Ask Better Questions

I meet with about 20 businesses a month - some small, some large, and a few start ups.  One of exercises I like to lead people through is a competitive map - where the market perceives the Price and Quality of each of their competitors, and where they think their company is.

It is amazing how many start-ups want to be “The highest Quality and the lowest Price.”  I always ask “why?”

If you really had the highest quality, wouldn’t you want to be the highest price?  Consider:

1.     Price is usually the first indicator of Quality.

2.     Price - especially for manufacturing and retail businesses - has a much greater impact on the bottom line.

Let’s dive into the first point.  Do you really want a $3 haircut? Do you want to look at $20,000 houses or $200,000 homes? What are your initial quality assumptions?

Point #2 - Let’s compare a 10% increase in Price vs. a 10% increase in Volume:

A & B show the bottom line impact of a 10% increase in price - leading to a 19% increase in Net Profit.

C & D show a 10% increase in Quantity - a 12% increase in our bottom line.

And of course, this works in the other direction.  When we get nervous about the future, we often “slash prices” in order to maintain volume - and then wonder why our bottom line disapears.

When I propose that companies raise their prices, they often look at me like, well, like I am an idiot.  How can I raise my prices in tough economic time?

The answer is to earn it.  Increase perceived quality - what is known in the industry as “Bag the Lettuce.”  How do people want to consume your product?  Can you re-package it?

Your mom used to buy a head of lettuce for $0.39 - you buy a bag of lettuce for $3.99.  Is the quality really 10x greater, or is it just more convenient?

Chances are, if your business has slowed down, what you have is time, what you don’t have is money.  Invest your time with your current customers.  Increase their perception of value.

Train your staff more often.  Call your top 20 customers and ask them to help you understand why they keep coming back to you - and how you can do better.

Find out why the last 20 customers went away - look at it from their stand point, and fix the perception.

And, of course, give me a call if you need a hand figuring out how to best position your company for growth.

Advertising will in the future world become gradually more and more intelligent in tone. It will seek to influence demand by argument instead of clamor, a tendency already more apparent every year. Cheap attention-calling tricks and clap-trap will be wholly replaced, as they are already being greatly replaced, by serious exposition; and advertisements, instead of being mere repetitions of stale catch-words, will be made interesting and informative, so that they will be welcomed instead of being shunned; and it will be just as suicidal for a manufacturer to publish silly or fallacious claims to notoriety as for a shopkeeper of the present day to seek custom by telling lies to his customers.

– T. Baron Russell, A Hundred Years Hence, 1906

100 years later, is anyone really hearing this message? If your game plan is to shout meaningless phrases at the masses, and hope it attracts just enough to stay in business… well, the end is near.

If your advertising copy contains the words “your _____ headquarters” or “for all your _______ needs” - please seek help immediately.

I recently fine-tuned my Financial chops at a week long National Development Association training on economic development finance.  It was a tough week, but a good one. I brought back some new tools we can use to analyze companies quickly and efficiently, and help determine debt capacity and operational effectiveness.

Here’s a concept that bears exploration, and one that I find is commonly underestimated by even the best managed companies - permanent working capital.

It’s the cash that’s tied up in your operations.  Here’s one way to think about it.  When I sold my radio stations in 2000 it was an asset sale - I still owned the accounts receivables and payables. Since radio stations have no physical inventory, this math is pretty easy - At close I started to pay all my left over bills - all the accrued payroll expenses, the snow removal bill, the phone bill, everything up to the date of close.  This drained the checking account down, but I was also receiving the income from all the advertising we had sold before the day we handed over the assets of the company.

90 days later all the bills had been paid, and all the receivables collected (with a few write-offs.)  What was left over  was my permanent working capital.

Calculating working capital requirements isn’t difficult - there are great tools to figure it out.  Understanding the concept is important.

There are two concepts of working capital - the first is the Balance Sheet concept - simply the difference between short term assets and short term liabilities, and is a quick method of gauging the debt capacity of a company.  Matching asset life and debt terms is critical to make sure that this concept is reflected accurately by the financial statements of a company.

My focus is on the second concept of working capital - the operating cycle.

The uncertain, un-synchronized cycle of payments and receivables.  Buy inventory, pay staff, accrue liabilities, make product, sell product, pay bills, get paid, etc. etc.

To calculate your companies cash cycle, take your annual sales (P&L) and divide it by your Accounts receivables from your year end balance sheet.  Multiply by 360.  this is your average days receivable.  If your terms are net 30, and this number is 30-35 - you are doing a great job collecting. Tracking this number over time is a great way to watch for operational effectiveness.

Days inventory = inventory (balance sheet)/COGS*360

You’ll also calculate days payable - accounts payable/COGS *360.

Days Accrual (all your payroll related stuff)/COGS*360.

Now you have all these days - the average turn on inventory - the average length of time it takes to pay your bills.

To calculate your Cash cycle - Days Receivables+Days inventory-days payable-days accruals.

That’s how many days you have of cash tied up in your operating cycles.

What’s the right number?  Depends - restaurants have a very short cycle - they buy food for cash and sell for cash the same day.  Ship builders have incredibly long cycles - years and years.  Dell computer made a billion dollars by figuring out how to pull off a negative cash cycle.

Track it, compare it, understand it.  Manage your finances to match short term capital with the seasonal fluctuations, and long term capital with the permanent, necessary portion of working capital.

Questions?  The Small Business Development Centers provides free counseling to businesses every day - give us a call!

I’m teaching an MBA course at Mankato State University - MBA 690 Executive Series.  The class is filled with amazing students - bright, inquisitive and well informed.

We’ve lined up some great speakers.  Our first guest was Lorin Krueger, former CEO of Winland Electronics and current start-up entrepreneur.

I’ve facilitated guest speakers before, but have never seen the level of engagement and “better questions” than I’ve seen in this class.  The students even started a blog to facilitate sharing articles and topic ideas prior to meeting Lorin.

The 2 hour exchange was amazing - the students really dug into his life’s story and drew knowledge that would have been left behind without their research and questions. Of course it does help to have great people like Lorin that naturally encourages friendly and frank discussions.

In the coming days I am going to try to chronicle the highlights of our class… stay tuned.

I was recently re-introduced to the “5 Whys Exercise” - used by Toyota during the evolution of their manufacturing methodologies.

Simply ask “why” five times to get to the bottom of things.

“We don’t have the proposal ready”  Why?

“Betty didn’t get it done” Why?

“She didn’t get started ’till Monday” Why?

“I didn’t send her the draft until Friday” Why?

“The boss didn’t email approval until that morning” Why?

“She was on vacation all week.”

Try it the next time you need to figure out the real reason something went wrong - or right.

Here’s a revisit of an article I wrote a few years ago while teaching at WHU in Germany.  I’ve updated it a bit…

All companies seek growth. Below is a plan of attack for identifying new venture opportunities within the framework of your current business. The key is to start with problems of your customers, suppliers and other stakeholders. If you can solve these problems, you’re bound to make money.

Problem

• Research problems of all stake holders – on both sides of the network
• Define the scope of the problem – dig for “pain points” and causes
• Segment into problem groups – shared problems across stakeholder

Idea

• Brain Storm – With each problem comes the solution brainstorm – think big, think
  wild, record everything
• Crystallize – Start to talk it out, dig deep, apply a little bit of real world
• Return to beginning – go through the list, record new ideas, dig into each idea little more
  

Opportunity

• Can we do it?
• Is it true to our brand?
• If we don’t do it, can someone else do it? Can we do it with a partner?
• What is its potential? – profitability, barrier to entry, stabilizing force, etc.
  

Plan

• Real business planning process - not just writing a business plan
• Weave a MAT – Milestones, Assumptions and Tasks*Assign Actions & Responsibilities – Senior management must not abdicate execution knowledge!

Execute

• Invite to succeed - Identify leaders & opinion makers and sell within first
• Re-examine against original goals
• Learn from failure – is it still a good idea? Can someone else do it better and still benefit our stakeholders? Explore cultural aspects of failure, and distinguish from technology, systems and HR factors.

*Thanks to Guy Kawasaki – The Art of the Start – a must read

“Happiness” is one of those weird spelling words - I think it should be “Happyness”, but I get a red squiggly underline, so I’m wrong.  I get a lot of red squiggly underlines.

“Happiness” is something I’ve been thinking about.

I lead a great life.  I have a fantastic wife who I adore, and seems to like me well enough.  Unbelievably wonderful, healthy, wise, outgoing kids who make me proud.  Yeah, they could do the dishes more often, but who’s perfect?

My immediate family is still close - I just spent Christmas with my father and step-mum Lynn - they are so happy and full of life.  My brother lives in town, and he and I still hang out - we’ll be going to a movie today.  My two sisters are close, even though one insists on living in Switzerland.

I am blessed with great friends.  We have a tight group that, frankly, is the closest group of friends my wife and I have ever had.  Yeah, the house is a mess, but Shelly and Ann did the dishes while Joe and I played guitar while Jules sang, so I can whip the kitchen back into shape before the family gets out of bed.

I’m still involved with my friends at Yovia.com - hosts of this blog.  I made an investment of both time and money to help the company over a year ago.  These are great people doing wonderful things, and I am impressed with what a great company they have built.

Now I call the South Central Small Business Development Center home.  I took over directing this non-profit.  I love helping new businesses get started, and helping existing ones grow.  I work with a great team, and am connected with dozens of partner agencies and a large network of people doing good work.

The stock market is back up.  My Apple stock is at an all time high. (I bought 10 shares in 1979, and a bunch more along the way.) It’s nice to see my 401k climb back out of the red.

So, how can I be happier? Fred Wilson blogged about it a few days ago, and he’s a guy I respect. Here’s a quote from Fed’s blog,which is a quote from a book I just ordered.

Second Splendid Truth
One of the best ways to make yourself happy is to make other people happy;One of the best ways to make other people happy is to be happy yourself. The Happiness Project Gretchen Rubin

My new years resolution is to be even more happy. Every day I will focus on making other people happy.  How hard can that be?

I will also seek to create Joy - lasting happiness.  Not only fleeting fits of giggles, but the joy of watching a business grow, of having successful kids, of helping your community.

What a great world this would be if everyone made - and kept - this same resolution.

Oh, and I’m going to lose 20 lbs.

Related articles:

• The Happiness Project - A New Year’s Resolution (avc.com)

From the Innovative Thinking Files: Eric Schmidt, CEO of Google, recently published an Op-Ed in the December 1st Wall Street Journal.

In his article, he looks ahead at what will probably be the future of “printed” media - electronic devices hosting customized, intuitive content.  Some of this subsidized by subscription, some by advertising, and some from corporate partnerships.

He deftly transitions to the current free-fall of the American Newspaper industry, and the recent reaction by some to blame Google for their woes.

He points out that Google sends over 1 Billion free clicks a month to printed newspapers.  How much revenue?  Here’s his statement:

The claim that we’re making big profits on the back of newspapers also misrepresents the reality. In search, we make our money primarily from advertisements for products. Someone types in digital camera and gets ads for digital cameras. A typical news search—for Afghanistan, say—may generate few if any ads. The revenue generated from the ads shown alongside news search queries is a tiny fraction of our search revenue.

It’s a great article, and anyone following the transition of media, and the price of attention vs. the price of delivering content, should read the article.

From a strategy perspective, I think this is a bold, genius move by Mr. Schmidt.  This is a positioning strategy, and negotiation tool, and a strong signaling statement roiled into one.

The tone of the article is clearly one encouraging cooperation.  By expressing it it the Wall Street Journal, the signal is clear: We respect journalism, and want to be a part of the solution.  The article clearly defines the partnerships Google is pursuing to accomplish this goal.

What can you learn from this?  Even small business can use signaling to foster “co-opetition” - the art of creating value by recognizing the interdependence with your suppliers, employees, competitors and your customers.

There is a very good book - I highly recommend - called Co-opetition (available here.) Here’s a quote from their website:

The best way to do this will obviously be different for different businesses. But one strategy that Co-opetition emphasizes is working with what we term “complementors.” A complementor is the opposite of a competitor. It’s someone who makes your products and services more, rather than less, valuable. Not surprisingly, the complementor concept is especially relevant to the builders of the Information Economy. Hardware needs software, and the internet needs high-speed phone lines. No one, alone, can, build the infrastructure for the new economy. It’s a whole new system made up of many complementary parts.

Drop me a note if this sparks any questions about your industry, and how you might take advantage of thinking a bit differently, and asking better questions.

I’m asked everyday to make a referral.  As Director of the Small Business Development Center, I offer to help find resources that can fit the persons needs, and do not recommend any particular law firm, CPA, bank or whatever.

However, the next question invariably is “who have you worked with?”  And I always answer honestly.  I try to explain why the particular firm was right for me - leading them to the opportunity of discovering their own perfect match.

The great thing about living in Minnesota is we are simply too connected and too small to allow bad firms to exist for very long.

My father taught me this lesson when we moved to the town of Austin from Chicago in the late 70’s.  “You see, son” he said, usually with his eyes closed, “If you are a crappy plumber in Chicago, there are plenty of strangers that will call you, and you can stay in business.  Here in a small town, everyone talks to each other - if you ripped someone off in this town, you’d be out of business in a few weeks.”

I know I sound a bit ingenuous when I tell clients that all the law firms in our area are good - but it is true!  I’ve never heard a horror story about any of them.  The fact is, we are too well connected, and live in a world where bad news travels faster than the speed of light.  If there was a “bad firm” out there, we would have heard about them.

Of course, this leads to a particular challenge for the new company in town.  And, a big part of my business is helping the “new guy/gal on the block.”  The good news is there are some tips and strategies to overcome the initial suspicion that exists, and to create your own network of satisfied customers very quickly.

Bad mouthing the competition is rarely a good marketing plan.

Amplifying the voices of your most satisfied customers is always a good strategy.

This is usually the last story I teach for Entrepreneurship:

A boat docked in a tiny Mexican village. An American tourist complimented the Mexican fisherman on the quality of his fish and asked how long it took him to catch them.

“Not very long,” answered the Mexican.

“But then, why didn’t you stay out longer and catch more?” asked the American.

The Mexican explained that his small catch was sufficient to meet his needs and those of his family.

The American asked, “But what do you do with the rest of your time?”

“I sleep late, fish a little, play with my children, and take a siesta with my wife. In the evenings, I go into the village to see my friends, have a few drinks, play the guitar, and sing a few songs. I have a full life.”

The American interrupted, “I have an MBA from Harvard and I can help you! You should start by fishing longer every day. You can then sell the extra fish you catch. With the extra revenue, you can buy a bigger boat.”

“And after that?” asked the Mexican.

“With the extra money the larger boat will bring, you can buy a second one and a third one and so on until you have an entire fleet of trawlers. Instead of selling your fish to a middle man, you can then negotiate directly with the processing plants and maybe even open your own plant. You can then leave this little village and move to Mexico City, Los Angeles, or even New York City! From there you can direct your huge new enterprise.”

“How long would that take?” asked the Mexican.

“Twenty, perhaps twenty-five years,” replied the American.

“And after that?”

“Afterwards? Well my friend, that’s when it gets really interesting,” answered the American, laughing. “When your business gets really big, you can start buying and selling stocks and make millions!”

“Millions? Really? And after that?” asked the Mexican.

“After that you’ll be able to retire, live in a tiny village near the coast, sleep late, play with your children, catch a few fish, take a siesta with your wife and spend your evenings drinking and enjoying your friends.”