Leadership and Failure

Over the years I have become more comfortable using my missteps and failures as lessons and examples for my students.  Of course, they seem to love to hear the success stories.  But they need to learn that hardship, challenge and failure all teach us important lessons about our business, our customers, and ourselves.

Bill Hobbs sent along a good post from The Executive Update that speaks to learning from failure.

[W]e tend to live in an avoidance society, where failure is often overlooked or ignored and we only focus on successes. That’s a mistake. Leadership comes from learning lessons taught by failure. People rebound from failure because they choose to learn from their mistakes.

Well said.

Inflation Heats Up

The inflation news released today is not good news.  We had a 1.1% increase in the CPI in just the past month, according to a report released today by the US Department of Labor.  This is the kind of double digit annual inflation that many of us have been worried about.  Mind you it was only for a month, but inflation can be infectious in an economy.  The ripple effects of energy will soon make their way through the rest of the economy if this persists.

And if you think I am the agent of doom (and I know at least a few of you do feel that way) read what Nouriel Roubini, Chairman of  RGE Monitor and Professor of Economics at the NYU Stern School of Business, has to say.  (Thanks to Andy Tabar for passing this along).

Pay Attention to Changing Preferences

Once again Walmart has its finger on the pulse of American consumers.  Just when inflation is kicking in and the economy softens they are seeing strong growth.  How?  They are listening to the customer.

They are marketing aggressively and focusing on prices and values.  This is just what the consumer wants to here right now.

From the St. Paul Pioneer Press:

Sales in entertainment were strong at Wal-Mart, with flat-panel televisions continuing to run in the high double-digit same store sales increases. Some retail observers see Wal-Mart’s aggressive marketing of inexpensive electronics as a threat to Richfield [MN]-based Best Buy.

The Pioneer Press article also reports on flat sales at Walmart challenger Target, which has not changed their strategy of shifting up in brand quality and to a more upscale approach to merchandising

We are seeing the same thing in the restaurant market.  Value sells.  McDonald’s is showing strong performance with increases in same store sales.  At the same time, upscale restaurants are closing left and right.

Also, many entrepreneurs I know in the service sector are experiencing pressure from their customers to trim back pricing or risk losing customers to low cost competitors.

The advantage that entrepreneurs are supposed to have is our ability to be nimble.  Now is a time to be very nimble. 

Listen to your customers.  Think like your customers.  Your reality in should be built on their perceptions.   Inflation is scaring them.  Rational or not, it doesn’t matter.  It is time to focus on pricing and value.

 

Seller’s Remorse

When we were in the process of selling our business our attorney did a wonderful job of preparing us for much of what was ahead of us.  One of the things he mentioned more than once was that we should be prepared for seller’s remorse. 

There are two types of seller’s remorse.  One kind is the emotional feelings that you are doing the wrong thing.  It is not really rational, it is just that fear, insecurity, and/or uncertainty play tricks on your mind.  Think Brett Favre.  I would bet that rationally he knows it is time to move on from the Green Bay Packers (this is an American football metaphor for those of you outside the US).  But, all he knows is football and he probably had not spent much time planning for what comes after his career in the NFL.  I can empathize with him.  I had a lot of the same kind of pangs of doubt when we sold our company.

The other find of remorse is one that happens because the sale puts you into a situation that is no longer fun.  You are still in the company you created, but you no longer own it and now work for a boss.  From the NY Times:

“The person who became my boss was the man I was negotiating with when I was selling my company,” said Mr. Asterino, 46. “You’re trying to maximize the value of your company when you’re selling it — and then when the transaction closes, that individual is your boss. It was very difficult.”

I knew I could not be happy with this type of exit, so planned carefully to craft an exit in which I not only monetarily exited, but physically exited, as well.  Not all entrepreneurs have this option, but if you do I would strongly suggest you take it.

(Thanks to Jennie Bowman for passing along the NY Times article).

 

 

Entrepreneurial Principles for Principals

I am winding up a short trip to Baton Rouge, LA.  Yesterday I conducted a workshop on how entrepreneurial practices and principles can be applied to educational organizations to a group of aspiring school principals.  It is a pilot program to help use entrepreneurship to transform education in the state of Louisiana.  It was a day that gave me hope for educational  in the US. 

There is a growing interest in how business principles — such as competition and entrepreneurial innovation — can help fix what is ailing the educational system.  There is huge resistance from teachers’ unions and school of education in universities.  But, parents, business owners, and civic leaders are beginning to say “enough is enough.” 

You can see more on this program and its goals here at the website of the sponsoring organization, Advance Baton Rouge.

What, Me Worry? Inflation and Debt

My post yesterday got a comment questioning why business owners are so worried about inflation and its affect on debt. 

During periods of high inflation, many small business cannot keep pace with higher costs.  Their profit margins will shrink as costs go up more quickly than they can increase prices.  We are already seeing evidence of this.

When margins shrink, businesses may no longer be good credit risks for banks.  Their cost of borrowing money goes up.  Or in some cases, they may become out of compliance with the profit margins required in the restrictive covenants in their loans.  The banks may force them to move their loans to another bank.  That will mean the transaction costs for the new loan and typically higher interest rates.

The Fed will soon begin to use higher interest rates to cool off inflation.  The cost of debt goes up.  During our last period of inflation in the late 1970s mortgage rates hit 16-18%.  Higher rates hung around late into the 1980s, when we still were paying 9% for a prime plus a quarter business loan.

Inflation of 2-3% we can handle.  We have had a long period of solid economic growth with modest inflation.  Younger entrepreneurs have never known anything else.  What many of us think is coming is double digit inflation.  That changes everything.  Profits will be harder to maintain.  Debt will cost more and can become much more difficult to secure. 

Those who get out ahead of this will have a better chance to be OK.  Those who do not will have a higher risk of failure.  See this recent post I wrote on steps entrepreneurs should be taking to shore up their income statements and balance sheets to prepare for a period of much higher inflation.

Inflation is Top Concern Among Business Owners

It should come as no surprise that inflation is the top concern in the most recent poll of small business owners conducted by the NFIB.  What surprises me is that it has taken so long for people to pay attention.

Since 1983, the average percent of owners in the monthly NFIB poll citing inflation as a top problem has been 3 percent.  As recently as February 2008, only 8 percent cited inflation as their top problem. By May, 17 percent said inflation was their top concern, and in June it shot up to 20 percent.  To be honest, I worry that it is not even higher right now.  The beast of inflation is on the loose and will likely be with us for quite a while.

Small business owners are planning to keep on spending — a sign that any recession will be short and not very deep.  I have argued all along that Washington is paying attention to the wrong economic issue.  Plans for hiring and capital spending, as well as job openings, inventory investment plans and expected credit conditions, are all stronger than in past recessions.

Among those surveyed, expectations for real sales gains and improvements in business conditions are as bad as in 1980-82, the worst economic period in recent years.  But this time is is will be inflation induced, and not a true deep downturn in economic activity.  I see an economy that will be going nowhere faster and faster and faster.  That is what long term inflation can do an economy.  We will be busy, but will make little real progress due to the beast of inflation eating up any progress through a higher cost of doing business.

Every Business is a Lifestyle Business

When people use the term lifestyle business they usually are referring to something small and even part-time.  Academics and policy folks will often say the term lifestyle business with a hint of indifference, boredom, or even condescension.  This is not a business that interests them very much.  If is not designed to scale up and grow.

I would argue that every business is a lifestyle business. 

Why?  Because the business we create will dictate our lifestyle.

We can choose the lifestyle our business creates deliberately, basing it on our goals, aspirations and values.

Our lifestyle may be one of integrating our business with our passion to change the world.  We call this a social venture.  Our lifestyle in this venture would be one of sacrificing our own income and wealth potential in exchange for making the world a better place.

Our lifestyle may be one that has the flexibility to spend the time we want to with our family, our church, our community, our hobbies, travel, or what ever.

Our lifestyle may be one that keeps things simple.  We are willing to trade off the growth potential in a venture for the peace of mind of having no employees to worry about or to provide for.

Our lifestyle may be one of fame and fortune — of work ahead of everything else.  So we look for opportunities that provide wide open markets with significant growth potential. 

Be deliberate in planning a business that reflects the lifestyle you want.  And understand the trade-offs that come with the choices you make — there are always trade-offs.

High growth ventures offer high rewards of income and wealth. But, they also come with the risks associated by pursing such ventures.  Your income is more at risk, certainly in the short-run.  Your family will likely see you less.  Your hobbies and interests will take a back seat.

The decision to keep your business small can offer the ability to control your time and make it more flexible for other parts of your life.  But, your income potential will be more limited and you will have to be content with passing on opportunities to add on more products, move into other geographic locations, or maximize our share of the market.

The key thing is to recognize that every business has an affect on your lifestyle.  Be honest with yourself.  Know what lifestyle you truly want and then engineer that lifestyle into the business you build.

Word of Mouth Takes Action

My column in this week’s Tennessean is on what it takes to make word of mouth effective:

A recent poll found that 82 percent of small businesses use word of mouth to grow their business, and that 15 percent rely almost exclusively on word of mouth.

However, what many entrepreneurs fail to recognize is that word of mouth rarely just happens.

They fall victim to the myth of “if we build it, they will come.” Nothing could be further from the truth.

Continue reading Word of Mouth Takes Action

Accountants are from Mars and Entrepreneurs are from Venus

Imagine moving to a foreign country where the people speak a different language from your own.  While you may be able to get by for a while without learning the language of this country, you will be severely hampered.  Asking for and receiving simple information will be a tedious and frustrating task.  For example, assume you want to go to a movie.  How do you get to the movie theater?  How do you order a medium box of popcorn? What are the actors in the movie saying?  More complex tasks are even a bigger challenge.  Imagine trying to rent an apartment.  What does the landlord expect from you as a tenant?  The contract she is requiring you to sign is completely unintelligible to you.  Even an interpreter will only help so much.  Your interpreter can translate, but the process is slow.  And it would be impossible to rely on your interpreter all of the time. 

Accounting is called the “language of business.”  Much of what is communicated about a business is done in this financial language.  And yet to many entrepreneurs this is a language as foreign to them as the language was to the traveler in this story. 

This summer I am learning this “cultural experience” from the opposite perspective.  I am teaching our required graduate Entrepreneurship course.  But instead of teaching it to our MBA students, I am teaching to a section that has only graduate students in our Master of Accountancy program.  As I teach them about entrepreneurship, I now appreciate that many of them experience my world of entrepreneurship as a strange and confusing place.

Their world is order and precision.  Mine is change and chaos.  Their world is historic measurement of what has happened.  Mine is the hope and dreams of what might be.  Neither is better or worse, and neither is right or wrong.  And in today’s entrepreneurial economy we need each other more than ever.

We teachers always like to say that we learn as much from our classes as do our students.  This summer I know I am learning much more than my students.  Given the importance of entrepreneurs really knowing and understanding their numbers, I know that what I learn from my accounting students will help me to better prepare my entrepreneurship students for the for their frequent and critical trips into the Land of Accounting.