3 epic business theories to raise your bottom line
I make a living out of cleaning up messes. As a parachuting CFO and strategy consultant, one of my first tasks is to dismantle the assembly line mentality. When that takes over finance, IT, engineering, marketing, your entire back office misses out on strategic thinking.
Worse, assembly line thinking stifles the bottom line and destroys value to the company. The happiness factor goes down when people get assigned the wrong jobs or don’t know why they are following certain procedures.
Enter three epic business theories. They transform productivity, accuracy, morale, and quality. I use them every day. Here’s a behind-the-scene’s look at how I apply these theories to my work.
#1: THE PETER PRINCIPLE: PATHWAY TO INCOMPETENCE
Many of the messes I encounter are often created by people who are very accomplished – just not in the job they have. They ended up assuming a role because of a previously demonstrated expertise.
You just got a taste of the Peter Principle: promoting people to their highest level of incompetence. Lawrence J. Peter published his views the same year man stepped on the moon for the first time. It was 1969.
Let’s look at an example. A phenomenal accountant becomes a not-so-great controller. Why? According to the Peter Principle, we reward greatness with a bigger title. I’ve seen this firsthand. The former-stellar-accountant-turned-controller creates a math I get to clean. He takes on a strategic role without the necessary vision.
It may sound like I am talking myself out of projects, but I believe prevention is better than intervention in health and business.
You’ve seen it too: The best salesman is promoted to sales director but lacks people management skills. A competent machinist on the manufacturing floor becomes department supervisor and chokes. Our culture’s “up or out” philosophy drives the Peter Principle.
PRINCIPLE #2: PROFIT POTENTIAL AND MICHAEL PORTER’S COMPETITIVE FORCES
Now fast forward a decade to 1979. Harvard Business School professor Michael E. Porter presented five competitive forces to help determine a business’ profitability potential.
I use Mr. Porter’s genius every day. After parachuting in on multi-million dollar, global companies with maturity and brand under their belt, I’ve seen how difficult it is for many to identify their business components. This is operating in the danger zone. Think yellow taxi cabs, Blockbuster and Kodak. You don’t want to be them.
I know, it’s a little scary.
Borrowing from Han Solo, the forces ARE with you. Here’s a ten-second rundown on Michael Porter’s competitive forces. The first three are horizontal forces. The last two are vertical forces. All speak to business risk and impact the bottom line.
Competitive Rivalry. Look at the number of competitors and their capabilities, online versus offline competition, and the percentage of market share from the top four firms. After analyzing competition ten ways to Sunday, you’ll inevitably look at your company’s innovation factor and go, “Ramp it up!”
Threat of New Entrants. If your industry is easy to enter, risk goes up. The bigger the party, the less treats for all. For example, there are many barriers of entry to the communications industry. Big money is needed for spectrum licenses auctioned by the FCC and to deal with a complex regulatory environment. Being an Uber driver? Easy, but with lots of competition.
Threat of substitute products or services. Rethink what you are selling. Are you selling insurance or peace of mind? Do you sell mattresses or a good night’s sleep or rest? Blockbuster is the classic example of not getting it. They thought they were in the business of renting DVDs. They focused their efforts in beating the “perceived” competition (Hollywood Video and other brick and mortar stores). They were blindsided when Netflix came out. Netflix understood the product was not DVDs, it was entertainment. And they changed how they delivered it. Are you clear on what you are REALLY selling?
Bargaining power of suppliers. Suppliers are like business partners: The decisions they make impact you. In keeping with the other forces, you have control over the business model you create. But what about having control or influence over the decisions your suppliers make? The more suppliers you have, the less dependence (aka risk) you assume. Also, the more you represent of your suppliers business, the more they will be willing to accommodate your needs in order to keep you coming back.
Bargaining power of customers. Like the force on suppliers, this one follows suit. The more diversified your customer base is, the less risk you take on. One leaves, you’re still in business. Look at pricing and quality as differentiators.
Applying these forces to your business will make a difference for you. They will help you organize and be more efficient so in an economic downturn or change of command, your business will thrive.
PRINCIPLE #3: SIMON SINEK’S WHY
Back to the messes. As mentioned, I make a living out of cleaning them up, rearranging business parts, and making them work. It’s easier for me to do that than it is for you; I have objectivity. I don’t know the history (as in who came up with the original idea to make 12 copies of a report back in 1995) that has shaped policy and procedures.
So one of the most important questions I ask is: Why?
There’s an ROI to asking why. If you don’t believe me, just ask Simon Sinek. His credentials are rather incredible: bestselling author of “Start With Why,” speaker whose TED talk has garnered 28 million views and counting, and all-around Grand Poobah of a global movement to find out the real reason you wake up for work each day.
He is probably the most famous circle artist ever. His circle of why puts “why” at the center, “how” in the next circle, and “what” in the third. Simple to draw, just my style. He says most companies ask from the outer circle inward. Successful innovators start in the center.
I ask a lot of whys when I work with a company. Here’s a real life story that saved money, staff time, CEO time and provided a better solution – all because I asked why.
The owners received a daily cash report. Of course it’s important you know your cash position. This report, however, would pass through many hands. I asked: Why are we creating this when we could download the information at any time and put those transactions in Excel? Someone asked for the report, most likely, before internet banking.
To be fair, the company was concerned about outstanding balances. Working from this primal “why,” we created a weekly summary aging report that was much more solution-focused. It provided answers like collection amounts by customer, comments on payment plans proposed, predictions on riding out the balance, the DSO (days sales outstanding), a ranking of the worst offenders, and those most likely to pay. Asking why turned a report into a tool for business decision-making.
One last thought. We’ve evolved since Ford introduced the assembly line. Thriving companies understand where things are going and treat each other as internal customers. It requires more thought than pressing down a screw really fast, not thinking where a part comes from or where it’s going. The end result is less mess, greater confidence, and a healthier bottom line.