“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.”
Donald Rumsfeld, Former US Secretary of Defense
“Just one more question.”
Lt Columbo, San Francisco Police Department
In our last post we covered how critical it is to learn the lesson of the great detective, and treat a strategic review as an investigation. In this post, we look at the basic areas to cover in a review, and where companies classically miss valuable insights by not adopting this inquisitive mindset.
If it’s going to be useful, a strategic review should cover a minimum of five areas:
1. Positioning at a macro level—this classically consists of some measure of market attractiveness and some measure of competitive positioning
2. Positioning at a micro level—this review covers the buying process, routes to market, purchase criteria, company performance against those criteria, performance versus competitors, customer purchase intentions, and switching
3. A review of financial performance by business unit or product or geography
4. An assessment of the risks and opportunities the company faces
5. Strategic decisions about where and how to compete as a result of the investigation
In addition, management might then want to look at some specifics or angles or hypotheses it wants to test, such as market appetite for a new product. Management may also want to put together projections and a business case to support the decision making and subsequent planning process.
This list above is over-simplified, but you get the gist.
The fatal mistake to make with strategic reviews is to stay at too high a level, be too assumptive and too generic. Without asking that next question, leaving all the difficult stones unturned, you’re left with a strategy built on limited and superficial knowledge, Mr Rumsfeld’s known knowns. You never get to the unknown unknowns where the insights lie.
When management adopts this high-level mindset, our five review areas above tend to play out as follows:
1. Management defines its markets too broadly and so is in no position to understand properly the size, growth or any other measure of attractiveness of its different businesses’ markets. Also, without a tightly-defined view of which markets it is competing in, management doesn’t understand who it is really competing against for its most important business
2. With a high-level mindset, positioning at micro level is barely covered - it appears to low level for strategic work. As a result, management misses critical information about customer budgets and spend intentions, revenue security, requirements for service improvements, and other tangible, useful facts
3. Financial performance by business unit/product/geography, etc ends up being confined to Board KPIs and familiar numbers, with the consequence that some very common and vitally important drivers of economic value and returns are missed completely in analysis
4. With excessively superficial and generic information from areas 1-3, the range of risks and opportunities becomes much too broad and irrelevant. Management is then faced to many poorly-defined risks to know how to mitigate them, and has an excessively long list of nonspecific opportunities that it can only guess how to prioritise
5. With no new insights raised to challenge assumptions, the strategy ends up being very close to that inside the CEO’s mind prior to the review. Unless the CEO has incredible prescience, there is only a slim chance of this being the best strategy for the business
In the rest of this series, we cover how the investigative mindset gives us more insight and clues in areas 1-3. With this deeper and more accurate level of knowledge, management can make more valuable decisions and take more relevant actions.
Copyright Latitude 2009. All rights reserved.
Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk
For the full text of this series email steve@latitude.co.uk
Saturday 28 March 2009
Tuesday 24 March 2009
Strategic Reviews — Overview: “A Little More Columbo and a Little Less Sun Tzu”
Every so often the management of a business has a prompt to ask itself some big fundamental questions: What business are we in? Where and how should we compete? What are the prospects for our business and how can we change them? Which parts of our portfolio should we keep, sell, close, grow, harvest, restructure? Where do we focus our limited capital and time?
One common exercise provides the basis to answer these essential questions—the strategic review.
It requires an analysis of the attractiveness of the company’s markets, its competitive positioning, drivers of profit and economic value, a review of new opportunities and an assessment of risks. Done well, this strategic review provides management with the information and the confidence to make decisions from the most high-level (such as which businesses should we be in) to the most everyday (such as how do we improve our customer service).
But here’s the thing. A strategic review is an investigation. And in this investigation, God is in the detail. The Columbo fans out there know this already — you don’t solve the case if you act like the local cops and just take a cursory look, missing the key fact that the murdered “burglar” who came in from the lawn has no grass on his shoes. It’s the same with strategic reviews: you don’t generate insight by going through the motions and staying high level; you get it by behaving like the great detective — asking the questions nobody else thought of and noticing the things nobody else noticed.
There is a time for strategy and vision and bold moves and inspiration and big picture; but that time is later, once you know exactly where you stand.
In this forthcoming series of posts, we will cover the basics of performing strategic reviews, highlighting along the way some of the disciplines we use to generate the insights that successful reviews should produce.
Copyright Latitude 2009. All rights reserved.
Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk
For the full text of this series email steve@latitude.co.uk
Thursday 12 March 2009
Business turnarounds - troubleshooting performance problems (3/3)
In our last post we looked at our two most fruitful areas of analysis when an under-performing company has issues with sales (or gross profit) growth. In this post, we look at the two areas of investigation that we find most useful for companies with profitability problems.
Again, the most useful analyses are the ones that are rarely done. Board packs, management KPIs and performance measures often track return on sales and total profit by line and by customer group. These analyses ordinarily have value, but don't add to what the Board already knows, and so do not provide insights to a performance problem that the Board has to date been unable to address.
The analyses we find most useful are related to lifetime profits:
1. Analysis of profit contribution of assets over their lifetime
2. Analysis of profit contribution of customers over their lifetime.
Profitability analysis of asset usage
Capital constraint is a critical issue in turnarounds. However, profitability numbers in Board KPIs often either ignore asset usage or treat amortisation uniformly for each product line, not distinguishing asset-intensive versus asset-light customers.
Accounting for each customer group’s asset usage often highlights major cash sinks. It can overturn previously held understanding of customer profitability and often reveals where companies have historically focused time and resource on what turn out to be loss-making or value-destroying customers.
Example – gaming machine operator turnaround
Profitability had declined for five consecutive years in a highly capital intensive sector, resulting in low return on investment and ultimately covenant breach.
The business had focused on maintaining high machine rents, by targeting sales on high end managed pubs and by rapid and continuous new product introductions. The business deprioritised lower end free trade customers that required lower rates of introduction and paid correspondingly lower rents.
Using a simplistic assumption for machine depreciation, managed houses appeared profitable, free houses unprofitable.
Correct accounting for machine asset depreciation showed the historic focus on managed pubs to be value-destroying.
The business consequently renegotiated its managed pub contracts to reflect the accurate understanding of cost structure, grew profitability and has successfully refinanced.
Customer acquisition cost and lifetime value
Management accounts and monthly KPIs can hide the true cost of acquiring customers, and the payback over the customers’ lifetimes. This can be particularly true for larger deals or new services where the customer contributions appear large, but the time and cost taken to acquire these customers can make them loss-making over their lifetime. This is further exacerbated when accounting for a high time value of money in distressed situations: a large initial sales cost outlay and delayed incoming cash flows can generate large negative net present values and heavy cash requirements for some major prospective customers or ambitious new services.
Example – telecoms reseller turnaround
A corporate telecoms reseller had operated at low scale and with heavy losses for several years, and faced closure by its financing parent.
The business perceived greatest potential from large corporate customers and focused sales efforts on these accounts.
Analysis of customer lifetime and acquisition cost arising from low hit rate, resulted in the conclusion that the business was incorrectly focused on loss-making large corporates and under-investing in sales to highly-profitable SMEs
The business refocused onto SMEs and subsequently achieved trade exit in excess of £150m.
So, there we have it, four rarely-used but commonly insightful analyses to perform on struggling businesses, when the usual KPIs and Board packs have not given any productive clues to the causes of decline.
Given the recent trend for debt holders to delay taking control of breached or distressed companies, we believe that management and equity now has greater breathing space to diagnose financial issues. And we believe that a rigorous understanding of such issues is value-adding for everyone involved.
Copyright Latitude 2009. All rights reserved.
Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk
For the full text of this series email steve@latitude.co.uk
Again, the most useful analyses are the ones that are rarely done. Board packs, management KPIs and performance measures often track return on sales and total profit by line and by customer group. These analyses ordinarily have value, but don't add to what the Board already knows, and so do not provide insights to a performance problem that the Board has to date been unable to address.
The analyses we find most useful are related to lifetime profits:
1. Analysis of profit contribution of assets over their lifetime
2. Analysis of profit contribution of customers over their lifetime.
Profitability analysis of asset usage
Capital constraint is a critical issue in turnarounds. However, profitability numbers in Board KPIs often either ignore asset usage or treat amortisation uniformly for each product line, not distinguishing asset-intensive versus asset-light customers.
Accounting for each customer group’s asset usage often highlights major cash sinks. It can overturn previously held understanding of customer profitability and often reveals where companies have historically focused time and resource on what turn out to be loss-making or value-destroying customers.
Example – gaming machine operator turnaround
Profitability had declined for five consecutive years in a highly capital intensive sector, resulting in low return on investment and ultimately covenant breach.
The business had focused on maintaining high machine rents, by targeting sales on high end managed pubs and by rapid and continuous new product introductions. The business deprioritised lower end free trade customers that required lower rates of introduction and paid correspondingly lower rents.
Using a simplistic assumption for machine depreciation, managed houses appeared profitable, free houses unprofitable.
Correct accounting for machine asset depreciation showed the historic focus on managed pubs to be value-destroying.
The business consequently renegotiated its managed pub contracts to reflect the accurate understanding of cost structure, grew profitability and has successfully refinanced.
Customer acquisition cost and lifetime value
Management accounts and monthly KPIs can hide the true cost of acquiring customers, and the payback over the customers’ lifetimes. This can be particularly true for larger deals or new services where the customer contributions appear large, but the time and cost taken to acquire these customers can make them loss-making over their lifetime. This is further exacerbated when accounting for a high time value of money in distressed situations: a large initial sales cost outlay and delayed incoming cash flows can generate large negative net present values and heavy cash requirements for some major prospective customers or ambitious new services.
Example – telecoms reseller turnaround
A corporate telecoms reseller had operated at low scale and with heavy losses for several years, and faced closure by its financing parent.
The business perceived greatest potential from large corporate customers and focused sales efforts on these accounts.
Analysis of customer lifetime and acquisition cost arising from low hit rate, resulted in the conclusion that the business was incorrectly focused on loss-making large corporates and under-investing in sales to highly-profitable SMEs
The business refocused onto SMEs and subsequently achieved trade exit in excess of £150m.
So, there we have it, four rarely-used but commonly insightful analyses to perform on struggling businesses, when the usual KPIs and Board packs have not given any productive clues to the causes of decline.
Given the recent trend for debt holders to delay taking control of breached or distressed companies, we believe that management and equity now has greater breathing space to diagnose financial issues. And we believe that a rigorous understanding of such issues is value-adding for everyone involved.
Copyright Latitude 2009. All rights reserved.
Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk
For the full text of this series email steve@latitude.co.uk
Business turnarounds - troubleshooting performance problems (2/3)
In our last post we pointed out that the most fruitful areas to investigate for unaddressed causes of performance problems are, by definition, those that aren't covered in standard KPIs or Board packs.
We find four analyses particularly insightful, depending on the area of underperformance. The first two are suitable for understanding issues of sales (and gross profit) growth/decline, and we cover them in this post. The third and fourth are more suitable for issues with profitability; we will cover these in our next post.
To diagnose issues with sales or gross profit growth/decline, the two most commonly insightful analyses are:
1. Reviewing market and competitive benchmarks, in order to understand whether the company's product mix matches market growth areas and if gross margins are in line with peers, or if, more likely, the company is working hard to hold back the tide by growing share in a low margin segment
2. Analysing the year-on-year sources of business, to understand the reliable base line of secure business, and whether the company's underperformance is a result of issues with customer acquisition, customer retention, or both.
Review of market and competitive benchmarks
A market and competitive review generates rapid and useful benchmarks of reasonable growth expectations for a company’s services and expectations for gross margin. Problems with revenue and gross margin can often be simply the result of a poor business mix, skewed towards the low growth, low margin market segments.
Plans to exceed market benchmark growth or margin are too unconservative for a sound turnaround plan. Changing business mix to higher growth, higher margin segments, achieved by reprioritising marketing and sales investment, is almost always a more pragmatic path to follow.
Given the generally strong positive relationship between gross margin and market growth, such a reprioritisation kills two birds with one stone.
Example – technology services turnaround
Sales had slowed below historic rate in the previous 18 months, and gross margin shrinkage caused impending covenant breach.
Rapid analysis of market growth and competitor margins showed that business had focused excessively on a low growth, low margin segment. This growth in excess of market had depressed margins even further. A return to sales and margin growth was possible from rebalancing business mix to higher growth segments.
.jpg)
The refocus took 8 weeks to implement and resulted in business returning to full-year budget performance within 4 months. The business refinanced successful with all solvent banks retaining participation and is now the most profitable player in its sector.
Analysis of new versus retained business
Understanding a company’s reliable base of recurring business is clearly important in the context of turnaround financing and planning. In addition, a review of new versus retained business over months or years illustrates whether the revenue problem is one of acquisition or retention, each of which has very different restorative actions.
Example – tour operator turnaround
Sales had declined for three consecutive years in a steadily growing niche, resulting in declining total profit, with trend rate threatening covenant breach.
The business had cut unprofitable discounted lines but maintained traditional efficient distribution in an unsuccessful attempt to reverse profit decline.
Analysis of sources of yearly bookings showed a strong stable base of regular customers but a continual annual decline of new customers, resulting in steady decline of volumes.
Cumulative bookings from previous customers show consistent annual spend
Cumulative bookings from new customers show ongoing annual decline
Evidence of reliable loyal booking provided a solid baseline for a successful refinancing.
The business refocused on new customer acquisition through a successful new online channel, regional departures to reflect changing travel patterns and the launch of lower-cost introductory products to capture new customers.
Of course, there are limitless other analyses that can be used to address the underlying causes of sales underperformance, but the two in this post are the ones we find most useful and under-used.
In our next post, we will cover our two most fruitful approaches to understanding profitability issues.
Copyright Latitude 2009. All rights reserved.
Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk
For the full text of this series email steve@latitude.co.uk
We find four analyses particularly insightful, depending on the area of underperformance. The first two are suitable for understanding issues of sales (and gross profit) growth/decline, and we cover them in this post. The third and fourth are more suitable for issues with profitability; we will cover these in our next post.
To diagnose issues with sales or gross profit growth/decline, the two most commonly insightful analyses are:
1. Reviewing market and competitive benchmarks, in order to understand whether the company's product mix matches market growth areas and if gross margins are in line with peers, or if, more likely, the company is working hard to hold back the tide by growing share in a low margin segment
2. Analysing the year-on-year sources of business, to understand the reliable base line of secure business, and whether the company's underperformance is a result of issues with customer acquisition, customer retention, or both.
Review of market and competitive benchmarks
A market and competitive review generates rapid and useful benchmarks of reasonable growth expectations for a company’s services and expectations for gross margin. Problems with revenue and gross margin can often be simply the result of a poor business mix, skewed towards the low growth, low margin market segments.
Plans to exceed market benchmark growth or margin are too unconservative for a sound turnaround plan. Changing business mix to higher growth, higher margin segments, achieved by reprioritising marketing and sales investment, is almost always a more pragmatic path to follow.
Given the generally strong positive relationship between gross margin and market growth, such a reprioritisation kills two birds with one stone.
Example – technology services turnaround
Sales had slowed below historic rate in the previous 18 months, and gross margin shrinkage caused impending covenant breach.
Rapid analysis of market growth and competitor margins showed that business had focused excessively on a low growth, low margin segment. This growth in excess of market had depressed margins even further. A return to sales and margin growth was possible from rebalancing business mix to higher growth segments.
.jpg)
The refocus took 8 weeks to implement and resulted in business returning to full-year budget performance within 4 months. The business refinanced successful with all solvent banks retaining participation and is now the most profitable player in its sector.
Analysis of new versus retained business
Understanding a company’s reliable base of recurring business is clearly important in the context of turnaround financing and planning. In addition, a review of new versus retained business over months or years illustrates whether the revenue problem is one of acquisition or retention, each of which has very different restorative actions.
Example – tour operator turnaround
Sales had declined for three consecutive years in a steadily growing niche, resulting in declining total profit, with trend rate threatening covenant breach.
The business had cut unprofitable discounted lines but maintained traditional efficient distribution in an unsuccessful attempt to reverse profit decline.
Analysis of sources of yearly bookings showed a strong stable base of regular customers but a continual annual decline of new customers, resulting in steady decline of volumes.
Cumulative bookings from previous customers show consistent annual spend
Cumulative bookings from new customers show ongoing annual decline
Evidence of reliable loyal booking provided a solid baseline for a successful refinancing.
The business refocused on new customer acquisition through a successful new online channel, regional departures to reflect changing travel patterns and the launch of lower-cost introductory products to capture new customers.
Of course, there are limitless other analyses that can be used to address the underlying causes of sales underperformance, but the two in this post are the ones we find most useful and under-used.
In our next post, we will cover our two most fruitful approaches to understanding profitability issues.
Copyright Latitude 2009. All rights reserved.
Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk
For the full text of this series email steve@latitude.co.uk
Tuesday 10 March 2009
Business turnarounds - troubleshooting performance problems (1/3)
Turning around an under-performing company has one major characteristic in common with fixing your central heating - unless you work out what went wrong, you'll never fix it, at best you'll patch it up, keep your fingers crossed and sit there shivering next time the weather turns cold.
We have worked with hundreds of companies with performance problems. Only a handful of these had a clear and accurate picture of what went wrong to get them into trouble. With the exception of one (extremely fortunate) company, we have not seen any recover from distress without knowing the problem that got them into it.
There are occasional examples when the problems are obvious to everyone. In these cases, the decline is often rapid and can be associated with something specific, such as loss of a key contract, a change in legislation or a change in the market or competitive environment. Handling a potential turnaround in such a situation is usually straightforward, requiring brutal but obvious decisions. However, these sudden-dive situations are uncommon.
The majority of financially-troubled businesses that bring us in have experienced an extended decline, one that current or previous management has worked unsuccessfully to reverse. In these situations, management can often identify some areas of underperformance through various KPIs. However, without a clear and correct diagnosis of the underlying causes, management is shooting in the dark. It cannot possibly address business underperformance and more usually makes decisions that worsen the situation. As a result of such flawed or incomplete understanding of customer or service profitability, we have witnessed heavy targeting of loss-making customer groups, withdrawals from profitable, cash-generative business lines, proliferation of product into areas of marginal or negative return, together with a long list of progressively desperate gambles as performance deteriorates.
In a turnaround situation, the two major constraints are time and capital, and management needs to know where to direct them. To achieve this, we believe that a business needs to undertake a complete diagnosis of where it is making and losing money, and the underlying causes of performance problems. Only once it does this can it identify which areas of the business to protect, which to cut, and where to address scarce time and resources in performance improvement.
The most fruitful areas to investigate are, of course, the ones most commonly over-looked - ones that by definition do not appear in the Board pack or management accounts. In the next four posts of this series, we outline the four most common problems we see, and the ways to identify them.
Copyright Latitude 2009. All rights reserved.
Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk
For the full text of this series email steve@latitude.co.uk
We have worked with hundreds of companies with performance problems. Only a handful of these had a clear and accurate picture of what went wrong to get them into trouble. With the exception of one (extremely fortunate) company, we have not seen any recover from distress without knowing the problem that got them into it.
There are occasional examples when the problems are obvious to everyone. In these cases, the decline is often rapid and can be associated with something specific, such as loss of a key contract, a change in legislation or a change in the market or competitive environment. Handling a potential turnaround in such a situation is usually straightforward, requiring brutal but obvious decisions. However, these sudden-dive situations are uncommon.
The majority of financially-troubled businesses that bring us in have experienced an extended decline, one that current or previous management has worked unsuccessfully to reverse. In these situations, management can often identify some areas of underperformance through various KPIs. However, without a clear and correct diagnosis of the underlying causes, management is shooting in the dark. It cannot possibly address business underperformance and more usually makes decisions that worsen the situation. As a result of such flawed or incomplete understanding of customer or service profitability, we have witnessed heavy targeting of loss-making customer groups, withdrawals from profitable, cash-generative business lines, proliferation of product into areas of marginal or negative return, together with a long list of progressively desperate gambles as performance deteriorates.
In a turnaround situation, the two major constraints are time and capital, and management needs to know where to direct them. To achieve this, we believe that a business needs to undertake a complete diagnosis of where it is making and losing money, and the underlying causes of performance problems. Only once it does this can it identify which areas of the business to protect, which to cut, and where to address scarce time and resources in performance improvement.
The most fruitful areas to investigate are, of course, the ones most commonly over-looked - ones that by definition do not appear in the Board pack or management accounts. In the next four posts of this series, we outline the four most common problems we see, and the ways to identify them.
Copyright Latitude 2009. All rights reserved.
Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk
For the full text of this series email steve@latitude.co.uk
Sunday 8 March 2009
What makes a market leader? (7/7)
In the last three posts in this series, we covered the common and unique characteristics of market leading companies in our research that enabled them to make breakthroughs in performance and cope with rapid growth without losing momentum or focus. In this final post of the series, we describe the characteristic shared by only the market leaders that stayed ahead – the ability to stay uncomfortable.
Participants highlighted two big areas of concern once they were ahead of the field.
The first concern was being exposed to changes in customer demand: with a large share of the market, you inevitably rise and fall with it.
The second concern was complacency: once ahead, companies faced temptations to concentrate on reaping the financial benefits of their strong position, and to stick with winning ways. But the dangers of this “defend and reap” attitude were considered by leaders to be enormous: from outside due to targeting and copying by competitors, and from inside due to the departure of ambitious people lacking new challenges. Indeed one PLC leader attributed its slow demise to the spawning of competitors from within the company.
The most consistent solution that successful leaders gave to both big concerns was to stay uncomfortable and deliberately take the business to the next challenge.
Staying uncomfortable
This wasn’t about asking for more of the same, which is demanding without being challenging at all. It was about challenging where and how the company did business. To achieve this was difficult and needed discipline, and as with previous themes, different organisations achieved it in different ways. For example:
Raising the stakes by increasing the size of the arena the company played in, for example one payroll services company designed its next generation of further services to address the broader challenge of improving the workplace and the productivity of clients’ employees
Moving a local business into dominant positions in new geographical areas
Incorporating a challenge of “Is it brave? Is it original?” in relation to all market-facing and planning activity
Sustaining the challenge by splitting the business into smaller, more focused components every time it became too unwieldy
Establishing restless, constant change as a deliberate policy driven from the top
There was no common individual solution, other than the underlying requirement to stay on the edge of management’s comfort zone.
The common theme however was deliberately to raise the bar rather than to look back and focus on defending an established position, even though this often meant losing key members of the original senior team, who weren’t willing to get back on the tightrope.
So, in summary, we have now covered the common characteristics of market leading companies from Latitude research that were missing in their more mediocre counterparts.
First, relentless focus on a cause based on a combination of passion for that cause and a firm grip of market and commercial reality.
Second, tough action to get the right team in place, based on the right attitude, even at the expense of talented or experienced team members who aren’t up for the challenge.
Third, creation of breathing space so that management can concentrate on important actions for the business and are not continually distracted by urgent firefighting.
Fourth, clear, tangible behaviour boundaries, inside which there is room to perform, but the crossing of which is simply not tolerated.
Fifth, and finally, the continuing challenge from the senior team to keep the business on the edge of its comfort zone in terms of where and how it does business.
These aren’t rationalised steps to success. Rather they are a series of characteristics that should look obvious to experienced managers of high-performing businesses. By presenting them here, our hope is that they provide a nudge to make a decision that the manager already knows he should be making anyway.
Copyright Latitude 2009. All rights reserved.
Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk
For the full text of this series email steve@latitude.co.uk
Participants highlighted two big areas of concern once they were ahead of the field.
The first concern was being exposed to changes in customer demand: with a large share of the market, you inevitably rise and fall with it.
The second concern was complacency: once ahead, companies faced temptations to concentrate on reaping the financial benefits of their strong position, and to stick with winning ways. But the dangers of this “defend and reap” attitude were considered by leaders to be enormous: from outside due to targeting and copying by competitors, and from inside due to the departure of ambitious people lacking new challenges. Indeed one PLC leader attributed its slow demise to the spawning of competitors from within the company.
The most consistent solution that successful leaders gave to both big concerns was to stay uncomfortable and deliberately take the business to the next challenge.
Staying uncomfortable
This wasn’t about asking for more of the same, which is demanding without being challenging at all. It was about challenging where and how the company did business. To achieve this was difficult and needed discipline, and as with previous themes, different organisations achieved it in different ways. For example:
Raising the stakes by increasing the size of the arena the company played in, for example one payroll services company designed its next generation of further services to address the broader challenge of improving the workplace and the productivity of clients’ employees
Moving a local business into dominant positions in new geographical areas
Incorporating a challenge of “Is it brave? Is it original?” in relation to all market-facing and planning activity
Sustaining the challenge by splitting the business into smaller, more focused components every time it became too unwieldy
Establishing restless, constant change as a deliberate policy driven from the top
There was no common individual solution, other than the underlying requirement to stay on the edge of management’s comfort zone.
The common theme however was deliberately to raise the bar rather than to look back and focus on defending an established position, even though this often meant losing key members of the original senior team, who weren’t willing to get back on the tightrope.
So, in summary, we have now covered the common characteristics of market leading companies from Latitude research that were missing in their more mediocre counterparts.
First, relentless focus on a cause based on a combination of passion for that cause and a firm grip of market and commercial reality.
Second, tough action to get the right team in place, based on the right attitude, even at the expense of talented or experienced team members who aren’t up for the challenge.
Third, creation of breathing space so that management can concentrate on important actions for the business and are not continually distracted by urgent firefighting.
Fourth, clear, tangible behaviour boundaries, inside which there is room to perform, but the crossing of which is simply not tolerated.
Fifth, and finally, the continuing challenge from the senior team to keep the business on the edge of its comfort zone in terms of where and how it does business.
These aren’t rationalised steps to success. Rather they are a series of characteristics that should look obvious to experienced managers of high-performing businesses. By presenting them here, our hope is that they provide a nudge to make a decision that the manager already knows he should be making anyway.
Copyright Latitude 2009. All rights reserved.
Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk
For the full text of this series email steve@latitude.co.uk
Friday 6 March 2009
What makes a market leader? (6/7)
In our last two posts we covered the most critical actions that market leaders from our research took in order to achieve a performance breakthrough. In this and the next post, we will describe the two characteristics that determined whether these same companies continued to thrive, or if they saw their leadership positions fall away.
CEOs of companies that made performance breakthroughs described an interesting challenge that will be familiar to anyone from a fast-growth company. With a breakthrough in performance, came rapid growth and an influx of talented people. The challenge facing a CEO in this situation was how to maintain direction and momentum, and avoid dilution or chaos, whilst giving new people space to act with minimal needless constraint. In our research, we expected strategic planning to be the answer to this problem. But every company we talked to, good and bad, used strategic planning, and this didn’t distinguish the higher performers
The answer to this challenge from the CEOs of successful, sustained market leaders was to employ very clear behavioural boundaries. If people stayed within these boundaries they were given responsibility and room to perform. Stepping outside them, i.e. behaving in a way that was not acceptable to the company’s culture was never tolerated.
A clear “our way” of behaving with uncompromising boundaries
Leaders were very clear that the setting of behavioural boundaries was the key that enabled them to get the most out of people, to generate growth in their team and their business, but at the same time maintaining clear focus and discipline. This delegation of responsibility with clear conditions meant that senior people had space to look forward and focus on important decisions, rather than becoming caught in an operational bottleneck; it also meant that capable junior people took responsibility for solving their own problems and as a result developed and stayed with the business.
There was no universally applicable code of behaviour that distinguished the successful from the unsuccessful companies – there were no magic behaviours. Indeed, behaviour codes were very different in equally successful companies: the absolute requirement to “mix it” in the locker room style of one leading computer games company was essential for people in that business; but this would have been totally unacceptable in the conservative environment of a market leading recruitment consultancy that emphasised respect and professionalism as an essential part of its behaviour code. What was common to the successful companies was that the behaviour code was very clear, very simple, was right for them and was something that the CEO could describe with countless real examples of good and bad. To give a common example, whereas a follower might state “integrity” as a defining value (as did about three-quarters of our sample), a leader would say “we keep our promises”. Simple.
There was also no common pattern to how successful companies in our study came up with these behaviour codes in the first place. There was no magic exercise. Some went through very inclusive approaches, some pushed things down from a strong and inspirational leadership team, for others it was just obvious and there was no discovery exercise at all. What was universally consistent in the leaders was the strength of dissemination of the behaviour code – in particular how the “way of behaving” wove its way into the day-to-day expressions and language of the business.
Of course, there is another side to the behaviour boundary coin – for our leading companies not behaving appropriately was fatal. CEOs described this in very dispassionate terms – “if they don’t behave our way then they’re out” – as simple as that.
In our next and final post of this series, we cover the final characteristic of market leading companies, and probably the most important factor in staying on top – the ability to stay uncomfortable.
Copyright Latitude 2009. All rights reserved.
Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk
For the full text of this series email steve@latitude.co.uk
CEOs of companies that made performance breakthroughs described an interesting challenge that will be familiar to anyone from a fast-growth company. With a breakthrough in performance, came rapid growth and an influx of talented people. The challenge facing a CEO in this situation was how to maintain direction and momentum, and avoid dilution or chaos, whilst giving new people space to act with minimal needless constraint. In our research, we expected strategic planning to be the answer to this problem. But every company we talked to, good and bad, used strategic planning, and this didn’t distinguish the higher performers
The answer to this challenge from the CEOs of successful, sustained market leaders was to employ very clear behavioural boundaries. If people stayed within these boundaries they were given responsibility and room to perform. Stepping outside them, i.e. behaving in a way that was not acceptable to the company’s culture was never tolerated.
A clear “our way” of behaving with uncompromising boundaries
Leaders were very clear that the setting of behavioural boundaries was the key that enabled them to get the most out of people, to generate growth in their team and their business, but at the same time maintaining clear focus and discipline. This delegation of responsibility with clear conditions meant that senior people had space to look forward and focus on important decisions, rather than becoming caught in an operational bottleneck; it also meant that capable junior people took responsibility for solving their own problems and as a result developed and stayed with the business.
There was no universally applicable code of behaviour that distinguished the successful from the unsuccessful companies – there were no magic behaviours. Indeed, behaviour codes were very different in equally successful companies: the absolute requirement to “mix it” in the locker room style of one leading computer games company was essential for people in that business; but this would have been totally unacceptable in the conservative environment of a market leading recruitment consultancy that emphasised respect and professionalism as an essential part of its behaviour code. What was common to the successful companies was that the behaviour code was very clear, very simple, was right for them and was something that the CEO could describe with countless real examples of good and bad. To give a common example, whereas a follower might state “integrity” as a defining value (as did about three-quarters of our sample), a leader would say “we keep our promises”. Simple.
There was also no common pattern to how successful companies in our study came up with these behaviour codes in the first place. There was no magic exercise. Some went through very inclusive approaches, some pushed things down from a strong and inspirational leadership team, for others it was just obvious and there was no discovery exercise at all. What was universally consistent in the leaders was the strength of dissemination of the behaviour code – in particular how the “way of behaving” wove its way into the day-to-day expressions and language of the business.
Of course, there is another side to the behaviour boundary coin – for our leading companies not behaving appropriately was fatal. CEOs described this in very dispassionate terms – “if they don’t behave our way then they’re out” – as simple as that.
In our next and final post of this series, we cover the final characteristic of market leading companies, and probably the most important factor in staying on top – the ability to stay uncomfortable.
Copyright Latitude 2009. All rights reserved.
Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk
For the full text of this series email steve@latitude.co.uk
Sunday 1 March 2009
What makes a market leader? (5/7)
In our last post, we covered the first action market leaders from our research took to make a performance improvement - tough decisions to get the right team in place. In this post, we cover the second activity required to make a breakthrough: creation of breathing space.
Every company that made a breakthrough found a way to create breathing space so that management could get away from piles of day-to-day matters and take time to reflect properly on the business. The leaders emphasised how criticalit was for their senior people to be able to spend time thinking about important, but non-urgent issues without distractions and the need to engage in permanent fire-fighting.
Dominant external factors that stole managers’ attention and intruded upon proper breathing space were cash flow pressures and customer servicing demands.
Deliberate and successful means of dealing with the distraction of cash flow issues were varied. The two most prevalent that didn’t rely on rich parents were, firstly, tough internal decisions to take the costs of the business below ongoing revenues; and secondly focusing deliberately on generating continual rather than one-off revenue streams, which could mean taking a lower margin to buy revenue continuity.
Customer servicing demands were also an unhealthily large day-to-day management distraction for companies struggling to break through. When entering into relationships with clients, leaders consciously took care not to overstretch themselves. For example one leader limited the number of new clients it engaged with every year because the additional servicing needs of new clients could affect performance with existing clients. Another leader used a series of financial and non-financial pre-contract tests upon which it needed to be satisfied before accepting new business.
Though finance and customer service were the biggest external assailants of breathing space, most problems were essentially self-inflicted. As one MD said: "we were the arsonists as well as the firefighters".
MDs of successful companies talked of ways of achieving breathing space that were simply means of ring-fencing time for managers to take their attention beyond the day-to-day. These included simplifying management structures so that responsibilities were clear; giving managers enough time and ownership to work out how to achieve their objectives before interfering; hiring personal assistants; and taking regular team away days. It was always simple stuff that gave managers room and a separate time to work on the important as opposed to the urgent.
Creation of breathing space was the second critical step that our breakthrough performers took. After breakthrough to leadership positions, our market leaders faced some new challenges that required new disciplines to address them. We'll cover these two disciplines in our next two posts.
Copyright Latitude 2009. All rights reserved.
Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk
For the full text of this series email steve@latitude.co.uk
Every company that made a breakthrough found a way to create breathing space so that management could get away from piles of day-to-day matters and take time to reflect properly on the business. The leaders emphasised how criticalit was for their senior people to be able to spend time thinking about important, but non-urgent issues without distractions and the need to engage in permanent fire-fighting.
Dominant external factors that stole managers’ attention and intruded upon proper breathing space were cash flow pressures and customer servicing demands.
Deliberate and successful means of dealing with the distraction of cash flow issues were varied. The two most prevalent that didn’t rely on rich parents were, firstly, tough internal decisions to take the costs of the business below ongoing revenues; and secondly focusing deliberately on generating continual rather than one-off revenue streams, which could mean taking a lower margin to buy revenue continuity.
Customer servicing demands were also an unhealthily large day-to-day management distraction for companies struggling to break through. When entering into relationships with clients, leaders consciously took care not to overstretch themselves. For example one leader limited the number of new clients it engaged with every year because the additional servicing needs of new clients could affect performance with existing clients. Another leader used a series of financial and non-financial pre-contract tests upon which it needed to be satisfied before accepting new business.
Though finance and customer service were the biggest external assailants of breathing space, most problems were essentially self-inflicted. As one MD said: "we were the arsonists as well as the firefighters".
MDs of successful companies talked of ways of achieving breathing space that were simply means of ring-fencing time for managers to take their attention beyond the day-to-day. These included simplifying management structures so that responsibilities were clear; giving managers enough time and ownership to work out how to achieve their objectives before interfering; hiring personal assistants; and taking regular team away days. It was always simple stuff that gave managers room and a separate time to work on the important as opposed to the urgent.
Creation of breathing space was the second critical step that our breakthrough performers took. After breakthrough to leadership positions, our market leaders faced some new challenges that required new disciplines to address them. We'll cover these two disciplines in our next two posts.
Copyright Latitude 2009. All rights reserved.
Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk
For the full text of this series email steve@latitude.co.uk
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