Bureaucracy – Success’s Adversary or Savior?

“Hell hath no fury like a bureaucrat scorned.”
― Milton Friedman 

“Keep your friends close, but your enemies closer.” 
― Niccolò Machiavelli

As the older of two children my father, like everyone else on the block, owned his own company.  During my formative years I was surrounded by business owners and spent many weekends with my father at the plant.  When I started my first company at 27 my father’s reaction was “it’s about time.”   I grew up deeply ingrained with the belief that small business owners were our social and economic backbone.

I was an adolescent in the 1960’s.  This was a time filled with tremendous conflict.  There was a ubiquitous desire to live the mythical lifestyle of Sheriff Andy Tailor’s Mayberry.  A time to this day idealized where parents didn’t divorce and children roamed neighborhoods without parents’ fearing sexual predators or drug lords lurking around every corner.  This was however, also a time of great turmoil.  Our Mayberry world relied on an unspoken faith that conforming to convention was the glue maintaining an idyllic life.  But the hippies and youth of the day, that’s probably you and me of today, had other ideas.  This time was to become what we now consider the social foundation for a world where we honor change, diversity and the rebel.  How far we’ve traveled over the course of four to five decades.  Remembering the bumper sticker “challenge authority” summarizes in many ways the battle raging at that time and continuing in a new form today.

Reflecting on this era leads me to make two observations with particularly significance to business.  Change is inevitable and what seems ideal about the past probably wasn’t.  Idealizing the past is usually a symptom of unthinking hope and careless expedience.  The tension created by change and mythical ideals is prevalent today in business and is exemplified with the tension between bureaucracy and entrepreneurialism.

Since the time of my adolescence fashions have changed, music evolved such that we as parents find the music of today as incomprehensible as our parents found our music, in our day.   I’m sure you remember like I do the long hair, tie dyed fashion, micro bus driving gypsies listening to music that made our starched parents cringe.  This was a time when two cultures collided.  One culture with its importance on conformity colliding headlong into a culture of rebellion.  At its root this conflict was about change: resist or embrace.  The tension created between these two conflicting ideologies, conformity and rebellion, is important and deserves not to be carelessly judged adversely rather deserves thoughtful circumspection.  There is now an entire generation, or multiple generations, that idealize this radical bunch of 60’s hippies.  I believe we are seeing the same battle re-playing itself today between entrepreneurialism and bureaucracy.

The mantra of 21st century business management enthusiastically champions abolishing bureaucracy so that entrepreneurialism may flourish.  Business bureaucracy has earned a reputation as a sclerosis clogging the arteries of innovation.  Nevertheless, every business depends on the correct and timely satisfaction of routine tasks.  The fact that a task is routine does not mean it is unimportant, it means that the need recurs frequently.   Many of these administrative tasks, on first impression, seem ancillary to the basic business purpose.  It can be difficult to associate the Accounts Payable clerk’s processing of supplier invoices as core to a business’s success.  Most of the time we think of activities of this sort as a necessary cost of business.  At some juncture most executives feel the frustration of spending money on bureaucracy that makes little contribution to competitive success or financial performance.

I’d like to try to relieve some of that frustration by offering an alternate point-of-view.  Bureaucracy is the word we use to de-personalize the assembly of people responsible for ensuring that all of the routine or administrative actions are completed correctly and timely.  A senior executive can be well served understanding and appreciating the value of bureaucracy and the people attracted to bureaucratic work.  In this issue of The Business Odyssey, I am going to suggest that the bureaucracy is an essential constituent for improving competitive and financial performance.

A reasonable starting point is to adopt a more precise and useful definition for bureaucracy (in the context of business infrastructure).  This sharper understanding is the point-of-departure to harnessing the benefits and avoiding the traps.  Bureaucracy in its true meaning implies an organization conceived to process information in an orderly, efficient, competent, accurate, timely and repeatable manner.  Simply put, bureaucracies are designed to reliably act in accordance with a pre-defined rule book.  The purpose is to ensure that certain routine activities are performed consistently, correctly and timely.  The heart of a bureaucracy are the people competently performing their responsibilities directed by clear standards and equipped with the right tools.

Senior executives want to be sure that their business’s suppliers are paid in a timely fashion while retaining sufficient cash to satisfy those and other obligations.  This seemingly simple task requires that invoices be reviewed to determine that payment is appropriate, meaning the goods or services have been received and comply with expectations of quality, completeness, performance or other terms of acceptability.   Additionally, someone needs to confirm what amounts are owed or perhaps previous credits are available to offset amounts owed.  This Accounts Payable clerk will also be expected to fully exploit discounts or other payment terms.  Separately, the simple task of paying a vendor’s invoice also requires confirming that sufficient cash is available.

The simple payment of a supplier’s invoice is composed of many individually modest tasks.  However, each and every one of these tasks must be performed correctly.  The collection of individuals responsible for managing accounts payable is a bureaucracy.  It is staffed by individuals whose job it is to ensure that these activities happen correctly, timely and produce the right outcome.  These individuals understand the importance of what they do and thrive on doing the same task over and over again correctly.   This detail many sound a bit monotonous.  But I’m dwelling on the boring for a reason.

Most senior executive have better things to do, like find new ways to make money, than to be devoting time verifying and paying vendor invoices.  The same executive probably doesn’t want to devote any time thinking about these tasks.  These executives however, want to know that the system for paying supplier invoices is working and is working properly.  Meaning that actual performance is consistent with expected performance.  Hence the importance of the bureaucracy.  It is the company’s bureaucracy that has the responsibility to perform the routine and to perform the routine correctly and timely.  This happens with a front-end investment of time, and perhaps money, to define the outcome expected, the rules the bureaucracy uses and most importantly, the skills and competencies required to ensure everything works as its suppose to.  Hopefully, this investment is made with careful thought and is required rarely.

This is what bureaucracies do.  According to Niall Ferguson[i], the origins of a bureaucracy were based on “recruitment by examination, training, promotion on merit, regular salaries and pensions, and standardized procedures”. This system is subject to a strict hierarchy with emphasis on technical and efficient methods to ensure the expected outcome.

Now to rescue this from the delete key I’ll suggest that understanding how to employ the business’s bureaucracy is the foundation to using it for competitive and performance advantage.  Businesses employ a variety of bureaucracies to serve different purposes.  These bureaucracies are a very real expense that most would agree is unavoidable.  The challenge is then tailoring the bureaucracy to satisfy business needs as well as contribute to satisfying customers, producing investment returns, and enhancing competitiveness.  To do so first requires eliminating the preconception that bureaucracy is simply a sunk cost or necessary cost of business and replacing it with the challenge To Serve and To Protect.

Bureaucracies appear in different forms.  A few examples: collecting accounts receivable, responding to requests for proposals or bids, ordering parts or materials, processing payroll, maintaining promotional materials, production scheduling, hiring, maintaining accounting transactions, arranging travel, answering the phone, providing customer service, preparing budgets, analyzing data, preparing reports and a great many other things.

Contemporary businesses need to do a lot of things right.  The margin for error shrinks daily.  Businesses can no longer indulge in avoidance, denial or over-simplification.  Failing to resist that temptation will ultimately lead to failure.  And the debate over bureaucracy and entrepreneurialism is an important starting point. More importantly however, is the business’s need to get the biggest bang for their investment.

A well-functioning bureaucracy should not impede a business’s ability to be entrepreneurial or innovative.  In fact, a well-designed and functioning bureaucracy will improve the business’s competitive performance.  But this isn’t going to happen when permeating the business is the attitude that bureaucracy is bad.

Internal controls, business formalities, procedures, systems and tools are too often labeled as bureaucratic.  No question, there are too many occasions where this branding is well deserved.  But, deserved only because these formalities have been adopted and imposed for the wrong reasons.  Ironically, anarchistic practices are acceptable as a necessary price of entrepreneurialism.  Mindlessly delegating “solutions” down the organizational chain sounds so democratic.  However, delegating the responsibility to resolve important business decisions without carefully understanding the consequences and the requisite competencies will produce solutions but solutions that may not serve the business constructively.  This is not to say that seniority, title or status is any assurance that business decisions will be made with any greater care.  Another common trap to avoid.

Mature companies understand the bureaucracy’s contribution.  They do so by knowing what these people do and what these people do not do.  Institutional formalities in the form of systems, policies and practices are tools to ensure that activities and initiatives undertaken will achieve the outcomes expected. These formalities can protect the organization from wayward, nefarious, undesirable or wasteful outcomes.  More importantly, these formalities demonstrate the business’s seriousness and commitment to maturity.

The business infrastructure found in mature and successful businesses uses its bureaucracy to operate, adapt and shape change.

[i]  Niall Ferguson is the Laurence A. Tisch Professor of History at Harvard University

Advertisements

Business Infrastructure – To Serve and To Protect

“I don’t read very well.  So I don’t think I think very well either.”  Galinda smiled.  “I dress to kill, though.”
─ Gregory Maguire, Wicked

I want to offer you a deal that will double your net worth.  And all that’s required of you is to make a decision, something you do every day.  There is however a catch: there is a 30% risk that you will lose everything.  Everything.  How simple is that; you make a decision and accept the possibility that you may lose everything.

I don’t know about you but I’m not real crazy about the possibility of losing everything I’ve worked so hard to acquire.  Do I really need to risk losing everything I’ve already created?  I think most of us would graciously runaway from this wonderful opportunity.  Posing the offer so directly creates a tremendous advantage; the possibility of losing everything is made obvious.  My offer alerts you right from the start that there is risk.  Unfortunately, most business decisions don’t announce risk so transparently and in many cases the risk is very effectively disguised.  This leads to business owners and executives making seemingly simple decisions that unnecessarily put the business at risk oftentimes with no hint of doing so.

The topic of risk management is extremely complex and a topic I will return to in future issues.  At this time I am going to focus on Business Infrastructure; employed effectively, the first line of defense against unacceptable risk.  I intend to divide infrastructure into its components, People, Things and Rules, discussed individually over the course of the next three issues of The Business Odyssey.

I use the term business infrastructure frequently. Business infrastructure is essential to business success, financial performance and effective decision making.  Business infrastructure is also the heart and soul of business maturity. The term business infrastructure is confusing and means different things to different people.  Its meaning varies widely and usually depends on perspective; reminding me of the parable about the six blind men describing an elephant.  The parable tells of each blind-man’s individual perception, while each description was true, none revealed anything to suggest that the object was an elephant.  So rather than starting off describing parts, I am going to describe the elephant – or in this case – describe the meaning of business infrastructure.

Business infrastructure is an organized assemblage of people, things and rules that working together produce specific business outcomes.

Business infrastructure exists to satisfy one of two purposes: to serve and to protect.  Businesses rely on infrastructure, sometimes unknowingly, to ensure that the multitude of tasks, some visible and some invisible, are accomplished correctly so that the business can provide its customers the satisfaction expected.  In this sense business infrastructure exists to serve the business in its pursuit of creating customer satisfaction, providing a return on invested capital and distinguishing itself from competitors.  Separately business infrastructure also exists to protect the business from unintended or undesirable consequences.

Managing human resources is a useful example to illustrate infrastructure’s ability To Protect and To Serve.  Companies reaching a certain number of employees and need a dedicated manager of human resources to oversee complex administrative and compliance demands.  Generally speaking, the HR Manager ensures a correct payroll, transparent benefits information, standards of conduct, and other regulatory compliance.  The compliance requirements pertaining to employees is a nightmare and gladly delegated to someone.  This is a simplified description illustrating the obligations the human resources infrastructure is expected to satisfy.  I suspect most senior executives recognize the appeal of delegating those responsibilities.  My example highlights the To Protect half of the infrastructure equation.  The responsibility of the human resources infrastructure is to protect the business from the consequences associated with non-compliance.  This, not uncommonly, ignores the To Serve contributions.

To Serve contributions are perhaps a little less obvious. How does Human Resources Serve the business, in addition to protecting the business?  Human resources can be critically valuable recruiting and retaining the best people.

A recent client engagement included helping the company recruit a controller to replace the CFO who had recently departed.   Senior executives were primarily focused on spending less.  The old sage “pennywise dollar foolish” rings familiar.  The Company’s compliance culture inclined the HR manager to concentrate his time writing an “acceptable” job description, posting an advertisement, screening resumes and scheduling interviews.  Completely absent was a dialog devoted to the position’s contribution to present and future performance.  Simply said, executive managers knew a title and price, but had no clue what the person they were attempting to hire should do.  The HR infrastructure could have fostered the dialog, crafted alternative job descriptions, analyzed salary data and summarized the qualifications of candidates so executives could better understand the decision they were trying to make.  As an aside, this all happened but was led by an experienced outside consultant (me) rather than organically by the HR infrastructure.

The manager of human resources need not be an expert in the specific functional requirements but rather possess the ability to understand what is required to recruit and retain the best people.  This of course will only happen when the senior executives recognize the business infrastructure’s ability to contribute to the business.

There is no ready-made business infrastructure template that fully satisfies the needs of an individual business.  In the next few issues I intend to dissect business infrastructure into its three interdependent components: 1) People; 2) Things; and 3) Rules.  The business’s infrastructure is like other business assets – capable of contributing to satisfying customers and rewarding capital providers.

In the third issue of The Business Odyssey I introduced the Fundamental Business Purpose.  My premise asserts that every business must convert revenues and capital into customer satisfaction and a return on invested capital.  As you may recall I illustrated this Purpose by using the analogy of an internal combustion engine.  The difference between a lawn mower and a formula one race car engine is not function it is the intention the engine’s design seeks to satisfy and this is reflected in its infrastructure.  Same with businesses; the difference is in the infrastructure.

Infrastructure’s contributions to business performance may take many different forms.  It may be direct such as the packaging Intuit Real Estate Services used when it shipped loan documents.  Alternatively, it may be less obvious such as General Electric’s disciplined application of financial measures in decision making.  My hope is that business leaders will think differently about business infrastructure and be inspired to challenge their infrastructure investment to contribute in new and imaginative ways.

Returning to my irresistible opportunity to lose everything.   I observed that many executives make outwardly routine choices that expose their business to serious or even catastrophic losses.  The most common example is the decision so often made to trade diligence for expedience.  It is not uncommon in my experience to discover business infrastructure’s part in decision making routinely dismissed or disregarded.  Business infrastructure is begrudgingly incorporated as a business grows primarily as a means for business executives to free-up time for other matters (principally making money) and to ensure tax compliance.  Most middle-market business leaders I’ve worked with assume that all the tedious infrastructure tasks are satisfied and the less time devoted to thinking about business infrastructure the better.  There is a certain appeal to this management stratagem if not for the one minor problem that ultimately it produces dangerous results.

In the issue of The Business Odyssey to follow I will discuss the people component of business infrastructure.  This forthcoming issue is titled Bureaucracy – Success’s Adversary or Savior?  When the ultimate goal is producing customer satisfaction and a return on invested capital there are countless hidden tasks that need to be performed correctly.  Hardly surprising most of these are taken for granted, we don’t think about them we just expect them to be accomplished producing the right outcome and doing so at the right time.  These tasks are accomplished because of people.  These are the folks wearing the green eyeshades that are charged with saying no; or least that’s what we’ve been led to think.

Bureaucracy is a convenient, albeit most often pejorative, label describing the organization responsible for ensuring all the grubby back-office work is performed correctly and timely.  This term, bureaucracy, unfortunately has a reputation, deservedly in many cases, of being a ridge and unyielding organization placing more importance on pushing paper than producing results.  Labels, while convenient, are oftentimes misleading.  Highlighting bureaucracy will hopefully encourage executives to re-focus their attention on the outcomes and values infrastructure offers by looking beyond common and misleading labels.  I also want to dispel the myth that bureaucracy conflicts with entrepreneurialism.  Diving deeper into the meaning of bureaucracy may provide a fresh approach to business infrastructure that produces superior financial and operating performance.

There are three components to business infrastructure: People, Things and Rules.  Things take on many different forms but can include tools, software systems, information, machines, locations, or the like.  The issue following people will focus on infrastructure things entitled “Things – The Levers of Business.”    My intention is limited to exposing the idea that a business probably has a lot of idle assets that can and should be put to additional productive uses.The final installment in this series on business infrastructure will be “Rules – Success Needs a Playbook.”   Smart, motivated and well-meaning people are essential to a successful business.  Business success however depends on people doing the right thing at the right time.  And that should not be left to chance or carelessly delegated.  Rules, as I’m using the term, means well thought-out procedures and protocols that describe how specific circumstances are to be resolved. Rules also ––––clearly identify responsibilities and authorities. Clear and well understood rules improve the efficiency and effectiveness of dealing with routine tasks.  Moreover, it allows executives to sleep better knowing that their time and energy is only required when some exceptional or unexpected event arises.  Exploring why rules are important and how they manifest to produce a well-functioning business infrastructure will be the subject of this upcoming issue.

Collectively, businesses need not only a solid foundation, satisfying the Fundamental Business Purpose, but also sturdy framing in the form of business infrastructure.  Mature, sustainable and profitable businesses use their business infrastructure to serve underlying business intentions and to protect the value that has already been created.

THE BUSINESS ODYSSEY – Competitive Strategy

“People in any organization are always attached to the obsolete – the things that should have worked but did not, the things that once were productive and no longer are.”
― Peter F. Drucker

“Any man who can drive safely while kissing a pretty girl is simply not giving the kiss the attention it deserves.”
― Albert Einstein

Competition exists to choose who gets the prize when the prize can’t be shared. To prevail requires strategy. Business requires creating customer satisfaction and return on invested capital. The business environment is about competition. Securing profitable customers, suitable capital and qualified employees is not a consequence of happenstance; it is a consequence of strategy. The competition for customers1, capital or employees is typically a zero-sum game, there is only one winner. Every business employs a strategy though not necessarily explicit or successful. This issue of The Business Odyssey will share a few thoughts about competitive strategy.

Conceptions of competitive strategy stir up a muddy mix of meanings and expressions. Even the most casual reader of business literature cannot help but feel bombarded with theories about strategy touting success’s dependence on Big Data, Game Theory, Scenario Planning, Strategy Maps, Value Chains, Balanced Scorecards and a long list of other ideas. To be clear, all of these ideas as well as others can contribute significantly to a business’s efforts to achieve a competitive advantage. These advanced methods however, have limited value in the absence of a solid foundation of competitive strategy. My focus is limited to building that solid foundation.  I identify and explain the basics necessary to produce a sturdy foundation that can support a sustainable advantage and when appropriate apply more advanced tools and methods.

Middle-market companies rarely need overly complicated or sophisticated strategy methodologies. These companies do nonetheless, benefit from understanding strategy’s importance, how to develop strategy and how to incorporate strategy into operations efficiently and effectively. A sound competitive strategy, effectively integrated into the business’s modus operandi, is unmistakable evidence of a business taking its maturation seriously.

Our goal is to construct a conceptual foundation for competitive strategy that produces meaningful advantages. To construct this strategic foundation we have devised a simplified process consisting of three steps: characterization, integration and validation.

CHARACTERIZATION
Devising a healthy competitive strategy requires discipline, precision and attention to detail. The wisdom in the old saying – information is power – is revealed clearly in competitive strategy. I call the first step of strategy development characterization to reflect the initial emphasis on defining and clarifying specific aspects of the business. Characterization describes three things: 1) what the business does (outcome); 2) who the business does it for (customer); and 3) why the business is different (advantage).

What the Business Does (Outcome)
What the business does is a precise and accurate statement describing the customer satisfaction it creates.  Relying solely on a description of a product or service fails to provide adequate insight into a customer’s underlying decision to buy.

Customer satisfaction is the measure of the business outcome; not the features or benefits of a product or service. The following example illustrates the difference between customer satisfaction and product description. When Intuit developed its personal finance management software Quicken it could easily have conceived it as an accounting program for individuals. Most individuals maintain a checkbook and avoid anything remotely resembling accounting like the plague. Offering an individual an automated solution for personal accounting is trying to solve a problem that most individuals don’t have or want. Individuals want to pay bills, keep their accounts flush, and balance their checkbook. And about once a year they would like to eliminate some of the burden experienced preparing a tax return. Intuit, focusing on customer satisfaction and not a “product description” created the automated checkbook – Quicken.

The satisfaction customers seek can take many different forms. And it is important that the individuals devoted to crafting strategy recognize and suspend personal bias, stepping into the shoes of their customer. Some customers may seek economic satisfaction in the form of low price or cost of ownership. Other customers may put higher importance on the value of time and hence look for usability, convenience, or reliability. A different customer may place more importance on status or prestige looking for rarity or perceived quality. Or the customer may value social responsibility found with such attributes as sustainable materials, chemical free, living wages or contributions to worthy causes. All of these are forms of satisfaction customers seek and all are legitimate.

Who the Business Does it For (Customer)
Customers are people. Markets are abstractions. Relying on demographic characteristics parsed from a seemingly attractive market produces an abstract composite caricature of an “idealized” customer. To the best of my knowledge, I’ve never actually met one of these people. Alternatively, conceptualizing a specific individual together with requirements and expectations reveals information that can be used to create a competitive advantage. Generalizing from the individual oftentimes produces unexpected markets. It doesn’t matter whether the satisfaction is delivered via product or service; or the customer is a consumer or institution. Every decision to buy is made by an individual (or perhaps several).

Using Intuit again, the company produced an automated checkbook that conveniently also relied on double entry accounting. A conventional market analysis would categorize this as a consumer product. However, Intuit discovered that many businesses in need of accounting software were staffed with individuals with the ability to manage a checkbook but not necessarily the specialized knowledge of double-entry accounting. QuickBooks was introduced as an automated checkbook for business.

Why the Business is Different (Advantage)
To prevail in competition requires an advantage. Securing consequential competitive advantage requires an understanding of what the business does and for whom it does it that is meaningful, effective and clear. Competitive advantage is the customer’s perception of value that makes the business different. Customers have the choice to select a competitor, a substitute, or to do nothing. Any one of those three choices means your business loses. So why will a customer select your business’s offering rather than one of these other alternatives?

It is well beyond my scope to attempt to catalog, much less discuss, the different ways to create a difference.  Michael Porter2 describes three general competitive strategies: cost leadership, differentiation and focus. As an unapologetic Porter devotee I will use these three strategies to describe differences.

Cost leadership: an advantage the business achieves by its ability to offer its products or services at a cost less than a competitors. Using cost leadership as a source of advantage requires the business to tailor its entire way of doing business in a manner that allows it to maintain an overall cost structure that competitors cannot match. Contrary to popular thinking this does not necessarily mean that all costs need to be minimized or that cost reduction is the panacea for success.

Differentiation: businesses create competitive advantage when a customer can clearly perceive and value a difference. The complicating factor in devising differentiation strategies is the variety of alternatives and the temptation to do things that conflict. To illustrate a successful form of differentiation is the appeal to a customer’s desire for exclusivity or status; luxury cars are an easy example. Some customers seek products seeking to enhance an image of success or superiority. These customers will pay a premium for that privilege. I’ve seen on more than one occasion a business seeking to appeal to the status buyer but holding the steadfast belief that prices needed to be discounted compared to competing products. Big mistake. The status buyer is only satisfied with a product no else has, a discounted price may imply that the product will be accessible to everyone, defeating the purpose. This is not to say that pricing and cost management become unimportant.  Quite to the contrary, pricing and cost management are always inextricably dependent on competitive strategy and require careful consideration. Premium pricing is not a license for frivolous spending.

Focus:  Business can achieve a distinguishing and profitable advantage by focusing on a specialized segment of a market. Successful defense contractors employ specialized know-how pertaining to procurement processes, contracting, accounts receivable collections, and the appropriations process their customer use for future procurements. These companies build organizations that are profitably optimized to satisfy contracting requirements in an environment that is highly sensitive to cost. An interesting corollary is the difficulties successful defense contractors encounter trying to diversify and service private sector clients.

INTEGRATION
The Characterization stages identify the components of competitive advantage. Successful competitive strategy and the advantages it creates require that these components be fully integrated into the way a business operates. Consider as an illustration of operational integration the recruiting function. The business seeking an advantage as a leader in technology innovation requires the ability to recruit and retain the most innovative and smartest people with recruiting becoming a critical competitive competency. Imagine yourself in a space capsule preparing to launch; you don’t want to be thinking that you’re sitting at the top of all the low-cost bidders – not a reassuring thought. I would much prefer to think that the smartest people in the world worked together to produce the rocket I’m sitting on. Customers have their own requirements and expectations of what they are paying for and want to believe that whatever that expectation, the business is structured to perform better than anyone else.

The strategy of low cost provider is a good example to look at with a little more detail. Offering the lowest price is only the tip of the iceberg. The business not only needs to offer the lowest price it needs to do so in a manner that is profitable. I’ll have more to say about this in a moment when I introduce the business purpose. For the moment, a business pursuing a low cost advantage requires executives to dissect each activity or function of the business to ascertain how it contributes to satisfying its customers with the lowest cost. These activities include purchasing, paying attention not only to the cost of materials but also the costs associated with purchasing. This careful analysis might possibly reveal that paying more for a component can reduce manufacturing costs. There are countless trade-offs that must be revealed, analyzed and made.

Developing a successful competitive strategy requires understanding how each component influences every activity the business needs to perform from the obvious examples such as pricing, developing products and advertising to the not so obvious like recruiting, purchasing and accounting. Meaningful competitive strategy affects everything. Thinking otherwise will result in second place in an environment that only rewards first.

APPLYING THE BUSINESS PURPOSE
In the third issue of The Business Odyssey I introduced the idea of the Fundamental Business Purpose. All businesses need to create customer satisfaction and a return on invested capital. The competitive business strategy is viable only when these two conditions are satisfied. Adopting a strategy to be the low cost provider is not a license to operate without profits. The fundamental business purpose is a critical diagnostic of the soundness of a competitive strategy.

This issue of The Business Odyssey has focused on competitive strategy. This discussion, by necessity and brevity has been restricted to a narrow focus on establishing a few foundational concepts. It is by no means complete. The foundational concepts presented are introspective with a focus directed inwardly at operations. Meaningful competitive strategy cannot ignore competitors, suppliers, or other external factors. A future issue of The Business Odyssey will discuss the external business environment and the influence on competitive strategy.

Notes

1   The operational domains where competitive strategy has relevance are much broader than just customers. Throughout this article the term customer is oftentimes used, for the sake of brevity, to also include investors or prospective employees.

2   Michael Porter, Professor at the Harvard Business School, is in my opinion, the definitive author on business strategy. This does not demean the contributions of many other important writers however, I would advise anyone, with a reason to delve more deeply into business strategy, to start with Porter. As a consequence many of the thoughts presented in this issue of The Business Odyssey can be traced to Porter. Clayton Christensen, a Professor at the Harvard Business School, also deserves credit for his significant contributions to many of my views reflected in this article. Despite the appearance of blatant plagiarism my intention is to extract and apply sophisticated, complicated and proven ideas about competitive strategy to the middle-market businesses that have not fully embraced the importance of competitive strategy.

 

THE BUSINESS ODYSSEY – Business Planning An Overview

“Alice came to a fork in the road.  ‘Which road do I take?’ she asked.
‘Where do you want to go’ responded the Cheshire Cat.
‘I don’t know,’ Alice answered.
‘Then,’ said the Cat, ‘it doesn’t matter.’”
– Lewis Carroll, Alice in Wonderland

Unlike Alice, for business leaders the choice does matter.  One road may take the business on a perilous journey with an uncertain but possibly rewarding outcome.  The other road may end in disappointment or destruction.  Decisions and uncertainties are inextricably and unavoidably part of business.  Business planning, when used correctly, provides the needed navigation for good decisions in an environment filled with uncertainty.

This edition of The Business Odyssey offers a general perspective of business planning.  This issue will be followed by more specific planning topics presented with greater detail.  I separate planning into four distinct subjects: strategy, operations, ad hoc opportunities, and products.  Each of these four topics serves the business in different yet interdependent ways.  Treating each planning theme independently encourages the business to approach each with rigor and discipline using precious resources more efficiently.

Translating business goals, objectives, action items, assumptions and other factors into the quantitative language of finance, in the form of projections, forecasts or pro forma financial statements, is an essential part of planning.   Financial analysis and forecasting uses a different language intimidating many and misunderstood by most.  A future issue of The Business Odyssey will discuss financial analysis in detail.

The Importance of Business Planning
Every struggling company with which I have worked had at least one symptom of trouble in common: not a single one had a “real” business plan much less a proper planning process.  This is hardly a coincidence.  The absence of a formalized planning process is a significant sign that a company is not yet growing up.  The excuses always imply: the future can’t be predicted.  True to a point.  Those that adopt that view and avoid planning however, reveal how little they understand about planning and about business.

The purpose of business planning is not to predict the future but rather to take the future seriously.  Rigorous, disciplined and meaningful business planning reduces uncertainty and manages risk.  Others, besides the business, rely on the outcome of effective planning.  Investors and lenders, for example look to the quality of a business’s plan and planning processes as a proxy for the risk associated with providing capital. The following example illustrates how thorough planning and rigorous financial analysis produced $7 million in debt capital for a start-up client.

A Successful Financing – Planning Reduces Uncertainties and Manages Risk
We were approached not long ago by a potential client to help raise $7 million in capital to acquire operating leases for multiple healthcare facilities.  While the two executives had extensive healthcare experience the business was a start-up.  Further complicating this capitalization was the founders’ unwillingness to part with any ownership of the new company.  Anyone experienced in capitalizing start-ups would quickly point out that $7 million of debt for a new company was not possible.   So despite making the obvious choice we undertook the challenge.

The executives presented us with the one-page financial projections prepared for the project.  Needless to say, these projections raised more questions than provided answers.  The uncertainties were many.  Rather than give up, we focused on identifying and resolving the critical uncertainties.  How much capital was really needed and how was it to be used?  The answers from the founders were general and vague.  The financial analysis they had prepared lacked sufficient details to credibly answer these two basic questions – how much and for what purpose was capital needed.  We produced a detailed financial analysis that included how and when revenues would be earned; what expenses needed to be incurred and when; and we carefully analyzed when revenues would be booked, invoiced and collected.  Doing the same for expenses; incurred and disbursed.  Focusing on the uncertainties we showed that revenues were occupancy fees earned daily and predominately reimbursed by the Federal government (Medicare).  The capital required was to provide liquidity prior to receiving payment from the government.

By focusing on resolving the uncertainties we developed a defensible plan that allowed a lender to use the earned but unbilled fees as collateral.  The company successfully secured a $7 million revolving line of credit to satisfy its working capital requirements using unbilled receivables.

This example illustrates how rigorous planning is used to resolve uncertainty and achieve outcomes otherwise seemingly insurmountable.

Planning as a Business Process
Good planning creates predictable and reliable outcomes.  These outcomes are a result of clear and actionable goals and objectives.  Predictability comes from explicit assumptions and a well-conceived Point-of-View.  Adopting a disciplined planning process produces clarity, accountability and manageability.  When executed individuals, especially executives and board members, use precious time with greater efficiency.

A disciplined planning process is periodic, clear, written and most importantly taken seriously by senior executives.  Planning processes are reliable and repeatable producing defensible and actionable plans.  Businesses use standardized tools such as reporting and analytical templates as well as meeting agendas and schedules to ensure completeness and timeliness.  Planning includes routine monitoring by using frequent status reporting and review meetings.  Routine monitoring need not be burdensome to be effective.  When action items are clear, measurable, temporal and assignable monitoring performance can focus on exceptions.

An effective plan ensures each individual, expected to execute specific action items, have a clear understanding of their responsibilities.  These individuals should have a sense of ownership and personal responsibility; producing better results rather than imposing responsibility unilaterally or arbitrarily.  In no way does this subordinate the importance of executive or board reviews and approvals.  Distinguishing preparation from review and approval improves adequacy, feasibility and responsiveness to the business’s objectives.  Robust planning produces plans everyone believes, identifies specific actions, describes the outcomes expected, assigns responsibility to specific people, articulates critical assumptions, has a schedule with measurable milestones and includes a defensible budget.

Strategic Planning
Strategic planning is the process that defines the business’s direction, overarching goals and competitive position.  The strategic plan is the approved and adopted outcome of a strategic planning process.  A valid strategic plan is the foundation executives use to make decisions allocating resources and choosing one alternative rather than another.  Strategic plans are typically longer term (three to five years) but evaluated annually. We’ll have more to say about strategic planning in a separate issue of The Business Odyssey.

Operational Planning
Operational planning and the operating plan produced, is the responsibility of each revenue and cost center.  These plans describe the specific outcomes and necessary initiatives required for the year that support the company’s strategic goals and objectives.  The operating plan includes each business unit’s expected accomplishments, action items, initiatives, budgets, scheduled milestones, and assignment of responsibilities. Individual operating plans should ultimately be consolidated into a single company-wide operating plan.  To be effective, operating plans need to be clear, actionable, temporal, assignable and measurable.  The financial forecasts must be responsive to the strategic plan adopted by the company.

Opportunity Planning
Operational planning typically occurs annually.  Businesses need to anticipate and prepared for unplanned opportunities.  Adopting a process specifically designed to evaluate and respond to unplanned opportunities introduces reliability, predictability and manageability to what would otherwise be distracting, overwhelming or overly burdensome.  Opportunity planning can be considerably more streamlined and ad hoc without compromising completeness, rigor and defensibility.  Opportunity planning will be discussed in more detail in an upcoming edition of The Business Odyssey.

Product Planning
Businesses that depend on product advancements can benefit from a forward looking Product Plan (also known as a Product Roadmap).  The level of detail depends on the nature of the products.  The product plan for a technology company may determine that certain future products depend on technology capabilities that currently don’t exist.  Alternatively, an apparel company may need to identify certain consumer trends.

Business planning is a process not an end-product (a plan).  The value of planning is realized by thinking in advance about the minute details, the intended outcomes, the threats and the unknowns.  Effective planning is rigorous and defensible.  The value of planning is reflected in all the little decisions that can be made along the way.

 

“If you fail to plan, you are planning to fail!”
Benjamin Franklin

THE BUSINESS ODYSSEY – Intentions

“Excellence is never an accident. It is always the result of high intention, sincere effort, and intelligent execution; it represents the wise choice of many alternatives – choice, not chance, determines your destiny.”
― Aristotle

Intentions establish the foundation guiding choice and action.  In a previous issue of The Business Odyssey I described the Fundamental Purpose of Business.  In that issue I mentioned, but did not discuss, the idea of intentions unique to each business.  This issue will focus on describing business intentions and its significance.

Business is about an idea, a concept that is converted to something of value to others.  Businesses use some expression of Institutional Intention to justify the business’s existence in the form of achievable outcome(s). This issue of The Business Odyssey will describe two different but interrelated forms of intention. The first, Institutional Intentions[1], expresses the business’s expectation of outcomes and dependent actions. Private Intentions, synonymous with self-interest, often exert insidious influence on business performance.

Intentions are easily overlooked or treated with nothing more than superficial acknowledgement.  The disregard for intentions probably occurs more often because executives, board members, or investors lack a careful understanding of what intentions are and how intentions exert influence on business performance.  Consequently, careful consideration of intentions commonly begins and ends with a company’s Mission Statement.

In my experience, business dysfunction is often rooted in ambiguous or conflicting intentions. For this reason I am using this issue of The Business Odyssey to stress intentions (in particular the distinction between Institutional and Private Intentions) as a critical attribute of business maturity.

Institutional Intentions

Business organizations commonly rely on a Mission Statement as a convenient surrogate, rather than devote the rigor necessary to acquire a more perceptive insight into Institutional Intentions.  In principle, the Mission Statement provides clarity and guidance to formulate goals, objectives, decision making and strategic direction.  Mission Statements on occasion are good, many are bad; most however are ornamental.   In practice, Mission Statements usually suffer from three shortcomings: 1) fail to comply with the requirements of the fundamental business purpose; 2) ambiguous, confused or muddled intentions; and 3) fail to mitigate conflicts arising from private intentions.

Countless words have been devoted to defining the essence of a ‘good’ Mission Statement.  I am going to side-step the trap of opining on what makes a good Mission Statement, suggesting instead a simple test that can (and should) be applied to determine if a business is articulating a viable and useful Institutional Intention.  Ultimately, the expression of Institutional Intention (in the form of a Mission Statement) needs to satisfy:  1) clear and understandable outcomes; and 2) actions and choices necessary to achieve the expected outcomes.  Judging the quality or appropriateness of a Mission Statement is obviously subjective. Nevertheless, it needs to be clear, unambiguous and memorable.  And the business’s actions and choices need to be consistent with its words.

The importance of a clearly stated Institutional Intention is easiest to appreciate by thinking about the audience.   Employees make countless choices (or decisions) every day to carry out individual responsibilities.  Each choice is guided by self-interest, values (personal and institutional) and the Institutional Intention.  Investors and others use the Institutional Intention as the basis for understanding the business, and shape their expectation of the choices and future performance of the business.  Customers consult a business’s Institutional Intentions to differentiate one supplier over another.

This does not mean a well-crafted Mission Statement is a satisfactory expression of Institutional Intentions.  The ultimate test is the coherence between what the company says and what it does.  The effectiveness of the explicit statement of Institutional Intentions (Mission Statement) stems less from the artfulness of its wording and more from its fidelity to actions and choices.  It is this fidelity of the Institutional Intentions to the business’s actions and choices that requires a deeper understanding of the interplay between Institutional Intentions and Private Intentions.

“In this world . . .
It’s Heaven when:The French are chefs, The British are police, The Germans are engineers, The Swiss are bankers And the Italians are lovers.
It’s Hell when:
The English are chefs, The Germans are police, The French are engineers, The Swiss are lovers And the Italians are bankers.”
Hidekaz Himaruya, Hetalia: Axis Powers, Vol. 2

 

Private Intentions

There is no denying or avoiding that individuals have self-interest.  Self-interest, in and of itself, does not necessarily corrupt or compromise a business’s Institutional Intentions.  When undetected or ignored, however, self-interest can and does have a caustic effect on businesses.  Oftentimes, recognizing and embracing self-interest, or as I call it Private Intentions, can contribute to the most desirable outcomes.  Private Intentions that remain hidden often become a caustic force conflicting with implicit Institutional Intentions relied upon by stakeholders, leading to disappointment and conflict.

Sometimes Private Intentions are obvious, such as an individual’s expectations or desires for compensation, title, job security or responsibilities.   Pretending that individuals don’t have self-interests is foolhardy.  It is also naïve to think individuals will subordinate their self-interest to some institution’s “higher good” without just cause or motivation.  A recent example exemplifies the destruction created by a CEO’s self and egocentric interest when allowed to predominate over the interests of the business and its stakeholders.

Intentions at Work

Supreme Construction Services[2] (“SCS”) provided specialized equipment used predominately by commercial builders.  Builders rented the equipment with SCS responsible for delivering, assembling, disassembling and removing.  The CEO, two institutional private equity investors and a lender combined to purchase the company in a leveraged buyout a few years earlier.

SCS understood the customer satisfaction it provided and had an effective business operation.  Additionally, the CEO consistently articulated clearly the importance of earning capital providers a return on the capital furnished to the company.  The Institutional Intention was clear and satisfied the requirements of the fundamental business purpose.  Additionally, the CEO and his institutional private equity investors had a shared and well understood agreement to focus on improving financial performance from the company’s history of modest performance.  On the surface this all seems pretty reasonable.

The CEO, conveniently holding 51% of the ownership, harbored personal intentions and went to extreme lengths to keep them hidden.  The CEO reserved for himself the exclusive and unilateral right to make decisions.  His rigid insistence on hierarchy and deference to his title produced an autocratic culture where obedience was valued over results.  Any dissenting or challenging opinion was an act of insubordination and considered a treasonous violation of the right he held by virtue of his rank as CEO.  His Private Intention (obviously not expressed explicitly) was to rule over a kingdom where he was supreme ruler.

As a practical matter, perpetuating the CEO’s egocentric self-image infected his ability to make the necessary choices to advance business performance. Sadly and unsurprisingly, the bankruptcy filing that followed resulted in a liquidation of the business. The investors and the lender ended up losing nearly everything they invested.

This example is extreme, but an extreme that occurs frequently.  There are other forms of Private Intentions that are valuable to describe that are less catastrophic.

Other Forms of Private Intentions

Founders have Private Intentions when they start a business.  A few examples of these intentions include:  creating a legacy, supporting a lifestyle, producing wealth, retaining control or proving an idea. None of these Private Intentions are inherently right or wrong.  Trouble stems not from the Private Intention but rather from the consequences when Institutional and Private Intentions conflict.  For example, a founder seeking to support a personal lifestyle or retain personal control will eventually encounter conflict with an outside provider of capital who expects investment rewards commensurate with aggressive growth.  The choices or decisions made by a founder motivated by lifestyle or control will not likely harmonize with the Institutional Intentions.  Similarly, the senior executive recruited, based on a founder’s promises of aggressive growth, will be disappointed when the founder is unwilling to relinquish control or authority.

Private Intentions, while legitimate, will influence business priorities.  This influence establishes the “what” and the “how” of the business’s actions.  When intention is inconsistent with other principles, performance will disappoint and failure is likely to follow.

Business performance depends on individuals working collectively and in unison to achieve a common outcome.  Assuring these collective actions requires clear intention and purpose, free of ambiguity and hidden agendas.  Transparent and coherent intentions produce good choices and effective actions.

[1] In the course of this article it may seem that I use “Institutional Intention” and “Mission Statement” interchangeably.  While Institutional Intention and Mission Statement may seem synonymous, they are not.  The Mission Statement is a written expression of the institutional intention.  A Mission Statement may or may not adequately reflect the institutional intentions of the business.

[2]  Out of respect to current and former clients, I fictionalize certain aspects of the business and business name.  Any changes are for the purpose of protecting identity and are not meant to compromise or misrepresent the illustrative value the example.

THE BUSINESS ODYSSEY – The Fundamental Business Purpose

“I went to a bookstore and asked the saleswoman, ‘Where’s the self-help section?’ She said if she told me, it would defeat the purpose.”
― George Carlin

Every business is different. Businesses differ in scale and performance. They differ in what they do and how they do it. Despite the exclusive character of each business there is an underlying principle that each and every business must conform: The Fundamental Business Purpose (Business Purpose). Failing to satisfy this fundamental purpose will result in business failure. This design applies to every business regardless of whether it is a sole practitioner or a multi-national enterprise; whether a start-up technology company or a local pizza parlor; whether for profit or not for profit.

The Business Purpose requires a business to convert revenues and capital into customer satisfaction and return on invested capital. This commonsense idea is tempting to dismiss as obvious and trivial. Doing so, however, will result in failure. The idea of the Business Purpose is illustrated with an everyday analogy – the internal combustion engine.

Every internal combustion engine converts fuel and oxygen into power and exhaust. No matter the size. No matter the application. All internal combustion engines do the same thing. A lawn mower engine does exactly the same thing as the engine found on a Formula One race car. The difference is the application of the engine and the infrastructure required to satisfy the application. No one would confuse a lawn mower engine with the engine found in a Formula One race car.  Nevertheless, both engines do the same thing; just very differently.

Independent of the Business Purpose, each business has an intention – what it intends to do to make money – whether producing a product or delivering a service. Business intention is unique and complicated.  Business purpose is not. The infrastructure required to satisfy the business intention successfully is tailored to each business. Both topics, business intention and business infrastructure, will be discussed separately in future issues of The Business Odyssey.

THE IMPORTANCE OF THE BUSINESS PURPOSE
The simplicity of the Business Purpose does not undermine its importance and significance. The business that fails to satisfy customers will see its revenues eventually disappear. Similarly, the business that does not pay its capital providers for the use of the capital invested will eventually find itself without capital.

Businesses use revenues and capital to produce customer satisfaction and a return on invested capital. The Business Purpose is an essential context for making decisions and is easiest to think of as a diagnostic test. This test applies to any and all business decisions. This test is applied by demanding that all business decisions clearly identify their contribution to customer satisfaction and return on capital.

It is misleading when revenue is confused with customer satisfaction or profit with return on invested capital. Revenue together with capital work together to create customer satisfaction and produce a return on the capital used. Customers trade revenue for satisfaction. Customers don’t pay for a product (or a service); customers pay to solve a problem or satisfy a need. The ideas behind creating customer satisfaction are presented in numerous business books and publications. To explore this topic in more detail I recommend my favorite authors Clayton Christensen, W. Chan Kim, Renée Mauborgne and Geoffrey Moore.  When a lender, equity investor, founder (sweat equity), or a provider of intellectual property contributes capital they do so because they expect to be rewarded with a return.

AN EXAMPLE
Some years ago I worked with a client that had developed a very sophisticated method of performing advanced numerical analysis. This method was used when designing a structure, such as a combat jet, to simulate and analyze its response to all different types of operating conditions. These conditions included mechanical loads, different thermal conditions, or any other kind of physical conditions. The company was staffed with very capable engineers, mathematicians and scientists producing breakthrough methods.

Strategically the company was focused on developing the most advanced numerical methods that could be used in structural simulation and design. The company believed it could monetize its methods by selling a software package to analyze structures. They believed that anyone from aerospace engineers to architects would buy its software package.

Like so many companies I advise, the only thing preventing them from success was more money (There seems to be an uncanny coincidence that all struggling businesses suffer from the same problem, a shortage of money – at least according to operating executives. I can’t help but wonder if there exists a rampant addiction to OPM (Other Peoples’ Money)).

As a consultant or any outsider, it is tempting to point out the obvious at the onset. To do so, however, sidesteps the real value derived from retaining an outsider to provide surgical and temporary guidance. As consultants, my job – the customer satisfaction I need to create — is enabling my client to successfully perform in the future, long after I’m gone. In this case I needed to guide the executive team and the board of directors to think about their business differently. And nothing aids perspective better than the right questions.

Rather than analyze the company’s cash flow or marketing plans or operating budget or capital requirements I started by asking “what is the customer satisfaction you are creating?” This seemingly innocent question turned out to be difficult to answer. The first attempts exposed the executives’ confusion with a description of a market: aerospace companies. Aerospace companies are not the buyers or the users. Aerospace companies employ buyers and users as well as adopt systems prescribing institutional criteria for procurement. My client-executives then identified design engineers and analysts, individuals who would use the product but not necessarily make the decision to buy. With persistent guidance, the executives eventually understood the distinction between the “buyer” (who makes the decision to buy), the “end-user” (who uses the product) and the “influencer” (specialists who influence the decision to buy). In this case a sale would require navigating a complex network of buyers, end-users and influencer (IT department).

Armed with a more accurate understanding of the “customer”, we tackled the concept of satisfaction. Satisfying the IT specialists would require confidence that the software purchased would integrate with other existing systems as well as satisfy reliability, documentation, support, and security requirements. The buyer needed satisfaction that a better product was not available and they were getting the best price. Satisfying the user, on the other hand, would require a user environment that included a graphical interface, the ability to easily use legacy data, and other software utilities. Additionally, my client needed to demonstrate that its technology performed significantly better than current systems and was worth the time necessary to learn to use.

Rigorously working through these questions, the executives began to see that selling the product (creating customer satisfaction) was far more involved than writing software code, and it required satisfying many different kinds of conditions. Creating customer satisfaction was clearly more complicated and costly than forecasting revenues.

This discussion naturally led to the equally important second half of the Business Purpose equation: creating a return on invested capital. The more complete understanding of customer satisfaction exposed the need for significantly more capital than anticipated originally. A detailed financial analysis was not needed to show that satisfying investors’ expectation of a return on capital would be impossible pursuing the original strategy.

Requiring coherence between the Business Purpose and the current strategy exposed the deficiencies of their orthodoxy; or generating the revelation, as I like to say that “we can’t get there from here.” This analysis did, however, reveal a strategy that would be successful: Sell the technology to a company that already had the missing pieces. This strategy not only made sense; it also worked.

The above example is all-too-familiar to many readers. It is a common scenario with an obvious solution, unless of course you’re completely invested in an established strategy. The example shows how testing the fidelity to the Business Purpose reveals not just the land mines but also the feasible solution. The best results are a product of the right questions. And the right questions start with the basics – The Business Purpose.

Hindsight is clearer than foresight, tempting one to think that a strategy of positioning for acquisition is unattractive as a starting point. Had the company considered fidelity to the Business Purpose in its early strategy deliberations it would likely have deployed its capital and its efforts very differently. With no doubt this may have resulted in the need for less outside capital, reduced risk, accelerated the time to a liquidity event, and produced a much better return on capital and fewer sleepless nights.

Executives and directors have a responsibility to ensure that the business satisfy its Fundamental Business Purpose. Doing so with serious and rigorous determination will steer the business on a course away from many of the dangers that can lead to failure and towards a destination of success.

The Business Odyssey – The Struggle

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.

SKILLS

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

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.

INTELLIGENCE

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.