My thoughts exactly

by Gregg M. Steinberg

Game plan

Business owners whose primary expertise lies in technical applications rather than strategy tend to make decisions based on expediency and personal experience. In many cases, however, these owners don’t have all the facts on which to base sound decisions.

There are two possible reasons for this oversight. One, they have not identified the key operational matrices of the company. Or, two, if they have identified the matrices, they cannot ascertain the key facts that compose them because they lack the systems, methodologies and procedures for daily tracking.

A business that doesn’t have all the facts is like a sports team that begins a game without a game plan, lacking statistics on player performance. To transform a small or medium-size business into a larger, more successful company, owners must become master strategists who have internal business information at their fingertips at all times, based on current information, not historical data.

Here’s a short course on what it takes to get there.

Start with a game plan
Like coaches, strategists need a game plan, but they also need to know their options in order to make new decisions rapidly if the first plan fails. Just as a coach may change the game plan at half time, so too a business needs to be able to make changes over the course of a day, week or month. If a business is tracking operations historically and has to wait 30 or 60 days to know where it stands, the game may already be forfeited.

A company depends on current information, just as a sports team depends on its scoreboard. For the master strategist, the key is to identify what areas of the business need tracking and implement the systems to monitor them on a real-time basis. This allows a full understanding of:

• The impact of current events on the day-to-day operations of the business from a short, medium and long-term perspective.
• The tangible and intangible effects of every decision on the short, medium and long-term aspects of the business.
• How those decisions affect the company’s mission, management’s purpose and the overall goals of the organization.

The master strategist integrates this information into a decision-making process that aligns each major decision in the direction of success.

A successful transition from entrepreneur to business leader requires the ability to work on the business rather than in the business. Like a coach, the master strategist takes a view from the sidelines, keeps an eye on performance and makes strategic decisions based on facts, not emotion. He or she operates with a long-term view, rather than dealing with day-to-day matters.

When owners work in the business rather than on the business, errors in decision-making can occur and include:

• Rush demands from "best customers" are accommodated at a moment’s notice, which creates a ripple effect on delivery schedules for other customers. Promises are broken and customers are displeased.
• Long-term "good customers" are retained, although they produce only unprofitable sales due to pricing and other concessions. The company in effect grows itself out of business.
• Decisions on employee retention are based on emotions and emergencies rather than on a full understanding of the business and the impact of the choices made.
• Decisions are designed primarily to maintain the status quo.
• The company’s moral obligations are not weighed against the long-term impact on the business.

Owners who want to work on the business rather than in the business need two valuable tools. The first is employees to whom they can delegate with confidence and whose strengths complement their own. Insight into how people reach decisions allows training them in accordance with the company’s vision, long-term strategic goals and ethical standards.

The second is proper controls and tracking mechanisms. Here’s an example of what happens without them.

An electrical contractor started his business as a sole owner-operator. He knew exactly how much work he could accomplish in a day and based his bids on that knowledge. A little later, he trained two crews whom he supervised closely while continuing his own bidding. As the company grew, he no longer had time to do all the bidding himself, and he had so many crews in the field that he could not visit them on a daily basis.

Bids became less accurate as the bidders lacked the owner’s intuitive understanding of the process. Also, the crews didn’t have the same level of enthusiasm as the owner had, so jobs took longer to complete. Inventory control declined because others were making purchases – sometimes at retail – and parts and equipment were disappearing when employees used them for moonlighting. The owner also lacked the systems with which to track pricing against budgets and bids. He didn’t know which jobs were profitable and therefore couldn’t make decisions on which jobs to accept and which to turn down.

Without the appropriate controls in place, including systems for tracking inventory, bidding and labor, the owner’s control decreased steadily, leading to rising costs and financial difficulties. The lesson is that without a way to measure and monitor the components of key operational matrices, companies can fail even while growing.

Ripple effect
It is possible to achieve growth and increased profitability without necessarily increasing the number of employees. The way to achieve that goal is to increase unit productivity by having each employee continually produce more for the corporate benefit.

In other words, a company with X revenue and Y employees can generate X+ revenue without increasing the number of employees. This benefits both the company and the employees because as the company grows, employees may advance to positions of greater responsibility.

How can this be accomplished? In sports, each player knows his or her statistics and in most instances, their opponents’ statistics. They can measure themselves against other players in similar positions and their team against other teams.

In the same manner, by knowing the key operational matrices and the data that compose them, the master strategist establishes a methodology for measuring employees. Employees will know their individual goals, quotas and objectives and will have tangible targets against which to measure them.

Based on employee quotas and targets, the strategist then establishes a compensation structure that motivates employees to meet goals and objectives. Remember, employees cannot be expected to become more productive against intangible goals. Goals must be tangible, viable, measurable and realistic.

An unrealistic quota only acts as a disincentive. This system is not based on guesswork, but founded upon knowledge of the true matrices of the business.

Not the same thing
Contrary to what many businesses still think, marketing and sales are not synonymous. In short, marketing is done to increase the brand awareness of a product or service while sales refers to the physical transfer of the product or service. Companies must do both.

Successful marketing is a function of the company’s products and the competitive factors of the marketplace, including an understanding of:

• Which competitors are profitable and which are not.
• The internal break-even point, so the company can determine where to compete and where not to compete.
• Brand identification in relation to the desired perception in the marketplace.
• Target market(s) to determine the most effective media.

The way to learn is not by trial and error, but by following established business practices, which means acquiring the appropriate knowledge base. Without that knowledge, the company might waste money, send the wrong message and frustrate both customers and employees.

Financial strategies
Predicting and improving cash flow are functions of clearly understanding the revenue and expense cycles of the business. A company that has no systems for tracking cash flow on a day-by-day basis is attempting to move forward while focusing on the past. This is the reason why most companies disappear within the first five years. Lacking the tools to look ahead, they’re always trying to figure out what just happened instead of determining what is about to happen.

The ability to minimize tax burden comes through effective corporate structuring, strategic planning, estate planning, succession planning and tax structuring, all of which must occur early on in the formation of the business. Too many owners worry about company organization and tax structure only later in the corporate maturity, when they begin to show a profit. At that point, it might be too late to change the structure of the business, at least for immediate impact. An unnecessarily high tax burden is the unfortunate result.

Acting too late also makes it difficult to transition the business in an orderly fashion, and if a catastrophic event should occur without a tax plan, the next generation may be severely burdened, if not forced to sell the business. Everything the entrepreneur has worked for might disappear due to poor tax planning.

The transformation from technical expert to master strategist is not just a transformation internally within the company, but it is also a strategy that allows the entrepreneur to have balance in life. Master strategists who work on the business rather than in the business have ease of operations, security and time to do the things they enjoy in life outside of work. They don’t just have cash flow and profitability, but also an increased quality of life. That’s the key to success.