Bringing Order to Chaos

We have all been there! Taking over a company or group that has lost its way or suffering under market conditions that has overwhelmed it. Or, a major customer relationship erupts requiring immediate triage to stabilize and return to a normal business relationship. Or, you are blind sided by a third party trying to disrupt your organization by hiring away key employees affecting product development, sales and operations, or undercutting you position at key accounts. What do you do?

Your plan of action is a result of a quick but careful assessment of the conditions that exist. Many contradictory factors may be in play: Lack of organization and individual confidence, trust issues (mistrust, blame, defensiveness), break down in business discipline, poor communication, poor vision execution, etc. The effectiveness of your action plan is based on how you organize and prioritize what you do first, second and so on!

The following is a five-step process that I have used successfully to deal with severe organization dysfunction and poor performance:

• Focus Employees On What They Can Control - The biggest distraction that I find that needs to be contained is the disruption that things people cannot control causes. Uncontrollable events can be very distracting to many employees and they are far more productive and satisfied when they can offload the unexpected and uncontrollable issues and Focus on What They Can Control.
• Establish a Crisis Path - As a sizable part of the organization returns to processing controllable events there needs to be a timely response to the uncontrollable. Every organization has people who are more adept and comfortable dealing with uncontrollable problems where boundaries are poorly defined. They thrive on solving crisis. These people are capable of rising to the occasion in creating and developing solutions that solve tough problems in a timely and effective manner.
• Establish a Horizon - A dysfunctional organization has lost track of what it is working toward. It may be difficult to target a long term goal right away. Daily (or in more severe cases hourly) goals or targets might be necessary at the beginning to measure progress and accomplishment for the organization. A sustainable track record of attaining daily goals will lead to increased confidence in setting longer term weekly and then monthly goals.
• Eliminate the Root Causes of the Uncontrollable - As the organization begins to redirect itself toward a successful direction and uncontrollable crisis are contained; resources need to be applied to eliminating the causes of repetitive crisis. Possible reasons for this condition are:
• Poor quality that is either occurring in the organization or by a supplier in the supply chain.
• Critical business processes that are not being complied with.
• Customer communication on commitments and expectations has broken down leading to an unrealistic demand on company resources.
• Honesty, Transparency and Communication - Through all of this it is imperative to be as honest with employees and customers as possible. Ongoing urgent or crisis situations breeds skepticism. Telling the ruth is golden over telling people what they want to hear. I have had amazing response from employees and customers alike when I present the truth about a situation rather than using double talk or worse - delay and deny - to deal with a problem.

Are these the only steps you can use to bring order to chaos. No! These five-steps have worked successfully for me in laying a foundation of stability in addressing severe organizational dysfunction in a number of management assignments in my career. Some of you may have circumstances that required a different tact and I would certainly appreciate hearing from you on what worked best for you.

Do You Have An Effective Market Strategy?

"Strategy should be developed from the bottom up, not the top down . . .In military warfare, the serious student of strategy begins with the study of the bayonet"

- Marketing Warfare, Ries & Trout

What is the underlying message in this quote? A smarter strategy will overcome just working harder in the trenches. Do not confront your opposition head-on when they have the high ground. If you are number 2 you seek higher ground. If you are number 3 you seek a flanking action to go around the high ground, And, if you are just entering the market your tactics would involve going under the high ground.

As a market leader your strategy would be defensive to protect your market position. For years Microsoft protected its strong position with its bundling strategy which positioned its browser, for example, ahead of others, possibly better performing, products. Apple comes to the market late and offers leading design, technology rich products that exceed the capabilities of the market leaders and taking advantage of their disadvantages.

Do openings exist when the market is dominated by one leader? As a company becomes a market leader it begins to struggle with being all things to all customers. Its success may have originally been serving a market segment very well and, over time, adding improvements to the product or service to make it attractive to a larger customer base. What often happens then is that the sharp features set and message that originally attracted customers becomes fuzzy and less distinct allowing smaller companies to step in and grab market share with targeted product solutions that respond to rapidly changing needs in the market place.

Customers react well to products that are refreshed regularly to meet their changing needs. Larger companies find this difficult to do as they become more bureaucratic and key decision makers become removed from the front lines where they were in constant contact with the market.

The strategic planning development process is a critical aspect of the ability of a company to hold or gain market share. Many companies fall into the top-down approach where decisions are made without the benefit of direct contact with tactics currently at play in the market. A bottom-up approach is able to use this tactical information to more effectively define what it will take to overpower a competitor or market leader for a segment of the market. This process is more likely to include the anticipation of what a stronger competitor will do and the best way to attack the weakness in the competitors strength so that they cannot respond without giving up its strength.

A market leader is more likely to believe they can do anything if they allocate enough resources. However, a poorly conceived strategy using a top-down approach will shift resources away from the point of battle where they are needed.

What is your market strategy process? Is it top-down where you are not incorporating current tactical information from the marketplace? Are your key resources improperly allocated to be effective in the development and execution of a market growth strategy?

Examine your market strategic planning process to make sure it is appropriate to your market objectives and position in the market place.

Resource: QuickMBA

The Benefits of Revenue Linearity

"Through improved revenue linearity and strong working capital management, we improved DSO, decreased inventories and, as a result, generated $46.8 million in positive operating cash flow, our 46th consecutive quarter of positive operating cash flow."

Chairman and CEO Robert Hagerty, Polycom Inc.

Many companies measure revenue on a monthly basis and overlook the "flow" of revenue during the month. In some cases companies are captives of their customers as it relates to the demand curve that they place on them. We often receive promotion offers to order by . . . which are designed to improve the linear flow of revenue for the company. In other instances, companies do not apply sufficient planning(forecasting)/control to the manufacturing process which can result in a hockey stick flow of revenue at the end of the month. This can be particularly true for build to order products versus those that are more commodity oriented. Insufficient order backlog can also produced a non-linear revenue flow as manufacturing will produce products for potential orders that do not arrive until late in the month placing extreme demands on operations as they do final assembly, configuration and test to ship by the end of the month.

Why is linear flow necessary and valuable to the financial performance of the company?

Revenue Linearity Example: Ideally if you have a monthly revenue budget set at $1.2M and there are 20 working days in the month then a linear flow would be to deliver to finish goods and ship $60K per working day.

This example assumes that there are sufficient orders and customer approved ship dates to ship available inventory each day at a $60K rate. This linear flow allows the collection process to begin earlier than if the bulk of the $1.2M is shipped the last week of the month. Also, inventories and work-in-process can be optimized to support a $60K/day flow instead of a large "burp" the last week of the month (in some cases this could occur over a few days).

By the end of the first month or by the 15th of the next or second month a good portion of the cash from the first part of the month would be received or on its way. A non-liner flow would push many receivables out into the third month putting pressure on working capital and credit lines.

The graphic below highlights the difference in collection is a linear and non-linear revenue pattern. In the Linear example the first collections are on their way by the middle of next month and would continue to increase as the each receivable aged. In the non-Linear example we see a substantial portion of the receivables delayed and additional 15 days or more depending upon the severity of the non-linearity. The cash is delayed but demands for cash regular wages, utilities, inventory for the current month revenue still exist and would have to be paid by reserves or a draw on the credit line.

When build-to-order products are involved the scheduling and production performance are critical to produce the linear flow. Lean manufacturing methods have improved the ability of manufacturing operations to meet scheduled delivery dates that also support linear revenue flow.

In the case of Polycom above, it improved revenue linearity along with strong working capital management and produced an attractive positive operating cash flow.

What is your linear revenue strategy? Are you taking advantage of revenue linearity to improve cash flow in your company?

Cash Flow Planning and Profits

Cash Flow Planning is something that many companies do not integrate with the normal budgeting and profit forecast process. For some companies this is not a serious problem in a "normal" economy as they have sufficient cash reserves or credit line that can absorb the normal ebbs and flows of cash demands of the company. In todays economy where cash reserves have been depleted or credit lines tightened or "lost" raises a new demand for "accurate" cash flow planning.

If I make a profit then whats the big deal about cash flow? Profits on most company financials do not represent cash but a sale that is a liability on the customer to pay at some time in the future. Until the customer pays the company uses working capital to pay for inventory, employee wages, heat, lights and other expenses. It is the management of customer payments and company obligations that results in either positive or negative cash flow.

Isn't it just a matter of making sure receivables are greater than payables - right? This would be a simplistic view of managing cash flow as this attitude would most likely not recognize factors that influence the changes in Days Sales Outstanding (DSO) or balancing non-uniform demands for cash such as new products, tax payments. capital expenditures or debt reduction.

DSO is a measure of the number of days that a company takes to collect revenue after a sale has been made. Why would DSO vary?

1. Products that have quality issues and do not operate properly will cause payments to be delayed until the products perform.
2. The customer mix changes where the majority of customers paying in 45 days days may transition to customers who push payments out to 60 days - or more.
3. Customer cash flow problems can filter down to you where they may delay payments to improve their own cash flow situation.

So if I do a good job on collections cash flow can be managed? Managing the inflow of cash is important but it is also critical that you look what expense and asset strategies you are using in the company. Such as:

1. Carrying inventory that is not being used consumes cash making it unavailable for other purposes such as paying wages, lease payments, etc. Excess inventory can even result in lost cash if the inventory becomes absolute and is written off - thrown away.
2. Capital expenditures such as equipment or buildings consume cash prior to getting a return on the investment. Timing of investing in capital expenditures can put positive cash flow at risk.
3. Factory cost or the cost of goods sold - labor and material - will put pressure on cash if productivity and quality objectives are not kept to insure that a dollar of sales will yield a predictable gross margin. Loss of control in labor cost, productivity, quality or material cost can create products that cost more than expected and/ or delivered later that expected resulting in a cash flow crisis.
4. Vendor financial stability can become a problem where they may need to tighten their collection policies which may require you to pay early if there are not otters sources for the same product or service that will let you pay on the same schedule you have planned into your cash flow plan.

Summary

Good cash flow management is not an accident. Intentional action is required on a regular basis to make sure that all of the factors that support your cash flow plan are in order. Cash is king - but you have to take a proactive role with your organization to make sure you achieve your cash flow objectives. Integrated cash flow planning is essential. Developing cash models of your business will help you and your team understand the sensitivity of your specific business model to factors that can cripple or impede good cash flow management.

Are you Managing or Leading?

I am passionate about the four key elements that I feel are critical to running a successful company. These elements are Leadership, Process, Metrics and Organized Financials. The cornerstone of this four-step methodology is Leadership. Do not use confuse this with the term "management" or "managing". Leadership involves inspiring others with a clear vision of how things can be done better. Those who manage tend to implement someone else's vision or what they believe is the "corporate" vision and normally slow things down by limiting what their part of the organization can do to just what has been asked or expected - to play it safe and no more.

Leaders work between the lines and interact with their organization to test their vision and assumptions by getting feedback from those who actually work in the operations they are responsible for. Taking the time to understand what is holding people back from higher levels of job satisfaction and job performance. Leaders try to find out how the employee can be unleashed to higher levels of performance than they thought possible and then get out of the way. This is true for individual contributors and those in intermediate supervision positions as well.

Too often artificial ceilings trap employee performance because of misunderstandings, poor vision implementation and access to the facts that drive the business. The Leader looks for this condition and gets to the bottom of the problem. Few people intentionally perform poorly when provided with reasonable training, equipment, work environment and motivation. The leader is conscious of the whole picture and looks beyond the traditional boundaries to see that his business (or department) is successful and that their employees are excited about what they are doing and are onboard with the direction of the business.

Have you trapped yourself into a "manager" mindset? Are you excited about your business? Are you transferring that excitement to others in your business? Can you recognize that excitement in those who produce your products or deliver your services. Take a fresh look at your business, take a new look at your business plan (even better - develop one), identify what is necessary to energize not just your key people but all employees. Become a facilitator and less a controller. Celebrate the independent accomplishments of employees and supervision when they do well and lift the performance of the team(s).

Be a leader!

WWDD: What Would Deming Do?

"No one has to change. Survival is optional." W. Edwards Deming

Several lifetimes ago (1983) I attended a 3.5 day seminar in San Diego and joined over 300 people from various manufacturing and service companies to listen to W. Edwards Deming. Deming is attributed to be the father of the evolution of manufacturing in the use of statistical methods to manage business processes and the attitude of continuous improvement.

We all sat at narrow tables in a large ballroom with Deming on a raised dais. We were equipped with a full 3" binder that contained a Xeroxed volume containing his many lessons on how to apply statistical methods to solve business problems and improve product performance. Deming was not a gifted speaker but his stories and anecdotes were riveting and despite the size of the group few people left early.

Deming did carry a chip on his shoulder since he had not, by then, received recognition in America for what he had done in Japan. Others, American based statisticians, were claiming ownership of the movement but it was clear that Deming had fostered a miraculous change in post-war Japanese industry that resulted in significant inroads in American markets with lower cost and higher quality products. In the early 80's it was clear that American companies were waking up to what they had to do to just catch up let alone get back in the lead.

What Would Deming Do Today? American industries have gone a long ways in implementing the the following Deming philosophy into their business.

Deming would evoke disbelief in his management seminars when he insisted that 94 percent or more of all problems, defective goods or services came from the system, not from a careless worker or a defective machine. He would go on to say that to improve an organization’s goods or services, the system had to be improved rather than searching for the guilty worker or broken equipment.

In almost all cases, when top managers implemented his ideas, they were surprised to find that they agreed with him: The management and the system they were managing were the true source of both problems and improvements.

However, in today's economy we find an increasing presence of government in business in terms of regulation, company ownership and increasingly complex taxation and fee structures. What role should government take in adopting the Deming philosophy as it becomes inextricably involved with the ability of business to operate in the free-enterprise marketplace. Can government, a body that sees some form of leadership change every two years, plagued by lack of accountability, has many political appointees that are not carefully recruited and placed because of their ability to perform in their jobs, has extreme difficulty in managing itself (post office, budget deficits, perks) let alone managing profit based organizations?

Successful adoption of the Deming principles begins at the top of the organization. It requires a constancy of purpose, breaking barriers between functions, driving out fear as the common denominator for change or performance, elimination of slogans, exhortations and targets and a solid understanding of the processes that they are managing. This is a tall order for a government process that consistently demonstrates an inability to be accountable to its citizens and other stakeholders for the management of basic services.

What would Deming do? He would get government out of the business of managing business.

Sailing with Martin: A Management Example

I recently had the pleasure of sailing in a sail boat race on Puget Sound at the invitation of Martin who runs a local high tech manufacturing company. It was a beautiful fall day with sun and plenty of wind for sailing. As a precaution I dressed for rain - the normal weather for this time of year. The boat was 42' long so it easily accommodated the onboard crew of 5. To be competitive in a race, the crew has to efficiently respond to changing conditions such as weather, water (current, depth, tide), proximity to other "vessels" and to effectively execute ship board maneuvers necessary to keep the boat tuned (trimmed) to the optimize its sailing characteristics.

Martin, who has extensive competitive sailing experience, was the captain. Sailing is a passion for Martin and the boat is his love. What makes Martin different from other experienced sailors is his ability to manage the multiple activities of processing the external factors affecting the boat - wind, current, etc. - and the onboard operations - steering, lines, sails, etc. and then effectively communicate what he needs to his "experienced" crew to perform. Of course this is all done in a foreign language that relies upon unusual words: leeward, sheets and stays, spar, weather, tack, jibe, luff, halyard, helm, guy, pinch, reach, backstay, about - to name a few key words. It is one thing to watch "Master and Commander" on TV and hear these terms and watch others understand what to do but another when you hear them thrown at you assuming you know what to do when the boat is under way, healed over, rail in the water, and everyone is moving fast toward their assigned job. As a novice I found myself often saying "Huh?"

Martin is in his element when the boat is under sail. He is constantly checking the trim of the boat to optimize its speed under the current heading. Is the mainsail right, could the foresail be tighter, is the helmsman falling off the wind or pinching too much, are the lines set for the next planned maneuver, what is happening to the boats ahead and what does that suggest will happen to him, what is the current depth, how fast is the current adding to or taking away hull speed, are we on course for the next turn? Martin is constantly in motion "managing" the boat to be as successful as possible under the prevailing conditions. His boat is not the youngest in the race and does not have a lot of the hot-technology equipment that many of the other boats have but Martin makes up for reasonable handicaps using his sailing savvy and tenacious sailing skills to be competitive.

How does this experience apply to business management? The similarities with running a business are striking. We are constantly buffeted by either known or unknown market factors that can affect your ability to navigate your business through uncertain business conditions. While you cannot control the unknowns you can address the "knowns" of your business to improve your ability to "weather" the storm successfully. In order to do your job well you find a way to constantly get a "bearing" on where you are in terms of your sales pipeline, your ability to keep your operations "trimmed" to operate at optimum profitability, how effectively you are communicating within your organization so that all know what to do and when to do it, be aware of market conditions and familiar with how the rest of the market is performing and what changes you need to make to perform better.

I have known Martin for many years and while I do not have a detail knowledge of his business management skills I do know that his industry has undergone stress and he has successfully "navigated" his company through troubled waters to profitable performance. I am sure his sailing talents are at work in his business office.

There is a lot we can learn by observing others in personal pursuits such as sailing and how we can apply those lessons or impressions to our business practices. While there may be obvious differences between businesses and industries it is amazing how common the skills and strategies are to managing successfully.