Some businesses succeed. Other businesses fail. Most businesses struggle. There are countless reasons businesses struggle. A few include: insufficient capital, disappearing sales, delayed collections, sagging economy, competition, regulatory changes, excessive expenses, or ineffectual employees. Despite seeming diverse and unrelated, these symptoms are united by a common theme. Businesses struggle and fail because they don’t grow up.
Mature businesses, like mature, well adjusted, functioning adults, have the skills and intelligence to perform routine activities, make decisions, and cope with uncertainty. As a business matures, like people, it acquires skills, intelligence and tools that enable it to efficiently and effectively perform routine operating activities, to make effective decisions and to cope with uncertainty. Business maturity is reflected in a business infrastructure composed of skills and tools integrated with intelligence. It is this infrastructure that produces efficient and effective operations, decisions and change – the response to uncertainty.
Maturity however, is not achieved simply with the passage of time or the expenditure of money. Business maturity comes from hard work, learning and clear thinking. The business that advances its maturity seriously, with commitment and resources, produces superior performance. Mature companies acquire the independence to seize opportunities and avoid threats. Environments of accomplishment and personal satisfaction replace unilateral and arbitrary actions and decisions. Mature companies have staying power; they don’t fail.
An upcoming edition of The Business Odyssey is focused on Turnarounds. The edition on Turnarounds describes the responses required when the imperative is survival. For now I limit my discussion to companies that are struggling with growth or failing to perform to potential. These companies need the attributes of maturity.
The journey to maturity begins by acknowledging that performance is not what it can or should be. It may be tempting to expect a “How-To” narrative capable of prescribing the remedies necessary to cure under performance. I respectfully suggest that you disregard that temptation. The remedies to under performance need to be tailored to the specifics of the business. I offer below a more concise and general description. Integrating three business attributes – skills, tools, and intelligence – creates a foundation leading to maturity and superior performance. Materializing these attributes will be described in future editions.
Businesses use skills to accomplish tasks. Certain business skills are obvious. The local pizza parlor requires skills to make pizza dough and bake pizzas. Other critical skills may not be so obvious. The company that provides services to the Department of Defense needs skills to perform its services. The same company also needs skills to manage its accounts receivable to ensure the timely payment of its billings. Identifying and acquiring essential skills, whether conspicuous or not, is an important challenge. The example that follows illustrates an inconspicuous skill that was overlooked with damaging consequences.
A recent client fabricates complex, sophisticated machine parts for large aerospace companies. These parts are components used to produce advanced aircraft and defense systems. The contractors producing these systems maintain production schedules projected years in advance. Using an MRP (Manufacturing Resource Planning) system linked to the contractor allowed this client to maintain a backlog detailing what parts would be required and when. The client’s customers provided all the information necessary to anticipate material purchases, and production schedules, as well as to forecast future sales and collections. Early cash flow forecasts produced erratic results. Projected sales didn’t reconcile with actual sales. This was particularly unexpected because the sales forecasts were taken directly from the backlog that was based on confirmed customer orders. We discovered that a part’s scheduled delivery date, provided directly by the prime contractor, were arbitrarily changed by the Company to suit its own purposes. This client lacked the skills to manage its backlog. Moreover, they had no clue how backlog data affected operational and financial performance.
Our client lacked the skills to use the information they had in hand. As a result, inventory languished for upwards of 160 days, an inventory turn of about twice a year, late deliveries were common, cash balances were consistently negative, operating losses were reported every period and the company’s lender was very unhappy.
Tools conjure up the immediate image of something like a hammer, screw driver or other device designed to accomplish a physical or mechanical chore. Business tools, however, take on forms that may not be so obvious. Employing tools for business produces efficiency, reliability, and predictability while also reducing or eliminating errors and omissions. Well-designed tools also make it easier to delegate tasks to others with confidence that fidelity will be preserved.
An employment application illustrates a common business tool. Employment applications are a standardized form to collect information used to make hiring decisions. A standard form ensures that each candidate’s application information is complete and consistent. Additionally, the responsibility for collecting this information can be delegated to others without requiring more sophisticated qualifications. The knowledge applied to establish the required information is used once and replicated easily by others.
Every business has countless activities that benefit from appropriate tools. Efficiency – improved productivity with less effort – is not the only benefit. Tools also produce more reliability, information and knowledge, more timely access, greater confidence in completeness, and accuracy.
Tools also enable business to retain or share lessons and best practices. For example, many businesses prepare an annual operating plan. This plan describes what individual business units intend to accomplish and establish the operating budget for the next year. Though these plans are routine in the sense they are prepared every year, the twelve month lag oftentimes means that planners are forced to either re-invent a new planning format or resurrect a prior plan to imitate. Adopting a standardized planning tool makes preparing the annual plan easier for planners. The reasons for developing and employing a standardized planning tool are threefold. First, it allows the company to incorporate past experience and best practices. Second, it allows planners to focus on planning rather than constructing a temporary planning tool. And third, a standardized planning tool simplifies the integration or consolidation of multiple business units.
There are many manifestations of tools encountered in businesses. Some tools are employed to ensure efficiency, reliability, and accuracy. Templates created on a spreadsheet, standardized data collection forms, or written policies and procedures are a few examples. Other tools are used to aid in decision making. A company’s use of market research, return on investment analysis, or weekly operating reports, can provide timely and reliable information to satisfy those purposes.
There is no shortage of vendors peddling commercially available business tools. I do not suggest that there is any inherent flaw with tools of this sort. Nevertheless, it is easy to get lost in a maze, trying to find the “right” tool, a temptation to be avoided. An effective business tool need not be expensive or burdensome. It is often preferable to start simple, pay attention to the lessons of experience and build improvements incrementally.
The intelligent application of tools enables skills to be used more productively. The absence of useful or effective tools is a good indicator of a company that has not yet matured.
It’s a common mistake to confuse information, knowledge and intelligence. Understanding the differences produces better and faster decisions. The clearest way to distinguish between information, knowledge and intelligence is to think about the role each plays in making a decision. Information is the raw materials, facts or data. Information is meaningless until something is done with it. Knowledge on the other hand integrates information, experience, education and skills into a partial or complete idea. By clarifying or structuring knowledge, intelligence assigns relevance, which in turn is applied to solve problems or make choices. A good business decision is a decision made for the right reasons. The best decisions come from asking intelligent questions.
Mature companies, capable of making effective decisions, rely on processes that collect information, create knowledge and use intelligence to act. Relying exclusively on past experience, arbitrary beliefs or unilateral preferences produces flawed decisions with disastrous results.
Another former client had developed a sophisticated method for analyzing very complicated aerospace systems. This company had brilliant engineers and scientists. They understood the nuances of aircraft design. They did not however understand how a large aerospace company buys software, a process that is very formalized and complicated. The company needed the intelligence to effectively navigate the procurement process. This intelligence meant collecting information pertaining to the target company’s purchasing requirements as well as identifying each decision and who would be making it. This information would then need to be integrated with other information about competitive offerings, end user needs and the company’s own product offerings. Knowledge was created using a graphical presentation of the procurement network that included, among other things, decision gatekeepers, influencers and makers. The Company’s new Go-To-Market strategy explicitly incorporated intelligence going forward.
The ability to perform the routine efficiently, make good decisions and cope with uncertainty is an important precursor of maturity. As a business matures, it improves its ability to anticipate potential obstacles before they become serious threats. These businesses provide their customers with the satisfaction they seek and receive the rewards of superior revenue growth and/or price premiums. The business that delivers the returns that investors, lenders and other capital providers expect will be rewarded with access to needed capital, when it’s needed, and at attractive rates.