Wednesday, June 5, 2013

Time: Costly Growth-Currency

Photo image of a sunken boat at a marina near the mountains.
A manager growing a business at the same rate as that of the industry is not growing anything. Credit can't be given for industry growth. Industries grow due to macro factors, like demographics, and not due to any single person. Paraphrasing President Kennedy: when the tide rises, even terrible ships go up. Yes, I butchered it. But it sends the right message. To measure real performance, take the company's growth rate and deduct the industry's rate. A positive number will mean expansion at the expense of competitors; which is a great thing.
As the residential boom gained steam after the turn of the century, many undeserving businesses thrived. Anyone could get a truck and a small crew to begin installing any of the many products going into the new mac-mansions. Success was almost guaranteed. Bad business models grew, leaving their managers with the impression that they had the magic touch. It is well known that success makes people think to be smarter than they really are. Growth accelerated and the party went on. Then, all of a sudden, the bottom fell off in April of 2006. The crews were fired and the trucks repossessed. Small business owners all over the nation were left wondering who took their success away.
What success? They just rode the wave until the wave crashed.
As a manager, you should always have a degree of skepticism about success. Take credit for what you have achieved but give credit where credit is due. If, for example, price inflation makes revenue go up, acknowledge that sales are up because of unit price increases. A quick count of units sold will usually reveal the truth. Likewise, mistakenly buying too much inventory right before the competition runs out of theirs is plain luck. I don't know about you, but I would rather be lucky than good. If the market gives me a freebie, I will take it and credit the market without a second thought.
Illustration over white background of a bar graph with ascending green bars and an upwardly tilted blue arrow.
Now that we have taken these extrinsic factors out of our growth chart, it would seem that there is not much left. Such is the impression that many small businesses have. While claiming to have a culture of aggressively driving growth, many companies really just sit still. Their managers are blinded to this fact. They thus feel no need to push for growth alternatives.
So, assuming that they would open their mind, how could they buy growth? Put simply: with resources. It costs time or money. Sometimes business intelligence helps get a discount; but for the most part growth must be payed with time, money or both.
A business that grows organically is paying for growth with time. In America, there are about a million companies with sales between one and four million dollars. A large portion of these has been in business for over 20 years. Often, their owners started with not much and grew their investment through lots of personal effort. No doubt that these owners have made a descent living as their business grew. But anyone who thinks that organic growth came at no cost should think twice.
To find the real value of time, just ask one of these business owners if she would do it again. Would she start from scratch again today? Would they spend another 20 years to duplicate what they have achieved? Chances are that they wouldn't. You see, time is viewed as free by young people who are just starting and seem to have a surplus of it. But as they grow older, time seems scarce and thus much more valuable. Building a business organically, it turns out, is a very expensive alternative.
Picture of a typical distribution warehouse
20 years ago, an entrepreneur without any idea of the cost of time started a business. Now, with the benefit of hindsight and experience, the same entrepreneur would not start the business again today. This point, I think, highlights why business owners who reach yearly sales between one and ten million dollars run out of steam. Companies everywhere struggle past this point in their life. I call this difficult time: corporate puberty, as it is a time when corporate identity comes into question. Intuitively, businesses just don't want to grow in the same way as they had, despite consciously claiming to be seeking growth.
The dichotomy of wanting-growth but really not-wanting-growth therefore originates from a lack of perspective. It simply has not occurred to these managers that they can buy growth with other currencies. Large businesses know this well. Small businesses are mostly blind.
Large businesses and their professionally trained managers know that acquiring other businesses is a good alternative to growing organically. It is well understood that, in general, it takes about five years for a business to expand into a new category and reach an adequate level of know-how. Sometimes, five years is simply too much to pay.
For example, a small businesses selling installation parts to small automotive repair shops may want to improve efficiency and gain additional business by adding delivery trucks. The problem is that efficiently and effectively running delivery trucks is not the same as just owning a company vehicle. There are correct and terrible ways to manage maintenance and routing concerns. There are also best practices on things like how to handle the associated changes to the balance sheet. Why not eliminate the risks and just buy a small delivery company? Even if the company presently serves a different industry, delivering cakes for example, the ideal acquisition target must have developed great expertise on operational efficiency.
From the outside, it would seem foolish for an installation parts business to buy a cake delivery business. But from the inside, it is a simple math calculation. At a low enough price, the cake delivery business could be acquired in lieu of having to pay years for the know how. If the acquiring company is large enough, the proportional cost of time increases while the proportional cost of money decreases. This means that money is discounted the larger the acquiring company is. This is because rapid deployment of the new service will give the acquiring company years of advantage over its competition; creating benefits that will be multiplied by the large number of customers. The gains could even offset the costs associated with shutting down the cake delivery business.
In this case, the right growth alternative was just a matter of thinking laterally and applying simple math. Likewise, sales growth could be acquired when hiring key industry people or by buying shelf space. Large retailers often sell the right to key locations to vendors willing to take the risk. For those who understand the benefits, there isn't even a question about the value of the space. But for companies without the experience, the idea of paying tens of thousands of dollars per moth for a single hook on a wall may be overwhelming. Unfortunately. many small businesses fall under this category. Their owners, as we described above, know no other way of growing but organically. To buy space as a way to buy business seems as high risk.
I know that there are plenty of businesses that fail to properly incorporate acquisitions. But if you think that growing organically comes on a straight line, you are mistaken. Both ways of growing have equally large pitfalls. There is a reason why it takes so much time for organic growth to take place.
Many will argue that acquisitions are more prone to internal silos and political infighting. But businesses that grew organically also display silos. The difference is that, because acquisitions don't cost much time, silos pop up quickly after each acquisition. On the other hand, silos take much more time to develop within organically grown companies because of the slow pace of growth. As a result, business anomalies like silos have nothing to do with the way a company grows but with management competence.
Most small businesses think that they have some sort of special culture and that bringing in a new group of employees will sicken their culture. To me, this is nonsense. A company that grows organically will also have to add just as many new employees from outside of the company. The problem is not the number of new employees. The problem is managing the rate of change. Organic growth grants more time for adjustments.
Some say that a new employee will not hold as much political power as a dozen new employees. This is true, although it again is a management competence concern. It is a matter of management rising to the challenge.
Unfortunately, management competence is where small companies fall short. Their management is generally not up to par when trying to properly handle these constraints. As a result, acquisitions don't create cultural breaks; poor managers do.
Line-drawing illustration of the balance between buying a business with money (acquisition) or with time (organic growth).
With capital at hand, I would chose to acquire another business by paying with money rather than paying for it with time. At least I can get to look for the right business features immediately rather than to have to wait a long time to find out. Who knows; things could change before we get to have success with the new organic venture.
Moreover, I see paying with time as being similar to writing a blank check. I much prefer to know that, even when things go off course, the cost will stay within a manageable range.
I suggest that you see growth as something than can be bought with time or money. I also wish for you to see that both time and money have a value. Specifically, don't discount time. Value it and preserve it.

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