Blog post category: Mental Models in the Trenches
Warren Buffet once said that when the reputation of a bad business and a good manager meet it’s the reputation of the (bad) business that survives. I added the parenthesis because most readers are lazy. I added the previous sentence to be funny.
When the original thesis for which you made an investment is proven incorrect it’s usually a simple –but very difficult– decision to cut your loses and get out. In the day-to-day operations of a small business this can be a product or service line that needs to be closed. When your divesting within a company it often means staff is displaced. If you’re a really small business you usually have the relationship capital (brownie points) to cash in and ask the quality people to move to a different role within the organization. Sometimes they navigate this pivot with grace –and sometimes not. It really depends upon your culture. Similar in a large organization but with greater expectation of people bouncing.
Mikel Berger once told his team at Delmar Software development that they could sell ice cream if they wanted. The leaders sat there stupified. The point he was trying to make is that we steer the ship on the daily basis. It was a philosophical test that his employees did not appreciate. They didn’t sign up to make ice cream. Duh. So, if software development became a crap business, and he thought the ice cream business was better, and he were to proceed toward ice cream, he could be sure that his teammates would become free agents quickly. (thanks for allowing me to pick on you Mikel –what a good partner?)
In my own experience, I’ve found myself in a number of business lines that I did not like as well as I had imagined liking them beforehand. This happened before Little Engine Ventures and within our time running LEV. Some businesses just don’t fit the owner-operator as well as others. Why is that? What mental model can be used to tease that out? How can you prevent that from occurring?
Smaller iterations are better. See-sawing from one big strategic move to the next introduces unnecessary risk. Whether the company is large or small, young or old, the incremental changes allow a group of people to evolve over time. Big, bold moves create unforeseen blowback issues. So change small. Do not change slowly. Change small. Make small improvements regularly. Make small cuts regularly. The tiny adaptations along a common course will find you transforming your business dramatically over the course of a few years.
Cut misfit customers. The primary source of financial loss is customers sucking the life out of the core business. The marketplace has a way of attracting loss making quickly. Insurance carriers can grow really fast by selling statistical losers. Everyone wants free money and the power of large numbers means it will be found. It’s your job as the operator to cut/block misfit customers before they get in the door. If they are there, fire them. If they sneak back in, run them off. As a service provider this is the number one challenge in our business. Our location managers fall in love with the dud customer and bend over backward trying to keep them as we bleed out. Cut this crap daily. Trim the weeds. As an investor, you have to ferret this out, also. What is a dud and what is just taking time to develop? How can you tell the difference?
Locations that don’t work, don’t work. Despite your grand strategy, if you cannot get the vehicle in gear and moving forward your goose is cooked. (too many cliches?) We had some really cool business lines and business locations that simply could not seem to get it done. We could not get it in gear. And we could not keep throwing good money after bad practices. We chose to cut our losses and move on. We chose to get focused. We chose to win. In the trenches, this looks like employees that simply won’t step up and be A-players. Maybe they used to be A-players but your standards are now higher? Maybe it’s a customer that used to be profitable but now isn’t worth it compared to your alterantives? You have to give up to go up.
The primary point of this post is that eliminating drag, removing blocking issues, will inherently speed things up. If you want to go faster, take on less. It’s counter intuitive to the work ethic of most founders and successful small business owners. You actually have to eliminate to advance.