Nov 26, 2021 | Analytics, Management, Operations
Communication of outcomes, from the strategic drivers of your business to what was produced in the last 5 minutes at a station on the factory floor, is increasingly recognised as the key to performance improvement.
Communicating the right things, to the right people, at the right time is as important as the communication itself. A communication is only successful when the meaning received is as intended, and the receiver can do something useful with the information.
Most businesses are already able to collect more data than they know how to use productively. The challenge is to pick the few that are the drivers of decisions at each level. Collecting data for the sake if it makes no sense. If it does not provide insight to decision making, why bother?
The five questions:
Who is it for?
The MD needs different information to the operations manager, whose needs are different to those on the factory floor. This cascade exists across the business, up and down the functional silos. The more the information can be made responsive and relevant to the cross functional users the better.
What is the objective?
What are the people using the data trying to achieve, and by when? Information is most useful when it charts progress towards an objective. Again, the nature of the information and the cycle will vary by level and role in the organisation.
What is the frequency?
By the minute, hour, day, month, all users have unique needs, and all information has a cycle time that makes it relevant. Typically, the higher up the organisational hierarchy, the slower the cycle time. However, making the information available to all on demand is an extraordinarily effective way of generating functional and cross functional alignment.
How do we improve performance?
Solid data is the starting point for every improvement initiative, from the smallest improvement on the factory floor to the drivers of strategic success. The scientific method prevails and requires the stability of good data on which to work.
What data is needed to answer these questions.
Data needs will evolve over time as objectives and progress toward them evolve, and is highly context sensitive.
Danger signals: there are two of them.
- Too many metrics. The dashboard should be three, up to five at a stretch, certainly no more. Data is only as good as the decisions and behaviour they drive, and the more there are, the less motivating they become. Ideally the three are: rolling current, next period, progress towards the objective.
- Vanity metrics. I see these all the time, they are easy, may look nice, but are functionally useless. The obvious example is Likes on a social media platform.
The cadence of an organisation is one of the defining factors of success. The frequency and relevance of the dashboards at every level, the way they make outcomes transparent is a key to performance improvement.
Nov 15, 2021 | Leadership, Management, Small business
The term ‘Washing Machine Brain’ was used recently by a client as we sorted through all the competing tasks and priorities of his role running a small, rapidly expanding business. Everything was mixed up, tangled, swirling at a rate he found difficult to keep up with, let alone get on top of any of the seeming endless list of tasks.
Common problem, and a very expressive descriptor.
Over the 18 months I have been working with him, the number of tasks and the complexity of those tasks seems to have increased geometrically, while the revenue has increased arithmetically.
Again, a common problem in a rapidly growing business. Every advance delivers a new set of management challenges, until a tipping point is reached. After that point, the scaling of operations can be done off the established base, and the ratio is reversed.
Over the 18 months, we have achieved a number of milestones, and left some significant tasks underdone. The product is a bespoke manufactured product with a sizeable number of customer driven variables, many of which are challenging to explain to the customer base.
We have:
- A very clear strategy, well understood by the small number of employees. .
- Implemented an operational planning process from order to installation that works pretty well. This uses Trello as the formal communication tool, enabling transparency across the operational staff, as well as encouraging input and accountability.
- Developed an electronic customer record in Dropbox that is the storage and reference point of all design and operational data that relates to individual customers.
- Automated the quotation process, although there is manual intervention still required, and given the nature of the product, may always be required. However, there are still many ‘wrinkles’ to be sorted out.
- Partially implemented a powerful CRM system to manage the outbound sales effort and lead funnel. Like many of these products, every time we turn a corner, there is more to do, but the promise of further automation to assist scaling is seductive.
- Generated more sales leads than can be managed with the existing operational and sales resources.
- Moved from break even to making sufficient profit to reinforce the owners faith in the product, and ensures the business has the resources to fund growth internally.
We have not:
- Successfully implemented a systematic qualification process to optimise the time spent in the pre-sale stage. We need a process to identify tyre kickers and potentially difficult customers & jobs early enough to either walk away, or price them accordingly.
- We do not have an adequate handle on cash flow, or the accounts generally. As a reformed accountant, this disturbs me greatly. These ‘back-office’ tasks require robust processes and resources, and remain a work in progress,
- The supply chain on which we rely is disorganised and hugely wasteful, much of which we wear in lead time uncertainty. While we do not control a key part of the manufacturing, the incentive to find a way to exert control is compelling.
- Labour availability is a profound challenge. The product relies on physical installation which can be complex, depending on the site. It has a range of variables new to this country and finding experienced people has proven almost impossible, and finding suitable trainees at least as hard.
None of this is unusual in growing successful businesses, but knowing that does not make the challenge any easier.
The only antidote is focus. Relentless focus.
Pick the few things that can be done today, this week, this month, and focus on getting them done, before moving onto the next source of value to be addressed. In so doing, spend the time and effort to complete each activity as well as possible. It is inevitable that in a growing business, the requirements will change, so processes need to be able to evolve, but there is little more frustrating and wasteful than having to re-cover areas you had thought behind you. Over time the washing machine will become significantly less chaotic as we iron out the wrinkles and scale the business. (Sorry, could not resist the obvious pun)
Oct 15, 2021 | Leadership, Management, Small business
One percent is a tiny fraction. A question I have asked many times of clients, and management in my former corporate life is ‘who could not……… by one percent?
The blank is filled in by a variety of items:
Raise prices, reduce trading costs, reduce overheads, increase volumes, and so on. Nobody ever says ‘No’ to the proposition.
When you look at the impact, particularly cumulative of those one-percenters, they supercharge profits.
We are all in business to make profit, without profit, we are not in business. While there is an extremely important place for calls to be good corporate citizen, provide all stakeholders with a mission and vision to which they can relate, and to build for the long term, none are possible without commercially sustainable profits.
Many SME’s I talk to fail most basic understanding of the make-up of their P&L, and how the one percenters impact on profitability. Usually it is simply because their accountants have failed to break their costs up into fixed and variable, and they have no idea of the impact of the one percenters as they have never done the exercise on a spreadsheet which makes it incredibly obvious.
Profit is not a bad word, it is the gold standard.
It also not a useful objective, which is a role played way too often. Profit is an outcome of a whole range of other, often very small things, done successfully.
Cartoon credit: Dilbert. Anyway, who would want to do business with an unprofitable business?
Oct 8, 2021 | Analytics, Management, Operations
We are all wary, in fact, usually very reluctant to put prices up, in case we lose customers. We ignore the sage advice of Warren Buffett who knows something about making a bob when he said: ‘If you have to go to a prayer meeting before raising your prices, you have a lousy business’
Increasing prices is a valid concern if two conditions are not met.
- You are undifferentiated in a way customers value
- You are in a commodity market.
There are five strategic drivers of price, the items that should be considered in your strategic thinking that delivers your pricing architecture:
- Your business model
- Price packaging
- Strategic priorities
- Market power
- Behavioural drivers.
Before you consider the actual price you will be charging, you need to have built the pricing architecture that best accommodates the dynamics at play in your market, and the price elasticity of demand.. Any pricing decision has two dimensions:
Strategic: The pricing architecture that is consistent over time, which provides the structure of your price list.
Tactical. Price can be moved around as necessary, while always remaining inside the pricing architecture.
Many just leave price decisions to the end, a grave mistake, as finding the Optimum Price, the one that leaves a minimum ‘on the table’ will have a profound impact on your profitability.
If you produce a simple spreadsheet, such as the one below, you will be able to model how the profit changes at various price assumptions. It is almost always the case, that to a point it is better to put your prices up and take a modest volume loss, than to drop prices hoping that the added volumes will deliver greater profit.
The assumptions in the chart:
- The Price we charge is entirely our decision.
- The volumes we forecast at any price point are the combination of experience, assumptions, and gut feel. They can be very tactical, varying time to time, and customer to customer in some circumstances.
- Cost of goods sold/unit and fixed costs are unchanged at any volume or price.
Developing a simple model is just maths and a range of assumptions, but we use it too infrequently. Our instinct is usually to drop prices in a crisis to preserve market share, rather than thinking about the impact on profit. If you have a gross margin of 40%, for every $1 you drop your price, you have to gather in $2.50 in added revenue to break even.
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Option 1 |
Option 2 |
Option 3 |
Option 4 |
| Price/unit |
$15 |
$18 |
$21 |
$25 |
| Quantity/period |
100 |
85 |
80 |
55 |
| GOGS/unit |
$6.0 |
$6.0 |
$6.0 |
$6.0 |
| Fixed costs/period |
$400 |
$400 |
$400 |
$400 |
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| The profit outcome of the various options can be seen below |
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| Revenue Price X Quantity |
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| Minus Total cost = ((COGS X Quantity) + fixed costs)) |
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| Equals Net profit |
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|
Option 1 |
Option 2 |
Option 3 |
Option 4 |
| Revenue |
$1,500 |
$1,530 |
$1,680 |
$1,375 |
| COGS |
$600 |
$510 |
$480 |
$330 |
| Total cost |
$1,000 |
$910 |
$880 |
$730 |
| Net Profit |
$500 |
$620 |
$800 |
$645 |
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| Breakeven point. |
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| Fixed costs/Unit Gross margin |
44 |
33 |
27 |
21 |
The break-even point also changes. This is one of the most under-rated but simple calculations available to businesses to gauge their financial health.
Whatever you do, there will be some for whom the price is too high and will not therefore buy.
There will be others for whom you are pricing below what they would have been prepared to pay.
Either way, you leave profitability on the table when you pick a single ‘Optimum price’ point.
This is represented by the left-hand graph in the header.
When you can have two price points, you tend to increase the profitability.
I.e., You drop one price below the ‘optimum’ single price, and pick up those ‘cheapskates’.
You have a second option with prices higher to capture those who are willing to pay the higher prices.
The challenge is, how do you effectively fence off the two, so you are not just delivering an extra reward to those prepared to pay the higher price, just to capture the cheapskates?
It is in the ‘Fencing’ that the creative strategic thinking must take place.
This is represented by the right-hand graph in the header.
The obvious example is economy airline seats. Every economy seat is almost identical, yet there are price fences based on time, and ticket flexibility. Book early, cheaper than in peak booking time. Book very late, you might get a very cheap price, or you might miss out altogether. This is in addition to loadings on location: aisle and window, forward and aft. This is also in addition to the fences that exist between economy, business and first class, which has similar demarcation, for time, as well as the premium to be there instead of cattle class.
A final thought. Many SME’s are not selling time, or input costs & materials, they are selling the results of knowledge and experience and the value they can deliver to their clients.
How do you put a price on experience?
We all have trouble with that, at least I do, and most people I have come across do also. There are three basic rules to follow as you consider how to price for a job.
- Price the client rather than the service. This means if you make them a million, shoot for a share of the outcome. This involves a ‘value conversation‘ early on. E.g., If I was able to deliver you added profit of 100k, how much would that be worth to you? This sets a benchmark, from which you can come to an arrangement. Remember, that a client asking you to do something for them is all about removing risk. You cannot offer guarantees with certainty, as there is always risk involved, but a bit of creativity can expose some useful ways to share the risk and reward. To quote Peter Drucker: ‘In business all profit comes from risk‘. Therefore, the answer to how much they are willing to pay would be tempered by the risk and reward to both parties.
A further example: A friend of mine is a hypnotherapist, and often helps smokers become non-smokers. The value conversation around her services should not be about the price/session, but by how many packets of cigarettes it was worth, in which case, success would mean an ROI in a couple of sessions. E.g., How much does a packet of ciggies cost? How many packets a week do you smoke? Quick mental arithmetic… that means that success here will save you $250/ month on cigarettes, and that is before you factor in the health benefits. What a great deal!!!
- Offer options. Where possible, offer more than one option at differing price points. A premium version, and one or more cheaper versions that have had some features removed. Think about the SAAS software options offered on the web. There are differing features listed for various price points, and it is always three.
- Anchor high. Three price options, start with the highest first, it acts as an ‘anchor’. This is opposite to what we do automatically, we tend to price low as it seems that will be more effective at closing, but the opposite is true. Price high, usually they will go in the middle. In addition, it is far easier to price high and give a discount than it is to price low and try to add features at an increased price.
None of this is easy, if it was, everyone would be doing it. However, it can be done with some creative thought, experience, domain knowledge, and good feedback mechanisms to enable ‘fine-tuning’
Note: Please excuse the dodgy graphs in the header. I am a strategic thinker, not a graphic artist! However, despite their dodgy state, I hope they convey the message.
Sep 23, 2021 | Governance, Leadership, Management
‘How can I be held responsible when I do not have the authority’?
Anyone in a management role has probably heard, and perhaps asked that question after some ‘do-do’ hits the fan.
‘Accountability’, ‘Responsibility’, and ‘Authority’ often become entangled in ways that leave management, improvement, and scaling of any set of activities challenging. The lines become blurred and ambiguous, which enables problems to be shovelled into a quiet corner, unresolved.
As with any process, ensuring shared clarity, transparency and understanding is the only way to improve.
The absence of such shared understanding means a problem will always be someone else’s. ‘Not my job‘ in the vernacular.
Following are my definitions, which may clear up the differences.
Accountability
Accountability means that someone is specifically held accountable for the activity or set of activities. That person is accountable to track the progress of the activity, process, function, whatever it may be, and give it a ‘voice’. If you cannot nominate one person who is specifically accountable, it will fall through the cracks.
Responsibility
Responsibility falls to anyone who has the ability and opportunity to respond proactively support an activity or process. Anyone who ‘touches’ a process has responsibility to do their best to ensure that the activity progresses as expected, and to remove any hinderances they may see. This is decision making at the ‘coal-face’, taking responsibility for outcomes.
Authority
Authority belongs to the person with the final veto power. There is always someone who has that final say. The larger the organisation, the further away from the day-to-day operational decisions that person is likely to be. Conversely, the bigger the decision, the closer they will be.
The processes and boundaries that determine the point at which a decision can be made will be an explicit outcome of the descriptions of each role, and the culture of the enterprise.
The differences between the meaning of these three words offers a huge expanse of quicksand, in which many people and organisations get stuck.
For example, in a previous life as GM of a large organisation, I had final authority over the expenditure of marketing budgets. The marketing manager had accountability for the development of marketing plans and their implementation across the functions in the business, and the authority to make relevant decisions within the marketing function. Product managers had accountability for the specific activities that took place in their brand portfolios. Operations management had responsibility to ensure that the products produced were up to specification, and when that was not the case, the authority to rework or dump as appropriate. Logistics management had the responsibility to ensure orders were filled on time and in full, and the authority to make decisions to ensure that was the case. We all had a shared responsibility to ensure that the customers who bought our products were serviced in a manner that had them coming back for more.
Back to the question asked at the top: ‘How can I be held responsible without the authority’. The answer is: ‘it depends’.
Everyone has the responsibility to manage their own activities on a daily basis, and be held accountable for the outcomes, but as you move up a corporate ladder, it becomes increasingly challenging to maintain the direct link. The more senior you are, the more you will be held accountable for things over which you have less and less direct control. That direct control is held at lower levels in the organisation.
The key to making this all work is to thoughtfully, consistently, and transparently delegate the authority to make the veto decisions, both Yes and No, as far down the organisation chart as possible. Counter intuitive as this may be to many, offering people control over their defined workspace and span of control, leads to quicker and more informed decision making. It also assumes that everyone understands the differences between these three words, and that there is consistent and explicit feedback on both the outcomes of decisions, and the manner in which they were arrived at and implemented. This requires that you pinpoint the job to be done, have a system of interlinking KPI’s, and that there is explicit and transparent performance feedback and management of both the process and those held accountable for the components of the process.
It also relies on having the best people in the right spots, willing and able to make the decisions necessary, at the right time. Of all the challenges faced by those at the top of an organisation, having the best people in the right spots to deal with the challenge of building commercial sustainability, is the most challenging of all.
Header cartoon credit: Scott Adams and Dilbert, again make the point.
Note: I realised after publishing that I had dealt with with this exact question previously in a post back in 2019. Fortunately, while the wording is different, the meanings ascribed to the three key words are identical. After 2000 plus posts, this accidental doubling up does happen occasionally. Perhaps it is a measure of importance?
Aug 30, 2021 | Leadership, Management, Operations
What do we have to do to scale successfully?
That is a question that I often find myself answering in conversations with SME manufacturing businesses run by people who are seeking to map out in their mind, ‘where to from here?’
Generally, they know some of the answers, but they are hidden amongst all the other stuff going on, and the distractions of being all things to all people who walk through the door.
It is little different to building a house. You need solid foundations, upon which you build your house, brick by brick, designed to meet the needs of your family.
Before anything else, there are three foundational strategic questions to be asked, and answered:
What is the current status?
Every journey has a starting point. Doing the work to define that point clearly is the first step in any journey.
What are the trends, barriers, and competitive forces in their industry, and how does the existing capability set you have leverage those factors in a differentiated manner?
What is the objective?
It is important to understand what it is that they want to achieve. Articulating the objective in measurable terms is fundamental to being able to build the plans to get there. Often it is more than financial success, and unless that is clear from the outset, you can waste a lot of effort further down the track. I use a process I call ‘Hindsight planning‘ in which you imagine the objective has been achieved. You are therefore thinking in the present tense, from which you can look back and observe the mistakes, opportunities missed, and what went as expected with some level of imaginative hindsight.
What are the foundations of the business?
Every business requires a foundation, like anything you build, without which it is no more sustainable than a house of cards. The foundations of every business differ, but are made up of a variety of qualitative and quantitative bricks. The balance will vary depending on the nature of the industry. Childcare for instance will have more regulatory bricks in the foundation than life coaching.
Having answered the three essential foundation questions, you then add the frame that determines how the house appears publicly and shapes the way the activities in the house flow. The activities in the house never cease to evolve in the operational detail, but remain inside the framework determined in the design. Later, you can always add extensions, which are often ugly in the absence of creative thought, or you can build another house.
In no particular order, following are the 12 components of your framework.
Business Purpose. The expression of ‘Why’ they want to do whatever it is, a sentence that distills their motivation. This seems easy, but is in fact a very tough question, and is often not answered without considerable soul searching over some time, and often not before the building process is well begun. The caveat is that it must have something to do with the way value is added, and to whom. ‘To make money’ is not a purpose, it is an outcome of success.
Value proposition. What is it they can offer their customers that will make them want to do business with you rather than someone else? The benefits that they will gather by doing business with you. Often people I speak to are tangled up in the features they can offer, and struggle to get past them to understand customers are not interested in the features of your offering in the absence of any direct benefit to them.
Identify your ‘ideal customer’. The better the description of the ideal customer the better, not only can you target them better in connecting and communicating, but it also enables you to focus your efforts where they have the best chance of delivering.
Differentiation. What makes your offer different to that of any competitors? Differentiation goes hand in hand with the profile of your ideal customer. The differentiators you have must correlate to the specific pain points you are seeking to address with your ideal customer.
Branding. What are the brand characteristics you are building, the personality traits, messaging styles, what stories does the brand tell, and how do they relate to the ideal customer? In effect, it is what you would like those with whom you encounter to say about you when you are no longer in the room.
Strategy. How do you plan to go to market, which market, which channels, which customers, and how you are you going to execute on the strategy? All these questions need an answer, the absence of which will at best cost you money that could be saved, at worst, lead to your demise.
Business model. Your business model is how you turn your value proposition into revenue. Understanding, and making deliberate decisions about how your business model should work is a vital step.
Record keeping and reporting. This starts with the regulatory accounts, compliance reports and returns, but goes much deeper into the management of the enterprise. Producing and disseminating the relevant performance and progress reports to each level of the organisation in as close to real time as possible, is a challenge, but crucial to scaling. The old cliché ‘what gets counted gets managed’, applies.
Regulatory compliance. We live in a community, and there are always rules and regulations that must be followed on top of the moral obligations we have. Often these are seemingly pointless exercises in bureaucracy and politically correct box ticking, but they are nevertheless vital ingredients in the foundation of your enterprise.
The plan. Nothing happens without a plan, a goal without a plan is just a daydream. You must articulate how you turn all the above into a plan that is workable, realistic, funded, and with a clear path towards clear objectives, with activity priorities, review points and feedback loops built in.
People. Scaling is an intensely resource hungry activity that requires the right people. No business is anything more than an idea without people to make it happen. Having the ‘right’ people, irrespective of the size of the business is essential tom successful scaling. Indeed, it is essential for success at any level, but scaling is particularly people sensitive. The obvious challenge is to identify the profile of the ‘right people’ and even more complex, ensure that the mix of skills and thinking styles blend, and compound each other.
Cash. Cash is the enabler of all the above, without which, you will go nowhere. However, cash is readily available from all sorts of sources; the key is to get just sufficient working capital to match the rate of scaling, while ensuring that those around you have confidence in your leadership.
Image credit: Wikipedia
