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Stock Re-Purchase? A Lack of Imagination?

Posted by Ted Sehl on February 11, 2011 at 10:28 AM Comments comments (1)

Here is the scenario: you are a public company with a sizeable cash balance and it is proposed to the Board that you re-purchase some of your shares, thereby giving the stock price a nice nudge forward.  After all, your view is that you are there to maximize the shareholders wealth.  A no brainer, right?  I agree – you have not thought this through.  I would suggest that you look at the following alternatives first:

 

1.      Re-invest in your business.  If your business is making good returns, why not re-invest and create more wealth for your shareholders and strengthen your position in the industry.

2.      Accelerate your strategic plan.  Even in businesses that are generating large cash flows, there are tough allocation decisions to be made.  Ask yourself, if we could spend some money now to accelerate our strategic plan, would that give us an even greater market advantage?

3.      Payoff debt.  The companies that survived the recession were generally the one’s that had conservative balance sheets –is this the time to prepare for the next recession?  Could you weather a double dip recession?  As a former colleague often said, “I have never seen a company go bankrupt that had no debt”.

4.      Leverage the supply chain.  Do you have suppliers that have poor cash conversion cycles? If so, negotiate more flexible payment terms that allow you to pay early– you will be surprised at the size of discounts you are offered. And those discounts fall directly to the bottom line.

5.      Look at acquisitions.  Can this accelerate your expansion into a new market?  Can you solidify your market position?

 

Your stock is valued by earnings multiples.  Your choice is to either accelerate your earnings or reduce the amount of shares outstanding.  If you choose the latter, what is it saying about your organizations’ view of the future? It would appear to me that a re-purchase may signal a lack of imagination and a management team that does not have an idea of how to expand their business.

 

 


Why Do Strategies Fail?

Posted by Ted Sehl on February 1, 2011 at 12:26 PM Comments comments (0)

Why do most strategies fail? Many of us assume it is because the wrong strategy was chosen and that the secret is picking the “winning formula” for the industry.  My experience is that this is seldom the case.  Lou Gerstner said fixing IBM “was all about execution”.  His claim was that at the end of the day their might be four to seven strategies that could be chosen for a specific industry, so it all came down to execution.  So strategy success or failure is not often determined from the corner office but rather on the plant floor or elsewhere in the front lines.

 

If we chose the correct strategy why do we fail?

 

The two most common reasons are the inability of the corporation to execute and the timeliness of the implementation.

 

Companies often fail to execute because they have overestimated their capabilities and resources. This is the hard part of strategy – knowing whether or not your organization can pull it off. Unfortunately, entrepreneurs are by their nature optimists and tend to thinkt heir organizations are world class and can accomplish anything.

 

Care must be taken when planning the execution of a strategy to insure that all members of the team are realistic about their capabilitiesand resources. Strategies should always be over resourced.  When I was working in the restaurant industry, you deliberately overstaffed for the first three months of operation of a new location.  You wanted to give your customers exceptional service right from the start, otherwise they may never return.  Only after you developed that exceptional service did you consider optimizing your staffing levels.  This resource loading is part of the cost of implementing a strategy – do not assume that everyone will be able to fit thenew strategy within their current workday

 

Because entrepreneurs are often overly optimistic about their organizations ability, the resources are often not adequate to carry out the strategy.  As a result, the strategy gets implemented unevenly and not as quickly as expected.  This leads to the second type of failure which is the timeliness of the implementation. Long implementations can lead to organizational fatigue, brand confusion and missed windows of opportunity.  If your strategy is to move part of your manufacturing to a low wage country, you may not have time to do in-depth site analysis and build your own site.  Rather, it may be prudent to lease a site and get the benefits of the low cost wages now and then optimize the site selection at a later date.

 

If you have done your strategy right, you will have picked the correct strategy, you will have carefully planned the resources and timelines and you will have insured that your organization is prepared for the challenge.  Taking the time up front to plan and having milestones for strategy checkups will help your organization out execute its’ competition.

 

 


Tips for Business Process Engineering

Posted by Ted Sehl on January 24, 2011 at 11:17 AM Comments comments (0)

I have found that there are six critical considerations when creating a new business process.  Get these six right and you will be well on your way to building an effective process.

 

1)      Minimize handoffs:  every time that information is passed from one person to the next, there is a chance for misinterpretation, information to go missing or critical time delay. The more people involved in a business process, the more back and forth between departments, the less likely it is that the process will be completed accurately and on time.

2)      Person who knows the information first doesthe entry.  Long gone are the days when there were data entry departments.  Whenever information comes into an organization, the person on the receiving end should enter it into the system so that everyone is aware of it.  To hand it off to another person risks the errors mentioned in #1 and creates timeliness issues.  If salespeople are out on the road recruiting new accounts, then the process needs to be set up so that the salesperson can begin the creation of the new customer. The push back will be this is too time consuming for the salesperson and that they need to be selling.  This is a warning sign that the information process is too cumbersome.

3)      Simple is best:  Determine exactly what information is needed and in what format.  Asking for additional information can lead to fatigue for your business partners.  Whenever dealing with an outside source, insure that the information request is in their language, not yours and that your forms and processes lead to a high degree of compliance. 

4)      What is the approval for?  Approvals can be the most misunderstood part of a business process.  Many people who do approvals are not entirely aware of what their approval signifies.  In the case of approving an invoice for payment, approval can mean several things: you have verified the service or items has been  consumed, you approve of the price, you approve of the terms that the vendor has been granted, you approve that the expenditure was necessary at this time, you approve that the expenditure is within the budget etc.  The approvers’ assumption of what the approval is for may not match the company’s expectations, so care must be taken in communicating the role of each approver.

5)      Handle exceptions as exceptions:  Many people try to build a process that will handle 100% of the company’s requirements. The result is very complicated processes with many feedback loops.  You should build your process to handle 98% of the data.  The exceptions need to be handled at a higher level than the normal process, by people who have a better view of the company’s needs.

6)     Make it flow:  Just like in a manufacturing process, look for bottlenecks.  Anytimeyou find a bottleneck, you need to examine whether or not it is a necessary step, how you can add resources to get it done and how you can make the information more of a continuous flow.

 


Saving Your Way to Recovery

Posted by Ted Sehl on January 10, 2011 at 12:50 PM Comments comments (1)

Throughout the life of an enterprise, there will come times when a cost reduction strategy must be adopted. This is usually a result of a string of poor financial results – either unsatisfactory returns on investment or more commonly a string of losses.  Unfortunately, it is nearly impossible to cost reduce a company back to health. This is not to say that the cost reduction is not important but rather that something else is going on here.

What is that something else? It is a failure of the company’s basic strategy – where they have chosen to compete, with what product offerings and with what key advantages over the competition?  The fact that the returns are not acceptable means that the enterprise has failed the first test of a healthy strategy – can it consistently beat the market.

Research has shown that 80% of revenue growth is explained by choices about where to compete; leaving only 20% about explained by choices of how to compete (Baghai, Smit, Vigueirie, The Granularity of Growth, 2008 )  So, the first step is that a review should be taken of what market segments have attributed to growth and which have not.  Resource allocations should be reviewed with an aim to supporting the growth areas. 

The next step is to review the product offerings.  Do they tap the key sources of advantage that the enterprise has over its’ competition? What about over substitutes that have entered the market?  What has happened to erode this advantage?  What can be done to regain it?

These are all tough questions that must be addressed.  Cost reduction may stem the tide of losses for now, but the real turn around will come from the review of the enterprises’strategy.

Choose Where You Compete

Posted by Ted Sehl on January 6, 2011 at 10:22 AM Comments comments (1)

I am always surprised by the entrepreneur who does not think about his or her competition.  I have been involved with projects that seem great in the boardroom but do not meet up to the test of the market place.  One of the most common reasons for this lack of success is a poor choice of where to compete.

If you are offering a new product or service, the guiding questions have to be 1) is it within our competencies and aligned with the way we compete today? and 2) who else is in the market with the same offering?  As Warren Buffett is attributed with saying: "I don't look to jump over 7-foot bars: I look around for 1-foot  bars that I can step over."  Many companies fail because they are swinging for the fences rather than just trying to get a man on base.  If you are a small player and the market is saturated with large players and lots of competition, then you need to find profitable niches rather than compete in the mainstream of the offerings.

I have a friend who once stated that he looked around for markets where the competition was small and that he knew that he could easily beat the products and services that were currently offered.  A reporter who listened to his speech creating the tagline that he "enjoyed beating up on little guys".  It sounds harsh, but let me ask you this and remember, it is your money that is on the line - would you rather beat up on the little guys or do you have a David complex and want to take on Goliath?

The successful companies I have seen take a portfolio approach to expansion.  I recommend that you plan to fail often, fail cheaply and fail quickly.  You will be surprised how often that your failures lead you to creating the winning combination down the road.

Hitting Your Numbers

Posted by Ted Sehl on December 31, 2010 at 12:02 PM Comments comments (0)

No one likes surprises – especially your bank.  The bank looks to you to provide theirsecurity and a return.  To do this, theworld has to unfold as you told them you expected it would unfold.  They can accept market changes and will bemuch more patient than you may first assume, but eventually it all comes downto hitting your numbers.  If you cannotmeet the projections that you give them, then they begin to lose faith that youreally know where your business is going. It is an issue of control.

So what do you do if your forecast has to be fairlyoptimistic to hit the financial covenants that you have in place?  First start by listing all your assumptionsand then key in on the actions you have to take to insure that theyhappen.  If you need to land a big customer,who is leading that charge? How are you monitoring the progress?  Do you have any other prospects in the salesfunnel that you can accelerate should this initiative fail?

Next, assume the worse. Recast your numbers and determine how far you are away from compliancewith the covenants.  What can you do tomeet them?  Do you need to inject extracash?  Accelerate receivable terms?  Negotiate more favourable terms with suppliers? Make overhead reductions?  Quantify each alternative and determine whenit gets you back into compliance.

Your ultimate goal is to be able to provide the bank a forecastwith a list of assumptions so that they know what you are counting on, and thena list of remedial actions that you can make happen if you do not hit yournumbers.  You want your banker to be ableto sleep nights.  You may enjoy the goodnights sleep also.

 

 


First Principles - Follow that Cash

Posted by Ted Sehl on December 30, 2010 at 11:24 AM Comments comments (0)

We often try to make business more complex than it is. We have reports with Key Performance Indicators (KPI's) to keep our fingers on the pulse of our business; we do elaborate financial forecasts or budgets; we do strategic planning ... but there is always one simple reason why we are in business - to make money.  And the simplest way to measure that is our net cash position - do we have more money today than we did yesterday.

While it seems like Business 101, you would be surprised how many entrepreneurs lose sight of cash.  I worked with a franchisee who thought he was ready to expand. He was busy arranging the financing, planning a new opening, and hiring staff.  He thought that his business was running fine; it was hitting all the key metrics and budgets that he set and he was ready to grow.  What happened was he had hired a new accountant months earlier and explained the metrics that he expected.  The accountant lacked confidence, so gave him what he was looking for in reports and moved all the variation into expense accounts to be examined later.  Later never came.  How could this entrepreneur have known that the reports were not accurate?  By looking at his cash balances.

As simple as it may sound, reviewing your cash balances on a routine basis confirms what you see in all of your other reports and metrics.  Find a way to build it into your daily or weekly routine.  As the owner, you are the one person who should have complete information and know what to expect to be going through your bank account.  A simple check will give you peace of mind and let you know where you stand.


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