How not to Run your Business
A Guide for the Positive Thinker
How to Improve Qualitative Decision Making
Jephtah Lorch
First published in 2011 by Jephtah Lorch
Smashwords Edition
Copyright 2011 by Jephtah Lorch. All right reserved.
Cover photo by Juan Lobo
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ISBN 978-965-7569-00-9
Knowledge is Power, It’s application - an Art
Jephtah Lorch
Dedicated with appreciation and love to my family, my children and, my friend and wife Ruth who has been loving, patient and supportive throughout the adventures described in this book.
Jephtah Lorch
A Life Experience: Turning a Company Around
A CEO’s Perspective of Economy
Infinitesimal Calculus and Running a Company
Know Your Company’s Limitations
Disruptive vs. Applicative Technologies
Qualitative Decisions Gone Wrong
List of Figures
Figure 1 A company's Four Activities or ‘Limbs’
Figure 2 The CEO, loneliest of Stars
Figure 3 The simplified business cycle
Figure 4 Convergence of a Function
Figure 5 xDSL Oversupply food-chain example
Figure 6 Strategic Behavior Under Duress
Figure 7 Short and Long Terms - No Mid Term
Figure 8 Setting Operational Priorities
Figure 9 Increase in the Award of Academic Degrees
Figure 11 Price List - the Pivot
Figure 12 Qualitative to Quantitative Conversion
The drive behind this book is my life experience. Through years of very intensive, mostly Hi-Tech experience, of creating sustainable change and growth, I was exposed to situations, people, dreams and disappointments in different environments and companies. Enlisting also the will and power of others, I generated a company’s drive, leading it to close the gap between realities and dreams, existence and vision. I have seen how simple matters are made complex and how complex matters are oversimplified. I have witnessed egos, greed, fears and misperception of realities leading to unnecessary failures or unwarranted optimism. I have experienced the loneliness of decision making, of firing good family people, the taste of sweet success and that of bitter failure. This book is about the qualitative aspects of management where the seeds of success or failure are sown. I share here the insights and lessons I have learned, many of which are known whereas others represent my own life experiences as a turnaround CEO of companies on the brink of failure.
Over the years, I have led successful company turnarounds and their subsequent sale. I turned bankrupt companies whose debts exceeded their assets, into cash cows that were subsequently sold. On the other hand, I identified material flaws in companies’ business models. In one case, in spite of a company being perceived as a great investment, the flaws were so critical that I brought about its closure. It suffered from a major flaw in the management’s understanding of the market. Three months after the closure, the decision proved to be entirely correct because the market, as foreseen, had drastically changed, and in reality collapsed. The facts were available all over but were misinterpreted or overlooked by most writers of market forecasts, including world renowned ones. One had only to read the information, analyze it and form his or her own opinion.
Decisions are made by people based on the information available at the time, but not only on that basis. People cling to comfort zones, to social pressures and expectations. We are in many cases prisoners of the professional and social web to which our lives are attached and on which they depend. We fear stepping out of the inertial loop dictated by our pasts and by our environments.
To succeed we need to form our own ideas, opinions and decisions. We need to break the quantifiable loop of daily life and reflect on qualitative aspects of our personal and professional lives. Are we really leading in the right direction? Are we quantifying the direction which will maximize our output or our Return on Investment? These questions are valid in our personal as well as professional lives. In our professional life we ask the questions on behalf of the company in which we are involved.
There is no single management theory that applies to any company in the world. There is however one practical and hopefully successful, management practice for each company. That practice can be summarized as the leadership, thinking and execution instilled by the CEO and his executives. They are the power-house of practice, integrating all data, prioritizing, deciding and implementing. When they apply management theories, they do so considering actual personal and corporate situations rather than an ideal world.
This book shares experiences, qualitative concepts and tools aimed at simplifying thinking and the execution of managerial tasks: strategic, tactical and daily. An effort has been made to keep the book simple, as business and life should be. This is a hands-on book, written in clear language to ease reading and help readers identify with their experiences while not burdening even very busy readers.
The high level concepts presented in this book are applicable in government, security, non-profit organizations, and education, as well as in our personal lives. The principles are the same, although the data and directions are different.
A company is established by people to fulfill a certain task or need. In some cases a company, or rather its management seeks to create a need, to fulfill a growing need or to create a solution for a latent need. The need is a ‘customer need’, real or perceived. Customers are the people who feed the company with its main survival food: cash. Company survival and growth depends first and foremost on its customers, by serving their needs such as transportation, food, fun, products and services. The individual making the purchasing decision eventually drives the economy. In today’s world, economic drive is the reflection of the consumption that companies and corporations seek to generate or fulfill.
In addition to sales, cash or ‘company food’ is raised through a variety of sources such as bank credits, investors, bonds, stock, and supplier credit lines. Here again, it is people who decide when, how much and under what terms cash will be given to the company. Still, the most important long term source of cash is customers, especially repeat and long term customers.
We find ourselves impressively dependent on people, their cultures, needs, work abilities, knowhow, personalities, and whims. People are the consumers, the first and most important source of success. If people do not consume products and services, economies will collapse. People are also company employees who perform such activities as manufacturing, developing and selling. People are bankers, suppliers, subcontractors, designers, shareholders and so on. Therefore, as managers, we need to connect and promote our company to all the circles of people with which we and the company interact. Running a company is therefore about people, many types of people.
We use certain tools to generate our decisions, two of which, used knowingly or not, are discussed below.
Qualitative and Quantitative Decisions
The entrepreneurs, managers, employees, sales people and customers drive economies and industries by making decisions, executing them, controlling and improving. People make qualitative as well as quantitative decisions. Examples of a quantitative decision sound like, “Can I afford this house?”, “Oh, this is too expensive for me!” or “Give me five beers and keep the change”. Our quantitative decisions are measurable and are a reflection of our qualitative decisions or wishes. For example, the price of buying the house is too expensive because we made the decision to begin with, to look for a new or better house. Or, a large tip is left when we feel generous.
Qualitative decisions are based on people’s experience, knowledge, gut feelings and emotions. An entrepreneur follows his instincts, a buyer does so too, and so does a young person who decides to become a medical doctor. It is only later, after these decisions are quantified for for purposes of execution, after they become measurable, that success is enjoyed or failure is met.
Most of the world we – people - live in, with its huge quantifiable organizations, is based on simple, sometimes latent and hidden qualitative decisions that someone, somewhere, made. Personally, I made a qualitative decision to undertake company turnarounds. This is a challenging, task with a low probability of success. Why? It was a qualitative, gut-based decision.
Out of the Box Thinking
Out of the box thinking is a widely used term whose users do not always realize the implication thereof. Thinking is a conscious use of our brain to put together and analyze information. The ‘box’ is the database on which we work. Thinking out of the box requires the thinker to simultaneously or individually handle two threads: the data and the thinking process.
Thinking is a much recommended tool in managerial roles, as it helps us assess trends, relate our daily activities to our markets, customers, general economic situation and so on. Analysis and conclusion-drawing, which put our brains to work, are mental sports. These sports will help us solve logic problems, sharpen our ability to identify crucial details and so on. We all remember the logic tests we went through like GMAT. Some took courses teaching us the ‘tricks’ but in fact, the courses taught us new thinking patterns or rather what for us were new thinking patterns. We tend to stick to our ‘comfort zone thinking patterns’ which lead to eventual mental stagnation.
The data ‘box’ is also important. If not enriched, we will have strong thinking abilities but in a ‘small back yard’ where we find the comfort of well known, probably outdated information. The world is dynamic and rich with news and novelties generated by the minute. Certain news items are relevant to our lives and jobs while others have a lesser effect. Our data collection and analysis efforts need to be proportional to the current relevance of each piece of information. For example, if we operate in the United States and there is a monetary crunch in Europe, we should ask ourselves if and how such a crunch can affect our business. We should not write off the crunch because it is in Europe. We should not live in a bubble disregarding tsunami waves that are out there in what for us are open seas, because they may very well catch up with us.
The term ‘out of the box thinking’ implies that we should break comfort zone patterns, that we should increase our radius and depth of learning and thinking. Life is about self improvement and so is our work. We should learn more and train our brains. We should seek ways to apply what we learn and what we think of. The opportunities are there, it is up to us to reach out and make them happen.
Both threads can be trained nevertheless in most cases they are not. In our competitive world we tend to enjoy our comfort zones like stability, routine, habits social circles, thought patterns, acceptance of statements as facts and so on. Expanding these circles is a matter of priorities, of allocating the awareness, time and energy to improve, much like an athlete who sticks to his training routine. Play Chess, Bridge, games of logic, expand our horizons. We should enrich our mental data-base and your ability to look at the same data from different angles. It is our decision to do so, it is an effort to be exerted, it is our tool to become better managers and better people.
A closing comment: decisions reflect our thinking and clarity but not only, as they are also affected by emotions, passions, love, hate, jealousy and so on. Be clear as to the impact of emotions on conclusions and decisions and, decide if you want to go ahead with them. Emotions, passions and love may be the ingredient of success in the implementation of decisions, but they can also lead to unwanted results.
So don’t be offended when you are told to think out of the box. Accept it as constructive criticism, train your thinking and increase your horizons.
This chapter offers a different view or perception of what a company is in terms other than legal and accounting. The perception offered here describes the driving factors that help companies navigate long term growth paths in normal times, and survive rough waters in hard times. Companies are special creatures. While having rights and obligations, the entities called ‘companies’ do not have brains, soul, muscle, wishes or even a body. However, companies are alive, growing, developing, have illnesses, successes, childhood, maturity, rebirth and more. In a sense, a company is like a child. A company has a family, which is its guardian. It is in a continuous learning and improvement process. It may decide to change its profession. It seeks to grow and improve while living in an environment that is constantly changing. More importantly, it is in an environment where the only constant is change. However, by itself a company is incapable of exercising and executing its rights and obligations.
What then bridges the gap between the abstract concept of a company or a corporation and the fact that it is alive? What bridges the gap between the intangible, immeasurable, yet crucial, factors in the formation and life of a company?
The gap is bridged by people. People conceive companies, nurture them, grow them and are passionate about them. People are the guardians, brains, heart, soul, drive, eyes, ears and muscle of a company. As such, people should take care, protect, educate and feed the child called company. It is here, at the qualitative decision making level, that the seeds of success or failure are sown. While larger corporations have enough muscle and possibly some fat, smaller companies are lighter, faster moving, more agile, and have less muscle and fat. Each company has to be treated and nurtured according to its personality, its goals, critical mass, strength and needs.
The art of nurturing a company is called management, often confused with administration. In this book, management is first and foremost about the qualitative aspects of leading and running a company, including its philosophy and intangible characteristics such as integrity and corporate culture. It is about leadership in good and especially hard times. It is about employee leadership, the energy of which will radiate to customers, suppliers, financiers and others. This qualitative view is about corporate culture, product lines, and decisions as to what goals should be reached two to five years down the line.
The heart and soul of the company is the CEO. He or she makes the life blood flow in the ‘body’ of the company. The CEO ensures that the brain gets enough oxygen, balances body and mind, nurtures muscles and more. Company employees contribute muscle, sensory organs like eyes, ears, touch and feel. Employees are the brains and limbs, the kinetic energy of the company. Employees fulfill functions like research and development, sales and marketing, product marketing, customer support, manufacturing, administration and all other corporate functions. The drive and heart of all of this is the CEO.
The CEO is also the chief spokesperson of the company. He or she spearheads corporate strategy and sees to it that the body of the company is fed to execute its mission. As spokesperson, the CEO is also the chief salesperson of the company. His or her personality, integrity, vision and execution abilities are crucial to gain public support and recognition. The ‘public’ is a broad, yet very specific term, including first and foremost the company employees. Their belief in management and its leadership is crucial to achieve success. Good shareholders and their board of directors will support and promote the company and its’ CEO. Belief in the company’s management also affects suppliers’ trust, bankers and definitely customers. All these people will gladly follow promising and successful leadership.
Company Activities
The entity called company has four key corporate activities or ‘Limbs’: Sales & Marketing, Offering & Technology, Finances and Operations. While the first two are what the French call the raison d'être (reason of being) of the company, the latter are the supporting activities.
In figure 1 below, the top two boxes indicate the reason for existence of a company or, the revenue generator which translates into the ‘top line’ in the company’s financial statements. The two bottom boxes represent the support activities which affect company profit or loss, also referred to as the ‘bottom line’.
Figure 1- A company's Four Activities or ‘Limbs’
All limbs must be proportionately strong and balanced. A strong Research & Development (R&D) group with a poor sales group will lead to failure. The same thing happens with the acceptance of a large purchase order without the facilities and working capital to finance such manufacturing. There may be great technology but lack of operational capabilities to execute the technology. These are some typical scenarios where the head and body are not synchronized, making failure only a matter of time.
Properly synchronized, the company will have a good sales and marketing group that is able to identify market opportunities and work with R&D, leveraging their knowhow and generating timely differentiators in order to gain market advantage. When company activities are properly synchronized financial officers will provide competitive and growth oriented financial facilities, manufacturing will ensure competitive and timely production and so on. This internal harmony is the result of human or people’s relationships, of managers being able to cooperate and support each other, of the positive energies instilled by leadership.
A Life Experience: Turning a Company Around
This chapter can also be called Thriving on Chaos. It was this life experience that sparked the writing of this book. It is about my encounter with an amazing group of highly intelligent, intellectually capable yet managerially incompetent people, whose academic degrees failed to compensate for their lack of people skills, system overview and leadership. Combined with a healthy level of greed, the company and its saga turned into a sticky and messy soap opera or Latin Telenovela.
This seven-years-old, non-US, optical wireless company had reached the verge of bankruptcy. The company was financially over-leveraged and had negative assets on its balance sheet. Sales were negligible and its business goals were never reached. Investors lost interest in the company, which was controlled by its founder. On top of these issues, the company acquired a US competitor out of foreclosure, only increasing management’s pressures.
The founder was a very charismatic person but unable to run a company. He managed to raise funds from twenty-two shareholders, private and institutional, until shareholders, existing and potential, stopped believing him and in him. Under pressure of the institutional shareholders, the founder was forced to bring professional management on board, which is how I was brought in as a turnaround consultant. After almost three years of hard and intensive teamwork, the company was sold for over seven times the funds invested in it. This was a nice exit considering where we came from.
By the time I arrived, other consultants had been in the company, presented their reports and left. Clearly, as time went by, cash availability became scarce. Due to the tight cash situation, I carried out a one week, high level analysis and delivered a two page report, pointing to the basic, high level problems rather than lower level and execution related flaws. I kept my recommendations short due to ‘reader filters’: those of the implementing manager as opposed to those of the consultant who wrote the recommendations. Many details are lost or misunderstood due to the different life experiences of the consultant and the managers. Such time consuming misunderstandings are prohibitive when cash is scarce.
My most important conclusions were that the core offering had its differentiators and market appeal and that the core technology was good. The conclusion therefore was that the company’s reason of being was valid, while execution, namely top line (sales) and bottom line activities were mismanaged, if managed at all. This important conclusion was the basis for continuing to the next stage.
The next question was leadership. The dominant person in the company was the chairman who was also the controlling shareholder. He was incapable of managing the company, or else he would have done so to begin with. His wife, who was also employed by the company, was very verbal but also unable to contribute to managing the company. Much like her husband, she led management off-track. She had re-entered the company ’to help’ when it got into trouble. The other managers were unable to assume the CEO’s position, including the acting CEO. The main reason was because they chose not to confront the chairman and offer alternatives to his failing ways. This situation illustrates a typical ‘people’s deadlock’ in which a damaging status quo is established and maintained.
Upon presenting and explaining my two pages to the chairman and the board, the chairman asked me to stay on to take charge of the improvements. He was desperate. He knew this was the last opportunity to generate a change. I asked the chairman: “Will you run the company or will I be your advisor?” The answer was “You run the company”. I made it clear that if I were to run the company, I would position myself as the top execution authority, namely the CEO, whose position was already taken. I clarified that this position would not be that of a consultant and that he was practically replacing the CEO. This was especially appropriate because the current CEO was against having an additional consultant. It was inevitable that he would have to leave if a consultant came on board receiving the CEO’s authority. Eventually, the CEO resigned and I stayed on as CEO to implement the methods described in this book.
I will skip the details of the process and internal politics to concentrate on the key findings. I will just point out that high level politics were tedious, time and energy consuming, on top of which I ‘drew the fire’ or politics to myself, isolating management from it as much as possible. I needed them to work.
Sales
Sales depended on sales managers who lacked motivation or abilities. Their key handicap was in generating sales leads by identifying and developing new customers and distributors. As funds were unavailable, all company secretaries were put to work as back office sales agents, each responsible for a geographical sales area. Each ‘desk’ received a potential distributor and customer database to pursue, with guidelines on how and where to find additional databases. The result was mass exposure of the company to potential customers with real names and telephones (unlike marketing level exposure). Exposure was prioritized to generate a Domino Effect in each region, to become ‘the talk of the day’ within the respective markets and professional circles.
The exposure not only created leads and sales, the sudden area-wide awareness resulted in representatives competing with each other to receive the local representation and distribution of our company. Clearly they were not aware of its’ poor financial situation. They liked the offering, the message, the energies and persistence. This back-office, domino-effect generating arrangement, released the expensive sales force to focus on closing deals rather than generating leads. The results were fantastic to the point that sales growth was limited because of lack of working capital needed to finance manufacturing.
Service
Many existing customers and distributors were frustrated when the systems they purchased had problems which the company was unable to solve. To address this difficulty and improve the company’s image, we moved to solve all worldwide field problems, which luckily were not too numerous. Solutions were provided regardless of cost. This entailed, in some cases, sending new equipment to replace problematic units. This was a concise and powerful, though costly, message to the sales force and customers. In other words, we made it clear to the customers that we would support them irrespective of what was required. It worked. Distributors and representatives accelerated their efforts, showing up to a three-fold increase in order intake. This service effort paid off generously.
Products
As stated, the core technology was good, providing differentiators and market appeal. The biggest problem was the gross margin of the products. Gross margins were in the range of fifteen percent in a forty percent gross margin industry. The company could not survive without going through a comprehensive development and manufacturing improvement program targeting cost reduction.
With this qualitative understanding, a new and quantifiable master goal was defined for both R&D and manufacturing divisions. The master goal targeted two key factors:
1. Cost reduction to be achieved by design for cost and design for manufacturing and, leveraging this process to...
2. Expand the product line.
Achieving these goals required a thorough redesign of the full product line. Quantitative goals included lowering total manufacturing costs, minimizing the number of parts in each product, maximizing the number of common parts in all products, minimizing the number of parts handled in inventory, reduction of assembly and testing hours and, based on the same platform, expanding the product line. Therefore, the execution plans included:
1. Plan for a unified platform for all products while adding and expanding performance.
2. Replace limited life-expectancy parts like lasers with long life-expectancy devices.
3. Reduce assembly and tuning time by fifty percent. Increase automation and reduce mechanical assembly time. Assembly time was reduced by unifying mechanical parts and lowering the number of bolts and screws. (A point well learned from an article I read early on in my career about the SONY Walkman. Once commonplace and copied all over, Sony made a redesign for cost. The post redesign analysis showed that the reduction of the number of assembly bolts and screws was a major cost saver as it reduced manual labor.)
4. Reduce the number of subcontractors, suppliers and components to be purchased.
5. Move to annual purchasing plans with optional delivery extensions.
This execution plan, including feature and performance extension, proved very successful. Inventories were drastically reduced. Assembly and tuning times were cut by almost fifty percent, saving expensive manpower. The new, extended range units were unique on the market, achieving a seventy percent gross margin in the forty percent gross margin industry! The extended range units became the company’s lead product and the power house for cash and profit generation. The additional products achieved the required forty percent gross margins serving as the company’s cash cow. The success of the project and resulting top-of-the-line seventy percent gross margin was achieved due entirely to the holistic development approach used, namely by simultaneously analyzing and solving all issues as described above.
Finances
Finances were a mess. Accounting and bookkeeping were mismanaged, showing profits when the company had great losses. No financial (cash) facilities were available. The company’s debts were much bigger than its assets (also known as negative assets on its balance sheet). The company had huge debts which were renegotiated, but management failed to comply with the new terms, causing creditors to lose the little patience and understanding they had.
Checks were written, registered as paid on the books, while the checks themselves were stashed in a drawer. Suppliers called daily and banks halted all credit facilities. Chaos is the only word to describe the company finances. There was no information available on which any financial planning could be made. Therefore, the first step was to understand and analyze the company financials. We did this by setting up a cash flow management tool.
In simple terms, our financial challenges included lack of working capital, debts to important suppliers and creditors, and the chaos in the books. A financial strategy was set to stabilize cash flow, put order into the Profit & Loss (P&L) statement and then restructure the Balance Sheet.
Debt analysis revealed three types of debts to much-needed suppliers on whom we depended. Next, there were suppliers whose support was needed for long term progress. And finally, there were suppliers with whom no further business was foreseen. With the first group, debt return was negotiated as part of a combination of reduced prices, a long term purchasing commitment and partial debt repayment. This was to be partially paid with payments for new product deliveries. The second group was asked to wait patiently and let the new management work to generate much needed cash. Payment to the third group was delayed pending later payment-discount negotiations. In addition, an effort was made to pay all small amounts as these demanded the same management attention as the bigger debts but were not worthy of so much attention. Many of the small-sum suppliers liked the new management’s approach, offering to increase their business with the company.
Much needed cash was shifted from banks and investors to supplier credit lines. Consumption of inventories, increased productivity, reduced manpower, and accelerated sales helped the cash flow. To reduce working capital needs, inventory was ‘turned around’ more times per year, especially because of the lower cost and common parts new product line. This resulted in lower operating cash requirements and additional freed-up cash earmarked to finance manufacturing.
Payments were made twice a month only to the group of essential suppliers, not to nagging or insistent suppliers and creditors, as was the case before the turnaround process started. An Excel spread sheet was used to tightly control cash flow, while a tedious project was begu to put order in the company’s books and computer files. The Chief Financial Officer (CFO) who was busy with personal matters rather than saving the company was respectfully released from his job.
Accounting was instructed to tell the truth as to the company’s situation. One of the non-US bookkeepers approached me one day and said “…I never knew I could tell the truth”. She had been consistently instructed to fend off creditors with the well-known excuses such as “the check is in the mail”, “tomorrow we will receive money” and “…I promise you next week!” Quite like the Dutch boy trying to stop the leak in the dam, by putting one finger in each hole, the boy and the bookkeeper were running out of fingers. If a supplier wanted to talk to the CEO, the staff was instructed to transfer the call. People accepted clear and honest answers instead of what they felt were evasive and not necessarily true answers. Amazingly, far fewer creditors called and our energy was put into restructuring. Moreover, not a single lawsuit was filed against the company!
Within 6 months, the negative cash bleeding was stopped marking the beginning of a decrease in cash flow deficit. This was achieved by pushing sales and lowering costs. Positive cash-flow, excluding debt repayment, was attained after another year. Debt repayment, especially long term debt, was still a burden together with the lack of banking credit lines. A few months later the P&L statement showed a first-ever profit. It was now time to put the balance sheet in order.
These were just some of many symptoms dealt with on the financial front.
Creative Premises
The company was located in an industrial zone that had turned into a shopping and recreation center. The location was far from main roads thus reducing the number of interested and overseas visitors. On top of these issues, the company’s financial state precluded it from being able to move to a more adequate location. The company needed to leave the somewhat old and run down location to get closer to key highways, be in a Hi-Tech area, improve the working environment and send a message of positive change to customers, business partners and employees.
One real estate agent, who was chasing company management for over a year called me, the new CEO, soon after I joined, offering me alternative locations. My response was, “Give me six months to see if I have a company for the premises you offer.” He was patient and did call after six months. We met. During the meeting I opened the company books sharing with him the financial situation. The books showed that cash bleeding had stopped and sales had increased, the company however, was heavily debt ridden. “If you want us as a tenant, let me know” was my summary of the meeting.
To my surprise, the realtor called me the next day with a positive answer from the owner of the several possible buildings he had to offer. After visits, area calculations, number of parking spaces and real estate related discussions, we agreed on the premises and started negotiating the terms and the contract. When reaching the clause related to securities and collaterals, I reminded him of our meeting in which he was exposed to the company financials. “What can you offer instead” he asked. “Options and warrants” was my answer. Here again, to my surprise, the landlord agreed. The deal was signed. Eventually, the holding company that owned the building was generously compensated for its risk when our company was sold.
A year or so after we moved into the new building, the realtor visited us. Over a cup of coffee I mentioned my curiosity as to why the holding company management agreed to take on such a huge risk. After all, if we went down they would lose not only their cash investment for building adaptations but also the guarantees they received. His response was interesting. He said, “Tenants looking to rent space and buildings tell us about how successful they are and how much more money they will make. However, when it comes to actual rent payments they ask for extensions and drift into pretexts. And here was someone who told us the truth from day one.” They liked it.
In a few cases, we needed to defer rent payments. Based on our cash flow projections we asked the holding company, with a reasonable notice, to defer rent payments. They always agreed and always got their payments.
Investments and Investors
Prior to my arrival as the new management, as the company got into deeper trouble, the controlling shareholder, instead of dealing with the problems, focused on the symptoms. The most notable symptom he concentrated on was the lack of cash. Being charismatic he managed over the years to convince additional private and institutional investors to invest. However, as time went by, institutional investors lost interest in the company, private investments became smaller and investment agreements wrongfully shorter. Cash pressure led the controlling shareholder to sign agreements conflicting with the company’s Articles of Association and with previous investment agreements.
One of the results was that earlier investors invested at higher evaluations or company price, some of which had full or partial downside protection in case company value sank. Clarifying and putting order into shareholders individual rights and holdings became a real issue. As the company improved, a large investment was required to expand sales and deal with the balance sheet structure.
I led intensive diplomatic negotiations to get an agreement from all shareholders to a new capitalization (shareholding) table. The effort also required dilution iterations, as share prices were constantly changed. A new capitalization (cap) table was established recalculating holdings, investments and share price. The new cap table was enabled only by investors’ goodwill. They saw the improvement in company results and some investors understood the fact that further dilutions were required to save their original investment.
Corporate Culture
Corporate culture needed a drastic change. Company communications had to shift from paper based communications to verbal communications. Attitudes needed to change from fearing the boss to sharing problems with him and together seeking solutions. Waiting for instructions had to be converted into showing initiative, and to-do lists of ten to twenty tasks had to be reduced to just three prioritized tasks. It worked. People stopped reporting via long written reports, stopped answering memos and spending time on filing paper. They cleared their desks and went to work. Their tasks were defined as high level tasks. As managers, they were to break down tasks to executable blocks, support their teams and verify execution. Managers received my backing as CEO when mistakes were made, even costly ones. We all make mistakes and so do good managers.
People unable or unwilling to join the momentum were let go, including the Chairman’s wife. She made no contribution to company activities except for drawing too much attention. Management was confused as to whose instructions should be followed, the chairman’s, his wife or the CEO’s. It wasn’t a power game, it was an essential step to focus management, increase efficiency and cut costs.
Value Creation
The three-year, people-driven and executed turnaround project harmonized the company, aligned its internal logic, increased sales and profits, paid back debts, solved the cash flow problem, improved and converged into a healthy P&L and strengthened the balance sheet. All this resulted in the sale of the company for seven times the cash invested. This was an extremely positive ending considering the massive write-offs shareholders made.
A CEO’s Perspective of Economy
I believe that a general understanding of the economic environment in which a company operates is essential for a CEO to plan ahead. Today’s elaborate, multifaceted and fast moving world economy, has a substantial impact on business decision making.
Supply and demand, pricing, offerings, differentiators are some of the aspects affected by macro-economic factors. The 2008 collapse of the sub-prime mortgage pyramid is just one example. The result in this case was a collapsed US housing market, lower housing prices and lower demand. The value of goods is in the eyes of the beholder. Can or does the consumer want to pay for a specific product? People sensitive to milk, will not buy milk and not even take it for free. Diamonds, used for jewelry and adornment, began their industrial use during the 20th century. Their shiny, light-refracting appearance, combined with clever marketing and supply-side control, turned diamonds into a much wanted, valued and expensive jewel-stone, in spite of the existence of other, much rarer stones. The aesthetic appeal of diamonds created a perceived product value which in turn set merchandise prices that balanced supply and demand.
Market or trading venues have shifted to internet trading. Examples include stock exchanges, supermarkets, commodities and many other products and services. Venues, type of products and technology enable today’s practically virtual trading where the buyers do not see, touch, feel or smell the goods they buy. Stock trading too has come to the virtual world. The ‘goods’ or share certificates, are not even moved around further contributing to the virtual trading world.
Supply and demand are affected by trading modes, cash availability, cultures, geography and global or specific factors. In setting product and market goals, one needs to consider market-specific penetration strategies that take into account the macro and micro economic and other factors typical to each market. For example, when developing chocolate for worldwide consumption, Hershey’s takes into consideration chocolate melting temperatures, different tastes, hardness, crunchiness and prices for the various markets. This illustrates a key working tool, localization, used in worldwide companies like Hershey’s, IBM and Proctor & Gamble.
The Only Constant Is Change
As already stated, corporate and business life are highly dependent on world affairs. Economics, whose roots are trading, accumulation of wealth and property ownership, has been going through on-going change and evolution. Changes are of all types, ranging from social to geopolitical, from industrial revolutions to slavery to natural disasters and religious wars. Changes are also the result of mass psychology notable in today’s advertising and branding intensive world, as well as in stock exchanges. The flock instinct is a factor counted on to gain followers. Following is a brief account of some of these factors.
Geopolitical Change
Geopolitical changes resulting from wars or peace are strong economic drivers. Geopolitical effects can also result from natural disasters like weather and earthquakes. While editing this book, the 2011 earthquake and Tsunami hit Japan, with the Fukushima area and its nuclear power stations being the hardest hit. The catastrophe affected not only livelihood in the Fukushima area but also industries and agriculture. Employees lost houses and families, manufacturing plants were damaged, electricity and water infrastructures had to be restored to minimal levels and more. This hand of nature also slowed down the American automotive industry, which depends on Japanese parts. The ‘all-American’ iPhone and iPad are manufactured in China. When the plant caught on fire in China, US sales were consequently jeopardized. This domino effect is an example of globalization.
Wars are normally short term growth drivers mainly for the war related industry. The growth lasts as long as the economy can support such an effort by feeding the war machine. Wars affect many aspects of the economy and of livelihoods, such as oil prices, steel and copper prices and the availability of manpower for agriculture. Peace leads to corporate expansion, worldwide branding, global corporations, free trade zones and other economic growth drivers. Peace has driven economies to be much more dependent on global markets. It has shifted the manufacturing or ‘income generation’ center of gravity from more expensive countries to lower cost countries. This trend is seen today with the mass shifting of manufacturing, R&D and support desks to countries like India and China. This puts pressure on developed economies to improve by developing new competitive edges. This flow from high to low cost countries is expected to balance out because salaries and income expectations in the low cost countries are steadily rising. The outsourcing to countries like India has seen jobs like support-desks and R&D also move out of the US.
Local, natural disasters are an important geopolitical factor. They affect the price of goods as well as the repair costs of the disaster. For example, storms off Japan’s shore can reduce available sea algae like Nori which is harvested from the ocean and used for sushi wraps and Nutraceuticals (The word combines “nutrition” and “pharmaceutical” to describe food or food products that provide medical benefits.). Under-supply of Nori has raised prices more than once. Another example is the summer 2010 fire in Russia which burned a huge part of its wheat fields, resulting in the cessation of wheat exports thus affecting poorer countries like Egypt.
The space race is an example of a geopolitical contributor to world technology as well. Over the years, NASA has developed a great number of new or applicative technologies currently used in all aspects of our lives from kidney dialysis and cardiovascular fitness to athletic shoes, thermal insulation for homes and clothing, water filtering, freeze-dried foods, lubricants, battery technology, to solar power.
As all companies and businesses participate in the global food chain or eco-system, they are all affected by the geopolitical game.
Minerals
Minerals and ore such as oil, diamonds, copper and gold are strong economic drivers used in many applications. The widening use results in increased demand with limited supply. Metals are crucial for all industries as raw materials used to conduct electricity, construct buildings and so on. Diamonds, oil, copper, aluminum, gold all further transform economies, habits and cultures.
Diamonds transformed certain African countries into war zones. ‘Blood diamonds’ drove war efforts while international interests fed them. By buying blood diamonds, unaware end consumers made a contribution to further feed these wars. Oil transformed the Middle East. From an area mostly populated by nomadic Bedouins, the oil industry converted the Arabian Peninsula into a rich, world power-broker making the Middle East an important geopolitical player. High demand for construction grade steel in China, driven by fast growth and the 2008 Olympic Games, raised steel prices in the world.
Technology
The technology drive in industry started during the first industrial revolution, propelled by James Watt’s invention of the steam engine in the 1770’s. Watt’s engines enabled the introduction of industrial scale machinery into manufacturing lines, reducing the need for manual labor with machinery. Machinery required capital investments which, in turn, became the central growth factors along with the necessary financing issues. Technology revolutionized industry while changing cultures. It led to population growth in cities, increased income for some while perpetuating poverty for others, creating pollution and so on.
Many technologies proved to be disruptive such as machines that displaced jobs, the train that displaced the Pony Express, the airplane that replaced passenger ships and transformed the travel industry, the transistor that replaced the vacuum tube and enabled the digital miniaturization era, and internet that is used instead of mail. On the other hand, over the years many new technologies improved performance of disruptive technologies but did not actually replace them.
Technology is still a cyclic driver: we exhaust its disruptive effects and concentrate on its applicative effects. Humanity is exploiting and exhausting the disruptive application of knowhow generated during the nineteenth and twentieth centuries by scientists and their basic research. Current basic research needs better government support to provide enough and timely results to drive the next disruptive era.
Business Drivers
Business attitudes and drivers keep changing. The twentieth century saw accelerated changes due to massive technological developments, some driven by warfare. Entrepreneurs were quick to serve consumers with platforms exploiting these technologies. Consumers were quick to adopt these and grow their expectations for additional offerings.
Business-driven technologies on which we strongly depend include electricity, currently available to everybody in developed and semi-developed countries, the extensive use and dependency on oil that facilitates platforms for mass transportation, and the development of the first electronic transistor device, which enabled the whole semiconductor field and led to inventions such as microprocessors.
In the twentieth century, new technologies were developed by companies like BELL, IBM, RCA, XEROX and others, creating a technology-driven demand. Whoever had the best perceived technology became the market leader and enjoyed business growth. As technologies became cheaper and more accessible, entry barriers were lowered. The result was increased competition shifting to a lower price, and a marketing oriented approach in which advertising and branding were key ingredients.
Competition led to lower prices, pushing down production costs but affecting product quality. The lower quality initiated a quality improvement cycle including concepts like Total Quality Management, known as TQM. Once cost-performance reached a balance, service improvement became the key industry differentiator, focusing businesses on customer retention for services and return customers for products.
Since the beginning of the third millennium, we are enjoying the next generation of consumption where integration is the key differentiator. Products, features and services are bundled to improve perceived and actual cost-performance in an effort to achieve industry’s next competitive edge. Business drivers keep changing. Some originate from markets and customer needs (market pull) while others are driven by innovation or user advantages which tempt or cause clients to consume (market push).
Cultural Changes
From the wheel to the internet, cultural changes go almost hand in hand with new inventions and developments. A side effect of most innovations is the generation of (or, at least, a contribution to) cultural changes, some minor and some disruptive. I think it would be reasonable to state that a large portion of cultural changes stem from technological developments adopted by statesmen and leaders. There are many examples of innovation-triggered cultural changes; a few examples follow.
Construction, its design, the ability to quarry and move large masses of stone, changed habitats, made wealth accumulation important and changed warfare. Our caves became houses, our tents and huts became real estate, marked by limits of ownership. We became possessive about our habitats, their value and the inheritance we leave after our deaths. Castles were built, harder to penetrate and to burn down, decorated with the best and finest to show riches and how much wealthier was the occupant compared to his neighbors.
One important reason why the Europeans discovered the Americas was their knowhow and experience in sailing and navigating the open seas. In spite of their advanced cultures, the Chinese and Japanese practiced coast line sailing. In other words, they sailed at a safe distance from shore following the known shoreline limiting their reach into foreign lands as far as the Americas.
Invention of the first electric motor and steam engine put everything in motion. From trains that eliminated the pony express to cars, washing machines and escalators that changed life styles. The development of airplanes, later adopted for passenger and cargo transportation, caused a paradigm shift in the travel and shipping industries. Technology drastically changed warfare, introducing more accurate and more lethal weapons. It is not necessary to see the opponent any more, just shoot and the missile hits. Warfare also enjoyed substantial changes in intelligence gathering, better focusing military operations. Many of these war-oriented technologies ended up enhancing our daily lives. The most famous of these technologies is the GPS.
Value is in the Eyes of the Beholder
The value of goods in the eyes of the buyer is, in most cases, a combination of the perceived and practical value of the wares traded. An interesting example is digital cameras. In many areas in South America, Asia and Africa film cameras are still used. In spite of the high perceived value of a digital camera, people do not own computers thus making the use of digital cameras impractical. The beholder in this case is the individual who makes the purchasing or trading decision, a decision that eventually drives the economy. In today’s world, economic drive is the reflection of consumption which, in turn, companies and corporations seek to fulfill.
The value of an offering can drastically change with the adoption of new solutions like the photocopier and the personal computer. Copiers replaced stencil machines, providing much higher productivity. Photocopiers became cheaper through technology, design and manufacturing, allowing lower pricing and increased volumes. Adoption of the personal computer was driven by hardware developments as well as the mass availability of software applications.
‘Value’ combines the comparative and perceived value of goods and services. ‘Good value’ sometimes drives purchasing decisions as, for example, consumer goods purchased irrespective of the actual benefit or contribution to the buyer.
Shareholders and Stock Exchange
In spite of earlier evidence of debt and share ownership, modern age trading in debt bonds is believed to have started during the twelfth century in France. ’Stock exchanges’ existed for quite some time before debt bonds became traded goods. The stock exchange was a place where livestock, commodities and agricultural supplies were exchanged. The location of trading exchange of inventory between willing buyers and willing sellers later became the trading floor on which the wares traded were stocks and bonds.
Over time, the concept of a partnership in a company developed into holding shares in a company. Shares, as a certificate of ownership, have existed since Roman times. A 1288 share certificate for 1/8th of the Stora Kopparberg copper mines in today’s Sweden was found, showing thirteenth century ownership registration practices. The first known joint stock company was the Dutch East India Company, created in 1602 and traded on the Amsterdam Stock Exchange, the first official stock exchange.
Originally, fund raising was done to help grow companies and expand them into new product lines and new markets, to provide financing facilities or cover losses during hard times, and to enable new acquisitions. Financial and passive investors in companies sought to enjoy dividends and, it was hoped, real growth of their companies as assets. Modern stock exchanges enable trade of shares or ownership rather than the trading of goods and services.
Today’s stock exchanges are very developed, offering intensive share trading and complex financial tools. Unlike the original tight link between shareholders and a company, today’s financial markets have an almost independent behavior. Most trading is done not by those interested in the wellbeing of a company but rather by traders and investors looking for short term profits. The result is overvaluation of many companies, like self-fulfilling prophecies that put pressure on managements to further inflating valuations rather than produce real business results. A symptom of this was the “bubble burst” in 2001 when the overvalued internet or dot.com and telecommunication companies, many of which had no real revenues, collapsed affecting the whole market, pensions, savings and so on.
The dot-com bubble was triggered by the accelerated development of the internet and its innovative programming that sparked imaginations. This new dream offered seemingly infinite application and programming possibilities as we know them today. The new possibilities required ‘bandwidth’ or in simple terms, a larger capacity data pipe that could serve more users, faster, with more graphics and features. As a result, the telecommunications market sought to provide additional bandwidth by developing the relevant equipment which, in turn, was based on new semiconductor components. The wheel of technology was put in motion once again.
This speculative era covered roughly the years 1995 and 2000, during which a huge investment spree in ‘me-too’, unproven ideas was peaking, with immense demand for new investment stories and many companies going public. This bullish market raised most share prices to irrational values. Making money in stock exchanges was perceived as obvious. Then, towards the end of 2001, reality began to emerge. Companies did not deliver, sales were nonexistent, infrastructures were not ready to support the market, consumer education was lacking and service prices were too high. The bubble burst when NASDAQ started crashing, eventually falling to approximately one third of its peak value. Billions of US dollars were lost, funds disappeared and investors’ life-long pensions were much diminished.
Common sense can help identify qualitative symptoms of unstable markets. One should simply dare to independently identify and interpret the symptoms, for the sake of strategic decision making.
The Chief Executive Officer (CEO), Managing Director, General Manager or any other title of the company’s top person, is a very lonely position. The concept that the CEO is paid to worry is especially true during hard times.
Figure 2 - The CEO, loneliest of Stars
In most companies, the CEO, being the heart and soul of the company, is the key person to lead the company to success. His biggest challenge is to manage and optimize short term corporate efficacy and business results while forming and implementing a long term vision and delivering the expected growth. This is an abstract and worrisome task for which the CEO is hired.
In addition, the CEO fulfills the most complex ‘junction’ where shareholders and the company board connect with the executing body of the company. The CEO reports to the board of directors who approve his work plans, control his business results and commend or reprimand him. Once goals, plans and budgets are agreed upon, the CEO drives his team to execute and achieve goals, a tricky task by itself. From his position, the CEO is the catalyst instigating execution and change or, in poorer cases, leading the company to stagnation and failure.
As already mentioned, CEOs and their executives operate in a quicksand environment. Changing technologies, markets, globalization, competition, lower cost labor, cost of raw materials and oil prices are just some of the daily factors executives need to cope with. A wrong decision or indecision for that matter can cost the company its life. In fact, management kills companies, accidents rarely do so.
In the year 2000, shortly before the demise of the Hi-Tech bubble, the CEO of a four hundred and fifty million dollar sales company wanted to turn the company into a holding company. His dream was to spin off telecom technologies developed within the company, raise funds and, eventually sell or take public the spun-off companies. In my opinion, the CEO made two crucial qualitative mistakes which, combined with the burst of the bubble, almost cost the company its life. The first mistake was a gross underestimation of the effort, focus and cost of spinning off companies. The second error was that new core-business customers were taken for granted. While costs increased, income and profitability dropped. After the the 2001 bubble burst, the company shrank to approximately seventy million dollars in sales, being lucky to survive at all.
As the lead executive, the CEO hires ‘corporate brains and hands’ to work, plan, develop and brand, while driving the body in a sensible and synchronized motion. In the environment he or she creates, the CEO’s personal attitude, ethics and behavior dictate the type of company he or she will lead. Malice draws malice, gossip encourages gossip, fantasy ends in failure and excessive dominance causes fear while openness brings creativity. Goodness is repaid with goodwill and support is translated into motivation. It is here that the seeds of failure or success are sown.
The CEO sets the future of the company by choosing the type of people surrounding him or her with. A strong personality wishes to have strong people around him, better people than he is. Let them run. Allow them to develop personally and professionally because the faster they run, the faster the company will develop. Freedom and a degree of chaos are healthy for creativity, a concept well practiced at Google where employees operate in a quasi playground environment with few restrictions as long as they deliver.
Driven by fear or ego, weaker personalities will normally look for lesser people with whom to surround themselves. Their ‘height’ will depend on how ‘short’ the people around them are. Remove such a manager from his fortress and he shrinks back to his real dimensions. This attitude results in poor teamwork and stagnation leading the strong to jump ship for workplaces where they can express themselves and develop. A weak manager will be confronted with symptoms like low motivation, lack of productivity and creativity. Typical make-believe behaviors become common place like time consuming gossip, fearful employees sitting idly at desks, long useless meetings, paper shuffling, private internet browsing and game playing. The short term attitude that engenders such behavior should not be accepted in leadership positions.
In his unique position, the CEO does not have many peers to consult with on complex and delicate matters. This is unlike managers and employees who can consult their peers and superiors. The CEO, from his lonely position, has to generate and drive a vision, sell it to employees and shareholders, prove its long term success and hire and fire. Hard decisions are made surrounded by loneliness. Successes have many fathers, failures only one.
Equipped with a vision and his team, the CEO has to make things happen. In start-ups, the positive energy of belief and optimism is there. In large corporations, the spirit, surroundings, ambience and team work are defining factors in the generation of cooperation, open discussions and communications in its broadest sense. Lack of communication and trust eventually leads to stagnation.