The Facts of Business Life

by Bill McBean

  How Not to Use Controls

  In the 1970s, General Motors (GM) was the world’s biggest and most profitable business. A Level 4 company, it dominated the North American market, selling one out of every two new vehicles in the United States and Canada, as well as being a major competitor overseas. By late 2008, though, GM was selling less than one out of every five new vehicles in North America and was warning the financial markets that it was running out of cash. A few months later, it declared bankruptcy. What happened, essentially, was that the company stopped doing what made it a great company and literally beat itself.

  The way it did that was by failing to focus on those areas of the business that needed to be controlled. Although the company had controls and knew, for example, that its market share started falling in the late 1970s, instead of addressing this dangerous trend, they made excuses for it. And instead of dealing with it, they focused on other issues and championed other causes, like constant reorganization and buying businesses unrelated to the car business, as well as some that were, which cost them billions before they shut them down or gave them away.

  The point is, obviously, that controls are important, as is having the courage to recognize and aggressively address problems until they’re fixed. Because GM didn’t do this, even though it had at one time been a hugely successful company, over a span of 30 years it fell from being a great car company to being “just another car company.” GM’s executives were able to walk away and still be well looked after, but most business owners in a situation like this are more likely to walk away bent over from carrying the debt they’ve accumulated and the money they’ve lost.

  The Benefits of Control at Level 4

  Being in control continuously focuses you on the important areas of your business.

  Being in control helps you improve your company’s performance even when the business is already successful.

  Being in control helps you set up your business for long-term success.

  Being in control helps the company improve its performance so that there can be a larger payoff if it’s sold or an easier transition if you implement a succession plan.

  Being in control enables you to keep a company fresh and constantly challenged.

  Being in control creates consistency in how the company operates, including how customers are handled, which in turn reinforces customer loyalty.

  Being in controls creates a standard for how employee issues are handled.

  Being in control enables you and your managers to maintain your business’s brand message by making sure that it is consistent company-wide.

  Control of Information at Level 4

  By the time a business gets to Level 4, its owner should have learned about the importance of having relevant, current, and factual information, as well as what a great tool information can be. As I’ve already mentioned, though, Level 4 calls for improvement over the successes in Level 3, which means improved controls will have to be implemented to attain a higher level of performance. That is, in order to find your best opportunities and meet expectations, new and more detailed information will be needed. This quest for information can lead to a challenge that you, as an owner, may not have experienced before. That is, you have to be particularly careful about what you measure, because measuring the wrong things can promote the wrong activities and lead to a loss of focus within the organization.

  For example, if one of your improvement goals is to produce additional gross profit per employee, one possible solution could be adding technology in order to reduce costs. However, while doing so might help your company meet the goal of increased gross profit per employee, it would also add to your overall business expenses, possibly so much so that it would wipe out any projected profit increases. As a result, unless you are sure you are measuring the right thing—in this case, net profit—your decision to add technology may not actually help you reach your goals at all. In other words, at Level 4, the information you gather must not only be accurate, it has to be relevant and must be analyzed in terms of your overall definition of continued success.

  Controlling information is a lot harder than it sounds, and it becomes even harder when one of the purposes of doing so is adding value to the overall business, the customer, or both, as it does at Level 4. Adding value can mean finding new revenue streams, increasing gross profit margins, improving internal efficiency, and creating customer benefits, among others. Goals like these can be accomplished by continuously looking for better ways to make use of the information available. For example, similar industries can provide a wealth of information. Automotive dealers can learn a lot from how Harley-Davidson dealers captured their aftermarket accessories business, including clothes, coffee mugs, playing cards, and other items; or how John Deere creates brand awareness by selling toys to kids, like tractors and other machines, that are replicas of what their parents use. Creative information like this is priceless, and it’s all around for the taking.

  The bottom line, though, is that if you do not control the quality and relevance of the information you use to make decisions, you are likely to find yourself overloaded with it. And information overload usually leads at best to time wasted and an inability to make decisions, and at worst to concentrating on information that takes the focus away from what’s important in maintaining success, the same kind of thing that happened to General Motors (GM).

  Control of Processes at Level 4

  As I’ve already mentioned, processes are actually the engine that drives the business forward, and those processes need constant attention and maintenance, just like the engine in a car. The reason they do is business is always in a state of motion. Employees, customers, competition, and product innovation are just some of the elements that keep a business in constant motion. And unless internal processes keep up with the changes, they will lose their relevance and become bureaucratic rather than effective. For example, a process that was designed a year ago when sales volume was a third of what it is today won’t work without restructuring. And that restructuring can take any of several forms, including eliminating processes, replacing them with new ones, or “retuning” them, that is, adapting them to fit the current reality.

  The best way of determining which processes need to be changed is to regularly conduct audits on those processes, and this is particularly important at Level 4. There are a number of ways to do so, ranging from the expensive—hiring consultants to do it for you—to the inexpensive—doing it yourself with your office manager and/or your department managers. Whichever you choose, though, it’s essential for you to remember that processes can’t be expected to work at more than one level of your business. They can be stretched up to a point, but common sense says if you were selling 200 widgets a month and now you’re selling 600, things have to change, and those things are processes. In this instance, that means, for example, that your inventory level will have to increase, which in turn means new ordering and restocking processes will have to be developed, among others.

  Control of People at Level 4

  Because a company’s processes are operated by its employees, understanding the connection between them helps owners at Level 3 in their efforts to move their businesses from survival to success. At Level 4, though, since the primary goal is to solidify a company’s position by lifting it to a higher plateau of performance, coordinating processes and people becomes even more important. It also becomes a major challenge for owners, primarily because the kind of problems that arise at this level frequently stem from the owner’s effort to improve the company and can be very difficult to solve.

  Some of these problems come up because some of your employees may not agree with your decision to take your business to a higher plateau. As a result, as you strive to move the business ahead and make new demands on your staff, you can begin to meet resistance from them, even from some of those at the highest level. And the first place this resistance shows up is through the performance criteria and controls that you’ve establ
ished. This is obviously a very serious problem, and one that won’t go away unless you take appropriate action to fix it.

  There are several ways you can do this. One way is to watch how frequently your key employees are checking their department controls. If these controls are not being checked often enough, you can step up their frequency by installing more stringent reporting requirements. You can also see how aggressively your managers are developing new controls and processes to match their new volume expectations. And if these new controls are not being developed, you can come down heavily on those responsible, and make it clear to them that unless they start doing so they will be replaced. Problems like this, if not corrected, can take a Level 4 company back to Level 3—and in a hurry. Moreover, in your efforts to fix these problems, it’s important for you to realize that others in the company, both those who have and those who haven’t committed themselves to improving performance, are watching you very carefully and will view your actions as a test of your commitment. And it’s a test you have to pass if you are going to achieve the goal of Level 4.

  Control of Product at Level 4

  Achieving the goal at this level depends on maintaining control over information, processes, people, and product. However, it’s particularly important for an owner to maintain this control over his or her products. In fact, at this level, an owner has to develop a “killer instinct” as far as the product or service is concerned. I talk more about this “killer instinct” in later chapters, but it’s important to note that at Level 4 not only do controls have to become more sophisticated, but the discipline that goes with those controls has to be uncompromising. In other words, whenever owners or their key employees see a “red flag” in the product area, they have to deal with it immediately. That’s because product issues don’t disappear, and unless they’re addressed—and the sooner the better—any company can find itself in the same position as GM.

  One example of more sophisticated product control is better management of a company’s inventory. Most owners know their best-selling merchandise, but they may not know how much or how little these best sellers contribute to gross profit. The goal for inventory, of course, is to stock items that reflect customer demand, sell or turn quickly, and contribute the most to gross profit. But gross profit doesn’t always get the same attention as sales does, although it is just as critical. At Level 4, if you want to improve your business, you can “data mine” past sales. That is, instead of looking at your volume leaders, look at your best gross profit leaders. Doing so will allow you to build an inventory that reflects gross profit margins as well as sales. In fact, while the data mining is taking place, you can also track lost sales, seasonality of products, buying practices, and any other critical components in which knowledge might help build inventory that turns quickly, provides an attractive gross profit increase, and increases sales.

  It should be obvious by now that products and their controls are extraordinarily important, and without them the chances of becoming a Level 4 owner are slim. But—and this is a big but—controls can never become more important than the product, and can never interfere with why the product is selling in the first place. A lot of products and services sell well not only because of the products or services themselves but also because of the “sizzle” that goes with them. If, for example, a product has some sex appeal, or makes some kind of social statement, the owner has to recognize that fact and never let anything overshadow it. This is something that GM neglected to do with its Cadillac and Oldsmobile brands, and they paid for it. By allowing financial and engineering issues to dominate the product lines, that is, processes rather than the cars themselves, GM forgot that its role was to provide what its customers wanted, and sales plummeted as a result.

  There is also another potential trap for owners at this level, and it’s a trap that can derail even the strongest company. While it’s true that you must have controls if you want to get to Level 4—much less stay there—if you exercise too much control, it will eventually become a negative factor. And that’s because, at this level, while strict controls are needed in some areas of the business, relatively little control is needed in others. For example, it is particularly important to maintain strict control over accounts receivables, inventories, equipment, and financial records, among others. Without such controls a company can find itself in serious difficulties. However, it is equally important at this level to not exercise a great deal of control in other areas, including personal management, daily decision making, and training. This is because doing so can have a negative effect on employee satisfaction, company and product innovation, and empowerment.

  Too much control can also affect the primary reason a business is successful in the first place—its customers. The vast majority of customers do not want to do business with a company that appears to be robotic and sterile. Customers want to feel appreciated, to enjoy the buying process, to have fun, and to experience a little excitement. And too much internal control interferes with the pleasure they get from doing that. So it’s important for owners to take into account what their customers expect and want when they’re looking for ways to increase efficiency. Controls are an invaluable tool to attaining and maintaining success, but only when they are used judiciously.

  Level 5: Moving on When It’s Time to Go

  Although every level is different in several ways from every other level, Level 5 is different from all the others in a unique way. It’s the only time the owners’ goals for themselves and their goals for their businesses do not mirror each other. For the first time since the company began, the owner and the business are no longer joined at the hip as far as the future is concerned. Because the owner will be going one way and the business another, at this level the owner has to control two unrelated issues—his or her exit from the business and keeping the company running as it has been.

  Wearing these two hats, and the control issues they create, is a formidable challenge. In fact, it’s a lot harder than most people understand, largely because both roles demand time, energy, and patience. In addition, there is a huge emotional issue for most owners at Level 5, one that obviously does not exist at other levels. To overcome these challenges, the first thing an owner must do is recognize the dual nature of what he or she is facing. But it will also require the owner to change how he or she personally oversees the company, and to develop a new set of skills, that is, learn how to understand and control the selling or the succession process.

  The Benefits of Control at Level 5

  Being in control helps you decide which of the two major issues you are facing need their attention at any given time.

  Being in control helps you balance your time, energies, and priorities between your two roles.

  Being in control warns you of impending internal problems well before they becomes crises, which is especially important when your attention is divided between the exit process and maintaining the company.

  Being in control enables you to turn oversight over to subordinates and free yourself to deal with exit issues.

  Being in control helps you see quickly where action is needed to refocus and reassure employees when the company has been sold or you are implementing a succession plan.

  As I mentioned earlier, there are also two important realities that have to be taken into account at this level. The first reality is that if you don’t pick your time to exit, someone or something else will. That is, you could be in a crippling accident or worse, you could develop health issues as you grow older, or your passion and energy for the business may lessen. In fact, there are any number of things that can occur over which you have no control. By the time you’ve reached Level 5, however, you will have run the race and done it well. So you should finish well, that is, pick your time before someone else does. The second reality is that the best time to sell your business or implement a succession plan is when you don’t have to. When your business is doing well, you don’t have to sell, and you can afford to wait for you
r price. And if you are implementing a succession, it’s best to do so when the company is doing well, because it makes the transition a great deal easier, on both you and your successor. At Level 5 your goal has changed, and it is in periods of change that control is more important than ever.

  Control of Information at Level 5

  When you are considering moving on, whatever the reason may be, there are a number of important questions you have to ask yourself, including:

  How much is the business worth?

  How do I calculate the value of the company’s goodwill in setting a price?

  Can I live off the sale for the rest of my life?

  What happens after I leave?

  How will my life change?

  Answering these questions and many others like it depends on information and, of course, the accuracy of that information. And since it is likely that the answers you arrive at—and the decisions you make based on them—will affect the rest of your life, it is very important to have a good grip on that information, that is, to have control over it.

  In fact, controlling the kind of information you use and the accuracy of that information are the two most important factors in making an exit decision. For example, just because an owner feels that his or her business is worth several million dollars does not make it a fact. It just doesn’t work that way, even if the buyer is willing to pay the price. In most cases buyers need a bank’s support, and a bank won’t lend money to a buyer unless it makes sense based on pertinent and accurate information, such as past sales, gross and net profits, current and long-term assets, real estate, and industry and regional multiples, among other factors.