Last week I read Peter Drucker’s “Managing for Results” (1964.) He uses several recent examples (circa the 1950s and 1960s) to demonstrate several timeless business principles. I really enjoyed it. What took me so long to read it?
My hope in this blog post (per usual) is to provide some overview commentary alongside my personal experience so that you can apply concepts to your own business.
Over the last 12-18 months, I have been more involved in operations than expected. There are many reasons for this, but mostly my idea of buying and building was simultaneously a bit too aggressive. We bought twelve companies in three years, and I basically asked each one to grow by step-change intervals. Anytime someone would forecast single-digit growth, I would say, “think bigger.” I would only tolerate plans with 50% to 100% growth attempts somewhere in the realm of possibility… yet, with the same resources. Oh, and by the way, I wanted to be able to withstand some slippage. “Get creative,” I would say. I was not trying to be mean or blunt. I was trying to make it fun! Be different. Be right. Go. Fight. Win.
Why not? Most of these businesses are asset-light, zero/low debt, service/sales businesses at the edge of a plateau. They were owned by patient partners, not in need of immediate dividends, with enabling tech-oriented leaders. Let’s leap to the next stage! My idea of conservativeness was waiting six months before slamming on the accelerator.
So, what was the big idea?
Help small businesses go to the next level.
I started Little Engine Ventures to buy and build for the long term. Do the stuff other people are not willing to do, but it is easy for me. Move around as the needs and opportunities change. Drucker uses this concept of “easy” in his book, and I was floored. I’m not sure I’ve ever read a business book that said it so plainly. “Profit” is basically just that. It’s the excess between price and cost. It was “easy” cost-wise for me to navigate rapid change in a small business… and have excess (profit.) I could also diversify from a common core. Profits are usually derived from the way you assemble your costs. Have you uniquely assembled your costs? How do you change your cost-assembly with the environment? The aggressive change goes hand in hand with aggressive growth. It’s exhilarating and rewarding.
Drucker’s book points out the social phenomenon of businesses. Most people think in normal distributions, and yesterday’s inertia leads to incremental thinking for tomorrow and rather standard behavior today. However, business is riddled with power-law distributions and phase changes. A 0 to 1 change is not incremental. Landing a single large account is not incremental. Small businesses don’t have smooth figures. They lurch. 90% of the results are produced by 10% of the events. Yet, 90% of costs are incurred by the remaining, resultless events.
Locate the 10% and concentrate resources there.
Drucker uses the concept of “energy dispersion” as a metaphor for effort in business. Efforts (and resources) will disperse to the 90% of events that produce practically no results. They will allocate themselves to the number of events rather than to the result-producing fraction. Smart people are usually the worst offenders. They seek challenges where they should seek victory.
In the last year, I’ve been working with company managers to identify (and agree on) the specific, strategic expenses that produce a profit. We’ve agreed that “everything else” is non-strategic and subject to creative reduction or destruction to simplify things. We must free up limited resources to concentrate on the elements that we do better than anyone else. We must think “max revenue per effort.” Our teams have taken to the idea quite well, and we see fruit from their efforts. I’m grateful.
This is not natural. Natural behavior disperses energy. It attempts too many activities and fails at everything. People are complex and adaptive. They have different passion projects and training.
The financial man sees the margins of separate products or divisions. He wants to promote the highest margin products. The retailers agree. However, the manufacturing man sees seasonality and prefers the year-round product. He proposes price cuts of the year-round and elimination of seasonal products to optimize his workload. The artist wants to try something new all the time. The marketing man sees packages of product combinations. He muddies both the financial and manufacturing leaders’ thinking –irritating both while bringing forward some of the most strategic ideas.
Drucker proposes looking beyond the legal boundaries of the current business and product definitions. Think about it from the customer experience. What is it they want? Who else serves this customer? What can you do that is valuable and easy for you but difficult and expensive for others?
Simplicity begets concentration, and concentration begets profits. Design the ideal business—focus available resources on the most attractive possibilities. Then, maximize resources to find or create.
Find or create. Otherwise known as “buy or build.”
I am fundamentally a builder. But when I find an idea, it feels like exploitation. Yes, I used the word “exploit” on purpose. There is a feeling of sneakiness to it. Like, “I know something you don’t know” sort of way. I think employees struggle with this. And it’s why business people can get a bad reputation. Sometimes they deserve it.
But, sometimes, it is unfair. Some people have more and are capable of more. Or are good at some things that others are not. Is it “fair” for a deer to hear better and run faster? Is it “fair” for a crocodile to lie in the water all day and wait? A croc shouldn’t graze, and a deer shouldn’t lie in the water. “Fair” is a four-letter word. Let’s make it equitable.
What is it that I know that others do not?
What is it that I am willing to do do that others are not?
In almost every major business, there are risks that one business can absorb that others would consider absurd. Drucker writes about drug developers –here is a risk you harm people. A home appliance retailer would never dream of becoming a drug developer. It’s not risk-wise for them. Likewise, a drug developer might look at building a skyscraper and think, “heck, no.”
But we must evolve with the times. What new opportunities are available for us to exploit? What unfair advantage do we see that others do not? How are we assembled? How must we change?
In 2016 the idea of entrepreneurship through acquisition was fairly novel, especially in the Midwest. There were/are many boomers looking for transitions. Banking was more regulated. Who has the skills to sweep these up?
As things sit today, my perception of banking is changing. I think there is a strong appetite to lend against good businesses with young, exclusive owner-operators. The SBA program is very attractive to the individual. And, the Gen Y group is pretty large and hungry for risk. It’s a great recipe for the Boomers. The Gen X’ers are fewer (birth control) and slower moving as a group. My Oregon Trail generation straddles these worlds. My competitors are way more operational than I. They want a single business to buy and run. They want to be in one business and crush it. And they can, and they will.
Our method/my method of concentration is a bit different. Many people think it’s about diversification. That is certainly a component. Frankly, it’s more about our core insight.
Be an accommodating buyer.
We expend our primary efforts on business sellers. We think of them as our customers. We “sell” something they want