Business isn’t Zero Sum

In any negotiation, you can assume a win-win solution or a zero sum outcome. “Win-win” is defined as when both parties come out ahead or achieve what they seek. “Zero sum” is when the premise behind negotiation is that whatever one party achieves equals a loss for the other.

Liberal economics (not the left-wing kind of liberal, the open-markets type) assumes that most trade is win-win.  For example, cheap Chinese labor and government subsidies allow working class Americans to walk around with powerful pocket computers (their smart phones). Who enjoys the greatest economic benefit?

Certainly the many thousands of Chinese workers enjoying a newly middle-class lifestyle are better off. So are the manufacturers and marketers (such as Apple) who profit as the middle men. But win-win economics argues that the value to everyone in the product pipeline pales in comparison to the economic stimulus of instant communications, Internet shopping and access to unlimited information.

On the other hand (a favorite phrase of economists everywhere), to the unemployed American worker who presumably would be making that phone, albeit at a much higher cost; it looks a lot like a zero-sum proposition.

When Wal-Mart began buying in China, economists calculated the net savings for Americans as equal to a 1% drop in the cost of living nationwide for the next several years. The millions of working class Americans who poured into Wal-Mart stores for cheaper goods might be shocked at an accusation that they were putting their neighbors out of work, but it was true.

Business is Win-Win

We accept win-win in business every day. You know that your vendor is profiting on what he sells you; that’s how he stays in business. You fully expect to profit from selling your goods and services. The people who buy them expect a benefit in proportion to what they spend, or they wouldn’t do business with you.

You pay your employees more if they are productive, meaning that in return they make you more money. Employers who worry that every dollar they pay in wages is one less in their pocket don’t attract top personnel, and usually don’t thrive in business.

The assumption that everything is zero sum is not only wrong, it is stupid. The political, social and business  landscapes can’t function on a premise that anything good for one party is automatically terrible for the other.

Allowing American companies to fill positions for which they can’t find Americans keeps them growing. As a point of information, those seeking H1B worker visas for technology workers can only do so if they have advertised the job to Americans, interviewed all qualified applicants, published the compensation, and agree to pay the same compensation whether the job is filled by an American or a guest worker. Those are the current requirements.

Saying that every guest worker has stolen an American job is ridiculous. Just as ridiculous is the claim that any controls over firearms leads inevitably to troops bashing down your door for general confiscation. So also is the position that every social safety net creates dependents who will mooch on the taxpayer for generations. Along with that put the premise that all foreign trade is evil because someone profits from it.

A Zero Sum Business

Let’s try running your business on zero sum assumptions. Set the amount you wish to pay for each expense item on your P&L. Determine your sales price for maximum profit. Then post wages that will get you the most return on your employees’ labor.

Now, announce that under no circumstances will you vary by one penny from what you want to pay or charge. Tell everyone that you aren’t in a position to lose anything just so they can win. Your vendors, customers and employees can take it or leave it.

Good luck.

Your Exit Map: Navigating the Boomer Bust is a fully-illustrated look at the impact of Baby Boomers on small business ownership, and what their options will be for transitioning companies.

You san sign up to receive free excerpts in advance of publication here.

Posted in Business Perspectives, Entrepreneurship, Incentives, John's Opinions, Managing Employees, Politics and Regulation, Strategy and Planning, Technology | Tagged , , , , , , , , , , , , , , , , , , , | 1 Comment

One Response to Business isn’t Zero Sum

  1. Mike Wright says:

    Very good points. Unfortunately we have become very short term and self centered thinkers. Those with the greatest economic or political power will do what is necessary to gain and retain their control. This creates sub-optimal binary states that we fluctuate between rather than making long term gains for all.

Leave a Reply

Your email address will not be published. Required fields are marked *

Stop Managing

Why would anyone advise business owners to stop managing? Management is a proven science. From the time and motion studies of Frederick Winslow Taylor in the late 1800s, to Matthew Kelly and Patrick Lencione’s Dream Manager, we are constantly in search of ways to make employees more effective.

Management trends (some say “fads”) come and go. Wikipedia lists a number of major theories since the 1950s, including Management by Objectives, Matrix Management, Theory Z, One-minute Management, Management by wandering around, Total Quality Management, Business process reengineering, Delayering, Empowerment, 360-degree feedback, Re-engineering and Teamwork.

You could probably throw in a couple of offshoots like ISO 9000, Open Book Management, Six Sigma, Balanced Scorecards and Net Promoter Score. All have metrics (Key Performance Indicators) to measure their effectiveness.

In the 125 years since Taylor, after the introduction of automobiles, telecommunications, manned flight and the Internet, we are still working from the basic framework of time and motion studies. We try to empower people, but that often just means having them track their own production rather than have someone else do it for them. (Delayering)

That leads us to one of the Catch 22s of many business owners’ reality.  Once you have grown an enterprise large enough to require management, you’ve outgrown the skill set that made your business successful.

Small businesses become bigger businesses through their owners’ leadership and creativity. Time isn’t a fungible commodity, you can’t save it or get more of it. In a zero-sum  equation, any increase in one factor means a reduction in others. The more time you spend managing, the less there is left over for leading and creating.

Stop Managing, Start Creating

Last week, I sat in on a panel of three successful business owners who were discussing the value of a second in command. Each mentioned how delegating the management tasks of daily operations had freed them to focus on longer-term objectives, develop new ideas, and improve their personal quality of life. (In case you’ve forgotten, that’s why we own companies.)

A second-in-command to manage the business can’t be undervalued. I recommend Gino Wickman’s Rocket Fuel for a terrific examination about the relationship between a visionary and an implementer. If you haven’t read my own Hunting in a Farmer’s World, subscribe to Awake at 2 o’clock (to the right) for the chapter “I’m a little bit ADD” and see if you recognize yourself. (If you already subscribe, don’t worry. We don’t send duplicate emails.)

There were a number of owners from smaller businesses in the panel’s audience. Their comments were not unexpected. “I can’t afford a hire really top-flight manager.” “What if I get dependent on someone and he leaves?” “How can I find someone who knows as much about the business as I do?”

Those observations are being made by looking through the wrong end of the binoculars. The real question to ask  is “What would happen if I had more time to do what I do best?”

The average business owner estimates that about 20% of his or her time is spent in business development, the long-term creation of new products, services, systems and relationships. If a second in command can take just 30% of your duties, you could increase your business development effort by 150%.

What will happen if you stop managing, and devote 2 1/2 times the effort to growing your business? That’s how much a good manager is worth.

Are you over 50 years old, or do you advise business owners who are?

Sign up for free excerpts of my upcoming book, Your Exit Map: Navigating the Boomer Bust

Posted in Building Value, Entrepreneurship, Exit Planning, Incentives, Leadership, Managing Employees, Strategy and Planning | Tagged , , , , , , , , , , , , , , , , | 1 Comment

One Response to Stop Managing

  1. Ed Bierschenk says:

    Great summary of the panel session. I was in the audience for the panel and it was clear that business owners need to be more willing to let go and delegate more to a qualified 2nd in command. Like, John, I would encourage owners to consider upscaling their next hire into a more qualified candidate who can assume a strategic competency as a GM, Operations Manager, or even 2nd in-training. This is a high leverage investment which will allow more time for “working on the business.” TAB Business Coach-

Leave a Reply

Your email address will not be published. Required fields are marked *

Exit Planning in a New Political Environment

What does a new political environment mean for business owners who are planning to transition their businesses? Should you accelerate your plans, or slow them down?

As I’ve said many times in this space and elsewhere, the biggest single factor in successfully selling a company is the current condition of the financial markets. Since the Great Recession, the Federal Reserve has poured new cash into the system at very low interest rates. This “cheap money” has trickled down to fund a wave of leveraged buyouts by financial professionals seeking a better return than that from more traditional investments.

This wave of cash enables some 7,000 private equity groups (PEGs) to seek targets in almost every industry. Those targets, however, are typically among the 20,000 or so privately held companies with over $1,000,000 in pre-tax profit.

That leaves out some 9 million employers on Main Street (those that sell for less than $3,000,000.) Of those, about 5 million are owned by Baby Boomers who are, or should be, thinking about life after business ownership.

Most of the owners I talk to are at a loss to predict the climate of the next few years. They hope that a pro-business administration will reduce bureaucracy and pull back some of the regulatory burden on business owners. On the other hand, they are concerned that trade wars, rescission of treaties or diplomatic snafus will drive the US, or the world, into another economic trough.

A very few claim that they know exactly what President Trump and the Republican Congress will do. In the words of Prussian General Helmut von Moltke, “No battle plan survives contact with the enemy.” People may think they know what is coming, but it would be foolish to bet the ranch on any single outcome.

What does this mean for exiting business owners? At the risk of sounding too pat, it means exit planning is more important now than ever before.

Why Start Exit Planning Now?

Here are some reasons why an exit plan is valuable in uncertain times:

  • If your planned exit is more than five years from now, the landscape will likely change again before you transition. A plan will give you the tools to track key components of a successful exit, and improve your ability to respond to changes.
  • If your intention is to preserve the legacy of your company by selling it to employees or family members, starting the transfer now can put you in a position to accelerate or delay the final transfer according to current conditions.
  • If the stated intention of the new administration (a return to 4% GDP growth) is successful, a plan to maximize your value to a third-party buyer will leverage higher pricing multiples.
  • If the economy winds up in the tank, a plan is only a plan. It can always be put on hold until conditions improve.

An exit plan is, by definition, a strategic plan with the addition of a completion date. Some owners fear that by stating a deadline, they are committing to it regardless of circumstances. Of course that isn’t true.

Planning your exit and actually exiting are two different activities. It only makes sense that the political environment should be one of the factors that affect your final decision.

Would you like free excerpt from my new book Your Exit Map: Navigating the Boomer Bust?

Just register here. We’ll send you short pieces every few weeks until its publication in the Spring.

Posted in Economic Trends, Entrepreneurship, Exit Planning, Exit Strategies, Marketing, Selling a business, Strategy and Planning | Tagged , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Branch Mentality and Sanctuary Cities

Every multi-unit company suffers from branch mentality. I’ve worked with many, and no matter how much they promote a corporate culture and team spirit, branch mentality creeps in sometimes.

It comes in two versions; the outposts’ attitude and the headquarter’s complaint.

In the outpost, where service is delivered, it goes something  like this. “Those people at corporate just don’t understand what we do. They hand us rules that interfere with our ability to get the job done. If they knew how difficult it is to run operations on a daily basis, they wouldn’t burden us with these useless procedures.”

At the main office, the complaint is a mirror image. “Those people in the field want to do things any way they please. They don’t understand how important consistency is to our customers. When we ask that things be done the same way in each location, they act like we are interfering instead of just doing our job.”

Sanctuary Cities

In politics, the issue of Sanctuary Cities is similar. Since the founding of the United States of America, the individual states have resisted unity on many levels. I’ve often had to explain to businesspeople from other nations that they can’t just set up shop anywhere in the USA and begin selling nationwide.

Each state has its own licensing, taxation, consumer protection and labor requirements. These variances were accepted as a kind of background noise until the passage of the Affordable Care Act (“Obamacare”) where states were specifically permitted to opt out of a national law.

I’m certain that this high-profile exercise of states’ rights had a lot to do with subsequent movements to “opt out” of Federal statutes on marijuana and discrimination based on gender identity.

City dwellers have been increasing as a percentage of the total population for over a century. In some states, one or two large cities account for a majority of the state’s population. Sanctuary Cities are just one aspect of local representative governments now extending their lawmaking authority to opt out of regulations from higher up that their citizens don’t like.

Branch Balkanization

It may be tempting for an owner to let managers in the field go their own way. “You are closest to the customer, do what you think is best. As long as you achieve profitability and growth goals, decisions on the ground are yours.”

Choose a pathHow far does decentralized authority  extend? If a store can choose it’s own methods, why not allow the same authority to each manager? Certainly the clientele who shop or eat early in the morning differ from late night customers. Shouldn’t you then allow methodologies to be delegated to the lowest operational level?

Of course, you won’t keep customers very long if they don’t know what to expect when they walk in. That way lies anarchy.

The authority of central governance should be limited to what needs to be centralized. The way to combat branch mentality is to mandate those things that control your offering and presentation to the public. Those rules are inviolable. Flexibility in implementation is acceptable, as long as the most important features of the company’s offering never vary.

If a rule becomes merely a suggestion it is not only ineffective, but you could start a process that degrades other, more important rules along with it.

yem-flat-cover-smallThank you for reading!

If you would like to receive free pre-publication excerpts from my newest book Your ExitMap: Navigating the Boomer Bust, please register here.

Posted in Customer Relations, Entrepreneurship, Leadership, Managing Employees, Strategy and Planning | Tagged , , , , , , , , , , , , , , , , | 2 Comments

2 Responses to Branch Mentality and Sanctuary Cities

  1. John Lind says:

    In my other life, while being a Corporate person, I became completely entrenched in the Corporate philosophy based on expectations, performance, strategic direction, planning, bench mark standards, consistency of customer relations, product quality, performance guarantees, and team work and development of personnel. These points worked well and the Corporation met financial expectations in the marketplace and stayed ahead of the competition that was consistently on our heals. If there was a ‘sanctuary’ location it would have not worked… the same goes for cities that believe they should be ‘sanctuary’ city on the Federal dime. Cut off the Federal dime if they are allowed to maintain a ‘sanctuary’ city., Consistency should be paramount across the USA.

  2. Gordon Stuart says:

    I think you left a key level off – that is multi – national. I used to work for an Australian Bank who we referred to as IAW – standing for “In Australia We” . This was how they started the sentence to talk down to you whether I was in London or Auckland.
    There is a whole subject here on cultural or market differences – my experience is Australia, NZ, UK, Canada and USA are all very different and despite being in the same industry you need to be careful with acquisitions!

Leave a Reply

Your email address will not be published. Required fields are marked *

Exit Planning: Telling Secrets

Planning your exit from a business is a process of telling secrets. For many owners, it is the most terrifying part of selling.

A rancher in South Texas once said to me, “I’m going to tell you a secret, and you have to solemnly swear not to tell anyone. When you do, you have to make them swear the same thing.”

Most business owners are very cautious about with whom they share their exit plans. The logic is intuitive. The more the information is shared, the bigger the chance is that someone will use the knowledge against you.

telling-secretsCompetitors will tell customers, insinuating that your company will no longer be a dependable supplier. Employees might begin looking for greater security in other jobs. Vendors may seek another distribution channel. Your bank could start tightening your credit.

Yet your buyer wants to verify due diligence information. He wants to talk to key employees and customers. Lines of supply and the solidity of relationships have to be confirmed.

Some owners are unduly afraid of letting anyone know their plans. Sooner or later everyone will know, but when they should be informed is an important part of your planning. Controlling the distribution of information might have dramatic impact on the value of your business.

Those who should know about your plans can be placed in three groups.

Round One

Key employees: Whether they are slated to be the next generation of owners or not, key employees should be the earliest group informed of your plans. Of course if you are contemplating an internal sale, their willingness and ability to buy the company requires disclosure. If you are planning an external sale, their cooperation in preparing the company for a buyer’s due diligence will be critical.

Consider having the employees sign a new non-disclosure agreement. Even if you have confidentiality provisions in your employment contracts or policy manual, it serves to emphasize the sensitive nature of exit planning information.

Round Two

Going outside your trusted inner circle is a big step, but you should consider it once you have a solid buyer in place. Sharing earlier, rather than later, makes due diligence easier.

General Employees: Employees can usually be informed fairly early in the sale process. Explain that the transition of the company is a normal part of its lifecycle, and that you are taking steps to ensure that it is done with an eye to their continued  employment. That will go a long way to making them feel more secure. If you treat it like a dark secret, they will have greater concerns about the inevitable rumors.

That’s why I suggest you inform the employees before you tell vendors and competitors, from whom they are likely to hear it anyway. Bringing them “in the know” will also help forestall any hiring attempts by other businesses. Inertia is a powerful force. Usually after a few weeks with no major disruption, the employees just accept your exit planning as a fact of life.

Critical vendors. If you have an exclusive distribution or supply relationship with some larger companies you may already be fielding requests for a documented succession plan. Many suppliers appreciate the forethought of exit planning because it ensures the stability of their distribution chain.

One area of caution. Watch out for a vendor’s loose lipped salespeople, who may regard news of your pending departure as hot gossip for the rest of their customers.

Round Three

Customers: Most customers should be told as late as possible before the transaction closes. If informed of a fait accompli, they are likely to stick with the relationship long enough to gain some experience with the new owners. If informed too far in advance, customers will logically begin to look for alternative sources of supply.

Lenders: While many bankers and other lenders will say that they ought to be informed as early as possible in the process, it is often not a great idea. They may seek the opportunity to finance a transaction, and certainly would like to begin a relationship with any new owner as soon as possible, but they also have a primary responsibility to protect the assets of their institution.

That means they have to worry about the security of your personal guarantees, and whether they see any risk to their capital in your business. Discussions with your bank should include details about the future of your banking relationship.

Due diligence is only one step in the process of telling secrets. Lots of other stakeholders will need to be informed. How and when you do that should be a formal part of your planning process.

yem-flat-cover-smallThank you for reading. If you would like to receive free, pre-publication excerpts of my next book, please register here.

Posted in Customer Relations, Entrepreneurship, Exit Options, Exit Planning, Leadership, Selling a business, Strategy and Planning | Tagged , , , , , , , , , , , , , , , , | Leave a comment

Leave a Reply

Your email address will not be published. Required fields are marked *