Originally written for Canadian Metalworking Magazine, November 2015 issue.
It is not the most intellectual of the species that survives; it is not the strongest but the one that is able best to adapt and adjust to the changing environment in which it finds itself. -Darwin
Companies will face challenges continuously because of changing business environment. The situation has gradually become very difficult for Management who kept themselves complacent and remained comfortable with legacy systems and processes. Their if-it-ain’t-broke-don’t-fix-it mentality is hurting companies as they fail to adapt and respond quickly to changing market conditions. The same mentality can be attributed to troubles that ultimately lead to the business’s demise.
Existing business models are subject to disruption and displacement faster than even a decade ago. Management’s intuitive response to problem-solving and their prevailing thought process cannot remain as archaic as the legacy systems that support them.
Some of our friends in the construction industry have had significant challenges in recent years. There is no margin for error when providing quotes for any type of job, whether fabricating, installing and constructing steel structures. Competitive pricing has turned into a race-to-the- bottom phenomena. As a result, margin contributions are squeezed, bottom lines are negative and balance sheets are depleted. Those who fail to innovate, are too complacent, and are too short-sighted to invest in cutting edge technology in its generation are the obvious losers of this zero-sum game. Their colleagues in peripheral industries became reluctant recipients of spill over effects.
Continuous improvement is inevitable and no longer a luxury of the past. Those who subscribe to this thinking and adapt not only survive but thrive over the long term.
During my banking career, I have seen business owners in their 50’s sometimes 70’s lose their shirt in the end because of complacency and lack of responsiveness. Even those who admit their businesses did poorly the year before are quick to dismiss the situation, asserting that the industry goes through a cycle and things will get better again next year. While that may be true to some extent, there are times that the long awaited turn-around event for the company doesn’t materialize. Management continues to be in denial. One more fatal blow such as a loss of a major customer can ultimately lead to bankruptcy.
When the dreaded phone call from the bank or CRA comes, the Management panics losing their ability to deal with the situation rationally – thereby failing to make intelligent decisions.
Responsive managers on the other hand plan ahead. When warning signs become apparent, they embark on making frantic phone calls. They invite people who may be able to provide a solution long before the numbers slide further.
The following are my essentials to business survival during crisis and disruptive times.
- Do not pursue the top line at the expense of the bottom line. If sales are growing fast but profits are not, prepare to turn customers away through premium pricing tactics or by focusing on profitable customers.
- Change the way you sell your products and services. If your workforce continues to sell traditionally, i.e. providing estimates where winning the bid is based solely on pricing, you need to challenge your conventions. Avoid bidding for money-losing projects at all cost.
- Adopt an ERP system that generates drawings that maximizes existing tools and equipment. It will minimize labour intensive tasks and prevent estimating errors.
- Invest in a state-of-the-art equipment to improve efficiency. Leasing the equipment will minimize the upfront costs associated with the purchase. If an equipment that costs $100K reduces manpower requirement by 100 hours per month, it will pay for itself within 2 years.
- Improve your trading cycle. Ask customers to put a larger down payment and request suppliers to temporarily extend credit terms. Remember to honor your commitment to revert back to normal payment terms once financial performance improves.
- Be prepared to inject equity when needed. Banks are reluctant to lend more when your bottom line is negative.
- Scale up or down when necessary. When work is scarce, lay off redundant employees and only keep the key employees. Parting with an underperforming Estimator may well be part of the solution to the problem. This harsh reality is a better alternative to going bankrupt. Establish practical Key Performance Index (KPI) for those that you keep.
- Determine growing markets to exploit. I remember a client during recession in 2008. While others struggled through the automotive industry slowdown, he diversified into aerospace. A bold move which paid good returns over time.
- Set hubris aside and pursue consolidation and strategic partnerships to rationalize costs. If 2 companies are barely surviving from one year to the next, perhaps it’s time to merge both operations. Large corporations do it, why shouldn’t you.
Alma Johns is President of Bench Capital Advisory Inc., an independent corporate finance and debt advisory firm based in Toronto. Reach her at email@example.com.