Overcoming Business Failures With Mentoring

 

According to Bill Warner, co-founder of EntreDot, approximately 26,000 new companies are formed each year in North Carolina and, in that same year, over 23,000 companies fail due to poor management and operational mistakes. Warner further states that, “The statistics are worse in rural and minority populations. This means that good ideas go to waste along with the grant and investor funds that helped get these companies started. As a result, the potential growth of revenue and new jobs is lost also.” These comments are very similar sentiments to what Dun and Bradstreet found in some surveys conducted during the period of 2007 – 2010. D&B found that the rate of business failure went up by an average of 40% during the recession years.

D&B SMB Lowest Failure Rate by State 2010

 

Many of the states with lower failure rate increases are less heavily populated states. In fact, of all the states that have seen a decline in the rate of small to medium sized business failure, only North Carolina makes the list of 10 most populous states in the country. Of states (below) with large increases in failure rates, only California is heavily populated.  

D&B SMB Failure Rate by State 2010

 

 

 

From 2007 through 2010, Western states in the West had the highest increase in failure rates. Reasons D&B provided for the uptick in failures include continued instability in the residential housing market and drop-off in the tourism, travel and hospitality sectors. Interestingly, Tennessee has been home to the highest small business failure rates for four years in a row.  

D&B Largest SMB Industries 2010

 

These trends have been occurring at a time when the number of retail establishments and corresponding retail employment have both dropped by 15-20%. On the other hand, the number of SMBs in the Business Services category more than doubled and these businesses experienced a 30% increase in the number of people they employ. The fastest growing industries for SMBs are summarized below:

D&B Fastest Growing Industries 2010

 

As you can plainly see, nothing else comes close to the growth of  the Business Services category. Bear in mind that many software as a service companies are part of this category and have been launched in only recent years. The macrotrends that become evident are that retail is on the wane, highly populated states are more stable in terms of business failure statistics, and the business services category’s growth will be a key cog in the engine of our economy.

Warner points to the following issues of significance to these small businesses:

  • Business strategy and planning to make sure their business is focused on a viable market with a winning product and/or service that has a competitive edge
  • Forecasting and financing ensuring that sales forecasts are realistic and that revenue, cost, expense and cash are well managed
  • Operational discipline and judgment to increase the chances of success by making fewer mistakes
  • Industry connections that can help accelerate the business and its operations
  • Start-up company experience that can instill the wisdom of what it takes to really start and manage an emerging business

 

He feels that these companies need the dual combination of basic business know-how and mentoring. The situation in North Carolina, where Warner and I live, is that our state has a comprehensive array of entrepreneurship education programs throughout the community college and university systems including various other private and public organizations. The problem is that we have little help for entrepreneurs once they have completed these programs and actually try to start a business. We recommend assistance for entrepreneurs who are struggling to create successful businesses, the failures should decline considerably. Entrepreneurs should be seeking out business mentors that can help them through the early years of their business.

 

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When Less Polish is Better

 

The week before last, I stopped by one of my satellite offices to visit with my team mates. Unfortunately, none of them were there as all had outside appointments. What I did encounter, however, was a leftover Christmas gift. A referral partner of mine had dropped an envelope off for me and I hadn’t been by since he did. Inside the envelope was a book and a very kind note. The book’s title, Getting Naked, caught me off guard, but the contents were a very pleasant surprise.

The author is Patrick Lencioni, famous for his previous work, The Five Dysfunctions of a Team. Lencioni is well known for teamwork, leadership, and organizational health expertise on the speaking circuit. The book is told as a type of fable, with narrative mixed in with didactic lessons. First person narrative is used to show a change of heart from a traditional approach to client service to one that is very vulnerable, transparent, and self effacing. Excerpts from the book are provided below to give you an overview of its themes and principles.Young consultants

Lencioni writes that most service providers are susceptible to three fears that prevent them from building trust and loyalty with clients:

1. Fear of Losing the Business

No service provider wants to lose clients, business opportunities, or revenue. Ironically, though, this fear of losing the business actually hurts our ability to keep and increase business, because it causes us to avoid doing the difficult things that engender greater loyalty and trust with the people we’re trying to serve.

2. Fear of Being Embarrassed

No one likes making mistakes in public and having to endure the scrutiny of spectators, especially when those spectators are paying us for advice or counsel. And yet, like a fifth-grader, we know that the only thing worse than raising our hand and having the wrong answer is failing to put our hand up at all (and realizing that more often than not, we did indeed have the right answer). This fear, then, is rooted in pride, and it is ultimately about avoiding the appearance of ignorance, wanting to be seen as smart or competent.

3. Fear of Feeling Inferior

Like the previous fear, this one has its roots in ego, but there is an important difference between the two. Fear of feeling inferior is not about our intellectual pride, but rather about preserving our sense of importance and social standing relative to a client. 

Lencioni makes several great points.  It is so easy in a client facing role to withhold information that we sense the client may perceive to be bad news. There is almost a subconscious thought that the client will think less of us because we can’t control the outcome. Instead, we are exhorted to be frank and sincere because in so doing we will win confidence and trust. In the long run, we are more believable for having let our guard down–not less! In addition to being willing to say tough things, the thought of asking crazy questions without worry about how we will be perceived is very freeing. When a service provider is not afraid to make the client look good at her own expense, she has the right view of how the relationship should be structured. We ar to be there for the client’s needs–not the reverse.

 

 

Find Ways to Improve Manufacturing Company Profits

In trying to understand business issues, case studies can serve as a useful tool to show us what we may not see at first glance in our own businesses. When I was doing the research that led to the founding of the Turnaround Management Association a number of years ago, I had the “opportunity” to compile, read, and review over 900 case studies on attempted turnarounds. As I read about companies from a variety of industries, geographies, and backgrounds, I was able to decipher certain trends and best practices. While I obviously don’t have the space (or your attention span) to delve into that level of detail in a blog post, I wanted to recount a case study and point out some lessons to be learned.

better resultsA $100+ million company lost 25% of its revenue during the period 2005 – 2010. Simultaneously, EBIT declined by 91%, dropping to 0.9% of  2010 sales numbers. A turnaround firm was retained to restore revenues and achieve at least 10% EBIT by the end of 2012. The results of the project were that 2011 revenue improved by 20.20% over 2010 and 2011 EBIT was 5.5% of 2011 revenue, an increase of 470% over that of 2010.

How the Results Were Achieved

Strategic Alignment

By analyzing the markets served, rates of growth, and trends, the turnaround firm was able to highlight the very best opportunities for high growth. Historical analysis yielded insights into top customers and products, with breakout information by plant location. As insights were gleaned from the data, brainstorming sessions were held with the executive team to modify strategic and tactical plans.

Product Pricing

As with many companies who suffered a decline in fortunes, this company had begun to compete on price rather than more strategic competitive advantages. As their products and services became commoditized, considerable price variability had snuck into the company based on local market conditions. With considerable (40%+) market share in its primary markets, the company in crisis had very few price comparables available from competitive intelligence by which new pricing could be developed. The consultants helped the company do the following:

  1. Make product groups by cost and technical specs,
  2. (For each product group) establish minimum, mean, and max prices,
  3. Determine products that were priced outside of guideline rages, and
  4. Identify customers who were not profitable to serve.

Margins were terrible, so the company implemented the following procedures recommended by the turnaround firm: 

  • Pricing for non-strategic customers was immediately increased,
  • Held meetings with strategic customers to explain the fair price increases, and
  • Future price increases were planned in unison with strategic customers.

Product Costing & Standardization

The old product costing model was jettisoned in favor of a more accurate, easier to maintain one. Product Standardization was accomplished by analyzing SKUs across key product groupings. A small list of products were designated as standard offerings. Everything else was labeled “custom,” with appropriate cost and pricing decisions.

Operations Improvement

Process improvements were instituted after plant visits. Highlighted items included:

  • Supply chain improvements through TQM and JIT were achieved
  • Minimum order quantity guidelines streamlined production runs and enhanced scheduling efficiency
  • Setup and preventive maintenance routines were sharpened
  • Paperwork and scrap reduction and recycling were instituted

The culmination of 2011 efforts was that higher contribution margin at the plant level. Production scheduling and materials requirement procedures were highlighted as areas for additional improvement. 

When an outside team is brought in to focus on profitability and the executive team cooperates fully, great things can happen in a turnaround. Clear communications, improved decision-making, unified focus all lead to enhanced morale and the profitability becomes an outgrowth of good management.

 

The Turnaround Adviser’s Responsibility

The ability to turn the company around quickly without getting it bogged down in the minor setbacks is a hallmark of a good turnaround adviser. Emphasizing a solution-oriented approach, the adviser can rise above circumstances and fight another day;  such determination distinguishes the true turnaround expert from the would-be practitioners of company revitalization. Rather than dwelling on problems and making too much of an ultimately inconsequential event, effective advisers confront each challenge ready to overcome the odds stacked against them.

For example, a company may become delinquent with creditors and be unable to pay them in full in the near future. Under those circumstances, a partial payment plan can be worked out, but only if all creditors agree. Non-compliant creditors should then be segregated and handled separately. Whether they are paid at all during the turnaround is an issue; it may be better to let them file liens, since the liens can be repaid according to a schedule that is devised later at the magistrate’s office or in a court of law.

Primary Responsibilities

It is the turnaround artist’s primary duty to critically assess the executive team’s vision for the company and create a recommended course of action for realization of a mutually agreeable vision. In light of this duty, the adviser has three primary responsibilities:

  1. analyzing problems,
  2. drafting a turnaround plan for marketing, operations, and finance, and
  3. implementing the plan.

Therefore, the adviser should not be confused with consultants who merely offer advice. he must necessarily preside over plan implementation and be prepared to modify it as changing conditions demand.

Analytical Responsibilties

The analytical role includes the gathering and analyzing of marketing, operations, and financial information. Both internally produced reports and externally researched intelligence should be scrutinized in creating the turnaround plan. Any errors and omissions in the compiled plan must be noted for further investigation. From this analysis, the adviser develops the road map–a basic critical path of action.

Critical Path of Action

First, crucial points of action within the critical path are prioritized, such as completing a project for billing or getting to a key milestone on another before a window of opportunity is missed on behalf of the client. Personnel are then assigned responsibilities based on the established priorities, which are time sensitive. The turnaround adviser conducts regular debriefing meetings to update all affected parties on turnaround progress and the focal areas for the upcoming time period. As problems surface, the managers responsible for prioritized critical points, rather than the top executive, conduct troubleshooting sessions. If the sessions require negotiations with third parties, the turnaround adviser initiates these negotiations. For example, if lenders turn up the heat, the turnaround adviser must assuage their fears. Clearly, it is the  adviser’s general job requirement to put out all fires or make sure that someone else does.

Education

The turnaround adviser’s final responsibility is to educate the top executive, her team and other managers in the principles of sound business judgment and practice. If the group can observe the adviser’s actions during the renewal process, its members will learn a great deal about management techniques and strategies. When the adviser leaves, he or she should feel that the existing team is capable of steering the company through any weather.

Qualifications of a Turnaround Adviser

An effective turnaround adviser must be uniquely qualified to deal with crises and prepared to assume responsibility for the company’s success. The three most important background credentials for an adviser are as follows:

  • an identification with the needs of declining companies
  • specific industry expertise in your industry or a related one, and
  • a track record of overcoming adversity and making the most of poor situations

General Requirements

When evaluating possible advisers, teams should look for someone with both practical, hands-on capabilities and an educational or research-based knowledge of the issues at hand. Make sure you do not have a novice attempting on-the-job training at your expense. It would be wise to find someone who has performed at least a dozen turnarounds individually and who has access to other personnel with the same or greater levels of experience. Furthermore, familiarity with research and educational publications within your industry that highlight concepts of turnaround practice gives an adviser a more objective view of workable solutions to difficult problems.

Industry Expertise

A background in your industry prepares an adviser to face the peculiar, industry-specific dilemmas that invariably arise. Previous work with companies of various sizes and in various markets furnishes the adviser with extensive–and beneficial–exposure to your industry. A proven ability to learn new markets overnight and employ existing operating resources effectively will result in quicker turnarounds. Examine the methods the adviser used with prior clients and determine whether similar programs would make a comfortable fit for your business. “Sanitized” copies of turnaround plans produced for other clients may even be requested.

Success Rate

A turnaround adviser’s success rate with previous clients is an important statistic. Much as a baseball team manager would hesitate to hire a pinch hitter who batted below .200, the executive team must exercise caution in selecting someone to captain the turnaround team. Most advisers who have been in business for more than five years can claim a one out of two (50 percent) or greater rate of success. To reduce risk, the team should look for an adviser who can claim–and substantiate–an 80 percent or better success rate. Once a successful adviser has been located, the team shout contact references and ask what made the effort a success.

Crisis Management

Effective turnaround advisers must possess certain qualities and characteristics that uniquely prepare them to deal with crises. The first such quality is “multilevel simultaneous thinking”–the ability to solve problems on several different levels at the same time. This is a skill gained over time through both education and experience. The ability to interact with numerous employees to resolve multiple dilemmas and relate to each in an appropriate manner is also essential.

Negotiating with Opponents

A turnaround adviser’s ability to search for all the important details, address issues with a penchant for opportunism, and follow through on commitments will also further the turnaround process. Note that “opponents” emerge in turnarounds virtually overnight; they tend to be former allies such as lenders and vendors. Being able to decipher an opponent’s true bottom line and make an offer that more than covers his or her threshold yet preserves the company’s position will save the company precious time during the turnaround. Indeed, many of these opponents in negotiations will return once again as allies when the business emerges from its decline. In completing a cycle of commitments to stakeholders, the turnaround adviser should ensure that every promise made can be carried out to the letter. Such consistency in following through on promises will enhance the builder’s credibility and image in the community.

Often employing little more than intuition, a crisis-oriented adviser can anticipate pitfalls and plan around them before trouble occurs. Being able to foresee a turn of events is a rare quality to begin with, but is especially valuable when coupled with the creativity that allows the adviser to adapt the flexible strategic plan to the changing demands of the situation. This ability to adapt to change is a necessary elastic band in the adviser’s armor, without which all other tactical weapons would be useless.