Why You Need a Business Plan & How to Prepare It

Virtually all businesses, within a corporate structure and the majority of larger private businesses, have well-developed business plans that incorporate clearly defined strategic objectives, detailed plans about how those objectives will be achieved and financial projections, including forecasts for sales, profit & loss account, balance sheet and cash flow. None of this guarantees success but it provides a road map, with a clear destination and a properly defined route for the business to follow. These types of businesses usually put considerable time and effort into the preparation of their business plans because they know it significantly improves the likelihood of building and/or maintaining successful market positions, strong balance sheets and sustainable competitive advantage.

By contrast, many small and medium-sized businesses spend very little time thinking through and preparing business plans and, in some cases, they spend none at all. As a result they tend to drift. The business is managed from day-to-day and goes from one year to the next, sometimes moving forward and sometimes going backwards but, in reality, making little or no progress.

Initially, many start-ups can show considerable progress, as they establish their market position but, more often than not, without a business plan as a blue print, they generally reach an early plateau, from which they find it difficult to progress. To be fair, this suits some business owners but, for many, it creates enormous stress, as they are continually living with a very uncertain future and less personal income than they require. And yet, preparing a worthwhile and effective business plan doesn’t have to be a massive project that distracts the business owner away from the action for too long; and actually, standing back for a short time to work on a business plan, almost always proves highly beneficial for the business and can be very therapeutic for the business owner.

So why don’t business owners stand back more? In my experience, the usual reason is that they think “no one else can do what they do” or no one else can do what they do as well as they do it”. So they micromanage everything and get increasingly bogged down and stressed out. In reality, many of the day-to-day activities can be done quicker and more effectively by their staff, if only the business owner would just let go. I’ve developed this theme in another article but, for the time being, let’s assume that the business owner has let go and is now about to work on a new business plan. How does she or he go about it?

The first thing is to look outside the business and see what’s going on in the market. For most small and medium-sized businesses, this doesn’t require a lot of detailed market research, it’s more about using suppliers, customers, competitors, trade organisations, trade publications and, of course, your own staff, who interface with customers. Using all these sources and any others that may also be helpful, try to establish what’s actually happening. Which market sectors and product groups are growing and which are declining? What’s happening with prices across those market sectors and product groups? What are your competitors doing? What quality standards and service levels are the norm? What technological developments are occurring? What legislative and regulatory factors are likely to affect you? In practice you’ll know much of this anyway; so it’s as much about standing back and putting everything into context and creating a balanced and objective picture, as it is about searching for new market data and intelligence.

The next step is to look at your own business and make an honest and objective assessment of how well it interfaces with the market. Are you capitalising on the sectors and products that are in a growth phase? Are you exposed to market sectors and products that are in decline? Are you under-pricing and giving away margin unnecessarily? Are you over-pricing and uncompetitive? How do you shape up against your key competitors? Where do you have competitive advantages over them? And where do they have competitive advantages over you? Are your quality standards and service levels meeting market expectations? Are you investing in appropriate technologies? Are you complying with all appropriate legislative and regulatory requirements? And are you running ahead of your competitors or lagging behind them?

You can now compare your business with the market by undertaking a simple SWOT analysis (Strengths, Weaknesses, Opportunities and Threats). You’ll very quickly see where your business’s strengths and weaknesses lie and you’ll clarify where the threats and opportunities, presented by the market, are likely to be.

Once your SWOT analysis has been completed, you can start to develop your strategy. Generally, you’ll want to build on areas, where you’re already strong. The more difficult decisions are likely to be around strategies for areas of weakness. How are you going to deal with these? Alongside this you’ll need to consider the threats to the business, from wherever they may come and decide how you are going to meet them. Then lastly, you’ll need to look at the opportunities the market is presenting and decide whether you should exploit any of them.

At this stage, you’ll probably have a lot of potential ideas, which collectively will be unaffordable and which, if you tried to implement them all immediately, would simply overwhelm the business. So you need to start establishing priorities and time frames; and as you do that, you’ll create the framework for your business plan, which would probably be built over a three-year period.

With the framework complete, it’s time to run some numbers, which would normally include projections for sales, profit & loss account, balance sheet and cash flow. The first year of the plan, which is your next full financial year, is likely to become the budget for that year. The second and third years will be increasingly aspirational. So this process needs to be undertaken on an annual basis, which means you’re always working with a business plan on a rolling three year basis.

It is highly likely that the first time you run your numbers, the projections will look completely unrealistic; unachievable, unaffordable etc. So you’ll need to adjust and refine; correcting errors; improving the accuracy of some of your assumptions; scaling some things down; scaling other things up; adjusting time frames etc. until you have a realistic and achievable plan. At this stage you’ll have your road map, with a clear destination and a properly defined route for the business to follow. As I stated at the beginning of this article, it won’t guarantee you success, but it will make success a considerably easier and more likely outcome.

If you haven’t been through this type of process before, you’ll probably need some help. If your business is big enough to employ its own management accountant, he/she should be able to run the numbers; if not, you may need to engage your external accountants. But, in a sense the numbers are the easy part. It’s the development of the strategy that leads up to the point where you can run the numbers that is important to get right. And to do that, you need to debate all the ideas, challenge all the assumptions and make sure that the strategic framework is realistic, robust and achievable. For many small and medium-sized businesses this isn’t always easy because it can be difficult for employees to challenge the boss’s ideas and there is no one else to do so. That’s where you need help from an experienced independent industry expert. Some small and medium-sized businesses have a non-executive director; and this is an area where he/she can play a very important role. If you don’t have a non-exec, there are invariably a number of independent business consultants who could be brought in. However, if this is something you are considering, do ensure that the person you select has had senior management experience within your industry and has a good understanding of your type of business and the market, in which it operates.

Once you have your business plan, it should become a key reference point for you and your management team. It should be the yardstick by which you measure performance and there should be regular monthly reviews to see how the business is performing against the plan. In areas where the business is under performing against plan you’ll need to consider what remedial action is required. Where the business is over performing, you’ll need to consider whether and how this can be further exploited.

Once you’ve started to use your business plan in this way, you’ll wonder how you ever managed before. It will provide focus for many of your management decisions; it will provide direction for your managers and staff; and it will help you to build a much more profitable and sustainable business.

If you’d like to discuss any of the issues raised in this article, in more detail, please feel free to contact me.

The UK Window Industry: Balance Sheets & Quicksand

Whilst there are some very successful businesses within the UK window industry, unfortunately, too many are seriously challenged due to their weak balance sheets. This may not have mattered so much during the long years of growth and comparative prosperity but, in today’s saturated market, it’s a crippling disease that the industry ignores at it peril.

Let me support this statement with some facts.

The Plimsoll Report analyses the financial performance of the 1,000 largest businesses in the industry. The table below shows some interesting data from their latest report, published in April 2014.Figure 1

Only 368 of the 1,000 largest companies saw their net worth increase during the previous year and 160 saw theirs remain static. So less than 50% actually increased their net worth. The report also shows that the average net profit for this group of businesses, during the last year was 2.3% of sales, which is a very low average indeed and suggests that there are a significant number of serious loss makers, balancing out a few star performers.

The pie chart below shows Plimsoll’s categorisation of these 1,000 businesses in terms of their strength and sustainability. 227 are classified as being “in danger” and another 90 categorised as “caution”.Figure 2

So, although 578 are either strong or good, a very large proportion of these businesses are relatively weak and, as we see from the above table, are either stagnant or declining.

The report also points to increasing polarisation between some highly successful businesses, building on their success and, at the other extreme, a very significant number of businesses in decline, to the extent that, without some form of intervention, they are at an increasing risk of failure.

Remember, we’re talking about the top 1,000 businesses in the industry, which according to Insight Data has around 14,000 businesses active within it. So, if this is the picture painted of the top 1,000, it’s fair to assume that the collective position of the smaller businesses is even worse.

To test this hypothesis, I undertook a small experiment.

From the GGF website I selected 10 businesses that were GGF members. I disregarded the larger names that would have been part of Plimsoll’s top 1,000 and I also disregarded all smaller businesses, of which I had any prior knowledge. So all ten that I selected were completely unknown to me; but to try and provide some regional balance, I ensured that my selection was distributed around the country. Having made my selection – and it’s important to note that I selected the companies, without any prior knowledge of their financial status – I then obtained their latest accounts from Companies House. For all but one company, the accounts were abbreviated, in line with small company rules.

The table below shows, in an anonymised format, some key balance sheet figures for all ten companies.Figure 3

Of the ten, there are two really good businesses (Company A & Company B) with strong or fairly strong fixed asset bases, good liquidity, represented by high net current assets, and significant shareholders’ funds (net assets). What isn’t shown, in the table, is the fact that Company A substantially increased its net worth over the previous year. So here we see two businesses in comparatively strong positions.

By contrast, Company J is balance sheet insolvent, having net liabilities of circa £20k. It’s difficult to tell from abbreviated accounts how the business is able to continue trading. It has net current liabilities of £30k, indicating a significant liquidity problem; and it has minimal fixed assets of £12k. So it’s either hanging on by the skin of its teeth, lurching form crisis to crisis, or it’s being supported by a kindly creditor or shareholder. Realistically, this business needs to embark on a major transformation strategy, which, in the absence of any significant cash, may be very difficult. But without this, the prognosis is unlikely to be very good.

The remaining seven businesses are all solvent, from a balance sheet perspective; but their nets assets (shareholders’ funds) range from virtually nothing to not a great deal; so none of them is in a strong financial position and two of them, Companies G and I, have net current liabilities, suggesting a very tight liquidity issue. Of the seven, only Company G has significant fixed assets; but that’s offset by its net current liabilities.

Based on this analysis, I’ve classified 20% as stars or stronger performers, 40% as chugging along but quite vulnerable, 30% as more seriously challenged and 10% as insolvent. This is a significantly worse position than that shown by Plimsoll for the top 1,000 companies. But if the systems companies and some of the large trade fabricators were to analyse the balance sheets of the companies, making up their customer networks, I have little doubt that they would find a very similar pattern. And this is the nub of the industry’s problem. We have a comparatively small number of larger capital intensive players, at the core, dependent on supply chains that are built on quicksand.

Roughly, 80% of the industry’s output to the final customer is via these small businesses, 80% of which range between vulnerable or insolvent; and that isn’t a foundation for a successful long term future.

So what can we do about it?

In my view we need to consider this very serious challenge on two distinct levels, namely strategic and cultural.

At the strategic level we need to move away from the current laissez-faire supplier-customer relationships, with each level of the supply chain and each business, within the supply chain, doing its own thing, in its own way, and often not very well. And we need to move towards strategic alliances that enable entire supply chains to act in a co-ordinated way, based on common standards, systems and processes and under the umbrella of a single brand.

A homeowner in Newcastle upon Tyne, buying from a fabricator/installer of Systems Company X should receive the same product, quality and service levels as a homeowner in Truro, buying from the Systems Company X fabricator/installer in Cornwall. The processes and systems deployed should be identical throughout; and the total brand experience should be exactly the same, just as it would be if these two customers were buying from a large national brand such as Everest or Anglian.

I’ve waxed lyrical, in previous articles, about the issue of small businesses in our industry having no brand, on which to base their business/marketing strategies. The systems companies and large trade fabricators have commoditised the product to an unprecedented extent; and to an extent that does not exist in other building product or home improvement markets. Other than the 20%, or so, held by the large national brands, most of the market is price driven, with an unrealistic belief that good selling can deliver premium prices in the absence of a brand. Good sales reps can undoubtedly achieve higher prices than poorer sales reps; but there aren’t enough of them; training is a never ending journey because of the high turnover rate, within sales forces; and, in any case, the higher rates that the good reps do achieve are relative to the levels of their own sales forces not to the levels of a premium brand.

It’s no wonder that we have so many unprofitable or marginally profitable small businesses within the industry. On their own, they’re not big enough to develop strong brand positions. They rely on local reputation, which is very difficult when, at best, their product is only purchased, by the end user, a few times in a lifetime. Some do break through to become significant local or regional brands; but these are a small minority and, even then, their own perceptions of their brand strength can sometimes be considerably greater than an independent brand recognition survey would assess them to be. Many of these small businesses are left, by the systems companies and large fabricators, to fend for themselves, often without the management and business skills that they need to run a successful, profitable business.

There can be several different ways of creating more cohesive networks under a single brand; and the precise structure is not the key issue. However, there are four important requirements.

The first is that there is a core organisation, at the heart of the network, that implements and monitors performance standards over the product range, productivity, operational efficiency, quality, systems, process and service levels. This could be a systems company, a large fabricator or some other third party; but all businesses, within the network, must be contractually bound to adhere to those standards.

The second is that each business, within the network, must have real and meaningful business support available to it. This doesn’t just mean marketing support of one sort or another. It means that they need support that will enable them to manage their businesses better, achieve high levels of operational performance, make good profits and build strong balance sheets. Everything from HR to PR; from production to installation; from financial control to administration; from IT to process and systems; from management to organisation structure. Support in all of these areas needs to be available to help the businesses, within the network, build on their strengths and really get to grips with their weaknesses.

The third is that the whole organisation must go to market under a single brand, with co-ordinated advertising, PR and lead generation strategies; albeit tailored to suit local circumstances. This could mean a franchise type arrangement, where the franchisees only use the core brand e.g. McDonalds or Body Shop; or it could be a dual brand with an identifiable independent business selling a branded product range – System X from ABC Windows. Either way, there should be a single, state of the art website, enabling the brand to be properly managed, developed and controlled, rather than many small, often not very good, websites with a wide range of uncoordinated brand messages, giving rise to hopelessly confused brand values.

The fourth is that all this has to be paid for; and each level of the supply chain – systems company, trade fabricator and retailer/installer – must accept their share of the cost. Again, there are many different ways of achieving this; but one thing is for sure, neither the systems companies nor the large trade fabricators can fund it on their own; so it must be a cost to the entire network, but proportional to each layer of the supply chain and to each business within it.

Developing a network with a good, well managed product range, supplied through a group of disciplined businesses, all optimising their operational performance and service levels, will bring significant financial rewards at all levels of the supply chain. And if this happens under a strong brand, the network, as a whole, can determine where it wants to position itself in the market and the price levels appropriate to that position.

This last point is incredibly important. Not every network can be a premium brand, going to market with a premium price. Some will need to be value brands and some will need to be budget brands. The cost structures, within the networks, will need to differ accordingly, as will the brand values that are developed and promoted.

That’s enough about the strategic level. So let’s now consider the cultural challenge.

To achieve the change, from where we are to where we need to be, a significant cultural shift is required.

I’ve talked to many senior people, from within the industry, about the need for the sort of changes that I’ve described. And there seems to be an acknowledgement that the products have been commoditised and that this has given rise to some serious difficulties. There’s also an acknowledgement that, if the industry is going to thrive once again, substantial change is required. But when it comes to the specifics of what that change should be, the barriers often go up and the reasons why things can’t be changed seem to overwhelm the reasons why things can and must be changed. The result, not surprisingly, is inertia and a retreat to comfort levels, which is likely to lead to continued decline.

Somehow, the bigger players must start thinking outside their traditional boxes. So much of our thinking is still influenced by the sales driven philosophies of the 1980s and 90s; but those days are over and the industry needs to move on. The face of retail and direct sales has changed beyond recognition, due to the on-line revolution; and we need to look closely at what happens in other more progressive markets and at the cutting edge of both B2C and B2B developments. There’s so much to learn and we’ve been so slow to learn it. Perhaps we need to bring in more people from more dynamic retail environments; not just to teach us but to lead us and to give us the confidence we seem to lack. One way or another the major players must initiate the changes that the industry needs because it can’t continue to exist on a foundation of quicksand.

But a different culture is not just needed amongst the larger players, it’s needed within many smaller businesses as well. Many of them really must raise their games; and this is something, with which some will struggle to come to terms. But they need to manage their businesses better so they can generate more profit, strengthen their balance sheets and create greater long term sustainability. But without help and support, of the type I’ve described, this is often very difficult for them to achieve; and sometimes impossible. So whilst I’m urging the systems companies and larger fabricators to develop more controlled networks, with far more support for the businesses in their supply chains, the smaller players need to accept that they may need some help and that they will lose some independence, as the price they pay for support from the network, of which they become part. At the moment the supplier/customer relationships, within the various supply chains, are a free for all that are, in practice, damaging many more businesses than they are helping. The network approach is that each business, within the supply chain, is part of and contributing to a larger team. But the strength of the larger team, within the market, is greater than the sum of the strengths of the individual businesses.

If we can start to address these cultural issues, the changes that are needed will start to flow.

On a final note, there are actually some encouraging signs that movements in the right direction are beginning to happen, albeit very slowly.

The US building products giant Masco is now well established in the UK window industry; and, whilst it’s still a bit of a sleeping giant, it’s hard to believe that it won’t want to develop a more dominant position over here. When it does, it will start to put some real pressure on the indigenous industry to change.

Similarly, Internorm, the leading European window brand, seems to be showing some increased interest in the UK market and this may also add to the potential pressure from Masco.

On the home front, Epwin’s recent news that it’s floating on the AIM market and appointing a new Chairman is very interesting. Peter Mottershead was a previous CEO of Anglian and brings some serious retail experience to Epwin. So we could see some interesting developments and perhaps a much greater emphasis on the Swish brand, which although a household brand name, remains only a small part of Epwin’s business. Perhaps it’s another sleeping giant that is starting to stir.

Network Veka is currently by far the most advanced network in the UK window market and has created a very successful organisation focused on first class service levels and operational performance. It’s associate Veka UK, now owns the Halo brand, which was originally designed as, and intended to be, a consumer brand (As the first CEO of Bowater Halo, I wrote the original business plan!). It’s not hard to imagine a “Halo” branded product supplied through Network Veka; that could be very powerful, so who knows.

The Conservatory Outlet is almost the opposite of Network Veka. It’s a fast developing network of independent businesses, all going to market under a single brand, based on a modern, on-line marketing strategy, using a single website. It seems to have some strong legs and, whilst still comparatively small, may be showing the way to some of its larger rivals.

Imagine combining the operational disciplines of a Network Veka type organisation with the brand management and marketing strategy of a Conservatory Outlet type organisation. Eureka! We’re getting there slowly; and someone is going to join the dots up before very long. And when it happens that organisation will be catapulted into a commanding position, within the market, with others being forced to play catch-up.

It will be interesting to see who gets there first. Epwin with Swish? Veka/Network Veka with Halo? The Conservatory Outlet by extending its business model? Or perhaps a current outsider? Polyframe, the Halifax based trade fabricator, has been taking market share very successfully, resulting in controlled and profitable growth. This has involved a number of strategic alliances with other fabricators/retailers; so perhaps its next move could be to extend its business model to incorporate a Conservatory Outlet type brand and marketing strategy. Who knows?

The changes that I’m advocating are starting to happen, albeit in a small way and perhaps without all the dots being joined up yet. But to return to my starting point about weak balance sheets and foundations of quicksand, things need to speed up. At the moment there is still too much resistance to change, a lack of vision, too little mould breaking strategic thinking and not enough energy and resources being applied to shaping the future. If we’re going to create a firm foundation for the future and address this debilitating balance sheet problem, this must change; not tomorrow or sometime/never; but today.

The Challenges for the Window Industry in 2014

It looks as though the UK economy may have grown by as much as 2% in 2013, which is a lot faster than the pundits were forecasting not very long ago. That’s great news but, perhaps even better, the IMF has just upgraded its 2014 growth forecast for the UK to 2.4%. In general the outlook for businesses is now much more encouraging than has been the case for several years. But what does this all mean for the window and conservatory sector?

We need to remember that our problems started long before the banking crisis of 2008 and the subsequent recession. The window market, including all its sectors, peaked in around 2004 and the prime driver for its decline, since then, has been saturation in the domestic replacement window sector, which was, and still is, the largest sector by far. The market today is substantially smaller than it was ten years ago; and, even though respected market analysts, like Robert Palmer of Palmer Market Research, are forecasting growth over the next two or three years, for the foreseeable future, the total window market is unlikely to be anywhere near as big as it was in 2004.

Let’s now think about what happens in shrinking markets. Consolidation tends to occur between some of the major players, as they take capacity out of the market. We’ve seen that happen; for example, Epwin Group’s merger with Latium Group; and Veka’s acquisition of Bowater Windows (WHS Halo), the business I started in 1982. The number of companies withdrawing from the market or diversifying into other sectors also tends to increase; and we’ve seen that as well. Sadly there tend to be more company failures; and that has happened too. But perhaps most significant of all, shrinking markets tend to change the structure of supply chains, as businesses become more focused on their core strengths; and I’d like to look at this more closely.

Over the years, the systems companies, as a group, have never created any real brand strength for their products, except within the trade itself. This is quite unusual; and, if you think about other building material and home improvement markets, they are littered with well-known brands. Ideal Standard, Showerlux, Mira, Stelrad, Myson, Poggenpohl and Alno are but a few. Of course a few major players have developed well-known brands; for example Everest, Anglian and Safestyle; but these are the exception. The vast majority of the market is dependent on products originating from the systems companies. As a result, most small and medium sized players are selling commodity products and having to rely, almost entirely, on their own reputations rather than on the brand strength of the products they supply. To the homeowner one plastic window is much the same as another; and this has left most of the systems companies as capital intensive producers of a commodity, from which they make little or no money. Ironically, this has also helped both timber and aluminium products to stage a revival; and some businesses are doing very well, as a result.

At fabricator level we’ve seen some major changes. The number of fabricators has been falling for quite a long time, giving rise to a trend of fewer larger fabricators. Some of these large fabricators have developed very successful strategies, focussed on building market share, as smaller retail fabricators withdraw from fabrication to focus on sales and installation; think of Polyframe. But interestingly, despite market shrinkage, a higher casualty rate and fewer fabricators, the number of businesses involved in the industry hasn’t changed very much. So what we seem to be seeing is polarisation between a relatively small number of major players and many very small businesses, often started up by ex-employees of larger businesses that have either downsized, diversified, withdrawn or failed. This in turn has led to the development of the “one stop” specialist trade counter businesses such as Window Fitters Mate and The Window Store. These businesses are merchanting operations, from which small window installers can buy their frames, glass, trims, fixings, mastics and everything else needed to install windows, doors, conservatories and roofline. So we’re seeing another layer in the supply chain, which now progresses from systems company to fabricator, then to trade counter and finally to installation contractor. Interestingly enough, the market is developing in a similar way to the central heating market, after the central heating boom of the 1970s and 1980s. Something I predicted in an article I wrote for Glass & Glazing magazine back in 2002.

Shrinking markets impact on individual businesses in many different ways; but ultimately, it’s all about market share. Stronger businesses take market share from weaker businesses; so if you’re losing market share in a falling market, you’re hurtling towards the precipice of oblivion, unless you can do something to reverse the trend. Even if you’re gaining market share, your sales can still be falling unless you are gaining market share at a greater rate than the rate, at which the market is shrinking. So what determines whether you gain or lose market share? The answer is whether you can create and maintain sufficient competitive advantage. If you can, you’re winning; if you can’t, you’re not.

Hopefully, the UK window market has now hit the bottom of the cycle and is starting to show some signs of revival. However, we are likely to have a problem of overcapacity for some time, until supply and demand have reached a more sustainable equilibrium. So life is likely to remain tough for many businesses in the industry for a while yet. Achieving and maintaining real competitive advantage is, therefore, all important. So let’s look at what this means.

When we talk about competitive advantage, many people tend to think about things like price, quality, customer service etc. And of course these are all important factors. I like to group all of these together under the heading “Operational Excellence”. Basically it’s all about being better, more efficient and more cost effective than your competitors; and in highly competitive markets, this is essential. However, if we’re honest with one another there are far too many businesses in the window industry, whose level of operational excellence isn’t good. And these businesses need to work hard on addressing this serious weakness, if they are to secure their futures in the tough market conditions that are likely to prevail for the foreseeable future.

However, there are other equally important factors in the creation of competitive advantage and I’d like to mention three of these.

The first is financial strength. Obviously larger corporate businesses have much more financial muscle than SMEs; and this will always be the case. But that’s not really the issue. If a smaller business has a strong balance sheet, relative to its size, it is in a much stronger position than similar sized competitors with weaker balance sheets. It is much easier for it to fund the changes it must make in order to achieve the levels of operational excellence that are required to give it the competitive advantage it needs. But there are far too many businesses in the industry with weak balance sheets. It is, therefore, very important for those businesses to rebuild their balance sheets. To some extent the issues of balance sheets and operational excellence are chicken and egg. You need some financial strength to achieve the level of operational excellence you require; but you need to achieve a reasonable level of operational excellence to build your balance sheet. So some careful and well thought through strategies are needed.

The second is sales and marketing strategy. Whilst there are undoubtedly examples of some really good and highly effective sales and marketing practices within our market, the industry, as a whole, remains in a time warp. We’ve grown up on a diet of untargeted, randomly implemented, in your face, lead generation, accompanied by crude, high pressure selling that focussed on pounding “punters” into submission. It worked, in the past, thanks to almost 35 years of uninterrupted market growth aided and abetted by a lack of both consumer awareness and statutory regulation. But the world has moved on. Our market has been contracting for nearly ten years, our customers are far savvier and statutory regulations are much tighter. Added to all this, the internet has revolutionised retailing and direct sales in a way that we couldn’t have imagined only a few year ago. Today, successful retailers and direct sellers, across a wide spectrum of market sectors, are those that have adapted to and exploited these new conditions.

Marketing today is about getting the right product to the right customer, at the right time, via the right channel, at the right price. It’s about brand building, establishing brand values, brand positioning, delivering the brand promise, accurate targeting and empowering the customer to make his/her own decision in your favour. As an industry we’re light years behind many other retail and direct sales markets. But actually, this presents a huge opportunity for those businesses that are willing and able to embrace change and turn themselves into modern marketing businesses. Despite all the gizmos and widgets we build into our products and get very excited about, in consumer terms, we’re supplying “me-too” commodity products, which are very hard to differentiate. Gaining competitive advantage, at consumer level, through product differentiation is, therefore, nigh on impossible. But gaining competitive advantage by taking a 21st Century approach to marketing is where the future lies for the more switched on businesses in our industry.

The third and final factor is the more general business strategy. Where does your business sit within the current supply chain and is that position sustainable, as the supply chain changes?

We’re seeing fabrication consolidating towards fewer larger fabricators; and many of those larger fabricators are doing very well as a result of this momentum. They’ve probably achieved fairly high levels of operational excellence and may have built up reasonable balance sheets. They’ve also seen power, in the market place, shifting towards them and away from the systems companies. But what happens when the flow of small fabricators, pulling out of fabrication dries up, as it will? Without a brand, these businesses will be faced with the same problem as the systems companies; selling a “me-too” commodity product. So will they make the same mistake that the systems companies made or will they start to develop networks that are based on consumer brands?

We’re seeing the growth of very small installation businesses and the one stop trade counters that supply them. Without any consumer brands, this part of the market is inevitably price driven, particularly as many of these small installation businesses have limited selling skills. Depending on whether some of the larger fabricators do or don’t embrace the brand challenge, this may or may not continue to be the case. Thinking outside of our market, you can buy a top of the range Worcester Bosch boiler via a small plumber/heating contractor and pay a premium for the product, whilst paying a much cheaper installation fee than you’d pay British Gas. So there may be an opportunity here for premium prices for a fabricator brand but installation will still be cheaper for the homeowner than it would be through a larger retail business.

At the other extreme, we still have a few major brands selling at premium prices; Everest and Anglian spring immediately to mind. But the interesting one is Safestyle because they have come in as a comparatively late entrant and have grown to become a major player, ranking alongside Everest and Anglian. They’ve also been very clever with their brand positioning, which differentiates them from their two main rivals. This all indicates that there is still a market for higher priced branded products. But set it alongside the growth of the trade counters and small installation businesses, and it suggests that we’re starting to see a significant degree of polarisation between the large brands and the small installers. In this situation, the middle ground is inevitably being squeezed; and this is precisely what happened in the central heating market after the central heating boom of the 1970s and 1980s.

So if your business is in this middle ground, as many are, what are you going to do? You can either carry on and be pushed gradually into extinction or you can start to develop a strategy that reduces your exposure. That could include many different things. You could look at developing a trade counter business. You could become a specialist in a particular niche – conservatory roofs, composite doors, bi-fold doors, vertical sliders, etc. You could diversify into other materials – timber, aluminium, composites etc. You could diversify into other home improvement products – kitchens, bathrooms, bedrooms, studies, garage doors, driveways etc. You could combine any of these and many more options besides. You could also develop entirely new business models that are web based. You’ll need to tread carefully and you won’t get everything right first time but the successful players, in the future, will be the ones that address the challenges that a changing market presents.

Summing all this up, it seems to me that we operate in an industry that has, to a large extent, been bypassed by developments in many other markets and that we’re now a long way behind the general level of play. The peaking of the market around 2004, its subsequent decline and the effects of the recession, since 2008, have played havoc with us; albeit some star players have emerged during that period. However, the long term effects of those difficult years and the impact of what is now a mature market means that the industry itself must also mature. Businesses, in general, need to raise their game, combining operational excellence and financial strength with 21st Century marketing and business strategies that are sustainable in a market that is changing beyond all recognition.

Crackers at Christmas

The summer holidays are over, the schools are back and, increasingly, our focus is now on Christmas. We Brits love our Christmas; don’t we just? But, as much as we might love it, Christmas creates huge distortions in the annual trading cycle. For some businesses, for instance many high street retailers, the run up to Christmas and the January sales account for a large slice of their annual sales; so, if they don’t do well over the December/January period, their budgets are knocked for six. For other businesses, probably the majority, sales in the run up to Christmas fall away dramatically, order books run down very quickly and, during the aftermath of Christmas, output is depressed until order books recover. Furthermore, a full month’s overheads are incurred during December, whilst trading is restricted to about three weeks. So you can see why many businesses find their cash flow very stretched at that time of year and why January to March is the danger period, when many weak businesses fail.

So, if your business is one of those that are hit badly at Christmas and the early part of the New Year, what can you do about it?

Well what you can’t do is fight it. It’s part of our British culture and there’s not much you can do to change that. The real issue is how you manage your business through this period with the least amount of damage.

The first action that you need to consider is right now. During the autumn you need to build your order book as much as you can. Increase your advertising, while your market is active, and maximise your flow of enquiries/leads. At this time of year, you’re targeting customers, who are a long way through the buying cycle and are ready to buy; so create some urgency by running a time related offer that requires your product or service to be delivered before Christmas. The orders you take need to be well priced, giving you good margins that will sustain your business and deliver some decent profits. So don’t be tempted to cut prices. The offer you run needs to be product related – an upgraded spec: a free extra etc. And what you’re looking to do is make it something, whose perceived value is greater than its true cost to the business.

However, at some point prior to Christmas, you’ll cross a threshold. Market activity will start to drop off very quickly and your order book will reach the point where you can no longer offer a pre-Christmas delivery. There’s no clear rule as to which of these will come first; but whichever does come first should trigger a complete change of tactics.

Your advertising must change to target a different type of customer. You’re now looking for customers, for whom buying your product or service isn’t influenced by the timing of Christmas. You’re after bargain hunters looking for good deals. They’re not tempted by free upgrades; for them, it’s all about price. You want orders that are placed before Christmas but with delivery in the New Year. The incentive is a significant discount that makes your product or service exceptional value for money. Whilst the market may be generally inactive, serious bargain hunters, with a genuine interest in your product or service, will still respond, if the deal is good enough. For you, low priced business is better than no business; and your aim is to keep your business’s output up, in the aftermath of Christmas. So not only is this cut price offer for a limited period in the run up to Christmas, it must also stipulate that the product or service must be delivered within a limited time frame after Christmas; perhaps by the end of January or maybe February. The actual cut off will depend on the length of your delivery period. Your objective will be to attract enough low priced volume to keep your output up, in the immediate aftermath of Christmas but not to impede the delivery of higher priced orders that start to build up in the New Year. It’s a tricky balancing act designed to fill a gap; and you probably won’t get it 100% right. But even so, it’s far better to have this type of strategy in place than to let your business be a helpless victim of market distortions caused by the British being crackers at Christmas.

Adapt or Die

The only certainty about any market is that it is in a state of permanent change. Some markets change very quickly, others much more slowly; but change is both continual and remorseless.

For businesses, of all types and sizes, adapting to market change is fundamental to on-going sustainability; and exploiting that change is critical for future growth and success. However, even some of the largest players misread the signs and get it wrong.

Think about Nokia; not very long ago the giant in mobile phones. Now Nokia is struggling against the likes of Apple and the smartphone; it just didn’t adapt soon enough.

Think about Comet, the now defunct retailer of white goods and brown goods; it didn’t adapt its traditional retail business model to embrace the on-line revolution. By contrast, Dixons Retail plc has reinvented itself several times. It started out as a camera and photographic retailer, based on in-store concessions. It progressively moved into brown goods, launched PC World as a retailer of computer hardware, moved into white goods, through the acquisition of Currys, and developed a huge on-line presence in parallel to its retail stores. It’s now Europe’s largest specialist electrical retailing and services company; and it has created massive competitive advantage, with which the likes of Comet just couldn’t compete.

So here are three interesting and different examples of how businesses have adapted to market change. Comet didn’t adapt and collapsed. Dixons Retail has continually adapted and, from small beginnings, is now a leading European retailer. Nokia didn’t adapt soon enough and has been left behind, with an enormous challenge ahead of it. But, of course that was the story of Apple. Apple lost its way a few years ago and came back with avengeance. But it came back through technical innovation that was at the cutting edge. So it actually drove market change rather than adapted to it; and that’s very difficult indeed.

Sadly, the world of industry and commerce has a huge graveyard of businesses that failed to adapt to changing markets; and, whilst there have been some spectacular corporate failures over the years, the overwhelming majority are small and medium sized businesses. So why do so many SMEs fail to adapt?

I’ve spent many years working with and supporting SMEs through periods of change and transformation and, in my experience, there are probably three critical factors.

The first is that many SMEs are actually very isolated from the markets they serve. They are minor players with small market shares and the only part of the market that is visible to them is that fraction, with which they regularly engage. They often don’t have sufficient budgets to fund professional market research and they tend to be poorly supported, in this respect, by larger customers and suppliers, who are frequently much better informed. So they are just out of the loop, unless they make a concerted effort not to be; and that leads me to the second reason.

The second reason is that many owner managers and directors of SMEs are too focused on the day to day issues of running their businesses and have a strong tendency to micro manage. Because they don’t empower their key employees, they don’t have the time to look over the horizon to see what’s going on in the wider market. It’s a vicious circle that leads to an introverted culture, within the business, and a strong tendency to remain within personal comfort zones.

The third reason revolves around skills and experience. Very often, owners and directors of SMEs may have backgrounds in sales, production, logistics, accountancy, operations, etc. However, they may not have broader based commercial or strategic skills and may, therefore, simply not recognise the importance of market intelligence or the need to adapt to changes that are taking place in their markets. In practice, once those changes have become obvious, they may respond but often at a very late stage, by which time they have lost a considerable amount of competitive advantage and are well and truly on the back foot, fighting for survival.

Having identified the problem faced by many SMEs, what can they do about it?

The answer is not simple because most of them can’t fund expensive market research; and moving ahead with a change programme that has not been properly evaluated could be even more risky than doing nothing. This isn’t a problem that has a clear cut solution in the way that a new piece of machinery could solve a productivity issue, at a known cost.

The main change that owners and directors of SMEs need to try and make is to put aside some time every week or every month to look over the parapet and see what’s going on in the wider market. Managing a business isn’t just about working in the business, addressing the various daily chores and tasks. It’s also about working on the business; monitoring progress and developing the strategy. Part of this should also include looking at the wider market and trying to pick up the trends and developments, within it. Talking to customers, suppliers, competitors, trade associations and providers of professional services can all help build up knowledge and information. The trade press and market surveys from organisations like Mintel and Keynote are good sources of information. Reading the business sections of the daily papers will provide an awareness of general business sentiment and trends. Attending trade conferences and exhibitions is also an important source of market intelligence.

All of this needs to stimulate discussion and debate within your own management team. But it all takes up time and to find that time, you’ll probably have to do less micro management, give more responsibility to your key people and stand back more. Ironically, you may well find that your business runs much more efficiently as a result. Over the years, I’ve found, time and again, that owner managers and directors, who micro manage and don’t stand back, become the main obstacle to growth and sustainability. In extreme cases, I’ve seen businesses collapse as a result.

By being better informed, you can start to see where the market opportunities are emerging, where the threats are developing and where the trends are heading. So you can then look at your own business and start to think about the general direction it is going in and whether this is exposing it to greater threats or positioning it to exploit emerging opportunities. In order to minimise the threats and maximise the opportunities, you may need to rethink your strategy and business plan; or in some cases actually develop a strategy and business plan.

For many owner managers and directors of SMEs, this may be taking you outside your comfort zone but it’s too important to ignore. So if you’re in this position, you really should bring in outside support. This could be in the form of a non-executive director or it could be via a business consultant or mentor. The way you do it is of less importance than the fact that you have available sound advice and support provided by a rounded business professional with a successful and relevant track record.

The objection to this is usually the cost; and yes there is a cost. But with the right person that cost will be repaid many times over, as your business’s success and sustainability grow. Successful SMEs are increasingly widening their horizons through some form of external support and once they’ve taken that leap, few revert back to the previous isolation that undermined their ability to adapt to the circumstances of an ever changing market.

Is your lead generation targeting the right prospects?

“I never respond to Junk mail; I just throw it in the bin”.

“If people knock on my door trying to sell me anything, I just shut the door on them”.

“When people phone me up selling things, I just put the phone down”.

How many times have you heard comments like these? Indeed, how many times have you made comments like these? And yet there are lots of businesses in the UK that rely heavily on direct mail, door to door distribution, telesales and door to door canvassing. These businesses collectively spend huge sums of money on activities of this type; and, if they didn’t work, it’s reasonable to assume that the companies involved wouldn’t invest in them. So how can we reconcile the perceptions of most consumers with the experience of many B2C businesses?

The simple answer is that, it’s all about appropriateness and timing. Let me give you an example. A close neighbour of mine retired a couple of years ago as CEO of a reasonably substantial business. He and his wife have decided that they want a new kitchen; and he was talking to me about it. Whilst they had the money in the bank, ready and waiting, they were busy with family and other things and just hadn’t found time to start researching the local market for an appropriate supplier/installer. And he said that, “if any kitchen company knocked on his door or phoned him, he’d almost certainly, at least, give them a fair hearing”. This is a man who normally never buys from door to door or telephone sales people and who is very adept at saying no to them. But despite that, in these particular circumstances, a direct approach would actually be welcome because he and his wife are in the market.

Lead generation isn’t primarily about creating markets or developing brands; it’s about generating enquiries from people, who are already predisposed to buy. It’s about getting the right product/service offer in front of the right people, in the right place, at the right time. Get all of that right and you’ll sell; get it wrong and it’s much more difficult.

Lead generation invariably means some sort of unsolicited sales approach and, if this is undertaken in a random, untargeted way, it can have a very damaging effect on the brand and its brand values. A few years ago, I was involved in some market research, for a client, who relied heavily on random, untargeted lead generation activities, on a large scale. And we discovered that for every customer gained through these unsolicited sales approaches, three other people, who could have been potential customers, in the future, were alienated. It became clear that whilst this company was successfully exploiting the market in the short term, it was undermining its brand for the longer term. And sure enough, as the market became increasingly alienated, the business started to lose market share; sales went into decline and eventually the business went into administration.

The problem with many unsolicited sales approaches is that they tend to be very poorly targeted; so most recipients of them aren’t like my neighbour; they’re just not in the market, for that product/service, at that time. As a result, they tend to see the approach as intrusive and can often feel threatened by it; so they develop a very negative view of the brand and/or the business.

Obviously few businesses, selling into B2C markets, can guarantee to target only those people that are in the market; that’s neither practical nor possible. But the more you can target your lead generation towards people that are in the market for your type of product/service, the more cost effective it will be. Conversely, the less you target, the more damage you will do to your brand and the less cost effective your lead generation will be.

I’d now like to turn to a third aspect of targeting, namely the profile of the prospect, who will be most likely to buy from you. Even if you offer the right product/service at the right time, you may still have a fight on your hands if your brand values don’t gel with the aspirations of your prospect.

Much of this is subliminal; but it’s still very real. Different types of people will tend to buy similar products/services from different types of businesses.

Some buyers are looking for premium brands; some for budget brands; and some for value brands. Some people place local suppliers above national; some the reverse. Price, specification, delivery period, quality, local reputation, image, length of time in business, knowledge and experience plus many other factors influence different people in different ways in their selection of a product/service. And this is why the customers of one supplier of a product/service may have an entirely different profile from that of another business, supplying a similar product/service. And if the first business tries to sell to prospects, whose profile is similar to that of the second business, it will find it much tougher to win sales; conversion rates will be much lower and selling costs will be much higher. Think about Marks & Spencer v Primark: Asda v Waitrose: Everest v the local window company: Magnet v the Alno kitchen studio. Different people shop in different ways for broadly the same thing.

To summarise all this so far, B2C businesses need to target the right profile of customer with the right product/service, in the right place at the right time. The closer you get to this, the more sales you’ll achieve; the more you’ll strengthen your brand position; and the lower your selling costs will be. The further away from this you stray, the lower your sales will be; the more you will undermine your brand; and the higher your selling costs will be. So the $64,000 question is, “how can you get your targeting right”? So I’ll try and give you some pointers.

The first thing to focus on is your existing customer base. These are people who have bought from you already; so they’ve accepted your product/service, your brand values etc. and by definition, these are the type of people that will buy from you or your business because they’ve already done so.

They are, therefore, likely to be warm to approaches for additional sales; additions or enhancements to what they have already bought; upgrades; linked sales; replacements of old models etc. And this should result in low lead generation costs, high conversion rates and good margins. But for this to be effective, you need an appropriate Customer Relationship Management (CRM) System to support the effective control of the process. I can’t stress how important this is and I’m regularly surprised by the number of B2C businesses that either don’t have one or have one but don’t use it effectively.

A good CRM system provides a full audit trail of the entire interface between the business and the customer, including contact details, a record of what the customer has purchased, when he/she purchased, the price paid, issues/complaints that may have arisen, how these were resolved etc. It should also record selling opportunities for the future. For example if you’ve supplied and installed replacement windows, there may be doors that have not yet been replaced or an opportunity for a conservatory. If you’re installing central heating or a new boiler, there’s an opportunity for a service contract. If you supply kitchens and bathrooms and you’ve fitted a kitchen, there may be an opportunity for a bathroom. These are just a few examples, within the home improvement sector; but most B2C businesses will have similar opportunities to record on the system. Add to this, records of conversations with customers and you have some really good information, which you can use.

If you have a CRM system full of the type of information I’ve described, you can start making direct approaches (subject to appropriate approvals for TPS, MPS etc.) to your customers with product/service offers that are both timely and relevant; and if they are timely and relevant, you have a much greater chance of a good response than if they are not. In effect, you will be developing strategies for individual customers rather than a “one size fits all approach”. In a very much more sophisticated way, this is what Tesco does with its Clubcard and the promotions it develops from it.

Still focussing on your customer base, the next step is to generate new customers from your existing ones. Most of your customers will have friends, relatives and neighbours that are similar to them; similar circumstances and similar values. So a higher proportion, of these people, is likely to look favourably on your products/services and brand than is an entirely random group of people elsewhere. So, once again, you’ll find them easier and cheaper to sell to than people, to whom you are entirely unknown.

There are really two things you should do.

The first is to have a good recommendation scheme with an appropriate reward for every customer that makes a successful recommendation and an incentive to the prospect that the customer is recommending. This means that both the customer recommending and the prospect are incentivised. Once again, this has to be properly managed on the CRM system and effectively promoted to your customer network. It should all be date driven with triggers for each part of the process so that every customer receives the correct details at a predetermined time and frequency. Good well managed recommendation schemes can be a highly effective way of generating new customers very cost effectively.

The second is to promote your products/services in the neighbourhood of your customer, shortly after that customer has completed his/her purchase. A variety of media can be used, depending on the type of product/service involved. It could be anything from knocking on neighbours’ doors to leafleting or direct mail. But the main point is that these people are more likely to have similar profiles to those of your customer than would be the case with a random group. And whilst the response may not be as strong or positive as it would be with recommendation schemes, it is likely to be stronger and more positive than would be the case with a random group.

We’ve looked at additional sales to existing customers and developing new customers from existing customers. But now we now need to consider how to target entirely new customers that don’t fall into either of these groups.

The key lies in understanding the detailed profile of the type of people that are most inclined to buy from your type of business and then identifying where they live.

Consumer profiling has become a very sophisticated process. And there are some very effective profiling tools on the market. However, rather than discuss these products in general terms, I’m going to concentrate on one particular product called ACORN. But when reading about ACORN, you should bear in mind that there are other similar types of products, some of which are even more sophisticated and some sector specific. However ACORN is a very useful product that is applicable to most B2C businesses; and it is the brainchild of a company called CACI.

So what is ACORN?

ACORN is a geodemographic segmentation of the UK’s population which segments small neighbourhoods, postcodes, or consumer households into 6 categories, 18 groups and 62 types.

 ACORN provides understanding of the people who interact with your organisation. It helps you learn the who, what, where, when, how, and why of their relationship with you.

This can help you to target, acquire, manage and develop profitable relationships and improve business results. The classification also gives a better understanding of places and the people who use them.

Who uses ACORN?

Retailers, financial organisations, and over 200 public sector organisations use CACI data to provide an accurate picture of the needs of their customers and local communities.

ACORN is used to understand customers’ lifestyle, behaviour and attitudes, or the needs of neighbourhoods and people’s public service needs. It is used to analyse customers, identify profitable prospects, evaluate local markets and focus on the specific needs of each local community.

You can learn more about your customers’ behaviour and identify prospects who most resemble your best customers by adding ACORN codes to a customer database.

Such an understanding of the ACORN characteristics of a market can also be used to drive effective customer communication strategies.

CACI Ltd is the company that has developed Acorn and it describes itself as follows:-

CACI was founded in 1975 in the UK and operates from several offices across the country.

Headquartered in London, CACI Ltd is a wholly owned subsidiary of CACI International Inc. CACI International Inc. is a publicly listed company on the NYSE with annual revenues in excess of US $3.8bn and approx 14,000 people worldwide.

CACI offers an unrivalled range of marketing solutions and information systems to local and central government and to businesses from most industry sectors.

The ACORN User Guide provides a detailed description of ACORN and gives a full description of the lifestyles and values of each of the 56 ACORN types. You can view and print the “ACORN User Guide” by following link below: –

ACORN User Guide

The first step for most B2C businesses is to profile their existing customer base using ACORN. Each customer record will be tagged with its ACORN type and the entire customer database can then be compared with the base population. From this you will see the ACORN types, with which your business does very well and those, with which it scores less well. Typically most businesses score highly with a few ACORN types – perhaps five or six – and then moderately well with another five to ten groups. Thereafter the scores tend to fall away.

The high scoring ACORN types are those, whose lifestyles, life stages, incomes, values etc. gel with the brand values of your business. These are the people most likely to respond to your promotions and the most likely to buy from you. Apart from existing customers and customer related prospects, these people represent the most cost effective target group for your business. As you move further away from these key ACORN types towards ACORN types that are less well disposed to your brand, response rates and conversion rates will decline and the cost of generating sales will increase.

Once you have established which ACORN types are key to your business, you can obtain maps, showing the concentration of these people, by postcode delineation and you can buy or rent mailing lists, including only people that fall within your key ACORN types. With this information you can develop well targeted advertising and lead generating campaigns, using a wide range of media that can be structured to focus primarily on your key ACORN types. And because you have a considerable amount of detail about these peoples’ lifestyles and values, you can ensure that the advertising messages are relevant and appropriate for the target audience involved.

As I’ve already said, I’ve focused on ACORN but there are other similar products available that do much the same thing. What is important for B2C businesses is that they start using these types of tools to improve the efficiency and effectiveness of their marketing and advertising and that they take a more structured, focused and targeted approach to lead generation. In so many markets, creating competitive advantage through product USPs, quality and service issues is becoming much more difficult, as playing fields level out; so competitive advantage is becoming increasingly dependent on smarter marketing, an important part of which is targeting the right people with the right offer at the right time.

If you would like to discuss any of the issues in this article with me or would like any further information.

Log on to my website: www.apbusinessconsultants.co.uk

Email me: anthony.pratt@apbusinessconsultants.co.uk

Call me: Office: +44 (0)1962 715899 – Mobile: +44 (0) 7770 816468

Are we about to see a renaissance in British manufacturing?

I was born in 1948 and grew up in what must have been the worst period, in history, for British manufacturing. It was typified by decline, poor productivity and strikes. My father was a buddy of Sir William Lyons, the founder of Jaguar cars and of Bill Heynes, Jaguar’s chief engineer, the man who designed the famous XK engine.  In those days, Jaguar was one of the most prestigious car manufacturers in the world; but there were plenty of other prestigious British manufacturers as well. However, during that terrible period, from the end of the second world war to 1979, we saw the remorseless decline of many of our manufacturing companies and, indeed, entire industries.

By contrast to my own background, my wife’s father, who I didn’t know until 1975, was a shop steward in the Steel Company of Wales’s plant at Port Talbot. He was actively involved in some of the crippling strikes of the 50s, 60s and 70s. He was also a buddy of Hugh Scanlon, the leader of the engineering union, the AUEW.

I mention all this to highlight the contrasting views and ideologies that I encountered in my youth and early adulthood and, therefore, the perspective that they have given me.

If we are to understand that period of decline, we really need to go back not just decades, but centuries.

Towards the end of the seventeenth century, the foundations of the British Empire were laid, with new colonies in North America. The empire continued to grow throughout the eighteenth century and was accompanied, first by the agricultural revolution and then the industrial revolution.

Agriculture became mechanised – one of my own ancestors was Jethro Tull, who invented the seed drill. There was a huge migration of people from the land to the cities. Steam driven manufacturing grew, as all manner of new machinery was invented. And transport systems were created, firstly with the canals and then the railways. Britain was leading the world.

The growth of empire and the growth of manufacturing drove one another. Raw materials were imported from the empire and finished goods were exported to the empire. It was a closed shop but, in 1776, it was nearly derailed, when the American Colonies declared independence. The key issue for the colonists was the control over their trade and manufacturing exerted by Britain. It’s interesting to speculate what would have happened if the government of Lord North, the Prime Minister at the time, had been more forward thinking and relaxed those controls, as the colonists had demanded. The US may now be an independent monarchy, within the Commonwealth, with the Queen as Head of State!

As it turned out, the loss of the American colonies proved to be a wobble rather than a show stopper. Despite setbacks, with various wars and recessions, 25% of the land surface of the world eventually submitted to British control. The Empire continued to grow throughout the nineteenth century and so did British Manufacturing.

Britain was dominant, politically, financially, commercially and militarily. But in the second half of the nineteenth century, things started to change. Bismarck united the German states to form the German empire and American industrialisation started to gather momentum. Japan was also beginning to industrialise. So the threats to Britain’s dominance were emerging.

The early years of the twentieth century saw the British Empire at its peak; but the cracks were beginning to appear. Then, of course, came two world wars, which wrecked the economies of Europe and Japan, whilst giving an economic stimulus to the US.

It’s what happened next that was, in my view, the defining factor. Germany and Japan, with American financial support, set about rebuilding their countries, their economies and their manufacturing industries. Britain, on the other hand, focused on developing the welfare state and, under American pressure, dismantling the empire.

However desirable Britain’s priorities may have been politically and socially, the consequences for manufacturing were disastrous. Without an empire, our closed shop disappeared and we were exposed to competition from other manufacturing nations, particularly Germany and Japan. Despite the magnitude of our earlier glories, we had never really encountered international competition on this scale before; and we proved wanting. But compounding the problem was the development of the welfare state, which consumed huge resources that may otherwise have been available to invest in manufacturing. Germany did, of course, develop its welfare systems but only after it had rebuilt its manufacturing base and could afford to do so. Finally, we had the un-mitigating disaster of nationalisation, which saw several of our key industries taken into public ownership and run by bureaucrats and politicians, who were managerially incompetent and prioritised political objectives over commercial ones.

Lack of investment, industrial unrest, over powerful unions and poor quality management all combined to decimate our manufacturing base during the 60s and 70s.

In 1979, a phenomenon called Margaret Thatcher became Prime Minister. Some people, including my late father-in-law, would say she decimated British manufacturing industry. I believe that, in the future, when historians can look back with complete objectivity, they will agree that the decimation occurred prior to Thatcher and that it was her government that established the foundations for its recovery in a very different world from the one that existed when British manufacturing was at its peak.

The Thatcher government did four key things. It addressed the union problem; it deregulated the financial markets; it privatised the state controlled businesses; and it stopped propping up inefficient businesses.

By addressing the union problem, managements were able to start managing their businesses, once again, without the constant fear of disruption and reprisals. This was a massive achievement.

The deregulation of the financial markets facilitated the availability of investment capital and venture capital, which are crucial to manufacturing industry. Despite the current problems, this was a hugely important move.

Turning back the role of the state meant that previously state owned businesses could become less politically driven, more commercially led, more dynamic and more capable of competing in world markets.

Not propping up failing businesses is probably the factor, for which the Thatcher government is most disliked because it resulted in large scale job losses and industrial wastelands in some parts of the country.

The underlying problem was that these companies and industries were operating in increasingly international markets and unable to compete. Propping them up might have worked, if during that time, they had adapted and changed; but they didn’t and the position became unsustainable. Maybe the process should have been extended over a longer period to reduce the amount of personal suffering; but it wasn’t and we are where we are.

Since 1979, we’ve seen British manufacturing shrinking, driven by competition from Germany, Japan and other nations too. We’ve also seen more and more outsourcing of manufacturing to China and the Pacific Rim, where labour costs have been much lower. Furthermore, our increasing wealth and standard of living, during the 90s and early 21st century, have been largely based on the success of banking and financial services not on manufacturing.

So where does all this leave British manufacturing? Are we going to let it go on declining or are we going to do something about it?

I believe that we are at a crossroads and that it could go either way; and which way it goes will depend on whether there are enough manufacturers prepared to grasp the nettle and do what needs to be done.

So what does need to be done? But before I answer that question, let’s look at some of the positive signs for British manufacturing that are already there.

The car industry has seen a huge renaissance. We’re producing more cars than ever before; and we’re seeing some real success stories – Jaguar Landrover: Honda: Nissan: Mini: Rolls Royce: Bentley: and others as well. But they’re mostly foreign owned; and I’ll come back to that point later.

We have other world class businesses such as BAE Systems in defence and aerospace, GlaxoSmithKline in pharmaceuticals and Rolls Royce in engines, turbines and power systems. So we can do it.

We have many excellent smaller manufacturers in specialist niche markets. So we have the ingenuity.

Our political leaders are, at last, beginning to understand that we have become too dependent on financial services and that we need a stronger manufacturing base. So we are likely to see more help and support for manufacturing over the next few years.

There seem to be some signs that the drive to have 50% of school leavers go on to university is creating huge problems by devaluing degrees, by promoting degrees that are of little practical value and by undervaluing trade and manual skills. So maybe the tide is starting to turn.

We’re also seeing the return of apprenticeship schemes and, although they may not be as good as we’d like, in the words of the Chinese philosopher, Lao-Tzu, “a journey of a thousand miles begins with a single step”.

So we need to take these positives and build on them. But first, let’s try and identify our core weaknesses, for which there are two interrelated clues.

The first is that we have outsourced huge amounts of manufacturing to China and the Pacific Rim because of cheap labour rates; and yet, for many products, labour is a relatively small proportion of the final selling price; so the gains are not always that big. Germany has, for many years, had higher labour rates than us but lower labour costs because of its higher productivity. It does outsource, particularly to Eastern Europe; but not as much as we do and, as a consequence, it retains a much larger manufacturing sector. Basically, they manage their production processes better than we do.

The second is back to the car industry. Our car industry is now world class. It employs British work forces and, within its organisational structures, most of the management is also British. But it’s largely foreign owned; German, Japanese and Indian; and their management styles and cultures have been able to influence their UK businesses in a way that has created stable, effective, efficient, well paid and well looked after workforces. They achieve higher standards of operational excellence than we do and they’re better at managing their people.

Despite the passage of time, British management still tends to be influenced by the period of empire, when we didn’t actually need to be that good and by the culture of welfare that promotes “the world owes me a living” attitude.

The Germans have shown that, in many instances, high productivity can support high wages and successful manufacturing. Our own car industry shows that British workforces can perform at world class levels. The real weakness we have – and many manufacturers won’t like me saying this – is the way we run our businesses and the way we manage our employees.

Governments and banks have a significant influence; and the economic conditions that have existed since 2008 have made life much more difficult for manufacturers; but they aren’t the core underlying problems.

There is now a real chance for a renaissance in British manufacturing. But, for this to happen, owners, shareholders and directors of manufacturing businesses, from the smallest to the largest must come to terms with their strategic, operational, organisational and leadership weaknesses. And then they must put plans in place to address those weaknesses and create the levels of excellence that others have proved are achievable.

If manufacturers can grasp this nettle, the future for British manufacturing will be bright. If they don’t, there are likely to be several more generations of decline.

The Value of Business Advisors and Consultants to SMEs

I recently circulated an email promoting my services and amongst the replies, I received, was this one: –

Anthony
Many thanks for your kind offer for ————.
Unfortunately X——— was recently placed in Administration but when I “resurface” I may well revert back to you.

Kind regards

Y————

I don’t know “Y” and I have no knowledge of either the business or the circumstances surrounding its demise. But, my immediate reaction was a sense of frustration. I would, of course, be pleased to help Y in the future, as he implied but, if I could have started working with him perhaps a year ago, we could have possibly turned his business around and prevented this tragic outcome. Y’s prospects would now be considerably better and his employees would still have jobs.

To be fair, Y may have brought in business advice and support and it may not have worked. But, in practice, many struggling businesses don’t or, if they do, they leave it too late. And that’s the basis of my frustration.

When an established business fails, it is very rarely a sudden event that comes completely out of the blue. It normally happens after a comparatively long period of decline that could, in some cases, take several years. In fact, it never ceases to surprise me how long some businesses hang on before they eventually succumb to the inevitable.

Businesses that are institutionally owned or part of larger corporates, generally have structures and processes in place that are better able to identify potential threats at an early stage; so remedial action can be taken long before any serious harm is done. If CEOs and management teams are found unable or unwilling to respond appropriately, they are replaced. It’s a fairly clinical process; albeit not very pleasant, if you’re the person being fired.

In the case of owner managed businesses, these structures and processes aren’t normally as robust and often don’t exist at all. So the identification of weaknesses and threats tends to be left to the owner manager plus, perhaps, a small team of directors working for him/her; and this isn’t always easy because their main focus is managing the day to day activities of the business, which can often obscure some of the more strategic and broader based issues.

However, irrespective of the ownership of the business, threats and weaknesses need to be identified and addressed at the earliest opportunity to prevent a crisis from arising. If this doesn’t happen, the number of options starts to reduce, profits decline, cash becomes tighter and the ability to fund the change programme, that is needed to achieve a turnaround, is undermined. The business then slides inexorably towards collapse.

Owner managed businesses tend to be more susceptible to this problem than institutionally owned businesses or those that are part of larger corporates. This is partly for the reasons I’ve already explained – lack of focus on strategic factors – and partly because owner managers can sometimes become overwhelmed and unable to find solutions.

There is also another factor that needs to be considered.

If a management team has been running a business that is either in crisis or which is sliding into a crisis, it is unlikely that the same management team, on its own, will achieve a turnaround.

There are, undoubtedly, exceptions to this but, generally, it holds true; and it is one of the main reasons why CEOs and other senior directors of institutionally and corporately owned businesses are replaced.

For the owner managed business, the position is, in many ways, more difficult. An owner manager is unlikely to fire him/herself; and even if he/she did, who is going to run the business in their place? However, if the owner manager has managed the business, as it has declined, the chances of him/her turning it around, on his/her own, are not great. If the skills and experience had been there to do so, the decline would have been arrested much earlier.

Let’s now consider why businesses get into trouble to start with. A successful business creates and maintains a sufficient level of competitive advantage in its market(s) to remain sustainable. The really successful ones develop strategies that enable them to build on this and increase their competitive advantage over the medium and longer term. A declining business may have created significant competitive advantage in the past and maintained it for a time, but its decline indicates that it is now losing whatever competitive advantage it may have created.

Competitive advantage isn’t just getting things like price, quality, delivery and service right; as important as those factors are. It is about creating advantages over competitors across a whole range of factors that are important to the market concerned. However, markets are continually changing; so something that provided a competitive advantage yesterday may not do so today; but something else might. So businesses need to be continually adapting in response to the market. It’s a journey without an end. For anyone interested in reading more about competitive advantage, I have written an earlier article, which you can read at: –

https://anthonypratt.wordpress.com/2011/11/30/competitive-advantage-what-is-it-is-it-dangerous-does-it-hurt-do-i-really-need-to-understand-it/

Markets go through their various cycles of growth, maturity and decline; economies go through cycles of boom and bust; and the time frames of all of this are often inconsistent and unpredictable. In the right conditions, when a market is buoyant, the strongest businesses will grow, prosper and make large profits; and most others will survive reasonably comfortably; but, even in these circumstances, there will be some that just can’t make it work and which fail. However, when market conditions become adverse, the strongest businesses will still grow and prosper but they will mainly do so by taking market share from the not so strong. As a result, for many that were previously surviving comfortably, survival starts to become more challenging and, for the weaker businesses, survival becomes very difficult and increasingly impossible.

Let’s now consider a business that has been reasonably successful and surviving comfortably but which starts to see its performance decline, as market conditions change. There are really only two possible outcomes.

The first is that it responds to the changing market circumstances, adapts appropriately and remains successful, albeit with a bit of a blip, while it grapples with the change that was needed.

The second is that it doesn’t respond or responds inappropriately and continues to decline.

For the first outcome to be achieved, there is a prerequisite that the business correctly identifies the changing circumstances in the market and that it then develops appropriate strategies to address those changes. Identifying the changes is often reasonably straightforward because there is usually plenty of discussion about it within the particular market and its trade press. Developing appropriate strategies to address those market changes is much more difficult and usually involves a degree of risk.

This is where institutionally owned businesses and those owned by larger corporates often have an advantage. The CEO and directors have access to external resources that can support the business financially through change programmes and provide a broader base of experience. This combination means that new strategies and change programmes are likely to be more robust and incur less risk.

For the owner managed business, the challenge can be much greater. Limited resources mean that you can’t afford to get it wrong. But there is often much less experience available, other than that of the owner manager and his/her team; and there can be a very limited capability of testing and challenging the strategies that are developed. So the risk of getting it wrong tends to be higher.

The risk of change can also lead SMEs to do nothing, which, set against changing market dynamics, can actually be just as risky or, in some circumstances, even more so.

When you start to think about all of this, from the perspective of an owner manager, it can all become very daunting and can lead to inertia, inappropriate strategies and panic, all of which, in the face of changing markets, leads towards administration.

This may all sound very gloomy; so we must remember that most owner managed businesses don’t fail and a minority remain very successful indeed; although it’s probable that the majority underperform and never achieve their full potential. But there are also a considerable number of owner managed businesses, for which the scenario I have painted is very real. So how can you prevent your business from being one of them? And how can you ensure that it achieves its full potential? I would ask you to consider the following points: –

  • Ensure that you have enough feedback from the market to know what is going on in it and the trends that are developing. This doesn’t necessarily have to be in the form of expensive market research. But most businesses have some form of sales function, which is out and about in the market; so listen to it. Similarly listen to suppliers. Read the trade press; attend trade shows and exhibitions. And network; keep talking to people at all levels and in all sectors of your market. Then bring together appropriate groups of your own employees, at regular intervals, and maybe invite an outsider or two, with relevant experience; throw everything into the pot and then distil out the facts from the fiction.
  • Make sure that your business is responding appropriately to the facts i.e. the changes in the market that are definitely happening; but maintain a watching brief on the fiction until it is either confirmed as a fact or is dismissed as being incorrect.
  • Be totally objective and non-partisan about the competitive advantages that your business has in the market place. How real are they? How important are they to your customers? How does each competitive advantage, you have, rank against those of your competitors? In each case, are you gaining ground or losing ground? Are some of the competitive advantages that you have declining in importance in the market place? Are you developing competitive advantages that are increasingly important to the market? Do the competitive advantages you have cover a broad enough spectrum or are they too narrow? Are you developing new competitive advantages that expose weaknesses in your competitors? If you have the answers to these questions and others like them, you can begin to understand the direction, in which your business needs to go.
  • Develop, a “Business Improvement Plan”. This should have short, medium and long term goals. The medium term goals should move the business in the direction of the long term goals and the short term goals should move it towards the medium term goals. It doesn’t matter how strong and successful your business may be, there isn’t a business in existence that couldn’t do better somewhere or somehow. And a business improvement plan is a template that will under pin progress. However, a business improvement plan needs to be dynamic; and if market conditions change or the business’s circumstances change, the plan must be adapted accordingly. Moreover, the plan should, at all times, guide the decision making process so that the business is heading resolutely towards the achievement of its various goals and milestones.
  • When things don’t go according to plan, as so often happens, face up to it sooner rather than later. CEOs, owner managers and directors all tend to put a lot of personal kudos behind the various strategies they implement; and it can sometimes be very hard to accept that you’ve got it wrong. I’m not suggesting that you should change course every time there is a hiccup but, as patterns start to emerge, don’t allow yourself to start tilting at windmills; if you do, your business will soon be on the slippery slope. When things start to go wrong, the sooner you act, the more options you have, on which to base a recovery and the more likely you are to turn the position around.
  • Think very hard about the resources and experience you really need; and don’t penny pinch. This is particularly relevant to owner managers, who all too often spoil the ship for a ha’porth of tar. However, don’t be over ambitious with your objectives and ensure that they are within your ability to resource.
  • Bring in external help and support to plug the experience and skill gaps that your business inevitably has.

The seventh point is probably the most critical because it is fundamental to the achievement of the first six.

For most SMEs, external help and support can probably be split into three types, namely: –

  • The outsourcing of specific services
  • Mentoring, coaching and training
  • Business advice and support

The outsourcing of services refers to such things as IT, HR, Health & Safety. In some cases, it may also include operational activities such as logistics.

There are arguments for and against outsourcing of this type; and there isn’t a “one size fits all” answer. But most businesses, in this day and age need efficient IT systems, good HR management and a keen focus on health and safety. But smaller businesses often struggle with the half person syndrome, where they can’t really justify a full time person; so outsourcing may be the answer, particularly if it can provide a much broader base of skill and experience. What is crucial is that these services are comprehensive, appropriate, efficient and cost effective. And my advice is to be open minded and objective about how this is achieved.

Mentoring, coaching and training are often overlooked by SMEs because they can’t afford them and they’re “nice to haves” not “need to haves”. However, as you build the skill sets within your business over those of your competitors, you increase your competitive advantage; and the bigger the gap in skill sets that you can create, the bigger the competitive advantage you develop. Many owner managers accept the need for staff training but relatively few think about their own training and development. Yet, this is actually at least as important, and probably more so, because the consequences of their decisions and leadership are likely to be much more profound than those of their employees. More owner managers are now beginning to engage business coaches and mentors to help them develop their own skills and competencies; and most who do acknowledge that it helps them enormously and adds real value to their businesses. However, if this is the case, the gap between the coached and the uncoached will open up giving an increasing competitive advantage to the coached. So like it or not, the pressure on owner managers to “up their game” is now increasing.

Business advice and support can be achieved through the engagement of non- executive directors, management consultants or a combination of both. The difference between this type of service and that delivered through coaches and mentors is that business advice deals with the development of strategies and processes for the business, whereas coaching is concerned with the development of the individual director or owner manager.

Businesses that are institutionally or corporately owned are monitored, supported and evaluated, in many different ways, by external shareholders. Wider external skills and experience are available by default, as is a significant degree of objectivity. Pressure can also be brought to bear on CEOs and management teams to address weaknesses and threats. None of this is true for most owner managed businesses; and it can undoubtedly give institutionally and corporately owned businesses a significant competitive advantage over them.

It is for this reason, that owner managed business should at least consider the engagement of some form of external support, of which there are probably three different types.

The first is regular advisory input to develop strategies, structures and processes; to monitor performance, identify threats and opportunities; and to provide general advice across a wide range of business and management issues. This type of advice will draw on broad based experience that is gained predominantly from outside the business concerned. It will be more objective and will act as a balance against the more subjective, more intense but narrower field of experience that exists within the business. If structured correctly, this will deliver more robust strategies, stronger financial performance, improved competitive advantage and greater long term sustainability. A good non-executive director or a competent business advisor should be able to provide this type of service on the basis of a few days per month; so the cost does not have to be high and the potential advantages are substantial.

The second is project based consultancy. This is where a business may have a particular problem or issue or wish to develop an opportunity that has arisen. There may be insufficient skills or resources to tackle whatever it is; so outside help is required. In these circumstances, the choice of consultant will be determined, to a very large extent, by the nature of the issue involved. A production related issue will require appropriate production skills and experience; a logistics issue will require appropriate logistics skills and experience; and so on.

The third is where the business is under performing and facing an increasing risk to its long term sustainability. Unfortunately, this is a far more common problem than many of us would wish and, in far too many cases, is not being addressed. Under these circumstances, a consultant would undertake a full review of the business, identify, quantify and qualify the threats and weaknesses and develop strategies designed to address those strengths and weaknesses, as well as strengthen the business’s competitive advantage. In many instances, consultants will also be able to help manage the implementation of the change programme.

In practice, a business review of an underperforming business or a project based consultancy may be undertaken on the recommendation of a non-executive director or business advisor. Similarly a project based consultancy, the appointment of a non-executive director, the engagement of a business coach etc. could be an outcome of a business review. So all of these means of help and support can be interlinked to produce the desired outcome. But this is where, for many owner managers, things can become confusing and appear to have the potential to run away with the cash. So I’d like to finish this article with a few words about how to select the support you need and how to keep control.

If your business is performing well, you’ve been growing and developing it successfully, you have good market feedback, you’re developing strategies to address market change and exploit market opportunities, then you have a great business model. So whatever you are doing doesn’t need fixing; just carry on and don’t be tempted to hire people that can’t add any more value. However, if you’re in this position, you’re almost certainly amongst a fairly small minority.

If, on the other hand, you could, with the right kind of support, build a stronger and more successful business or turnaround an underperforming business, then you would be well advised to consider the type of support you need.

Is there a particular part of the business that is weak and letting down an otherwise strong organisation? If so look for expert help in that area and bring it in.

If you personally feel out of your depth and are struggling, then perhaps some form of business coaching or mentoring would help. Or perhaps you should engage a business advisor or non-executive director to provide advice, act as a sounding board and oil the decision making process.

If the business is struggling strategically or operationally, perhaps a business review would help give it some direction and focus, particularly if this was followed up with the development of a business improvement plan.

However, the problem for many owner managers is that they know that they need some support but find it difficult to establish what kind of support would be best for them. If this is the case, a business review can be very useful because, it will take an objective view of the business, including the role and contribution of the owner manager. And one of the outcomes should be the type of support, from which the owner manager would benefit.

So in essence, if you’re clear about the type of support you need, go for it; if you’re not, consider an external business review and let that guide you.

However, whatever type of support you require, remember that you are searching in an unregulated market. There are some excellent practitioners, who will be able to help you but there are also some not so good ones. So do a proper search, make sure that the people or firms, you select, have the appropriate experience and track record; and it’s usually best if they have, at least, some knowledge and experience of your industry sector.

Finally, fees are normally based on daily rates plus expenses. What is important isn’t the daily rate; it is the added value in relation to the total cost of the service. If one consultant charges half the fee of another but takes three times as long to deliver and creates only half the added value, he/she will have ended up charging more money for a lesser result, even though the daily rate was much lower. It’s a bit of a minefield and, within reason, its best to make a judgement based on your confidence in the consultant to deliver the outcome you want, for a cost that is acceptable, rather than the headline daily rate.

I hope that you’ve found this article useful; and I’ll be pleased to discuss my own consultancy services with you at any time.

Should SMEs make more use of Business Advisors and Consultants?

The straight answer is almost certainly “Yes”. But I would say that wouldn’t I? I’m a consultant.

Let’s start with the rather well-worn joke about consultants.

“You engage a consultant, who then borrows your watch, tells you the time and charges you a large fee for doing it!”

I’ll be the first to admit that there is some truth in this. Business consultants & advisors can be engaged for many different reasons. In many large businesses and, particularly, in the public sector, consultants are often used to support or challenge strategies that have or are being developed. The reason for engaging them may be “political” in the sense that there are opposing factions for and against a particular strategy and the consultants become de facto adjudicators. Furthermore, if a well know firm of consultants is supportive, the strategy must be OK; mustn’t it? And, if things do go wrong, some or all of the blame can be offset. In these circumstances, the use of consultants is more about internal politics and minimising the risk to individuals’ careers rather than adding real value to the organisation; so there may well be an element of borrowing your watch to tell you the time.

However, this doesn’t tend to happen in the SME sector, which is generally much more resistant to the use of consultants for any purpose. So why are small and medium sized businesses so averse to the use of external advice and support?

In my experience, there are three main reasons: –

  1. Management dynamics
  2. Not fully recognising the added value consultants can create
  3. Cost

So what do I mean by “Management Dynamics”? Well I think that it involves several different threads. Many owners and directors of SMEs are charismatic, larger than life entrepreneurs, who have taken risks, often run by the seat of their pants, worked incredibly hard, overcome all manner of setbacks and ultimately created a successful business, of which they are justifiably proud. And they really don’t want outsiders coming into their business, picking holes in what they’ve done and trying to change it into something different. In many ways, it’s similar to an outsider trying to interfere in a relationship between a parent and a child.

However, in just the same way as a parent will sometimes overlook the shortcomings in their children, an owner or director of an SME can overlook the signs that not all is well within his/her business. But sometimes the issues presented by a child require some form of external intervention; this may involve developing strategies with the child’s school, perhaps with the GP or even a social worker. For parents, coming to terms with this can be very challenging emotionally, and acting on it can be very difficult indeed. But by not engaging in this way, the child’s future could be seriously compromised. It’s much the same with a business; and owner managers and directors of SMEs can find it very hard to accept the need for external advice and support.

For directors, who manage businesses that are institutionally owned or part of larger corporate organisations, it’s not quite such a difficult issue because the shareholder(s) will be monitoring performance, taking an external and broader based perspective and ensuring that the directors are taking appropriate action to meet the various financial targets and strategic objectives that have been agreed. The owner manager has no one to help keep him/her on track; and that can be both difficult and lonely. But it’s where a good independent business consultant can help. A consultant can’t act with the authority of a majority shareholder but he/she can bring considerable experience and a broader based perspective. Coupled with the drive and resolve of the owner manager, this can be a powerful combination that moves the business forward to an extent that could not otherwise be achieved. There are examples of where this happens very successfully, in many different sectors; it just doesn’t happen enough and, as a result, too many businesses under perform and struggle unnecessarily.

The second reason why owner managers and directors of SMEs don’t engage business advisors and consultants is that they sometimes don’t recognise what these people can actually do. Furthermore, they can often be put off by the image that consultants can sometimes portray.

At times, the image issue is not helped by consultancy firms at both the top and bottom ends of the spectrum.

At the top end, there are many stories, within small and medium sized businesses, about large consultancy firms engaged by SMEs, where the outcome is anything but satisfactory for the owners and directors. A partner, from the consultancy firm, may appear at the initial meeting, but most of the work is undertaken by bright young graduates with plenty of confidence and jargon, but little experience. In many instances this happens on the recommendation, or even the insistence, of a bank. Unfortunately, banks can add to the “borrow your watch syndrome” because, very often, all they are looking for, from the consultancy process, is reassurance; and the outcome from this type of consultancy process gives them the justification they need for a lending decision or even the appointment of an administrator. It’s not really designed to add value to the business; but the owners/directors are still faced with a large invoice, which they have no option other than to pay.

It would be entirely wrong to dismiss the large consultancy organisations as charlatans. Many of them are world class and at the cutting edge. Furthermore, many developments that benefit businesses of all types and sizes originate from these organisations. It’s more a question of horses for courses. The large consultancy firms are really geared to the needs of large projects for large clients. They are often less able to support the needs of SMEs, as effectively.

At the other end of the scale, there is a large turnover of people that move in and out of consultancy and never become experienced consultants. Very often they are people who are “between jobs” or people who think they’ll have a go at consultancy but don’t make a go of it and then go back into full time employment. However, it would also be wrong to dismiss all of these people as being bogus. Some newcomers quickly establish a niche position and grow from strength to strength, providing their clients with a first class service. Some people, who are between jobs, have great skill sets that SMEs can make use of for short periods; and, of course, some of these start by working on a consultancy basis and end up as full time employees. From both the employer’s and employee’s viewpoint, it’s a great way of establishing if there’s a good fit.

But, unfortunately, there are quite a number of people within this category, who are playing at consultancy for short periods, not delivering any real value and even pulling out of projects before they have been completed. Unfortunately, they can, and sometimes do, tarnish the reputations of genuine independent consultants.

On a much more positive note, between these two ends of the scale, there are some extremely good business advisors, mentors and consultants, able to provide SMEs with high quality and effective support that adds real and significant value to those businesses. Some work within small firms, others are individuals working on their own; but they all share a professional ethic and take their responsibilities to their clients very seriously.

You can probably classify these consultants into two groups. The first is those that offer a particular skill set, such as IT, marketing, production, logistics, HR, accountancy, etc. The second group provides more general business advice; it’s this second group that I belong to.

It’s probably easier to categorise the services that the first group provide because what is written on the lid is generally in the box. In other words, the services that, for instance, an IT consultant provides, are fairly obvious. However, a potential client needs to bear in mind that many of these small consultancies may be operating within specific markets or sectors, for which they are extremely skilled but they may have less to offer businesses, in different sectors.

In practice, SMEs use consultants with specific skill sets quite routinely; but these consultants tend to work on clearly defined projects under tight control. Furthermore, the boundaries, between consultancy and outsourcing, often become blurred. For example, an IT consultant may be engaged, initially, to address a specific problem or issue but, once this has been resolved, on-going IT support may be outsourced to the same consultant. It is the consultants that provide more general business advice and support that tend to be kept at arm’s length by many SMEs. So let’s examine what it is that these consultants can provide?

The simple answer is: “Experience”. Most consultants, in this category, are likely to have had senior management experience, at an earlier stage in their careers. They understand the fundamentals of running a business. They’ve had successes and failures. They’ve seen different ways of approaching problems. They understand the pressures that business owners and directors are under and they can empathise with them. They are realistic about the restrictions imposed by limited finance, resources and skill sets. They understand the need to carve out practical strategies that can exploit market opportunities, within the limitations that exist. In addition to this, the very fact of being a consultant means that they see many different businesses, working in a wide variety of ways and can, therefore, bring a much broader perspective to the development of solutions and strategies.

Let me give you a couple of examples, with which I’ve personally been involved.

I was called in by a client, who had a sales and marketing problem. The strategy they were pursuing wasn’t delivering the level of sales they expected and they wanted some help in deciding what to do about it. I analysed, in detail, the various activities, in which they were engaged, the results they achieved and the costs they incurred. There was actually very little wrong, except that the whole process was being significantly under resourced, for the level of sales they were targeting. However, there was no cash available to address that problem; so I looked at other areas of the business and identified significant under performance in production. Both direct labour and material consumption was far too high and, if this could be addressed, it would release the cash they needed to support sales and marketing more effectively.

I was not the right person to work with this client to sort out the production problem; but my experience was sufficient to enable me to show them that this is where the route of their difficulties lay. They were then able to take appropriate action and, by introducing improved production systems, they gradually resolved their marketing problem.

My second example also starts as a sales and market issue. The client, a home improvement business, was struggling with low margins. They had screwed down their costs as much as they possibly could but their margins were still much too low. They tried to increase their selling prices but, every time the price went up, volume fell back significantly. And yet their market intelligence was telling them that their unit selling price was well below that of many of their competitors. So they were stumped. I undertook a profiling exercise of their customer base and found that their core customer profile was younger couples in their first homes. These customers were not interested in buying top of the range products but were looking for bargain basement products that would tidy up their homes, make them better to live in, in the short term, and easier to sell, when they moved on, in a year or two’s time. However, the product, the client was supplying, was premium not budget.

There were only two possible solutions. The first was to reposition the brand in the market, targeting buyers of premium products, prepared to pay premium prices. The second was to maintain the existing brand position and selling price but supply a budget product that was cheaper to produce.

On the basis that changing market position is very difficult, very expensive and would, in any case, take a long time, the solution was to change the product. This is what they did and, ultimately, it meant changing supplier.

Would these two companies have reached the solutions without my involvement? Possibly; but nothing like as quickly and the costs of delay would have been considerably more than the fees they paid me.

These are practical examples of ways, in which a business advisor can help. They are both project orientated, where the consultant (me), was engaged for a specific project, at an agreed fee, went in, did the work and then withdrew. However, business advisors and consultants can often be retained to provide on-going support on a regular basis; a day or, perhaps, two days per month. This enables them to maintain an on-going involvement with the business, review performance each month, help identify problems, develop the best solutions and look for opportunities and ways of exploiting them. All of this can be very difficult for owner managers and directors of SMEs because they tend to be immersed in the day to day activities of the business with very limited opportunity to stand back and take a wider and objective view. And this is why so many SMEs fail to optimise their performance and why some eventually fail. The consultant provides much of the external perspective and objectivity that an institutionally owned business or a subsidiary, within a group, would gain from its shareholder(s).

Another advantage of retaining a business advisor or consultant is that, if specific projects emerge that require a consultancy input, the consultant is already there and has no learning curve to go through. This means the project can be completed quicker, more effectively and at a lower cost.

We’ve looked at one off projects and on-going support. But there is a third area, in which a business consultant can help. Remember that these people have invariably run businesses in the past; so they can step in, where necessary – short term – in an operational role to manage the introduction of a change programme or stand in for a senior manager/director, who may be sick, have resigned etc.

In my view, the best and most effective consultancy, of this type, derives from building relationships, based on mutual trust and respect. A consultant, who is retained for a day or two a month, builds up knowledge of the business, which steadily increases the value of his/her work and provides an additional skilled resource that can be deployed, as and when required.

The third and final reason for SMEs resisting the use of business advisors and consultants is cost.

Consultancy costs vary enormously from a few hundred pounds a day for the casual consultant, at one end of the spectrum, to a few thousand pounds a day for a partner of a large consultancy firm. So it’s fairly meaningless to talk about average costs. However, most good independent business advisors and consultants are probably positioned at £1,000 per day or below. My own fees are significantly less than that.

Because you only engage a consultant for a one off project or for just a limited number of days each year, your annual consultancy costs should be modest, predictable and controllable. Furthermore, most responsible consultants will not try to leverage up their fees to a level that becomes a burden on the business. Most will structure the consultancy so that it is affordable. After all, they have no interest in giving you a cash flow problem and not getting paid!

So the issue really comes down to whether you think you are getting some value in return. I would argue that an effective business advisor or consultant, working two days a month, in most SMEs, would add considerable net benefit to the bottom line.

The problem for most owners and directors of SMEs is that, at the outset, the costs of a business advisor or consultant are defined, whereas the benefits are, to some extent, speculative. In addition, most business owners and directors become more risk averse in tough times. So a speculative punt on a business advisor becomes much less likely.

The irony is that the skilled business advisor or consultant can often make a larger positive impact on the bottom line, when times are tough, than when they are buoyant. And to illustrate the point, I’ll recount a piece of work I’ve done recently.

For obvious reasons, I’m not going to publish any clues as to who the client may be; all I’ll say is that it is a £5m T/o business that has been trading for about four years. So it’s done well to achieve that level of growth in a comparatively short time. Its directors are intelligent, skilled and very industrious people, with high levels of integrity. I was approached by them in the last quarter of 2011 because they had cash flow problems. They were very open and honest, with me, about their position and I worked, with them, to establish why they were in their current predicament.

They had never made big profits because they had been funding their impressive growth. However, during the latter part of 2010 they started making losses and during 2011, they implemented a cost cutting programme to try and stem those losses. But it didn’t work because, although their overheads fell, their margins came under pressure and their gross profit declined, by more than the reduction in overheads.

I undertook some detailed analysis and found that the margin erosion was due to two factors. Firstly, they had started chasing volume. They cut their prices and took more risky work. As a consequence, their margins fell and their bad debts increased. Secondly, by cutting their overheads, they had taken away some of the key controls in the business, without replacing them with automated or more efficient systems. Consequently their procurement process was out of control and material costs increased significantly.

I worked with them to review, restructure and properly resource their systems and processes in order to regain control. We also introduced more effective credit control and stopped chasing volume.

When I first became involved, the business was, in all probability, heading towards administration. It’s now back in profit and starting to generate cash. There is still a long way to go; but it’s out of intensive care and the prognosis is now for survival and long term sustainability. Without my involvement, that would not have been the case.

My total fees and expenses amounted to a little over £6,000 plus VAT. I leave you to consider the added value that this expenditure created.

The directors of this business took a leap of faith by engaging me, I ensured that the fee structure was manageable and, between us, we got the result we wanted.

It goes without saying, that you must be very clear about why you engage a business advisor or consultant and that you are careful about whom you appoint; but if more SMEs would take the leap of faith, taken by my client, there would be many more strong balance sheets and considerably fewer casualties, particularly when market conditions are tough.

Market Share – One Critical Leg of a Three Legged Stool

Here’s a quote from BBC Business News on 31st January 2012: –

“In the 12 weeks to 22 January 2012, Tesco’s market share dropped to 29.9%, the lowest since May 2005, research firm Kantar Worldpanel said. Tesco has described its Christmas trading period as “disappointing”, after like-for-like sales fell 2.3%. In contrast, Sainsbury’s and Iceland both gained market share. Sainsbury’s edged up from 16.6% a year ago to 16.7%, its strongest hold since March 2003. Iceland’s share rose from 1.9% to 2.1%, its best share for 10 years.”

One of the key measurements of success for supermarkets is market share. In this quote, we see Tesco under pressure because it has lost market share during the last Christmas trading period; and Sainsbury’s and Iceland glowing because they’ve gained market share.

Supermarkets allocate large budgets to researching market shares and they have very sophisticated data capture systems to provide them with detailed market share information. They look at market shares by product, by time frame, by region, by store and probably by many other criteria as well.

They don’t do it for fun; so why do they do it?

There are, no doubt, a myriad of reasons ranging in importance; but there are really three key measurements of business performance and sustainability. These are: –

  • The Profit & Loss Account (P&L)
  • The Balance Sheet
  • Market Share

The P&L tells us how much money was made or lost over a specific time frame; a month, a quarter, a year etc. By implication, it tells us how effective and efficient we are as a business and it helps us identify areas of operational strength and weakness.

The balance sheet tells us how strong we are financially; our working capital, our gearing, our net worth etc. If we’re making profits our balance sheet is building and we can use it to help us make decisions about future investment, growth, development etc. If we’re losing money, it helps us understand how long we can sustain those losses and what financial resources we have to help achieve a turnaround.

Market share tells us how well our business strategy is working. If we’re losing market share, we lack competitive advantage, our competitors are outperforming us and our strategy clearly isn’t working. If we’re increasing our market share, we have created competitive advantage, we’re outperforming our competitors and our strategy is working.

Sales growth or decline and market share should not be confused. If the market is growing and your business is also growing, you will still be losing market share, unless your growth is equal to or greater than that of the market. If you’re growing but losing market share on a rising market, you’re benefiting from the growth of the market, but you’re still under performing, relative to your competitors and, as soon as the market turns and starts to fall, which it will do at some stage, your rate of decline will be greater than that of the market; and, as I’ll show later, this could be catastrophic.

Similarly your sales could be falling but, if the market is falling even faster, you’re still in a position of having competitive advantage; and this could put you in a strong position, when the market stabilises or, in extreme circumstances, it could give you more time than your competitors to develop a diversification strategy.

Strategically, the relationship between the P&L, the balance sheet and market share is all important and the messages coming back from each need to be considered together, if you’re going to make the best decisions for your business.

If you have a strong balance sheet, your P&L is showing very healthy profits and you’re gaining market share, then your business is in pole position; but realistically only a minority of businesses achieve this and maintain it for very long. At the other extreme some businesses have very weak balance sheets, are incurring significant losses and are losing market share. Realistically, many of those are heading for collapse. Most businesses lie somewhere between those two extremes; but in tough trading conditions, businesses are pushed down the scale and in buoyant conditions, they are pushed up the scale.

Consider a few scenarios.

Scenario 1: Take a business that has a strong balance sheet and is very profitable, but which is losing market share on a rising market. Its P&L suggests that, operationally, it is efficient and well managed. Its balance sheet suggests that it has plenty of resources for investment and development. However, its loss of market share suggests that its strategy isn’t delivering; so, despite a strong financial performance, all is not well. No business can survive indefinitely if it continues to lose market share. But because it has a strong balance sheet, this particular business can afford to invest in a detailed review of its strategy as well as the development and implementation of a new or reconfigured strategy. And that is what it should do.

Scenario 2: Let’s take an almost identical situation except, this time, let’s assume that the balance sheet is much weaker. The problem is the same. The strategy isn’t working; but the ability of the business to fund a major strategic rethink and change programme is much more limited. If no strategic change is brought about, the business will ultimately fail; that’s inevitable. But the weak balance sheet means that the resources available to fund the change programme are much less, as is the room for error within the change process itself. The rate, at which change can be achieved, is also likely to be much slower. So the risk to the business is much higher than is the case in scenario 1; and, although it doesn’t mean this business can’t be returned to long term sustainability, it’s going to be much more difficult than it will be for the business in scenario 1.

Scenario 3: Consider a business that has a reasonable balance sheet, is gaining market share but is delivering very low profits. Is this the “busy fool syndrome”? Is this business buying business? Is it simply selling too cheap? If it didn’t know what was happening to its market share, how could it answer those questions with confidence? The answer to this last question is that, “it couldn’t”.

These three scenarios illustrate how the P&L, balance sheet and market share data can be used together to understand the performance of a business and help identify if and where strategic change is needed.

I now want to describe two real examples. These are based on fact; although I am not identifying the businesses for reasons of confidentiality.

I’ll call the first business “Company A” and will describe it as a significant player in the home improvement market. It was very profitable and operationally well managed. It also had a strong balance sheet. I undertook a market share analysis and found that, for a number of years, it had been gaining market share on a rising market; so during that period its strategy was working well. However, its increasing market share then reached a plateau, after which it started to fall. But, for a time, the decline in market share was masked because the market continued to grow and Company A also continued to grow, but at a lesser rate than the market. During this period, the business continued to make healthy profits; but the warning signs were there. The strategy that had worked so well in the past was no longer providing the competitive advantage that the business needed to stay ahead of its competitors. At this point there needed to be a fundamental strategic review and the development of a new strategy, capable of recapturing the lost market share and then gaining further share beyond that. This didn’t happen; the market then started to fall and Company A found itself losing market share on a falling market. Despite its operational efficiency, sales volume fell, to the point where there was insufficient critical mass, and the business eventually went into administration.

The real point of this story is that the main focus was on the P&L and balance sheet, both of which remained strong for a considerable time, while market share was declining. The business was balancing on a two legged stool that eventually toppled over, rather than sitting on a three legged one, which would have had a much greater chance of remaining upright.

My second example is another home improvement company, which I’m calling Company B. Company B is a successful and profitable regional player. The business had been using local radio as a means of advertising for several years. However, its trading area didn’t fit easily into any of the broadcasting areas of the available local radio stations. This meant that it had to utilise several local radio stations rather than just one or two; and furthermore, there were large gaps with no radio cover at all. The costs were high and the cover not complete; as a result, Company B decided to analyse the sales that it could attribute to local radio advertising. Its conclusion, based on this analysis, was that local radio advertising wasn’t cost effective. However, before the business withdrew from radio advertising, I was asked to consider whether there might be other ways of measuring the results.

I used published market data and found a way to calculate Company B’s market share, based on relevant postcode delineation. I then overlaid this with the local radio stations’ broadcasting areas. The results were interesting because, whilst the original sales analysis showed relatively few sales directly attributable to radio advertising, Company B’s market shares were much higher in those areas covered by radio advertising than those that were not. In principle, this wasn’t unexpected but the differential between the hotspots within local radio broadcast areas and the cold spots, where there was no radio advertising was substantial.

In this example we see market share information being used more tactically than strategically; but without it, the wrong decision could have been made. In the event, Company B continued to use radio advertising.

Now let’s go back to the supermarkets. They put so much resource into market share analysis because they need to be able to measure the effectiveness of their strategies and tactics at very regular intervals. They can then make informed decisions at an early stage and, by so doing, optimise their financial performance and identify problems at the earliest possible opportunity.

Most large FMCG organisations rely heavily on this type of analysis and research. But as businesses move away from FMCG, there tends to be less emphasis on market share research and analysis. In the SME sector there is often very little. However, for the reasons I’ve outlined, most businesses need to have a reasonable fix on their market shares and, if they are to optimise their financial performance and remain sustainable in the medium and long term, they need to respond to the messages that are conveyed.

In many markets, where market research is much less sophisticated and much less frequent than is the case in FMCG markets, it is usually possible, with a little thought and ingenuity, to use published market research data to provide a reasonable basis for market share calculations. It won’t be as detailed or as sophisticated as that used by the supermarkets, but it will be enough to keep the business secure on a three legged stool rather than falling over on a two legged one.