Core Capital Target, Leadership or Management, Value Drivers, Costco & Power of the Hedgehog
16th August 2020 Evolution Partners Newsletter
“Every past market crash looks like an opportunity, but every future market crash looks like a risk” – Morgan Housel
Hope you’re Thriving!
I’ve had a productive week with a few Quarterly Planning workshops and on reflection, a common theme over the past month or so has been resetting. Leaders are trying to come away from the anxiety fuelled, relentless focus on executing and resetting back to a normal meeting rhythm. Now normally I would show an image of a huge reset button, and state now that we have closed our last quarterly plan it’s time to reset and begin to build our next quarterly plan. But recently, this has seemed more of a theme, or to be of more importance for many businesses. And it’s such a strange time right now, at least here in Australia, because many businesses have survived and stabilised, thanks to Government stimulus, many now have good cash reserves, but in 6 weeks the Government stimulus will (mostly) end, the obligation for landlords to not evict will end and the obligation for employers to not ‘rightsize’ or fire employees will also end.
So maybe there’s a false sense of security, maybe when all the protections finish economic reality will kick in across the economy as predicted. But no matter what, if cash isn’t an issue at the moment for you, it’s a great time to build your cash reserves. To build your Core Capital Target a buffer of 2 months fixed costs in cash, because even if you don’t think you will be affected, if your customers are, then you will be.
In a crisis, the most important thing is to save the company, if it’s at risk. That means focussing on executing and bringing in revenue and gross profit however possible. Unless you have recently gone back into lockdown such as Melbourne or Auckland there is probably some stability in your business, without the major changes we saw in March and April. The question with stability then becomes should you be managing, or leading?
In a crisis, all hands should be focussed on executing, and the leader should spend more time on management. Don’t stop doing the main roles of a CEO altogether, but more time should be spent on management than leadership.
As we emerge from a crisis, opportunities arise, leadership becomes more important and the effectiveness of strategy begins to yield ever-increasing impact.
But coming out of a crisis, with all the stress and emotions still lingering, and knowing how to do it is really hard.
Think about the image below of leadership vs management.
During March and April leaders had to save the company, to focus on executing. More time was spent on the right side, on management.
At some point, we must come back to strategy, come back to leadership because we have steadied the ship. With a steady ship, we need to spend less time managing and more time leading.
And now when you think about your strategy, and how you are going to come out of the crisis, what are the bottlenecks preventing acceleration?
If you’ve been focussing on day to day, relentlessly working in the business instead of on the business, maybe it’s time to reset and start moving the big rocks before you look at the everyday. The One Page Strategic Plan in column 4 lists the “rocks” — the top 3-5 priorities for the whole company. The term rocks came from Stephen Covey and his book The Seven Habits of Highly Effective People and is simply explained by Covey in this 8-minute video from 1994.
Yet before you prioritise the rocks, the important things required to work on the business, that should be prioritised over working in the business, you must understand the bottlenecks that are preventing your growth.
Now I don’t mean more sales meetings or more marketing. I mean things like we don’t have a sales process or we don’t have a marketing process which is a bottleneck to our growth.
And so for all that, if your ship is now stable, if you’re now able to step out of management and into leadership again it’s time to reset, time to think about the bottlenecks preventing your growth and set the right priorities (rocks) as you begin thinking about strategic growth again.
Is your bottleneck the inability to make data-driven decisions?
Over the past decade or two, the role of a CFO for mid-market businesses has become more accepted, and for many, it’s become necessary. Certainly across the clients I work with I’ve seen many reap good rewards from the insights and value a CFO can provide. But, it’s a muddy area, and many accountants might call themselves a CFO.
My interpretation would be;
Accountant – provides reports based on historical data for you to analyse
CFO – provides insights into the future, helps with planning and helps other leaders make better data-driven decisions
Even better is CFO + Power BI, but that’s for another time.
As the role of the CFO changes about 41% of CFOs now spend the majority of their time on non-finance related activities, fueling data-driven decisions across the business. And the infographic below shows just how much this once ‘finance only’ role has evolved.
In recent times the part-time, or fractional CFO model has emerged meaning that mid-market businesses can access a high-quality CFO without the high-cost salary.
But beyond the simple explanation I provided above, what are the reasons one should consider a CFO?
In this interesting presentation you may find valuable, Dominick Bencivenga outlines the top ten reasons why every entrepreneur should have a CFO.
I spoke above about the need to begin to think strategically again if you haven’t been so in the past months. But once you’ve stabilised the ship, an interesting learning from a recent HBR article and study is don’t pivot from being a value or quality leader to becoming a cost leader. Or if your previous business model was focussed on quality or service, there’s no gain in shifting to focus on lower pricing, or competing on price. In fact, it increases the chance that you’ll go out of business. From the article “In a competition to become more of a cost leader, the cost leader always wins. So, what should a differentiator do? Our research does point to some concrete lessons for strategists at differentiator firms during recessions.”
Read the article here “Avoid Making This Strategic Mistake in a Recession”.
Finally this week I really enjoyed this article discussing Costco, a cost leader identified above, and how they manage to offer rock bottom prices, and yet still have some of the best products around. The article details how Costco entice the best manufacturers in each category to actually make products for the Kirkland brand that are 1% better than the leading national brand. There are 3 main criteria to qualify as a Kirkland product in order to leverage the Costco customer.
- It must be as good or better than the leading national brand
- It must be sold for 15-20% lower
- It must be an important product for customers
Read the article here How Costco Convinces Brands to Cannibalize Themselves.
This week on The Growth Whisperers podcast
On episode 18 of The Growth Whisperers, Kevin Lawrence and I talk about the following.
Are managers useless?
Kevin and Brad discuss an attempt by Google to remove all managers based on an early belief held by some of Google’s leaders and engineers that managers are, at best, a necessary evil, and at worst, a layer of bureaucracy.
Upon learning the importance of managers a research team subsequently proved that great managers produce happier and more productive teams. Brad and Kevin talk about the ten things that the research team identified great managers do, and provide examples from their own experiences.
Listen to The Growth Whisperers
From the vault
The real power of a BHAG is in the hedgehog
In our work with management teams, one of the thought leaders we use is Jim Collins and his book ‘Good to Great’, an in-depth analysis on a set of elite companies that made the leap to great results and sustained those results for at least fifteen years. How great? After the leap, the good-to-great companies beat the stock market by an average of seven times in fifteen years, better than twice the results delivered by a composite index of the world’s greatest companies including Coca-Cola, Intel and General Electric.
In the book, Collins described how greatness is not a function of circumstance but is largely a matter of conscious choice and discipline, which is great news for us mere mortals, as it tells us we have the potential to build a great company (rather than awaiting luck to favour us).
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