January 14, 2004: Distribution Channel Commentary (DCC) # 53

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THIS WEEKíS TOPICS

  1. Future Funding Gaps For Everyone And Our Businesses Too?
  2. Couldnít We "Innovate" To Close These Gaps?
  3. Some Distribution-Specific, Simple, "Innovation" Tools To Share With All
  4. "Bruce, Can You Make It Risk Free For Me?"
  5. "And Pain Free Too?"
  6. Closing Thoughts
1.    Future Funding Gaps For Everyone And Our Businesses Too?

Being a big believer in the power of tax-free, compounded income over the long haul, I was stunned to recently read that about 50% of all people who have switched (or lost) jobs in the last few years have cashed in their pension accounts. I know that many people might also be challenged by doing net present valuation math planning if they think that:

  • US government retirement programs will survive as we know them past 2010; or thatÖ
  • Investing in Yahoo stock today at 143 times earnings will offer a good total return 10 years out. (Warning: the Internet stock bubble is back big time; how long will greater fools keep bidding the prices up from here?)

How the US government is going to plug its future funding gaps may seem a bit out of our control, but how does the future funding for our companies look? Any gap opportunities there? I have recently asked three different distribution clients to make 10-year projections by two different parties independently: current owners and potential next generation owners (family and/or younger managers). The exercise required writing down of all important business assumptions and how the following expectations were to be funded:

  • How much does the company have to make and reinvest to keep all employees, customers and suppliers interested in working with our company?
  • How much does the company have to make, in addition, in free cash flow to cash the current generation of owners out at the price and terms that they might fancy?
  • How much does the company have to make in total to encourage the next generation of buyers to want to sign the bank line and go into a long-term, bootstrap buyout phase?

I encouraged each group to do several quick iterations of the exercise to avoid getting caught up in too much forecasting detail just to see if the numbers came close to answering all questions. In all three cases, there were huge gaps. It turns out that doing bootstrap buyouts looks far more difficult over the next 10 years than it did in the past due to excess channel capacity and too much me-too, commodity product lines with price-selling pressure.

The common - "Whatís our best back up alternative plan"- solution from all three groups of current owners was (with a dubious smile): "Do you think new, industry consolidators will appear and pay ridiculous multiples like the consolidators did from 1996 to 2000 in many different channels?"

The reason they all smiled was that the most aggressive consolidators of the recent past in their respective channels were all buried under debt and bad numbers. Although the "deal rate" had recently stirred from nothing in two of the channels, the terms being offered by a few industry bigs were, on a cash equivalent basis, running at about 80% of reported book value. The few, smart buyers left didnít want to pay for garbage inventory and non-current receivables.

What then is "Plan C"? First, we should run our core basis a lot better than we are currently doing; it needs to be re-invented. If we are not a top 5%-ile performer at our old game with a healthy free cash flow from core activities, then we should not presume that we can be better at tangential growth adventures than at our old game. For awhile, we are apt to perform worse than we are currently doing in our core activity.

Second, we should consider doing any growth initiatives on a spin-out, joint-venture basis that can attract true, new, intrapreneurial talent from outside our business and from the area in which we are going. These key people should be able to bring strong, important new relationships, expertise and energy to the challenge. The parent company may control a big majority of the stock (80%+ for accounting consolidation purposes?), and may later consider buying out the minority for a fold-in event.

The best case study (and a great down-to-earth, operational read) on this spin-out, fold-in process to solve future funding gaps that I have seen is by Jack Stack in his book "A Stake in the Outcome". You can read my review on the book in DCC #4.1, and check out the reviews at Amazon.com. (To get to DCC #4, go to our home page; click on the "all other commentaries" link in the upper right hand corner; and then scroll down to #4 to click on it.)

A second story that you might enjoy about a long-term perpetuation success was recently published on-line by Industrial Distribution magazine. The article stars N.H. Bragg of Bangor, Maine. They are celebrating their 150th anniversary under 5th generation leadership. Here is the link to that story: http://www.manufacturing.net/ind/article/CA372301?stt=000&pubdate=1%2F1%2F2004.

So, whatís your 10-year funding gap for financing different stakeholdersí expectations? Do a 20/80 cash-flow projection as a discussion catalyst, then perhaps a few more iterations to surface all expectations and business (valuation) assumptions. If you do have big gaps, then it might be time to re-think present day strategic assumptions, practices and innovation efforts.

2.    Couldnít We "Innovate" To Close These Gaps?

Sure! If what we are doing isnít going to hack it for the longer term, then we need to change. In the spirit of "Who Moved My Cheese?" and "Letís solve world hunger", what specifically are we going to do besides try harder and more efficiently at what we have already been doing. Better brass polishing techniques on the Titantic wouldnít have changed the structural integrity of the hull or the course through the icebergs (our current business model). Big gains only happen when we start by rethinking our fundamental business model strategy. For example, re-think, re-define and re-pursue target customer niches as in 3.b below. But, big changes are generally unpalatable to all human organizations even when at deathís door. In this country, different business parties are usually still suing each other for the ashes of bankruptcy.

Based on the latest air ball forecast for job creation - consensus 150,000 new ones, actual 1000 along with downward revisions for previous reports - it sounds like the US job creation machine needs more innovative help than the government has led us to believe. For a best, brief view on what the real macro view is check out this past Sunday (1-11) NY Times article entitled: "The No-Bang, All-Whimper Recovery" at this link: http://www.nytimes.com/2004/01/11/business/yourmoney/11watch.html.

To go from the US macro to our local cities urban re-invention challenges, check out yet another NY Times article entitled: "As Schenectady Rusts, Experts Fear Policy Inertia". For you who do read this excellent, in-depth article, consider making a list of all of the factors that are thwarting change in this city and then find the analogue conditions within your own business that have resisted past change efforts. Make another list of all of the change programs that you have tried and figure out why they were only half-measures that didnít change the structural hull or course of your company boat. And then consider this: what if these cities could become one metro-zone that was then turned into a "free enterprise zone" in which many business inhibitors were suspended with one simple, flat, low tax, much like the eastern seaboard of China?

Hereís the link to the article, and if you are in a big, old, urban city area good luck: http://query.nytimes.com/gst/fullpage.html?res=9501E7DE133EF93AA15751C1A9659C8B63.

Now that we have looked at both national and metro innovation challenges, doing something better and/or new in our simple little businesses shouldnít seem too hard. To help you in your reinvention efforts a few helpful aides are offered in topic 3 below.

3.     Some Distribution-Specific, Simple, "Innovation" Tools For All

Because most of us already know how to run our businesses better than we are doing, we need to take the hit or miss art of implementing successful change and make it a more consistent science. To help do that here are a few how-to, distribution-specific, combat-tested, educational offerings:

  • If you havenít checked out our annotated slide shows under the "slide show" button on our homepage, then you might want to start with "Closing the Knowing-Doing Gap" at this link: Knowing_Doing_Gap_slides.pdf
  • Then, assuming that we can always sharpen our definition of and service for different customer niches, check out our brand new annotated slide show entitled: "Identify Best Customer Niches For Profit Maximization" at this link:
  • Identify_Customer_Niches.pdf

    Maybe these slide shows will just add to you knowing capability and still not give you enough help in making change happen with the troops. They will, after all, have to intellectually understand the whyís and howís of change 100% before you can even begin to deal with the collective psychological resistance to change. So, you might want to review the short summary descriptions of the 10+ learning-how-to-learn-and-change-together video modules that are in Section 5 of our "High Performance Distribution Ideas for All" video. Hereís how to do that:

      • Go to our homepage
      • Look for the links to video information in the center of the page
      • Click on the fourth one down entitled "summary notes for each module"
      • Scroll quickly down to "Section 5" and skim through the summaries for all of the change tool ideas that are covered by 10-minute video modules.
      • Then, back-scroll to "Section 4" to read about how you might go from "good service" to consistently distinctive service.
      • And finally, because all employees will be asking themselves, "Whatís in it for Me?"; you might go back to the beginning of this PDF document and scroll through "Section 2". There you will find out how you might teach everyone the ABCís of corporate finance, where premium wages for their job niche come from, and how they can be part of the premium productivity, vale-added and profit power solutions. Otherwise, they will be part of the inertia problem.

    4.     "Bruce, Can You Make It Risk Free For Me?"

    Most executives are ODíd on advice and printed material on "best practices" and " change management", so they donít need to pay more money to add to their dusty collection of "educational material". Our video is unique; it truly is a transformational, company-wide, dialogue, change-management tool. Because you have heard these claims before, we encourage you to first skim through some of the 10+ testimonials from different distribution executives in different distribution channels posted at our web site under the last link for video information in the center of our home page. (Your cumulative risk so far is the time you have spent reading this DCC and skimming some information on our homepage.)

    Then, realize the product is unconditionally guaranteed for 30 days. If after looking through the 295-page implementation guide and viewing a few of the most intriguing video modules, you can throw away the invoice and ship the product back. (You would then have lost another 30 minutes and a UPS charge.)

    If you donít like our list price, then buy it through a re-seller for 50% or more off. If you donít see a re-seller that you can buy it from, ask me about our "be the reseller catalyst deal". This gets the real cost down to the post-purchase time that you and others will eventually invest in digesting the video modules.

    Then, you will continue to get on-going support and encouragement through our past and future DCC series. Iím happy to respond to quick email questions for free, and even telephone consulting can get important answers in minutes because we donít have to spend much up front time educating each other as to who we are and what we are trying to do.

    The only risk you have is not checking out the video as a possible breakthrough solution for your long-term funding gap discussed in topic 1 above.

    5.     "And Pain Free Too?"

    According to Machiavelli, "Change has no constituents". Others might point out that big change causes big pain, especially for those who are over-paid, under-skilled and under-energized for where the company needs to go. They may have had their most productive time in mastering the past, but we must all change with the times. Clearly some would rather not or can not change, they would prefer to be subsidized by the rest of the employees until they retire.

    The best guidelines that I can give you for dealing with the pain of change are:

      • Sell and let everyone buy into a new set of assumptions for what it might take to make the company a better economic commonwealth on which all stakeholders can take a ride. This is a thorough educational exercise on what we have been doing, what we could be doing and what kind of economic difference the change could make.
      • Start posting new numbers that reflect new understood goals. Itís like being overweight and getting on the scale three times a day whether we want to or not. It is tough for denial and rationalization to creep back with constant reminders of what we arenít doing.
      • After dealing with the collective educational, intellectual reasons for specific changes, then we must deal with the psycho-dynamic generated "stalls" that different people will put up hoping that the change energy will die and the status quo will reassert itself.

    To supplement the "53-step program" change process that is inherent in our video, I can recommend one book heartily for "stall management" and one book prospectively:

    The 2000% Solution by Don Mitchell, et.al. is excellent. Check out its full story at Amazon. What I like about this book is how it gives names to 7 different categories of stalls and explains why they are OK to have and natural to do. But, once we have named them and claimed them (we all do these stalls more or less, here or there), then we need to work through them to make the change happen we all know we must do. This bookís approach offers the most pragmatic, best-written, approach to the emotional resistance issues that I have found so far.

    Another book that I plan to check out is appropriately entitled: "Change Without Pain: How Managers Can Overcome Initiative Overload, Organizational Chaos, and Employee Burnout" by Eric Abrahamson. This book is just out, and I have only read an early, favorable review on it. But, Iím familiar with the authorís good work on management fads. So, I will let you know if it is worth, IMHO, a deeper look. For now, I do like the promise in the title.

    6.     Closing Thoughts

    I have been blessed with a terrific, management-wisdom screener and forwarder, Mr. Tenney Campbell. There are few days that go by that Tenney does not email me copies of management literature gems including periodic trilogies of related quotes. Here is a recent set of quotes that ties in with our need to manage change or innovation better:

  • What would you attempt to do if you could not fail? (Robert Shiller)
  • It is the function of creative man to perceive and to connect the seemingly unconnected. (William Plomer)
  • Truth is the cry of all, but the game of few. (George Berkeley)

No matter what might be going on in our changing global economy, there is plenty of opportunity to reinvent what is right under our noses. Letís find it and make it happen. Thatís all for this week!

 

Bruce

Bruce@merrifield.com

Phone: 919-933-7474