The Facts of Business Life (18 page)

There are also traps awaiting unsuspecting owners at this level as they attempt to solidify their companies as Level 4 businesses, and without the use of internal controls these traps will be almost impossible to navigate around. For example, it's important that the sales and gross profit figures you get from your sales department balance with those you get from accounting. If they don't and you lose control of the balancing process, you will end up with two different sets of information, with the possibility that neither one is accurate. As a general rule, owners must exercise continuous oversight and control in order to have accurate financial statements on which to base decisions, as well as continually expand these controls as the business grows.

As I've already mentioned, as an owner, it's important to understand that as you move from one level to the next you have to bring the tools and experiences from the previous levels with you. But it's particularly important in making the transition from Level 3 to Level 4 because at this point you don't only have to bring what you've learned with you, you have to improve on it. In fact, if you want to maintain your success and become a strong Level 4 business, you have to take your company to a higher plateau of performance. Unless you do, you will be unable to avoid the traps of success and will never be able to put your company on a continuously solid footing. There is an old adage that says it's one thing to win but quite another thing to continue winning, and this is especially true in business. Your competitors want what you have—your customers—and if you don't fight for them, you'll lose them and your business along with them.

The idea of ratcheting up performance is certainly not unique to business. Think, for example, about NFL, NHL, or NBA teams. Hoping to win a championship, they play the entire season to position themselves to make the playoffs. And then, since only the best-performing teams get into the playoffs, they have to ratchet up their performance in order to win the playoffs and become champions. It's the same in business. Unless you take your company to a higher plateau of performance at Level 4—the equivalent of the playoff games—you will never get any closer to sustained success. There's also another similarity between business and sports at this advanced level of competition—the first rule to continue winning is to not beat yourself. In sports, this means not incurring penalties or making other mental mistakes such as misreading plays or being out of position. In business, it means your company has to be running smoothly on all cylinders, and the only way that can happen is if your company's internal controls are working efficiently and effectively.

The Benefits of Control at Level 4

• Being in control continuously focuses you on the important areas of your business.
  
• Being in control helps you improve your company's performance even when the business is already successful.
  
• Being in control helps you set up your business for long-term success.
  
• Being in control helps the company improve its performance so that there can be a larger payoff if it's sold or an easier transition if you implement a succession plan.
  
• Being in control enables you to keep a company fresh and constantly challenged.
  
• Being in control creates consistency in how the company operates, including how customers are handled, which in turn reinforces customer loyalty.
  
• Being in controls creates a standard for how employee issues are handled.
  
• Being in control enables you and your managers to maintain your business's brand message by making sure that it is consistent company-wide.
  

By the time a business gets to Level 4, its owner should have learned about the importance of having relevant, current, and factual information, as well as what a great tool information can be. As I've already mentioned, though, Level 4 calls for improvement over the successes in Level 3, which means improved controls will have to be implemented to attain a higher level of performance. That is, in order to find your best opportunities and meet expectations, new and more detailed information will be needed. This quest for information can lead to a challenge that you, as an owner, may not have experienced before. That is, you have to be particularly careful about what you measure, because measuring the wrong things can promote the wrong activities and lead to a loss of focus within the organization.

For example, if one of your improvement goals is to produce additional gross profit per employee, one possible solution could be adding technology in order to reduce costs. However, while doing so might help your company meet the goal of increased gross profit per employee, it would also add to your overall business expenses, possibly so much so that it would wipe out any projected profit increases. As a result, unless you are sure you are measuring the right thing—in this case, net profit—your decision to add technology may not actually help you reach your goals at all. In other words, at Level 4, the information you gather must not only be accurate, it has to be relevant and must be analyzed in terms of your overall definition of continued success.

Controlling information is a lot harder than it sounds, and it becomes even harder when one of the purposes of doing so is adding value to the overall business, the customer, or both, as it does at Level 4. Adding value can mean finding new revenue streams, increasing gross profit margins, improving internal efficiency, and creating customer benefits, among others. Goals like these can be accomplished by continuously looking for better ways to make use of the information available. For example, similar industries can provide a wealth of information. Automotive dealers can learn a lot from how Harley-Davidson dealers captured their aftermarket accessories business, including clothes, coffee mugs, playing cards, and other items; or how John Deere creates brand awareness by selling toys to kids, like tractors and other machines, that are replicas of what their parents use. Creative information like this is priceless, and it's all around for the taking.

The bottom line, though, is that if you do not control the quality and relevance of the information you use to make decisions, you are likely to find yourself overloaded with it. And information overload usually leads at best to time wasted and an inability to make decisions, and at worst to concentrating on information that takes the focus away from what's important in maintaining success, the same kind of thing that happened to General Motors (GM).

As I've already mentioned, processes are actually the engine that drives the business forward, and those processes need constant attention and maintenance, just like the engine in a car. The reason they do is business is always in a state of motion. Employees, customers, competition, and product innovation are just some of the elements that keep a business in constant motion. And unless internal processes keep up with the changes, they will lose their relevance and become bureaucratic rather than effective. For example, a process that was designed a year ago when sales volume was a third of what it is today won't work without restructuring. And that restructuring can take any of several forms, including eliminating processes, replacing them with new ones, or “retuning” them, that is, adapting them to fit the current reality.

The best way of determining which processes need to be changed is to regularly conduct audits on those processes, and this is particularly important at Level 4. There are a number of ways to do so, ranging from the expensive—hiring consultants to do it for you—to the inexpensive—doing it yourself with your office manager and/or your department managers. Whichever you choose, though, it's essential for you to remember that processes can't be expected to work at more than one level of your business. They can be stretched up to a point, but common sense says if you were selling 200 widgets a month and now you're selling 600, things have to change, and those things are processes. In this instance, that means, for example, that your inventory level will have to increase, which in turn means new ordering and restocking processes will have to be developed, among others.

Because a company's processes are operated by its employees, understanding the connection between them helps owners at Level 3 in their efforts to move their businesses from survival to success. At Level 4, though, since the primary goal is to solidify a company's position by lifting it to a higher plateau of performance, coordinating processes and people becomes even more important. It also becomes a major challenge for owners, primarily because the kind of problems that arise at this level frequently stem from the owner's effort to improve the company and can be very difficult to solve.

Some of these problems come up because some of your employees may not agree with your decision to take your business to a higher plateau. As a result, as you strive to move the business ahead and make new demands on your staff, you can begin to meet resistance from them, even from some of those at the highest level. And the first place this resistance shows up is through the performance criteria and controls that you've established. This is obviously a very serious problem, and one that won't go away unless you take appropriate action to fix it.

There are several ways you can do this. One way is to watch how frequently your key employees are checking their department controls. If these controls are not being checked often enough, you can step up their frequency by installing more stringent reporting requirements. You can also see how aggressively your managers are developing new controls and processes to match their new volume expectations. And if these new controls are not being developed, you can come down heavily on those responsible, and make it clear to them that unless they start doing so they will be replaced. Problems like this, if not corrected, can take a Level 4 company back to Level 3—and in a hurry. Moreover, in your efforts to fix these problems, it's important for you to realize that others in the company, both those who have and those who haven't committed themselves to improving performance, are watching you very carefully and will view your actions as a test of your commitment. And it's a test you have to pass if you are going to achieve the goal of Level 4.

Achieving the goal at this level depends on maintaining control over information, processes, people, and product. However, it's particularly important for an owner to maintain this control over his or her products. In fact, at this level, an owner has to develop a “killer instinct” as far as the product or service is concerned. I talk more about this “killer instinct” in later chapters, but it's important to note that at Level 4 not only do controls have to become more sophisticated, but the discipline that goes with those controls has to be uncompromising. In other words, whenever owners or their key employees see a “red flag” in the product area, they have to deal with it immediately. That's because product issues don't disappear, and unless they're addressed—and the sooner the better—any company can find itself in the same position as GM.

One example of more sophisticated product control is better management of a company's inventory. Most owners know their best-selling merchandise, but they may not know how much or how little these best sellers contribute to gross profit. The goal for inventory, of course, is to stock items that reflect customer demand, sell or turn quickly, and contribute the most to gross profit. But gross profit doesn't always get the same attention as sales does, although it is just as critical. At Level 4, if you want to improve your business, you can “data mine” past sales. That is, instead of looking at your volume leaders, look at your best gross profit leaders. Doing so will allow you to build an inventory that reflects gross profit margins as well as sales. In fact, while the data mining is taking place, you can also track lost sales, seasonality of products, buying practices, and any other critical components in which knowledge might help build inventory that turns quickly, provides an attractive gross profit increase, and increases sales.

It should be obvious by now that products and their controls are extraordinarily important, and without them the chances of becoming a Level 4 owner are slim. But—and this is a big but—controls can never become more important than the product, and can never interfere with why the product is selling in the first place. A lot of products and services sell well not only because of the products or services themselves but also because of the “sizzle” that goes with them. If, for example, a product has some sex appeal, or makes some kind of social statement, the owner has to recognize that fact and never let anything overshadow it. This is something that GM neglected to do with its Cadillac and Oldsmobile brands, and they paid for it. By allowing financial and engineering issues to dominate the product lines, that is, processes rather than the cars themselves, GM forgot that its role was to provide what its customers wanted, and sales plummeted as a result.