Recognize your five critical business risks.

If you could predict a crisis within your business before its occurrence, wouldn’t you move to prevent or reduce its impact?  Making such predictions is a skill that can be developed, and here’s one method of doing so.

First let’s eliminate external risks for this conversation.

Of course, there are external risks that cannot be controlled or predicted but can be planned for as well – natural disasters, sudden political or economic events that rattle the entire economy, and more. That discussion is for a future time.  Here are risks you can address.

Here are five basic kinds of internal risks that a business faces over time.

First, there is market risk.

Will the marketplace accept your product? Is there a market for your class of product at all?  Market risk is constant and should be of greatest concern to any executive or entrepreneur.  Mitigating market risk is not easy.  Someone within your firm must be finely attuned to the changes in the market, including subtle signs from competitors.  If you are big enough to have a dedicated product manager, that person is a good candidate for this ongoing task, as is a marketing manager, who should be attuned to the changes in the environment.

Second is product risk.

Totally controllable within your organization, the quality and durability of your finished product should be at the top of someone’s job description. Whether it is you or a quality control manager, someone must assure that the product or service you send out to the world will not fail to perform at least to the level of customer expectation, if not to delight those customers most likely to be critical.

Third is finance risk.

[Email readers, continue here…]   Too often the person you call your chief financial officer is trained in accounting, which is primarily a process of looking backward over events in the past. A real CFO must be one to project and plan for the future as well, aware of the need for increased cash during times of growth or market disruption, and aware of the weekly challenges of shifting cash flow.  The worst thing a fragile, entrepreneurial business can endure is to run out of cash.  Not only is the enterprise threatened, but confidence is shaken among employees, suppliers, even customers. Competitors have a field day when hearing about cash problems at a company; and the rumors they pass on can reverberate for months or longer after the problem is solved.

Fourth is competitive risk.

This consists of two separate risks. First: do you have a significant barrier to entry to keep competitors from undermining your effort?  And second: does a competitor have a better story and product to compete effectively against your offering? Someone within your firm must be finely attuned to the changes in the subtle signs from competitors.  These include having a current knowledge of competitors’ hiring practices, pricing strategy, and more.

Fifth is execution risk.

This falls squarely on management to perform, to take the company to and beyond profitability. It is your job to oversee the constant gathering of information, efforts to mitigate these risks, and even to hold senior level planning meetings around analyzing data and asking “what if…” questions that bring out the doomsday scenarios that could hobble your company.   Once defined, the obvious next step is to role play responses to each challenge, or even to put in place preventative measures well in advance for each identified risk.

Running into one or more of these is inevitable.

When one or several of these events hit you and your team, and they certainly will someday, you’ll be better prepared to respond quickly and with a more appropriate, planned response. That will reduce the possibilities of suffering a catastrophe and will more quickly calm the many stakeholders who have reason for concern, looking to you for assurances.

Here’s your homework:

Why not plan a series of meetings with the appropriate members of your firm to discuss these challenges as you and they identify them, and prepare a plan for overcoming each? The time it takes may well be the difference between survival and doom; or it may be the plan that distances you from your competition if any of these events do occur in your mutual future.

Posted in Protecting the business | Leave a comment

What can go wrong with your business growth?

So, your business has begun to take off.

You’ve figured out your channels of distribution, pricing model and how to support your growing list of customers.  Don’t be alarmed by this next statement.  That’s relatively easy.

You can be the one to develop a product or service, promote it, and support it when you are a small operation.   But what if you need to repeat the process of positioning, selling, and supporting your product ten thousand or more times as often as you do today?

What could go wrong?

It’s worth repeating my every three million dollar crisis insight.  You will have recurring crises as you grow your business.  These are predictable and usually arrive in the same recurring order, and often with every $3 million in additional annual gross profit from revenues as you grow.

Your first two predictable growth crises

The first crisis is financial, funding the business, development, inventory, and marketing. The second crisis is organizational. At about the twenty-employee level, the organization is too large for one person to handle internal operations, and a new level of management must be inserted between the founder and the existing team, causing communication and control issues that many founders have not experienced.

[Email readers, continue here…]   And the third predictable crisis is…

… quality control. At about $6 million in revenue, there are so many new customers that product or service quality is stretched to the limit, and complaints about quality surface in quantities you never experienced previously.

Then it usually starts all over.

Guess what? And, at about $9 million in annual revenue, the cycle repeats, with financial needs for additional working capital and money for growth churning to the top of the problem stack.  And, as you grow, the same class of problems returns but with a larger scale and more urgent cry for attention – and more ruinous if not solved.

Know these three and plan for them.

It is important – no it is urgent – that you solve these problems and know how to spot them coming in advance. To scale any company to a large size, you must know how to solve the problems of production, customer service, working capital needs and more in order to keep the company on the rails.  The cost in lost efficiency, customer referrals, and corporate reputation is too high not to make this a priority for a growing business.

Many of the insights in the BERKONOMICS series deal with the issues of scaling your business.  As you feel more and more comfortable being able to scale each portion of the operation, you will be able to focus upon other areas of weakness, spreading the risk out and into a manageable range, rather than overwhelming you and your growing staff with their magnitude.

But wherever possible, it is best to nail down the processes and structure before and as you scale the business, not in emergency response to issues as they develop and grow to threaten the enterprise.

Posted in Growth!, Protecting the business | Leave a comment

Premature scaling can kill your business.

Here’s a lesson from experience.

Venture capitalists sometimes make an error in directing their portfolio company CEOs to push resources to the limit and scale the business to immense size quickly, all to seize market share.  The logic in this is simple: once a company has market share, other issues can be sorted out to monetize the market, make the company profitable, scoop up wavering competitors, or even sell the company to a larger firm looking for a large customer base.

And it’s a contemporary problem.

This form of thinking has been unusually true during the current rise of social media platforms, where market share became the primary goal of a company, with revenues and profitability to follow later.  It was true for Amazon and other visionary companies that grabbed market share during the early Internet era.

But beware.

Many, many companies accepting venture capital lost it all following this instruction.  VCs have a goal of creating extraordinary value for their investors.  Incremental profits from companies that later sell for three to five times their original value at the time of their investment may be considered great successes for founders but relative failures for VCs, who must hit for the fences with every early-stage investment.

Why it’s so personal to me…

[Email readers, continue here…]    I’ve been involved as a board member of two such businesses, where venture investors came aboard and pushed management to immediately scale the business without regard for profitability, and without much regard for infrastructure.  Both businesses scaled beyond what their market could absorb, and revenues did not build at nearly the rate of audience increase.  The cost of each exercise was dramatic, far beyond what a founder-entrepreneur would order to be spent when using their capital or reinvesting cash flow from operations.  Venture investors need large scale to make large exit valuations, or in many cases are not interested in maintaining marginal companies.  To state it again: what might be a success to angel investors and to founders could be only of marginal interest to a typical VC.

Scaling a business is an art as well as a science. 

Scaling requires the addition of fixed overhead, sometimes the kind you cannot shed easily, including leases for expanded space.  Experienced CEOs often make it a habit to scale because of demand, reducing risk and mating cost to growth in revenues.

Angel investors are more tolerant of this than VCs.   Typically, when you bring a VC onboard, you increase the risk, the reward, and the definition of the size for a successful exit.  Adding to this is the extra risk undertaken by premature scaling.  It is important for you to realize that there is a fair tradeoff in valuation between a company with less outside investment and a lower endgame sales price, and one that shoots for a much higher valuation to justify a higher amount of outside investment.


Posted in Growth!, Protecting the business | Leave a comment

Five ways to make and execute a great plan

It is all about execution.

Waiting over a year to see results is too long, since your chance of mid-course correction is greatly reduced.  To make the point, Harvard’s Robert Kaplan believes that less than 10% of corporate strategies are effectively executed.  Ouch!

If that is true, we are tolerant bunch.

We carefully plan in long, dedicated sessions each year or so, then draw up a series of goals, strategies, tactics, objectives, targets, or whatever we want to name them.  We hold all-company meetings where possible, and departmental meetings to roll out the new plan.

We set individual objectives and rewards to match these goals.  Then we manage day-to-day routine execution, and periodically measure the results.

Does this process sound familiar? 

This is the description of a well-managed process within what should be a well-managed company.

And yet, Kaplan is close to right, whether it’s 10% or 30%, it is a minority of strategies that are effectively executed.  Why?

Here is your list of five things to do as a guide to better execution.

[Email readers, continue here…]

  1. Make the plan simple to understand. Once deployed down one or more levels in the organization, like the old game of telephone, the corporate plan begins to look less like the original as each department attempts to adopt it and create departmental objectives to conform.  A complex plan stacks the deck against all but those who created it at the top.
  2. Put someone in charge of executing the plan. That may be you, but in some companies, that requires a dedicated individual tasked with removing roadblocks, measuring success, and reporting progress.
  3. Provide feedback loops at each critical stage of execution. If the plan calls for increased revenues, measure output and efficiency as well as revenues.  Look for leading, not lagging indicators of change.
  4. Make sure you provide the resources necessary to hit the plan, including money, new hire authorizations, and above all, clear instruction and delegation form the top.
  5. Listen to complaints, suggestions and warning signs. Respond, so that people know you are serious about execution of the plan.  Modify what is not working.  Then pivot, when necessary, to scrap part of the plan, and then rewrite it to meet its objectives.

So, you could become one of the top 10% of planners.

If a plan has realistic goals and if you are reasonably able to provide the resources necessary to complete the plan successfully, you are way ahead of that other 90% estimated by Harvard’s Professor Kaplan..

But if you toss a plan out to others to execute, don’t follow through until the end, fail to measure, or to provide needed resources, then you will deserve your fate.  So, take heed.  If you go to the effort to plan, go to the effort to succeed.

Posted in Growth! | 1 Comment

How big is your ocean? A lesson in TAM, SAM & SOM

Is this a problem or an opportunity?

This insight is like a Hans Christian Anderson parable, but aimed at you and your business… There are big fish and small fish, potential customers, all swimming in the sea that is your potential marketplace.  You, the lonely fisherman, must weave a net to catch your fish.  Should your net be large and bulky, requiring more effort and expense to weave?  Or should it be small and delicate, to catch those fish that would otherwise fall through the net?


The biggest mistake many corporate marketers, entrepreneurs and even investors make in the initial stages of planning – overstating the size of the (SOM) serviceable obtainable market.  You probably know, and I’m just lecturing here, that this is the actual market you measure for your product or service, since it is limited to those who use or can use your offering and those you can reach. Those planners most often quote the size of the serviceable available market (SAM) which is so large as to be beyond reach but still in the general field of your offering.  Some even quote the total available market (TAM) which includes market statistics for an entire niche – for products or services far removed from yours, but perhaps from the same customer base.

So, is your (SOM) serviceable obtainable market large enough?

The size of your market may well define the ultimate size of your dream – and the interests of potential investors if that is your aim.  You can be the most successful coffee house owner in a city of ten thousand, or the founding CEO of the largest chain of coffee shops on the continent.  Defining your market in a limiting way reduces the opportunity to exploit the larger potential that may be available to you.

[Email readers, continue here…]   If you attempt to create a manufacturing business where the serviceable obtainable market for your products is only $30 million, even success leading to a dominant share of the market would not allow your company to scale it to a size of great interest to investors.

This lesson is important. 

Companies grow proportional to the size of their (SOM) market, and success cannot turn a limited market opportunity into a grand enterprise.

When we investors look at a business plan, we look immediately to see if there is research to support the claim of a large enough SOM market to expect the candidate company to grow into the size projected.  And we look to see if the size projected is large enough to interest us as investors, since that is directly proportional to the ultimate value of the company in a liquidity event.

To the point of the headline, sometimes an entrepreneur claims that there is a large market, making that TAM error, and then attempts to make the case for growth into a grand scale company, by sharing only a relatively small portion of that market.

The role of competitors in analyzing your claim.

If the market claimed to be of a large size has no current, fast-growing competitors, we investors must guess at the accuracy of your claim – something very unscientific.  But if there are entrants already scaling, often we then can focus upon your differences and advantages that you bring to the market, a much more comfortable piece of work for your investors.

The size of your dream must be scaled to fit into the size of your marketplace – your SOM.  Be sure you can back up your claim with some form of research, then work to perfect the differentiation you offer against the competition.

How about if you have no competitors?

And if your market truly is large but of unknown size, and if there are no competitors growing in the market, you must work doubly hard to convince investors of your dream.  Yet, there are wonderful cases where entrepreneurs created and grew vast enterprises in new markets which could not be measured when their journey began.  Think of FedEx, AOL, Microsoft, Cisco Systems, Facebook, YouTube, UBER, AinB&B – and tens of other billion dollar or larger players in markets that did not exist or were in their infancy when those entrepreneurs cast their nets.

Posted in Finding your ideal niche, Growth!, Positioning | 2 Comments

The four rules for motivating your employees with money.

We’ve debated this one forever it seems.  Should be overwhelm prospective employees with stock options and perks?  Or concentrate our available resources on just plain money as an attraction?   Well, here are rules to make money work for you in recruiting AND to better control its use after you’ve hired your candidate(s).

Some obvious qualifiers.

Salaries or hourly wages must be within reasonable limits set by the industry and matched by the competition, both regionally and for the same job classification.  But more difficult is the sticky issue of employee incentive compensation.  I’ve found that this is an area much more often the subject of a CEO phone call, a roundtable discussion, or a board compensation committee meeting.

And now we need to offer remote work as a primary non-cash incentive.  This one seems non-negotiable for many non-production-line workers and offers savings for both the company and employee if properly implemented and supervised.

But back to the money issue…

There are many studies that tell us how various industries reward employees for achievement above a base pay, or beyond expectation. And there are some industries where tools such as stock options are considered mandatory for a company to be competitive.  But how about listing the basics for designing an excellent incentive compensation program?  Here are several, gleaned from numerous companies and systems of compensation.

First, be rule specific.

[Email readers, continue here…]   A bonus or commission that is granted after the fact, without a target plan or without objectives to meet, is surely appreciated, but does not often create an incentive to exceed, only an expectation of receipt again in the next period.  When a leader and a subordinate agree upon a list of achievements in advance, then good performance can be rewarded based upon a fair assessment of accomplishments against those achievements.  And if those goals are aligned with those of the overall corporation, everyone wins, and the process can be repeated in subsequent periods.

Second, a substantial carrot, a bonus for outstanding achievement. 

A sales commission plan should reward a salesperson with a combination of salary and commission up to the expected level of performance, often called a quota.  Perhaps a part of that compensation plan should include a bonus upon achievement of quota, as a form of recognition and celebration.  Then, contrary to popular thinking, there should be an increasing reward for achievement above the expected number, beyond the list of agreed-upon incentives for non-commissioned employees.

 For a salesperson, the commission percentage should increase above quota, and a second level of bonus available at some higher point.  Sometimes, a combination of revenue, gross profit and even operating income form the basis for individual and team rewards.

Next, some form of rewards should be designed to be immediate.

Rewarding a February achievement in December disconnects the reward from the event, reducing the effect of the reward itself.  If we believe that money does motivate, then we should reward positive behavior immediately to reinforce that behavior.

Protection against gaming the system.

Finally, and perhaps most difficult to design, there must be protection against workarounds or from employees gaming the system.  Reward only gross revenues, and salespeople will push the limit of profitability with discounts, impacting the corporation but not to the same extent, their commissions. A good example is the real estate agent, paid as a percentage of the sale, not upon the sale’s relationship to the asking price.  Sometimes, agents push their clients to accept low offers to assure a quick closing of a deal, since their participation percentage is only slightly affected by a price cut to close the deal quickly.

More examples of gaming the system.

There are more insidious ways to game a compensation system.   Wall Street brokers helped to create the financial crisis by following a bonus system driven by quantity, not quality of trades.  Salespeople paid entirely upon closing a deal will care less about the subsequent completion of a complex, time-consuming transaction.  Support people paid based upon the number of tickets closed will rush to close tickets at the expense of quality service.   There must be thousands of such examples where poorly designed systems allow employees to achieve personal goals that are at odds with the best interest of the corporation or its customers.

Remember the four compensation rules.

So, use these four items as a checklist as you create compensation plans for various levels and types of employees.  Rule specific; substantial upside bonus; immediate rewards; protection against working around the system.

Posted in Depending upon others, Protecting the business | 2 Comments

The coffee and wine school of innovation.

Here’s one for debate around a cup of coffee or a glass of wine.

Most innovation occurs when creative people are relaxed and thinking about other things.  Coffee, wine, quiet time, showers…

How it occurs in large companies…

We all can picture the corporate R&D lab with tens of scientists working at white boards, or over computer models, or with prototypes.  And we picture programmers working at their workstations or on their portable notebooks creating great new code.

But all those people are following the flash of inspiration that started their activity, and it is that flash we seek to reproduce again and again in a successful enterprise.

There’s an advantage to smaller, more agile creative organizations, even if it is an organization of one person.

This leads us back to coffee and wine, and showers, and quiet time.

[Email readers, continue here…]   Given that we are looking for that flash of inspiration that starts us down the path of innovation through the hard work of R&D, maybe we should reengineer our thinking about allocation of time for our most creative resources, including ourselves.  Think like we are agile to the extreme. Imagine no barriers to the creation of our dream.  Wouldn’t that be empowering and productive?

But there are times when creativity comes under pressure.

Necessity, after all, is the mother of invention.  But whole leaps into new groundbreaking areas of innovation most often come from times of reflection, when the mind is clear to dream ahead, to think without interruption.

So, there are those who subscribe to the coffee and wine school and encourage creative thinkers to find extra time in the early mornings or evenings to free the mind to innovate, to find the spark that could propel a company forward.  As a part of a larger group or by yourself, this planned time for creative thinking is important to the successful outcome of a creative project.

Posted in Finding your ideal niche, Growth!, Positioning | 4 Comments

Reward success and failure. Punish only inaction.

Reward failure? 

That may be a difficult concept for an executive. And there are limits of course. We wouldn’t reward a failure to follow laws, or protect lives, or deliberate endangerment of the company or its people.

There are “good” failures.

But should we reward a research team that fails for the fourth time to find the solution to a nagging problem – on the way to a new product?  What if those failures are commonplace?   Where do we draw the line?  We know that Edison tried a thousand types of material before finding tungsten for the core of the light bulb.  If he had been a research employee reporting to you, at what point would you have pulled the plug on the project, or become disillusioned with the person?

Relate this to the culture of your company.

The culture of the company you grow is very much influenced by your actions in rewarding or punishing employees or whole departments. And the best companies seem to be those that are motivated from the top to push limits within reason to find better ways to do things, to create products, to expand the market.  The CEO must realize that most such efforts lead to a dead end or will fail outright.

Here’s (another) personal story…

[Email readers, continue here…]   I was once in the record business.  Speak about insanity. Only two percent of all records released broke even.  Of course, the major hits paid for thousands of misses.  In venture capital, the conventional wisdom is that one in

(Sometimes you miss the goal.)

ten investments will more than pay for the complete loss of half of those ten investments.  Yet investors reward the VC’s with a track record of one in ten, and record companies still churn out a reduced number of recordings, knowing that a great majority will fail to break even.

Let’s finish with a question for you?

So, where does the learned, best of breed CEO or manager step in to administer punishment?  As the headline infers, a visionary, proactive leader should not be able to stand by and condone inaction.  That is not only a waste of corporate assets, but the fixed overhead eaten by the inactive period keeps draining the cash and time resources of the corporation with nothing to show for it.  Wouldn’t you rather dissect the reasons for a failure and move forward, than have nothing to show for time and money spent in wasted fixed overhead?

Posted in Depending upon others, Surrounding yourself with talent | 3 Comments

Have you accidentally created a “power vacuum?”

Here’s a question to help you decide if you’re guilty.

How many times have you heard someone say, “Let’s do it now and ask permission later?” Have you done it in front of your cohort?  That’s a common practice in companies where there is a barrier between levels in the chain of command, or lack of communication between people who work together or even for you as a leader.  That statement represents a failing at some point in the delegation or communication chain, usually by a person at the upper level of management, and should be taken as a warning that there is a problem greater than the issue handled at the moment.

Large companies or small: there’s a difference here.

I’ve worked with organizations that are so large that extensive paperwork is required to obtain approvals to accept customer orders, make any purchases of any size, or any commitment of resources.  In every case, people try to stretch those restrictions in as many ways as possible to get around the time taken to complete forms and who expect to be lost in waiting for approvals.  It’s the “order prevention department” syndrome.

Why do subordinates do this knowingly?

Incomplete delegation of responsibilities, or controls that are too tight, both lead to a rationale for subordinates to circumvent the system.  The worst thing about this is that the people most likely to do this are those most entrepreneurial and creative in doing their jobs.  Conversely, those most likely to fall back and seek guidance, clarification and direction are those most subservient and least creative.

How about those who just assume power in a vacuum?

[Email readers, continue here…]   Middle managers sometimes identify those who assume power as non-conformists or even troublemakers. It is rare to ever see a dialog come out of such an event that leads to better defined delegation of responsibilities, removal of roadblocks, or relaxation of overly restrictive rules.

And the usual result?

More often such actions lead to reprimands without analysis of the underlying general cause.  And occasionally, the very creative, driven individuals you would otherwise celebrate are made candidates for elimination instead of catalysts for change.

Posted in Finding your ideal niche, Surrounding yourself with talent | 1 Comment

A tale of two CEO’s and the management of pain.

This is the tale of two CEOs, one of them unfortunately….me.  

It’s a story of how people handle unusual situations when selling to the top – an executive of a prospective customer.  And the stories couldn’t be more different.

First, my friend’s story…

Recently a CEO friend told me her story of a dinner including her director of business development and an executive of a major company, a candidate for a large sale.  As the dinner progressed, the prospect executive started, and then continued to excuse himself from the table, looking paler each time.  After several of these, upon his return, my CEO friend asked him if everything was OK.  He responded, like most of us would, that all was OK, and that he was having a bit of trouble breathing, would probably have to leave the dinner early, and drive home.

What would you do in this situation?

My CEO friend took one more look at the increasingly pale executive and went into decision mode.  “No, you aren’t fine,” she stated. “Give me your car keys; we’re going to the hospital.”  He reluctantly acquiesced, and she tended to him as her director drove all three to the hospital.  She had him call his wife on the way to meet them at the hospital.  As they waited in the emergency room, after more episodes, his breathing finally became easier, and by the time the doctor saw them, he could find nothing of worry, ruling out stroke or heart attack.

Being responsive to emergencies sometimes requires creative thinking.

[Email readers, continue here…]   Our CEO then returned to the restaurant and met with the chef to have him list all the ingredients from the meal the executive was eating.  The problem was, as you guessed, an undiscovered food allergy, with a possible ambulance ride averted and a happy ending.   The executive even tells the story now that the CEO may have saved his life, because he was unwilling to own up to the fact that his breathing was so very difficult.

Now, I would not have been so fast to take charge.

Maybe it’s a guy thing.  I would have been thinking about the sales relationship and the sale, and would probably have let the guy drive home, acknowledging his discomfort, and ending the dinner early.

This leads me to my story. 

Years ago, I was in the process of selling a software system worth more than $100,000 to a well-known baseball hero who owned his namesake hotel in St. Louis.  (His first name was Stan, for you baseball trivia fans.) Flying on the red eye to make a morning appointment, his hotel bus driver dropped me off in the dark a few feet beyond the lighted portico. I stepped off the van into… a recently dug pit about two feet deep and broke my foot in the fall.  What pain!  I tried to sleep in the room they gave me and managed to make it to the 10:00 AM meeting with the very well-known sports figure and sales candidate.  He saw me drag my leg into the conference room, made no comment, but asked if I would like a tour of the hotel.  “Of course,” I said, ignoring the pain and dragging my foot the entire way through the tour.

Well, I didn’t make the sale. 

And I didn’t sue the hotel.  I was in selling mode and nothing was going to detract from my focus or reputation.  I sure was not admitting to the problem or seeking recourse for the obvious flagrant error by the hotel in not marking the excavation.

Who was right? 

Well, I should have led the meeting with my story of woe to protect others.  The other CEO in this two-CEO story took charge, and made a friend of both the potential customer and his spouse, who she called as they drove to the hospital.

Is it a guy thing?  Is it conditioning us to put things in perspective regardless of the personal outcome, including a lost sale?  I think about these two examples now and have concluded that there are some traits of a great CEO that cannot be learned easily.  Putting others above self and sacrificing a short-term goal is not easy for a type ‘A’ driven entrepreneur when the stakes are high. But it is the right thing to do.

Posted in Depending upon others, General, Protecting the business | 1 Comment