Business Strategy, Tips & Tools
“Julia, I am working as hard as I can to make changes in my business. Why do I feel like I take two steps forward only to take one step back?”
The number one challenge for our clients is managing change! This is not an area most folks enjoy thinking about. What we find at Stanford is not that the business owners we work with don’t want or need change; rather, they don’t understand how to plan for and implement change. Sometimes, you have to take one step back in order to take two steps forward!
There are hundreds of books written on change management. I personally love to teach business owner’s how to tackle making changes in their business so I could write on this topic for a year! I will split this topic into two post in order to cover what I feel is most beneficial for business owners to consider when making changes in their business.
What is Change?
Change is the only constant that we can rely on in the business world. It is critical for business owners to:
- Understand change
- Promote change
- Cope with change
- Value change
Although it seems an obvious question to begin with – the differences in how people perceive change is quite amazing. We find that the easiest way to understand what change represents is to know where you are and where you want to be – all you have to do now is get there.
Seems pretty straightforward doesn’t it!
Well that is the theory but the practice can be a lot harder especially when you understand that it’s not only you that needs to know this but everyone who may be impacted by the change.
What Drives Change
The need for change can come from multiple sources both internal and external:
- Customers
- Internal processes
- Employees
- Economic conditions
- Competitors
- Suppliers
- Technology
- Culture
Business owners have to understand the many sources that drive the need for change and their impact, both actual and potential, on the activities that allow the business to operate and produce revenue. The ability to cope with the changes is critical to long term survival.
Types of Change
There are several types of change, each with its own set of characteristics and impact on the business. Which type of change do you think is more easily controlled and preferable to a small business?
Incremental Change
The characteristics of incremental change include:
- Mostly happening
- Evolutionary
- Can be planned
- Can be invisible
- Can be deceptive
- May be culturally driven
Transformational Change
The characteristics of transformational change are:
- Rarely planned
- Difficult to control
- Can be overpowering
- Can be unavoidable
Planned Change
For planned change the characteristics include:
- Focus is on structure, systems, and processes
- Focus is on implementation & planning
- Emphasis is on the people involved because organizations don’t change – people change!
Of course, planned change is more easily controlled and preferable to a small business. Again, understanding where you are and where you want to be are the first steps in how to get there. Planned change is most often achieved because you are focussed on outcomes. The most successful outcomes are leader, process, or improvement driven changes.
Preparing For Change
The most important pre-requisite for change is a clear shared vision. This vision, along with the capacity for change and defined steps to achieving goals, will reduce frustration for all affected by the change.
The ability to see and understand how the business will benefit is vital. Change is most effective when people involved clearly understand:
- Why the change is necessary
- What the change will mean to their activity
- Where or how the change will bring improvements
People need to believe in the change to give it their full support and commitment so a clear vision of what the change is about is vital. The vision will be dependent upon the following organizational factors
- Purpose
- Culture
- Values
- Mission
The vision is central and is dependent upon
- Conveying an imaginable picture of the future
- Appealing to the long term interests of the people
- Consisting of realistic and attainable goals
- Being clear enough to guide decision-making
- Being flexible enough to allow individual initiative as well as adjustments for changing situations
- Being easy to explain and understand.
Without a clear vision there is a high chance of the change failing and this may have a significant negative impact on the survival of the business or goals. It is important to look at and understand the reasons why change fails.
Without taking heed of the negatives and planning for the positives to be implemented, change will be seen as a resource draining activity that is unwelcome in the organization. The ability to plan, implement and manage change successfully provides a business with a significant competitive advantage in today’s business environment.
We will look at Resistance to Change & Why Change Doesn’t Work next time.
Business Strategy, Tips & Tools
“Julia, you are always saying WHY, WHY, WHY, WHY, WHY! What is so important about why?”
Read Part 1 here.
Developing the Solution
The solution devised and implemented must meet the following criteria:
- The problem must not recur
- The solution cannot have additional negative effects
- The solution must be appropriately implemented
- The resources required to implement the solution must be kept to a minimum.
Two simple techniques for developing solutions are TPN and Brainstorming.
TPN analysis
TPN Analysis is the process of deciding whether or not you have Total, Partial, or No control over a situation. It can be done every time a problem arises or as you are weeding through a list of problems.
This technique allows you to decide which problems you can actually do something about. The focus is therefore on the span of control and there is a need for realism to be applied. The methodology for TPN analysis is straightforward:
- Determine your problems
- For each problem, decide whether your span of control over it is
T – Total
P- Partial
N – None
This forces you to look only at the problems where you can have an impact. Once you have determined which problems you can control, a good technique for coming up with solutions is Brainstorming.
Brainstorming
Rules for Brainstorming
- Have a strict rotation to involve everyone
- Allow people to pass their turn
- No discussion
- No criticism
- No evaluation/editing of ideas
- Capture everything in a visible format
- Number the ideas as they emerge
- Go into a free flow mode towards the end
Brainstorming is the process of gathering a group of trusted advisors to help you identify the root cause of a problem and throw out ideas for solutions. A trusted advisor could friends, family, other business owners, really anyone whom you trust.
During your brainstorming session you will:
- Create a list of problems
- Identify theories of why the problem exists
- Identify the root cause
- Share ideas
- Define solutions
Brainstorming gives you an opportunity to get different views and opinions from those who are not as closely related to the problem. If done properly, it can spark creativity and provide options that you may never have thought of.
At the end of your brainstorming session, you should have a list of possible solutions. Your next step is to pick the best solution, implement it, and monitor for effectiveness.
Implementing the solution
Once the solution has been identified, the implementation must be planned. Metrics to determine the extent of the success or failure of the solution need to be set.
- A suitable measurement system needs to be set up
- Analysis of the metrics needs to be established in advance
- If the metrics show a failure then action needs to be taken to realign the effort
This process can be managed through the Plan, Do, Check, & Act cycle (PDCA).
- Plan – Plan the implementation and define the metrics
- Do – Start the implementation process
- Check – Check the implementation results against target
- Act – If the implementation results are off target then act so as to realign the effort.
The PDCA cycle can be used as tool to bring discipline into the implementation and make sure that the results obtained are compared with those expected and any deviation leads to a re-evaluation. The goal is for continuous improvement as shown by achieving the expected results.
Why We Sometimes Can’t Fix the Root Cause
Poor Problem Solving Skills
- Due to lack of training
- Capability of the personnel involved even after training
- No emphasis put on problem solving as a critical business skill in the organization
Lack of Focus
- Insufficient focus on the problem at hand leading to non-completion
- Too many problems being tackled at once
- Activity centered on problems that affect non-critical business areas, thereby devaluing the problem solving activity
Lack of Resources
- Information not available or accessible
- No personnel released to work on problem solving teams
- Little or no co-operation
- No support from senior levels
Non-implementable solutions
Solutions are not implementable due to
- Resistance to change
- Cost
- Political issues
- Capability of personnel
- Time requirements
- Wrong solutions generated
Understanding where or why we are making excuses is the first step to solving most of our problems! Once we move past the excuses we can get to the root cause of the problems and use the tools we have to find solutions!
Business Strategy
“Julia, you are always saying WHY, WHY, WHY, WHY, WHY! What is so important about why?”
All businesses have problems. The problems in a small business are unique for many different reasons. One being we wear so many different hats that problems tend to be pushed aside to be dealt with later. Pushing them aside leads to small problems becoming big expensive problems. This is why it’s important that we learn to tackle the problems quickly and effectively by getting to the root cause and implementing a proper solution.
What is a Problem?
A problem is a deviation from acceptable performance.
There can always be a gap between what is actually happening and what is supposed to be happening. By solving the problem that is causing the issue we will close the performance gap.
Why Solve Problems?
Where problems exist but remain unsolved the following can occur:
- Demotivation of staff/self
- Loss of customers
- Waste of resources
- Reduction of profit
- Compromised growth/survival potential
Solving a problem effectively leads to:
- Increased productivity
- Increased enjoyment at work
- Less stress
- Improved quality
- Improved efficiency
Every business has problems. Problems are just opportunities to make improvements, forcing us to make necessary changes that will eventually show up on the bottom line. To find an acceptable solution to a problem we must first identify the root cause of the problem.
Symptoms are usually the visible manifestation of the problem and because they are visible they can attract attention. In many organizations, effort is often spent eradicating symptoms of a problem, however the unseen parts of the problem – the root cause, is still there needing attention.
Types of Problems
Each problem category has its own peculiarities that must be taken into consideration when tackling them.
Problems can be broadly grouped into 3 categories:
- People problems
These may be difficult to resolve because people are not totally logical and emotions can play a part. Plus no two people are alike, and what works for one will not work for another.
- Process problems
Processes are in place to ensure that everything happens as it should, every time, and by everybody. Usually people are a key element of processes. This adds another level of complexity to system problems.
- System problems
Systems are used to execute the process. These cover mechanical, electrical, electronic, or informational. These problems are usually logical but complex and requiring a high level of technical knowledge.
For the small business, most problems are going to fall under the People and Process categories.
Identifying the Root Cause
To get to the real cause of your problem, you must dig down past your assumptions and excuses. For example, many small business owners blame decrease profits on lack of sales due to a poor economy. In reality, the economy doesn’t dictate “if” we do business, it dictates “how” we do business. In this example, our decrease profits are due to our failure to adjust our business model and control our expenses.
There are many techniques available to help you determine your root cause. We suggest a few simple approaches.
- The 5 W’s
- The 5 Why’s
- Cause and Effect Analysis
The 5 W’s
This is a simple technique that allows you to dig into the problem by asking:
You may also ask How. This technique gets you to dig into the problem in more detail so that all available information can be gathered.
Example:
- What: We are over budget on expenses.
- Where: We are over budget on Travel/Entertainment/Meals
- When: Month/Quarterly (the month of May)
- Who: Me
- Why: Went to multiple unplanned Networking events
The 5 Why’s
This is another simple technique that allows you to strip away layers from the problem and tackle root cause. This technique can be used alone or in conjunction with the 5 W’s.
- Ask why the problem occurred
- Get an answer and ask why it is so
- Do this 5 times to reach a depth of 5 layers of causes.
Depending on the problem, you may not need to do this 5 times. This method begins to give robust information beyond the third Why.
Example:
We’re over budget:
- Why? Sub-contract labor was over budget
- Why was sub-contract labor over? Sub-contractor double-billed us
- Why we were double billed? It wasn’t a double bill, labor hours for 2 months was actually billed in 1 month.
- Why were we billed incorrectly? We failed to make a change order for extra labor hours.
- Why did we not make the change order? Bookkeeper failed to enter job costing.
So the root cause of our problem is a training issue with the bookkeeper.
Cause & Effect Analysis
Our third simple technique forces you to focus on possible causes of a problem. Once you identify possible causes of a problem you can analyze each to get to the root cause. You may find simple solutions or links several problems to one root cause.
- Identify all possible causes of the problem
- Write them on Post-it stickers
- Begin to analyze and cluster the potential causes
- Analyze for root cause
- Test the reality of each cause
Benefits are:
- Focus is on the cause
- Different perspectives emerge
- Allows linkages to be established
Now that you have identified the root cause of the problem, you must develop and implement a solution. And the rest of the Root Cause story is…until next time!
Tips & Tools
“Julia, you mentioned Key Performance Indicators last time. Please tell me more about them and how to use these indicators to see an improvement in the overall performance of my company!”
Key Performance Indicators (KPIs) are a type of performance measurement. They can be used to provide the most significant performance information as to whether the company is on track or not.
KPI’s represent a set of measures that focus on specific business functions of the company that are most critical for the current and future success of the company. They are measurements towards the success of reaching your stated goals. You can’t manage what you can’t measure! KPI’s are also known as performance metrics, business indicators, and performance ratios.
So, why are KPI’s important to me as a small business owner?
VISION (focus on the future)
OBJECTIVES (convert the vision into something you can measure)
GOALS (defines what needs to happen to achieve your objectives)
Remember your vision, the dream, the reason you started your business? Is your vision clear? Have you developed objectives for the company that support your vision? Are your goals relevant to meeting the objectives? These questions are important no matter what the size of the business. To meet the objectives of the business, we need to set goals that help us achieve those objectives, plain and simple. Without goals that support your objectives, you have no direction.
Developing Key Performance Indicators
- Identify the results you expect. In order to measure your performance with key performance indicators, first you need to know what the goals actually are. Establish clear goals that map to areas of the company: revenue, profit, expenses and so forth. Key performance indicators are not limited to income. Review business goals, and apply these to the desired results.
- Establish the numbers needed to reach goals. Go beyond just identifying the desired results. Identify actual numbers that represent company objectives. Ask yourself how much profit the company needs to make, how many new customers it needs to add, how much money it needs to save. A company that makes $1 million a year might have a goal of making $1.5 million a year. That $1.5 million is a specific, clear goal–more than just a goal of increasing company profits.
- Identify the progress that has occurred so far. Key performance indicators work alongside specific company activities, and developing indicators for future activities requires an understanding of what has already occurred or is in the process of occurring. If the company has a goal of making $1.5 million a year and is currently making $1 million a year, the company is approximately 67 percent of the way toward its goal.
- Determine the percentage of change that has occurred within each area of review. In other words, take a closer look at the current numbers–not focusing right now on the future numbers–and consider what has happened in the past. Doing so will enable you to create more effective goals for the future. Look at the percentage of change on different scales: the change in profits from one July to the next, or the number of clients between one month and the next.
- Establish the frequency of reviewing these indicators. Looking at key performance indicators should not occur just once but should be a process that occurs at stated intervals over time. Each area of a company studied will require a different frequency. Company profits might need to be reviewed only monthly, whereas satisfaction issues should be reviewed quarterly. Determine the frequency based on the nature of the company and industry.
Many small business owners think that KPI’s are something that only large businesses would be concerned with. However, identifying key areas in your business, no matter what size, allows the owner to quickly monitor the current health and direction of the business.
What do your KPI’s say about your business?
To really understand your business you have to collect data about your business and then turn this data into meaningful information. Data itself is not information. You evaluate the data to identify trends or inefficiencies in your business that are creating profit leaks in the form of lost revenue, out of control expenses, poor process management. All of which are important to all businesses.
Key Performance Indicators help a company define and measure progress toward a stated company goal. Many things are measurable. That does not make them key to the company’s success. In selecting Key Performance Indicators, it is critical to limit them to those factors that are essential for the company to reach its goals. It is also important to keep the number of Key Performance Indicators small, to keep it from being overwhelming and discouraging. Everyone’s attention should be focused on achieving the same KPIs.
Key Performance Indicators are a perfect management tool to use for monitoring improvement to the overall performance of the company.
You Can’t Manage What You Can’t Measure!
Tips & Tools
“Julia, you keep talking about “pre-planned profit”. What does that mean exactly and how do I do it?”
How much of every sales dollar are you actually keeping? We can all agree that nothing happens without a sale. However, looking at the total revenue line on the profit and loss statement does not tell the whole story. Increase in revenue does not necessarily equal increase in profit or profit margins. For example; if a company has costs that increased at a greater rate than revenue, it leads to a lower profit margin. Profit Margin is calculated by net income divided by total revenue (sales). This profit margin measures how much of each dollar the company keeps after all cost of goods and expenses are paid.
While increased sales add to the bottom line to a certain extent, you must control expenses to receive the full benefit. Controlling cost is the key to engineering greater profit. Profit must be pre-determined, planned, and monitored just as any other expense. Planning for profit is a component of your yearly business plan. If you are in business to make a profit then it makes sense to plan for it. Even if your company made a profit last year you have to ask yourself how much higher the margin could have been if you treated profit as your first line item expense (the first line on the expenses listed on your profit and loss). Practiced and administered consistently, a pre-determined profit plan can be quite advantageous for companies of all sizes. It avoids the usual “wing and a prayer” hope that at the end of the year that there is something left!
A profit plan is not a sales or expense plan. It is simply a clear and concise written action plan that details how owners and managers work together to achieve the company’s minimum profit requirements (pre-determined). This pre-determined profit is based on what the company needs to achieve in profits to meet the goals and objectives of the company. The pre-determined profit plan and the budget are intertwined and should drive all the company’s activity so the budget requirements are met and the profit expectations are realized. This is a perfect key performance indicator and should be monitored at a minimum on a monthly basis.
Four steps in creating and managing a pre-determined profit plan:
- Determine the sales and profit goals based on historical company information, risk and growth, the health of the industry, and the economy. The sales goals dictate the levels of performance required in all of your business’s departments to achieve goals.
- Identify activities and processes that drive the company’s profitability and ensure success of the company.
- Define the Key Performance Indicators (KPI’s) to measure performance and focus on company goals.
- Decide who will monitor the KPI’s and the intervals at which measurements will be recorded.
To create and manage a pre-determined profit plan successfully, the manager must have:
- Intimate familiarization with the company’s expenses and costs
- Participated in creating the plan
- An understanding of how historical information is correctly used to forecast realistic numbers— based on past and present performance
- Complete knowledge of how each cost contributes to profit projections
- Ability to shift focus to areas not meeting defined goals and encourage staff to participate in fixing the problems
- Management and problem solving skills to ensure deviations from the plan are identified and corrected as they appear
A pre-determined profit plan is a clear and concise written action plan that details how owners and managers work together to achieve the company’s profit requirements. That can mean the difference between failure and success. Determine you profit requirements and plan for success.
Key Performance Indicators are a perfect management tool to use for monitoring performance toward your profit goals.
