For Small Business It’s All About the Third Rule
Constant change requires small business owners to be sure they’re playing the right game
There are not many hard and fast rules in business. But, companies struggle when they don’t follow three basic rules and fail to realize that everything else changes.
Play the right game
In business you have to be sure you are playing the right game. Just ask the ex CEO of Nokia. In September of 2013 he announced that Nokia was being acquired by Microsoft, signaling the end of the once dominant mobile phone manufacturer. The CEO ended his announcement speech stating: “We didn’t do anything wrong, but somehow we lost.”
Faced with the failure that was seemingly out of their hands the team was overcome with emotion. But, of course, they did do something wrong. Nokia, like so many companies before and after played by the wrong rules. They thought they understood the market. They thought they dominated the market.
And then the market changed.
In business there are very few rules. In fact, there are three. They aren’t complex, difficult to understand and, being rules, they don’t change. Yet, in our experience, many businesses miss them. All too often they focus on the wrong things and face bankruptcy as a result.
The first two rules
The first two rules come from Michael Raynor and Mumtaz Ahmed who published them in the Harvard Business Review in April 2013:
Rule 1. Better before cheaper.
Rule 2. Revenue before cost.
Rayner and Ahmed show that companies that focus on quality and revenue do better over time.
Others might start out doing well but then external factors change and they almost always respond by cutting costs and digging in to the competitive environment. Focusing on revenue and quality means a focus on building, reinvention, and delivering a differentiated product; even as the market changes.
Nokia, Kodak, hard disk drive manufactures and main frame builders are all great examples of failing to operate by these rules. But the rules are not new, following them is the same challenge that buggy whip manufacturers faced at the turn of the 19th century.
Just as technology drives change today, buggy whip manufactures became a business school case study of failure because they missed the shift from horse drawn carriages to cars. Facing a changing environment they denied it and cut themselves to non-existence.
These are great rules, but they aren’t enough. There is a third rule.
The third rule
We see the need for this rule in the dozens of companies and teams that we have worked with so our experience comes from a different data set.
While Raynor and Ahmed looked for performance drivers in a database of companies that traded on U. S. stock exchanges from 1966 to 2010, we consider our experience with companies and teams not necessarily represented in public markets.
The key difference is that managing an IPO and operating as a publicly traded entity both require a certain level of sophistication. There are millions of businesses that are not publicly traded as well as teams within publicly traded companies that succeed and fail on a daily basis.
Those that succeed follow the first two rules in part by following the third rule:
Rule 3. Systematize the business.
Systems and processes are key to growing, scaling and selling a company because they make explicit the implicit processes and assumptions that exist in leaders’ heads or just organically.
They enable a company to execute on the first two rules by acting like recipes that allow employees to run the business just as recipes enable anybody to make a chocolate soufflé.
Without the systemic recipes companies struggle to prioritize revenue, deliver quality and manage change.
A challenge for all companies
Systems issues exist in companies of all sizes. Entrepreneurs face this challenge as they add employees and multinational enterprises have new teams, ventures and activities that require systems.
For example, one of our clients was a sales manager in a large, publicly traded enterprise. He managed a growing sales team that failed to deliver an increase in sales. Adding more people increased frustration but not sales.
The challenge appeared to be the people, but it was the system.
The manager hadn’t defined the recipe clearly enough for others to follow or in such a way as to enable this team to act independently. Wanting to ensure quality sales that were in line with corporate strategy, he had defined a system requiring his involvement in every deal.
No matter how many people he hired he was always the bottleneck. Because the system didn’t work, hiring people just meant more work for the manager.
To fix this we defined the sales process and created a system that would work for the team. Codifying the manager’s points of engagement gave the sales team clear guidelines and deal parameters. We trained the sales staff, even ran through simulated negotiations, to ensure everyone was working, and negotiating, the same way. Finally, we empowered the sales team to make decisions and sign contracts.
In order to track performance and give the manager control of the system we created dashboards and communication checkpoints. Whether through a paper report, a digital dashboard or a weekly meeting or all three, management must be able to evaluate and fine tune performance, efficiently.
Once the business is systematized management’s responsibility shifts from execution of the business to management of the systems. Leadership stops paying the bills and trying to do everything. Managerial focus shifts to making sure the systems work, ensuring that they are implemented consistently and working to improve them.
There are no other rules
Alignment alone is a strong enough reason for systems, but it is just the beginning. Done correctly systems facilitate the creation and evaluation of strategies and action plans – enabling change.
This is important because, again quoting Raynor and Ahmed, the final business rule is that there are no other rules. Just as we think we understand the market it will change so any business built on rigidity and “doing nothing wrong” will eventually fail.
There is a risk when creating systems that a company becomes more rigid. But implemented correctly, systems define clearly what needs to be done, enable execution and allow for the measurement of results. Managers then see what works, what doesn’t and what should change; the systems themselves become drivers and enablers of change.
This is where Nokia and Kodak and buggy whip manufactures failed: they had systems but they didn’t adjust. Like many companies they thought they knew their markets; they thought they understood the game. But then it changed. The right game is a focus on revenue, quality and building systems in order to meeting the challenge of continuous change.
Related articles:
Why You Should Always Be Anticipating Change
