Carnegie.) It's not that you can become a Midas Manager --the vast majority of us simply don't have "the right stuff" -- but you can study what they do and learn their tricks.
Tips for reinventing your business:
First things first: get out of denial. Chances are, you don't want to hear Slee's message. Few business owners do. After all, many of them built up highly prosperous companies playing by The Old Rules and they're loathe to change now. (Indeed, says Slee, many older owners he talks to do the equivalent of covering their ears and singing "la la la la la!") It may not be "fair" that everything you've built up no longer works, but wishing won't make reality go away. If you're going to survive, you must move to a conceptual business model, and that means making some hard choices.
In Midas Managers, Slee tells the story of Mann Wood Products*, a company founded in the late 1950s by Woody Mann. When Woody's son Chester took over the company, it was an integrated supplier that did everything from logging forests that it owned to sawing, chipping, kilning, planing, and moulding all that wood. One day in the early 1990s, Chester got a call from a representative of Brazilian Forest Products. The rep revealed that his company's products were selling for about 15 percent less than Mann's manufacturing costs.
"At first, Chester tried matching the Brazilian company's prices for a year, but all that did was generate $5 million in losses," says Slee. "But once he got out of denial, he reconceptualized his process chain. Instead of manufacturing boards, he bought them from Brazilian and its competitor. He decided to mould the boards for next day/next week delivery to home builders. He started buying pulpwood from independent loggers to feed the chip mill. And he reduced Mann Wood Products to just two divisions: moulding and chipping.
"In the end the company wrote off about $1.5 million in assets, reduced head count by more than 100 --including aunts, uncles, and cousins --and even forced Momma Mann to retire," adds Slee. "Sales went from $85 million to just $22 million, but instead of losing $5 million per year, Mann was now earning $3.5 million. Now I'm sure firing family members was not fun, but it had to be done to save the company. If Chester can fire Momma, you can do what you have to do as well. Just be sure to get out of denial before it's too late."
Get comfortable with conceptual thinking. Slee says we are in the Conceptual Age, which is defined by multi-dimensional (right brain) thinking. Like Chester Mann, today's mid-level private business owners must conceptualize their way to success. Operational excellence is no longer enough. In the Conceptual Age, it is merely the starting point. Machines, capital, and employees are no longer the main factors in creating business wealth. The biggest is the manager's ability to conceptualize solutions. Walt Disney would be proud: our imaginations are now the major constraints on wealth creation.
"It's ironic that so many of us were told as children to avoid artistic careers in favor of a more 'reliable' future in business," notes Slee. "Now, here we are living in an era when our ability to be 'artsy' will in large part determine our success in business. In a world where the major resources are available to everyone, it is the ability to do more with less that separates the winners from the losers. That's what conceptual business models are all about."
Raise your private finance IQ. Of course, all this talk of artsy-ness doesn't mean you can throw numbers out the window. Remember, what we're really talking about is value creation, and it's fundamentally a finance activity. As a business owner you have to understand finance; you simply can't leave it up to your controller or outsource it to a CPA. (What they practice isn't really finance, anyway, says Slee: it's accounting.) Understanding how private finance works is the path to wealth. Once you have a grasp on the three pillars of private finance --value relativity, cost of capital and value creation, and transfer value --a whole world of financial decision making opens up.
"It is possible to create wealth by planning or buying in one value world and then selling in another," says Slee. "For example, buying a business in the bankruptcy world and selling in the market value world usually creates wealth. Planning in the fair market value world and then going public in the IPO world also creates wealth. There is no substitute for knowledge of value worlds, cost of capital, and transfer methods...so if you don't have it, go get it now."
Pick apart your process chain. Figure out exactly what your company does, step-by-step, from inception to customer. To revisit our traditional wood-processing domestic process chain (� la pre-Brazil-call Mann Wood Products), timber is harvested by American loggers; American logs are sawed, then kiln-dried; dried boards are then shipped or further processed. Obviously, your process chain doesn't look like this --you wouldn't be in business if it did --but you may have a few steps being handled in a way that's nearly as inefficient.
Identify the steps that involve your intellectual capital. Outsource everything else. It really is that simple. In a conceptual business model, you own only your intellectual capital: the know-how and skill sets that allow you to be successful. You control --not own --the process chain. You're essentially the quality control manager. As Slee likes to say, you should have your fingers in everything, but no fingerprints on anything.
"Most companies have ten to twelve process steps in their process chain," he says. "Usually no more than three to four of these steps are intellectual capital. For example, in the world of investment banking, the first couple of steps of the process chain are intellectual capital: edu-market the client; negotiate the fee agreement. These must be owned. The middle steps, such as: create memorandums; identify prospects; run the auction, can be outsourced.
"Ultimately, you will want to leverage your intellectual capital by at least a 5:1 ratio, or better yet, 10:1," adds Slee. "Conceptual business models allow you to do that."
But don't just outsource. Partner. Many companies will tell you that outsourcing is no panacea. It can fail, and for a variety of reasons. But your chances of success increase dramatically when you join with a qualified and motivated partner. Slee tells the story of Scott Livingston, owner of Cosmetic Components Corporation, who adopted a "design and deliver" business model. His company designed parts for beauty products, outsourced the manufacturing, and then delivered finished products to customers.
CCC recruited offshore factories to supply 100 percent of its need in a particular product area. All of Scott's compacts and jars came from one company in China, all extruded tubes were produced by one company in Mexico, and all lipstick cases were made by a company in Thailand. Scott negotiated exclusive supply agreements that prohibited his partners from supplying parts to his competition and prevented them from selling directly to consumers. The company received shipments in leased space in public warehouses and then broke them apart for customers, shielding the customer from the manufacturer.
"This manufacturing arrangement solved several problems for Scott," Slee explains. "First, it eliminated the need for him to invest in manufacturing, which made his model both low-cost and scalable. Second, Scott's partners were extremely capable of producing the required parts, so he didn't have to worry about supply disruptions. Third, Cosmetic Components was usually the largest or second-largest customer for a partner so it got rapid responses anytime there was a problem. Fourth, with geographic diversity, Cosmetic Components was not overly exposed to fluctuations in weather or currency."
The moral? When you're seeking out partners, don't just figure out who can do it most cheaply. Think carefully about all the variables before you make a decision. And figure out why the partner would want to do business with you --if arrangements aren't truly mutually beneficial, they won't satisfy either party.
Become a niche-aholic. A niche can be defined in several ways. It might be meeting an unmet customer need, filling a hole in the market, or providing a product or service that is defensible, sustainable, and delivers a return greater than the underlying risk. For example: one manager of an industrial distribution company once heard a contractor mention that it would be great if the distributor could create and supply stock lists from job blueprints. The manager immediately recognized that this service could create a competitive advantage and would allow him to position his company in a new, lucrative, and sustainable niche.
Here's the thing, though: one niche is not enough. "During the 1980s a middle market company could develop a niche with $50 million per year in sales and defend it," says Slee. "Today, if a mid-sized company gets much above $10 million in sales from a niche, the world shows up, and they're not looking to buy. This is why most successful middle market companies are really amalgams of niches hanging from an intellectual capital tree. And it's also why successful managers spend half their time tending to current business and the other half in search of new niches."
Draw up lists of your company's core competencies and criteria for niches that will maximize them. This will enable you to know a promising niche when you see it or know what to do to make it one. Niching is not big-game hunting. It's listening to low-voiced comments and offhand questions from customers. Niche-aholics take what the market will give them, and in today's economy, that is either high volume but low profits or low volume but high profits. It's okay to hunt for niches with sales of $1 to $5 million. In some cases, it's the best strategy of all.
Don't push your products onto the market. Let them be pulled. If you are trying to convince potential customers that they need your product, you're on the wrong track. The Old Rules say that you should control your resources. The New Rules say just the opposite. Instead of dictating solutions, listen to your customers and react accordingly. The command-and-control mindset is obsolete. "A wise business owner once told me that successful service providers create a condition where the door to their office swings in, not the other way around," writes Slee. "In other words, the client comes to them."
How to create a pull business model:
Determine how to make your door swing inward. Who needs your products or services to meet their goals?
Create a platform that organizes and feeds a niched, networked community of these potential customers. Give them enough value-adding tools --without restrictions --to collaborate and innovate. Make them believe it's in their best interests to contribute something of value to the community.
Collaborate with partners. Leverage your partners' unique intellectual capital to build your platform. Choosing, enticing, and rewarding partners is a key to success in the Conceptual Age.
Dare to share. Innovation within networks occurs when the companies with platforms share capabilities.
If your head is spinning right now, you're not alone. You have a decision to make and your window of opportunity is closing. Slee says that many, if not most, business owners and managers simply can't --or won't --change. But there are survivors in every age --men and women who open their minds, rise to the challenge, and come out swinging. Hopefully, you'll decide you're going to be one of them.
"Today, we all bear personal responsibility for re-thinking our behavior to help us compete in the Conceptual Age," concludes Slee. "This will be difficult. It requires us to think strategically. It requires us to scale an unending series of walls. It's a chess match on steroids. It's a high-stakes poker game. It's a game we must win if we want to continue to succeed in business."
Rob Slee is Managing Director of Robertson & Foley (robertsonfoley.com), a middle market investment banking firm. Rob owns equity positions in a variety of mid-sized private businesses. His other book, Private Capital Markets, is now considered the seminal work in finance for private companies. Rob can be reached at robertsonfoley.com.
About the Book:
Midas Managers: How Every Business They Touch Turns to Gold (Burn the Boats Press, 2007, $27.00) is available at bookstores nationwide and from major online booksellers. For more information, please visit midasmanagers.com and robertsonfoley.com. Check out Rob's BLOG for lots of good, solid business information.
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