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Good and Bad Aspects of Small-Medium Sized Business Strategies

When I speak of “strategy” to business owners or entertainers, I usually get a blank look. Small and medium-sized businesses usually don’t have a specific business strategies. However, what they don’t realize is that they do have a strategy, formal or otherwise, and it was probably a bad one.

The Perils of Bad Strategy by Richard Rumelt discussed this concept of bad strategy. Rumelt defines a strategy as “a way through a difficulty, an approach to overcoming an obstacle, a reponse to a challenge.” The problem is identifying the challenge.

I have met business owners who refuse to face the problem. Why?

Their ego gets in the way. They want to see the business in their own light, and not reality.
They are afraid to look at the business problem. The owners literally bury their heads in the sand like an ostarich and ignore the problems.
The business owner is excellent at their trade, but not at management of a business.

Rumelt also states that business owners mistake goals for strategies. “We want to raise our sales revenue to $20 M in five years. So? That is not a strategy, that is a goal. I hear that type of talk all of the time from clients. They point to the “where,” but not “what,” and then the “how.” They don’t look at their core competancy (or Hedgehog concept as explained by Jim Collins in Good to Great.) And recently, I have not even been able to get that far because the company’s internal reporting system is inadequate.

The third hallmark of bad strategy discussed by Rumelt is “fluff.” I see this in the entertainment industry business propects. I remember one prospect that wanted to start a new record company. It was a typical scenario, a group of musicians and friends who are financed by a rich parent or two. This particular group set their entire strategy of one guy who was going to write for them and any band they sign. I alerted them the risk of establishing a company on the back of one unproven talent, especially in an industry who is still searching for a new business model. I didn’t get them as a client.

As a small business owner, you don’t have to hire someone to create a 100 page strategy complete with the history of your company. In fact, you can find someone to do it in about an hour. Then, as a small business owner, you should impliment it faithfully.

Charismatic Business Leaders: What to do afterwards? A Problem to Be Avoided

I can remember back in the late 1970s when only engineers and escentrics operated an apple computer. My neighbor brought me over and tried to explain how the large odd-shaped device worked. MS-DOS was not invented, and my attention span waned.

Business has embraced many aspects of Apple, along with the consumer, driving it beyond Microsoft’s highest endeavours.

But what happens without Steve Jobs at the helm, and how does this series of events relate to small and medium-sized businesses?

Kathleen Pender speaks of this issue in Maintaining success after exit of a charistmatic CEO. However, she really is not addressing the right questions. Does a company need a charasmatic leader? Or, what kind of personl should lead a company?

Jim Collins writes about these in his two books, Good to Great and Built to Last. In Built to Last he states that visionary companies do not require great charismatic visionary leaders. “In fact, [they] can be detrimental to a company’s long-term prospects. Some of the most significant CEOs in the history of visionary companies did not fit the model of the high-profile, charismatic leader.”

In Good to Great, Jim states what kind of leaders should lead a company. Level 5 leadership during pivotal transitional years “refers to a five-level hierarchy of executive capabilities, with Level 5 at the top. Level 5 leaders embody a paradoxical mix of personal humility and professional will. They are ambitious, to be sure, but ambitous first and foremost for the company, not themselves.”

Steve Jobs seemed to fit this definition. He seemed to push the company, not himself which will help foster the Apple tradition long after he departs from it.

Small and medium-sized business owners should take note of this distinction. I find that so many owners sell their personas, not the company. This is almost fatal in two respects:

When the owner wants to sell the business.
When the owner dies.

In both cases, the inherent value of the company is tied to the owner, not the balance sheet. If he goes, it goes.

So, how do you get out of this vicious circle. I recommend:

Read the E-Myth by Michael Gerber. The author descrives the owner’s chokehold on a business, and why a business of that type struggles to grow.
Train, train, train others to do specific tasks that you perform. If you are worried about losing your customers to you employees, create a system of divided labor where each person performs specific tasks, but you still hold the key to putting it all together.
Set out a timeline for an exit plan. When do you plan to sell the busiess? How big does your business have to be before you sell it? What annual metrics can you measure to make sure you are on your path?

Quantify you feelings. Don’t dream of a company that you cannot measure its success or milestones. You can be a visionary, but the it is not about you, it is about your business.

Are Business Strategies Obsolete? Does it Matter?

My wife and I have started a new hobby of collecting and reselling small antiques. We really enjoy “the hunt,” but one of the most rewarding aspects is our increased knowledge of 100 year old household tools. One such item was a nickle/steel handle with a cone cup on the end. The cone cup had a butterfly handle on the end of the cone that turned blades inside the cone, scraping the sides.

Almost nobody guessed its function, which was a Delmonico ice cream scoop.

Today, the basic operation of the Delmonico ice cream scoop is the same, scoop it up, and scrape it out.

The McKinsey Quarterly published an article by Bradley, Hirt, and Smit entitled Have you tested your strategy lately? The article listed ten tests of which most companies strategies failed. The first test was the most comprehensive, “Will your strategy beat the market?”

Looking at my Delmonico ice cream scoop, I question whether any of today’s companies can execute a strategy that can produce a product or service that can be an industry standard 100 years from now.

A major complaint about American corporations is that in the last 25 years, they have been striving for the short-term profits, and not planning for the distant future. We have seen that in the auto industry.

But what about small/medium-sized business strategies? Will they follow in the footsteps of the some of the large corporations?

That all depends. If you are like most small/medium-sized businesses, you are only concerned about Sales and whether you have enough cash to meet payroll.

Bradley’s ten tests may be a good place whether you are in the business plan or seasoned stage. In my experience, most businesses of these sizes could not pass three of these tests.

Managers and owners must review their strategies continuously during its implementation. Too many fall into The E Myth (Michael Gerber) and have the business run them, and not them running the business. Or as Gerber puts it, ” working on your business” as to “working in your business.”

When it comes to strategy, Bradley et al proclaim that it is not the newest strategy that a business owner should find, but flaws in their current strategy.

Business Acumen: Beware of Useless Advice

There are brilliant people that study for years to provide brilliant advice based on solid, empirical evidence. Then, there are others that just talk well.

Financing, Outsourcing And 7 Other Tips from an Expertby Shira Levine, touts the advice of two business women, Amy Abrams, and Adelaide Lancaster who are releasing a book in September based on 100 interviews of entrepreneurs.

The article sets forth the following advice:

You’re never finished with your homework
Really ask yourself what you want out of your business
Focus on what is meaningful to you vs. what you are passionate about
Figure out your business goals
Determine what to outsource
Find access to capital
Specialization is key

Now, I have not read the book. And based on these seven points, I probably won’t buy it. The reason is because these points don’t present a case that is no more than common sense. Business people do not need motivational speakers or cheerleaders. Instead, they need experience, knowledgeable and trained people to give them real advice of what, how, and when to do things.

To prove my point, if you were to buy this book, may I suggest that you spend an extra $50 and buy the following:

Good to Great by Jim Collins

Blue Ocean Strategy by W. Chan Kim and Renee’ Maugorgne

Predictable Success by Les McKeown

If you do not have the time or budget to read those, at least buy a smaller guide, Achieving Strategic Alignment by Barry MacKechanie.

Most of these books are critically acclaimed with sound business advice based on years of research by highly educated and experienced strategists. In these books, you will find recurring themes.

Compare what they say to Abrams/Adelaide book if you choose to buy it. Small business owners cannot hire the seasoned professional, but can learn from them through their writings. Business acumen has a price, but the inability to develop it has a much bigger price.

Startup Strategy: Are You Playing the Same Old Tune?

My college-aged son played “Satin Doll” with his jazz band in a local upscale restaurant last week. I turned to my wife and told her I played that song in a big band music group back in 1969. The 1953 Duke Ellington song is still timeless. But the same old tune doesn’t work for business startups.

The Digital Music News reported that nearly $15 million dollars was thrown at music startups in July bringing the year-to-date total to $143 million, Spotfly representing almost 1/4th of the total.

So far this year, about a half a dozen startup record companies have approached me to design a strategy and business plan for their new music venture. They always have the same plan: 360 deals, sign up and write for other bands, run on a shoestring budget.

I always reply, “So, what are you going to do different than the other companies, because their business models are broken.”

I always get a blank look because they only seek to do what others have done unsuccessfully before them. This of course allows me to do my Blue Ocean Strategy speach. I also thrown in my bad strategy caution.

A large componet that I stress to startups is that you must focus on your consumer. What is the consumer asking for? What are your competators giving the consumer that they don’t want? Are you able to create a strategy where you can extracate those things the consumer is not asking for and present a product or a service to the consumer that they are not getting from your competators?

Business consultants seem to produce the same framework for startups. To think like those who have come before you will not turn your startup into a resounding success. I am not saying that you should launch a startup based on some hairbrained scheme that you have not researched. No, instead, you should make informed decisions and take calculated risks with your startup.

In addition, don’t paint only a rosy picture of your startup, but present scenarios that show breakeven, normal, and pie-in-the-sky financial projections.

A CPA/Planner Tip on How to Survive in the New Business Economy

I worked with a plumber, Dan, when I was 15 years old. I learned some plumbing, but mostly I ran to his truck for tools and dug ditches…lots of ditches. Dan told me that I was good, but I wasn’t as good as “Speedy” from Big Springs, Texas. Speedy earned this ditch-digging title over all of the other plumber helpers.

One day, the boss bought a mechanical trencher. A trencher required one operator to walk behind it and guide it. Everybody wagered bets. Some on Speedy and the others on the trencher. Speedy was amazing digging a ditch along side the machine who worked at a steady pace. Speedy actually pulled a little ahead, until he had reached about twenty feet. Speedy started to lose steam, and slowly dropped farther and farther behind until the machine had reached the forty foot finish line, first.

This story parallels many situations in our new business economy. Of course, as a CPA/Planner I have seen this scenario in the world of business and in history, e.g., the steam locomotive, blacksmith, and prop-driven passenger aircraft. However, today’s new business economy has injected this phenonemon with steroids. Not only do you have to be ahead of your competition, you have to be ahead of your industry and any verticle industry that may steal your market share.

Take Apple for example. Twenty years ago when they were pushing the Macintosh, who would have guessed that they would now dominate not only the personal computer world with their ipad, but the music delivery system, itunes?

John Mariotti’s article, What’s Your Impossible Dream? tries to inspire business people to think big in whatever they do. He encourages people to do what they are good at, and what they love to do.

CPA/Planners take issue with motivational speakers. They seem to push people downhill but really give no guidance to where they are to go, and how they are to get there. That just won’t work in the new business economy because jobs are increasingly driven overseas, the wealth has been sucked into the top 5% of our population, and governments are being increasingly squeezed and cannot create jobs.

Looking at it from a planning perspective, I recommend Jim Collin’s books, Good to Great and Built to Last. Jim speaks of the three circles: Passion, economic denominator, and best in the world. In other words, do what you are passionate about, do something that can make money, and do something that you can be the best in the world at. The intersection of these circles should be your BHAG (“Big Hairy Audacious Goal”). In addition, keep your plan simple. Jim called it the “hedge hog” concept because the hedgehog was the best of doing just one thing to outsmart a fox.

Of course, as a CPA, I would suggest you quatify the economic aspect of this application.

The new business economy will require you to choose your path very carefully, but with all the elements above. To take the safe road may reduce you to the masses and risk whatever potential you have.

“Far better to date mighty things, to win glorious triumps, even though checkered by failure, than to take rank with those poor spirits who neither enjoy much nor suffer much, because they live in the gray twilight that knows not victory, not defeat. –Theodore Roosevelt, 1899

Financial Independence: Does That Define Your Small Business?

I grew up in a family of small business people. It started with my grandparents who opened an Italian restaurant in 1949 with their four high school children. At that point, my grandfather would arrive at the restaurant at 4 am and make the pizza dough that would raise by 9 AM. However, at 6 AM he was at Terminal Island in Los Angeles building navy ships as an electrician. Several years later, he achieved financial independence in which he could retire from shipbuilding and work full time at the restaurant. The restaurant supported, in part, five more of his children, and a couple of dozen grandchildren who worked such jobs as pizza makers, waitresses, dishwashers, and parking lot attendants.

This memory of small business financial independence came to me when I read Nell Merlino’s article, Building a plan to achieve financial independence with your small business. Nell lists three good points: Recognize your worth, get a mentor or coach, and don’t fear math. But even with these, you will not achieve the small business financial independence if you are unable to delegate to others. The end result is that you will end up working 80 hours a week in a business that you cannot sell and dies when you die.

The book, The E Myth Revisited by Michael E Gerber will help you understand your “worth” by leveraging your talents in supervising others. Most small businesses cannot achieve financial independence if the owners perform all of the main functions themselves. It is very hard to grow your business in a predictable and productive way, if you are so concerned with the nuts and bolts of the operation. You must step back and train others. He states that you must transform your thinking from a technician’s perspective to an entrepreneurial perspective. For example, Michael distinguishes these views as, “The entrepreneurial perspective asks the question: ‘How must the business work?’ The technician’s perspective asks: ‘What work has to be done?'”

In most cases, if you choose a technician’s perspective, you will not achieve financial independence because you will have to solve every problem yourself. In addition, you will not be able to enjoy (or even go on) a vacation because you will be on the phone every day putting out fires from your vacation spot.

The most important goal this year should be your financial independence. Identify where you are in your business, where you want to be, and how will you get there.

Is Music and Small Business Creativity Leaving Us?

Have you heard? We’re still in a major recession. Well, not according to our government.

However, according to Paul Resnikoff’s article, What is the Economy Doing to Creativity , our current economic disaster may quiet musicians because of their prolonged economic struggle.

I think Paul is on the wrong side of history. Artistic and business creators could not have a better feeding ground than our current economic condition:

Slave Music:Prior to 1865, slaves obviously were in a hopeless situation. Yet, while coping in their economic, social, and political dungeons, they created some of the timeless music. Starting with their African spirituals, they created Gospel music which is still popular 150 years later.
Jazz:Moving to the early 1900s, struggling musicians were blending art in New Orleans. Folk, blues, marching band, spiritual, and ragtime were just some of the music that fused into jazz. The micro-economic environment of jazz musicians percolated creativity from some of the most legendary composers of the last 100 years.
Rhythm and Blues: Toward the end of the Great Depression and during World War II, music creativity morphed again into R&B. Though many were just coming off of food lines and battlegrounds, creativity shined through the smoke. R& B moved into rockabilly and rock and roll.
1960-70s Counter Culture Music:This was the era where I learned to be a musician. In spite of the Cold and Vietnam wars, the musicians came out in droves spreading their music and lyrics into the halls of our government. Dylan claimed that he did not create the movement, but just reflected it.

The stars shine the brightest in the darkest part of the night. If artists were to stop creating, it would not be because of lack of finances, but because they lack the desire to create.

This can be translated into business, also. Small business owners become more creative when their backs are against the wall. They question assumptions, rehash markets, and listen more to their customers.

Today is the time to stroke your creativity. Small businesses and musicians, like never before, can reach thousands of people with little investment via the Internet. A small business that sings the same song has a much bigger chance of failure than one who creatively changes (or leads) the industry.

So, how do you it? I have written a number of articles, here, that sets out different strategies on achieving business success in this environment. But, one thing I cannot teach is creativity. That must come from your passion, or the passion of a person that you partner with.

Pareto’s 80/20 Principle: Business Playing the Odds

Amazing, just amazing. No more than amazing, it was magic. That was my first reaction to the 80/20 rule when I reached into my pocket and saw that 20 % of the coins equaled 80% or more of the value. So, I read the book The 80/20 Principle, The Secret to Success by Achieving More with Less by Richard Koch.

That was a few years ago. Since then I have applied the concept of the book (and the 1906 Italian economist Vilfredo Pareto who created the principle) in many business situations. Here’s a few conclusions:

80% of your income is earned from 20% of your customers: This is a danger signal to businesses. If your income is lopsided like this, you must change the way you are marketing. For example: If you are a brick and mortaur business, you may want to hire an SEO/social networking consultant to broaden your reach on the Internet. Conversely, if you are a local business with a lot of internet, non-recurring customers, you may want to canvas the local neighborhoods. Look at your marketing plan using the 80/20 Principle.
20% of your Products bring in 80% of your Income: So, why keep the other 80% of your products if they don’t sell? This is why cost accounting is so important. You must know what your gross profit margins are per product and why they are that way. Oh, sure, you may have a 75% gross profit margin on Product A, but if you only sell 3 a month, you have to ask about the effort it takes to market it. Cut the stale products using the 80/20 principle.
20% of your Employees are Producing 80% of your Company Value: Now, before you start handing out pink slips, look at your employees with multiple dimensions. Are they underperforming because they are lazy? Unmotivated? Poorly trained? Or, maybe they have a specialty that you have not looked at which could set them apart. People are not simple and must be observed from multiple points of veiws. Test these views and make adjustments using the 80/20 prinicple.
As an owner or C-level management, are you spending 80% of your time performing tasks that others can peform, and 20% of your time bring in business? Delegate to someone’s highest level of competance. Don’t try to be a one person shop but build a company network of talented individuals that interact for a common, and ultimately great goal. Manage your time using the 80/20 Principle.

The secret to analyzing hidden business pitfalls is to not be bogged down in the minutia. As a business owner, you should manage your business and depend on others to build the wealth through their labor. Use the 80/20 Principle as a looking glass to focus on the right things in your business.

CPA Economic Depression Thinking: Buy Your House and Pay it off…Good Idea? Maybe.

As a CPA, I have categorized home-owner’s financial strategy into two categories over the last 32 years: One, the Depression Victim, and Two, the Leverage Junkie. The Depression Victim’s financial strategy is a person who has lived or heard about people living during the Great Depression of the 1930s. My mother is like that. The philosophy goes like this. You buy a house, and you pay it off, period…Sure, you can buy rental real estate, but don’t use your house as a piggy bank.

The other financial strategy extreme is the leverage junkie. Looking at them through my CPA glasses, I see that a person who holds that philosophy will buy a house, and then when it goes up in value, borrow against it to buy an other.

As you probably guessed, many people that lived by the second philosophy felt our latest economic downturn. Conversely, those that stuck by the first philosophy fared better.

But what if you take a middle road? You refinance a current mortgage? Jilian Mincer’s article, When Refinancing Doesn’t Make Sense looks at this financial strategy. CPA’s normally look at these topics from a very narrow point of view, but I act more as a financial strategist than a CPA to my clients, at times. For example, the authors state that to refinance at a low rate and accelerate your payments may be wrong, because you can earn 7% with the same money that you are saving 4.5% in mortgage payments. Really? In today’s volatile economy where States are going broke and the feds can’t control income, where are you going to find a stable 7% return with very little risk? My CPA clients that have this financial strategy mindset will not risk their money to that extent.

Now there is an exception to this point of view. I always suggest that my CPA clients save a few of months of liquid assets. It could be in savings, bonds, even precious metals, but something that you can tap into in an emergency. Why is this important? If you contact a serious illness, suffer an injury, or get laid off, you have a cushion to make a few months of rent or mortgage payments while you decide your next move.

I find that my position as a CPA gives me a very good view point at business and personal finances. The best advice I can give is to balance your thinking and prepare for economic downturns.