Billy's 33rd Law: Transition One - From Hunter to Farmer

All business success rests on something labeled a sale, which at least momentarily weds company and customer.

 Tom Peters 

For most business start-ups, finding initial customers is often the initial challenge.  Many businesses are successful due to the outstanding sales skills of its founder.  In the world of sales, these are the hunters.  I admire hunters.  They prospect with wild abandon...make quick pitches designed to get them a longer hearing and don't worry about rejection.  Hunters are great at executing customer acquisition strategies.

Great sales skills usually drive of business growth.  The great hunters thrive on the challenges of bringing new customers on board.  The weakness of the hunter is they are often a bit ADHD...they get bored once they have closed that sale.  That is why we have  farmers. Farmers are great at executing customer retention strategies.

Farmers (I have also heard the term shepherds) thrive on  'customer care.'  They keep the customers engaged and often look for opportunities to meet customers’ needs in an entirely different way.  They are essential for sustaining a business.

When a company develops a growth strategy, it comes from one of two sources.  You can either find new products/services, or you can find new customers.  You can of course use a combination of the two.  This is obvious - but sometimes the simple and the obvious are amazing starting points.

 

	New Customers	Existing Customers
New Products	Product Growth	Hybrid Growth
Existing Products	Stable	Marketing Growth

To add products, you must determine if you must add additional capability.  Capability represents the things you can currently make or do.  For example, an accountant may want to offer business planning services to his customers.  If this individual has the ability to do the plans, then there is no need to add capabilities.  If the accountant lacks skills in marketing, or market research, he must develop or otherwise find these skills to add business planning to the product offering mix.

Your choice is important, as you will dedicate both time and resources to the direction you choose.  Product growth is great for companies with a breadth of competencies.  Large consulting firms can offer many different services to their existing customer base, and are never short of new ways to generate income!  Companies whose 'marketing customer' is very 'farmer oriented' are often great at finding new customer needs and then developing strategies to meet those needs.

Some companies are great at finding new customers for their existing product mix.  They thrive on the Hunter style of marketing.  They are adept at re-creating their success formulae in other markets.  Franchises and chains are good examples.  Many offer a limited product mix, but can duplicate this in many different markets.  (I am amazed how many sandwiches Subway can generate from such a small area.)  These companies grow by saturating markets and finding new customers for their products or services.

No company can use a single strategy forever.  Eventually, you must find new customers and expand or revise your product offerings.  Making such changes requires many of the same needs identification skills that made your company great in the beginning.

I have seen too many companies grow their market by going from one opportunity to the other with no strategy what so ever.  Opportunism is great (and a hallmark of many great entrepreneurs) however strategic growth requires evaluating the direction that best suits your corporate strengths, culture and abilities.  It is important to understand the role of hunters (customer acquisition) and farmers (customer retention) as a part of your overall growth strategy. 

Billy's Thirty-Third Law: Growing a busineness is different than starting a business

The skills required to grow a business are different than the skills required to start a business; the challenges found in growth different than those in start-up.

Several years ago, my friend Barb Mowat asked me to join her in a two day program devoted to business growth.  Barb spent the first day on how to grow a business.  She was, as she always is, supportive, encouraging and left the crowd feeling great!  I was responsible for the second day which we called, The Pitfalls of Business Growth.  Needless to say, my message was quite different and a bit less supportive and encouraging.  Our participants liked the balance that growth for its own sake was often misguided, but with planning and foresight, growth is successful and rewarding!

As a part of that presentation, I developed a model called The Growth Trap.  Consider the following scenario:

An entrepreneur starts a business.  She works hard and she has some success.  People like her product or her service.  As time passes, the business becomes more popular.   Customers become advocates ... create a real buzz around her business.  Sales begin to grow quickly and she is ecstatic.  She remembers those early days when sales were difficult and now the orders are rolling in!

Her product popularity pushes her productive capacity to the limit.  She is barely getting product out the door on time, or performing services for her customers on time. She continues to work hard on sales, all the while the timeliness service and quality begin to diminish ever so slightly.  Everybody works hard and the company keeps up with the ever growing demand.  But sales are up, so everything must be all right!

Unfortunately, as the company grows, she needs outside financing.  As her sales grow, her inventory and outstanding accounts receivable grow with them.  This creates a Working Capital crunch as her cash flow becomes a cash trickle.  She needs another increase in her line of credit and her banker wants this thing called a forecast her bookkeeper has no idea how to do one and a consultant wants $5,000 to do a financial plan.  "Why don't they give me the money", she wonders with exasperation, "After all, sales are up so everything must be all right."

To fill the demand, she starts to hire people.  At first she is very choosy, but as the business is growing she falls in to the 'hire and hope' method of recruitment.  At five people, it was just like family.  At twenty, it seems that the staff is not even on the same page.  But, everything must be all right because she has just opened another new outlet and sales are up.  One day her first hire...her right hand woman, so to speak, announces she is resigning.

If this sounds familiar, you are in the same boat of many entrepreneurs who are growing their businesses.  You are entering the growth trap... a trap which you must manage to avoid collapsing under the weight of your own growth.  Notice that that each aspect of this business grows at a different rate.  The result is a company with greater sales capacity than productive capacity, financial capacity and human resources capacity.  Eventually, something has to give!

 

The Growth Trap

 

 

The Growth Trap

Over the next four sessions, we will examine the effects of the four aspects of your business growing at different rates what you have to do in your business development to actively work on the critical business aspect and importantly, anticipate the aspect that will next require your attention.  Growth for its own sake is dangerous ... growth with planning and intent is rewarding and profitable

To get a free chapter of Grow your Biz, the book Barb based on our workshop, go to http://groyourbiz.com/about/free-chapter/.  

Billy's Thirty-second Law: Somebody always gets screwed

“Nothing is fair in this world. You might as well get that straight right now”

― Sue Monk Kidd, The Secret Life of Bees

I have long held a theory in business that somebody usually gets screwed.  What is ironic is that this is often consistent with an organization’s values.  Since we spend a great deal of time in planning sessions on Mission, Vision and Values; I thought it interesting that values are rarely fair.  Values, when they are truly lived out by the company, are generally ‘biased’ in a particular direction of another.  Typically, these directions are the customer, employees and shareholders or owners.  These are often values that work against one another – as customer needs, employee needs and shareholder needs pull the company in different directions.



 

Fairness, and often unfairness, often results from the organization’s values with respect to each of these stakeholder groups.  In British Columbia, where I live, liquor is sold through the Liquor Control Board.  This is a government organization that holds a monopoly on liquor distribution and a near monopoly on the retail distribution aspect of the business.  The LDB does very well.  Not only is there a 10% liquor tax, but the LDB in fiscal 2013, LDB made of 30% profit on sales.  Not bad for retail these days.  The employees at the LDB have a wage of $21/hour plus government benefits.  Guess who is getting screwed?  Well, when you consider alcohol prices in the US and the UK then you guessed it…the customer is paying way too much.  Somebody gets screwed!

Now consider Wal-Mart.  Let’s accept the fact that it is a competitive world, and set aside the impact that Wal-Mart has on the retail landscape, and just think for a moment about Employees, Customers and Shareholders.  Wal-Mart is, in revenue, the largest company in the world.  They have low prices so the customer is well taken care of.  The shareholder’s do ‘OK’ but the stock has underperformed, when compared to the Dow Jones Industrial Average, and the dividend yield is only 2.5%.  But it is the employees, and the suppliers, who really get screwed.  Wal-Mart is not a great paying organization.  Its average full time employee in the US earns $12.83/ hour, according to the Huffington Post (October 23 2013).  Part time workers earn less.

It is interesting the Costco, a direct competitor, pays well $21/ hour, prices well, but is criticized for its lower profits.  The return on sales… merely 1.9%, Wal-Mart's most recent year was 5.64%,  and the dividend yield is only 1.123%.  This time, the shareholder / owner gets screwed. 

Values:  Values define what a business will and will not do.  Values provide boundaries and direction for the planning process.   Values are not good or bad, until some kind of judgment is placed on them.  Consider the following scenario – which illustrates different business values.

A business has just received a report from a consultant advising them that the company could raise their prices 1% without any effect on their unit sales volume.  That one- percent would drop right to their bottom line!  Three executives of the company were discussing what strategy they should employ in order to move forward. 

The first executive said, “We can’t raise our prices – that just wouldn’t be fair to our customers.  We are only where we are because of our loyal customer base.

The second executive said, “I think that we should raise the price and pass that revenue directly to our employees.  One percent of sales would represent a 10% wage increase!   Our employees made us what we are today and they deserve this.

The third executive said, “I think that we should increase the price and then declare a dividend to the shareholders.  They took the risk to invest in the company and they are the ones who should finally benefit from their faith in this company!

Nobody is wrong…they merely have a different take on company values.

Billy's Thirty-first Law: Know what kind of entrepreneur you are.

I hate to lose more than I love to win.

Jimmy Connors

I know that sorting things into two groups often oversimplifies live.  It's sort of like the old joke that there are two kinds of people in this world, those who divide people into two types and those who don't.  (Have you ever noticed that referring to an 'old joke' is a euphemism for a bad joke?) I am going to succumb to that most banal of all temptations and do just that, hoping for a better idea for next week.
Entrepreneurs are by their very nature competitive.  There are two ways to look at competition...winning and not losing.  They may appear to be the same, but they are very different.  Those who Hate to Lose are different than those who Love to Win...and knowing which type you are may help you better understand your natural bias when making decisions.

Most people are more afraid of losing than they are programmed to win.  in investment theory we call this prospecting theory.  Given the choice between a guaranteed $50 and a 50% chance of winning $125, most people choose the $50 sure thing.  The logical choice, based on mathematical expectation, is to take the 50% chance of winning $125, as it has an expected value of $62.50.  The difference, $12.50, is the premium paid to avoid losing.

Entrepreneurs are not like most people.  Some hate to loose, others hate to win, but we all play the game.  Most people take the safe choice and get a job.  If your mother has ever asked you when you are going to get a 'real job', then you know exactly what I mean. 

With this in mind, I have put together some thoughts on both of these entrepreneurial types.  See if you recognise yourself and if the strengths, and weaknesses, apply to you.

 

Hate to Lose

I can relate to the hating to lose type because, I hate to lose.  My business partners wanted to embark on a software development project. My rule was that I wouldn't be out of pocket for any part of it. I was willing to risk my time, but not my money.

Here are some characteristics of the 'Hate to Lose’ (HTL) entrepreneurs.

1.      HTLs have trouble ‘cold calling’ as the chance of rejection is higher than calling on a pre-qualified lead.

2.      HTLs sometimes leave money on the table wh          en negotiating on price, for fear of losing the job.  Ironically, I teach price theory, yet often underprice my own services.

3.      HTL’s are often too slow to spend money or take action, for fear that it will cause more harm than good or that the action will result in failure. 

4.      HTL’s tend to have high success rates, but we often miss growth opportunities. We would rarely have those, bet the business moments.

One of the reasons I stopped reading seminar feedback is due to one scathing review.  I thought the session went well. Twenty-six of the Twenty-seven participants thought it was great.  The last one hated the session and hated me. I use humour to illustrate points.  Since this was a marketing seminar, the jokes are much funnier than in financial seminars.  The humour always illustrates an underlying business truth. This critic ripped me, my humour, the session and the relevance of the material.  One comment was, "If I wanted jokes I'd go to a comedy club." 

Everybody else loved the humour, the content and the session, but guess who I remember.  Now, the only thing I hate more than losing, is tying, so I refuse to change my style. I would rather lose than be bland.

Love to Win

Love to win people are less risk averse.  As they are not afraid to lose, they have far less hesitation when setting new goals or executing new tactics. They worry less about the consequences than the rest of us, giving them more comfort trying new things. Characteristics of the ‘Love to Win’ (LTW’s) group include:

1.      LTW’s are great at cold calling, but often execute customer acquisition strategies that ignore existing customers.

2.      LTWs forget about the core business when doing something new.

3.      LTWs fail to anticipate the ‘unintended consequences’ of the new strategies they execute.

4.      LTWs are often those who follow their gut feelings, rather than those who analyse situations and act accordingly

Many successful business partnerships balance both types.  This is a great way to fill in the gaps.  In my preparation for this blog entry, I asked a friend, who ran a very successful tool & die business, which of these he considered himself.  “I hate to lose” he replied…”but my partner, he really loved to win” I have had two partners who were exactly the same. 

Sometimes, we can change positions. My friend Mel and I have been friends since high school.  We wrestled together, even faced each other in a tournament. (He won)  If we were together when the coin toss challenge was issues, we would both choose the 50% chance of winning more money.  Neither of us would want to ‘wimp out’.  Many entrepreneurs are the same…we may have a dominant style, but that does not prevent us from moving when the opportunity is right.  Entrepreneurs are, if nothing else, flexible!

 

This is less about better or worse, and more about self-awareness and knowing how you make decisions and how those natural decisions may have a built in bias that will work against you.

Billy's Thirtieth Law - Skill Three: Becoming a Strategist

“The essence of strategy is choosing what not to do.”

Michael E Porter. 

Running a business is important, however; it is imperative that you keep your ultimate destination in mind.  Deciding on your destination is your strategy. When we start out, or strategy is usually as simple as ‘make enough sales to avoid bankruptcy’. 

When we decide to grow our business, simply saying, “We’ll just do more of the same.”  is just not going to work.  Most businesses start as singular strategy organizations.  They sell one set of products, or provide one set of services to a fairly homogeneous customer group.  You eventually exhaust the market potential for a single service.
  

For a business that wishes to remain small, this strategy need not change.  My father was a self-employed electrical engineer.  He offered engineering services in a fairly limited geographic area.  He was limited to his own skill-set and to the number of hours he could offer for ‘sale’.  His marketing was primarily word of mouth.  He successfully operated his business for nearly thirty years.

Many entrepreneurs want to grow their businesses.  Some do this by selling the same products or services, but expanding their market size.  Others increase their product offerings and sell to their existing clients, or at least a similar market.  Others do a combination of the two, selling a new set of products to different customers.  
 

All of these represent strategic change to the company.  New strategies must be vetted…to that the entrepreneur does not just go off and to the first thing that comes to his or her head. (Oh yeah, they do that and then call people like me two years after the mistake was made.)

Here are some tips for vetting potential growth strategies in your business:

Think of several different, potential strategies that help you achieve success.You can think on pivot around things like adding products increasing customers, adding outlets or changing distribution.  Don't stray too far from your core competencies (the things you do really well) or you may end up starting a new business, and not building your existing business. 
 

1. Do your homework before taking action!  You should know how to provide the product or service, and know how your existing and potential customers will act. For example, changing your pricing strategy to acquire new customers may serve to alienate existing customers.   
2. Develop a break-even for the strategy.  Include your start-up costs, fixed and variable costs and ask determine where you need to get to in order to break even.  Look at that figure and determine if you can achieve this sales target in a reasonable period if at all.  This alone is a great vetting tool.
3. Develop a plan with milestones and budgets.  If things are not on time or on budget, reconsider the strategy.  This is also a great way to determine if you have the tactical abilities to execute the strategy.
4. Unless you are going to the moon, there is no point of no return.  As a part of your plan have a number.  For example, if this has cost us $1,000,000 and we are still not profitable, we stop.  This is difficult due to the Sunk Cost Fallacy.  This is the notion that once costs are incurred, must be recouped.  This is, of course, nonsense.  We feel we are abandoning our investment of time and money.  You are, but you are also preventing this from getting worse.  Track and take action. 
5. Try to test quickly and on a small scale.  This is the putting the toe in the water approach.  
6. Ensure that each new strategic direction pays its own way.  Each strategy must have its own business case.  

New strategies are important to growing businesses.  For many entrepreneurs, trying new stuff is far more fun than operating old stuff.  Don’t fall into the trap of doing something new for its own sake, but do some new that adds value to your enterprise. 

Billy’s Thirtieth law: The Three Business Skills Every Entrepreneur Needs - Being an Analyst

I never guess. It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.

·         Sir Arthur Conan Doyle’s Sherlock Holmes, A Study in Scarlet

When we facilitate planning sessions with our clients, we begin our session with the diagnostic section. Diagnostics form the second of the three important skills all entrepreneurs must acquire in order to ensure the sustainability of the business. All entrepreneurs managing in a changing environment must master the art of business analysis.

Analyzing a business is not simply using a series of metrics.  As you know, I believe that Happiness is a warm spreadsheet, but by the same token, the spreadsheet and information found are the tools…the entrepreneur is the craftsperson. Here are some key ways to use both analytics and business judgment to help you grow and develop your business.

Step One:  Determine important measures

Many entrepreneurs look at financial metrics.  There are other important metrics in other parts of the business.  Marketing, Human Resources and operations all have measures that help keeping an eye on the health of your business.  Establish a series of monthly and even weekly measures that allow you to take fast action, and annual and quarterly metrics that give you a sense of the ‘long term’ health of the business.

Step Two:  Look for changes

Spotting trends and changes is an essential part of analyzing the business. For example, a drop in sales may represent a downturn, or simply a seasonal shift.  Comparisons to the previous year help reduce these seasonal factors.  Changes can come due to three factors.  Internal factors are changes to the metrics caused by internal actions of the company.  External factors are changes to the metrics caused by outside forces.  Anomalies are random fluctuations with no identifiable cause.  A single change does not necessarily indicate a trend, but may have no cause. 

Step Three:  Take Action

Once you have examined and sorted the changes, create strategies, or execute tactics to overcome these changes.  Alternatively, take action adapting to the change.  For example, if sales are down, execute a marketing strategy to increase sales, or reduce staffing levels.  In the case of an anomaly, keep an eye on the metric involved and see if there are any underlying factors that are driving change to the metric and to your business.

Underlying Conditions / Assumptions

When performing your analysis over a longer period of time.  For example US consumption of soft drinks is off by 20% over the past ten years.  This trend indicates a change in the ‘underlying conditions’ under which beverage companies are operating.  Demographics changes also change the underlying assumptions in healthcare, financial services and travel & leisure. 

Spotting these changes longer term changes is challenging.  Missing such changes often trips up large businesses. Ken Olsen, CEO if Digital Equipment Corporation (DEC) was quoted as saying, "There is no reason for any individual to have a computer in his home."  DEC went on to merge with COMPAQ and then…disappear.

Good entrepreneurs often started their businesses by sensing changes.  Great entrepreneurs, with the help of great analytics, sense these changes and adapt before the changes overwhelm them.

Billy’s Thirtieth law: The Three Business Skills Every Entrepreneur Needs. Skill One, develop great Tactical Skills

As I previously wrote in The Eighteenth Law, the entrepreneur must develop his or her skills ahead of the development of the enterprise. We can look at specific business aspect skills; learning more about finance, management, marketing and the operations of the business. Development also includes developing skill sets in three important components of business planning. These skills are Analytical, Strategic and Tactical.

Analytical Skills include all aspects of measuring, and interpreting those measures to make more effective business decisions.

Tactical Skills include all aspects of achieving goals set by the company.  These include everything from performing tasks to the systems and workflows that efficiently get things done. 

Strategic Skills are the planning, goal setting and visioning aspects of your company.  Strategies set direction while tactics get you to the destination.   

To use a simple example, when you take a vacation, strategy is deciding where to go, tactics is deciding how to get there and analysis tells you how long it will take. These three skills are taken from business theory; but don't let that scare you. You are already using each skill on a regular basis. The challenge is developing skills and building on the skills in which you may be weak. Over the next three blogs, I will shed light on each skill, why they are important to your firm and how these skills are essential parts of developing your enterprise.

Tactics:  Most Entrepreneurs' Strongest Skill

Strategy requires thought, tactics require observation.

·         Max Euwe, Chess Grandmaster & Mathematician

Most of the entrepreneurs I have met have little idea of why they are successful.  They attribute success to creativity, insight, hard work and other factors popularized by the press.  When I look at successful business owners they do not invent a better mousetrap, but rather build and sell mousetraps better than their competitors.  Successful entrepreneurs deliver well and deliver early.  This simple fact is not exciting, but it is the truth. 

In a previous blog, I suggested that success was more than simply hard work.  Successful entrepreneurs combine hard work with great tactics, especially when the goals (strategies) in the early stages of business development are quite straight forward. 

Tactical thinking is essential to success…especially early success.  An entrepreneur with whom I worked was in the solar control business.  This industry uses window tinting and roller blinds to reduce heat and glare in both buildings and automobiles.  The owner got his start installing tint automobiles and recreational vehicles.  He was extremely good at it, got a good reputation in the industry and built a profitable business. 

He didn’t invent window tinting.  He didn’t apply it to an entirely new industry.  He just found a better way of doing thing others were not doing well, and then building on it. There are tactics in production…finding better ways to produce your products or deliver your services.   There are marketing tactics, ways to influence your customers in ways that help you achieve your sales and profit goals. 

The challenge, as we shall discover going forward, is that strong tactics alone only take you so far.  This comes back to the hard working entrepreneur who works hard, but never really achieves much of anything.  It is fine to have your business exist to provide you with a job, if that is what you want.  There is nothing wrong with that…in fact that describes my own situation.  Many people want more…and tactics alone will not allow them to accomplish that goal. 

Good tacticians always look for a better way.  They know that there are no best practices, just best practices thus far.  In manufacturing they look at systems such as LEAN, TQM and Theory of Constraints; apply behavioral event interviewing in their recruiting efforts and apply online efforts to marketing.  Smart tacticians take from the best systems, adapt them to their unique situation and improve their ability to deliver.  

The weakness with tacticians hurt businesses in the long run.  These include a lack of the ability to delegate, assuming their tactic is the best tactic and failing to realign tactics when the company needs to change strategy.  Firms can get stuck in a ‘tactical trap’ where the means becomes more important that the ends. 

Most entrepreneurs are tactical and that is great when both the enterprise and the economics are stable.  Alas, we live in turbulent times; times that require more than great tactics, but add analytics and strategic thinking to the mix to develop a growing and sustainable enterprise.