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Five traps that sap opportunity, drain resources | By Gary Sutton | Too many business books focus on the positives. That’s how you sell books. Books with titles such as Hiring the Best, Winning and World Class Customer Service consistently top the business book best-seller lists. And there’s nothing wrong with that. It’s great to be inspired and to see the sunny side.
But if you want to be successful, watching out for trouble helps, because you can’t think so clearly when you’re bleeding. And in three decades of doing turnarounds, I rarely have seen a business that couldn’t have avoided the traps it fell into.
Sometimes, entrepreneurs fall into traps they aren’t even aware of. These traps can lead companies into trouble and, in some cases, severe financial difficulties.
Receiving positive advice is great. Staying upbeat always helps you face a challenging situation. But when any business slips into trouble, it gets harder to seize opportunities that will move the company forward. You’re struggling, treading water just to keep from drowning.
It’s like football. While a great offense may bring in the crowds, you need a great defense to get to the Super Bowl.
Over and over again, I see businesses of all sizes get into trouble in five basic ways. You can easily destroy your company if you don’t break out of your rut and change the way that you run your business.
1. CHASING SALES INSTEAD OF PROFITS
So common. So tragic. The big boys, such as AOL TimeWarner and Mercedes/Chrysler, try to get bigger by acquiring, since they’ve often lost the touch for natural growth. And then profits plummet.
Remember AT&T? Sure, you still see their ads, but the original AT&T is history, acquired by one of their formerly little children. When AT&T lost their monopoly, they tried to find shelter from new competition (which is something all monopolies hate) by buying into the cable television business. But, they overpaid, and the gamble didn’t pay off.
Not a mega-company? Don’t feel smug. Smaller businesses fall into this trap in the same way when they chase sales at any cost.
“If we land that new Acme order,” the president gloats, “imagine how much will fall to the bottom line.”
True, sometimes that works. Just as often, he discovers that the company had to drop prices way down to “get in Acme’s door.” Well, once you’ve stooped that low to get inside, Acme’s not about to let you stand tall again. That’s not how you got the business. You’ve set yourself up to charge low prices.
And while your employees are giving themselves high-fives over this new volume, a few older customers may be getting second-class treatment. About this time, you also discover that Acme has some special needs with each order that are disrupting your business and costing you even more with each sale. Your old customers are feeling slighted and beginning to shop around.
That competitor who lost the Acme business to you, meanwhile, is preparing a counter-attack. This rarely includes high prices.
Nothing “drops to the bottom line” smoothly. There are a whole series of savage lines between that top one and the bottom one, each a cost that rips dollars out of the revenue, never to be seen by your business.
Those lines stay there for new businesses. When they’re fixed costs, and the new business generates no special needs or attention, then it’s good. New business is the lifeblood of every organization, so there’s no choice but to always be adding.
But it’s those careless additions of business, the thoughtless pursuit of more revenue, that brings many a small outfit to its knees.
It need never happen. Sure, chase business. You need to add business to grow. But study each new chunk with cold eyes before signing up for it. Make sure it fits your best capabilities, can conform generally with your processes, and won’t distract from existing customer relations.
2. FUZZY DIRECTION
It was clear that Xerox was headed for trouble way back when they started calling themselves “The Document Company.” What’s that? A law firm?
Ford made money back when they said, “Quality is Job One.” Ford stopped saying it. Ford started losing money.
Never say you have the best quality, lowest prices and top service. That’s impossible. Two out of three are difficult. Simply claiming one, and doing it, creates success. Tiffany doesn’t claim low prices, and Wal-Mart doesn’t claim top quality.
Too many businesses die because they wanted to be “full service” or have the broadest product line. That simply means you’re special at nothing. The general store survived in frontier days simply because there was no other. If you wanted to shop, that’s where you went. There was no merchandising or advertising. There was no need.
Today, chains such as K-Mart and Sears survive only by shutting stores and hoping that something will change.
Domino’s Pizza became dominant by saying “pizza delivered in 30 minutes.” They didn’t say they had the best ingredients. They didn’t claim 40 flavors. They picked one way to excel, advertised it and became the leader.
Look through every aspect of your business. Find something that you do better than all others. Or find something that you could do better than all others if you simply concentrated more on it. Make this your slogan. It doesn’t have to be 100 percent achievable yet. But it’s got to be a realistic claim, one that you can achieve often now and 100 percent of the time very soon, or you’re asking for trouble.
Slogans lead the troops. When everybody understands the mission, your customer service gets better and better. If potential customers don’t believe your claim, it will fail. If you can’t back up your claim, it will fail. Your slogan shouldn’t be a “me, too” service or product, something that others already do.
Look at your current offerings, and find one to drop this quarter. That’s right — drop one of your offerings. Do it again next quarter. Watch your core business grow stronger.
3. POOR CONTROLS
Many solid businesses get into trouble simply because they cannot predict short-term trends and have no clue about where they really make their money.
When your numbers deceive you, stupid actions can follow. Small businesses struggle often with this. The founder is energetic and has a natural feel for the business. This is terrific — and necessary. But what happens when the business grows? Or the founder retires?
Vlasic pickles grew to dominate the pickle business, partly because they ran the company so tightly that few errors occurred. The entire company ran on one sheet of paper. The numbers were printed in large type. They came out daily. Everybody in the company could see what was really happening in about one minute.
Areas that showed trouble could then be analyzed. This method is vastly superior to 20 pages of printouts with so much detail that nobody can see what’s happening.
Financials aren’t enough. Producing accounting reports is like sitting at the rear of a boat and reporting to the captain about rocks that the craft just missed.
Forward-looking indicators are critical for month-to-month staffing, planning and ordering. (Don’t try to guess five years out; none of us is that smart. Be humble when forecasting next year.)
Quote activity, daily inbound phone calls, vendor pricing, trends in customer credit reports and probably one or two other indicators may be appropriate for your business.
A second problem is not understanding where your profits are generated.
Checks To-Go made checks that fit software programs such as Quicken, Peachtree, etc. It grew fast, but it lost money for about 10 years. A quick analysis of where the company actually generated margin turned that business into a profit leader within two months. Half their business, presumed profitable because the margins were so high, was bleeding because the customer calls and overhead diversion were so great. But the accounting system didn’t show that. Easy fix.
Step two was the analysis of the remaining lower-margin business. It appeared that 85 percent of the profits was generated by the three-day delivery orders, while the mainstream business (two-week orders) was losing money. Easy fix again.
The business began doing fast-delivery orders, at higher prices only. It became the industry’s profit leader and was acquired at a handsome profit by a larger firm within 18 months.
4. MARKET SHIFTS
No industry is immune to shifts in the market. Perhaps the worst task in America today is trying to salvage Kodak. Film photography is dead, and there’s no reason to expect that digital won’t march right into X-rays and the few remaining niches Kodak prays will keep them alive.
Yes, they have digital cameras now, and some are quite good. But they’re competing with outfits such as Canon and Samsung, folks who learned long ago how to live with 23-25 percent margins. Kodak got bloated on its 85 percent margins, when it enjoyed a monopoly. The company almost needs to start over for any hope of survival.
This is an ugly one. Many companies face a similar situation at one time or another. Sometimes there’s an opportunity. Tape drives lived for thirty years after discs made them obsolete, and the few who remained with them made great profits. But others were forced to leave the industry for that period of “life after death” to exist.
Today, Blockbuster is being eaten alive by Netflix, which will suffer at the hands of online movies when they become widely available and a practical alternative.
It works the same way with smaller businesses. When you see a marked shift coming, either bail out early, or get cozy with your competitors to learn who’s going to shut down and who isn’t. If they’re all quitting, stay. If they’re all staying, quit. Otherwise, you’ll be operating with an anchor around your neck.
5. TOO MUCH DEBT
If you’re spending more time with bankers than with customers, you’ve probably got too much debt. Customers give you money and rarely ask for it back. Bankers give you money and always want it back. Case closed.
If you lease everything instead of buying, you’ve probably got too much debt. Look up the financials of your leasing company. Typically, they’re making more money than you. That’s because you’re borrowing from them. Slow down.
Enron proved this in a huge way. They borrowed and borrowed and hid most of the money until the inevitable had happened. Debt is a great way to accelerate a business when you’ve got predictable margins and a credit rating high enough to secure more debt. It’s just that this situation doesn’t exist very often, and recessions come in cycles like the tide. While you may enjoy the rush for a year or two or five, if your debt is outgrowing your profits, a crash is coming.
Anybody can play “double or nothing” and win once. Some people can do it several times and win. Sooner or later, however, the odds catch up with you. That’s reality.
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Avoid these five traps. Unwatched, they will bring your business down. When you take control of them, then you’re free to seize opportunities, improve customer service and grow your business.
Author of Corporate Canaries: Avoid Business Disasters with a Coal Miner’s Secrets, Gary Sutton is an author, top-rated speaker and veteran turnaround expert. He sits on the boards of a dozen companies and has spoken at the MIT Forum for 15 years. For more information, visit www.mediacorporatecanaries.com. | | Like this article? Click here to subscribe to Strategies magazine, and start receiving great ideas for business growth every month! Your paid subscription will also grant you access to the online article archives found within the Subscribers' Section of this Web site. |
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