[Editor's Note: Over the past seven years, we have met with the CEOs or owners of over 200 private Colorado companies. These companies range from new technologies, products and services in such diverse fields as education, web conferencing, technology, construction, trucking, logistics, medical devices, outsourced services, among others. Some of these companies are growing - some quite rapidly; others are stagnant or stuck.]
Why are there such differences? Certainly companies that depend on some industries such as homebuilding or construction were severely impacted by the economic downturn. However, blaming stagnancy solely on economic malaise is an oversimplification. The recession – and subsequent “selective recovery” has highlighted the differences between the good, well-managed companies from those others whose fortunes rise and fall with the economy. We have found that industry, size, and the overall economy are not necessarily the determinants of company success.
Companies that have become "Colorado success stories" share certain traits. While this is not intended to be an all-encompassing list, this list is intended to provoke some thought about what breeds success.
1. Lifestyle or Equity Value. How many of you have ever been involved with a company where the owner was conflicted about current compensation or cash flow vs. investment for the future?
Be clear with what type of company you want to be. A lifestyle company can allow the owner to call his/her own shots and to move at his/her own pace. It is run for the cash flow and lifestyle benefits of the owner(s). In an equity value company, the owner strives to build real assets with a scalable, tangible value that can be bought and sold. This leader is willing to sacrifice some short-term gains in order to invest in growing the market value of the business. These “equity value” owners focus more on building value as seen by potential buyers: sustained improvements in revenue/EBITDA, and a strong management team that can operate and grow the business without the owner's constant involvement.
There is no right or wrong answer to the lifestyle vs. equity value question, but owners must be clear in the distinction. Straddling both lifestyle and equity value camps is sure to generate both lower current cash (compensation for the owners) as well as lower growth and value potential (lower equity value).
Below are some of the characteristics of Lifestyle vs. Equity Value companies. Lifestyle companies tend to have a short –term focus; they tend to run at the owner’s pace or comfort level. Investment in the business may be secondary to a passion of the owner, such funding the as sponsorship of a team, or sport, or the arts. While these companies may have some elements of other management styles, in the end, there is a centralized nature to decision-making and authority. Likewise, since there may be limited empowerment or upward mobility for managers, high performers are not attracted to Lifestyle companies, or do not remain. See the article “Which do you have – a Lifestyle Business or an Equity Value business?”
|Focus||Short-term Lifestyle; Run for Owner’s compensation||Long-term Equity Value; sacrifice short –term comp|
|Pace||Owner’s pace||Dictated by desired outcome|
|Management style||Command & Control; Centralized||Decentralized; individual decision-making|
|Owner Management||Can tend to be viewed as inconsistent, capricious and changing||Consistent with overall strategy and core values|
|Expense Control/Spending decisions||Tightly controlled at top||Managed through approved dept budgets and policies|
|Outside Capital||Debt; Investors not interested; Growth may be restricted due to availability of capital||Equity investors|
|Empowerment||Limited; Loyalty Rewarded; Small circle of trust||Expansive; Performance rewarded; Systems to enhance empowerment|
|Objectives||May change at owner whim||Clearly outlined; transparent|
|Employee Equity||No||Yes; equity awarded|
|Career Development||Limited upside||Significant upside|
|Employee Capability||“Steady Eddies” Thrive here||High performers thrive here|
|Sale of Business||Usually only to Employees or Family||To third-party Buyers (Strategic or Financial)|
2. Empower employees. Companies can't grow beyond a certain point if all of the real decision-making stays in the hands of the owner or a small group of managers. Growth companies look to empower employees to make decisions. They also develop a culture that allows employees to make mistakes and a mechanism so that they can learn and grow from the mistakes.
3. Hire for the next level. Companies that want to grow understand that they need talent that can manage at the next level. Successful companies hire people who can grow 1-2 levels higher in the organization so that the talent pool is constantly being strengthened. These companies also understand that paying more for top talent more than pays for itself.
4. Develop flexible strategies you can execute well. Traditional approaches to planning and execution assume away uncertainties and set a fixed plan in place for a year or more. Successful companies are developing multiple possible views of the future, developing a plan and actions, then revisiting the plan every 8-12 weeks to adjust to changes in the market or the competitive landscape. Otterbox, the designer and marketer of protective cases for smartphones, has grown from $15M revenue in 2008 to approx. $1B revenue with a flexible approach that re-evaluates all strategic operating plans every 6-8 weeks for possible adjustment. Other companies are utilizing scenario planning to develop and “rehearse” their responses to different possible future states in order to maximize their competitive position. See our article “Why every company should be doing scenario planning” and the 5-part series on Scenario Planning.
5. Develop an adaptable organization. Successful companies focus on creating a culture of adaptability. They develop an organization, and leadership that can react quickly and make necessary course corrections in response to market opportunities. See the article “Adapt is new thinking” and the 7-part series on Creating an Adaptable Organization.
6. Focus on a superior customer experience. Dan King of ReadyTalk calls it developing "emotionally-connected" clients; Maria Vogt and Sonya Yungeberg of government contractor, Ayuda Management, call it "under-promising and over-delivering". These companies focus on wowing the customer and build systems and hire and reward people who want to delight the customer with every interaction. Engagement of customers is key.
7. Play offense instead of defense. If you do anything long enough it becomes a habit; then it becomes part of your culture. Many companies have created defensive cultures with several years of cost-cutting and deferring or eliminating new projects and new products. "NO" has become the operating word for "stuck" companies. Successful companies look for opportunities to develop and test new business models, new products and new projects. They see the market as ripe with opportunities to grow and innovate. "HOW" is their operating mantra.
Conclusion: Examine your company. Do you live the traits of successful companies?
Let us know your thoughts.