In our last entry, we addressed the issue of making non-economic family needs explicit in the decision making process. We did not, however, intend to advocate for their priority. This time let’s think about some of the dangers of putting “family considerations” first, implicitly or explicitly.
Most decisions to “put the family first,” above “strictly economic” criteria, are based on a belief that the fundamental role of family is to support its members in ways that are not strictly economic. Among the families we have worked with, that belief generally assumes an ongoing level of economic resources that allows the family to provide much of the other support. For that reason, decisions that ignore their economic consequences can be devastating.
This is particularly true when the family’s primary asset is an operating business. In most cases, the value of the business to the family is made up of two things: (1) the stream of cash it currently produces for the family and its members, and (2) the value of the business in the future, either as a generator of cash if the family continues to run it or as a source of assets for reinvestment if the family decides to sell it.
Family first decisions often appear reasonable if only its current cash value to the family is considered. But some of the same decisions can damage, or even destroy, the important long-term value of the asset.
Take for example the case of a family that decided that every child was entitled to a job in the business. Each child who wanted a job was given one, and none was subjected to the same hiring criteria or evaluation process that applied to non-family employees. This strategy was a less than successful for both the children and the business. The child who was qualified to work in the business never had the opportunity to test himself objectively and to develop a real understanding of his own skills or leadership capabilities. The children who were not qualified never discovered what talents they did have and found themselves uncomfortably isolated among their colleagues. Their presence in jobs for which they were not qualified also discouraged highly qualified employees from staying at the company.
Apathy and costs increased; quality and profits declined; and a real leadership vacuum developed. Everyone in the family had a title and a salary, but it became increasing clear that the business was entirely dependent on the skills and relationships of the founder. The family’s entire economic infrastructure was at risk if she died, became disabled, or simply decided to retire. The owner realized this risk but couldn’t identify its cause. In order to protect the family, she decided the time was right to sell the business. She was surprised when the bids she received were not much higher than current earnings, despite the premium prices that prevailed throughout its industry.
Since this was neither the family legacy nor the financial inheritance the owner intended to leave, she sought help. After some study, she decided that the right choice for the family was to run the business as well as the business could be run – with the right personnel and the right procedures, uniformly applied – and to help each of her children find training and experience appropriate to their individual skills. She would tell you that she learned the hard way a very important lesson: what’s good for the business is what’s best for the family.
Thursday, October 05, 2006
Friday, September 22, 2006
He ain’t heavy; he’s my family
We have a supplier who owns and runs a small business. The business is located on a nice lot on a block of what used to be a by-way that ran from one sleepy beach town to another. Fifty years and two airport improvements later, that unmortgaged piece of property is in the middle of a block on the main road through the fastest growing part of a wealthy cosmopolitan county. The business does well enough: it covers its expenses and supports the family. Selling the land the business sits on, however, would ensure that no one in the family ever again have to get up and go to work in the morning.
Why do they keep operating their little low-margin, high-effort business? “This gives Dad something to do with his time” is the answer the current CEO gives when asked. Should we hold this up as an example of bad strategic planning? We don’t think so. In fact, we think it is an unusually good example of planning for a family business.
Standard business theory tells us that every asset should be used to produce its highest economic value. In this case, that would generally mean the family would sell the land and close the business. Or they would at least borrow against the land and invest the resulting funds in assets that produce a higher economic return. In this case, however, the value of giving the founding patriarch a purpose for his days has a higher value to the family than the land has.
Over time the family has done a little investing. Using the land as collateral, they have bought nice homes in the neighborhood and a family vacation home in the mountains. They have also purchased “some stocks and bonds.” They clearly have not, however, made any significant effort to diversify their assets. Why not?
The economically approved answer might be that the continuing development of the neighborhood around the land suggests that the return on the land will improve over time and/or that there is a tax advantage to holding the land until after the father has died. But, in this case – and, often, in the context of a family business – the family’s non-economic needs constitute a type of return the family has determined to be important.
That doesn’t mean that the family has ignored economic returns in favor of their non-economic needs. They have specifically catalogued and considered both the costs – direct cash costs and opportunity costs – and the risks of keeping the business running. Based on that information, they have consciously balanced family needs against alternative economic possibilities.
Weighing family needs against potential economic returns has to be done carefully. It can often be complex and require both objectivity and expertise that the family has to hire outsiders to bring to the discussion. Nevertheless, we believe that the family’s non-economic needs and goals should be recognized as legitimate needs and goals of the owning family and should be made explicit in the discussion of the strategy for a family-owned business.
Why do they keep operating their little low-margin, high-effort business? “This gives Dad something to do with his time” is the answer the current CEO gives when asked. Should we hold this up as an example of bad strategic planning? We don’t think so. In fact, we think it is an unusually good example of planning for a family business.
Standard business theory tells us that every asset should be used to produce its highest economic value. In this case, that would generally mean the family would sell the land and close the business. Or they would at least borrow against the land and invest the resulting funds in assets that produce a higher economic return. In this case, however, the value of giving the founding patriarch a purpose for his days has a higher value to the family than the land has.
Over time the family has done a little investing. Using the land as collateral, they have bought nice homes in the neighborhood and a family vacation home in the mountains. They have also purchased “some stocks and bonds.” They clearly have not, however, made any significant effort to diversify their assets. Why not?
The economically approved answer might be that the continuing development of the neighborhood around the land suggests that the return on the land will improve over time and/or that there is a tax advantage to holding the land until after the father has died. But, in this case – and, often, in the context of a family business – the family’s non-economic needs constitute a type of return the family has determined to be important.
That doesn’t mean that the family has ignored economic returns in favor of their non-economic needs. They have specifically catalogued and considered both the costs – direct cash costs and opportunity costs – and the risks of keeping the business running. Based on that information, they have consciously balanced family needs against alternative economic possibilities.
Weighing family needs against potential economic returns has to be done carefully. It can often be complex and require both objectivity and expertise that the family has to hire outsiders to bring to the discussion. Nevertheless, we believe that the family’s non-economic needs and goals should be recognized as legitimate needs and goals of the owning family and should be made explicit in the discussion of the strategy for a family-owned business.
Tuesday, September 05, 2006
An organization’s economics – not just for bean counters anymore
Over the long holiday weekend I spent some delightful time with a very creative eight-year-old friend of mine. Although his main interests have shifted from Thomas the Tank Engine to the Power Rangers to the Bionicles, he has never lost his love of story telling. Given half a chance, he has always been willing to tell any story to anyone who will listen. He has now reached a new stage: Presented with a handful of story elements – a couple of characters and a setting – he will make up and tell his own story about them. This weekend he fell in love with and built a small universe around the characters in the back-to-school ad currently being aired by Target.
His rapture with those characters gave me some real insight into why the task of identifying any organization’s inputs and outputs is a job that must be tackled by some multi-faceted team of people whose various perspectives will represent all of the perspective of an organization’s various stakeholders.
For those of you who haven’t seen it, the Target ad is a very clever presentation of various characters going back to school, with the characters made up of back-to-school supplies (like protractors, rulers, erasers and such). The characters bounce and dance and generally behave just like children who are excited to be going on a new adventure. And to my eight-year-old friend they are children who are excited to be going on a new adventure. He was so engaged in the narrative of what these characters were doing he didn’t even notice that they weren’t “human” at all.
We all do it . . . . .We take so many cues from the context that we don’t see the thing in itself. And we lose perspective on what the thing could do if it is different from what it does do.
This loss of perspective is why we think it is a mistake to allow any one department organization tackle the definition of the organization’s inputs and returns alone. The financial types will think mostly about the hard dollar costs and returns of any project. They may also assess opportunity costs, and costs of capital and other costs that may not be visible to non-financial types . . . . But will they think about issues like generating interest among a new market segment, or the costs of reducing services in such a way that a traditionally loyal market segment walks away? These are the day-to-day province of the marketing department whose job is to understand the organization’s customers and it is their job to bring that perspective to the organization’s understanding of its inputs and returns.
Organizations and their activities are generally complex, interrelated systems that most of us see most clearly from a single perspective. If we are to think well about the economics of our organizations, we have to do it creatively. We have to throw away the every-day definitions and assumptions we attach to the things we work with every day, and view our organizations with new eyes. This is an important reason to work in interdisciplinary teams: We will each start from our own assumptions and, if we work well, we will invite our colleagues to use their everyday perspectives to challenge those assumptions.
The second time my eight-year-old friend and I saw the Target ad, I told him what a protractor was and asked him what he thought the protractor boy would do at school. He thought awhile and said, “I don’t know; maybe he will use that [protractor] thing on his body to make a whole big circle so he and his friends can throw it around like a handball.” Indeed . . . . a new dimension to the children’s new adventure!
His rapture with those characters gave me some real insight into why the task of identifying any organization’s inputs and outputs is a job that must be tackled by some multi-faceted team of people whose various perspectives will represent all of the perspective of an organization’s various stakeholders.
For those of you who haven’t seen it, the Target ad is a very clever presentation of various characters going back to school, with the characters made up of back-to-school supplies (like protractors, rulers, erasers and such). The characters bounce and dance and generally behave just like children who are excited to be going on a new adventure. And to my eight-year-old friend they are children who are excited to be going on a new adventure. He was so engaged in the narrative of what these characters were doing he didn’t even notice that they weren’t “human” at all.
We all do it . . . . .We take so many cues from the context that we don’t see the thing in itself. And we lose perspective on what the thing could do if it is different from what it does do.
This loss of perspective is why we think it is a mistake to allow any one department organization tackle the definition of the organization’s inputs and returns alone. The financial types will think mostly about the hard dollar costs and returns of any project. They may also assess opportunity costs, and costs of capital and other costs that may not be visible to non-financial types . . . . But will they think about issues like generating interest among a new market segment, or the costs of reducing services in such a way that a traditionally loyal market segment walks away? These are the day-to-day province of the marketing department whose job is to understand the organization’s customers and it is their job to bring that perspective to the organization’s understanding of its inputs and returns.
Organizations and their activities are generally complex, interrelated systems that most of us see most clearly from a single perspective. If we are to think well about the economics of our organizations, we have to do it creatively. We have to throw away the every-day definitions and assumptions we attach to the things we work with every day, and view our organizations with new eyes. This is an important reason to work in interdisciplinary teams: We will each start from our own assumptions and, if we work well, we will invite our colleagues to use their everyday perspectives to challenge those assumptions.
The second time my eight-year-old friend and I saw the Target ad, I told him what a protractor was and asked him what he thought the protractor boy would do at school. He thought awhile and said, “I don’t know; maybe he will use that [protractor] thing on his body to make a whole big circle so he and his friends can throw it around like a handball.” Indeed . . . . a new dimension to the children’s new adventure!
Tuesday, August 08, 2006
Is Profit the only measure that matters?
The short answer is No. Notwithstanding the example we offered at the beginning of our last entry, Profit is not the only measure that matters. And organizations – even business that are nominally “for profit” – may choose, from time to time, to take a path other than the one that will lead to the largest economic profit.
The more important answer to this question, however, is that Profit – along with its economic sister, Loss – is a singularly important issue that should be weighed, calibrated, and addressed in the Strategy process, even by “nonprofit” organizations.
If you are thinking about Strategy in the context of a nonprofit organization, you are perhaps recoiling at this idea and ready to shout, “NO, that’s not why we exist!” To be sure, the issue of Profit is made more complex for organizations that are not driven primarily by economic profits. Nevertheless, we believe it is an issue that must be considered in the development of an effective Strategy for any organization.
What we are really talking about here is the centrality of any organization’s economic infrastructure – the balance of the resources that are used as its “inputs” with the resources that are generated by returns for its “outputs.”
Where an organization buys resources (i.e. supplies and labor) to make something to sell for money, its economics often seem relatively clear and hard to ignore. Where an organization uses donated resources to make or provide something that is given away, the economics are often less apparent and easier to ignore.
Nevertheless, the need for balance remains if the organization is to sustain itself and continue to achieve its goals over time.
This balancing act can feel as chaotic as the juggling clown on a bicycle looks. But, like the clown, it depends on some real discipline – in this case, specificity in identifying costs, articulating desired returns, and examining the ways they interact.
In our next few entries, we will look more closely at the kinds of “costs” and “returns” common to several different types of organizations. We can’t tell you in the abstract what the “right” balances may be for your organization, but we hope to help you frame the questions that will enable you to recognize what may be the pivotal tradeoffs that have to be faced by your organization if you are to keep your pins in the air.
The more important answer to this question, however, is that Profit – along with its economic sister, Loss – is a singularly important issue that should be weighed, calibrated, and addressed in the Strategy process, even by “nonprofit” organizations.
If you are thinking about Strategy in the context of a nonprofit organization, you are perhaps recoiling at this idea and ready to shout, “NO, that’s not why we exist!” To be sure, the issue of Profit is made more complex for organizations that are not driven primarily by economic profits. Nevertheless, we believe it is an issue that must be considered in the development of an effective Strategy for any organization.
What we are really talking about here is the centrality of any organization’s economic infrastructure – the balance of the resources that are used as its “inputs” with the resources that are generated by returns for its “outputs.”
Where an organization buys resources (i.e. supplies and labor) to make something to sell for money, its economics often seem relatively clear and hard to ignore. Where an organization uses donated resources to make or provide something that is given away, the economics are often less apparent and easier to ignore.
Nevertheless, the need for balance remains if the organization is to sustain itself and continue to achieve its goals over time.
This balancing act can feel as chaotic as the juggling clown on a bicycle looks. But, like the clown, it depends on some real discipline – in this case, specificity in identifying costs, articulating desired returns, and examining the ways they interact.
In our next few entries, we will look more closely at the kinds of “costs” and “returns” common to several different types of organizations. We can’t tell you in the abstract what the “right” balances may be for your organization, but we hope to help you frame the questions that will enable you to recognize what may be the pivotal tradeoffs that have to be faced by your organization if you are to keep your pins in the air.
Thursday, July 27, 2006
What is Strategy and why does it matter?
Suppose a company can produce and distribute 10 dozen boxes of Product A for a profit of $50,000. Suppose it can also make and sell 4 items of Product B for $50,000 profit. And suppose they know that if they try to do all of both, their profit will decline to $75,000 because they will have to hire incremental labor and buy incremental inventory. . . . .
How does the company decide what to do?
Deep in our hearts, almost every one of us who survived ninth grade algebra believes there is some mathematical formula that should answer this question, if only we could figure what that formula is.
But there is no formula. If we tried to impose one, it would have to assume that all labor was interchangeable Xs and all supplies were interchangeable Ys – or, at least that there were finite numbers of kinds of labor and supplies to be plugged into the formula.
This fantastical formula would also have to assume that all time is the same – that what works now will work equally well next week, next year, a decade from now. Although such an assumption might have been reasonable the day fire was discovered or the wheel was invented, how many of you are reading this on a computer you owned a decade ago or over an internet connection through an ISP you used 5 years ago?
Not all labor is the same; there is a practically infinite range of potential supplies; time is in perpetual motion; and we haven’t even mentioned the notoriously fickle nature of consumer behavior.
So, instead of a formula, we have Strategy.
Strategy is not a fixed solution, mathematically computed or not. Instead it is a set of dynamic guidelines that provide the context for a disciplined review of the many factors that affect any organization. It provides a context and process that allows the organization’s managers to make thoughtful decisions about immediate actions, long-term goals, and the terrain to be navigated between them.
Many entrepreneurs think Strategy is nothing more than fuzzy-headed abstract thinking, and that Strategy has little to do with the on-the-ground choices and activities that make an organization succeed. We disagree. Every organization has a Strategy, whether it thinks about it, talks about it, names it, or not. Left to fate, Strategy often turns out to be the mess you’re stuck with when everything that can go wrong has.
Used well, Strategy is the fulcrum on which is balanced every difficult decision a management team has to make. It is also the safe deposit box from which alternatives can be drawn and action taken when time brings its inevitable surprises.
This blog will focus on the practical activities that make up Strategy – its development, its implementation, and its day-to-day implications – for several types of organizations. We hope you will add your thoughts and examples.
How does the company decide what to do?
Deep in our hearts, almost every one of us who survived ninth grade algebra believes there is some mathematical formula that should answer this question, if only we could figure what that formula is.
But there is no formula. If we tried to impose one, it would have to assume that all labor was interchangeable Xs and all supplies were interchangeable Ys – or, at least that there were finite numbers of kinds of labor and supplies to be plugged into the formula.
This fantastical formula would also have to assume that all time is the same – that what works now will work equally well next week, next year, a decade from now. Although such an assumption might have been reasonable the day fire was discovered or the wheel was invented, how many of you are reading this on a computer you owned a decade ago or over an internet connection through an ISP you used 5 years ago?
Not all labor is the same; there is a practically infinite range of potential supplies; time is in perpetual motion; and we haven’t even mentioned the notoriously fickle nature of consumer behavior.
So, instead of a formula, we have Strategy.
Strategy is not a fixed solution, mathematically computed or not. Instead it is a set of dynamic guidelines that provide the context for a disciplined review of the many factors that affect any organization. It provides a context and process that allows the organization’s managers to make thoughtful decisions about immediate actions, long-term goals, and the terrain to be navigated between them.
Many entrepreneurs think Strategy is nothing more than fuzzy-headed abstract thinking, and that Strategy has little to do with the on-the-ground choices and activities that make an organization succeed. We disagree. Every organization has a Strategy, whether it thinks about it, talks about it, names it, or not. Left to fate, Strategy often turns out to be the mess you’re stuck with when everything that can go wrong has.
Used well, Strategy is the fulcrum on which is balanced every difficult decision a management team has to make. It is also the safe deposit box from which alternatives can be drawn and action taken when time brings its inevitable surprises.
This blog will focus on the practical activities that make up Strategy – its development, its implementation, and its day-to-day implications – for several types of organizations. We hope you will add your thoughts and examples.
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