Thursday, May 30, 2013
Last week I pointed out that business success requires more than a good plan. I said that the end-to-beginning planning process, if done well, would identify all of the challenges that would need to be dealt with to be successful. Once identified, decisions must be made on how to address these obstacles to a plan’s successful implementation.
There are some that will tell you that what will make the difference in these situations are managers that are critical thinkers. Theoretically a critical thinker is someone who is presented with an argument and can determine if it is true, sometimes true, partially true or false. Other definitions can be more detailed but this is essentially the gist of critical thinking. This simple definition assumes that the thinker sets aside emotional issues and any form of bias.
This is where the real difficulty lies. To be successful in assessing potential challenges a manager must be completely objective. Let’s take a simple example. Suppose you have planned to increase revenues by 5% for the upcoming year. To achieve this you might:
1) Increase rates by 5% and maintain current sales volume levels,
2) Increase volumes by 5% with no rate increase,
3) Increase some mix of rate and volume,
4) Add new products,
5) Add new customers.
6) And so on.
Let’s say that the planning process has uncovered a potential challenge to the 5% revenue increase - a new competitor with similar products offering discounted rates in order to gain market share. You are now faced with determining which mix of actions will most likely work.
If your company is the market leader with a strong reputation and image you may decide that the competitor’s strategy of offering low rates will fail and you choose to increase rates by 5% with no other actions required. You make this decision because there is a history of companies using these strategies to gain market share in the past and they have all failed to have any impact on your ability to grow revenues.
It is not uncommon for managers to choose actions based on limited and biased information. In using this approach a manager may rely on past experience and his/her belief that the outcomes in the past will hold true for the future. Indeed projections based on history will work until they don’t work – then the outcome may have very negative consequences.
Some would say that a critical thinker would be able to assess the argument that customers would accept a 5% rate increase without reducing volume and determine if this claim true or not. Then the best option for achieving a 5% rate increase would be identified and this action would be taken. Problem solved.
Here is the problem; this argument can only be answered correctly if perfect information is available. In fact anyone can determine the correct answer if perfect information is available. Unfortunately, when it comes to projecting the future or human behavior there is no source that can provide perfect information.
Managers are forced to use history, intuition, biases and beliefs coupled with as much data as is available to make critical decisions. Over the years different mathematical projection techniques and gaming theories have been developed to help managers better predict outcomes but they still do not provide perfect information.
So what is a manager to do?
The end-to-beginning process can help identify challenges or obstacles in reaching a planned goal. Successfully addressing challenges requires developing a list of possible outcomes for each challenge and identifying the worst outcome. Once identified, a contingency plan should be developed that allows the overall objective to the plan to be achieved even if the worst possible outcome materializes. In our example, if the rate increase results in a volume decrease then a plan should be in place to expand the customer base that allows the overall 5% revenue increase. This is a contingency plan that is ready for implementation should the need present itself.
The problem with contingency plans is that they take time to implement and they may be overly optimistic with respect to providing needed results.
Rather than having a shelf full of contingency plans it is probably better to develop plans based on a certain degree of failure in addressing identified challenges. In our example it might mean implementing a 5% rate increase plus setting a volume increase of 3% and developing new products and customer segments for yet another 5%. In other words plan for failure to achieve success.
Friday, May 24, 2013
In my last post I talked about envisioning the outcome of a business plan and working back to the beginning activities to help in planning. I have used this end-to-beginning process in several business situations and it resulted in some tremendous successes.
Unfortunately excellent planning does not offset an entrepreneur’s dogged desire to pursue a business idea regardless of the hurdles that must be overcome.
In one instance I started a daily newspaper in a small town that already had a daily newspaper that was owned by a large communications corporation. The corporate daily had alienated the community and its advertisers so I felt the timing was right for a competing newspaper. I attracted investors based on this premise and told them that only one newspaper would survive.
The end-to-beginning planning process was used and all of its elements were incorporated into a Critical Path/PERT planning process. The result was the creation of a newspaper from the ground up in 90 days. The staff was focused on serving the community and we were hitting the ball out of the park in market share and revenue gains.
I had pointed out to investors, only one newspaper would survive. It was apparent from the very beginning of the planning process that to be successful would require failure by the competition. We knew that it would be difficult but our dislike of the newspaper owned by the large corporation and our belief that we would win the community support led us to believe we could overcome any obstacle.
In The Art of War, Sun Tzu says that a force that is superior in size and resources will always win. To counter this strength the smaller in the battle must capture something that is critically important to the one with superior resources.
In this newspaper war, the competitor had the resource advantage but we believed that a locally owned newspaper would gain the community support needed for a newspaper to survive. We felt this community support was the critically important advantage required by the eventual winner.
While that might have been true to some extent it overlooked the ability of the competitor to focus resources on winning that support. Also overlooked was the real critical need for our competitor to demonstrate to other communities that starting a second newspaper was not a good idea. The competitor knew that if a locally owned newspaper succeeded in this market other markets could be in jeopardy.
In this case we did not identify a specific item that, once captured, couldn’t be regained by the competition. The result was a victory for our competitor through resources expended to gain community support. Our strategy was a good one, our planning was flawless and our efforts were valiant but we could not match the resources that the competitor could focus on winning the battle.
A couple of years later I was brought into a similar battle, which we did win. In this case we carefully identified a critical revenue stream that needed to be won. We identified this early on and the result was in fact a smaller newspaper winning the advantage over the larger corporate owned newspaper. Even so the corporation did not give up the market, it offered to purchase the new locally owned newspaper at a price the owners could not refuse. So in the end Sun Tzu was correct, the force with the largest store of resources won.
I tell these stories to caution entrepreneurs that while vision, commitment, strategy and planning are critical, it is important that all obstacles to success be identified and dealt with realistically.
I have had successes over clearly dominant competitors and those successes required an objective study of the actions required and the potential reaction by the competitor. In most cases victory was based on choosing a strategy that couldn’t be reacted to by the competitor (a disruptive technology) or by feinting a move that caused the competitor to make a critical error.
This is one of the reasons I am in favor of end-to-beginning planning. This process, if used well, points up all of the potential challenges that must be dealt with to create a successful business.
The thoughtful manager will identify areas that can result in failure and plan accordingly.
Wednesday, May 15, 2013
I can remember early in my career when I was asked to manage a department that was disorganized and not meeting its organizational objectives. While somewhat flattered, I was also afraid that I wouldn’t be successful. I didn’t have experience in defining organizational problems or developing their solutions. In this particular case I just decided to take an action and see where it led. As luck would have it the early actions raised questions that would require that I do some research into how others had dealt with similar problems.
In most cases the research gave good pointers on how to move forward and what next steps might produce results. The next steps usually led to more questions that required further research which led to still more steps to be taken.
While this approach moved the project forward, it didn’t provide a list of activities that would focus on improving the department’s ability to function effectively. This approach almost required that I discover problems and inconsistencies as I tried to implement changes.
As in the above situation, there are established businesses that must make changes in their organizations to grow or even to survive. There are also a lot of great ideas for new business initiatives and new businesses. In either case the difference between a needed outcome and achieving that outcome is in execution.
Execution is the process of taking something from an idea to a completed project. The ability to successfully execute a project usually boils down to attention to details. It requires breaking a needed outcome into components that can be described and measured.
I have been very fortunate to be given the opportunity to work on a myriad of projects for existing and new organizations. Over time this led to bigger projects and ultimately to starting and operating new business ventures. With each of these projects there came a deeper understanding of how best to define actions to take in order to have a successful project. I found that the best process started with a clear definition of the needed outcome. Once the outcome was defined, a review of all of the steps needed to achieve that outcome helped identify actions that were needed. This allowed the development of an execution plan rather than discovering needed actions during an implementation effort.
If the components of a project’s envisioned outcome are specific enough then a plan can be developed. The plan must be specific and detailed enough to completely implement the envisioned initiative.
The plan must consider all aspects of an initiative: environment, economy, competition, resources required, coordination of marketing strategy with management capabilities and so on.
Here are some steps using an end-to-beginning planning process to improve the level of execution success.
Planning – When setting a plan, envision the end result then take this vision and begin working backward to the beginning of the project. If the vision is to open a retail outlet, envision the store, the customers, the location, the merchandise, the fixtures and layout, your income (or profit), the employees and their level of expertise and so on.
Each of these envisioned characteristics require specific actions. For example, if an upscale location is envisioned then identifying acceptable sites, rents, build-out requirements and lease terms are required action items.
Envisioned profit levels will require a certain sales volume, pricing strategy and marketing effort. The staffing quality will come at a certain level of payroll and benefit expense. The actions here will help in developing the strategy for the initiative.
List of action items – The action items for each characteristic should be listed in a sequential format. For example one would need to identify a location before considering build out requirements. The sequence of action items once laid out should be set to a specific timetable. Thus if opening a retail outlet is envisioned to take place in six months, the identification of an acceptable outlet would have to take place and leave enough time to negotiate lease terms, build out, installing fixtures and inventory.
At his stage the planner may find that there are conflicts that require resolution. In this example if the build out requires four months and fixtures have a five-month lead-time, adjustments will have to be made in the time line. It may require setting a different opening date or finding ways to order fixtures before build out activities begin. This is where the use of a Critical Path or PERT chart would be useful. Mind Tools provides a good tutorial for using CPM and PERT at http://www.mindtools.com/critpath.html.
There may also be strategic conflicts. For example if the end-to-beginning analysis uncovers competitive, legal or other potential roadblocks additional strategic planning may be required.
Assign specific action items and timetables to individual managers - This allows each activity to be tracked by a responsible individual. This individual can alert others when difficulties are encountered so actions can be taken to keep the whole project on schedule.
This approach allows the identification of the final objective and a means of analyzing all aspects of the project in the planning stage rather than in the execution stage. It also helps uncover inconsistencies in strategic planning.
Once the vision is consistent with the actions necessary for implementation then the activities are arranged in the most efficient sequence and assigned to responsible individuals for follow through. This approach significantly increases to chances that the execution of a project will be successful.
Tuesday, May 7, 2013
Having performance indicators can help improve virtually any facet of your business.
Determining the business area to be monitored and the type of indicator will vary by business type. For example in retailing, customer satisfaction may be gauged by repeat visits by customers, frequency that merchandise is returned and customer complaints. For airlines, customer satisfaction indicators might include lost luggage and on time departure and arrival statistics.
Key performance indicators should provide a gauge of success in achieving internal goals as well as comparing performance with industry averages or industry leaders. Having a comparison to the industry prevents managers from becoming myopic when measuring results.
Some companies produce key performance indicator reports monthly and distribute them with financial reports to managers and senior staff. By combining key performance indicators with financial outcomes a manager is able to get a clearer picture of what is working well and what needs attention.
For example, a financial report might show a profit level that is meeting expectations or that revenues are at expected levels. Viewing key performance indicator reports may show that product sales volumes are higher than expected and that labor costs are below expectations. Here a manager looking at just the financial reports would assume everything was operating in an acceptable range and that significant improvements couldn’t be made.
By analyzing non financial performance indicators such as products produced per labor hours used and revenue per product, a manager in the foregoing example might find that the products are being sold at lower than planned rates and employee productivity reduced labor costs enough to offset lower revenue per unit sold.
This might cause a manager to ask why the products were sold at lower than planned rates. Further study might find a problem with marketing efforts, sales staff or product quality. Follow up actions might result in solutions that would allow unit rates to increase while maintaining sales volume resulting in increased revenues and profits.
It is a good idea to have operational managers report on key performance indicators in their area of responsibility on a regular basis. Monthly reporting is preferred but such reports should be required at least quarterly. This disciplined approach to reporting on key performance indicators will train managers to fully understand the implications and relationships of the indicators to overall organizational performance.
Key performance indicators to be reported on might include the following:
1) Workforce performance Indicators
a. Payroll costs per full time employee equivalent,
b. Products produced per person hour,
c. Customers served per person hour,
d. Revenue per person hour,
e. Benefit costs per full time equivalent,
f. On the job injuries per month,
g. Employee payroll and benefit cost per product sold or customer served.
2) Production Division Indicators
a. Percentage of available machine time used,
b. Repair and maintenance hours as a percent of available machine time,
c. Material waste per unit produced,
d. Defective products per 1000 produced.
3) Financial Indicators
a. Days in accounts receivable,
b. Interest cost or discounts lost due to late payment,
c. Discounts received for early or timely payments,
d. Days of material in inventory,
e. Inventory turns per inventory payment cycle.
4) Customer Satisfaction Indicators
a. Customer product returns per 1000 products sold,
b. Customer Complaints per 1000 customers,
c. Customers served per person hour,
d. Number of out of stock reports per product line
5) Sales and Marketing Indicators
a. Revenue per customer,
b. Profit per customer
c. Market share
d. Sales per sales employee
e. Sales administration costs per customer,
f. Advertising costs per customer,
g. Advertising and marketing costs per product sold.
This list of indicators can be expanded or customized to meet specific business needs.
Using key performance indicator reporting on a regular basis will provide useful information for actions that will improve the overall performance of any organization.