The Rockland Group, Inc.

Management Lessons From Barack Obama

2010-09-29T14:18:00.001-04:00

It has been a 20 months since our young President, Barack Obama was sworn into office. The election in November, 2008 and the inauguration in January of 2009 were heady times. The themes were hope and change for the future supremely marketed by Obama’s election team and eagerly accepted by a populace who had just gone through a global financial collapse and was growing weary from two lengthy wars.

But 20 months after that historic inaugural that same populace is now both disenfranchised with the promised hope and change and polarized along almost every major issue facing the country. In addition, the economy continues to crawl along the bottom of the recession curve with a tenaciously high unemployment rate. What happened? More importantly, are there lessons to be learned here that business leaders would be wise to heed? Let’s take a look.

Barack Obama took over his role as President when the country was in the middle of both an economic and in some ways a political crisis. In business parlance Obama was elected to execute a turnaround strategy for a country (think company) that was facing a crisis of confidence in itself and its institutions. Like many turnaround scenarios he also took over a country that was bleeding red ink. As is often the case the events leading up to this point were the result of years (in this case decade’s) of avoidance style leadership decisions and the use of unsustainable business models to produce artificially positive results (i.e. low interest rates and subprime mortgages).

So let’s take a closer look at some key areas that challenged Barack Obama and see if we can learn some lessons:

• Set Expectations – President Obama was elected in a wave of euphoria and ultra high expectations. The mass media trumpeted this heavily both during and especially after the election. Obama bolstered this by making several sweeping promises such as “No bill will be voted on until it is posted on the internet for all to read for 5 days.” The unfortunate result of this was that the populace was convinced of such high expectations that it became physically impossible for Obama to meet them.

If it took years (or decades) to lead a country (or company) into the need for a turnaround it will not take you a few quarters to fix it. Be realistic with yourself and your stakeholder’s right from the start. You will need their understanding and support to be successful. Ever hire a contractor to do a 3 day remodeling job and 3 weeks later he is still not done? And he has an updated quote for the “unforeseen” additional costs!

• Initially Focus Only On The Highest Priorities – It is obvious that Obama felt very strongly about issues like healthcare and financial reform. However, when you are leading a turnaround your first priority has to be stabilizing the country (or company) financially and operationally to guarantee its survival. Everything else is a lower priority. Even if you try and accomplish these in parallel with lower priority items you dilute focus and increase the risk of failure. The result has been with minimal GDP growth and 9.7% unemployment President Obama has received little credit for healthcare and finance reform and lots of criticism for the lingering economic malaise.

If you tell your board that you are progressing well with that hot new product you really believe in and file for Chapter 11 six months later how satisfied are they going to be?

• Don’t make Enemies Unnecessarily – Turnarounds are hard. You very often have to make very difficult and unpopular decisions particularly if you are trying to alter the behavior of an ingrained culture. However, you will need support (even begrudging support) from most of the key players in your country (or company), especially at the beginning. Nancy Pelosi carrying that huge gavel down the street to the healthcare reform vote was both childish and unnecessary. The fact that Barack Obama let her do it guaranteed a permanent partisan divide. What were the positive outcomes here?

Be firm but gracious as a turnaround leader. This is not easy for anyone. The most successful leaders are respected and followed by everyone, even those with differing views.

• Never Blame Your Predecessor – We all know why you are here. If your predecessor was successful we would not be standing here listening to you. Every time you blame your predecessor for our present predicament you erode your power and our confidence in you. There are no exceptions to this rule that I know of.

• Wisdom vs. Intelligence – President Obama is obviously a very intelligent man. During good times intelligence is a highly valuable trait to help a country (or company) capitalize on its resources. However, during times of challenge or stress (or a turnaround) there is another more critical trait; wisdom. Wisdom is intelligence acquired by years of actual hands on experience. Wisdom is what Captain Chesley Sullenberger used to land US Airways flight 1549 safely in the Hudson River.

Wisdom is having the knowledge of when to build a team of advisors with the experience you lack, and listening to them. This is known as “hiring to your weakness”, and is utilized by almost all successful leaders, especially newer ones. Having wisdom is knowing how to avoid the first four bullets in this article.

The above is not meant to be a partisan criticism of President Obama. I chose him because the President is such a highly visible subject. The struggles that President Obama wrestles with are the same faced by business leaders across the country, especially during challenging times like this. If President Obama had it to do over again I am sure that he would do many things differently. He is hopefully learning many lessons and most of them the hard way which is how they make the most long term impact. If he is open to learning then he is on his way to becoming wise which is the most valuable leadership trait of all in times of high stress. Just ask the passengers of US Air flight 1549.

The Art Of The Turnaround

2010-07-21T09:15:00.003-04:00

Given the continuing economic challenges one of the more popular projects I get to work on these days is the turnaround. Not the pure financial turnaround, as this is not what I specialize in, but rather the nuts and bolts comprehensive company turnaround. Usually this is a company that has seen better days but has diminished over time to the point where its very survival is in question. Over my 30 year career I have been both on the giving end and the receiving end of several turnarounds. This month I want to share a short list of what I have seen consistently work and not work when trying to turn a company around and give it a new lease on life.

Can The Patient Be Saved? - The most critical skills to bring to a turnaround are objectivity and honesty. My first step is always to execute an overall analysis of the company, its market, and its industry. If it becomes clear that the company has deteriorated too far to be realistically salvageable then I present this conclusion up front, along with the supporting data. The news may be unpleasant but is usually not a surprise. It is usually a waste of everybody's resources to attempt a turnaround at this stage. It is better to help the owner quickly explore other realistic options. What is really lousy is when this conclusion "suddenly" becomes apparent to everybody 6 months into a project. My recommendation to business owners is to have the consulting firm present summary data and a plan that convinces you join as an "investor" in this turnaround. Be skeptical and ask lots of "why" questions.
The Playing Field - Assuming the company passes the above test the first area I recommend analyzing is the market. This includes an industry and competitive analysis. This critical step will help set everyone's expectations. If the company is competing in an industry of Fortune 500 gorillas then a realistic goal may be to carve out enough market share to build a solid and profitable small to medium sized company. It is probably unrealistic that the company will become a market leading player. This step may also help identify a viable exit strategy for down the road. The key is to fully understand the playing field and your position on it so a realistic and viable strategy can be developed. I've seen too many turnaround projects begin marching down the road where the owner is expecting one outcome and the consulting firm is aiming for another, usually lesser one.
Start At The Top- One of the most critical first steps in a turnaround occurs in the minds of the employees. You need to consistently tell them that the company they are working for can be a winner, and why! Let them know exactly what you need them to do and that you are there to help lead and navigate the best course. Set realistic expectations; "No, we are not going to drive IBM into the ground, but we are going to grow revenue from $5M to $15M over the next 3 years, and become profitable". Ronald Reagan was a master at this. After the "malaise" of the Jimmy Carter administration, Reagan consistently hit the airwaves, drawing on history and patriotism to convince Americans that their best time was to come. It became a self fulfilling prophesy and resulted in one of America's greatest economic runs. Louis Gerstner did this at IBM. Lee Iacocca did it at Chrysler. Someone needs to do it at your company.
Focus, Focus, Focus - One of the biggest causes of turnaround failure I have seen particularly in small companies is due to lack of focus. During a turnaround it is absolutely critical to identify and focus on the highest priority areas and let the others wait. Resources are always limited and people have limited mental bandwidth. You need to stop any bleeding (financial, market share loss, etc.), stabilize the patient, and then start physical therapy. You cannot work on all three areas at once. Let all employees know what is mission critical and have them focus on and support those first. When those are complete, roll out the next priority items. Don't even let employees waste time talking about lower priority issues during a turnaround; you cannot afford to lose the mental bandwidth.
Houston, We Have A Problem - Every company I worked with or for seemed to have at least one absolutely "essential" worker who is also the employee from hell. While this is always a company culture and morale killer, during a turnaround it becomes especially dangerous. My usual rule for dealing with employees like this is "don't kill the pilot until the plane is on the ground". That is until you have his or her replacement ready. However, if during a turnaround I think the pilot is a suicide bomber I recommend shooting them immediately and grabbing the controls. These types often overtly and covertly sabotage a turnaround project because they are quite content with the status quo and they consider it a threat. You stand a much better chance of a safe landing if the person at the controls at least wants to land safely. It also sends an immediate message to all other employees that the company takes this situation seriously and intends to follow through with the plan. In other words, things ARE different this time.
Smile and Laugh - Seriously. Darth Vader never turned a company around and there is a reason why. Turnarounds are hard, but they can be extremely interesting and ultimately very rewarding. Make sure to stop and celebrate small victories along the way. It has probably been a long time since these employees had anything to celebrate. Use humor and a smile to break tension when appropriate. You are turning a company around. No one is going to die or lose a loved one. Keep things in perspective. You can actually make a turnaround enjoyable. For the first time in a long time people will feel like they have some control. They will feel there is a real goal and, by God, it is achievable. They will feel like tomorrow, although challenging, will be better than today, and will be much better than a month ago. This creates momentum within a company. And like a train rolling down the tracks, momentum is powerful and hard to stop.

These are just a few of the tips I've learned over the years regarding turnarounds. There are, of course, many tactical levels below these which are important, but the list above is where I see most fail. Of all the root causes of company deterioration or failure that I see, human resource related issues top the list. After all, a company is really just a collection of talented people banded together by a common cause.

At The Rockland Group we provide Action. Not Just Advice.

Why You Need To Care About Greece

2010-06-07T11:12:00.010-04:00

The Climb

The three climbers steadily made their way up the rock face. The day was bright and clear and the climb had been great so far. This was the first time that Annie had taken the lead on a climb. Roped behind her were her brother Peter and her father Royce, a world famous climber. They stopped to rest before a particularly difficult and technical part of the climb when it happened.

One of Royce's pitons (a small metal spike driven into the rock to hold the rope) pulled out sending him hurtling off the wall in a freefall. As the rope stopped his fall it jerked violently on Peter and Annie pulling out yet another piton and loosening two more. Since they were all currently on a near vertical face, and Royce was only semiconscious it was impossible to pull him back up. His hanging dead weight was putting a huge strain on both of his children clinging to the wall as well as the remaining pitons holding them all. All climbers know and fear what is called the "zipper". The "zipper" is when a climber falls and his momentum begins stressing both the other climbers and the remaining pitons until one by one they all "zipper" off the wall. As Annie screamed Peter did what was both unthinkable and necessary for the survival of his sister and him. He cut Royce's rope.

The paragraph above describes the opening scene of a movie called "Vertical Limit" made in 2000. Although overly dramatic (as movies usually are) it accurately illustrates the ramifications of a critical debate in the climbing world that has important parallels to today's financial environment.

To Rope Or Not To Rope

One of areas of often heated debate and difference in the climbing world revolves around the discussion of whether climbers should rope together while climbing. One side of the argument states that it is crazy not to rope together. The theory is that if one climber slips and begins to fall the other climbers who are roped to him can arrest his fall, thus saving his life. The other argument is, however, also compelling. This asserts, as the opening paragraph illustrates, that the fall of a climber is often sudden and violent and can put the whole team at risk. Better to lose one climber than the whole team.

The key point here is that the decision to rope together (or not) occurs before the climb begins. You either head up the mountain roped together or not. This forces the decision, in the event of a catastrophe, that you might actually have to cut someone's rope to save the rest of the team. You can guess the psychological and relationship ramifications on the team of that decision.

The Fear Of The Global Zipper

As we all know there has been endless discussion and writing about the creation of a global economy for decades now. This new global economy was going to make commerce seamless between nations and allow all everyone to participate in the new era of prosperity. Well as the saying goes, be careful what you wish for. I believe we truly are operating in a global economy today. The economic and political interdependencies between nations today are unparalleled. In essence, at the start of the climb we made a decision to "rope together" for the benefit of all. As we all know the economic events of the last 20 plus months have forced our "climbing team" to traverse some very treacherous and dangerous terrain. We are both tired and weakened (think debt) by this arduous portion of the climb. What would happen if someone fell?

In essence, Greece already has. The closest climbers to Greece, roped together by the Euro, have had to withstand the stress of her falling off the wall. There has already been debate among the Euro climbers about whether to cut Greece loose or not. The decision, for now, has been to try and pull her back onto the wall. Spain, Portugal, Ireland, and others are also losing their grip on the wall. What if one, or more, of them also fall?

More importantly remember in a truly global economy we are all now roped together. If the Euro climbers start to zipper off the wall the momentum of their fall will be felt throughout the remainder of the world including the major economies of the US, China, and India. Like the climbers in the opening paragraph, we are now in a situation where we both need each other and are a danger to each other. This will force each climber to make a very difficult decision. Stay roped to try and stabilize everyone or cut loose to save yourself.

The ramifications of these decisions, both economically and politically, will be felt for decades.

At The Rockland Group we help businesses navigate through this challenging terrain.

You wouldn't climb without a guide, why manage without one?

Bill Gately
Principal - The Rockland Group, Inc.
(781)-710-4064
bill.gately@rockland-group.com

The Power of Rivalry

2010-04-19T10:14:00.008-04:00

Great Rivalries

It was Friday, October 4, 1957. News leaked rapidly that the Soviet Union had successfully launched a satellite into low earth orbit. It was now official. The Soviet Union was ahead of the United States in the drive to be the first to enter space. Occurring close to the height of the Cold War the reaction in the US was near panic. Repeatedly told that the US Vanguard program was far ahead of the Soviets, the American public was caught totally off guard. What followed was the election of President John F. Kennedy and his bold statement that America would send a man to the moon and bring him back safely. This speech ignited the start of what became known as the Space Race and resulted in some of the most innovative and commercially useful technologies ever produced in the United States, all in the span of less than ten years. And as we all know, we did land a man on the moon and bring him back safely in a time long before hand held calculators and personal computers.

Robert Kennedy had been tracking the illegal activities of Jimmy Hoffa, the president of the Teamsters Union for years. He was determined to bring Hoffa to justice when he was installed as Attorney General under his brother Jack. Hoffa's office at the Teamsters Union was located in Washington D.C. approximately two blocks from the Attorney Generals office. Often when Bobby Kennedy would be heading home late at night he would see the light on in Hoffa's office. He would then immediately turn around and go back to his office and resume his investigation of Hoffa. "If Hoffa was working late committing his crimes then I can work equally late for the American people to stop him", Bobby remarked. Jimmy Hoffa was convicted in 1964 of jury tampering, attempted bribery and fraud in 1964 and sentenced to 13 years in prison.

Sports and Business

It is well known that NASCAR drivers like to pace behind and "draft" off a lead car right up until the last lap of the race. Then they make their move to pass the lead car and grab the checkered flag. Distance runners do the same thing. They like to pace behind a top competitor through the majority of the race and then in a burst of adrenal acceleration they attempt to slingshot past and cross the finish line first. It is well documented that when two top contenders in any sport attempt to pace off each other they often match or beat their individual best performances often resulting in new world records.

It is similar in the field of business. Microsoft and Apple battled it out for years. During their rivalry both companies had a string of incredibly innovative product development launches. On the hardware side Intel and AMD were arch rivals for decades. Again, both companies not only dramatically drove their own technology and product development roadmaps but the resultant exponential increase in processing power drove the entire PC and server industry. The ultimate winner of both of these rivalries was the customer who benefitted from ever cheaper and higher performing computing power. Hertz vs. Avis. Remember "We try harder"? Ford vs. General Motors. You get the idea.

The Exponential Power of Rivalry

So what can the power of rivalry do for your company?

A Healthy Paranoia - When a top competitor is hot on your heels or you're on his you get a constant healthy dose of paranoia. You know at all times that if you slow down or screw up your competitor is literally ready to pass you, maybe forever. When you race without a rival you automatically default to your comfort pace. That is why athletes rarely set records in this situation. Your competitor literally makes you better. It works the same with companies.
Make It Personal - Bobby Kennedy made it personal. When I ran my last company I had a frame hanging on my office wall right in front of my desk. In it was my top competitor's logo, a portrait of their CEO, and a picture of their latest competing product. I respected the CEO in that frame but I wanted to beat him and his company. I studied his strategies and tactical moves and listened to his quarterly investor telecons to better understand his thought processes and weaknesses. Often when I was tired, especially after a flight back from the Far East, I would start packing, look at that picture, and sit back down with renewed vigor. I made him make me a better leader. I paced off him.
Stop Hiding Behind The Company - Have each department of your company engage in a rivalry with your top competitors corresponding department. When I ran a product development group I researched the development group of our key competitor. I educated everyone in our group about our rival groups strengths, weaknesses, and accomplishments. We did not control the company we worked for but we did control our product development group. We challenged each other to develop faster, better, and cheaper products than our rivals. In short, we did not let the product development group work in a R&D bunker within our company but we competed on an open field against our rival group. The results were amazing. Because we were now competing against a rival group in a similar profession it became personal. We were not going to lose. So don't just review project schedules and marketing plans. Instead, have your managers give you a competitive assessment of how their departments are performing relative to their rivals. Most importantly, do the same for yourself, publicly.
Being The Best Is The Most Dangerous Position - One of the reasons I believe that the United States is going through such difficult times is that we no longer have a Soviet Union to focus our attention on and drive our efforts. We lack a comprehensive rival. The same holds true for companies. Most companies (and countries) begin their descent shortly after attaining dominant stature. Lacking a top competitor to pace them they default to their comfort pace which naturally decays over time. By the time they realize what has happened it is often too late. This has occurred from Rome, through Spain, France, and Britain over the centuries. All were at one time global superpowers. When you achieve a dominant market position it is imperative to retain a healthy paranoia and "reverse" draft off your closest rival.

Far too many leaders and managers today hide behind their company's identity and size and allow themselves to toil away in anonymous isolation. There is a security in this but there is no enjoyment or sense of accomplishment for them or their employees. So I challenge you to step out from behind the curtain and onto an open playing field with your toughest rival. Make it personal and make it public so it will hurt if you lose. You will be surprised at your true capability (and your company's) under these circumstances.

Bill Gately
Principal - The Rockland Group, Inc.
(781)-710-4064
bill.gately@rockland-group.com

Maybe It's Time For A Little Twelve O'Clock High

2010-03-24T20:07:00.006-04:00

Twelve O’Clock High

I remember as a kid watching one of my favorite war movies named Twelve O’Clock High starring Gregory Peck. Yes, I am that old. Peck played a Brigadier General named Frank Savage who was assigned to take over a “hard luck” US bomber squadron based in England during World War II. The squadron had been running almost continuous daily bombing raids over Germany and had suffered large losses of both men and planes. The squadron now consisted of very few experienced pilots and bombardiers due to the extensive losses and influx of new recruits. Savage had been assigned to replace the existing squadron leader, a colonel who had become increasingly more vocal in defense of his men and their ever riskier missions. In effect, he strongly sympathized with them and their plight and let it be publicly known.

When General Savage arrived he found a squadron that was sloppily dressed, possessed almost no military decorum, and spent the entire time between missions engaged in endless fatalistic conversations about their dismal conditions. As the time for each mission arrived the pilots and crew went through the pre flight briefing in a sullen stupor and took off believing they would probably never return. More often than not they were right.

General Savage knew he had to act both quickly and decisively if he was to salvage this squadron. He especially needed to preserve the few experienced men he still had left and get the new ones trained as soon as possible. So what did General Savage do?

• Start Inside Their Heads – The first thing General Savage had to do was get this group of men to start believing in themselves and have respect for both themselves and their squadron. The foundation of all successful turnarounds starts in the heads of the key players, especially the leaders.

How You Look - Immediately everyone was ordered to empty their footlocker and start cleaning and polishing all their gear. Boots were shined, brass was polished, and uniforms were pressed. When these men looked in the mirror and at each other they now saw airmen and officers, not just a bunch of guys. The fact that the squadron was based miles from the nearest town did not matter. The people that Savage was trying to impress was each other.
How You Act – Savage then ordered all men to stand at attention while on guard duty, salute when an officer approached, and sit up straight and take notes during pre flight meetings. If two men met in the middle of the night to rotate guard duty Savage was there to make sure they saluted each other and exchanged the appropriate information. Radiomen started using the correct cadence. The operative word was discipline. You will do under stress what you are used to doing routinely.
Keep ‘Em Busy – Every minute of every day not spent on a mission was spent on training and maintenance. Planes were repaired, sights were calibrated, and classes on technique were given by the more experienced men. Practice bombing flights were held almost continuously. Savage pushed relentlessly for better and better performance by both men and machine. No time left for sympathy and pity.

• They Need a Leader Not a Friend – No more small talk and group sympathy sessions chaired by the squadron leader. The men had each other for friendship if they so desired. They didn’t need another friend; they needed a leader, and a strong one. Savage drove his men hard but also made time for private conversations particularly with his more experienced men. In addition to leadership, he was wise enough to know he also needed a relationship. It just had to be appropriate for the task at hand.

• Focus on the Important Stuff – General Savage recognized that there were literally dozens of issues within this squadron that needed work. However, he was wise. He only addressed issues that would help reduce losses of men and planes. Everything else was second priority. His men quickly learned to focus on what General Savage was focused on and also dropped the remaining issues to a lesser priority. There are only so many hours in a day and only so many resources. In a turnaround, you squander nothing until stability is reached. Then you look at priority two items.

• Provide Consistency and Stability – Within a very short time the men of the squadron adjusted to their new reality. They may not have liked everything but they adjusted quickly. Why? Because General Savage’s approach was both consistent and stable. The men knew what to expect because it was always the same, just reinforced every day. They never had to wonder what to expect from General Savage. This allowed them to focus on meeting his requirements not guessing what they were.

• Give Praise, But Give it Sparingly – Everyone loves getting praise. That is unless everyone is getting praise all the time. Then it becomes meaningless. General Savage praised rarely and only for superior results. Like a diamond his praise became something men would expend large amounts of effort to receive because it was both rare and valuable.

The economy has been dismal for quite some time now. Your employees may be demoralized and you may be also. You’ve let more and more things slide as the recession has slogged on. Like the US bomber squadron stuck in the boondocks of England facing an unceasing series of challenges it is easy to feel sympathy for your company, your employees, and yourself. It is easy to resent the unfairness of it all. The unfortunate result of this will be higher losses of “men” and “planes” for your “squadron”.

It might be time for you to implement a good dose of Twelve O’Clock High. If you don’t, just like the colonel, someone might just arrive and do it for you. That is, if there is anything left.

A Very Dangerous Decade

2010-03-01T15:00:00.002-05:00

I don't like the tea leaves at all right now.

I have lived through several of these economic challenges in my lifetime and have studied about and discussed previous ones with wiser people than me who have lived through even more. The consensus I am reaching is that this one is different and potentially much more dangerous. The basic drivers of my increased concern include:

The widespread feeling of mistrust and hopelessness across a large cross section of the global population, especially in the US and Europe. This is partly responsible for the large "underemployment" rate.
Unprecedented and unsustainable debt levels across the globe.
A complete lack of motivational or inspirational political or business leadership across the globe which is vital to ignite an economic rebound.
Continuing large scale greed and corruption within both governments and "too big to fail" corporations while large sections of the population have seen both their incomes and retirement funds evaporate.
The fact that I feel this way may be of little concern or benefit outside of my family and my client base. However, there are now some very wise and seasoned players who are sounding the same alarm. One of them is the subject of this month's newsletter.

The article below was written recently week by Charley Munger, the 86 year old Vice Chairman and partner of Warren Buffett at Berkshire Hathaway. Charley is a legend in investing circles and has seen and studied economic cycles dating back hundreds of years. He was an ardent student of the investing strategies of Benjamin Graham, the father of modern investing strategies. In short, Charley Munger has seen it all and doesn't over react.

Whether you own a business or provide services to those who do you would be wise to read the article below and take it to heart. You and your clients should be preparing now. I think the 2012 timeframe for a crisis event is very realistic. And this has nothing to do with the Mayan calendar!

Basically, It's Over
A parable about how one nation came to financial ruin.

By Charles Munger

In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature's bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island "Basicland."

The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.

Moreover, almost no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property. The one exception was the widespread presence of secured, high-down-payment, fully amortizing, fixed-rate loans on sound houses, other real estate, vehicles, and appliances, to be used by industrious persons who lived within their means. Speculation in Basicland's security and commodity markets was always rigorously discouraged and remained small. There was no trading in options on securities or in derivatives other than "plain vanilla" commodity contracts cleared through responsible exchanges under laws that greatly limited use of financial leverage.

In its first 150 years, the government of Basicland spent no more than 7 percent of its gross domestic product in providing its citizens with essential services such as fire protection, water, sewage and garbage removal, some education, defense forces, courts, and immigration control. A strong family-oriented culture emphasizing duty to relatives, plus considerable private charity, provided the only social safety net.

The tax system was also simple. In the early years, governmental revenues came almost entirely from import duties, and taxes received matched government expenditures. There was never much debt outstanding in the form of government bonds.

As Adam Smith would have expected, GDP per person grew steadily. Indeed, in the modern area it grew in real terms at 3 percent per year, decade after decade, until Basicland led the world in GDP per person. As this happened, taxes on sales, income, property, and payrolls were introduced. Eventually total taxes, matched by total government expenditures, amounted to 35 percent of GDP. The revenue from increased taxes was spent on more government-run education and a substantial government-run social safety net, including medical care and pensions.

A regular increase in such tax-financed government spending, under systems hard to "game" by the unworthy, was considered a moral imperative-a sort of egality-promoting national dividend-so long as growth of such spending was kept well below the growth rate of the country's GDP per person.

Basicland also sought to avoid trouble through a policy that kept imports and exports in near balance, with each amounting to about 25 percent of GDP. Some citizens were initially nervous because 60 percent of imports consisted of absolutely essential coal and oil. But, as the years rolled by with no terrible consequences from this dependency, such worry melted away.

Basicland was exceptionally creditworthy, with no significant deficit ever allowed. And the present value of large "off-book" promises to provide future medical care and pensions appeared unlikely to cause problems, given Basicland's steady 3 percent growth in GDP per person and restraint in making unfunded promises. Basicland seemed to have a system that would long assure its felicity and long induce other nations to follow its example-thus improving the welfare of all humanity.

But even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland's citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called "the bucket shop system."

The winnings of the casinos eventually amounted to 25 percent of Basicland's GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos (many of whom were engineers needed elsewhere). So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called "financial derivatives."

Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts. As a result, almost all foreigners avoided holding Basicland's currency or owning its bonds. They feared big trouble if the gambling-addicted citizens of Basicland were suddenly faced with hardship.

And then came the twin shocks. Hydrocarbon prices rose to new highs. And in Basicland's export markets there was a dramatic increase in low-cost competition from developing countries. It was soon obvious that the same exports that had formerly amounted to 25 percent of Basicland's GDP would now only amount to 10 percent. Meanwhile, hydrocarbon imports would amount to 30 percent of GDP, instead of 15 percent. Suddenly Basicland had to come up with 30 percent of its GDP every year, in foreign currency, to pay its creditors.

How was Basicland to adjust to this brutal new reality? This problem so stumped Basicland's politicians that they asked for advice from Benfranklin Leekwanyou Vokker, an old man who was considered so virtuous and wise that he was often called the "Good Father." Such consultations were rare. Politicians usually ignored the Good Father because he made no campaign contributions.

Among the suggestions of the Good Father were the following. First, he suggested that Basicland change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees-and former casino patrons-to produce and sell items that foreigners were willing to buy. Second, as this change was sure to be painful, he suggested that Basicland's citizens cheerfully embrace their fate. After all, he observed, a man diagnosed with lung cancer is willing to quit smoking and undergo surgery because it is likely to prolong his life.

The views of the Good Father drew some approval, mostly from people who admired the fiscal virtue of the Romans during the Punic Wars. But others, including many of Basicland's prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market-even wild growth in casino gambling-is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when Basicland would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008.

The strong faith of these Basicland economists in the beneficence of hypergambling in both securities and financial derivatives stemmed from their utter rejection of the ideas of the great and long-dead economist who had known the most about hyperspeculation, John Maynard Keynes. Keynes had famously said, "When the capital development of a country is the byproduct of the operations of a casino, the job is likely to be ill done." It was easy for these economists to dismiss such a sentence because securities had been so long associated with respectable wealth, and financial derivatives seemed so similar to securities.

Basicland's investment and commercial bankers were hostile to change. Like the objecting economists, the bankers wanted change exactly opposite to change wanted by the Good Father. Such bankers provided constructive services to Basicland. But they had only moderate earnings, which they deeply resented because Basicland's casinos-which provided no such constructive services-reported immoderate earnings from their bucket-shop systems. Moreover, foreign investment bankers had also reported immoderate earnings after building their own bucket-shop systems-and carefully obscuring this fact with ingenious twaddle, including claims that rational risk-management systems were in place, supervised by perfect regulators. Naturally, the ambitious Basicland bankers desired to prosper like the foreign bankers. And so they came to believe that the Good Father lacked any understanding of important and eternal causes of human progress that the bankers were trying to serve by creating more bucket shops in Basicland.

Of course, the most effective political opposition to change came from the gambling casinos themselves. This was not surprising, as at least one casino was located in each legislative district. The casinos resented being compared with cancer when they saw themselves as part of a long-established industry that provided harmless pleasure while improving the thinking skills of its customers.

As it worked out, the politicians ignored the Good Father one more time, and the Basicland banks were allowed to open bucket shops and to finance the purchase and carry of real securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country's credit was reduced to tatters. Basicland is now under new management, using a new governmental system. It also has a new nickname: Sorrowland.

Charles Munger is vice chairman of Berkshire Hathaway

Control Your Most Precious Asset

2010-01-12T14:32:00.004-05:00

The Warning Light

The cross country flight had been uneventful. The Boeing wide body jet full of passengers had been cleared to descend to 5000 feet. The flight crew was executing a series of maneuvers to bring the plane to the specified altitude when that warning light came on again in the cockpit. The light had come on previously during the flight but the crew was always able to get it to turn off and assumed it was a faulty switch. The pilot decided to put the plane on autopilot at 5000 feet and with the assistance of the co pilot tried to troubleshoot the light in case the warning was real. As the pilot and co pilot tried several fixes to clear the light they heard the flight engineer behind them suddenly shout "Oh my God".

It was the last thing audible on the plane's cockpit voice recorder as the plane slammed into the ground. The NTSB (National Transportation Safety Board) later determined that while fixated on the warning light the pilot had inadvertently bumped the control wheel forward disengaging the autopilot and put the plane into a slight descent. As the pilot and copilot were completely focused on troubleshooting the warning light neither one noticed the plane's descent. The flight engineer noticed too late as he had his own series of tasks to perform in the rear of the cockpit. He had assumed that the pilots were in control. The passengers in the rear assumed that the plane was simply descending into the airport. Everyone on the plane (for different reasons) assumed that everything was proceeding normally until it was too late.

Your Most Precious Asset

Every person has a fixed mental bandwidth capacity. That is, you can only allocate up to 100% of your mental attention on a set of issues at one time. Whatever percentage you allocate to one issue leaves less for any others, including any new and unexpected ones that appear. This is why highly demanding professions such piloting commercial airliners have long employed the use of stringent checklists and regimented routines, especially during unexpected or emergency situations. They help control proper mental bandwidth allocation when stress (or human nature) urges the pilot to do otherwise. If a pilot allows himself to become distracted (i.e. misallocate bandwidth) at a critical time disaster can result as was illustrated in the actual event above. The same phenomena that doomed those pilots (and their passengers) happens every day to leaders (and their employees) of small businesses. They allow themselves to misallocate their mental bandwidth, overly fixating on an issue and often missing new, more urgent information until it is too late.

A good rule of thumb to follow regarding mental bandwidth allocation on a monthly basis for a business leader is:

Global economic and political news - 5% maximum. You want to be aware and current on these events but you have no control over them. Many of them may not have any direct impact on your business. Monitor them only and only increase bandwidth if something occurs that may directly affect your business.

Industry news - 10% is appropriate here under normal circumstances. Again, unless you are a Fortune 500 company you probably have little to no control over your industry. The 10% is allocated to pick up any new events or emerging trends that may affect your business.

Your company - 85% minimum of your bandwidth should always be focused on your business. You do have direct control here and most businesses have many moving parts. Due to the dynamic nature of the above two categories you will need to constantly monitor and then decide what strategic and tactical modifications are warranted as a result of any new events or emerging trends that you believe may affect your business.

Some Additional Tips on Controlling Bandwidth

Always be Scanning - As a business leader you need to make sure you are always scanning the above three areas on a continuous basis. I personally set up a selection of sources via the web and print that I check three times a day. Each scan only takes approximately ten minutes. I only stop and investigate deeper if I see something that may affect my or one of my clients businesses.

Never Fixate - As a business leader you cannot allow yourself to fixate on any issue either external or internal. Your responsibility is to identify the issue, analyze the impact, direct the appropriate resources to act on it, and monitor. This also pertains to internal projects and initiatives. Kick it off, support it, but do not allow yourself to fixate on it at the expense of watching the horizon. If the pilot of the plane mentioned above had identified the warning light issue and assigned it to the flight engineer while he flew the plane the outcome would have been different.

Your Employees Also Have Bandwidth - Your employee's mental bandwidth allocation is set in large part by your leadership and direction. It always amazes me when I see a business leader who wrangles over achieving a 10% productivity improvement and loses 25% of his employee's mental bandwidth (productivity) due to his erratic and emotional leadership style. If your employees are worrying or gossiping you are losing valuable bandwidth. The best way to combat this is with consistent and clear company communication and by having them totally focus on what they can control, the performance of their roles. Keep them focused and keep them busy.

Seek Objective Input - It is impossible for most business leaders to objectively evaluate the economy, their industry, and most importantly their company. They are often too close, too familiar, and too emotionally attached to the outcome to be truly objective. This is not a sign of weakness; rather it is a physiological realty. Especially during stressful and challenging times like this seek out and listen to trusted and experienced objective advisors to help chart your company's strategy and prevent disastrous fixation.

The Rockland Group was founded to address the growing demands being put on today's technology and manufacturing business owners and executives. We recognize you are under increasing pressure to achieve profitable growth in a more challenging global economy.

We understand your challenges because we are not business academics like those employed by many consulting firms who try and "squeeze" your business into ready made template style approaches. Rather, like you, we are experienced operating executives who have actually managed through these types of challenges. And, like you, we have the scars and bruises to prove it. This means we can provide objective, real world experience to help you achieve your goals by creating a powerful partnership backed with hands on business and technical expertise.

Contact: Bill GatelyTel: (781)-710-4064E-mail: bill.gately@rockland-group.com

A Lesson From The Trenches

2009-12-10T19:26:00.004-05:00

Follow The Yellow Brick Road

This week I drove for an hour and a half to take a tour of a company that manufactures vibration devices. These rather simple looking motorized devices sit there and vibrate on the side of dump trucks, rail cars, and concrete forms. Sounds pretty boring, huh? Actually, not really. And if you invest the five minutes it will take to read this article I will let you in on the most potent strategic weapon available to succeed in this economy and the impending upturn.

The first thing you notice when you enter VIBCO is the smiling faces. Not just on the receptionist but on everyone walking by. Huh? The next thing you begin to feel is the energy, even in the lobby. Huh? How can anyone who works in a mature manufacturing company, in this economy, in a state with one of the highest unemployment rates be happy and energetic? One thing is for sure, if I see it so do customers, and suppliers, and other visitors.

The Chisel That Made The Statue

The actual purpose of my visit and tour was to hear about how VIBCO had implemented Lean Manufacturing techniques into their company processes to achieve competitive efficiencies. I spent almost four hours walking around their facility and listening to office workers, assembly personnel, shipping clerks, and machinists enthusiastically explain how they had redesigned their work spaces and processes to dramatically reduce labor hours and inventory costs. One of the things that really stuck out was the degree of business knowledge these employees had regarding financial and manufacturing performance improvements and there affect on the company as a whole.

Although I was certainly impressed with the improvements that Lean Manufacturing had on VIBCO's business it was obvious to me that this tool was not the primary driver of the success of the company I had just toured. To believe this would be like attributing the greatness of Michelangelo's statue of David to the quality of chisel that he used. So if it wasn't Lean Manufacturing, what was it? I believe that the answer lay in a response I got when I questioned one of the VIBCO floor supervisors.

Consultants and Buzzwords

While walking through the machine shop I asked one of the supervisors the following question, "how long did it take before you believed that changing the way you worked according to Lean Manufacturing principles would actually benefit you and the company?" His response was, "at first I figured here we go again, another consultant with another set of buzzwords. The problem was that this guy didn't go away. He came back week after week after week. That's when I knew this was important and real. So I gave it a try."

The Epiphany

Karl Wadensten, President of VIBCO had been home sick when he got the call. A huge order for a major construction firm was in jeopardy. Unfortunately, both Karl and VIBCO had become quite skilled at fire drills. Also unfortunately, this time it wasn't enough. Karl had enough. VIBCO needed to change, he needed to change, and he needed help. Lean Manufacturing would be the lever he would use to navigate the company in a new direction.

VIBCO's Real Story

I promised if you read this I would let you in on the most potent competitive weapon available to succeed in this economy and beyond. As the chisel did not sculpt David alone, in my opinion Lean Manufacturing did not reinvent VIBCO alone. Rather the men behind those tools first had to envision what they wanted to create and then find the right tool to make it a reality. You see the most potent strategic weapon available to succeed in this economy and the impending upturn is leadership. Any vibration device company can implement Lean Manufacturing and probably even achieve similar operational results. But not every vibration device company has a Karl Wadensten.

So what do leaders like Karl do that makes them so effective?

They have vision. George Bernhard Shaw probably put it best. "Some men see things as they are and ask why? I dream dreams that never were and ask why not?" Leaders see things as they could be, share that vision with others, and then take steps to make it a reality. What is the vision for your company?
They are not afraid to publicly admit they don't know everything. When VIBCO missed the big shipment Karl made a decision to change his and his company's behavior rather than silently blame his employees, fate, etc. He did not sit as his desk alone and wring his hands. This takes self confidence, courage, and high self esteem. Could you do this?
They are not afraid to get help. Designing devices wasn't VIBCO's high priority problem, building and shipping them was. Karl is an expert in vibration devices not in Lean Manufacturing so he found someone who was. Do you seek help when you don't have the expertise?
They are enablers. Once Karl found an expert in Lean Manufacturing he enabled both the expert and his employees to move forward into an area that was unfamiliar to him. That takes courage. Do your employees feel comfortable moving forward without your constant supervision and approval?
They walk the talk. If you want your employees to change their behavior, change yours. The machine shop supervisor didn't believe until he saw that Karl was serious enough to remain committed. Do you walk the talk?
They are smart enough to value the whole employee. VIBCO pays an hourly wage to have an entire person on site each day. Does it make sense to just have them use their hands? VIBCO now reaps large benefits by having a fully engaged, intelligent, and motivated workforce. What percentage of your employees capabilities are you utilizing every day?
They're visible and they communicate constantly. Karl sits in an office in the middle of his employees with all glass walls. He can see and hear everyone and they can see and hear him. He is upbeat, highly motivated and a believer in his company. It shows and it is contagious. Guess how much this costs him and his company as opposed to sitting in a corner office out of sight of everyone?

VIBCO has had no layoffs while manufacturing a low tech product in a state with one of the highest unemployment rates in the country. They achieved this by taking market share from their competition as the overall market for their products is down due to the current economic conditions. No wonder the employees are smiling.

Every lesson in this article can be used in your company no matter the industry, product, or service. That's the real leverage of great leadership. It is universal and completely transferrable.

The Real Key To Business Survival

2009-11-12T17:21:00.004-05:00

The Recession’s Greatest Hits

Guess what the following all have in common:

Price Reductions
Headcount Reductions
Lease Renegotiations
Product Cost Reductions
Vendor Term Reductions
Salary and Benefit Reductions
Reducing the Sales and Marketing Budget
Reducing the R&D Budget
Implementing a Hiring Freeze
“Hunkering” Down

Answer: Not one of these will give your company a sustainable strategic competitive advantage.

Don’t believe me. Let’s take a look why.

Mastering the Obvious

Almost all companies when enjoying the benefits of a robust economy and an expanding market begin to introduce numerous operational inefficiencies during their often frantic quest to participate in this growth. These inefficiencies begin to significantly increase a company’s operating expenses but this is often masked and/or not deemed urgent due to the medicinal effect of ever rising top line revenue growth. When the top line suddenly stops growing, or in the case of a severe recession like the one we are experiencing, starts dropping dramatically, the bloated operating expenses can become a hemorrhage to a company’s cash flow and often its very survival. When this happens the company’s leadership often goes on autopilot and begins checking off the list above to quickly trim down the company’s operating expenses. Then many commit a version of potential corporate suicide. They stop! They hunker down to await the signs of the next upturn.

Why Mastering the Obvious Alone Doesn’t Help

Why can I make such a confident statement in the title above? Because there is not one item on the Greatest Hits list above that cannot be quickly copied by your competition. Once an item is effectively copied by your competition your strategic competitive advantage is nullified. Virtually every item on this list can be implemented in a time frame measured from weeks to months. This is not much of a competitive advantage window. Let’s take a look at a well known real world example…with a twist.

Over the last decade the global automotive industry has significantly matured and degenerated into a commodity based price and cost war. Every year body styles and features became less unique as manufacturers strove to achieve economies of scale by leveraging designs across several product lines. The result of this was 0% financing, special “employee” pricing for the public, autos selling at dealer cost, etc. The end result of this was massive and draconian cost reduction programs, excessive cash burn by all participants, and ultimately bankruptcy for some. There was one notable exception.

The Key Competitor

There was one of these competitors who employed another key component in their strategy however. Toyota Motor began development in the late 1990’s on a new fuel efficient power plant for their cars. It was called hybrid technology as it incorporated both fossil fuel and electric technology. When the price of gas hit $4.00 last summer there was only one company ready with a highly differentiated product able to capitalize at the expense of all its competitors, and was able to charge a premium for its efforts. That competitor was Toyota and the product was the Toyota Prius. Since then nearly all other competitors have been scrambling to develop and introduce their own version of hybrid and electric technology. The key advantage for Toyota however is that it will take years for these competitors to catch up. For some it is already too late. And of course Toyota now has leading technical expertise and market momentum to maintain or increase their lead. What was this secret weapon that Toyota employed at the expense of their competition? It was innovation. You see, the great strategic competitive advantage of innovation is that it is not easily copied by your competition. Even if they are able to successfully copy you it will often take years versus weeks or months unlike the items on the Greatest Hits list. This means that your company will have a sustainable competitive advantage for a meaningful time period. What made Toyota unique was that they began development of this technology before its strategic competitive advantage became obvious to others in the industry.

Still not convinced. Can you tell me who the most efficient manufacturers are of the following items?

The pager
The fax machine
The pay phone
The mainframe computer
The tablet PC

Can you even remember? Does it even matter? The fact is that all of the above items were rendered obsolete by an innovative and competitive technology. The same will happen today as we emerge from this severe recession. By the way innovation is not just for hardware, it is also employed by competitors in the service sector. Many have used the Internet, for instance, to innovate new and efficient models to deliver services.

Innovation - The Only Real Sustainable Competitive Advantage

So, after you’ve checked off some or all of the items on the Greatest Hits list don’t stop there. Analyze your industry. Analyze your customers buying behavior. Analyze trends and emerging technologies and how they might be employed to deliver your products and services. Make innovation part of your recession strategy. If you don’t all the cost reduction in the world may not keep you off the next list of Most Efficient Manufacturers of Obsolete Products and Services.

October 2009 - The Pain

2009-10-13T13:05:00.002-04:00

Poor Charley

Charley woke up that morning like any other. He rolled out of bed and then it hit him. Zap. A sharp pain in his side. Ouch, Charley thought, I need to get this fixed as soon as possible.

Charley was a smart guy, and a self made man. He dove right in and starting researching what would cause a pain like this in his side. Bingo, he realized, it is my appendix. Charley booked an appointment with a surgeon and had his appendix removed. The surgery went well and Charley felt better. When he tried to get out of bed however, the pain returned in full force.

Charley dove back in and did more research. Got it, he exclaimed, it has to be my gall bladder. Charley called and booked an appointment with another surgeon to have his gall bladder removed to eliminate the pain once and for all. Again, the surgery went very smoothly. But again the pain returned.

Of course the above story is fictional. No surgeon in his right mind would operate on a patient, let alone remove an organ, based on a simple phone call and a description of a symptom…a pain in my side.

But amazingly this happens every day in the business world. A business owner or manager wakes up one morning and realizes his business is in pain. Because he is smart and more than a bit independent minded he self diagnoses the problem and calls in an expert to treat the specific condition he self diagnosed. As the saying goes “to a hammer everything looks like a nail” so the well meaning consultant dives in to help. Often the result, like in poor Charley’s case above, is that a lot of money and precious time is lost but the pain remains.

So is there a better way? Let’s revisit poor Charley and see.

The Doctor’s Visit

Charley wakes up in the morning with a sharp pain in his side. Ouch, this hurts badly. I need to get this fixed as soon as possible because I have lots to do and cannot afford to lose any time being distracted with this. Charley calls his doctor, a wise general practitioner (GP), and books an appointment for that afternoon. During the appointment the GP asks Charley lots of questions, especially about what and how he eats. He examines Charley. He orders an X-ray of Charley’s side and some blood work. The next day Charley’s doctor calls him and tells him that the diagnosis of his pain is cramping caused by eating too much processed food especially late at night. He sends Charley an instruction sheet on how to correct his diet and a prescription to help with the pain in the mean time. Within a week the pain is gone for good and Charley has more energy and feels better than he has in years. If the diagnosis was different and surgery was required Charley’s GP could have referred him to the appropriate specialist, but this turned out to be unnecessary.

Obviously, the above example was made a bit extreme to illustrate the point. What is not extreme is the amount of money, lost time, and in some cases damage that I see companies experience by skipping the all important diagnosis step.

The Key Step – The Diagnosis

So what key attributes does an advisor have that allows him to accurately diagnose the root cause of a company’s pain?

Objectivity – It is extremely difficult to accurately diagnose the root cause of an issue if you are not completely objective. What if Charley was sensitive about his weight and his eating habits? Do you think this might affect his ability to diagnose his pain as related to eating? What if a business owner or manager considers himself an innovative product developer? Do you think he could objectively assess his company’s challenges in this area? What if he thought of himself as a marketing guru? Or a strong leader?

Clarity – As the saying goes, “he couldn’t see the forest for the trees”. When you are intimately involved and enmeshed in a situation daily it is very difficult to clear your mind of preconceptions and look at the situation from a fresh viewpoint. The same goes for all your other key employees and in some cases your board. You are all literally too close to the situation. A fresh set of eyes can “see” patterns or issues that are right in front of you but blend in due to your familiarity with them. Ever struggle with a puzzle piece and have your six year old walk over and just put the piece in the right place?

Wisdom – It is critical that whoever you bring in have wisdom not just knowledge. Knowledgeable experts tend to be very tactical in their thinking and typically follow a clearly defined one size fits all process, without regard to the specific situation. They often fall victim to the weakness of jumping to a conclusion and then collecting data to support it. Advisors with wisdom have learned (typically the hard way) to first look at the context and personal dynamics involved in the situation (like Charley’s long time battle with eating right). They are fluid in their approach and have learned that although many issues have similarities they affect each company uniquely. They can also reflect on experiences from different industries and company cultures. There is no shortcut to achieving wisdom. It comes from personally experiencing many differing situations and seeing lots of mistakes. It is invaluable in critical situations. Just ask the US Air passengers who safely landed in the Hudson River last January.

Courage – Often times as least part of the issue may reside with the business owner or manager. I find it really does start at the top. How many people have you met in your life who would sit down with a CEO and tell him face to face that their behavior is inhibiting the growth of the company? Tell them straight out that this is correctable but without addressing it everything else will have limited effectiveness. Do you know many CEO’s or managers who could do this for themselves? Do you think anyone on their management team would feel comfortable doing this? Do you think they would listen? My experience is that very few board members will actually do this. One of the key roles that the right advisor can play is addressing this issue. It is probably one of the key leverage points to energize a company’s growth. How do you think the company’s key customers, employees, and suppliers would react if the CEO started managing in a more proactive and empowering way?

One of the rarest and most valuable types of advisors available to a business owner or manager is the wise and experienced general practitioner (GP). So if you wake up one morning and your company is experiencing a severe pain, you may want to find out what is really causing it before you start spending lots of money and time based on a self diagnosis. Otherwise, like Charley, you may just be employing a very painful (and potentially dangerous) process of elimination approach.

The Dangers Of Going It Alone

2009-09-17T13:49:00.003-04:00

The Environment

One of my favorite "leisure time" activities is hiking. More specifically, mountain backpacking. My favorite destination for this fun and challenging sport is the White Mountains of New Hampshire. The White Mountains are not the tallest in the US but they have the dubious distinction of being one of the most dangerous places to hike. They earned this reputation by having one of the most rapidly changing weather patterns of any mountain range in the world. The reason is that three major storm tracks converge at the peak of Mount Washington and are constantly jockeying for position. I have hiked in weather conditions that went from sunny and 70 degrees to 30 degrees with ice crystal laden fog and 10 foot visibility in less than 1/2 hour. More than 135 people have perished hiking these mountains since 1849. Even though I have been hiking these mountains since the early 1970's (yes, I'm that old) and have a full complement of high quality gear there is one thing that I almost never do in the White Mountains...hike alone.

The Winter Hike

When my youngest son was around 16 years old I took him for a winter hike to try and ascend Mount Washington which is 6,288 feet tall. It was late November and there was about 16 inches of snow on the trail at the start of our hike at the base of Tuckerman's Ravine. I knew from watching the weather from the previous two weeks we could expect several feet as we neared the summit. I also knew that we would only have about 8 hours of daylight as the sunset that time of year is around 4:00 PM. Based on that I set a strict turnaround time of 12:30 PM in order to return to base camp mostly in daylight.

The weather as we left base camp at 7:00 AM was partly cloudy with light wind and a temperature of 22 degrees. The sun was just coming up. The forecast called for partly cloudy skies with some light snow squalls and a daytime temperature of 28 degrees. The hike started uneventfully as the early portion of the trail is fairly wide and gradual. The ascent up Tuckerman's Ravine was very steep with lots of ice and snow drifts. Avalanches are always a threat so it is important to always scan the terrain before proceeding and adjust your path accordingly. Another danger is fast running water under what appears to be solid snow. If you plunge through the wrong spot you can wind up soaked up to your thighs which can quickly result in hypothermia. As we hiked up to around 5,000 feet rapidly moving snow squalls started to drop some noticeable snow and reduced visibility at times to less than 100 feet. Then minutes later the sun would shine and you could see for miles.

My son was extremely excited to summit Mount Washington in winter and his excitement increased as it came into view. He was driven to reach the top. At about 11:30 AM we approached the rim of the summit. As often happens the high winds caused the snow to drift deeply into the large boulders that make up the mountain. We found ourselves "swimming" through drifts that were up to our armpits. Snow shoes do not work in this type of terrain so we had no choice. This dramatically slowed our progress and used lots of energy. Finally, we were less than 1/8 of a mile from the summit. I looked at my watch. It was 12:25 PM. I yelled to my son, stop. Let's have a quick snack, drink some water and start down. "What"?, he yelled. "We're almost to the top". "We'll summit another time", I said. "You can't take foolish chances up here. We set a strict turnaround time of 12:30 PM and it is here. Now let's go".

The Descent

The descent was tricky as I knew it would be. The snow squalls continued off and on and as the sun started to set it got cold quick. We kept moving. As we reached the bottom of Tuckerman's Ravine the sun burst out and the sky was completely clear. "You see" my son said, "we would have been fine". "Maybe", was all I replied. For the last hour we hiked in semi darkness. The trail was again wide with a relatively gradual slope but was now almost solid ice as the snow had melted in the sun and immediately froze when the sun set. We were tired but not tired enough to risk injury. We finally reached base camp at 5:15 PM. I could tell by the look on my sons face that he had expended the maximum amount of energy before entering a high risk state. The hike was just enough.

Lessons Learned

So what does this have to do with running a business? Let's see:

Environment - The White Mountains like the economy and the marketplace view you as an intruder. These systems will continue on as they will with little regard for your safety or security. If you are smart you may survive. If you are smart and wise, you may thrive. If you are neither, you may perish. You see it around you every day.

Wisdom - My son was very smart. He was very driven. He was reasonably knowledgeable for his age. However, he had not hiked the Tuckerman Ravine trail in the winter before. He did not know what to expect given the much more challenging winter environment. He had not yet achieved the wisdom that comes from having performed an activity over and over until you can anticipate almost all the unknowns. After our winter hike he began to obtain wisdom. The wisest leaders in the world always seek expert guidance to navigate unfamiliar terrain.

Objectivity - My son wanted to reach the peak of Mount Washington that winter day. He was totally focused on achieving that goal. I was also totally focused that day. I was totally focused on making sure I brought my son up and down that mountain safely. Whether we reached the summit or not was secondary. When we were 1/8 of a mile from the summit I was thinking objectively about our safety. My son was thinking emotionally about reaching the peak. People die up there that way. Companies die down here that way.

Self Sufficiency - If I continued to make my son reliant on me to safely hike the White Mountains I would be doing him and I a great disservice. Rather, I instilled in him the wisdom and knowledge to not only achieve on his own (with hiking buddies) the goals we reached together, but to surpass them. That 16 year old kid is now 22 and just finished hiking the 2178 mile Appalachian Trail from Georgia to Maine. It took him 5 months. When an advisor works with you are you becoming dependent or self sufficient?

So, like the story of my winter hike you are on a high risk journey in very unique and unfamiliar terrain. So I ask you the question. Are you going it alone?

The Credit Crunch is Dead, Long Live the Credit Crunch

2009-08-26T12:43:00.014-04:00

A Little History

As you most certainly recall, last fall we had an almost complete meltdown of the financial infrastructure in the US as well as globally. Banks and investment institutions, some founded over 150 years ago either failed or were on the verge of failure. One hundred year old automotive companies followed suit. Millions of individuals watched a decade of stock market gains evaporate in the span of less than three months. Then came the wave of residential mortgage and credit card defaults as millions of overextended individuals began losing their jobs. Banks reacted by immediately choking off credit to millions of individuals and businesses across the country, effectively grinding the economy to a halt.

Enter the Federal Reserve. The largest of the now crumbling financial and automotive corporations were immediately deemed "too big to fail". Congress rammed through the $780bn Troubled Asset Relief Program (TARP) to immediately begin injecting massive amounts of capital into the crippled financial institutions so they could begin lending again. Through several other monetary tools the Fed further injected trillions of dollars into the financial system to jump start the economy. Since the US is no longer on the gold standard all of this "printed" currency is nothing more than IOU's backed only by the taxing authority of the Federal government. Don't believe me? Prior to 1963 all US currency was printed with the words "This certifies that there has been deposited in the Treasury of the United States $1.00 ($5.00, $10.00) of gold (or silver)". It further stated that this note is "Payable to the bearer on demand". Go ahead check your wallet and see what today's currency says. Well thanks for the finance lesson Bill. What does this have to do with me? Lots.

The Dirty Little Secret

You see the dirty little secret of the economy is that the credit crunch is alive and well and living in millions of households and small businesses across the US. The TARP money was largely used to rebuild the balance sheets of the large financial institutions and almost none of it is flowing through the small businesses and households that drive the economy. It would be great if you bought stock in Bank of America back in March at $2.53 per share. It is now at $17.85 (+705%). Citigroup was at $.97 in March. It is now at $4.81 (+496%). Why do you think these stocks have rebounded so sharply? Do you think it is because these institutions are out lending to small businesses and individuals to help drive the economy? Or do you think they are using the TARP money to boost their capital ratios by covering write downs of impending commercial loan and credit card losses? Has your business rebounded like this? Has your family situation? Unfortunately, sector driven stock rebounds will do very little to drive an economic recovery which has historically been powered by small businesses and consumers.

You see the real dirty little secret of the economy is that other than spreading huge amounts of liquidity across the financial landscape almost nothing has been done to address the systemic issues that caused this crisis in the first place. Lest you think this is a political diatribe these systemic issues have been building and worsening for over ten years under the regimes of both Alan Greenspan and Ben Bernanke.

View From the Trenches

So as a consulting firm that works specifically with small and medium sized privately held business what am I seeing to back up my claims?

Credit Cards - Rightly or wrongly many private business owners utilize credit card lines as an emergency fund for unexpected business issues. Unfortunately, over the past several months banks have been reducing credit limits and/or raising interest rates on millions of credit worthy customers. I have seen small business owners with a $25,000 limit, who are carrying a small monthly balance to keep the card active, and never missing a payment, suddenly have their limit dropped to $5,000. The explanation by the bank is that they are reviewing their risk portfolio on all accounts and have decided to reduce the line. End of discussion. This eliminates a valuable safety net for many business owners who may have used that line to bridge a short term cash flow issue. In addition, this has an immediate negative impact on their FICO score (see below). Much of this is being driven to beat the new regulations coming out of Congress regarding credit card consumer rights. It is choking off the consumption ability of millions of individuals and businesses.

FICO Scoring - A FICO score is the nationally recognized numeric scoring standard of an individuals overall creditworthiness. The score ranges from 300 to 900 and is affected by making late payments, the percentage of total credit being currently utilized, and the number of credit inquiries. A new version of this system called FICO 08 has been implemented which offers some forgiveness for small late payments but is much more punitive in the other areas. For many individuals their FICO score has dropped with the introduction of the new standard. A privately held business owner's personal financial status is increasingly being evaluated by banks when determining businesses creditworthiness. Many banks are now requiring personal guarantees by business owners rather than accepting the backing of assets of the business alone. With the personal FICO scores of millions of business owners dropping due to the above situations many are now effectively locked out of acquiring capital for investment. Oh, and by the way, if you do apply for a loan and are rejected, your FICO score will typically be negatively affected, effectively putting you in a death spiral as your existing creditors react to the newly dropped score.

Existing Loans - Many businesses with existing loans in good standing are being inundated with calls and requests for updated business and personal information from the lending institutions. Much of this is due to the weakened status of the lender and has nothing to do with the business owner. However, the business owner now has to spend much of his valuable time to generate and report this extra information to try and maintain a reasonable working relationship. Of course, the same business owner knows that his chances of securing additional credit from this lender is now zero. This is a scary position to be in.

What I am seeing on this topic could easily fill a book. In respect of your time let me try an quickly summarize.

Many business owners would like to hire or make small capital investments but feel they are under constant financial attack and are therefore reticent to even seek funds. These same business owners also feel the same way on a personal level and are not making home improvements or buying cars because of it. Some no longer even qualify for college loans for their kids.

Many business owners are finding their personal and business creditworthiness more intertwined and are leery of the personal risk this entails.

There is growing feeling of helplessness as many do not feel they are in control of their own destiny. This is largely driven by the perceived arbitrary and random nature of credit line reductions, interest rate increases, and information requirements. Worse, there is no end in sight.

The pendulum was clearly too far in the lenient direction over the last ten plus years. That is what produced the bubble that made that loud popping noise last fall. However, the answer is not to swing the pendulum to the other extreme but to land somewhere in the middle. It is time for the financial institutions to really end the credit crunch and stop covering their ass-ets. That is what are TARP tax dollars were allocated for. More importantly, it is time to address the systemic issues that caused this situation in the first place.

The key to survive and even thrive in the mean time is to work creatively and innovatively to navigate through this boulder strewn economic and financial terrain. The standard methods such as bank loans and lines of credit aren't working right now and probably won't for at least another year. However, there are assets that both you and your company possess that can still give you maximum competitive leverage. Couple these with the right trusted navigator and you can leverage this situation as an incredible competitive advantage.

* If you are a private business owner or manager who is struggling to navigate today's economic climate contact us for a no obligation, initial consultation on how we can help.

* If you know of someone who may benefit from this newsletter please feel free to forward a copy. If you would like to receive your own copy visit www.rockland-group.com to sign up.

Bill Gately - Principal

Where Have All The Leaders Gone?

2009-07-14T14:17:00.006-04:00

Last summer I picked up a book written by one of my favorite business leaders, Lee Iacocca. The name of the book was Where Have All The Leaders Gone? It was written in the trademark gruff, no-nonsense language that Lee was known for during his decades of leadership at Ford and Chrysler.
Not surprisingly, the book received very little press and never made any best seller list. After all, who cares what a retired 80 year old auto executive thinks. But as I watched the debacle late last year put on by the current "leaders" of the automotive and banking industries I went back and read the book again. The contrast couldn't have been more stark.

I think Lee Iacocca has a very valid question. Where the hell have all the leaders gone? Read on.

Where Have All The Leaders Gone?

What Happened?

I don't know about you, but I grew up absolutely enthralled with learning how to run a business. I would devour biographies of all the great business leaders to learn about their backgrounds, their families, their education, and more importantly how they developed their leadership traits and skills.

My heroes were business leaders like Andrew Carnegie (US Steel), Alfred Sloan (General Motors), Thomas Watson (IBM), and Henry Ford (Ford Motor). While I was gaining my own experience during the 70's, 80's, and 90's there were still leaders who possessed the type of courage and skill that allowed them to successfully build their companies as well as the country. These included leaders like Jack Welch (GE), Warren Buffet (Berkshire Hathaway), Lee Iacocca (Chrysler), Lou Gerstner (IBM), Bill Gates (Microsoft), and Gordon Moore (Intel). I admired and studied them all. Today, I look around and wonder where they all went. More importantly, I look and look and look but I cannot find this caliber of business leader today. What happened?

Leadership by Example

On September 7, 1979, The Chrysler Corporation petitioned the United States government for $1.5 billion in loan guarantees to avoid bankruptcy. At the same time former Ford executive Lee Iacocca was brought in as CEO. After securing the loan, Lee Iacocca immediately hit the airwaves rallying every American with the phrase "If you can find a better car, buy it". He was personally featured in Chrysler's commercials so people could see and get to know who was running the company. This had never been done before. He worked non-stop to build confidence in the future of Chrysler, primarily through their newly introduced K-car series. To combat the perception of Japanese manufacturing superiority articulated by Sony CEO Akio Morita in his book "Made in Japan", Iacocca countered with his own book "Talking Straight". By 1983, the loans were fully repaid, several years ahead of time, resulting in a profit of $350 million to the U.S. government. This was true leadership by example and the result was impressive.

Fast forward to November, 2008. The CEO's of Ford, General Motors, and Chrysler sit in front of the House Financial Services Committee and are brow beat for 3 hours for flying to Washington instead of driving. All three sit there with their heads down and say virtually nothing save for a weak apology. For the next set of hearings before the Senate Banking Committee they all drive. Does anyone even know the names of these CEO's? Maybe you remember the name of Rick Wagoner, the former CEO of GM because he was publicly fired by the President. Did this public display instill confidence in the future of these companies? Did this make you want to go out and buy a vehicle from one of these companies? How do you think the employees felt as they watched their CEO get publicly flogged and not even put up a fight? Do you think that engenders respect and inspires motivation? Have you heard from any of these "leaders" since last November? Why?

Ditto for the "leaders" of the major banking institutions.

So What's Missing?

So what's missing in these modern "leaders"? Here are some of the key ingredients I believe that go into making a great business leader.

Integrity - Start with honest and worthwhile motivations. Leaders with integrity are not motivated by lofty titles and building personal wealth. They are motivated by building a high quality organization that provides real and lasting value to its customers, its employees, and its community. The title and wealth are a bi-product of this not the goal.

Vision - True leaders are creative and innovative. They are not P&L jockeys. They create new businesses and new ways of doing business. They accomplish this by outlining and articulating a clear vision of where the company is heading. Then they allow their talented employees to execute, making sure they have the resources, and running block on distractions that will derail progress. The leader identifies the destination point. The employees decide the actual path to get there.

Courage - Arrogance is selfish and unsubstantiated confidence. Courage is doing what is right, when it is right, and personally absorbing the repercussions. Courage is taking a calculated risk because it is necessary to make your company great. Courage is telling the Senate Banking Committee that you will be flying to Washington because your time is extremely valuable especially now and that you don't have time for meaningless displays of public apology.

Communication - Leaders must communicate clearly, honestly, and often. Forget the sound bites and mumbo jumbo. Real leaders don't need scripts and TelePrompTers. Speak clearly and honestly up and down the food chain. If something is broken, identify it, own up to it, and fix it. This is doubly important regarding bad hires. Keep everyone updated and do it often. Good news or bad lay out the facts. When people have to guess everyone loses productivity.

Passion - You must have passion and conviction for what you do, and more importantly for what you believe in. Passion is infectious. It allows people to believe they can accomplish what others think is impossible. Don't even try to fake this. You won't have the stamina to fake it for long and everyone will know. All great company builders had passion. Leaders without passion are incredibly uninspiring.
So look at the list above and then look around. I don't see too many leaders today that are strong, courageous, visible leaders of their companies. We have numerous templates that successful leaders have created for us to emulate.

But there is one more key ingredient that may be missing. Desire.

Bill Gately - Principal

Watch Out For The Bogeymen

2009-06-23T13:40:00.003-04:00

Here at The Rockland Group we are refining our focus.

We are dedicated to being a relentless and trusted ally for the owners of privately held small to medium size companies. Our goal is to help owners build their businesses and eventually successfully exit them to reap the rewards of their years of effort. Hence, our newly introduced service mark, Building Better Businesses (SM).

This months newsletter is targeted toward exposing some potential threats lurking in today's economy that get little attention in the daily press but we feel pose one of the greatest potential dangers to our clients future. These are the Bogeymen. Read on.

Watch Out For The Bogeymen

The Realist

Some of my clients are optimists. Some of my clients are pessimists. Me, I am a realist. Two of the most valuable assets I bring to the table are objectivity and realism. Although I tend to be optimistic by nature I am always on the lookout for economic, political, and business forces that can quickly and/or dramatically change the landscape. The ones I watch the closest are the ones that my clients and I have no inherent control over but must be prepared to react to immediately should they occur. This can only successfully be accomplished if there is a rehearsed contingency plan in place. What I never do is deny their existence or adopt a "what can you do?" attitude toward them. These forces are much too dangerous for that. I call them the Bogeymen.

As I write this we are heading toward the end of Q2 with the economy seeming to have bottomed with an expected upturn beginning in the second half of the year. I, like many, believe this is the most probable path to recovery. However, I am also watching several Bogeymen lurking that could dramatically alter this timeline. Let's take a look at some of the most dangerous and influential.

Terrorism

Without question the most dangerous and influential Bogeyman today is terrorism. In the 1960's and 70's a terrorist act consisted of some person or group who would hijack an airplane and hold hostages or demand to be flown to some foreign country. Other than for the unfortunate people directly involved these acts had little lasting impact on the world economic and political scene.

As we all know since September 11, 2001 modern terrorism can have a much greater global impact. Even though the global economy in 2001 was in much stronger condition than it is currently this one terrorist event set it back for two years.

Fast forward to 2009. We are now facing imminent potential threats from North Korea, Iran, and Pakistan that could all include the use of nuclear weapons. What do you think the impact on today's fragile global economy would be if even a limited nuclear crisis occurred? What about another 9/11 like incident, particularly on American soil? Today, these are very real and imminent dangers that you must monitor and be constantly prepared to weather.

US National Debt

As a business owner how would you feel if the total amount of debt your business owed was over 80% of your annual revenues? How would you feel if a large portion of this debt was held by your main competitors? How would you feel if your main competitors had the option on a monthly basis to purchase or not purchase your debt obligations, and this affected the interest rate you had to pay? That is the situation the United States government is in right now.

The Bogeyman here is that the US government is no longer in control of many key interest rates. The Fed can still set internal rates such as the prime rate and the discount rate but as evidenced by rising mortgage rates they can no longer directly control many key rates that affect the economy. One of the reasons the Fed drastically reduced the prime and discount rates was to drive down mortgage rates to revive the housing market. Although these rates are near zero mortgage rates have been rising as these rates are now being driven more by external forces such as the purchase of our debt by countries like China and Russia. It will be very difficult to manage and predict the economy if key interest rates are subject to the actions of outside interests. Hence, the Bogeyman.

The US Dollar

The value, and hence the exchange rate, of the US dollar has always been somewhat subject to outside influence and perception. This is particularly true as the dollar has historically been looked at as a safe haven in times of crisis. However, this is not so true today.

First, the national debt as outlined above has increased the perceived risk of the dollar by some countries which has resulted in a decrease of the dollar vs. foreign currencies. Second, and more ominously the dollars value can be deliberately moved by the purchase (or not) of our securities used to fund the growing national debt. This means that the ability of the US government to maintain or manipulate the value of the dollar versus foreign currencies, particularly that of China and Russia, are greatly diminished. In addition, both of these countries are now calling for a review of the use of the US dollar as the standard global currency. Our negotiation strength on currency valuation with these countries is at an all time low. Hence, the Bogeyman.

What To Do

The first step you need to take as a business owner or manager is to become aware and at least basically educated on these issues. It is easy, especially in difficult economic times to adopt a tunnel vision mentality and only concentrate on your local business or industry issues. However, we are now truly in a global interdependent economy and you can no longer allow yourself this luxury. All of the Bogeymen outlined in the above paragraphs share a common trait. Both you and the US government have very little to no control over their direction. This is historically new ground for our country. This gives rise to other potential Bogeymen such as oil prices and inflation in general.

All of the above issues can have a dramatic affect on both your business and personal future. You need to recognize that you have almost no direct control over any of them but you do have direct and total control over how you prepare and react to them. In many cases this may determine your very financial and business survival.

* If you are a small to medium size business owner who could use some objective and realistic advice to help navigating this challenging terrain visit The Rockland Group. If you know of someone who would benefit from this newsletter please feel free to forward a copy to them.

So You Want To Sell Your Company

2009-05-31T09:10:00.006-04:00

Your Neighbor's House

We have all lived in a neighborhood where all of a sudden one of the houses owned by a long time resident starts undergoing extensive improvements. Suddenly there are new windows, a new roof, new paint, some landscaping, etc. Within a few weeks the house and property look better than they have ever looked in the 10 years that you have lived there. As soon as the repairs go beyond what would be deemed "normal" what is the first thing you think? What is the first thing all of your neighbor's think? I wonder if the Jones's are going to sell, of course.

What I always wondered was why does someone wait until they want to sell a house before they do all the wonderful things that now make it look so beautiful and enjoyable to live in? Why would they allow themselves to miss out on 10 years of living in the house in its current high quality state?

The fact is that almost of all the things that your neighbor would do to improve their home to increase enjoyment and decrease maintenance will also allow them to achieve a higher selling price and a faster closing at time of sale. So, in essence, they get to enjoy the benefits for many years and then get to enjoy them again at time of sale. Not a bad proposition.

Your Business

So, now let me ask you the same question about your business. Why would you wait to do all the improvements that would increase enjoyment (profits, more free time, etc.) and decrease maintenance (losses, increased stress, etc.) until you are ready to put the business up for sale? Why cheat yourself out of a decade or more of these benefits when you can take advantage of the same proposition as your neighbor cited above? Because, as with your neighbor's house, most of the improvements that will optimize your business will also yield the same benefit both during your ownership and at time of sale. Skeptical? Let's take a look at the top candidate improvements that I typically see.

Succession Planning

One of the key areas that you need to have completed at time of sale is succession planning. Obviously, if you are selling the business you do not plan on staying around to run it, other than for a brief transition. The new owner will pay the highest valuation for a "going concern", and that includes leadership, preferably a management team and not just one individual. So let's say that you address this issue now instead of waiting until you want to sell. What are the dual benefits of addressing this issue?

You are not tied to the day to day operating details of the business. You can use your newly acquired free time to focus on strategic or growth opportunities, both of which will benefit the business. You could also utilize this free time to pursue other interests knowing the business is in capable hands. You may not have to sell the business now to have time for these pursuits.
New blood. Let's be honest, no matter how passionate you are about your business after 10 or 15 years it gets routine and it's easy to get tunnel vision. Bringing in the right successor can inject new energy and new ideas into the business.
A strong management team as opposed to a sole leader, no matter how brilliant or experienced, brings a variety of ideas and perspectives to the challenges facing your business. That is why prospective buyers will pay much more for businesses that have one.

Clean Financials

Almost nothing sours a business sale quicker than messy or inaccurate financials. What are the dual benefits of addressing this issue now?

You will have accurate information on the actual health of your business. Messy financials, like a strong pain killer, can mask a serious condition that needs to be addressed. You need to know your actual expenses, which products are profitable, and whether that new salesman is worth the investment.
Financials are the first representation of your company that a potential buyer will see. Their initial valuation will be determined by what they see.
It is easier and less costly to maintain clean financials.
Piece of mind. You will know where you actually stand.

Product Portfolio

Most of the companies I see have too many product offerings given their size and resources. Many of these are legacy products that are still being carried due to the misconception that the more products you offer the larger and more competitive your business appears. What are the dual benefits of addressing this issue now?

Every product offering, even an inactive one, costs money to maintain. These include costs for documentation, accounting, marketing, and inventory. Discontinuing these obsolete or unprofitable products now frees up valuable resources that can be used to develop new products or improve existing ones. You will get negative credit during due diligence for carrying unprofitable legacy products.
By focusing your business on fewer products you will greatly increase your chances of becoming a leader in the market segment.
Cleanse your inventory of obsolete components for these products and utilize the valuable floor space for a profitable activity. Lower inventory is easier and less costly to maintain and reduces working capital requirements. You are not going to get credit for these "assets" during due diligence anyway.

These are just a few of the typical candidate areas for immediate improvement that I routinely see. You can add to the list based on your particular business and industry. The point is that the very things you can do now to improve your business are in many cases the very things that will be valued by a potential buyer. Because, what buyers really value and will pay a premium for is a clean, well run business, with a management team in place to continue its successful operation.

Is that really much different from what you value?

Brains + Guts = Opportunity

2009-04-28T22:01:00.004-04:00

Brains + Guts = Opportunity

The Biggest Opportunity Of Your Lifetime

Although you probably don't realize it you are probably living in the midst of the greatest opportunity in your entire lifetime. That's right, the greatest opportunity. Right now as you read this, entire industries are being transformed, entire markets are undergoing fundamental long term shifts, and the global economic system is being restructured and reorganized. What this means as an individual and as an owner/manager of a small to medium sized business is that for the first time in decades perhaps in your entire lifetime, you have a strategic competitive over larger, and better capitalized competitors. Let's explore why this is so in more detail.

Herd Mentality

I think we all know how common herd behavior is. We see examples of it all the time. Remember when people were sleeping outside Walmart to get their child a Tickle-Me-Elmo doll? Same thing when the i-Pod was first released. This type of herd behavior is fairly harmless. But what about when someone calls their broker in a panic and tells him to sell all of his stock holdings and put everything in cash? Even worse, their only justification is that all of a sudden the stock market started going down and the media is all negative. They just dump all their stocks without regard to individual performance or circumstances. How about when a business owner slashes prices because they are afraid of losing customers, but have no actual data to support this fear? Or they cut the marketing budget in the middle of a recession because they feel the need to cut costs, any costs, without truly understanding the ramifications.

Now let's suppose you don't follow the herd. Let's say when everyone was dumping the stocks of the Big Three (General Motors, Chrysler, and Ford) last Fall; you calmly analyzed the situation and realized that Ford was not in the same situation as the other two. Your analysis shows that Ford is not taking government bailout money. Ford has five new vehicles out of the top ten with the highest design ratings. Ford has just tied Toyota and beat Honda for the first time ever in overall J.D. Power vehicle quality ratings. And Ford has used the specter of an impending Chapter 11 filing of General Motors and Chrysler to negotiate huge concessions from the UAW and its bondholders. For the first time in its 102 year history all stakeholders in Ford have a vested interest in its stock price increasing. At the height of the panic selling in November Ford is selling for $1.26 per share. So armed with your knowledge, and in spite of the herd, you act decisively and purchase a large block of shares. It would have taken guts to buy this stocks back in late 2008 when all the headlines were uniformly gloomy. Well as I write this newsletter, Ford is now selling for $5.12 per share, a 406% profit in five months! What if you did the same with the bank stocks that were all being dumped equally? That is, you kept your cool and analyzed each one on its own merits. If you decided that Bank of America, Goldman Sachs, and JP Morgan were fundamentally in a different situation than Citigroup, you would have profits of 287%, 235%, and 146% respectively. The point is not to teach you how to buy stocks. The point is to demonstrate how damaging and dangerous it can be to blindly follow the herd. And more importantly how profitable and successful you can be by remaining calm and looking for once in a lifetime opportunities in the midst of chaos. This same lesson can be applied to your personal life and the management of your business.

Some tips:

Keep the long view. Everything happens in cycles. This is not the end of the world.
Ask yourself what has really changed and how permanent is it?
Do I need to act right now?
Have I validated my initial analysis of the situation?
Which direction is the herd traveling and why? Does a contrarian approach make sense?
What opportunities are being created by this situation? How can I capitalize on them?
A calculated risk is acceptable. Gambling is not.
Don't ever try and time events. Base all strategies on the long term view.

Brains And Guts

As an individual or a small to medium sized business your biggest strategic competitive advantages are speed and flexibility. In essence you can analyze a situation, evaluate your options, and change direction in the time it takes your largest competitor to schedule a management meeting to even discuss the issue. The politics of actually reaching a decision will slow them even more. In general, people who work in large companies do not like to take risk. That is why they work there in the first place. Therefore, many large companies will remain frozen in place during times like this as there is no clear, low risk alternative immediately visible. This creates a great opportunity for the smaller company that has identified a fundamental shift in the marketplace and has the guts to make a decision and act on it. This was evidenced during the early 1980's recession (which was as deep and long as the current one) which witnessed the birth of both Microsoft and Apple. Their larger competitors were not as decisive and it cost them. Remember Digital Equipment, Data General, and Wang Labs?

It's Your Opportunity

I actually look forward to times like these. It is like someone bangs the chessboard and all the chess pieces get rearranged. This creates great personal and business opportunities for those who are prepared and can calmly analyze their options and opportunities. Some thoughts to help get you moving in the right direction:

There will be less competition. Many of the weaker players in your industry whose presence only served to drive down prices will not make it.
Many larger companies are currently understaffed and have a demotivated work force. In addition, as outlined above they will typically not adapt very quickly to changing markets. This gives you a keen competitive advantage. Capitalize on it now as it will not last forever.
The depth and nature of this downturn will produce lasting structural changes including:
More conservative, risk adverse behavior by people and businesses.
Less assumption of debt.
Higher savings rates.
Less trust of individuals, companies, and governments.
More pragmatic purchasing behavior. Less bells and whistles are better.
Smaller and local perceived as safer than larger and global.
There will be a major scramble for talent as the upturn becomes apparent. Many companies cut too deep in key areas. Also most businesses cut at almost exactly the wrong time. That is why unemployment is a lagging indictor.
There will be some great fire sale prices on quality businesses. When the upturn becomes apparent there will be a surge in M&A activity. If an acquisition makes sense don't wait.

So, you are in the middle of what may be the greatest opportunity of your lifetime. If your only goal is to hunker down and survive you will probably be successful. If your goal is to take full advantage of this fantastic opportunity that will take brains and guts. Because one rule never changes. Nothing in life that is worth achieving is ever free.

What Is Your Purpose?

2009-03-25T19:47:00.006-04:00

What Is Your Purpose?

What would you say if you were at a party or a networking event and someone asked you "what is your purpose?" What would you answer? Would you even understand the question? I can tell you from first hand experience almost everyone looks at me quizzically, may ask what I mean, and then eventually tell me their job function. Oh, I am an attorney, a CPA, an entrepreneur, etc. So, what would you answer if I asked you "what is your purpose?"

What Is Purpose?

To understand purpose let's put it in context. There was time in America that people founded and built companies to last "forever". In some cases they actually achieved this goal. Companies like Johnson & Johnson, Ford, IBM, and others have withstood the test of time and have adapted and survived decades of tumultuous change while thousands of other companies have come and gone. Jim Collins and Jerry Porras wrote about this phenomena in their best selling book, Built to Last. So what made these companies different? In a word these companies were founded with a purpose.

Johnson & Johnson actually wrote their purpose in a credo they published just before going public in 1943. It has remained unchanged to date. There are four groups that the company pledges to satisfy. It specifically states that the company's first and primary responsibility is to the doctors and nurses who are trying to alleviate a patient's suffering. Next come their employees, then the local community, and lastly, the stockholders. Despite prioritizing their stockholders last this company has been in business for over 120 years and has been one of the best and safest long term stock investments in the US. How can this be?

Henry Ford did not decide to found an automotive manufacturing company to flip it for a quick profit. Henry Ford wanted to bring the freedom of the open road to the American masses. He also wanted to pay his employees enough so they could afford to purchase and enjoy the automobiles that Ford was producing. The brilliant concept of the assembly line was a byproduct of this goal not the other way around. The Ford Motor Company succeeded in putting America on wheels, transforming our culture, and in large part driving the industrialization of the country.

What do companies like Johnson & Johnson and Ford have in common? In short, they have a purpose. Johnson & Johnson's purpose is to alleviate pain and suffering for its customers, period. That is why the company exists. Everything else is secondary. Ford wants to provide the freedom and independence of automobile ownership to the average American (their customer base is now more global). Having a purpose allows these companies to retain a directional focus even during challenging times like we are living in now. Perhaps, that is why Ford is the only US auto maker not seeking or requiring a bailout. Companies without a purpose tend to shift and drift as conditions change, losing focus and often their entire corporate direction. The results of this often prove fatal.

Companies aren't the only entities founded with a purpose. The United states of America was founded with a purpose. Instead of writing it in a credo like Johnson & Johnson, it was written in a document called the United States Constitution. Any time this country faces difficult challenges its current leaders always refer back to this document written by the founders over 200 years ago. It is the most distinct competitive advantage we have over every other country in the world and it is over 200 years old. How powerful is that?

The Compass

Did you know that you only need one piece of information to avoid being lost anywhere in the world? It's true. Do you know what it is? The answer is True North. If you know the direction of True North you can navigate toward a safe location anywhere in the world. Purpose is True North. If you have a purpose you can also navigate toward a safe location at any time and from any place in the world. The reason for this is that True North, like true purpose never moves. Although the path you travel may vary your point of reference never does. This is a powerful concept that can allow you and your company to navigate past less fortunate entities that do not have this reference point.

It's Not Just For Companies

The true power of purpose is that it works just as effectively for individuals as it does for companies. In fact, all "built to last" companies were launched based on the personal purpose of the founder or founders as noted above. So whether you are looking to launch a "built to last" life or a "built to last" company it all starts with you and your stated purpose. The purpose of the The Rockland Group is clearly stated on the home page of our web site. It is the first thing I want our customers to see. It is based on my personal purpose of wanting to help people by providing them use of the skills I was lucky enough to learn over my life time. Everything we do is based on fulfilling this purpose. This True North makes it much easier for us to maintain focus and navigate through these challenging times.

Now, what would say if you were at a party or a networking event and someone asked you "what is your purpose?"

Jumping Freight Trains - Are You Ready For The Upturn?

2009-02-10T13:49:00.009-05:00

Jumping Freight Trains

Are You ready For the Upturn?

When I was younger part of my often misspent youth involved hopping freight trains. My buddies and I would camp out in the White Mountains of New Hampshire and hop the freight train that ran back and forth from Burlington, Vermont. What, you ask, does hopping a freight train have to do with making sure your business is ready for the impending upturn in the economy. Read on and find out.

It's All About Perspective

Freight trains are pretty impressive machines. Long before you see them you begin to pick up faint vibrations from the tracks. You wouldn't even notice this unless you were looking for it. Then you begin to hear the faint but steady groan of the five locomotives pulling the 110 rail cars up the mountainside. At first, it is difficult to identify what you are hearing as the muffled sound echoes over the ridges. Finally, you spot the first locomotive rounding the bend as it heads toward your "jumping on" spot. The first thing you notice is how slow this monster appears to be moving. You begin to think you have plenty of time to prepare for the jump. You also anticipate that the jump will be pretty easy at this slow speed. But then something funny happens. As the train approaches it suddenly seems to rapidly grow in size and gain speed like a plane during takeoff. The only thing that has changed, of course, is your perspective. The train is not growing in size and is also not gaining very much speed. But once it is on top of you that means very little.

The Jump

So, now it is time to jump on. You are looking up at this massive machine and trying very quickly to figure out where to grab and how to swing up so you have the same number of legs that you start out with. You are trying to accelerate in order to synchronize your speed with the train but you are running on railroad bed gravel which moves under your feet like quicksand, increasing the challenge. And then there is that disorienting and deafening noise. It seems to shake everything around you. You still can't believe how quickly this all developed as you thought you were prepared for an easy jump. Finally, you pick your spot and jump up and grab the best looking location. You are committed now. A miss, even a small one can be catastrophic. A clean grab, however, is euphoric. You sit back and enjoy the beautiful scenic ride to Burlington, Vermont and back.

The Impending Upturn

So what does this story of jumping freight trains have to do with the impending upturn? Let's review:

The impending upturn, like those faint vibrations on the track will only be noticed by those that are keenly listening for them. Since you don't know the exact time they will begin you will need to be listening all the time. You will also need to know what to listen for. Are you listening? Do you know what to listen for?
Like the freight train at a distance the impending upturn will appear to be approaching very slowly. You will think you have plenty of time to prepare once the beginning of the upturn comes into sight. But, l think you will be quite surprised at how fast that amazingly large machine called the global economy appears to move as your perspective changes. Are you prepared? Does your company have in place right now what you will need to make a successful jump?
And there will be noise. CNN, MSNBC, Jim Cramer, The Wall Street Journal, and your local newspaper will all be shouting to tell you what is or is not happening with the economy. And most of them will be wrong. It will be hard to accelerate and synchronize with the impending upturn with all the disorienting noise. How will you know what to listen to and what to tune out? Distraction can result in loss of timing and you know what that means.
Then there is the jump. If you time things wrong you will not make it on the train. Time things really wrong and you may never recover at all. Given that you may have one shot to get this right have you done all you can to increase your odds of a successful jump?

So you see, like the next train there will be another upturn. What you don't know is the schedule. So you need to always be prepared for when the train arrives. You need to keep your ear to the tracks and learn what to listen for.

Did you hear something?

Want to work with a two-legged train jumper. Visit www.rockland-group.com.

Management Lessons From Bernie Madoff

2009-01-07T15:08:00.001-05:00

You have no doubt heard and read numerous bits of information about Bernie Madoff's infamous $50bn Ponzi scheme. It is really quite surprising how large, how widespread, and for how long (perhaps up to 30 years) this dubious investment scheme lasted. Or is it? You see the "marketing strategy" that Bernie Madoff exploited so well was leveraging the inherent weakness of people's use of emotions. More specifically, the dangerous use of emotional thought to make key strategic decisions when the downside risk is very large. Think this doesn't apply to business management? Think this doesn't apply to you? Read on and see if you are right.

The Ponzi Scheme

As a quick background, the Ponzi scheme was named after Charles Ponzi, an Italian who immigrated to the US in 1903 and was subsequently jailed for his version of the scheme in 1920. A Ponzi scheme essentially operates by using newly received investment dollars to pay "returns" to existing investors above that which is normally achievable in the free market. This means that you need a steady supply of new investors in order to continue paying "returns" to the growing number of existing ones. These schemes eventually collapse when enough new investors cannot be acquired to continue paying "returns". When the existing investors notice the sudden lack of returns they begin investigating why. At that point it is too late. Everyone typically loses everything. One key differentiator that Bernie Madoff utilized in his scheme was the use of a broad, but "exclusive' network of individuals who trusted each other due to long standing relationships. They, in affect, sold each other on the Madoff scheme, which is why Madoff's "marketing strategy" was so successful. Madoff also positioned his scheme as "exclusive", meaning that many considered themselves lucky to even have a chance to participate.

Management Lessons

So, what lessons can business managers learn from Bernie Madoff's Ponzi scheme?

Networking is a double edge sword: It had been drilled into our heads repeatedly that networking is the best and most effective solution to solve almost any business or personal challenge. Like most commonly accepted "rules" this one is basically true in most circumstances. Some caveats:
Networking can limit your scope. You only know so many people. Usually the people closest in your circle of contacts are the ones who think most like you. If you are looking for new or creative ways to solve an issue, looking outside your network can be very beneficial. There are many effective ways to screen and background check people outside of your network. Don't be lazy.
Networking does not replace due diligence. Just because your good business buddy Joe recommends that new marketing executive, don't throw due diligence out the window. Many of Madoff's victims stated that they didn't press for normal background information because they didn't want to "insult" their network introduction and possibly lose out on the opportunity. Madoff capitalized on this and so do others. Remember Ronald Reagan's phrase during the nuclear arms treaty negotiations with the USSR. "Trust, but verify".
Hiring an expert does not mean abdicating responsibility. When managing a company there are times when it is necessary to hire an expert to assist with an issue or opportunity. This may include attorneys, CPA's, management consultants, etc. This also includes hiring key employees. This does not mean, however, you can then abdicate all responsibility to that individual and move on to other things. Instead you should:
Get educated. Any expert (or employee) you hire should be willing to provide some basic level of education in the service they are providing. If they refuse, find someone else. You don't need to be an expert in all areas but you should always be expanding your knowledge base and understand what is being done on your behalf. Then monitor it.
Always perform the due diligence. No matter who refers you to the expert, check references and interview the person as you would a stranger. Many of Madoff's clients didn't have the time for this either. Guess what their spending their time on now?
If it sounds too good to be true it is. Ever interview a candidate who sounded just great. They had all the right answers. Then you ask them the classic question, "What was one of your biggest business mistakes and what did you learn from it". Problem is they didn't make any mistakes. How did that person work out?
Take personal responsibility for your life and your business. This is more important now than ever. I recently read a headline in the Boston Globe newspaper that shocked me. "Middle class sits helplessly by and watches retirement savings evaporate". What? Why would anybody sit helplessly by and watch their retirement evaporate? Would you do the same with your business? Get active. Get educated. Get involved and make a decision. Several of Madoff's clients had suspicions and never followed up on them. If you are paralyzed with fear get help to move forward.
There is no inherent fairness doctrine in business. Justice is driven by competition not by law. Therefore, you need to look out for your own best interests both personally and professionally. Martha Stewart did jail time for a $60K inside trade. Bernie Madoff is still living in a $7M downtown Manhattan condominium. His only restriction is that he needs to be home each night by 7:00PM. Enough said.
Out of crises come the biggest opportunities. Most people follow a herd mentality during a crisis. Just look at the stock market. Virtually every US company regardless of quality of management or earnings has been dumped. Does this make sense? Crises like these are like a forest fire, a painful but necessary periodic cleansing of the environment. Remember out of every forest fire comes new growth and a healthier forest which will flourish for the next hundred years. The species that flourish will be the ones that learn to adapt to the new environment the quickest.

More Important Now Than Ever

I had a conversation with a relative over the Holidays about work and the current economy. He went on about how nervous I must be working for my own consulting firm in a time like this. He has worked for a major investment firm for 15 years. I pointed out that we actually had a lot in common but that my employment risk was actually quite a bit lower than his. My points were:

We are both employees at will.
We are both paid on a consistent basis based upon our ability to continue providing a service that someone else deems worth the cost.
The security of our incomes is based on the health of our respective companies.
I run my company so I will always know its health and can take immediate and unilateral action to address any risks and/or adapt to any changes to the business or its market.
You rely on somebody else to do that for you and hope they are good at it.
That is not how the new forest is growing and I have already begun to adapt.
Have you?

How Not To Run a Country (or Company)

2008-12-10T14:59:00.003-05:00

There are many interesting lessons and perspectives for business leaders presented by the current economic crisis. One of the most interesting and provocative may be that it puts us all in a situation that our employees are in. That is, we are being led by a President (CEO), Congress, and the Senate (management team) that we have little direct control over and yet their decisions (or lack thereof) will have a dramatic impact on our lives and that of our families. Now having your future largely controlled by other people is concerning enough for most. However, if your confidence and respect for those people's ability to effectively lead begins to erode then this proposition can become downright alarming. You now know what I mean, don't you. Let's look closer.

Start At The Top

As always, let's start at the top. In a time of crisis what is the worst thing you can hear from the leader of your company, or in this case your country. The answer; NOTHING. That's right, the absolute worst thing you can hear from a leader is NOTHING. Even bad news will give you some data to make a decision. Even horrible news will give you some perspective with which to plan your actions. But NOTHING, well, gives you nothing at all to go on except your own imagination and that of your co-workers. And how is that working out? How are productivity, creativity, and initiative in a company, or country, where everyone is spending the day wondering what is going on? How are productivity, creativity, and initiative in a company, or country, where everyone wonders if it even matters what they do anymore? So for the cost of periodically communicating with people, which is free, a leader who remains silent loses huge amounts of productivity, creativity, and initiative just when their company, or country needs it the most.

Where are we heading? Ask almost anyone on the street this question today and I guarantee you the most frequent response is "I don't know". If I walked through your company today and asked the same question what would the most frequent response be? Why? Two of the most important responsibilities of a leader are to communicate where the company, or country is heading (strategy) and provide periodic updates on current status (operations). This gives employees and stakeholders their bearings which they need in order to maintain focus and equilibrium. Without focus and equilibrium, you lose them, usually when you can least afford to. Two key points. Number one, this is your job. Number two, this costs you nothing. It is free and provides the greatest management leverage available to you, bar none.

After 9/11, the President was very visible and effectively rallied the American people, and to some extent the world, by demonstrating leadership and resolve during this challenging time. It is one of the reasons that we recovered from this devastating event as quickly and solidly as we did. Contrast that with the deafening silence of what we are hearing during this economic crisis. How does it feel to wake up every morning and receive no clear information with which to make decisions? Or even worse, to receive conflicting information, read alarming headlines, hear rumors, etc. that you have no way to validate. That is how it feels to your employees every day you remain silent.

The Management Team

I find it interesting that Congress and the Senate were able to vote on and distribute $350 billion to several banks and insurance companies without so much as a casual discussion with the executives of those companies. However, when three of the largest manufacturer companies in the United States ask for help they are paraded through a public gauntlet of humiliation overseen by a management team (The Senate and Congress) that has one of the worst management records (and approval ratings) in US history. It is interesting to watch as the various Senators and Congressmen take a giant step backward from this economic disaster and question why these auto executives wound up in this situation and whether they deserve help. Perhaps this gives some insight into why the US is losing its manufacturing competitiveness.

Sound a little familiar. It should. Have you ever worked in a company where the CEO displayed favoritism towards a certain executive or department. Ever sit in a management meeting or company meeting and watch the VP of Sales run roughshod over the VP of Engineering because he couldn't deliver the latest "special' on time while the CEO sat there in silence? Ever watch as the VP of Manufacturing is criticized by the VP of Engineering because he can't assemble the recently released "product" that came with no documentation and tolerances that would put a Swiss watch to shame? Meanwhile, the CEO sits on in stony silence. Ever been on the receiving end of public criticism from a management team whose strategy you were trying to execute and now has taken a giant step back as if that strategy came from you? Again, the CEO stares at this activity impassively. How about when management team members publicly criticize each other in the hallways and over lunch with their employees? As an employee of the company how does that make you feel? Does it instill confidence that the CEO and management team of the company will be able to successfully lead the company through a crisis? What is it like to work for an organization where personal and parochial department interests trump that which is best for the organization as a whole? That is what our Senators and Congressmen have been doing since this crisis erupted. As an "employee" of the United States how does that make you feel?

The Choice Is Yours

So, as you can see this current economic crisis, and the governments handling of it, provides a unique opportunity to better understand how your leadership affects the daily lives of your employees. It provides an opportunity to walk in their shoes and feel what it is like to have your future largely directed and controlled in an organizational structure where you have limited influence. As you now understand it can be scary, frustrating, and sometimes downright maddening. The real question, however, is now that you know what are you going to do about it. I'll give you a hint. The first step is to get up out of your chair and walk out your office door.

A Lesson in Leadership

2008-11-12T14:52:00.001-05:00

Well, no matter how you look at it we sure seem to be in an economic crisis. A crisis of any type is a very interesting event. I have spent quite a bit of time researching and analyzing how people react in a crisis situation and how it relates to leadership. This analysis has ranged from plane crashes, fires, and the collapse of the World Trade Towers on 9/11. Do you know how most people react during situations like these? For those of you who are lucky enough not to have lived through a traumatic event like this you may be surprised by the answer. No, most people do not run around in a chaotic manner screaming. Most people do NOTHING. That's right, NOTHING. One of the human bodies most powerful primitive defense mechanisms during extreme stress is to shut down. It is called denial. Essentially your mind and body are overwhelmed with information that they are not used to receiving and they go into an immediate state of denial that the situation is real. This primitive defense mechanism is responsible for many of the preventable deaths in the modern world. That is why stewardesses on commercial airlines are trained to immediately SHOUT commands at traumatized passengers in the event of a crisis event to shock them out of this defense mechanism and get them moving out of the plane.

One of the most dramatic examples of leadership under crisis conditions was demonstrated by Rick Rescorla, a combat Marine veteran of the Battle of la Drang Valley, Viet Nam in 1965 and portrayed in the book and movie We Were Soldiers Once, and Young. Rescorla is pictured as a young man on the front cover of the book. The Battle of la Drang Valley on November 14, 1965 was the first use of helicopters in Viet Nam to drop US troops deep into enemy territory and retrieve them after completing their mission. In la Drang the Marines were unknowingly dropped into an area heavily occupied by North Vietnamese troops. Due to heroic and superior leadership on the ground, in large part by Second Lieutenant Rick Rescorla, the Marines forced the retreat of the much larger enemy forces and were evacuated. Many of Rick Rescorla's comrades credit his leadership with giving them the ability to save their lives. So what exactly do leaders like Rick Rescorla do? Read on.

In 1985 Rick took the job as vice president of corporate security for Morgan Stanley Dean Witter at their offices in the World Trade Center in New York. At the time Morgan Stanley had approximately 3,000 employees occupying twenty-two floors of World Trade Tower 2. After the 1988 bombing of Pan Am flight 103 over Lockerbie, Scotland, Rescorla worried about a terrorist attack on the Trade Center. After further investigation confirmed his concerns that the Trade Towers in New York would be a prime terrorist target, he immediately began to formulate a security and evacuation plan for Morgan Stanley employees in the event of such an attack. However, by 1990 many in The Port Authority thought he was overreacting and refused to commit the resources required to implement his recommended procedures throughout the buildings. Three years later in 1993, a truck load of explosives was driven into the parking garage of the World Trade Center and detonated.

After the 1993 bombing Rick had the credibility he needed. He immediately began implementing evacuation procedures and drilling Morgan Stanley employees on executing them. He remembered how long it had taken his people to leave the Trade Towers in 1993. He knew because he was the last one out as he followed the stragglers, the procrastinators, the slow, and the disabled. Rick ran Morgan Stanley employees through periodic fire drills where everyone would have to meet in the hallways and file into the stairwells and actually go down to ground level so they would understand the experience and he could time them. He did this because he was keenly aware of human behavior in emergency situations and how many people would immediately go into the denial phase and dangerously slow the whole process.

The radicalism of Rescorla's drills was stark. Morgan Stanley was an investment bank. Millionaire, high-performance bankers on the seventy-third floor did not enjoy or appreciate the evacuation regimen. Rescorla didn't care. He knew through his military training a simple rule of human nature; the best way to get the brain to perform under extreme stress is to repeatedly run it through rehearsals beforehand. They called it the rule of Seven P's: Proper prior planning and preparation prevents poor performance.

On the morning of September 11, 2001, Rescorla heard an explosion and saw Tower 1 burning from his office window. A Port Authority official came over the public address system and urged everyone to stay at their desks and await further instructions. But Rick Rescorla immediately grabbed his bullhorn, his walkie-talkie, and his cell phone and began systematically ordering Morgan Stanley employees to get out now. They already knew what to do because of the continuous fire drills he had run over the years. Even visitors to Morgan Stanley were immediately advised and trained in the evacuation procedure. As Rick stood directing people down the stairwell on the forty-fourth floor the second plane hit Tower 2. The building shook violently. As a way of calming and focusing the Morgan employees Rick Rescorla began singing Cornish (English) songs from his youth through the bullhorn into the stairwell. "Men of Cornwall stand ye steady; It cannot be ever said ye for the battle were not ready; Stand never yield!" In addition, he began shouting to the traumatized employees that "today is a great day to be an American" and that "tomorrow the whole world will be talking about you." When the last of the Morgan Stanley employees cleared the lower stairwell and ran out the front door, Rick turned around and headed back up to check for any others who had not left their offices. Tower 2 collapsed shortly thereafter. A picture of Rick Rescorla with his bullhorn on 9/11 is at the top of this article. Of the twenty-two floors of Morgan Stanley employees in World Trade Tower 2, 2,694 escaped safely and six didn't, including Rick Rescorla and four of his security officers. Morgan Stanley had one of the highest corporate survival rates in either tower.

Although it may seem trivial to put a business context on this story there are some very valuable leadership lessons here. So what leadership qualities did Rick Rescorla exhibit in a crisis situation that you can utilize in today's challenging times?

Always look at events with a historical perspective. Seek to identify patterns and trends to get a better understanding of what may be coming. After the Lockerbie bombing Rick stepped back and looked at the larger picture and trends. It was this insight that drove him to prepare for 9/11. Ask yourself, was this recession really that much of a surprise? Should it have been? Were there signs of this crisis building?
Don't panic. Step back, take a deep breath, and analyze the environment. Seek objective input and advice. Validate your assumptions before moving. Your company will not survive many wrong moves. People followed Rick as a leader both in Viet Nam and at Morgan Stanley because he was always cool and confident when most others were not. How would you feel if the pilot on your flight announced on the intercom in a panicked voice that there was a problem with the plane?
Condition yourself and your employees. There will always be downturn economies. The time to plan for them is not when they happen. Formulate a plan for challenging times as part of your annual strategic plan. Then communicate this to all employees. Then when the downturn comes, concentrate on its execution. This will keep your employees focused and productive. They will also not be surprised.
Lead. In times of crisis your employees look to you for leadership and direction. It is your responsibility not to let them slip into denial. Your company will lose valuable amounts of productivity that it cannot afford. Look around at how your employees are behaving. People with real leadership potential thrive in times like this. Identify and mentor your emerging leaders. By the way, slashing costs and hunkering down is not leadership, it is tactical management. Tactical managers are a dime a dozen and employees and customers are not inspired by them. The result of this type of management can often be the beginning of a death spiral for the company. Leaders are rare and looked up to during crises. They often identify or create new markets.
Exhibit optimism in the face of adversity. Many of Rick Rescorla's comrades in Viet Nam recounted their fear of sitting alone in the night and fearing the worst. Rick continually made the rounds sitting with each one and telling them that they were going to make history tonight by driving back the enemy. As one of his comrades said, "Rick's enthusiasm was contagious. I felt myself sitting up straighter and I started to believe he was right". Do you make the rounds? What are you saying to your employees and customers?
Look for opportunities. Challenging times like this always create new opportunities. Your competitors may be in denial. Move while they are paralyzed. Many market segments will undergo a fundamental shift over the next 3 to 6 months. Identify emerging market opportunities and be ready to capitalize when the economy recovers.
Keep your eye on the horizon. While your employees are busy executing do not keep your head down. Look at the horizon to spot emerging trends or changing environments. There is a lag time between identification and execution. In order to synchronize your strategy you need to be looking out 3 to 12 months ahead of your team.

The Biggest Threat To Your Business

2008-10-15T14:42:00.000-04:00

I think we can all agree we are living in pretty interesting times. Just 3 months ago a barrel of oil was trading at over $147. Today it is trading at around $72, a 51% drop. Five months ago the Dow Jones Industrial Average (DJIA) was over 11,000. Today it is around 8200, a 25% drop. While watching last night's final Presidential debate one thing became quite clear. Both candidates were strongly warning that failure to enact their economic plan (only achievable by electing them) would result in a Depression in the US worse than that experienced during the 1930's. What do all of these events have in common? They are the result of the use of (or the attempt to use in the case of the candidates) emotion and reactive crowd behavior to make important decisions rather than objectivity and experience. Ask yourself, did the events of the last 3 months really warrant the price of oil to rise and fall by 50%? Ask yourself, do you really believe that the market value of some of the largest and long-term successful companies in the US is worth 25% less than just five months ago? Do you really believe that either of these Presidential candidates will be able to enact anything close to their respective tax cutting economic plans given the current national debt? What does all this have to do with managing your business during these difficult economic times? Plenty.

What is lacking in the above examples is the ability of leaders and managers to maintain objectivity and focus when it seems like their market, or the world is either spinning out of control or worse, entering a "new era". Let's examine the components of these abilities and look at some examples.

The Energy Crisis - Part I and II

Some of you may remember the previous oil crises in 1973 and 1979. In both cases there were widespread panic and calls for energy conservation and achievement of energy independence from foreign oil. At the time the big three US auto makers embarked on a reactive emergency product development program to produce smaller, more fuel efficient cars. The problem was because these were reactive and panic driven development programs, the development costs were very high and the quality of the vehicles was poor. Anyone remember the Ford Pinto or the Chevy Vega? Meanwhile, despite the "oil crises", the Japanese auto manufacturers kept focusing on their core strategy which had always been producing smaller, more fuel efficient cars. Oil prices subsequently plummeted in both cases and the US auto makers reacted by shifting over to developing and manufacturing minivans and ultimately gargantuan SUV's like the Hummer. Meanwhile, the Japanese maintained their primary focus on the smaller, fuel efficient auto market. Now, in 2008 we enter the Energy Crisis - Part III and the US auto makers are again reacting and launching crash programs to develop fuel efficient cars, including electrics and hybrids. And as happened previously, the price of oil is now plummeting. If the price of gasoline drops below $2.50 per gallon what will the US auto makers do next? The results of the above leadership decisions:

The US auto makers have:

Suffered major quality issues due to multiple reactive shifts in their product development strategies.
Seen large erosion of their gross margin in part due to inefficiencies of continually changing product development strategies, market focus, and ongoing quality issues.
Weak balance sheets due to overall operational inefficiency and poor return on capital investment.
Loss of global market share.

The Dot Com Bust

I am sure you all remember the late 1990's and early 2000's when companies with no revenues and no profits had market capitalizations of hundreds of millions or even billions of dollars. We were told that we had entered a "new era' of business model where the valuation of a business was no longer measured as a multiple of revenues or earnings. I happened to be running a semiconductor equipment company at the time. The semiconductor industry had always been notoriously cyclical and capital intensive. The biggest trade show for the semiconductor industry was held annually in San Francisco in July. When I sat down at the keynote speech at the beginning of the show in July 2000 the title of the presentation was "Nothing But Blue Skies". The well known industry analyst went on to state that the industry was in its highest growth phase in history and there was no end in sight. He further stated that the industry had entered a "new era" where there would no more cyclicality as in the past due to the emerging economies of the Far East and the huge drive of the Internet. By that October, the DJIA had dropped by 25% and semiconductor industry had entered the worst downturn in its history. The industry has never recovered to this day.

Lessons Learned

The purpose of the above examples is not to criticize the US auto industry or use the benefit of hindsight to display my genius. Rather the purpose is the encourage you to exploit and utilize the power of objectivity and experience as a strategic competitive advantage in times of extreme stress. Some takeaways to keep in mind:

Always keep updated on macro trends occurring in the world in addition to your local industry trends. Think about how these trends may affect your market and your business before they actually do. Sometimes the answer is that they won't! Don't react to a perceived threat. Validate it.
Most events and trends are not really new. Use your life experience and historical perspective to look for repeating trends. Your awareness and knowledge of the previous oil crises in 1973 and 1979 could have provided you with valuable insight into how this latest crisis might turn out (i.e. rapid price spike followed by rapid drop).
Take a step back. Force yourself to look at the big picture. Seek objective advice. Ask yourself: is this a real long term sustainable change in process or a short term reaction to a triggering event that may reverse?
Stay the course. Only change long term strategy or direction if there is a compelling reason to do so. Don't chase trends based on temporary triggering events. You can implement short term low cost strategies to manage these.
Beware of extremes. When you start hearing or reading about "new eras", "new business models", or extreme predictions (the next Great depression) or movement in prices or supply don't just react. When every expert is predicting the most optimistic or pessimistic scenario it is usually an indicator of an inflection point (i.e. Nothing But Blue Skies). Look for historical precedence and some sort of secondary validation before launching expensive and risky new initiatives in response to these.
Most things don't change quickly and stayed changed. There is no question that over the next decade there will be increased use of alternative energy as a buffer against rising oil prices. However, people will not rush out and start buying hybrid or electric cars, solar panels, and wind turbines en mass over the next year or two. These technologies have been around for decades and continue to improve but it will probably take another decade before they are utilized by the mass market. The same is probably true in your market. Plan accordingly.
Trust your gut. You know more than you think. Read and watch the news reports but don't let them overwrite your own experience and objectivity.

There is an old saying that "adversity breeds opportunity". Volatile economic and market conditions will almost certainly result in the emergence of new high growth and profitable companies. However, this is often the result of what the leading companies failed to do as much as the genius of the emerging companies. So be careful, the biggest threat to your business could be you.

The Importance of Managing Expectations

2008-09-17T14:20:00.000-04:00

There is an old phrase very commonly used in a variety of professions that states "you should always under promise and over deliver". Although I do not personally subscribe to this doctrine, it does have some interesting implications for leaders who are starting or already managing their own companies. Managing expectations is one of the most critical and difficult balancing acts you will undertake. If you do not understand and execute this skill successfully, it can undermine both your company's future as well as your own.

First, Manage Your Own Expectations

Before you start managing the expectations of other's it is best to begin by managing your own. One of the surest ways to significantly increase the risk of your venture and your personal future is to begin with unrealistic expectations. We have all read the motivating stories about the fearless entrepreneur, who in spite of overwhelming odds and hoards of naysayer's, charges ahead and winds up dominating a multi-billion dollar market segment. These rare success stories are compelling, but for most entrepreneurs and business leaders to utilize this strategy is both foolhardy and unrealistic. Most successful businesses in the world today were built methodically and systematically over a period of several years, often up to a decade depending on the industry. During that time the company and its management team had to systematically reinvent themselves in order to possess the characteristics required to achieve the next level of growth (read June 2008 Blog - What Position Do You Play?). There are ways to accelerate this process, and even to execute it more efficiently, but there are very few realistic shortcuts. If you know and accept this at the start, you will be prepared to manage the journey over the long haul. To manage your own expectations start by answering the following questions:

Why am I undertaking this venture (or accepting this position)?
What are my personal expectations?
Business expectations?
Financial expectations?
Time commitment expectations?
Title/Position expectations?
What skills and experience am I able to bring to this venture?
What skills and experience are realistic for me to learn along the way?
What skills and experience are unrealistic for me to sufficiently learn?
Are my overall expectations reasonable given the answers above?

By answering the questions above you can accurately establish the following critical criteria:

If you are starting or joining a company to get rich quick your odds of success are pretty remote.
From the paragraph above it should be clear that it will take years, perhaps up to a decade to build a successful company. This does not translate into liquidity (barring an IPO), however, which means much of your wealth will be still tied up in the company (see get the rich quick point above).
If you are a technical founder/manager and have little business and financial expertise it is probably unrealistic for you to retain the CEO position over the long haul.
You will need to hire to buttress your weak areas in order to build a successful management team and ultimately, a successful company. This takes both courage and strong self esteem (not confidence or ego). The right people to hire will absolutely ask you hard questions and expect straight answers and will always be a professional threat to your current position. Look at how many CEO's came out of Jack Welch's management team at GE.

Managing The Expectations of Others

Once you have realistically managed your own expectations you can now turn to managing the expectations of others. Managing the expectations of other's does not mean providing overly conservative financial estimates or forecasts, padding development schedules, or downplaying market opportunities, in essence, under promising. It also does not mean the opposite; employing overly optimistic estimates in these areas. Rather, successfully managing the expectations of other's means that in addition to providing the most accurate information possible, you also need to provide the context and risk scenarios in which these activities will take place. Let's look at a couple of real world examples.

The CEO of a technology startup was looking to hire a top sales and marketing executive to round out his management team. He met a very impressive candidate and was convinced this individual could make a major impact on his company. During the several rounds of interviews the CEO painted an optimistic view of the future of the company, and the status of its product development. One month after the new sales and marketing executive started, he abruptly resigned. The reason for the resignation was that the scenario painted by the CEO was vastly different from the sales and marketing executive's view. The CEO in his enthusiasm failed to provide the context and risk scenarios for the development of the company's products. He had portrayed them as ready for sale, when in reality there were still several key development risks to overcome before release. The sales and marketing executive concluded that either he was misled or the CEO was naïve. He wanted to work for neither.
The founder/CEO of an early stage technology company was looking to raise his first round of venture funding. After several very successful presentations the company was able to secure a Series A round of $3M. Within 18 months a new CEO was brought in by the investors and the founder/CEO was moved into a CTO role within his own company. Within a year he left the company. The defining issue was that the founder/CEO had signed up to providing a growing revenue stream beginning at the end of the first year of venture investment when in reality the product still had several risky development hurdles to overcome. The founder/CEO had not sufficiently managed the expectations of the investors regarding the remaining risks in the product development process. In his mind he was raising development funding while the investors thought they had a guaranteed revenue stream beginning at the end of the year. Sadly, there are several types of investors who might have gladly invested in this company under expectation they were funding the next stage of product development in a pre-revenue company. The quickest way to find yourself looking at your company from the outside in is to mismanage the expectations of investors.

Lessons to be leaned from these unfortunately all too common stories:

When managing the expectations of others do not forget that they do not have the intimate knowledge of you, your company, your market, or your products. You do not have to get into the minute details of each but make sure they fully understand the overall context, risk, and interrelation of each.
Be sure to establish what is in your control from what is not. For instance, a big driver of current investment in the clean energy sector is a series of temporary government tax subsidies. There is no guarantee that these will be extended, especially in an election year. You probably have very little control over this but it will have a major impact on your ability to grow the business. Make sure your key employees and investors understand this.
As in the hiring example above it is better to be realistic and open when discussing your company's status and future. Everyone appreciates enthusiasm, but no one appreciates deception. Your new employee will know everything within their first week on the job.
The difference between research and development is that you cannot schedule research. Research is the investigation of the unknown. Development is the crisp scheduling and execution of the known. This can be scheduled. The CEO in the example above tried to schedule research.
Always have a backup plan. Managing expectations is not a "get out of jail free" card. When challenges arise, if you properly managed expectations, they should not be a surprise to you or others. Therefore, you should already have a backup plan in place, ready to execute.

The Power of Strategic Partnerships

2008-08-13T14:08:00.000-04:00

One of the most powerful tools available to early and mid stage companies for accelerating growth is the strategic partnership. A successful strategic partnership can be one of the few real world examples of that significantly overused word - synergy. So, what is a strategic partnership? How can you identify the right kind of strategic partner? What are the powerful benefits of a strategic partnership? What are some of the pitfalls to be aware of when entering into a strategic partnership?

What Is a Strategic Partnership?

Let's start off by looking at the definition of a strategic partnership. My definition of a strategic partnership is when two or more companies enter into a formal business agreement to pursue a common strategic goal. Strategic partnerships are most commonly driven by the decision of each company not to invest in that portion of internal capacity required to achieve the goal on their own. Let's dissect this definition to better understand this powerful tool. First, one of the main reasons an early to mid stage company would seek to enter a strategic partnership is to gain access to a resource that is beyond their current financial or operational means. For instance, partnering with a leading, tier one company in an established market may provide immediate access to a global sales and support organization as well as expert marketing resources for that segment. In addition, having a company of this stature incorporate your technology or product into their portfolio provides a major endorsement of your company to the customer base and potential investors. This can greatly reduce time to market and acceptance of your technology and/or product. The tier one company benefits by gaining rapid access to leading technology, which provides a strategic competitive advantage, backed by an experienced team without having to try and accomplish this with internal resources. Almost all large companies today have come to terms with the fact that developing new technology internally is becoming much harder to successfully achieve. This is one of the major drivers of the growth of the current M&A market. A strategic partnership should not be confused with a joint development program. A joint development program is where two or more companies typically share development resources, know how, costs, etc. and ultimately share the technology, including any intellectual property developed during the partnership. There are many reasons why this can be a dangerous road for early to mid stage companies. I will elaborate on this below.

Identifying the Right Strategic Partner

So, how do you identify the right strategic partner? The answer depends on many factors but one of the major drivers should be your strategic marketing plan. Look at the markets you have targeted to enter. Are their existing companies in that segment that could achieve a strategic competitive advantage by incorporating your technology or products into their portfolio? Are there technologies or products in their existing portfolio that would be in competitive conflict with yours? If the answers to the previous questions are yes and no, they are a potential strategic partner. Next, look at the potential partnership from your company's viewpoint. What do the potential strategic partner companies have that can help you enter your targeted market and accelerate the profitable growth of your company? Perhaps, as described above they have strong brand recognition. You can imagine that customer acceptance of your technology or product would be much faster under a co-brand with IBM® brand, for instance. Another compelling advantage would be gaining immediate access to a seasoned global distribution network with strong long term customer relationships. Yet another benefit may be access to key marketing expertise that may allow more accurate product specification and development of a successful marketing strategy. There are two key points to remember when identifying a potential strategic partner:

The partner should be in a market that you had targeted in your original strategic plan. Resist the temptation to enter a market just because a particular company is interested in partnering with yours. The whole point of a strategic partnership is to accelerate the achievement of YOUR company's goals.
Make sure that the partnership provides sufficient strategic benefit to both companies. This means that both companies' should be providing equal strategic competitive advantage to the other, though this may be in differing disciplines.

Benefits of Strategic Partnerships

The major benefit of entering into a successful strategic partnership is the ability to utilize the leverage of your existing technology or product offering to gain access to resources that would normally be beyond your means to obtain. As described above, these resources can range from the ability to sell under a strong brand name to having immediate access to a seasoned distribution network or marketing expertise. Successfully executing a strategic partnership can greatly accelerate time to market and reduce the perceived risk by customers and potential investors in your company. Both of these can allow you to significantly grow the valuation of your business in an accelerated time frame with greatly reduced investment. Another key benefit is the ability to work with a company with extensive experience in your target market. This can significantly reduce risk. The cost of misreading a market can be large, and is usually irrecoverable.

If you have demonstrated the ability to identify and commercialize your technology through the use of a strategic partnership agreement it can greatly increase leverage during subsequent funding negotiations. In addition, it is not unusual for the larger of the strategic partners to be a viable candidate to make a strategic acquisition of your company down the road. Since they are already experienced with your technology and team it can often result in a significantly reduced due diligence period and smoother negotiations.

Some Potential Pitfalls of Strategic Partnerships

Like any business agreement there are some pitfalls that should be avoided when entering into negotiations on strategic partnerships. These include:

Intellectual Property - Unlike joint development programs there should be no ownership sharing of intellectual property. The underlying premise of a successful strategic partnership is that each party is providing a complementary piece of the business relationship. Therefore, each company should be able to retain ownership of what they are providing. There are other methods of allowing use of your intellectual property while retaining full ownership such as licensing.
Exclusivity - It is not unusual for both companies in a strategic partnership to seek some type of exclusivity clause. The premise here is that if you are seeking investment and commitment to help bring your product to market it is reasonable for the strategic partner to expect that you are not providing the same technology or product to competitors in the same market. Conversely, you should be able to expect the strategic partner will not be distributing competitive products. Some other key points to consider:
Limit the exclusivity to a clearly defined market segment.
Limit the exclusivity period to a defined time frame. This can be subject to renewal based on agreed upon criteria.
Have a performance clause. If the strategic partner is not meeting the agreed upon "level of effort" to promote or distribute the product, for instance, there should be an option to void the exclusivity and seek other partners, or in extreme cases to void the strategic partnership agreement in its entirety.
Branding - One of the key advantages of a strategic partnership for the early to mid stage company is both the company and technology validation of partnering with a known and accepted brand. Make sure your company name is prominently featured so you are achieving this goal. This can be accomplished by co-branding, etc. Negotiate for joint press releases, etc. to achieve full benefit of this important relationship. Don't ever let your technology or product be buried in the bowels of a larger corporation's portfolio. Otherwise, all you have gained is an additional revenue stream and there are better ways to achieve that.
And, of course, always seek legal advice from a trusted attorney experienced in strategic partnership agreements.

So, as you can see entering into a successful strategic partnership can be a very powerful tool for an early to mid stage company seeking accelerated growth at reduced risk. It can also lay the groundwork for a successful future exit strategy. Like any business opportunity, a strategic partnership needs to be evaluated and executed carefully as there are many potential pitfalls, some of which can be quite costly.

Why A Recession may Be Good For Your Business

2008-07-16T14:01:00.000-04:00

OK, so I think we can all agree that the economy isn't doing too well these days. While the debate goes on as to whether we are in an official recession the reality is that it sure feels like a recession to your business. So, the question is what do you do now? The first order of business is to keep things in perspective. The economy, both domestically and globally, always has and always will (as evidenced by false predictions of the "new economy" during the Dot Com era) operate in cycles. This means that as bad as this down cycle appears it will eventually pass and lead into the next upturn, or growth phase. The key strategic advantage you want to create for your business is to be better prepared to capitalize on the impending growth phase than your competition. The good news (yes, there is good news) is that a recession provides both you and your business some great opportunities to improve. Let's review some of the most effective.

Fix Your Team

Let me ask you a question. If your company's staff was a professional sports team and your goal was to win the championship do you believe that every player on your roster is the absolute best you can get for the money? Do you have weak players in positions that inhibit the overall team's performance? Have you ever watched a professional sports team consistently exploit a weak player on an opposing team? How do you think that affects the motivation of the team's highest performing players? Would you trade for higher quality players in key positions if you could? Should you? Well, you can.

During recessions and downturns the availability of highly qualified people increases greatly. The reasons for this range from top employees being caught in a restructuring or downsizing to being more open to explore new opportunities due to concerns about their current employer's prospects. These top people will also often be highly motivated as they are appreciative of the opportunity to join a winning team. The other "advantage" of a recession is that since your overall business activity is usually lower the excuse of "we can't possibly replace Mary (or John) now given how busy we are" goes away. Now is the perfect time to replace that chronic problem employee with a highly motivated and qualified employee. You will even have time to train them properly. When the upturn arrives you will have the right player trained and in place ready to capitalize on it. By the way, don't overlook your management team when performing this exercise. The affects of a poorly performing manger are exponentially more damaging (and costly) than that of an individual contributor.

Fix Your Products

As counterintuitive as it may seem, now is not the time to cut your R&D budget. You will want (and need) new products or product extensions available for the impending upturn. Do you really believe that your competition isn't working on something to leapfrog or even obsolete your products? The key is to make sure you are effectively and efficiently using your R&D dollars. If you are not refer to the section above on Fix Your Team. With a slower overall business activity rate you will often have available engineering hours that were previously utilized for sustaining engineering efforts and brushfire style customer response activities. Now is also a good time to analyze your product portfolio. Are you carrying products that are unprofitable, obsolete, or have low sales volume? Now would be a good time to evaluate whether to discontinue them. You will be shocked and amazed if you accurately quantify all the costs (including opportunity costs) that are required to keep a product or part number active on your sales list.

Fix Your Factory

With order rates slowing you will probably have some excess resources on the factory floor. Rather than initiating an immediate layoff of these valuable employees how about executing on some of the projects that were never started when you were too busy? First, how about a good clean up and organization of the assembly, test, and shipping areas. Don't forget the overdue scheduled maintenance on equipment that couldn't be taken out of service when you were too busy. Now is a good time to analyze work flow patterns and review manufacturing strategy. Would it be more efficient to build in work cells? How best to design and implement this. What about a review of your in sourcing versus outsourcing strategy? There are probably several hungry suppliers out there who would be happy to handle some of your non-strategic assembly and test needs. Don't forget the stock room. Now might be a good time to purge and write down that excess and obsolete inventory. It will free up valuable shelf space and eliminate the ongoing "hidden costs' of carrying part numbers that are no longer really active. Now is also a good time to implement that cross training program that has been on the back burner. All these activities will ensure your company is poised to capitalize on the upturn. If the downturn is lengthy and you eventually do need to reduce the workforce at least you will have an optimized factory and supplier base ready. This is much better than having these resources sitting idle while you haggle over the layoff schedules and reduction lists. It also gives employees an opportunity to contribute to the future (and possible survival) of the company and their jobs.

Fire Your Bad Customers

That's right, fire your bad customers. What you need during a recession are profit and cash flow more than revenue. You know in your gut who these customers are. So does your sales force. They are the ones who squeeze your company to extract every last advantage for themselves. They negotiate brutally on every sale. They ask for extra features at the last minute; and they want them for free. They push the warranty period out. They pay late. They are never happy. If you analyze all the costs that these customers incur (including reduced employee morale and motivation) you would be shocked. In summary, these customers are unprofitable now and will never be profitable in the future. When you were busy trying to fill orders you never had time to analyze your customer portfolio and address issues like this. Now you do. So fire these customers before they continue to cripple your business. You can take the all the resources and capital expended on them and use them to increase sales to your good customers or to attract new profitable customers.

The above list is by no means comprehensive. I could continue and include sales and marketing opportunities, finance opportunities, etc. The point is that recessions are not all bad. In fact, they provide a valuable opportunity to evaluate and optimize yourself and your company to prepare for the next upturn. Too many companies are driven by fear and survival instinct and adopt the strategy of hunkering down, reducing costs across the board, and "waiting out the recession". Many of the leading companies that utilized this strategy in the past are no longer leaders or are no longer around at all. They are no longer leaders because there is always one consistent factor that accompanies every new upturn. It will always be powered by a different driver than all the previous ones.

What Position Do You Play?

2008-06-18T13:53:00.000-04:00

I want to debunk a common myth that has been around the business community for years. The myth is usually articulated in the phrase "I just joined a startup company because I want to get in on the ground floor". Of course, the implied follow up to this is "I will grow with the company and rise up into the management ranks instead of having to get a job at a larger company and work under someone who is already there". Let's see how this typically plays out. To make it a little interesting let's use a football analogy; the two-minute drill offense.

For those who are not avid football fans let me briefly explain the two-minute drill offense. This drill is a consistently practiced set of plays, and player rotations into and out of the game that hopefully enables a team to march down the 100-yard field and score a winning touchdown in under two minutes. This is usually the remaining time left to play the game when this drill is implemented. What does this have to do with working for a startup company? Lots. For starters, both require the expert use of specialized players to achieve a goal before resources expire. In the case of football the resource is time while in the case of a startup or high growth business the resource is almost always cash. Now let's move down the field.

Your Own Goal Line to Your Own Thirty Yard Line

Startups, like late game football drives usually begin at or near their own goal line. The strategy at this end of the field is to quickly get off the goal line and make some forward progress. This accomplishes two key things. First, it builds confidence in your team that they can compete. Nothing builds confidence faster than winning, or in this case moving the ball forward against a competitor. Second, moving off the goal line gives you and your team some breathing room. When you are snapping the ball on your own goal line there is no room for error. If you are the coach (think CEO) why kind of players are you rotating in now? Well, they certainly need to be able to handle high stress without making a costly error since it can mean the end of the game. However, they also need to be comfortable taking chances since you need to move the ball a long way and quickly or time (think cash) might expire. In an odd way you have nothing and everything to lose at the same time. These players also need to be able to work with limited resources (in this case both time and field position). They need to be confident, extremely hard working under adverse circumstances, and know how to take reasonable risks to achieve the objective. Under certain circumstances you may even opt for the "big play" downfield. Therefore, these players need to be highly adaptable to a quickly changing strategy and/or competitive environment. In fact, they need to thrive in it. This is your startup team.

Your Own Thirty Yard Line to The Opponents Thirty Yard Line

You have made some progress and have some breathing room that you don't want to risk losing. Your game plan now has to become a bit more conservative as the strategy evolves into one that methodically and more carefully moves the ball onto the opponent's side of the field while continuing to carefully manage the clock (resources). What kind of players are you rotating onto the field now and who is being rotated off? Those "big play" risk taking receivers that you absolutely needed down at your own goal line could be dangerous now. It's much more risky and less necessary to try and make a big play at this point. You just need to keep systematically moving the ball forward and control the clock (manage your cash flow). Now's the time to bring in that seasoned running back who has lots of mid-field experience and can be counted on to consistently carry the ball four yards at a time, and most importantly, not drop the ball. At this stage you need a structured, organized offense that can effectively move the ball deeper into the opponent's side of the field. You want to rotate in players that although less flashy, can be counted on to block effectively and not draw a crucial penalty at the wrong time. These players are proven, solid performers who have played under these circumstances before. They are the mid-field block and tackle players who just get the job done without a lot of glamour or unnecessary risk.

The Opponents Thirty Yard line to The Opponents Goal Line

Now you've made some real progress. You have taken seventy yards of field and still have 30 seconds on the clock. Enough time to get the winning goal (think exit strategy). What player rotations are you making now? The flashy players that got you to your own thirty are too risky now, especially given the goal line defense you know the opposing team will soon field. This will be the toughest defense you've faced so far (think taking market share from a fortune 500 company). The mid-field players were effective and efficient but the strategy you successfully implemented at mid-field won't work this deep in the opponents end. No, you need a different type of player to get the ball over the goal line. So coach, who do you rotate in now? Your highly competitive proven goal scoring players, that's who. I think you get the point.

So what are the lessons from the analogy above? Well, it should be obvious that it is a very rare breed of player who has the depth and breadth of skill, experience, and personality to be a major contributor for the entire 100 yards. As a coach, you understand the risks of trying to stretch people into roles they are unsuited for, especially during a two-minute drill environment. The results could be catastrophic, and quite frankly, unfair to the rest of the team and the fans (think shareholders). As a player you need to be honest and realistic about which part of the field you enjoy playing on and play best. You will be more successful and much happier putting all your effort into being the best at moving the ball through those thirty yards than you will trying to spread yourself over the whole field. You know in your gut that when you hit that part of the field where your skill and experience is not keeping up with the rest of the team and it is time for the next rotation to come on the field. Don't fight it, welcome it. Relish the fact you were successful at getting the team to this point using and building on your natural strengths and talents. Then look for another team that is sitting at the goal line with two minutes left and put your helmet and a smile on. This is your kind of game. Oh, and coaches, these same rules apply to you.

So You're Ready to Introduce that New Technology

2008-05-15T13:38:00.001-04:00

Congratulations. Your company has just developed a new technology and you just can't wait to introduce it into the market. This technology is so new, so novel, and so compelling you just know it will launch your company to the next level. Before you start writing checks and making promises maybe it would be beneficial to review three vital areas.

The Technology
The Market
The Resources

First, take a real, objective look at the technology. Is the technology really ready to be released to actual customers in a demanding market? To find out let's answer a few key questions.

Can the technology be replicated? In other words, can you reliably build more than one using a documented process and have the end product meet an established set of test criteria? Having your most talented engineer or scientist hand build one or two and 'tweak' them to meet a performance target does not count. There are countless impractical technologies and inventions that can be built using these methods. None of them has grown a company.
Does the technology consist of components that can be reliably and cost effectively manufactured and assembled? Arts and crafts were fine at summer camp but can be fatal in the real world of manufacturing technology based products. If the components required to build your new technology are extremely complex or require extremely tight tolerances this can often lead to frequent quality issues, shipment delays, and high customer support costs. Unhappy customers do not grow companies.
Is the technology scalable? There is nothing more frustrating than watching the orders flow in for your new product only to realize it can't be reliably manufactured in high volumes. There are numerous technologies that are well suited to low volume markets but are just not economical or technically feasible for high volume production. Think Rolls Royce. You could not realistically scale the hand made production methods utilized for these automobiles. Technologies that cannot scale result in companies that cannot scale.

Second, let's look at the market. You did perform a comprehensive market and competitive analysis, right? Seriously, think of the capital and opportunity costs you would absorb if you launched a new technology into the wrong market or even worse, if there was no market. Some key questions to answer:

Who are the customers for this new technology? Have you talked to them directly? Why do they need or want this new technology? What are they using now, since this new technology is not yet available? How much are they willing to pay to for this new technology?
What is the competition for this technology? If the answer is that this new technology has no competition, stop development immediately. Everything has competition. I am competing right now with many others things that you could be doing other than reading this article. Do you know that one of the most difficult competitors to beat in the world is inertia? That's right, inertia. I don't believe that I have to do anything therefore I won't. This is especially daunting if your technology requires a change in habit for a person or a change in process for a company.
What is the actual market segment for this new technology? How large is it? How much of the market can you realistically expect to capture the first year? The second? Most markets are notoriously risk averse, especially to implementing new technology in any scale until it is thoroughly proven. That means the mass market may wait for up to a year or more to see how the new technology performs. Have you planned for this?

The third key area is your resources. If you are successful in launching the new technology you will need resources to sell, market, design, build, test, ship, and support your product. Many of these resources may be new and all of them will be working with a new technology which means new processes for everything and lots of training for everyone. Do not underestimate the magnitude and cost of this task. No matter how compelling the technology if it cannot be reliably sold, marketed, designed, built, tested shipped, and supported it will not meet your forecasted targets. These resources need to be in place and trained before your new technology launch as you will probably not have the bandwidth to successfully play catch up after the launch. As you can see this is quite an investment which is why answering the questions in the article above first is so important.

So, as you can see developing and introducing new technology can be very exciting, very profitable, and also very dangerous. Many of these launches, especially for smaller companies, turn out to be "bet the farm' decisions as recovery from a miscalculated new technology introduction is not always certain. The losses of capital, opportunity cost, and company reputation can be irrecoverable. So the lesson here is do the upfront homework. Consider these costs an investment in a low cost insurance policy against a much larger potential loss. And remember, some new technologies should never go to market. They are just not practical, reliable, or profitable. So stopping development on these early in the process outlined above may turn out to be a prudent and gutsy business decision that will let you and your company live to fight another day.