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SMB Impossible, Part II

In last month’s post, we got into a meditation on business turnaround principles, as demonstrated by the philosopher Robert Irvine (the host of Restaurant: Impossible). Restaurant: Impossible is my guilty pleasure, my Keeping Up With The Kardashians. And I thought it might be beneficial to try and divine real-world business lessons from a staged, pseudo-realistic makeover show. This is roughly like learning about culture and teamwork from Survivor.

Here is a brief review of the three turnaround principles from last month’s article:

1) Who You Are Is Meaningless; What The Market Wants is Everything

This means that you should get over yourself and your original concept, and make what the market will buy from you at high margins.

2) Knock On The F*#@ing Doors

This means that you should stop pretending that you instinctively know your customer’s mind, and show some hustle with phone calls, surveys, meet-and-greets, and other opportunities that force you to come out from behind your desk to engage the customer.

3) Simplify! Cut Down The Menu and Make Everything Delicious

This means that if you are working your ass of but not profitable, you’re most likely stretched too thin, with too many unprofitable and probably low quality offerings.

And now, let’s pick the conversation back up, and learn what else the great Robert Irvine has to tell us. For the remainder of this article, I consulted heavily with Gary Sutton’s insanely practical turnaround handbook, The Six-Month Fix.

 

4) You Are Ignorant, So Fix Your Ignorance

At the beginning of a standard episode of Restaurant: Impossible, Irvine typically asks the restaurant owner how they started the restaurant. The story usually goes something like this: “Well, I spent 15 years in the manufacturing / software / live bait / other completely unrelated industry, and wasn’t fulfilled. So I took my child’s college fund and all other life’s savings, and went into a business I knew nothing about with a person whose relationship with me I would never want to damage. We are no longer on speaking terms, and I am $25k/$50/$100k/$3M in debt.

The follow-up is always, “What knowledge or experience about the restaurant industry did you have when you started?” Invariably, the answer is, “None.”

Then, “Do you know what your average daily/weekly/monthly food cost is?” –“No.”

–“Do you know what your current food inventory is, and how fresh it is?” –“No.”

There are some businesses that people romanticize. They say, someday I’ll quit the rat race and own a restaurant/bed-and-breakfast/art gallery/eBusiness/really-popular-blog. As if with any of these endeavors, simply hanging the “Open” sign rings the cash register. Restaurants and hospitality businesses are difficult on a good day. The costs are high, the staff typically young and inexperienced, the patrons ungrateful, the economy flaccid, the kitchen chaotic, yada yada yada. Even people who’ve spent years in this industry have a tough time because certain elements like tastes change quickly.

Accept that you are ignorant. Even if you’ve been in your industry for your entire career, accept the philosophical stance that at any point in time, “I know nothing.” Then, get on top of the basics. What are my costs (fixed vs variable)? What’s my breakeven point? What are my product margins? That’s it. Start with your costs and your profitability. Knowing that makes everything easier.

 

5) Forget The Grand Plan, and Stop the Negative Cash Flow

The Six-Month Fix, by Gary Sutton

Once you fix your ignorance, you can proceed to fix your loses. Those managers who are aware of their costs and still losing money are usually under one of the many common illusions in business. These are illusions like, “We’re shooting to acquire this one massive contract, and once it comes in things will get better.” Another is, “We’re just holding together until our game-changer product comes out later this year/next year/in five years.” I’m cribbing heavily from Sutton here.

The illusion in the restaurant business is usually, “We are the only authentically Italian/Lithuanian/Madagascarian/Martian restaurant in at least three miles, so if we can just wait until the economy picks up…” Just as an FYI, the economy is a great scapegoat. I’ve made this mistake too, blaming the economy for the lackluster effects of poor execution. The list of companies that created their greatest profits in the middle of, nay because of, an economic downturn is large and humbling.

This is not the time for holding tight to illusions, egos, misguided concepts or unrealistic assessments of the future. This is the time for adaptation.

There is one caveat: I am not saying that we mortgage our future by killing off investment in future products, or anything like that. Cash is king, but it is not God. We all have to be actively figuring out how our offerings are going to be better tomorrow. That’s what a business is. But we will be judicious about it.

So rank all your current products or services by profit margin, and kill the bottom half of the list. Or see if prices can be raised on low-margin products without affecting sales too dearly. Rethink costly expenses like travel. Find out where your employees hours are being wasted (too many meetings, anyone?). Be open to all options that will save you from having to lay off employees.

 

6) Figure Out Your Core

As Tim Ferriss would council, focus on the 20% of your offerings responsible for 80% of your revenue, and make them outstanding.

In the last section, we discussed one side of the Coin of Delusion: hanging onto an outdated identity or long-shot possibility as a justification for not taking action. Like, “The economy will bounce next quarter.”

The flip side of that delusional coin is the notion of being everything to everyone. The restaurant that promotes itself as a bistro AND pizza joint. And they sell sushi. And coffee drinks. And they’re a music venue…

Diversifying your product (profitably) is fine if it doesn’t interfere with your core business identity. Sutton tells the story of a manager at Home Depot who, as a test, let a vendor sell pantyhose at a kiosk that was near the cash register. The test ended up being wildly profitable, and could be more so if it was expanded. The manager took this idea to his superiors, expecting to be instantly promoted and given a medal for original thought.

The idea was axed, and the manager was asked to remove that profitable kiosk. But why?? Because it’s Home Depot. What home improvement problem is solved by pantyhose, other than the potential attractiveness of the occupants? Their executive management said, correctly, “Fuzzy direction kills more businesses than competition or dying markets.”

There are some very general businesses, but most successful ones find success by distinguishing their product and their customer better than their competition does. This is like a pub that says, “We have many things on the menu but we are famous for how good our hamburgers are, and we tailor our business to the after-work crowd from our working-class neighborhood.”

In any business, you have to be able to do something better than all the other guys, and that something has to heavily influence the purchase decision in your favor. What do you do better than anyone else?

 

7) By the Time You Become Aware of Employee or Culture Problems, It’s Too Late

Of all the elements of Restaurant: Impossible, the one that adds the real umph is the human drama. The owner has their whole livelihood on the line, usually mortgaged many times over. They are typically desperate to turn around their failing business through long hours and pressure on the staff. In every case where Irvine finds business dysfunction, he also finds dysfunction on a managerial, which is to say a basic human, level.

This typically plays out as a Come to Jesus meeting between the manager and the staff. You can tell that it’s the first honest conversation that’s they’ve all had in a while. The manager is resentful that the staff acts lazily and unprofessionally, leaving him/her to clean up the mess and put in all the extra hours. The staff tries to articulate as best they can that they’ve never been properly trained, that there are no established procedures for anything, and that their personal boundaries are violated by the manager’s step-in-an-do-it-myself attitude. Crying is usually involved.

Trust is a tricky subject. Managers can screw up trust very unintentionally. I’ve known very well-meaning managers who put a lot of time and effort into developing a specific company culture, who then inadvertently screw up that trust by stepping in an controlling a process that they’re supposed to have delegated. They can’t help themselves.

Fight opaqueness and politics. Healthy culture does not begin with Foosball tables in the office (although there’s a lot to be said for that). Healthy culture starts with transparent conversations and honest assessments about collective strengths and weaknesses. The moment you feel you need to “puff up” or in any way massage or sugarcoat a communication “to the troops” (I hate that pejorative term), your culture is already dying.

Actually I’m wrong about that. Healthy culture starts with the manager being able to hear criticism of his/her performance voiced by his employees, value it, absorb it dispassionately, and fix it. Some would argue that should be a two-way street, but I disagree. The manager is setting themselves up as a leader. They set the example of how to take the criticism of a transparent conversation and use it to make improvements. “The troops” will do likewise if they have the good example to follow.

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SMB, Impossible: Transferable Principles of Successful Small Business

May 31, 2015 1 comment

One of my guilty pleasures is the show Restaurant: Impossible with Robert Irvine. Whenever I take a trip out to my parents’ place in Woodstock, they always have a backlog of the show on their DVR.

I’ve always loved stories about fixers, from Winston Wolf to Michael Clayton to Ray Donovan, to real life practitioners like Judy Smith and Gary Sutton. And of course, Chef Irvine. I love the romantic fiction that a special breed of grizzled, hard-knocks teachers can fly in like The Pros from Dover and set everything straight. And of course, those fixers who do not live in complete fiction are still presenting a stage-managed pseudo-reality. We accept this when we watch – that their pronouncements are “for entertainment purposes only.”

Still, there are learnings here for us to take. Let’s take Irving as our example. For those who have never seen Restaurant: Impossible, it’s exactly what you think it is. Irvine has to make-over a failing restaurant within two days and with a $10,000 budget. He’s an imposing former military man, and his brand of love is, as you would expect, a little on the tough side. He’s also a showman and a bit of a self-promoter who raised some controversy in 2008 for resume-padding, so we know better than to take his lionized self-portrayal at absolute face value.

I have no doubt that, in general, the incompetencies, lack of standards, ugliness and muck that he identifies are not completely off-base from how they are portrayed on the show. Among the sloppiness he finds are thing like business partners who no longer like one another, mountains of financial debt, no processes and procedures for running the business, no clear responsibilities, no real leadership, bad food, ugly decor, dirty kitchens, untrained staff, and naturally no customers. There may be exaggerations, and some circumstances where Irving is off base, but for the most part I’d be willing to accept that the initial problems are pretty damn bad.

Irving’s next step is to make some major adjustments to menu, decor, responsibilities to whip things into shape. Let’s see if we can’t take some of these restaurant turnaround actions he would institute, and broaden them out a bit so that we can apply them to our own businesses. Here are my first three principals. More to come in a follow-up post. Let me know your suggestions in the comments.

 

1) Who You Are Is Meaningless; What The Market Wants is Everything

The first obstacle to making a profit that Irvine typically finds is that the restaurant owner has a great deal of ego wrapped up in the restaurant’s identity. It’s as if to say, “Regardless of the dynamics of the world around me, this is WHO WE ARE!!!” These are the establishments that are still preparing Beef Wellington table-side like they did in the 60’s, even though no one today orders it.

There have been some restaurants that didn’t survive the make-over, with some of the doomed owners going on record saying that they undid a lot of Irving’s changes because that’s “what their customers wanted.” And then they went out of business. I have no idea the individual circumstances, but I’m picturing one of these diners in a college town who has somehow made regulars out of the five retirees in the neighborhood. And someone comes in and says, “Are you crazy? This is a college town! That’s the market!” And then the idiot owner points to the five retirees and says, “These are my long-term, valued customers, and I’m going to orient my business around them!”

 

2) Knock On The F*#@ing Doors

One recent episode I binged from my parent’s DVR involved a restaurant in Downer’s Grove, IL that insisted on being THE high-end grocer/bistro of the area. They had a huge rack of $60+ bottles of wine that hadn’t been turned over since they opened, and they wondered why. They were located in a residential complex, and so the first thing that Irvine did was something that the owners had never once thought to do: he knocked on the neighbor’s doors, introduced himself, and asked what they thought of the grocer/bistro. Surprise, surprise…no one went there because it was way overpriced.

If you’re in a small business that’s not executing well, the easiest thing you can do is come up with an internal hypothesis: “Oh, it must be the economy,” or some such. The thing that takes guts, and the thing that you have to do, is find some potential customers and effing ASK them. “Hi, I’m Mr./Ms. Blank, and this is my company/product. This is the price. Would you ever buy something like this for yourself?” I personally suck at this. I’m a digital marketer, which means I hide behind an Adwords or Facebook ad platform all day and “divine from analytics” that which should be changed. This is completely stupid. Find potential customers and ask the question!

 

3) Simplify! Cut Down The Menu and Make Everything Delicious

Here’s another common business problem that plagues the best of us. I happen to be fighting this very phenomenon right at the moment. Irvine orders five or six things from the menu to test the service and the food quality. And most times he’s served reheated frozen food. Of course it sucks.

How many times have managers you known tried to expand their way out of a problem? “Oh yeah, we can do that too. And that too. And THAT too!” If only we added this competency, we wouldn’t have lost that last sale…right?

This is repugnant. Even a staff operating at peak efficiency can only do so many things well. Focus on the 20% of what you produce that’s creating 80% of your good results and start cutting. Take what’s left after the cut and improve it. Improve the quality, improve the presentation, improve the customer experience and customer service. You probably have the skills to execute really well if you’re not asked to execute EVERYTHING.

 

What other general SMB principals (if any) can we take from the tough-love make-over gurus like Chef Irvine? Let me know in the comments.

TO BE CONTINUED…

The Psychology of Enron

June 29, 2014 2 comments

Cover of

“Nil sapientiae odiosius acumine nimio. (Nothing is more hateful to wisdom than excessive cleverness.)” –Petrarch

One of the most striking scenes in Bethany McLean and Peter Elkind’s Enron expose The Smartest Guys in the Room details the courtroom testimony of Kenneth Lay and Jeff Skilling during their criminal trial. You would expect that the people responsible for scandal that defrauded thousands of stockholders and pension plan investors to do their fair share of finger pointing and legalistic arguing, but Lay and Skilling went further than that.

They seemed in a different reality altogether. It was though they actually still believed, even after the bankruptcy, that Enron was a fundamentally healthy company that was the victim of bad luck, a fickle press and the vindictiveness of Wall Street analysts. Far from trying to obfuscate and spin their criminal behavior, they seemed to believe — actually believe in their hearts — that they had done nothing wrong.

Now, Skilling and Lay never raised an insanity defense; they never contested the notion that they knew exactly what they were doing. They simply never saw any wrongfulness in their actions. Those actions involved hiding billions of dollars of debt from their balance sheet (The Enron SPE’s), personally profiting ownership stakes in Enron business partner companies (Again, the SPE’s), and lying  to stockholders about the very nature of their business (maintaining a facade as a “logistics” company while making most of its profits from energy future speculation).

Much of this denial of the belief of wrongdoing is reminiscent of the banking crash of 2008. Defendants seemed to believe in their hearts not only that they were following the law, but that they were in fact innovating new financial markets. The blindness to the big picture corruption of the sub-prime mortgage market and the disguising of bad debt is eerily reminiscent. In fact, some of the very vehicles that Enron used to hide its debt from shareholders (off-balance sheet SPE’s) factored heavily into the 2008 banking crisis.

I’m not interested in the moral question of what makes us elect unethical behavior. From this writer’s perspective, men are apes with iPhones. But I am interested in what goes on in our brain to make us believe we are acting ethically when in fact we are grossly transgressing boundaries that would be clear to any reasonable man. Read more…

The Anti-motivational Speech – A Top 10 List

December 10, 2012 5 comments

When I was 11 years old, I saw a speech by 80’s-era motivational speaker Joe Charbonneau. I thought it was the coolest thing ever, and from that day forward wanted to be a public speaker of some kind.

That star faded a little bit as I got older, and I could peek behind the curtain of the tropes and platitudes that seemed so brilliant at the time (no disrespect to the late Mr. Charbonneau). This kind of speaking is now (rightly) considered more self-parody than serious boost to personal development. I wish I could say that the genre is no longer taken seriously, but speakers like Tony Robbins are now giving mega-concerts to thousands of their faithful. There is, when you think about it, no substantive difference between Tony Robbins and Joel Osteen or Rick Warren. They deal in the trade of temporary ecstasy.

I was looking through YouTube for examples of good modern motivational speakers, just to see if there was anyone out there with some substance. The exercise was depressing. The field has not changed much from the 80’s; the most successful speakers are still blow-dried white guys talking about getting you to change your state of mind. Many are hired by their fellow blow-dried, white corporate managers who believe that their workforce is unmotivated because of some attitudinal flaw that only affects the middle class.

What’s worse, the content is mostly schlock. Many famous systems are based on Neuro-linguistic Programming, a controversial, unproven form of hypnosis. Recently, on an international flight, I saw a BBC documentary called  “Money” about the proliferation of wealth creation seminars in England. It was about how poor and middle-income people would pay thousands of pounds for materials about attitude transformation. They would be instructed to meditate in strange ways several times a day, visualizing themselves with tons of cash. It was sickening, like an Amway seminar had slept with a Baptist revival.

I still want to be a speaker, and after having listened to a lot of modern motivational speeches, I think I have a useful trial theme. I call it, “The Anti-motivational Speech: How To Motivate Yourself and Those Around You By No Longer Being a Fucking Idiot.” I think it’s really going to save the world. It turns out, even smart people get themselves into really stupid habits, and transform into idiots slowly over time. You might be behaving like a total idiot and not even know it! I have ten points so far that I’m thinking about including, and I invite you to submit suggestions if I’ve missed anything important. Read more…

To Fake It, or Not To Fake It

October 31, 2012 4 comments

Dr. Amy Cuddy is a social scientist at Harvard Business School and an expert on prejudice. Her most recent article (Co-authored with Dana R. Carney) focuses on the relationship between physical postures and hormone levels in the body. It’s attracted enough attention to earn her a TED talk, which is how I first found her.

Since ancient times, we have taken for granted that body posturing reflects a person’s mood at that moment. The West, and in particular the U.S., makes body language observance practically into a fetish. One needs look no further than the recent presidential debates to see pundits over-analyze and misconstrue every twitch and tick of the candidates.

Dr. Cuddy (She must get a lot of grief from fans of the show House) further points out that body language also predicts behavioral outcomes. She cites research in which experiment subjects who viewed 30-second (silent) videos of doctors speaking to their patients could accurately predict which doctors were more likely to be sued based on their non-verbal manner (demonstrating that doctors’ behavior correlates more strongly with lawsuits than does their competence).

Now to the central question: we know that non-verbals can govern how we feel about, and behave toward, other people; do they also determine how we think and feel about ourselves? In other words, do our physicality and posture influence our mood as much as our mood influences our physicality and posture?

Dr. Cuddy designed an experiment in which subjects held a certain body pose for two minutes. They were not told about the nature of the poses, but half of the subjects posed in attitudes of “high power” (e.g. hands on hips, leaned back, arms extended upwards and wide, etc.) and the other half posed in attitudes of “low power” (e.g. contracted core, legs crossed at the knee, hands touching neck, etc.). They than ran a number of tests on these subjects including questionnaires, gambling tests, and saliva tests for endocrine levels.

She found that those who held the high-power poses for two minutes showed more poise and confidence immediately afterword, were more optimistic, and willing to take risks. Most striking, the two groups showed vastly different levels of certain hormones in the saliva tests. Those who held the high-power posers showed a 20% testosterone increase from baseline (low-power posers showed a 10% decrease). This explains the increased feelings of optimism and confidence. Also, high-power posers showed a 25% decrease in cortisol (low-power posers showed a 15% increase). Cortisol governs stress-reactivity – lower levels of the hormone tend to indicate better coping. It seems, amazingly enough, that physicality actually changes body chemistry. Read more…

Michael J. Muldoon, Teacher and Coach, 1948-2012

July 20, 2012 8 comments

Michael J. Muldoon

Anyone can talk a good game about emotional intelligence. But when they pass away, and the line for their wake goes out the door and around the building, it’s a sign that they knew a little something about the subject.

Mike Muldoon was a marketer, corporate leadership coach and one of my professors at Lake Forest Graduate School of Management. He died this past Saturday, aged 63. He was an insightful and demanding instructor, with an irrepressible sense of humor drier than the Mojave. He famously talked through a set of clenched teeth about the things that fashinated him. His students performed loving imitations of his mannerisms. He signed his emails with the tag line: “Don’t tell me the sky’s the limit when I know there are footprints on the moon.” Confidentially, I always thought it was a touch cheesy until now.

He talked about his family constantly, and I met them for the first time at the service. They instantly gave the impression of a warm, close-knit, church-going midwestern family. His son, a tall man with a strong presence, was just married the previous weekend. His daughters, both lovely people, were bearing the receiving line duties with poise. One of them is to be married in less than a month. They had the support of an endless host of friends, family, and well-wishers. Read more…

Why Corporations Undervalue Your Contribution

Capital managers have always viewed companies as collections of assets rather than employees, but over the last 30 years this mentality has become an unfortunate, unquestioned part of our mainstream culture. The viewpoint didn’t really become real for me until I took my MBA finance class, a class which teaches decision-making based on a company’s financial status. I was amazed how different the world looks when you only care about the books.

For those people who are unfamiliar, there are a few basic financial statements that all public companies release quarterly. One is the balance sheet, which shows a snapshot of everything the company owns and how much of those assets can be claimed by creditors versus stockholders. The other major one is the income statement, which matches a company’s revenues to the expenses that generated those revenues.

Here’s what I finally understood from taking this class: if you evaluate a company only by these statements, you have different inclinations than if you work for that company and know the employees personally.

Read more…