by Bill McBean
Ultimately, though, what you should be most concerned with protecting is the gross profit provided by your products or services. Sales revenue isn’t always a good thing if there isn’t sufficient gross profit attached to it. It is, after all, gross profit that pays the expenses of the business, and plays a significant role in making the overall business profitable. Making sure this happens is your responsibility, which means that in weighing opportunities to offer products or services to your customers, you must take the gross profit attached to them into consideration. Understanding this point is important because it also relates to respecting and controlling the costs associated with running your business. That means, for example, if you think it’s necessary to offer some loss leaders in order to be competitive, you should do so only if you can balance them with other products or services that provide significant gross profit. At the same time, having too high a gross profit on your products can make you uncompetitive. In the retail business sector, for example, it’s best to have fast-moving, low-gross profit products balanced with higher-grossing ones. In other words, as far as opportunity is concerned, all that glitters is not always gold—unless gross profit is attached to it. But when it is, you’ve got a good chance of being more successful than the majority of your competitors.
Protecting People at Level 1
The customer–employee–owner dynamic is rarely given much attention or considered in the context of asset protection. We all understand why it’s necessary to focus on customers when decisions are made, and the importance of employees doing their jobs in a coordinated way and with a positive attitude. We also understand why these two assets must be protected. Seldom, though, is the importance of what the owner wants given much consideration, and some people—mostly owners!—think it is the most important part of the equation.
Every owner, like every other human being, has wants and desires, but exactly because they are owners, what they want can have a very significant impact on a larger number of people—that is, their employees and their customers—and, ultimately, their businesses.
Of all their wants, however, perhaps the most important in terms of its impact on asset protection is how willing—or unwilling—they are to take risks. I spoke of this earlier in the context of tangible and intangible assets, but this issue has an even greater effect on the customer–employee–owner dynamic. This is because, while few owners are willing to admit they are concerned or worried about losing what they have, the fact is—exactly because they are human beings—they do have such concerns, to a greater or lesser extent, and those concerns have an impact on their customers, their employees, and their paychecks.
This is an asset protection issue because the way an owner views an opportunity has a great deal to do with how he or she feels about taking on new risks. Imagine, for example, this scenario. An owner has a key manager who does an adequate job but is content with his position and income and no longer has the drive he once exhibited. In all likelihood it would be in the company’s best interests for the owner to replace this manager with someone who understands that standing still in business really means falling behind. In this case, however, the owner is content with protecting what he has and is accordingly willing to retain the manager rather than take the risk of bringing in someone new. On the surface, it would appear that the owner’s decision would have an effect only on the manager and himself. In fact, though, the decision would be felt not only in the manager’s department but throughout the business.
It would be felt in the manager’s department because, as a rule, good employees want to make more money, are willing to work for it, and understand that the best way to do that is to take advantage of opportunities. As a result, if they see opportunities not being pursued, they will become discontented. This discontent will show up in their attitude, which will in turn affect other employees in their own department, and eventually spread throughout the business like the measles. The long-term effects of this are that the better employees leave, usually going to competitors or becoming competitors themselves, and the remaining employees underperform. In addition, when the better employees leave, they are usually replaced by people who have experience but not too much “get up and go.” Of course, all of this is eventually passed along to the customers, usually showing up as indifference, which disinclines customers to continue buying whatever the company is selling.
The point is that when an owner is reluctant to take risks, whatever decision he or she arrives at inevitably has consequences, and the result, as in this example, is that everyone loses. The owner loses on opportunity, good employees, and eventually both market share and profit. The employees lose on wage and salary increases and the opportunity to succeed, and the customers lose because of indifference and lack of overall competitiveness—and all because the owner forgot about the importance of protecting all of his assets, in this case the customers and the employees, and focused on preserving his net worth at the expense of his other business. As an owner, then, it is important for you to remember that the customer–employee–owner dynamic is one that requires balance. Focusing too heavily on one at the expense of the others is a slow walk backward on the survival–success spectrum.
Level 2: Creating Your Company’s DNA
A company’s DNA essentially defines how the business operates. That is, it determines how employees act and react with customers and each other, how competitive it is, how its processes and procedures work, and how all of these things are coordinated so they work smoothly together. As such, it represents the business’s character or culture, both in the minds of its staff and customers and in the marketplace. And because it does, it is an asset, albeit an intangible one, and extremely valuable. As with all your company’s assets, it needs to be protected, in this case from erosion, incompetence, lack of attention, and all the other ills a company’s DNA may be prone to.
The idea of protecting something as important as DNA—along with all of a company’s other assets—just makes sense, so it’s something every owner should be able to understand. In reality, though, it doesn’t get the attention it deserves—except from successful owners, most of whom learned their lesson by not protecting their assets. And yet, DNA plays a vital supporting role in the company by preparing and coordinating the company’s activities, so when it moves up to Levels 3, 4, and 5, it’s ready to take on the market. And this applies whether you are just starting a business, taking one over, or reengineering an existing one. At this level, then, the most important step an owner can take may very well be to simply realize that DNA has value and needs to be protected.
The reason DNA is so important is that it affects virtually every aspect of the business and vice versa. In fact, DNA is literally at the crossroads of all internal activity—preparation, planning, decision making, and implementation. This is an important point because it makes protecting assets both challenging and critical. Bear in mind, though, that challenging doesn’t mean impossible—it just means it’s not easy to do. But something being difficult to do is not necessarily a bad thing. The harder something is to do, the less likely your competitors will do it, which means your doing it will provide you with a market advantage they don’t have.
It’s important to bear in mind that as far as DNA is concerned, your goal should be to create a business that runs flawlessly every day. To be fair, expecting perfection every day may be stretching it a bit—after all, we are human. And, in fact, it’s humans who represent the greatest danger to DNA because they’re the ones who operate the processes and come in contact with the customers. Your company’s DNA must accordingly be protected from the human element, that is, the mistakes people make, whether it’s doing sloppy work, being unprofessional, not performing as expected, or any of the other faults people are prone to. Of course, you can’t eliminate all such problems, but your goal, as noted, should be to get as close to eliminating them as you can, by focusing in on asset protection.
The Importance of DNA in a Takeover
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br /> In the early 1990s, my partners and I purchased a medium-sized business that had been underperforming. We were confident that if we put a fresh face on the business, that is, created proper operating processes and controls; made individuals accountable; and used proper business techniques, the business could improve significantly. We wanted to jump into the market aggressively, but my experience told me to hold back until we could put this new DNA into place so the staff would know what was expected of them. We didn’t want to launch a major media campaign and have customers come into our new business only to find that it was being run the same way as the old one. We told our staff that, as far as we were concerned, the past was the past, and that all we were concerned about was going forward.
In order to do accomplish that, I outlined three principles that every employee, including myself and my management team, was to use as a “compass” or guide. They were, in no particular order: (1) we want to win, (2) we want every employee to be satisfied, and (3) we want every customer to be satisfied. These may seem pretty standard and boring, but they weren’t, because of the power, passion, and weight I placed behind each one, especially when it came to success or failure. Each of these principles had a clear definition. “We want to win” meant when we set goals or objectives, we did everything we could to make or exceed them. “We want every employee to be satisfied” meant we would treat them with respect; provide a safe, clean environment with up-to-date equipment; provide financial support for their kids’ extracurricular activities; and help out where we could in family emergencies. And “we want every customer to be satisfied” meant we would make their buying experience one to which they would return time and time again, and hopefully tell their friends. This didn’t mean the customer was always right—it meant we would do whatever we could to correct a mistake, satisfy the customer, and worry about checking out the details later. In other words, it empowered managers to satisfy our customers, and to do it now.
I knew the staff had to understand that things were going to change, and they began to do so immediately. Although most of the staff stayed, a few left, primarily because these three points had sharp teeth. In the end though, everyone knew how they were to treat each other and our customers, and that winning meant making the objectives and learning together from our successes and failures. And it worked. With the help of DNA, we came out swinging day after day, month after month, and took a crippled business and made it a huge success.
The Benefits of Protecting Your Company’s Assets at Level 2
Understanding the need to protect your assets enables you to list, evaluate, and determine the extent to which they will enable you to meet your goals.
Understanding the need to protect your assets helps you realize that DNA is in every part of the internal machine, and that almost every change the business makes involves DNA in one way or another.
Understanding the need to protect your assets enables you to realize that any asset can be used to improve the business and to then create a DNA process to do so.
Understanding the need to protect your assets helps you make better decisions about how to use those you have because you are continuously matching them to the opportunity you have chosen to pursue.
Understanding the need to protect your assets enables you to anticipate how to protect them and what support will be needed from other assets to maximize their value.
Protecting Tangible and Intangible Assets at Level 2
As I have pointed out, your business is more likely to be successful if you maximize each of your assets and make sure they support each other. But this doesn’t just happen by accident—it takes thought, planning, and preparation. And if you don’t figure out beforehand what assets you have and how to coordinate and use them, they won’t work together efficiently. This is one of the situations in which DNA plays an essential part in your business, regardless of whether you’re involved in a start-up, a takeover, or in the process of reengineering your company.
Let’s say, for example, that you are planning to open a manufacturing business and will need certain machines to produce what you’re selling. You could just go out and buy the machines and have them installed, but doing so wouldn’t do you very much good unless you have people to run them. Of course, you could also recruit and hire people, but that won’t help much unless you make sure the people you hire either know or can be taught how to operate the machines. And even if they do know how to operate the machines, neither they nor the machines will be of any value unless you develop processes for using the machines, as well as processes to coordinate all the machines so you can manufacture your product. And none of this will happen unless you develop DNA for it, that is, unless you think it out, plan, and prepare for it beforehand.
This connection between tangible and intangible assets—and how they support one another—is, again, one of those underappreciated ideas you need to champion because if you don’t do it, no one will. In order to do this, you must focus on two issues. The first concerns protecting all the company’s tangible assets from events that could be catastrophic for the business. Your first step obviously would be to get insurance for those assets that can be insured in order to protect your investment and minimize your financial exposure to lawsuits. But is that all you could do? What would happen if your customers just stopped buying from you, or if most of your employees suddenly quit, or if for some reason the demand for your product disappeared. None of these scenarios are very attractive, but they could all happen. How could you protect yourself and your assets if any of these things were to occur? The answer is in your company’s DNA.
As long as you have developed your DNA properly, your business should be profitable and operating smoothly, in which case the chances of your employees leaving without any warning would be minimal. In addition, if your business is competitive in price and value, and your customers are satisfied and comfortable with their relationship with you, they would have no reason to leave. And even if there is a problem, your processes would pick up on it, and you would be able to correct it quickly. Your DNA is accordingly one of the best weapons you can have to protect all the business’s tangible assets as well as your investment in them.
The second issue concerns protecting both tangible and intangible assets by proactively leveraging, supporting, and coordinating them so they can work together to provide your company with long-term success and profitability. Let’s say, again, that you’re opening up a manufacturing company, and you’ve purchased your machines, hired people to run them, set up training for them, and created processes so the machines are all coordinated with each other. That’s all well and good, but you will also need managers or supervisors who know how to maximize the use of the equipment and know which parts, supplies, or accessories will be needed to keep them operating efficiently. In addition, you will have to make sure that processes are in place for ordering the required parts, and the accounting department knows when these parts are inventoried, at what cost, and when and how much to pay your suppliers. And that’s just the beginning—there could be hundreds of other processes that have to be coordinated, right up to the point at which your customers buy your product, and even after that. The point is that every aspect of your company’s DNA has an impact throughout the business, so the best way to manage it all is through the business’s DNA.
Protecting Products or Services at Level 2
Since Level 2 is a preparation level, the focus at this point is not on the product’s performance in the market, but on how your assets will support the product internally. In this respect, you need to focus on how the product will be delivered to customers, the equipment and personnel that will be required, and the need to educate your staff on the product itself, its pricing, and the processes created to support it. The overall goal here is to avoid sabotaging your own product even before the customer has a chance to buy it. That is, you have to make sure you don’t beat yourself with conflicting processes, old rules and beliefs, poor decision m
aking, an uneducated staff, making incorrect assumptions, or ignoring obvious market trends and realities. Of course, no sensible owner would do this intentionally, but it happens when owners don’t focus on protecting and maximizing assets.
If, however, your business’s DNA focuses on results, success, and internal control, the chances of beating yourself become exponentially lower. This is because an owner who understands DNA and its importance knows the overall goal of the business is to create customers and keep them. And this can happen only if the internal processes match what customers expect from the product and from your business. Of course, in order to accomplish this you have to know exactly what your customers do expect. Among the many things customers expect are getting the product or service when they want it, a competitive price, superior quality, professionalism and courtesy, and a sense that your business cares about them. In some cases, customers might also want to establish an ongoing relationship because they need advice and want to work with people they feel they can trust. And if this is what they want and expect from your company, you can create and deliver it through consistently run DNA processes. Again, this isn’t necessarily easy to do, but if you do it and your competitors don’t, you will have an advantage over them.
Although none of this actually happens until you reach Levels 3, 4, and 5, it’s at Level 2 that you have to make all the necessary preparations. In other words, you have to make sure it works on paper before you ask your employees to implement it in the real world. However, if they are going to deliver what your customers expect, they have to be qualified to do what you want them to, have the training they need, be professional, understand both their responsibilities and their accountability, and know that depending on how they perform there will be either rewards or punishment. And that brings me to the third element—people.