So you’re ready to start that business plan you’ve been procrastinating over for the past year. Reality has set in: no business plan no bank loan, no business plan no investment, no business plan no business. But where to start: marketing strategy, sales programs, financial plan, customer research…the choices seem endless. I want to make a suggestion…start at the beginning. More….
http://www.scoreminnesota.org/2010/01/28/how-to-start-a-business-plan/
Like people, all organizations have clearly defined lifecycles that chart their journeys from birth to death. Unlike people, however, organizations do not have to die, but can prosper indefinitely in a state of vitality and maximum performance. To students of organizational lifecycles this state is known as “Prime.” Only at Prime can an organization maximize the opportunities presented to it and survive the challenges it faces. It’s the chief executive’s primary responsibility to drive her organization to Prime and keep it there. This can’t be done without a clear understanding of where the organization is in its lifecycle, the pitfalls inherent at each stage of the lifecycle, and the steps required to move the organization to Prime and to maintain its position.
WHERE ARE YOU?
If you know where an organization is in its lifecycle, you can predict its behavior and capabilities, and distinguish between the normal and abnormal problems it faces. In an ideal world, the company develops in correct sequence and identifies and resolves predictable problems at the right time, and with the right method. However, the ideal world is the exception rather than the rule.
What follows are descriptions of the various stages in an organizational lifecycle, and some of the reasons that companies fail along that lifecycle. Where is your company?
Courtship: All organizations begin as someone’s vision. In this phase, the organization is merely an idea. Generally a need or opportunity has been identified, but no commitment has been made. Initial discussions about the idea are filled with enthusiasm and expectations. Often there is an entrepreneurial spirit associated with the idea. The focus is on the future, and expectations are often overly optimistic. There is an unspoken but nagging concern: what if it doesn’t work? Expectations are high. Convincing talk is abundant. The champions of the new organization are trying to convince themselves, and others, that the core idea has merit. Courage and commitment are important at this stage.
Affair: An organization can die before it is born if there is only a willingness to think up ideas, but no commitment to work hard, or follow through.
Infancy: At some point, the commitment is made, and the risk is taken. The organization is born. The idea has become a reality and now requires time, commitment and resources. Each day brings new challenges. The Infant business needs to be fed. The emphasis is on making things happen, producing results, selling, and SURVIVING. There is little planning and there are few systems. Energy is high, consistency is low. Firefighting is a way of life. The entrepreneur/founder is the driving force in the organization. This is often a one-person show. It takes dedication, energy, and hard work to keep a new organization alive and productive.
Infant Mortality: The organization may die in its infancy from lack of cash, lack of commitment on the part of the founder who becomes detached, or if the organization remains in its Infancy too long, and people give up (too much continuous pressure on money and time with no short-term rewards).
Go-Go: To survive Infancy, the organization learns how to produce results. Its success is encouraging and it will begin to expand on its vision. With the expanded vision come more opportunities. Soon there is opportunity around every corner. The Go-Go organization is optimistic. It is confident in its ability, and often takes on more than it can handle. It develops pride in its growth, people, size, and sphere of influence. Big is considered better, but expansion creates crises. Opportunities abound, but every opportunity can be a threat. People and managers get spread too thin. Standards become lax and excellence in performance may be compromised. In this phase, the organization remains dominated by its leader. During the Go-Go period, nothing seems out of reach.
Founder’s Trap: Organization remains a one-person show too long. Founder does not recognize or cultivate creativity in the employees. He or she often pursues opportunities in which the organization has no expertise, and is moving too fast to recognize the dangers in that strategy. This is the phase at which many dot.com companies failed.
Adolescence: The expansion of Go-Go brings vulnerability and risk. Mistakes are made, too much is promised, too many projects are started. As management tries to control the organization, the organization moves into the Adolescent phase. The rapid expansion of the Go-Go is followed by a period of rethinking, consolidation and reorganization. This Adolescent organization, like the young teenager, is often characterized by conflict and confusion. In organizations the conflict occurs between people, departments, and cliques. Teamwork suffers. Leaders may not be agree on direction or risks that should be taken. The entrepreneurs are often at odds with their more conservative colleagues. Rapid expansion often leads to a loss of focus and confusion about what type of company the organization is, what market it serves, and how it should be organized. The challenges of the Adolescent organization are difficult. This is often a tough time for the leader and the organization. Organizations can get stuck in Adolescence and never see Prime, but if these issues and challenges are met, the newly directed organization can emerge into its Prime phase.
Premature Aging: The organization looses vision and appetite, and sells its future for today’s profits.
Divorce: Conflict between the founder and professional managers becomes insurmountable, and they part company.
Prime: This phase is characterized by strategically-directed management that achieves total quality in terms of service to customers, satisfaction of its employees, and the ability to achieve desired results. The Prime organization has a clearly defined mission and strategy. It is continuously improving its processes and its bottom line. The organization is generally predictable. It sets and meets aggressive goals. Challenges are faced and resolved efficiently and effectively. Reward and recognition systems are aligned with company strategies. Finding and developing enough capable and competent people can be a problem for Prime organizations. The organization and its mission are both focused and expanding. The culture is one of open communication, honesty and strong performance. Employees in the Prime organization experience great exhilaration. There is a great sense of purpose and achievement. The inherent danger in Prime is one of fighting complacency.
Stable: When an organization ceases to stretch for excellence, it will begin to age. Complacency sets in and its leaders slow down, settle in, and become “comfortable.” The aspirations for growth and improvement begin to fade. The Stable phase is the first stage in the aging process, and it is difficult to notice. The changes are slight, and tend to take place over a considerable period of time. The Stable phase is a phase of transition from growing to aging. The organization may still have some characteristics of Prime, but the aging symptoms begin to appear. The organization is still profitable, and may even appear to be a flashy industry leader. It has often had a long reign at the top of the heap. However, the team no longer pushes itself. Honest, open criticism is less tolerated. Politics becomes more of an issue. There is more focus on how things are done than what is done, more emphasis on activities than results. The organization is changing. It no longer goes after what it wants; it takes what it can get. Momentum declines; the organization appears “flat.” While transition into the Stable phase is subtle, its impact is profound.
Aristocracy: As the drive to produce results declines and the organization becomes more concerned with form and function, it loses energy. The conflict that keeps young organizations sharp is replaced by an easy-going tolerance, including a tolerance for poor performance, and there is an attitude of “don’t make waves.” The aristocratic organization may still have cash; its balance sheet and operating statement still look good, and bankers are its friends. Usually the organization has the tools it needs at this point in time. It has the location and systems, equipment is plentiful, and training courses can be found everywhere. However, the most common behavior is denial. This includes denial of problems, denial that customers aren’t as satisfied. Fewer are coming back each year. The drive for profit now focuses on creating a monopoly, reducing costs or raising prices. This stage brings the organization to the beginning of a decline.
Early Bureaucracy: If the organization does not recognize the symptoms of the Stable or Aristocracy phases and makes no effort to re-energize itself, it will continue to decline. As results decline, complete denial is no longer possible. People begin talking openly about “the problems” and try to identify the person who precipitated the decline. Scapegoats are found, the culprit is removed, and the team rejoices. However, the problems are systemic. The removal of a couple of people is not the answer, and the witch-hunt begins again. As people turn inward and point fingers, they turn their backs on customers. Service levels fall. Customers complain. At this point, the organization may self-destruct unless there is an immediate effort to turn it around.
Bureaucracy: At this juncture, the organization is in a death spiral that can’t be reversed. It doesn’t have the time, talent, or financial resources to save itself. Very occasionally, if the declining organization is big and vital to a nation’s economy, the government takes it over, creating a full-fledged Bureaucracy. When this happens, focus on form rather than function is taken to the level of an art form. Paperwork abounds, and the customers are left crying in the wilderness.
OVERCOMING LIFECYCLE THREATS
Fortunately, most of the threats faced by the organization can be overcome if recognized and addressed in a timely manner. Table 1 contains a summary of the suggested solutions for the threats at each stage of the lifecycle.
FINAL WORDS
Your organization is now somewhere in its lifecycle. A diagnosis can not only identify where your organization is in its lifecycle, but also the strengths and weaknesses of your organization that relate to the various aging factors. Best of all, such a diagnosis can guide you in creating an agenda for getting to Prime and staying there.
Adizes, Ichak; Corporate Lifecycles; Adizes, Ichak; The Pursuit of Prime; Lawrence M. Miller , Barbarians to Bureaucrats: Corporate Life Cycle Strategies; Faust, Gerry; Managing To Prime (6 cassettes)
Jim O’Brien
www.linkedin.com/in/catapultadvisors
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Table 1 – Lifecycle Threats and Proposed Solutions |
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| Stage | Threat | Solutions |
| Courtship | Affair |
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| Infant | Infant Mortality |
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| Go-Go | Founders Trap |
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| Adolescence | Premature Aging
Divorce |
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| Prime | Slide into Aging |
- Complacency - Control influence of accounting and finance functions - Risk avoidance - Retention based on personality |
| Stable | Aging |
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| Aristocracy | Aging |
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| Early Bureaucracy | Aging |
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| Bureaucracy | Aging |
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Ok…so you’ve made it this far! The worst economic recession in generations, and you’re still on your feet. We’re told there’s a light at the end of the tunnel, but is that the bright economic future we’ve all been waiting for, or a train barreling down on us. It’s no time to let our guard down.
This article is intended to speak to the CEO/President/General Manager of the organization. Others in the organization may play key roles in executing the actions discussed, but only the leader of the organization can bring a sense of urgency to the undertaking, prioritize the actions that must be taken, and quickly dedicate the resources necessary to get them done. The continued survival of the organization is the fundamental responsibility of the person on top: it can’t be delegated.
The key to this continued survival is to STAY AHEAD OF THE CURVE. Remember that expanding sales can be as destructive to an organization as declining sales. Keep an eye not only on your income statement, but also you balance sheet.
First, don’t ignore what’s already on your radar screen. Are incoming orders increasing or still declining? Are they increasing at a slower/faster rate than in the past? Are orders still being canceled? Are customers still asking for additional time to pay their bills? Are they just taking more time to pay their bills? While this is by no means comprehensive list of things to be watching, it is a good start in evaluating the state of your customers’ businesses, and their ability to pay you. If you’re not tracking these items on a regular basis, start now. Also, talk to your salesmen, customer service people, and vendors. What are they hearing about the industry? Your customers? Other vendors? Appoint someone to collect this information and report to you on a regular basis. Finally, it’s times like this when credit agencies earn their keep. Use them! It’s no time to get stuck with significant bad debts.
Second, if you have bank loans, make sure you are complying with all your loan covenants. If you’re in compliance with your covenants now, will you be in six months? A year? Keep in mind that if sales increase you’ll need additional working capital. Do you still have credit available? Have your accounting department do pro formas to answer these questions. If any of these scenarios would cause you to fall out of compliance, determine what you can do now to stay in compliance. This is not a good time to be petitioning the bank for an exception to your covenants, but, if it’s necessary to do that, consider discussing your situation with your banker in advance. By showing that you’re planning ahead and that you have a solution, you may be able to make a convincing case for forbearance.
Third, cash is king! Contrary to popular opinion, inventories are not the same as cash. Only cash is the same as cash! It’s time to really squeeze down your inventories. Evaluate them for excess and obsolete items. Drive down excess to proper levels (that means you have to determine proper levels given realistic forecasted sales). Find other uses for obsolete items. For example, after a large sporting goods company exited the football helmet business, it ground up the football helmet shells in inventory, and made baseball batting helmets. It took the company 5 years to figure that out; you don’t have 5 years. If you can’t find alternative uses for these obsolete items, sell them. What’s obsolete to you may not be to someone else. Remember that if you have $1,500,000 in inventory, and you can service your customers with only $1,000,000, you’ve freed up $500,000 in cash. Look at it as a one time interest-free loan.
Accounts receivable are more difficult. You control inventories, but your customer controls the payment of receivables. Monitor and demand payment within agreed terms (which after all, your customer did agree to). Don’t let payments drift. We often fail to remember that in times like this extended terms mean expanded risk. A customer that is healthy today may be in bankruptcy in 90 days. Also, brace yourself for the day you have to cut off or impose tougher terms on one of your major customers because of credit issues. A supplier I worked with had to demand a letter of credit from one of its best retail customers because of the retailer’s deteriorating financial situation. The retailer gave the supplier the LC for the upcoming retail season, but threatened never to buy from the supplier again. The retailer was right: it was in bankruptcy within nine months and never came out. The supplier was paid under the terms of the LC, but its competitors weren’t so lucky. Difficult times force difficult decisions. Be prepared!
Fourth, prepare a 12-month financial plan for the company that accurately reflects what you view as a reasonable scenario for the next year. It should include monthly Profit and Loss Statements, Balance Sheets, Cash Flow Statements, and Ratio Analysis (including bank covenants). Next, do the same analysis using pessimistic and optimistic assumptions. This exercise will give you some insight into the pitfalls you will be faced with in the coming year, and some ways to avoid those pitfalls.
Finally, if you have a profit improvement plan…implement it with a vengeance. If you don’t, develop one fast (no more than 30 days). While there are normally other elements to a profit improvement program than those listed below, these are offered because they tend to deliver the best results fastest. They include:
From the analysis suggested above, identify the three to five of the highest profit enhancing opportunities, and go after them.
The above is intended to provide a process that will allow you to keep ahead of the economic twists and turns that may play out over the course of the recovery. As mentioned earlier, survival is paramount; but another goal should be to come out the other end of these challenging economic times a better, stronger organization.
James R. O’Brien
Catapult Advisors, LLC
