Monthly Archives: September 2012

(Internal) Early Warning Signals of Decline

As ominous as uncontrollable external elements may appear, they are not the major cause of business failure. Rather, controllable internal elements are most frequently the problem. The internal elements that affect businesses are finance, operations, and marketing and sales. These are the basic functions over which a company’s executive team exercises direct control. Any business function can be placed within these categories. 

Business management is the force that drives these functions; yet changes in internal elements are at the root of the majority of business failures. These failures do not occur overnight; rather, such business decline usually occurs in stages. Extensive research that the founder of our organization performed suggests that the basic reason companies fail to recognize the onset of decline is simple management myopia or ignorance.

When your team fails to recognize the internal signals of decline, rationalization often ensues, with blame attributed to uncontrollable external elements. This approach appears on the surface to absolve management of responsibility for the company’s problems. For example, a shortage of cash might be blamed on stricter banking standards or lack of demand for the product/service. This “problem” can then be attributed to the nation’s economy.

Management can then take smaller “leaps of logic” to shift the blame to increased competition, which has made the marketplace unpredictable. While a shortage of cash is a symptom of a problem and surely a major signal of decline, the shortage of cash itself is not the actual problem; the problem may be buried deep within the business’s management and accounting information systems. You may be making sales at a price that does not cover the fixed costs of operations, or accounting personnel may not have developed contribution margin, product cost, and direct cost of sales standards. If your “system” cannot measure the causes of unprofitability, how do you know what changes to make?

As with external elements, internal elements can also interact with one another. Finance, operations, and marketing and sale shave a natural interaction with each other and are, in fact, related to one another. any one of these internal elements may cause decline. As the problem persists, the other functions become involved. Operations techniques may become antiquated. Marketing and sales can be in the wrong market with the wrong product. Finance may be unaware of other departments’ changing financial requirements. Such a lack of information flow between departments also signals decline. Businesses cannot survive without information about both internal and external environments.

Coping With Internal Elements

It is unfortunate when managerial tools are not used for maximum benefit. Many companies fail to manage by cash projections; instead they rely on “looking backward” statements like balance sheets and P&L. Budgets comparing projections to performance are critical to effective management. When budgets are tasks rather than tools, your management is weak. Balance sheets can show working capital reserves even when a company is in decline. Changes in accounts is important to track–it can point you to root causes and symptoms of real problems.

Controlling Internal Elements

The internal elements are the factors that should be most familiar to executive teams, but they are often the most overlooked. The very nature of the internal elements is dynamic; they are continually evolving and require constant monitoring. Since managers may be unable to understand the dynamic nature of the internal elements, a decline may go unnoticed for a while. Management’s primary role is to use these elements to maximize profits. Controlling finance, marketing, and operations requires monitoring of all the functions to identify potential signals of decline.

 

Coping With External Elements of Decline

By using tools like promotion, persuasion, buyer education, accelerated product development, process improvements or elimination, growth plans, market development, and adjusted sales practices, business owners can adapt to changes in their external operating environment. Paying attention to the following warning areas is important in coping with external elements of decline:

  1. Economic growth, which gives management an indication of the economic climate and influences expansion plans.
  2. Credit availability and money market activity, which indicates trends in commercial and investment banking affecting financial needs. Changes will affect the cost of funds.
  3. Commodity market movements, which reveal trends in raw material inputs.
  4. Capital market activity, which gives a clear signal of investors’ attitudes toward your industry. 
  5. Business population characteristics, which can advise executive teams on the number of businesses entering and exiting the industry (niche). This signal can be used as an indicator of the expansion and contraction of the market and competitive size of the industry.
  6. Price level changes, which indicate the rate of inflation. This rate influences the consumption and therefore has an impact on the company growth rate.
  7. Changes in the competitive structure of the marketplace, which affect products, pricing, and marketing and sales.
  8. Changing technology, which allows rapid breakthroughs and changes in products, processes, and marketing and sales.
  9. Cultural/social changes, which can alter buyer preferences or the conditions under which a product can be sold.
  10. Legal/political changes, which can adversely affect the marketplace or have an impact on the execution, marketing, or sales of a product/service.

Coping With External Elements

Some  businesses prosper during crises. They plan for changes and create resources that enable them to continue to function. For example, some businesses use substitute products in their processes, and their adaptability allows them to survive. In short, many strong teams do find it possible to both address and influence the external elements.

There is no denying, however, that external elements can have a profound effect on companies. Teams are forced into unique experiences when confronting situations they don’t understand. External elements are usually not a part of most businesses’s planning processes. While many will fail, some are saved–those that are adaptable and able to return to their core products and once again become profitable.

Businesses with less than 50 employees are actually the heart of the economy. Unfortunately, they are also the companies most frequently in need of a turnaround, having the same internal and external problems but lacking the business and human resources of many larger companies.  Consequently, these smaller businesses do fail, just as larger ones do, but without the press coverage.

To effectively cope with the external elements requires that the executive team plan for the unexpected and implement the plan when it occurs. Since management knows it can expect changes in economic conditions that will affect the capital and money markets, it must plan for those changes. The areas that management can control must be prepared for the possibility of external environment changes. Strategic planning that is not flexible is, therefore, useless. For example:

  • Most companies should prepare for increased competition, local, regional, and around the world.
  • Legal and political changes are always on the horizon and should be duly noted; it is not a question of whether they will affect the business, but when.
  • Being aware of cultural and social changes affecting purchasing patterns is predictive of consumer spending and its impact on the entire local business economy.
  • Changes in technology are continual and must be utilized where appropriate.

The main issue to be addressed is whether the business is making the change or being subjected to it. In either event, the management team must adapt to the new environment or be prepared to suffer the consequences.

 

Early Warning Signals (External) of Business Decline

Early warning signals companies should look for in the external environment include all legal, political, competitive, technological, economic, and social changes that affect them. Regular review of social media, trade periodicals, business publications, and newspapers will help to keep you current. A technological advance, for example, often affects buyer attitudes and expectations, thereby causing social changes that need to be addressed in product/service design and delivery/sales. If your organization is uninformed with regard to the changes–either that they occur or the extent to which they occur–company performance may lag behind competitors. 

Early Warning Signals – External

Management often tends to dismiss the external signals of decline as elements beyond their control. They believe that a downward trend will end when external elements (e.g. economic conditions) improve. Problematic external elements can include the following:

  • increased competition
  • rapidly changing technology
  • unpredictable economic fluctuations
  • cultural/social changes
  • legal/political swings

Within these external elements are market changes, customer preference changes, foreign competition, capital and commodity market movements, legal precedents, and unresponsive political solutions. While these elements cannot be controlled, they can be influenced. Also, since all businesses in an industry are similarly affected by external elements, management’s ability to survive these changes will determine future  viability. Some businesses weather external changes and emerge with increased market share and profitability; others fail.

Two major problems with these elements are their uncontrollable nature as well as their interaction with each other. Upon close scrutiny, it becomes apparent that factors affecting one of them can have a secondary effect upon another. For example, a cultural/social shift can result in a legal/political change. This change can affect the economic environment, which will interact with technological development. the rate of technological development consequently affects the status of competition. This process of action and reaction comes full circle when we realize that the status of competition then affects the economy and cultural/social change.

Businesses fail to realize that they can plan for external changes and safeguard their hard work. Their management teams have the ability to influence the external elements if they can predict their occurrence. Such foresight allows the executive team to influence the elements through the use of promotion, persuasion, buyer education, accelerated product development, process improvements or elimination, unit growth plans, new markets, and adjusted sales practices. 

Adaptation to the change is the result. For example, construction companies that build prefabricated residences have known for years about the external changes affecting the prefab sector of the home building industry. They have been affected by  cultural/social and legal/political changes for the last several decades. In response, they developed new products, such as modular multifamily housing, to offset their declining mobile home product sales. They invested in additional research to determine the number of potential single-family and multifamily buyers who preferred the cost savings that their construction process generates. They invested in new manufacturing capabilities, which would use material specifications offering a competitive advantage. These companies understood the early warning signals of the external elements and acted to offset them through:

  1. promotion and persuasion to keep their customers,
  2. additional market research about market size and buyer profiles,
  3. buyer education based on research findings,
  4. product improvements, and
  5. product elimination.

These tools allowed this segment  of the building industry to adapt to changes in the market. What are you doing in your business to a.) study the external environment, b.) adapt to the changes, and c.) position yourself in the eyes of prospects and existing customers to become more competitive? You can influence your own outcome!

 

Recognizing a Declining Business

In the past week, we have taken the time to look at characteristics of successful companies. In case you missed one of the posts, feel free to catch up by reading them in order (links below):

  1. How Successful Businesses Plan For Growth
  2. How Successful Companies Market
  3. How Successful Businesses Manage Their Finances
  4. How Successful Businesses Manage Their Operations
  5. How Successful Businesses Create Positive Cash Flow
  6. Revenue, Cost & Capital In Your Business
  7. How Successful Businesses Maintain Organizational Morale

This week, we are “flipping the equation” on you and examining what a business in decline looks like. As you track with the principles shared and lessons learned, you may find yourself to closely resemble a declining business in one way or another. Don’t despair! Knowing what needs to be fixed is important. You are that much closer to success than someone who doesn’t even realize that crisis is around the next corner because of ignorance.

No one is consistently successful. When things start to go wrong, however, the shrewd executive must recognize those events that are catastrophic and those that are not. Early warning signals of imminent business decline can occur both inside and outside a business. Changes in the operating environment due to external and internal elements may signal the beginning of decline. Once an executive team determines that the business is showing some symptoms of decline, the next step is to determine whether the decline is shaping up to be a twenty-four-hour bug or a terminal disease. Can it be treated? Can it be cured?

The Stages of Decline

Stages of decline include early, mid-term, and late periods, and recognition of these stages has an impact on the steps to reverse the decline. In early decline, it is very probable that the business can be totally saved and profitability restored quickly–often within a matter of months. In mid-term decline, the business has been suffering some erosion of value, and it may take a year or more to restore the value and resume profitable operations. Finally, there is a late decline. Sadly, fewer that one-third of companies in this type of serious trouble are able to reverse their decline and emerge on the other side “whole”–with existing management, ownership, and operations intact.

Before examining the warning signals of decline, we should look at the root causes leading to those signals. The earlier these causes of decline are observed, the easier it is to resolve them. The most common causes of decline–from both internal and external elements–are as follows:

The Causes of Decline

  • management by exception rather than by flexible planning
  • delegation without inspection or control–no feedback, review, or reinforcement
  • vertical organization chart with little if any interaction between departments (silos)
  • managers with responsibility for more than five direct reports
  • employees with more than one boss
  • chain of command broken when employees think necessary
  • breakdown in formal communications
  • overreliance on strategic plan
  • overreliance on management by objectives
  • senior managers’ abuse of outside activities and company benefits
  • marketing the wrong products
  • marketing in the wrong locations
  • aging workflow management techniques
  • inadequate research
  • inadequate staffing
  • inappropriate sales methods
  • unresponsive financial information systems
  • loss of competitive advantage
  • displacement by competition
  • changing technology
  • buyer preference changes
  • regulatory changes
  • economic changes
  • inadequate understanding of buyer needs
  • inadequate information flows, both between business functions and between company and customer
  • one department or business function dictating the mission, goals, and objectives of the company

All of the above causes for business decline are valid, and any one of them can precipitate the downfall of even an experienced team. Recognizing the warning signals of decline is the next step in righting the ship…

How Successful Businesses Maintain Organizational Morale

 

 

Organizational morale builds quality products (and services). Employees who are well-paid, well-trained, and appreciated work harder than those who are merely trying to earn a living. Giving employees more and more responsibility as they develop skills and gain experience makes them feel wanted and valuable. training employees to do their jobs expertly teaches them the value of quality performance. Finally, rewarding an employee for continuing contributions to company profitability reinforces the company’s goals, mission, and objectives.

Some of the benefits to organizational morale include the following:

  • Employees are willing to work longer hours to ensure that a job is done correctly.
  • Customer service and sales are carried out with positive attitudes. As the company makes more money from these quick and repeat sales, the business can afford to hire the cream of the crop in employees. The appearance to anyone outside the operation is that of a well-oiled machine.
  • Rather than fending off mercenary plots and complaints all day long, management can plan for upcoming projects, ensuring the best use of employees’  talents.
  • Striving and bitter rivalries are easily ended when all employees are treated impartially and fairly.
  • Quality control is much easier to enforce with a group of hard-working, motivated workers than with uncaring employees who are simply filling a slot.

Training

Truly effective training and development programs make good employees out of average employees, and great employees out of good ones. When an employer takes the time and effort to teach employees how to perform their jobs better, employees usually respond with increased effort on the job.  Bonds between management and employees are created as an employee gains a greater sense of self worth. The employee begins to feel that his or her contribution to the overall business matters and is important.

Responsibility

Employees in successful companies have two types of responsibility–to their peers and to their bosses. Each is important to a smooth-running company. However, responsibility can prove an albatross around the neck of the employee who lacks the corresponding authority to make decisions. Good employers will therefore not only be creative in assigning work to employees, but also in providing the best possible environment for them–including adequate authority where appropriate–to help them succeed. Reporting to management helps employees feel they must do a good job and that someone is around who can help them if the going gets rough. Being accountable to peers in addition to bosses teaches employees to respect one another’s work and to learn how to work together to reach common goals.

Motivation and Reward

Bonus and incentive compensation programs are the rewards of excellent employee performance. Rather than threatening to discipline or even dismiss a problem employee, it is often better to motivate employees through encouragement. Fear of failing will not lead to successful work attitudes and performance–it will only lead to ultimate failure. On the other hand, building up an employee’s confidence has proven much more effective than criticism in raising performance levels. 

Once an employee has performed at or beyond the established level, successful management teams find a way to reward the employee. Not rewarding someone who has done everything requested and more makes the employee wonder a.) whether he/she has indeed done a good job, b.) whether the supervisor is a good enough manager to recognize the employee’s contributions, and c.) whether a “change of scenery” may be preferable. However, bonuses and incentives must reflect current and projected financial performance. A company experiencing financial loss must have a flexible plan to adjust employee compensation as necessary. 

A successful company becomes a self-perpetuating entity–the more successful it becomes, the more successful it can become. Executive teams who maintain high organizational morale and plan for growth will create positive cash flow from efficient operations. While your business may not be in a position to always do what larger businesses do, remember to run your organization in a professional manner any you will meet with greater success!