If you cannot identify your loss leader, you are a lost leader.
To succeed in today's overly competitive business environment, leaders must be aware of the products, services, operations and costs that surround them, and possess a deep understanding of the market(s) in which they compete.
Sounds like Business 101 or a rudimentary aptitude doesn't it? Well guess again. Aside from knowing the basics, leaders can fail or self-destruct for the simplest of reasons ... Inexperience, poor communication or social skills, the inability to see the big picture, adapt, influence or accept feedback, politics, greed, arrogance, and many others. The fact is that there's more to the job than meets the eye, and it should not be assumed that all leaders are tuned in to the business basics.
Rather than delve into what can go wrong, let's focus on those key things that business leaders should know and why they need to know them. For the sake of keeping things simple and somewhat entertaining, I will provide examples of big corporate world problems through the management of a mom and pop restaurant called Al Pacino's.
When it comes to a leader's general business acumen, the size and scope of the business does not matter. Similar to how the first two years of college are generally the same for all students prior to establishing a major. Whether managing the country, a Fortune 500 company, a department or a restaurant, the DNA or building blocks of a competent business mind are the same. Also, realize that you shouldn't have to be an executive to understand the following:
Competitive Advantage: Businesses win in the marketplace by outperforming the competition, however, leaders must remember to choose their battles carefully. Companies cannot afford to satisfy all needs for all customers, or be number one in every area in which they compete. Developing a competitive advantage takes great innovation, expertise and resources. Whether its producing a product at the cheapest price, most superior design or guaranteeing the speediest service, acquiring any type of advantage over the competition requires intense focus and discipline. In many cases, the competitive advantage acts as the core of the company. Trying to be the best in every arena as opposed to a select few dilutes effort, promotes inefficiencies and leads to failure.
Companies operate with a finite pool of resources and, to stay competitive, those resources must be allocated effectively. Just imagine what would happen if Al Pacino's sought to have the greatest menu variety of the freshest quality foods with the lowest prices of all neighboring establishments. For this to occur, the restaurant would need to eliminate any food waste and allocate significant labor towards making all of its pizzas, pastas and meals fresh to order. In order to obtain the lowest prices, it would have to forfeit on a great deal of margin, as it could not efficiently undercut the much larger franchises that buy almost all ingredients in bulk. Lastly, to offer customers the greatest variety with superior freshness and quality, the restaurant would compromise on other competitive areas like speed or service. If not extremely heavy on staff, it would be nearly impossible to serve every meal made from scratch. The desire for Al Pacino's to be the best in these three key areas would not be profitable or sustainable.
So if you enter a small Italian restaurant and see a menu as replete as one from The Cheesecake Factory, expect to be eating frozen, microwaved foods. And if you work for a leader who states that the company is going to be the best in all categories, then you are dealing with a naïve boss or one who suffers from a Napoleon complex.
When developing a competitive advantage, consider following my beat the D.R.U.M.S. technique. Be sure that your competitive advantage is easily and efficiently DELIVERABLE, RELEVANT to customer needs, UNIQUE from the competition, MEASURABLE in a way to report performance and drive accountability, and SUSTAINABLE in a sense that you can securely win in this area for years to come.
Margin: I am a firm believer that a company should be able to identify the margins of its products and services down to the individual SKU level. I've worked for several major corporations and have experienced this benefit first hand. To the contrary, those companies that evaluate margin at higher levels, like product line or family, are blind to the inefficiencies and huge amounts of waste that are masked within.
For the past two quarters, Al Pacino's has been selling specialty breads. Overall, the bread category grossed more than $100k and it appears to be a big hit with customers, however, Al is baffled by how he has yet to recognize any significant profit. Pacino's started the business with only five simple breads and it now has more than 50 specialty loafs. Every new bread created has added to the topline growth of the bread category, but this has somehow eroded margins. Al continued to add more and more varieties of bread believing that this would eventually drive profits. After all, it only cost an average of $1.50 to make each loaf that he sold for $3.
When profits weren't attained, Al considered the thought of foul play, but after further consideration he knew that nobody in their right mind would steal from him. Al immediately called for a sit down with his bread maker, Giuseppe, to discuss what could be going wrong. After two espressos and a double shot of Sambuca, Giuseppe told Al that the problem was with the gluten-free breads. Gluten-free flour was five times more expensive than the traditional flour that they purchased in large scale for their pizza dough, and the tricky baking process led to three times the amount of waste and failed batches.
Al knew that in order to successfully compete in the gluten-free market, he would have to reach economies of scale in the purchase of the unique flour and eliminate any waste in the baking process. The next week Al brought in an expert baker of gluten-free breads to train his staff. The expert taught the staff that gluten-free dough requires much less flour and how it should have the consistency of pancake batter. He also showed Al how to optimize the production batch size to reduce the labor cost per unit. The expert baker recommended running one large batch of dough that would produce enough bread to satisfy his daily need, while also generating a surplus to that could yield 50 gluten-free pizza crusts. Al accepted the advice and added gluten-free pizzas to his menu. He also raised the prices on all gluten-free based products and other specialty breads like olive by $1. His profits immediately soared.
I have stepped into environments where companies grew from 300 to 3,000 to 30,000 SKUs while never considering what each new offering did to margin. Waste in excess inventory, working capital, the cost of returns and scrap never tied back to the product SKU level, therefore, no data ever suggested that the massive quantity of SKUs posed a problem. Don't be the executive who's left wondering how a profitable product line went sour. Understand your margins from the ground level up. Remember, topline growth is nice but profitable topline growth is a necessity.
The short and long-term margin of any new product should be evaluated prior to a product's release. This is an essential component towards determining the ROI, and to ensure that teams are held accountable to delivering on their commitments to produce profits. Without such measures, companies tend to create new products for the sake of doing so. After all, every sales person likes to have something new to sell, and if nobody's keeping score...
Never forget that companies are in business to make money and that determining the product mix or number of offerings cannot be arbitrary. In order to sustain profits in a competitive business landscape, costs, pricing, demand and waste need to be continually assessed and optimized.
Deconstruction: Al's head chef, Gianni, is a food aficionado. His pallet goes uncontested, as he can taste one bite of any dish and tell you exactly what each ingredient is right down to the slightest pinch of seasoning. Gianni's talent does not stop there, after breaking down all of the parts to its simplest form he does something even more remarkable. He puts all of the elements back together again in a superior way to construct a much better dish. Gianni's expertise gives Al Pacino's a huge competitive advantage in flavor and taste over the competition.
Hopefully by now you see where I am going with this. An experienced leader should be able to deconstruct the talent of his staff, as well as the budgets, processes and operations that surround him. If you are brought into a leadership role, during the first six months, you should be able to successfully meet the status quo. After that point, if you do not have a strategy and actionable plan in place to drive significant improvement (reconstruct), I would define your leadership actions and abilities as a failure. Sound harsh? Just imagine if our next president, or any president for that matter, ran with a campaign to keep everything as is. Why should the status quo ever suffice?
You do not have to be a CEO or executive to possess the ability to deconstruct and reassemble in a better way. This ability applies to individuals at all levels of the organization. Hopefully, it is those who demonstrate this competency that receive the opportunity to take on greater responsibility and later rise to the top.
Leaders may not be able to be the Subject Matter Expert (SME) in every area, but they do need to surround themselves with the right talent. However, the leader needs to carry enough knowledge to be one step ahead of the people she leads. She also needs the right performance metrics in place to assess the capabilities of her staff.
When Al Pacino does not understand Gianni's vision for a new entrée or Giuseppe's need for a new piece of equipment, Gianni will be able to explain the dish to Al from the first ingredient up and Giuseppe will be able to project the immediate reduction in labor hours with an estimated ROI.
After Al assesses the feasibility of the concepts he can then hold the two men accountable to producing the quality dish and targeted cost savings within the agreed timeline. Al holds all of his employees to a similar standard. Whether sourcing from a new vendor, changing a process or increasing the weekly food spend, Al is convinced that has the business acumen to gauge the efficacy of any change. Al's expertise within the restaurant industry assures him that nobody will ever pull the wool over the eyes of a Pacino. Can you say the same?
Manage People: Al Pacino's has been in business for 30 years. During this time, he only had a handful of employees quit their positions. Al believes that his incredibly low attrition rate is due to his ability to manage and empower his staff. Al remembers beginning his career as a dishwasher, and how great it felt to acquire new skills and capitalize on the many growth opportunities that surfaced throughout his career. Learning, driving accomplishments, being valued and rewarded were just a few of the things that kept Al's passion for the restaurant industry alive. He vowed to afford similar opportunities and benefits to all Pacino's employees.
Al appreciates loyalty, but asks that his employees stay loyal to themselves and their own career aspirations ahead of him. Over the years, Al helped more than a dozen former employees gain all of the necessary skills to open their own successful restaurants and all did. As a leader, coach and mentor, Al could not be more pleased. Sure Pacino's restaurant lost a few great people who could no longer grow in the role, but Al's good deed paid off 10-fold. Al knew that he trained his folks right. He continued to invest in them and now holds profitable equity in each of their new establishments. He also rotates, trains and shares talented employees with his former colleagues. This creates labor efficiencies for each restaurant in addition to learning opportunities and steady work for each employee. Al's management strategy is most respected throughout the entire restaurant community.
Good leaders never keep talented people down. They provide clear and concise direction that entices people to willingly follow. They'll bring committed and capable employees to heightened levels while opening the doors and removing the barriers along the paths to new opportunities. Performance rewards, delegation and job rotation are just some of the ways a leader can give back to deserving employees.
I am a huge supporter of the three-year employee contract, even at a front-line manager level. I will give every new manager three years to learn and grow under my realm. A good contract will spell out everything that I expect, as well as solidify my commitment to invest in the person (education, coaching, developing) and vice versa. At the end of three years, the contract is up and a renewal, promotion or job rotation could be sought.
There are many leaders who shy away from contracts. They'll adopt the approach of getting someone on the cheap and keeping her there for many years to come. Those are the leaders who look to escape talks about career growth and job rotation to focus on what more you should be doing for them.
I am a firm believer that you get what you pay for and employees should not be in the same role for more than three to four years. If you do not exceed my expectations and grow your skills within the first three years, I will not be renewing your contract or helping you to get another role within the firm. Those who exceed expectations, deserve the raise, promotion and more lucrative contracts to come. This is very similar in how a college graduate is worth more than a high school graduate. Businesses need to continuously improve to survive and so should employees.
Employees need to be self-motivating. However, leaders must assess the career aspirations of their people and guide them on how to get there. This is the only way to create a lasting win/win relationship that benefits each party as well as the company.
I was recently made aware of a mid-level manager who after 10 years was frustrated on the job and found another one outside of the company. When he gave his boss two weeks notice, the boss countered with a six figure signing bonus, a promotion and a raise. I applaud and respect the bold move of this leader, but still adopt the philosophy of never letting a stellar employee become disgruntled. Once an employee's loyalty is broken, it becomes incredibly difficult to resurrect.
Drive Results: A leader cannot succeed without demonstrating the ability to produce sustainable results. Results are the only tangible outcomes that separate those leaders who talk a good game from those leaders who play a good game. In order to drive accomplishments, a winning strategy must be formed, shared and followed. At a high level, leaders take action in systematic ways, some can be as simple as executing on the Three D's:
Disrupt - Challenge the status quo. View from a different lens. Create cognitive awareness for change.
Develop - Coach, train and educate staff for relevant types of process improvement, innovation and change.
Delight - Satisfy the needs and wants of customers and employees. Value employees through rewards, growth and empowerment, and woo customers with great products, a healthy pipeline and superior service.
A leader who establishes strategic, clear and timely company objectives in each of the three areas above, has set the bar necessary for employees to drive results. Leaders have the best chance of success when accountability has been established and the goals of each employee are aligned to one grand vision. Only then will employees feel that their individual efforts are valued and connected to the greater good of the company. More importantly, a shared vision promotes employee engagement and zero degrees of separation between the CEO and frontline employees; which is a surefire way to inspire people to willingly follow.
This article contains a few of the basics that effective leaders should embrace. Since we have only scratched the surface, I hope that you continue to learn from those around you who do things right, and have the wherewithal to pick up on what Al Pacino has been saying all along...
— Carmine Del Sordi (@BigLeaguesBook) July 20, 2014
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