Billy's Thirty-seventh Law: The importance of urgency...the effect of scarcity

 Everything I learned about marketing I learned by watching infomercials and direct marketing ads.

The first law about pricing was about the importance of choice.  The second speaks of urgency.  Urgency forces the brain away from the timely rational and towards the impulsive emotional.  This is an important part of all buying behaviour, and has a special effect on price sensitivity. 

When we panic, our brain chemistry changes.  This reaction, part of the fight of flight response, moves our brain into a reactive mode.  This is crucial when confronted with say…a sabre toothed tiger.  It is not so important when the announcer tells us that this is a ‘Limited time offer…quantities are limited…call that toll free number in the next five minutes.  The same brain chemistry kicks in…all be it in a limited way. We react rather than acting rationally. 

The twin of urgency is scarcity.  The laws of supply and demand tell us that where there is high demand, and limited supply, prices begin to increase.  In a great podcast from Planet Money, from National Public Radio in the US there was a great story on the reselling of Nike sneakers.  Those who purchase limited edition shoes early can often double or triple their money at resale. (I have referenced the website below…check it out it is very interesting.)

http://fivethirtyeight.com/features/you-see-sneakers-these-guys-see-hundreds-of-millions-in-resale-profit/

During the 2010 Olympic Winter Games, tickets to the Gold Medal between Canada and the USA sold for thousands of dollars, due to the high demand (the host nation in the gold medal match) and limited supply.

Sometimes, urgency and scarcity just happen.  Sometimes we can work to make them happen.  Limited editions of prints are an attempt to limit supply.  Time limited availability creates urgency.  You can use these techniques to influence demand or supply and therefore move your prices higher. 

Trying to create scarcity can backfire.  In anticipation of demand for the 2015 World Junior Hockey Championships, the Montreal organizers raised ticket prices to a rate much higher than the NHL Canadiens.  The result was empty seats in the stands…taking away for the overall hockey experience.

Scarcity and urgency affect consumer behaviour and price sensitivity.  Creating, or at least understanding these two pillars of your customers' mind will help you develop a more robust pricing policy.

Happy New Years.  I look forward to more posts as the year progresses.  This is a great time for forward planning, change and business development.

Billy's Thirty-sixth Law: It is important to manage both process and outcome.

Efficiency is doing things right; effectiveness is doing the right things.

Peter Drucker

I was working through some performance management issues with a client the other day.  We took the company’s key service offerings, broken those down into tasks, and then looked at the individual position involved in each task.  A single individual completed some tasks.  People in many different roles completed most tasks.

As we were discussing this, my client commented that it was not enough just to perform the task; the task had to be done correctly.  That got us to thinking about the processes involved in task management. To put things more simply, we wanted to look at how to manage both the how and the what!

Defining Outcomes

Several years I was doing a management seminar and I commented that the best way to think of performance management was to start with the outcome and then work backwards.  The fellow who was hosting the program, a human resources veteran, told me that that was a unique way of looking at things…the traditional HR performance management approach was to look at each step and manage the process.

We need to manage outcomes.  Define the five results needed for each position in your organization and manage the hell out of them.  A manufacturing client just implemented a system that creates a bi-weekly report including productivity (planned times vs. actual times) and quality management.  At the departmental level, the departments know in real time if they are ahead of time targets or if they are behind time targets.  He has taken outcome management to the shop floor. 

Managing Method

It is not enough to manage outcome…we must also manage and provide guidelines for methods.  If we learned anything at all from the financial crisis is that, the way we achieve results has consequences!  The values of your company must permeate down to the methods of delivery.  Sometimes, method is very prescriptive and other times it is more philosophical.  Here is an example from watchmaker Rolex.  It defines the corporate characteristics they call The Rolex Way.

The Rolex Way

     1. A way of doing things unlike any other.
     2. The way we make watches, the only thing we will ever make.
     3. ‘Precise’ is too imprecise for our attention to detail.
     4. ‘Tradition’ is too conventional for the innovation we undertake.
     5. We sculpt, paint and explore. But sculptors, painters and explorers we are not.
     6. There is no word for what we do.
     7. There is only a way.
     8. The Rolex Way.

There are other examples of this.  Hewlett Packard (HP) had the HP way.  Different companies define themselves in terms of customers, employees, innovation, product and a myriad of other aspects of their enterprise.

Outcome is like a script.  Anybody can say, May I help you when a customer enters the store.  Process and attitude determine if the greeting is sincere and welcoming. If you want to develop a complete performance management system, begin with the outcome, and then determine the how and why each task is completed.  This helps both performance management and employee development.

Billy’s Thirty-Fifth Law: Vision is important not only to the enterprise…but to the entrepreneur.

...your old men shall dream dreams; your young men shall see visions. 

Joel 2:28

The second pillar of corporate philosophy is vision.  Vision is dream with action.  It is more philosophical than goal setting and yet more specific than wishful thinking.  Vision often exceeds our grasp, until we find a way to achieve the vision.  Even when we do not achieve those lofty heights, we achieve greater things than those whose time horizon is the next day, week or quarter. 

Vision in business is nothing new, but that does not make it any less important.  As a business owner...especially as a founder... ask yourself if the vision you set when you began is the same as it is now. In planning sessions, I love to ask the planning team where they see the business in one, three or five years. How big is the enterprise in revenue, profit and staff levels?  Would it be similar or completely different? 

 

I am a big fan of succession planning.  This is especially true when there are key people reaching retirement age.  What would your enterprise look like if that key person retires?    What if they retired earlier than you expected?  This kind of visioning leads to the development of succession plans and even contingency plans.  We don't like this type of planning.  It is a little like estate planning, we know it is important, but do not think that it is imminent.

Most entrepreneurial coaches, educators and consultants encourage this kind of visioning as part of the planning process.  We often fail in the second phase of visioning.  We think about the enterprise, but not the entrepreneur.  I did some work in the area of 'succession planning'.  The woman I was working with, and expert in this field, pointed out that for many entrepreneurs, death was the succession plan.  My own father got sick and passed away without any kind of succession plan.  This increased the angst during a difficult time for our family.  

Have you envisioned your own life?  Here are some questions every entrepreneur over the age of 55 should ask him, or herself: 

• Will you work forever? 
• Do you have a succession plan? 
• Is your business salable, or can it become salable?
• If you plan is to 'cut back' do you know who will perform the tasks you are no longer performing? 
• Have you built your wealth in your business, or have you used the business to build wealth in other ways?

Many entrepreneurs have a vision for the enterprise.  Fewer entrepreneurs have a vision for themselves.  In the world of business and especially business planning, five years is not a long time.  I was with a client just the other day, talking to him about the future of his enterprise.  I told him, "I can picture being at Mr. X's retirement dinner honoring the contribution he made taking this business from a $1,000,000 / year business to a $5,000,000 business. I would love to think that this event, which will happen in five years, means that the business Ms. Y  now is ready to step in and continue the work in a seamless fashion."

 

I remind you again of Elizabeth Lake's definition of a sustainable enterprise. It is a business which may need the founder's current role, but it does not need the founder.  Visioning can help you achieve that goal of becoming a sustainable enterprise.  

For those of you who are regulars...I am on vacation and return in December. 

Billy’s Thirty-Forth Law: Values Matter!

The superior man understands what is right; the inferior man understands what will sell.

Confucius

When we engage companies in strategic planning exercises, we address three areas of corporate philosophy.  They are mission, vision and values.  I define mission as what you do…vision as where you are going…and values the underlying principals defining your path.  This week, I want to talk about values.

All organizations are ‘values driven’.  Strong organizations, including enterprises, have clear and agreed upon values.  Different companies have different values.  Some are conservative, others innovative.  Some companies are smart and others arrogant. Understanding the underlying yet unstated values of a company is often the most difficult part of the planning process.  Companies have difficulty acting against their core values…even when they ought to.

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!

Each executive is displaying different values.  They are neither good, nor bad they are just different.  That is the thing about values; they must be right for you and for your business. They tell what you should do, and what you should not do.

Wal-Mart has values.  They believe that low costs = low prices.  This value drives their behavior with their suppliers and their customers. IBM values education and they recruit and develop their highly educated workforce.  This drives their recruiting policies.  Some companies foster a ‘work hard play hard’ culture.  You may or may not agree with the morality of the values, but that's the difference between values and value judgement.

Values are hard to quantify.  They define what we do and importantly what we don’t do.  Contrary to popular belief, profit is rarely the sole business value. Many companies value revenue and market share over profit.  Profit is actually a rather weak value.  Even publicly traded firms only value profit for its influence on the ultimate share price…but that is another story.

 

Understanding your own values is the foundation on which you build your business.  Communicating and living those values drives cohesiveness in your internal and external messages.  Missions change…visions evolve…but true values remain an important part of your enterprise story.

Billy's Thirty-Third Law Transition Four: From Familial to Structural

There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success than to take the lead in the introduction of a new order of things.

Niccolo Maciavelli, The Prince (1532)

The fourth transition is often the most difficult…and for a variety of reasons.  When a business grows it transitions through a number of sizes…from the one person ‘solopreneur’, to a 100+ large organization.  Each of these sizes changes the company’s nature and culture. Revenue growth inevitably results in increases in staff sizes and employment structures. Managing this change is a daunting task for the most experienced managers, never mind the entrepreneur whose expertise is in his or her chosen field, and not in managing people and organizations.

Micro Employers – Up to Five Employees

Many people love for working at a ‘micro’ firm.  Everybody knows each other, eats lunch together and, importantly, it is easy to keep track of what everybody else is doing.  This ensures accountability as there is really, ‘no place to hide’.  There is less specialization, except in professional services, as everybody does a little bit of everything.  This situation requires the least amount of structure and the least amount of management.  Recruiting is more ‘fit’ based than qualification bases.  This generates a great deal of ‘sameness’ amongst the employees. 

Small Employers – Five to Twenty Employees

Something happens to a firm at as low as six or seven employees.  Communications begin to breakdown as people don’t necessarily know where everybody is.  A new receptionist may not ‘know’ that the boss is always at a breakfast meeting the third Tuesday of every month simply because nobody told her. 

As a company grows through the next stage, communications must become more formal.  This includes who manages and assigns tasks.  When a company is small, people are assigned tasks from a number of different people.  As the company grows, you become formal to prevent everybody from getting in each other’s way.  The result is a change in culture…a change that is not necessarily welcome by everybody.

Company growth often results in more complex tasks and processes.  Jobs outgrow the incumbent candidate.  A bookkeeper, adequate for a micro business, may not have the accounting skills required for a larger firm.  Tasks are often specialized as the company grows, leaving some employees left out.  Addressing this can cause strain on the organization, especially with long time employees who are used to a more familial style.

Medium Employers – Twenty to Fifty Employees

As your business continues growing, the working environment changes dramatically.  This is the point at which the organization becomes hierarchical.  Suppose you have a small chain of stores.  With one store, you have a store manager.  With five stores may require five store managers and an area manager.  At twenty-five stores, you may have twenty-five store managers, five area managers and a regional manager.   

The specialization continues, as does the knowledge level of those holding positions.  In the micro enterprise, a bookkeeper has sufficient knowledge to keep the company running financially.  In the medium sized firm, a financial administrator is required.  In a larger firm, a CPA may be required.  As an enterprise grows, it becomes far more complex requiring more sophisticated management structures.  

Before your firm grows, run through the following checklist and then plan for the changes:

·         Develop a Human Resources forecast and a recruiting plan to ensure you have the number of people you need when you need them.

·         Develop formal job descriptions for the employees in the firm.  Along with the job descriptions, develop measurable goals for each employee in each role.

·         Develop formal management structures.  People need to know to whom they are reporting. Develop and implement a formal review process based on the goals people must achieve.

·         Develop a formal compensation scheme.  This must include regularly scheduled wage reviews that relate to job performance.

This sounds so 'big business' doesn't it.  You can achieve these goals without a company becoming overly bureaucratic or impersonal.  Think of these measures as measures of fairness...fair to the employee...to the company...and fair to the customers they serve.  If this is your guiding light while developing your Human Resources strategies, you will never go wrong even as your company grows.

Billy's Thirty-Third Law Transition Three: Finance goes from Internal to External and From Income Statement focused to Balance Sheet focused

When my accountant reviews my year end statements with me, all I see are dancing cows!

Finance for most entrepreneurs is difficult.  Most entrepreneurs' strengths are in the areas of Marketing or Operations and they have to pick up Finance as they go.  There are two transitions in growing businesses of which owners must be aware.  They are internal to external and income statement to balance sheet.

Internal to External

When you start a business, the financial focus is on the internal needs of the financial statements.  Most people simply want to know if the business is profitable.  Sometimes, it is helpful to have an idea of who owes you money, however; it is amazing how many business owners know exactly who owes them how much at any given time. 

That is the first challenge as a business grows.  The entrepreneur who kept track of things in his or her head is now in a situation where he or she cannot possibly keep track of these vast amounts of information.  Keeping track of five customers is one thing...keeping track of twenty is quite another. 

Financial systems develop to keep track of the internal needs of the business.  They usually begin for tax and compliance reasons, and morph to management information reasons.  (OK Sometimes they don't...Some owners only do bookkeeping for tax reasons, but I again digress.)

As a business grows, it often needs outside financing.  This is usually from banks, however; it can also come from investors.  Now the financial systems must serve the needs of the outside user. This often means that the bookkeeper must now take on more complex financial tasks.  Secondly, businesses may consider financial forecasting as a part of controlling their business during growing times.  Forecasting, both cash flow and revenue & expense forecasts, are an important tool for any business, but are essential for a growing business.  The forecasts are required for business loans and for potential investors.  Checking your plan vs. actual is an essential part of financial managements, yet few smaller businesses have formal forecasting or budgeting sessions.  Get into the habit of forecasting annually and monitoring monthly!

Income Statement to Balance Sheet

The second transition is managing the balance sheet.  Most people intuitively understand the income statement...the revenue less expenses for the business for a period such as a month, quarter or year.  The balance sheet has two critical pieces of information.  Assets, the things the business owns, Liabilities, debts a business owes, and Equity, the owners stake in the company.  Simply put Assets are the 'tools' and Liabilities & Equity represent how the business financed those assets.  That is why Assets = Liabilities + Equity...also known as the balance sheet equation.

Now this has important implications for a growing business.  If the business is growing (revenue growth) then the business needs additional tools.  It may have higher accounts receivable, as more money is outstanding due to increased sales. You may need more inventory to support the growing sales.  You may need to purchase new equipment or add additional outlets.  All of these represent increases in your assets. 

We know that all assets are financed.  The question is, "What is the source of the additional funding?"  This can only come from two sources, debt (borrowing) or equity (usually retained earnings.)

If your change in asset growth is greater than your change in profit / retained earnings growth, then you are going to finance a disproportionate aspect of your business with debt.  This is unsustainable in the end, and your business may well hit a ceiling preventing your business from growth or causing a severe cash flow problem. 

This is complex, so I developed a tool to help.  It allows you to calculate the change in working capital required for every dollar in sales growth.  If you would like a copy of this spread sheet, which I have bundled in a work book called 'Dr. Profit's Took Kit’ just send me a comment and an email address and I will send you a copy.  Don't worry, it is free and there are no strings attached. 

Finance is hard.  If you don't get it, or don't want to get it, please seek advice.  Your accountant is a good starting point.  Take courses from your local business development centre or your local colleges' Continuing Education department.  Your investment in finance is valuable, especially as you grow and develop your business 

Billy's Thirty Third Law - Transition Two: Operations must become systematic

The biggest challenge to scaling your business is to move away from the chaotic and towards the systematic.

When we start our businesses, there are usually no business processes.  Everything is new...everything is custom...and everything is often made up 'on the fly'  Business is improv theatre or  jazz.  For some, these free wheeling forms are a means of expressing creativity and uniqueness.  Just as many marketing entrepreneurs love customer acquisition, or hunting, many technically oriented entrepreneurs love the challenge of developing something new.  For them, routine is boring!

In the previous blog, I talked about capability-- the different things a business can do with its existing resources.  This week, I want to introduce a second term...capacity. Capacity represents how much your business is capable of producing or providing.  In a service business, it may be represented by 'billable hours'.  In a production business it is the number of units you can produce.  A restaurant's capacity is limited by the seating.  Growing a business inevitably means managing capacity growth.  The wise entrepreneur knows how to get the most with what he or she has before hiring more people or purchasing additional assets.  The starting point means developing a business process.

The business process takes the guesswork out of producing or providing products or services.  It is the difference between playing off of a musical score, and jazz improvisation or the difference between adding a pinch of this or that until you like it and cooking from a receipt.  Developing systems allow you to duplicate and scale your business.  Michael Gerber's The E-Myth and Hammer & Champy's Reengineering the Corporation effectively address the issue business systems and documentation.

The Limits to Systems

Many entrepreneurs resist systems.  We believe that each situation is unique and that each situation has a unique solution.  Gerber takes the opposite approach, believing that everything is as systematic as making a McDonald's Big Mac.  Gerber is wrong.  There are many parts of a business process that involve creativity, special skills or scientific knowledge.  This is the ‘missing link’ in process development. Some of these include: creativity, special knowledge, special skills & abilities and judgement. 

A bank may have a process for a business loan application.  Sometimes, the answer is an obvious yes, or an obvious no.  These are decisions made by the system.  Some situations are somewhere in between.  The bank may default to saying no, to those ‘in between’ situations.  A better process would include having a specialist evaluate these situations and making a decision based on judgement. 

A manufacturing client of mine had a request for a lower cost for a particular part.  The owner could not produce the part for less, and was unwilling to reduce the price without reducing the cost.  The solution was to re-design the product and the process, creating a less expensive part to produce thus reducing the cost of the part to the customer.  The solution was a combination of both creativity and special knowledge.

The challenge is to develop flexible systems.  These systems allow you to combine structure with creative and specialty skills and knowledge to affect growth without compromising the uniqueness your enterprise provides.   

Remember...think systematically but never forget the importance of creativity, knowledge and judgement!