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.

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.

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

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.