Oh Dear! Are You a Micromanager?

If you own and manage a one person business, you are, de facto, a micromanager. You have no choice; you make every decision and you manage every process. If, on the other hand, you are CEO of a FTSE100 Company, you can’t be a micromanager because you can’t possibly make every decision and can only manage a very small number of processes, albeit they are likely to be major ones.

In the case of the one person business, if you don’t micromanage, your business won’t function; so it won’t survive. In the case of the CEO of the FTSE100 Company, any attempt to micromanage will cause chaos and undermine your corporate structure. So in one set of circumstances, micromanagement is very positive and very necessary, whilst in the other it is very negative and seriously damaging.

So, at what point does the positive turn negative?

Before answering that question let’s just look at what we mean by micromanagement. You can no doubt find many different definitions but essentially it means: –

• Allocating tasks, monitoring them in minute detail, intervening with the processes and making all the associated decisions. As opposed to
• Delegating responsibilities, within defined parameters, to subordinates, who make their own decisions and are accountable for the outcomes.

As soon as a business involves more than one person, tasks start to be shared. If the people involved are of equal status – directors, partners etc. – agreement is reached about the sharing of both tasks and responsibilities. However, if staff are employed, they tend to be engaged to undertake tasks under close supervision. They are probably given very little responsibility and are unlikely to make many decisions without reference to the boss.

Initially this may work ok. However, as the business grows and the number of employees increases, the boss inevitably spends more and more time making decisions for his/her employees and monitoring their activities. That means spending less and less time driving the business forward. As a consequence, the momentum of the business starts to slow down and the boss becomes increasingly stressed, as he/she becomes the main constraint on progress.

To address this problem, most businesses start to develop some form of organisation structure, with departmental demarcations and key staff taking supervisory/managerial roles. To start with, this invariably relieves the pressure. However, the extent to which this continues to happen depends on whether the boss is still just delegating tasks or whether he/she starts to delegate real responsibilities in a meaningful way. When the boss is able to delegate responsibilities enabling him/her to focus on the more important aspects of the business, the business itself has a much better chance of developing, growing and building its net worth. But where the boss still wants to micromanage, the business is much more likely to struggle and stagnate.

There can’t be a precise answer to my earlier question of, “At what point does the positive become negative?” because no two businesses are exactly the same. However, most people’s ability to micromanage everything that goes on, within a business, and still perform their own essential duties is quite limited; and once the business employs more than a handful of people, micromanagement invariably becomes negative.

Despite this, many owners and directors of SMEs don’t delegate responsibilities effectively and become increasingly frustrated with the lack of progress that their businesses make, often blaming everyone except themselves for that lack of progress. So why can’t they delegate and why do they continue to be micromanagers?

The four favourite answers seem to be: –

• I can’t get the calibre of staff I need
• My staff can’t do things the way I do them
• My staff can’t do things as well as I do them
• I can’t trust my staff

So let me deal with each of these objections in turn.

I can’t get the calibre of staff I need. If that’s true, then it’s likely that you’re not paying enough to attract the right quality staff. But in my experience, that’s not usually the problem. More often than not, the key people, within the business, are more than capable of taking on much more responsibility and are eager to do so. With very few exceptions, where I’ve been able to persuade the boss to stand back and empower his key people, the positive effect on the business has been substantial. However, when key members of staff are not empowered there is a tendency for them to become demotivated and cynical; and once this happens you really do have a problem.

My staff can’t do things the way I do them. Frankly that tends to be good not bad. A business needs a diversity of ideas. If the key staff are all clones of the boss, the business will go nowhere. The boss may be the key driver but he/she doesn’t have a monopoly on ideas, doesn’t know all the answers, doesn’t always have the best approach to problem solving and is often wrong. If key employees are empowered, bosses are much better able to develop their own strengths, whilst ensuring that their weaknesses are offset by the skills and experience of their key people. Running a successful business is about teamwork; it’s not a solo act.

My staff can’t do things as well as I do. In some cases this may be right. The boss will have skills that his/her key staff don’t have. But there will be areas where key members of staff have more skill and experience or perhaps greater aptitude or perseverance than the boss. It’s important to recognise this and exploit it. Again, it’s back to the principle of diversity of skills and ideas being the basis of a successful team. Where there are shortcomings in skill sets, you need to develop them through structured training programmes.

I can’t trust my staff. In many respects this is the real objection. The other three are often excuses for what is, in reality, lack of trust. And to be fair, all too frequently I hear stories of small businesses that have been ripped off by a rogue employee or damaged in some other way, by an incompetent one. But this opens up the much bigger question of how you actually manage and control your business.

The trust issue may be about not trusting people to complete tasks properly or take decisions appropriately; equally, it may be about the honesty and integrity of employees. In practice, most people are reasonably honest; but, unfortunately, a small minority is not. However, regardless of honesty and integrity, it’s important that no one, within the team, behaves as a lone wolf, acts outside their jurisdiction, covers up mistakes, works within a self-constructed silo or behaves dishonestly in any way. So how do you reconcile all of this with delegating responsibilities and losing detailed control of what your staff do and how they spend their time?

The answer is that you manage your business in a completely different way. And to do this, you need good management information that tells you, on a regular basis, how each significant element of your business is performing. In conjunction with that, you need to set targets, so you can see how each part of the business is performing against expectations. The type and level of information will differ depending on the type of business, its size and complexity and the markets served; but it’s likely to include data about sales, production and/or service output, productivity, costs, inventories, cash and all other key activities within the business. Some of this data will come through the production of monthly management accounts, some will require your IT systems to be set up to produce it. Some information will be most useful on a monthly basis, some weekly and some daily. When you have this data, you can identify areas of over and under performance, trends in both the right and wrong directions and aberrations that don’t, on the face of it, make sense. Whenever you identify anything that appears to be going in the wrong direction or otherwise out of the ordinary, you dig deeper until you have answers. If necessary you then take remedial action; but its remedial action based on facts not on gut feel or guesswork. You’ll soon find that you’re learning far more about what’s going on in your business than you ever did before.

This management information shouldn’t be treated as just yours and available to no one else. Headline data needs to be available to all your key players and each key player should have more detailed information about their own individual areas of responsibility. You can then meet regularly with your key players, both on a one to one and as a group, to set new objectives, report back on current issues, agree solutions to problems and establish strategies to exploit opportunities. This ensures that everyone is clear about strategies and objectives in general; and clear about their individual responsibilities and how these interface with the responsibilities of their colleagues.

As a result of this, you’ll start to build a real team that co-ordinates effectively, buys in to the core values and direction of the business and works with much greater enthusiasm and commitment. Under performance and lack of integrity then become a much smaller issues; but also much easier to identify because they’re much more difficult to hide.

Small businesses that make this leap are much more likely to grow and prosper than those that don’t. Sadly, many small businesses fail to reach their potential for no other reason than the boss remains a frustrated and stressed micro-manager. Some owners of small businesses do find it incredibly difficult to let go. If you’re one of these and you want to try and change, don’t try and do it on your own. In most industries, there are specialist business consultants, business coaches and mentors that understand this problem only too well and will be able to take you through a difficult learning curve far more quickly and effectively than you would otherwise achieve.

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

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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.

Better Times Ahead

Most economic indicators are now pointing to a recovery.

• The economy is growing
• Manufacturing and services are up
• Unemployment is continuing to fall
• Inflation is below 2%
• Living standards are beginning to recover, albeit slowly

Under these circumstances, business confidence is on the increase. However, over the last few years, small and medium sized businesses have had a tough time.

• Profits have been low
• Balance sheets have weakened
• Cash has been under pressure
• Investment in plant, equipment and infrastructure has been supressed.

So, it’s inevitable that many businesses remain very cautious. Nevertheless, as markets continue to recover, businesses do need to gear up; and being over cautious is likely to lead to lost opportunities and being left behind by your competitors.

So Think About Your Business

• Is your business model working effectively and still relevant to current and future market conditions; or does it need to adapt?
• Is your marketing strategy working; or have you been left behind by the fast moving on-line revolution?
• Are your products/services state of the art; or are they getting tired?
• Are your processes and systems as efficient as they need to be; or are they becoming cumbersome?
• Is your productivity as good as it should be; or are your direct costs too high?
• Are your quality standards under effective control; or are you getting too many complaints?
• Is your organisation structure fit for purpose; or has it become dysfunctional?
• Are you supporting your employees effectively; or are too many underperforming?
• Are your customers happy; or are they drifting to your competitors?

In all honesty, very few businesses can tick all of these boxes. Sadly, some can tick very few, whilst the majority fall somewhere between these two extremes and, therefore, have the opportunity to raise their game.

How Can You Raise Your Game?

As an owner, director or senior manager of a small or medium sized business, the first thing you need to do, is to be honest with yourself about the state of your business; good or bad. Then remember that you don’t necessarily have all the skills and experience needed to address the weaknesses your business might have, or exploit the opportunities that the market might present. Recognising that you aren’t superman or superwoman is a strength in itself.

Next, think about how you can spend more time working “on the business” and less time working “in the business”. That probably means more delegation of responsibilities; and remember that a failure to delegate is often more about your own inclination to micromanage, rather than the lack of competency of the people, to whom you should be delegating.

At this point, you can start to take a more considered view about the strengths and weaknesses that your business has, and you can be more objective about the opportunities and threats that exist. So you can now start to plan. Look at where you want to take the business and assess the resources you’ll need. Compare these with the resources you have. Then consider how, and over what time frame, you can acquire the resources you need but don’t have, as well as offload the resources you have but don’t need. This is all about developing a properly focussed strategy; and, once you have this, you can start to work on a more detailed business plan.

Now back to the point about your own skills and experience. For many owners, directors and senior managers of small and medium sized businesses, strategic planning and change management isn’t familiar territory; and if that is true for you, you have three options.

The first is do nothing, carry on as before and chance that everything will turn out alright in the end. It’s high risk but it might just work.

The second is to go it alone and to try and find your way through. If you do that, you may get there eventually, but the chances are you’ll take some wrong turns, get lost, have to retrace your tracks and end up taking much longer to reach your destination, whilst incurring substantially higher costs on the way.

The third is to hire a guide; a business advisor, familiar with the territory, who can steer you to your destination via the shortest and least costly route. Business advisors cost money; but the right business advisor will cost you a fraction of what it would otherwise cost, by the time you’ve taken several wrong turns en-route.

The changing economic climate means that small and medium sized businesses, which have battened down the hatches for the last few years, can increasingly start to take a more proactive position. But most markets are likely to remain highly competitive; so focused strategies, well developed business plans and ever increasing levels of operational excellence are essential to long term sustainability.

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.

Are your overheads too low?

If your business is losing money or making only small profits, the chances are, you’ll be under pressure to cut your overheads. Sometimes this pressure is self-generated and sometimes it’s applied by banks, accountants, financial advisors and financiers. But is it really the right thing to do?

In some cases, it most definitely is. If your overheads are disproportionately high relative to the throughput of your business, then you need to cut them. This is true whether you’ve let them grow too fast or whether sales have declined and you haven’t yet downsized.

But in many other cases, cutting overheads to address bottom line under performance is entirely the wrong thing to do; and I’ll explain why.

When comparing overheads with direct costs, overheads are usually much easier to control. You just say “No”. A manager wants an additional person in his/her department: you say “No”. An employee wants a pay rise: you say “No”. There may be a need for repairs or renewals: you delay them. There may be a requirement for investment in plant or equipment: you make do with what you’ve got. Your IT system may be past its sell-by date: you ignore it. So by just doing nothing you’re controlling many of your overheads.

In most businesses, there are some overhead costs that should be reviewed regularly, with a view to making savings; utility bills, outsourced services etc. This is simply good practice and should apply irrespective of bottom line performance. There are also some overheads that are difficult to influence in the short or medium term; rent and business rates being the obvious examples. So in practice, you’re stuck with them, irrespective of your bottom line performance.

When it comes to cutting overheads, there can be some difficult emotional, personal and personnel issues to address because it usually entails making people redundant. But predicting the costs that will be taken out through downsizing and achieving those predictions are relatively straightforward processes.

Now think about direct costs. In many businesses, the two major direct costs are raw materials and direct labour. So how do you control them?

Material costs don’t just depend on the price you pay for them. They depend on: –

• Efficient stock control, keeping losses and damage to a minimum
• Efficient utilisation that minimises wastage
• Getting orders right first time to minimise errors
• Quality output to minimise replacements.

Direct labour costs don’t just depend on the numbers of operatives or the rates they are paid. They depend on productivity and the level of output that is achieved. Furthermore, achieving the right balance between the number of operatives, their individual wage costs and their combined output isn’t just a question of how well they are managed day to day, although that is extremely important. It depends on the operational efficiency of order processing, planning, procurement and stock control. Well maintained modern machinery and appropriate levels of automation, as well as effective batching and efficient materials handling systems, are also essential in manufacturing businesses.

Effective control of direct costs is, therefore, much more complex and much less predictable than the effective control of overheads.

Now consider the relationship between direct costs and overheads.

In some businesses, such as professional services, overheads are likely to account for a much larger proportion of total costs than are accounted for by direct costs. So, in businesses of this type, where bottom line under performance is an issue, reducing overheads may be the only option.

However, think about a light manufacturing business or a home improvement service provider – windows, conservatories, kitchens, bathrooms etc. A typical profit and loss statement will show direct costs accounting for somewhere between 60% and 70% of total sales, whereas overheads may account for only 20% or 30%. In these situations, direct costs are much greater than overheads; and this is actually typical of lots of small and medium sized businesses in many different sectors. It’s also where the wrong approach to addressing bottom line under performance often occurs.

If the majority of your costs are direct and your business is under performing, reducing those direct costs, as a proportion of sales, is likely to provide far greater returns than cutting your fixed costs. But to many small and medium sized businesses, this is often perceived as a much bigger challenge.

In reality, most under performing businesses, in this category, are under performing because of operational inefficiencies. As a consequence, their direct costs are too high and that is why their bottom lines are under pressure. But few of them fully appreciate the extent of their inefficiencies; even fewer realise how much it’s costing them; and fewer still make any serious attempt to quantify that cost. So they focus on their comfort zone, namely overheads.

If you then look at why these businesses are operating inefficiently, it’s usually because they are under resourced. Their processes, controls and management information systems are often inadequate. Their administration often depends on too few managers and employees; and they put too little emphasis on the training and skills development of the people they employ.

Where businesses of this type are under performing, the right solution is, very often, to increase overheads to provide a more effective level of resource that can support greater operational efficiency. This will, in turn, reduce direct costs. So there may be a trade-off; for example, increase fixed costs by three percentage points (of sales) in order to achieve a ten percentage point reduction in direct costs, giving a net bottom line improvement of seven percentage points.

The problem with this approach, as perceived by many small and medium sized businesses, is that they need to commit to the increase in overheads with no guarantee that the direct cost reductions will be achieved. However, in reality, the risk associated with addressing the problem might be more immediate but the risk of not addressing the problem is usually much greater. Although, this can sometimes be difficult to reconcile, particularly when cash flow is under pressure.

There are several lessons to learn from this.

The first is not to get into this position in the first place. Always recycle a reasonable level of profits back into the business to invest in appropriate plant & machinery, automation, IT, systems & process, staffing and training. By so doing, you will have the best chance of maintaining effective control over your direct costs.

The second is that, if your fixed costs are starting to drift, either because they are going up or because those of your key competitors are falling, act sooner rather than later. The short term risk of an increase in overheads is much lower when you have a strong balance sheet and the ability to fund the additional costs reasonably easily.

The third is to recognise that if you have lost control of your direct costs, there will be an additional cost to regain that control. It’s unavoidable and the longer you leave it, the higher the costs will be and the less cash you will have available to fund them. It’s a vicious circle leading to a downward spiral; and the sooner you act the more chance you have of recovering the position.

The fourth is to understand the level of risk, to which your business is exposed. The earlier you recognise and address the problem, the lower the level of risk. If you don’t address the problem, the level of risk will increase, the number of available solutions will decrease and the risk of those solutions not working, when you do eventually try to implement them, will also increase.

Finally, if you’ve recognised that you have a problem but you’re not sure what to do or whatever you are doing isn’t working, bring in professional help. Yes there’s a cost; but it’s likely to be a much smaller cost than losing your business.

Anthony Pratt
AP Management Consultants
May 2013