May 4, 2015 | Change, Governance, Personal Rant
FEATURES: DT FEATURES – Warren Wed illo, 11.05.11.
A business that does not make money will not be around for long. While money is just the mechanism to count success, or failure, the lack of it is terminal in every case.
Well, every case but one.
Government.
They just keep on putting it on the national credit card, building debt to garner approval and votes.
As we approach the 2015/16 budget the blathering goes on from both sides of parliament, with occasional irritating rejoinders from the peanut gallery.
It is easy to poke fun at the pollies, and to be utterly cynical about their motives. Their collective and often individual behavior and demeanor make that cynicism almost mandatory, and it seems to make us feel better. However, it rarely adds any value, as the real issues become clouded by rhetoric, blathering, bullshit, and outright, bald faced lies.
Where are the facts, the data to support the various notions put by various interest groups?
We call ourselves the lucky country, as we are.
Supported as we have been particularly in the last 30 years by continuous growth, which we largely put down to the luck we had in being in a place well stocked with resources, but the worm seems to be turning, and we have little wriggle room.
Unlike a business, where the sustainability of the business relies on commercial decisions, and the impact collectively they have on their budgets, the sustainability of the Australian budget seems to rely on our political sustainability.
Up until the last few years we have a pretty good record, but the last few, powered by the fragmentation of the media and increasing ability of individuals to have a say and gather tribes of like minded people to their cause has changed all that.
I am concerned at the level of political unsustainability that seems too be evolving, and driven by that lack of a solid foundation, the sustainability of the national budget.
Roll on the May 12 crunch and hopefully after the debacle last year, there will be some sensible debate that adds to the political sustainability as well as to that of Australian small businesses, upon which the sustainability of the national budget relies.
Sorry, I have reverted to my Don Quixote mode, the chances of any of that must be almost zero.
Apr 27, 2015 | Change, Governance, Marketing, Small business, Strategy
value chain arbitrage
There may be a niche in the market, but is there a market in the niche?
This question was posed to me many years ago as I pondered a new product business plan.
There was pretty clearly a niche in the market that was not well inhabited by competitors, but I was asked:
“Is this because you are just smarter than others, and had seen something they had not, or was it that they had concluded that there was no market in the niche”
Identifying a niche with no commercial potential that would deliver an ROI on the investment may be an interesting observation, one to be filed away for a look again later, but no real value now.
I have kept an eye on that niche for years, way after I left the employment I had at the time, and observe that at the time there was no return in the niche, but now, post digital marketing, there is, and it has been mined extensively and profitably by those who saw it.
The parameters of marketing have changed radically since I first identified the niche.
No longer are we constrained by geography, value chain middlemen who control key points and strangle out rents on the arbitrage value, and expensive, pot luck advertising.
Those constraints are gone, and we are left with a landscape of niches that do have a market in them, recently uncovered by the power of the digit.
Small and medium sized businesses have been delivered the means to scale their operations in ways not imagined 20 years ago.
Niches are now global.
They may be narrow, and deep, but when you find someone down there, they are there for a very good reason indeed, and are usually very receptive to offers that reflect their deep engagement with the niche.
Rich pickings for niche Small and medium players who move quickly, play well, and play smart.
Apr 1, 2015 | Communication, Governance, Innovation, Leadership
How do you know
Some pretty smart people say some pretty dumb (with hindsight) things.
“Everything that can be invented has been invented.” Charles H. Duell, Commissioner, US Patent Office has been widely credited with this quote in 1899. He may not have said it, but it was reasonable at the time given the pace of innovation that had occurred for the previous 50 years. It is no sillier than Bill gates saying in 1981 that “640k should be enough for anybody”, or “Man will not fly for fifty years,” Wilbur Wright, 1901.
It is really hard to get a handle on all the stuff you do not know, by definition, you do not know you do not know it.
However, coming to grips with the opportunities that become available when you discover something from an unknown left field is where the gold is.
So how do you begin to see things you do not know you do not know?
This question is not common, but has come up a couple of times ion the last few years when working with clients with deep technical knowledge, but perhaps a narrower than ideal breadth.
In considering the answer, there appears to be few simple strategies to put in place:
- Be constantly and remorselessly curious, and ask questions. Anyone who has had kids knows that for a few years, the most common question they have is “why”. Go Back to your childhood, and ask why all the time.
- Have a diverse group of people around you who will challenge the thinking, preconceptions assumptions and most importantly, the status quo.
- Be prepared to give and receive honest feedback. There are rarely any right answers when you go looking for the unknown, just more questions, and the often unexpected and insightful responses you get from people, use them.
- Make sure others know you do not know, and are seeking answers, not offering solutions.
- Read widely and with great variety. This is now easier than it has ever been, we are overwhelmed with information sources, and the problem is curation and absorption rather than finding stuff out.
We are undoubtedly in a knowledge economy, competitive advantage is in knowledge, so gathering, sharing and leveraging it should be high on every enterprises agenda, from multinationals to the small business around the corner.
Mar 19, 2015 | Customers, Governance, Lean, Management, Small business
Image courtesy of ddpavumba at FreeDigitalPhotos.net
Remove transaction costs. Easy to say, hard to do.
The concept of transactions costs is generally attributed to British Nobel prize winning economist Ronald Coase, and the publication of his 1937 paper “The nature of the firm”
Transaction costs will always be present, they are the enablers of an organisation. The challenge is squeezing the maximum productivity out of the transaction costs you will inevitably incur.
Like all costs, transaction costs fall into three categories:
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- Those that are necessary for the sale, and that add value to the customer, so they would be willing, if you asked them (and this is the big test) to pay for it. Things like delivery of physical products fall here, and we all know there is no such thing as “cost free delivery”. ,
- Those that are necessary, but do not add value to the customer. Costs associated with compliance, your training and innovation programs, taxes and charges all fall here .
- Those costs incurred that do not add value in any way, just consume time and money, such as rework, picking up wrong deliveries, or correcting wrong invoices. You generally do not need an activity costing initiative to know that this third category is usually uncomfortably large, and should be eliminated.
The bloating of transaction costs has three basic causes:
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- Not getting “it right first time” requiring rework to correct the mistake. For small businesses, the costs of mistakes are relatively much harder to absorb than they are for a large enterprise.
- The penalty of small scale, expressed in the variable operational costs incurred, and the productivity per dollar of overhead spent. The flip side is that small operations can be far more agile than large ones, as the distance between a decision being made and actually getting something done, is much shorter.
- Less than optimum processes, or the ways that businesses manage the things that need to be done to support and document a transaction.
If you chose to take a deeper look at these three causes, they are all rooted in the way people go about doing their jobs on a daily basis, and for small businesses, with less people, and far easier personal communication, this is where the leverage can be applied by continuous improvement.
It costs the same to raise and process an invoice of $1,000 as it does for an invoice of $100,000. Therefore the transaction cost % of the invoice value is far greater for the smaller invoice. This relationship is reflected throughout the supply and distribution chain, and even minor improvements can deliver substantial savings. Technology offers the opportunity to reduce the absolute cost of processing to almost nothing, making the transaction cost irrelevant either way, but once people are added to manage the exceptions that cannot be handled automatically, the costs soar.
The source of Woolworths superior performance over the last decade compared to Coles has been the impact of their reductions in transaction costs that have dropped straight to the profit line. Wal-Mart became the biggest retailer in the world by focusing on the reduction of transaction costs of all types, and passing the savings on to consumers as lower prices to attract the volume creating a virtuous circle. Less obviously, they passed many costs back to suppliers, then continued to insist on and successfully extract cost reductions from those same suppliers in spite of increasing their costs, simply because of the scale of their sales potential for suppliers.
It seems to me there are two parameters to transaction costs:
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- The absolute amount of the costs in a whole process
- The productivity of the costs in the process.
Most systems just look at the quantum, and set out to cut corners, work the current system harder, but by looking at the detail of the things that generate the costs, you can eliminate those that do not add value. However, moving a transaction cost on to another link in the supply chain does little to eliminate the cost, it just moves it. Retailers generally have been expert at this moving of transaction costs, while often creating them as a source of revenue. Practices such as making minor claims on a supplier, and holding up payment of a complete invoice until the claim is dealt with, then making the dealing with the claim a minefield for small suppliers abound. A source of the success of Aldi in Australia has been their focus on the reduction of transaction costs, but in return they get their “pounds worth” at the invoiced price point.
In dealing with supermarket retailers over many years, a number of transaction cost types have become evident:
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- Cost of searching, storing, processing & managing information. Category management is a prime suspect here. Suppliers engage in a costly, data intensive exercise in the expectation (hope in most cases) that there will be returns from the collaboration that is hoped to occur, and from the opportunities good category management can unearth. While the costs of the data transactions themselves may have dropped precipitously over the last 20 years, the costs of the overheads to manage them have not.
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- Cost of negotiation. In almost any negotiation where one party has the power, and is happy to use it, the outcome is virtually pre-ordained, it is just the quantum of the cost that is in question. Knowing, and sticking to your “Walk away” point is an absolute must.
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- Cost of time. A vastly under measured cost in most businesses. We tend to have people on staff because there is a job to be done, and we pay them competitive rates to ensure we get the best people we can for the job, but we tend not to measure the value delivered by the doing of the job, its cost is just a part of the fixed overhead. Every minute spent costs a business, but apart from VC operators who use “burn rate” as a key measure, we tend to ignore it.
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- Cost of certification. The range of certifications that are supposedly “needed” from HACCP to OH&S, to quality verification of components in a product to various religious and quality standards are legion. Each costs time, money, effort, and carry heavy opportunity costs. A bit of effort to isolate those that are really needed, and to manage those that are with automated or at least consistent processes can save a significant amount of time and money
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- Cost of influence. People deal with people, not corporations, no matter how automated and impersonal our communications systems become. Getting to know people , building relationships and trust takes time and effort. It is time and effort well spent, to a point, and finding the point at which the costs outweigh the benefits is a management challenge most fail.
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- Costs of cock-ups and rework. This is probably the biggest, most pervasive source of transaction costs. From the wrong invoice to a truckload pf product turning up to be rejected, and turned around dumped or put into rework. It is not just the cost of the product, but the added time, lost sales, loss of reputation, and needless consumption of capacity that really hurts. “Lean” processes target waste, and this one is the biggest waste that occurs, and is often made up of a lot of low hanging fruit if you go looking for it, and know where and how to look.
Small businesses are in a great position to reduce their transaction costs, simply by being good at everything they do, and being “close to the action” can make the wrinkles that can be ironed out that more obvious.
The original post that started the series is here, followed by the more detailed posts, 1, 2, 3, 4, 5.
Mar 9, 2015 | Change, Governance, Management, Small business
Three core factors of success
Over 20 years of working with mostly small and medium businesses, I have found there are three common factors that are almost always are pre-requisites to a successful business, generally in this order:
- Cash. Cash is the lifeblood of business, and too often small businesses do not manage their cash well enough. Simple tools and techniques are not used that could make a huge difference in the success and often avert the demise of small businesses. Businesses have absolute control of the manner in which they manage their cash, it is entirely up to them.
- Leverage. Most small and medium sized businesses are run by people who are functionally extremely competent, really good at the thing that led them into businesses in the first place, rather than being an employee. However, the flip side is that they often do not let go of their functional control, and they let other things outside their competence slide. The net result is that they work ridiculously long hours to take home less than their employees, and have no life outside the businesses which grinds to a halt if they take a week off. They must find ways to leverage their time, to get more done in less time. Most business people have the opportunity to leverage their time far better than they do, the choice not to do so is usually in their hands, weather or not they know it.
- Simplicity. Simple is good, simple makes life easier, more productive, and more profitable, but ironically simple is really hard to achieve. Unlike cash and leverage, simplicity is to a significant extent out of the hands of the business owners. The really good ones have simplified their processes, ensured their activities are aligned with their strategies, and built a culture that engages employees to minimise rework and maximise the amount of autonomy and innovation that happens, but then they have to deal with the world outside their premises. Customers, suppliers, competitors all complicate life, as does the public sector, unable as it is to even begin to realise the benefit of simplicity and the costs their own complexity imposes on small businesses.
Nevertheless, setting out to do better on all three parameters will most certainly deliver dividends. The first step is to form a quantitative picture of the current situation, plan the improvements, then measure the improvements as the changes bite.
Then “Rinse and repeat”!
Feb 27, 2015 | Governance, Management, Operations, Personal Rant, Small business
Times are tough, success is hard to come by, even for businesses that have been around for a long time, well and truly beating the hoodoo that stalks new businesses, 9/10 failing in the first few years.
Somebody I have known for a long time, who has run a small businesses delivering a range of very good products to consumers via FMCG retailers is about to go to the wall. 25 years of effort and commitment about to slide down the dunney leaving him with nothing, not even his house, left to him by his parents.
Worse than sad. Tragic.
Many things factor in the eventual failure of this business, but one stands out starkly.
Poor management of his cash.
There are two sides to the challenge of managing cash.
The first is the cash itself.
In this case, from week to week even day to day, he knew how much was in the bank, but when the big bills came in, it has been a real struggle to pay them, because he was not adequately forecasting the flow of cash, giving him the opportunity to adjust activity as necessary. His bank has been unsympathetic, creditors demanding, and debtors increasingly reluctant to part with their cash, even in this current super low interest rate environment. Meanwhile costs have increased inexorably, way out of line with his ability to extract a corresponding increase in the prices he can charge in the marketplace.
Not pretty, and all too common.
The second is how the cash you have is used, the level of productivity you extract from it. Cash by itself is worthless, its value is in what you do with it. Purchase inventory, pay staff, provide a factory and all the other stuff we call the costs of being in business. After all that is done, most want some reward for the long hours and stress of being in a small business, and then to have some left over to go towards that world trip on retirement.
The productivity of the cash is not measured by the amount you spend, but by what you get for it, and small businesses rarely spend enough time considering ways to increase the productivity of their cash, concentrating on the absolute amounts coming in and going out. Challenge is that there is no explicit measure for cash productivity, and it is not a notion recognised in the accounting packages everyone uses, the accounting standards, or most peoples mindsets. Best we usually seem to do is have a few ratios like the “Quick” ratio which measures current assets over current liabilities, which are not regularly tracked performance measures, and have room for interpretation and thus manipulation.
Stock turn, debtors days Vs creditors days, Sales or Gross margin/employee, product value produced/realisable value of a piece of machinery, production value/production employee, time taken/task, and many others. There are thousands of ways to measure the productivity of the cash tied up in any business, and every business will be different. However, there will be a few measures for each that capture the essential nature of the business, where an improvement will deliver measurable financial results.
You should be seeking and using these key measures of cash productivity in your business.
Back to the case of my acquaintance.
He did not manage his cash flow well enough. Failure to adequately forecast and thus manage the ebbs and flows of cash into and out of his business, and as a result having to put in place very expensive short term funding in one way or another meant he was always chasing his cash-tail. He also did not measure, almost at all, the productivity of his cash, allowing the ” hidden” costs of poor cash productivity to kill him. Despite his Income statement, often called the Profit and Loss statement, telling him he was making a modest profit, he has hit the wall.
A sad but unfortunately common story, one I hope you are not seeing first hand.
