Lessons I Learned Today 6/3/09 – Hey, Can You Make Change?

This is a digest and recap of highlights, quotes, and comments from articles and discussions posted on this date on the Applied Entrepreneurship, LinkedIn group site.

  

*Board Stiff by James Surowiecki

“In the apportioning of blame for the financial crisis, corporate boards of directors have remained remarkably unscathed, even though they effectively approved the strategies that immolated so many companies.” 

Over the past couple of decades, a tremendous amount of attention has been devoted to improving corporate boards. New regulations, along with pressure from big investors, have forced companies to appoint more independent directors—people who have no direct connection to the company—and have tightened the definition of independence.

All these changes, though, have had a much smaller impact than expected. Academics have found no evidence that simply appointing more independent directors improves corporate performance. “Independent” directors are typically nominated not by shareholders but by the C.E.O. or by other board members, who, not surprisingly, tend to prefer directors who will be cheerleaders for the firm and won’t rock the boat. It also doesn’t help that independent directors are sometimes inexperienced, which makes it harder for them to take on management, or that they’re often chosen for name recognition.

Changing the way boards look matters less than changing the way they act. Directors are still part-time employees—the typical board meets just eight times a year—so it’s hard for them to devote enough time to make a meaningful difference.

Directors still rely heavily on the C.E.O. for information, and do little independent digging—one recent survey found that half of them wished they had more information about company strategy. Boards are more active than they were, and more willing to show underperforming C.E.O.s the door (as happened at both Merrill Lynch and Citigroup). But they often react too late, after the real damage has been done. And the fact that boards see their chief job as hiring and firing the C.E.O. is a problem: shareholders need boards to prevent messes, not just clean up afterward.

One proposal is that big institutional investors create a cadre of full-time directors, people whose only job would be to sit on corporate boards and look after shareholder value. Most board members, accomplished as they may be in their real jobs, are amateurs when it comes to being directors. So it shouldn’t surprise us when they get buffaloed or pushed around by C.E.O.s, who are professionals. Right now, boards are made up of moonlighters. And, if the last few years have shown anything, it’s that protecting shareholder interests is a full-time job.

 

*Hanging Tough by James Surowiecki

“In the late nineteen-twenties, two companies—Kellogg and Post—dominated the market for packaged cereal. It was still a relatively new market: ready-to-eat cereal had been around for decades, but Americans didn’t see it as a real alternative to oatmeal or cream of wheat until the twenties. So, when the Depression hit, no one knew what would happen to consumer demand. Post did the predictable thing: it reined in expenses and cut back on advertising. But Kellogg doubled its ad budget, moved aggressively into radio advertising, and heavily pushed its new cereal, Rice Krispies. (Snap, Crackle, and Pop first appeared in the thirties.) By 1933, even as the economy cratered, Kellogg’s profits had risen almost thirty per cent and it had become what it remains today: the industry’s dominant player.”

“You’d think that everyone would want to emulate Kellogg’s success, but, when hard times hit, most companies end up behaving more like Post. They hunker down, cut spending, and wait for good times to return. They make fewer acquisitions, even though prices are cheaper. They cut advertising budgets. And often they invest less in research and development. They do all this to preserve what they have. But there’s a trade-off: numerous studies have shown that companies that keep spending on acquisition, advertising, and R. & D. during recessions do significantly better than those which make big cuts.”

“In 1927, the economist Roland Vaile found that firms that kept ad spending stable or increased it during the recession of 1921-22 saw their sales hold up significantly better than those which didn’t. A study of advertising during the 1981-82 recession found that sales at firms that increased advertising or held steady grew precipitously in the next three years, compared with only slight increases at firms that had slashed their budgets. And a McKinsey study of the 1990-91 recession found that companies that remained market leaders or became serious challengers during the downturn had increased their acquisition, R. & D., and ad budgets, while companies at the bottom of the pile had reduced them.”

“Recessions make the strong stronger and the weak weaker, since the strong can afford to keep investing while the weak have to devote all their energies to staying afloat. But although deep pockets help in a downturn, recessions nonetheless create more opportunity for challengers, not less.”

“Risk describes a situation where you have a sense of the range and likelihood of possible outcomes. Uncertainty describes a situation where it’s not even clear what might happen, let alone how likely the possible outcomes are. Uncertainty is always a part of business, but in a recession it dominates everything else: no one’s sure how long the downturn will last, how shoppers will react, whether we’ll go back to the way things were before or see permanent changes in consumer behavior. So it’s natural to focus on what you can control: minimizing losses and improving short-term results.”

“The uncertainty of recessions creates an opportunity for serious profits, and the historical record is full of companies that made successful gambles in hard times.”

 

*Initiating Social Media for Business by Pete Hollier

“In some ways the business reaction to Social Media is similar to the early days of the Internet, businesses realized the Internet offered new opportunities but were unsure how to create and capitalize the new business model. Social Media has again put businesses in a position of seeing the potential, but being unsure of how this can or should be utilized.”

“The interaction and openness of Social Media is what many businesses are unprepared for and find difficult to comprehend and initiate.”

“Whether a particular strategy is relevant to your business often depends on the products and services provided, and the business’s target audience. Social Media however, has the potential to benefit a broad range of business types and customer demographics.

Reasons for a business to participate in Social Media include:

  • Encourage interaction, dialogue and loyalty between business and consumer
  • Develop sales leads and professional contacts
  • Increase exposure and monitor public perception of brand
  • Market research and product development
  • Customer service and support

“Due to numerous elements of Social Media such as networked customers, instant and open communication and the interaction between business and consumer, Social Media requires businesses to consider Social Media not only as a Marketing Program, but a new way to do business which often requires establishing a new company culture.”

“The initiation of Social Media should be done with consideration to long term goals and business objectives. The following questions which must be answered by the business prior to becoming involved in Social Media include:

  • What goals and objectives does the business wish to achieve through Social Media programs?
  • Who will be responsible for the implementation and monitoring of the Social Media Program?
  • Who is responsible for the development of content and approving the company’s Social Media communication and participation?
  • Who within the company will be empowered to communicate the company’s message, how often, on company or personal time?
  • Who will be responsible and how will the company’s online reputation be monitored and managed?
  • What Social Media tools will be utilized in the Social Media Program?
  • What criteria will be used to determine the effectiveness of the Social Media Program?”

 

*The New Entrepreneur: Before You Begin by Stephanie

“All new businesses begin with an idea. While many people toy with the idea of working for themselves and setting up a business, only those who take their idea and turn it into reality can call themselves entrepreneurs.”

“With any business, timing is crucial. That is not to say that a downturn is no time to start a business, but that there are certain times when it will be easier to get certain types of business off the ground.”

“Think about how current conditions would affect your business concept and weigh up the pros and cons of starting up straight away. You can always put your plans off until market conditions are more favorable. Delay is not failure.”

“There are universal questions for every business idea that need to be considered:

  1. Who will buy the product or service that you will be offering?
  2. Is there a market for what you are offering?
  3. How much are buyers willing to pay for your product or service?
  4. Who are your likely competitors?
  5. How well they are doing?
  6. What kind of business legal structure will you form?
  7. How much money will you need for the first two years?
  8. Where will your business be located?
  9. What kind of staff will you need?
  10. What are your strengths, weaknesses, opportunities and threats?
  11. How can you build on your strengths, address any weaknesses, reduce any threats, and take advantage of any opportunities?”

“You can carry out this basic research by using business support organizations such as your local chamber of commerce, small business association or the relevant trade body. Alternatively, some government trade departments compile reports on different market sectors which may be available to the public from their offices or websites.”

 

*The New Entrepreneur: Market Research by Stephanie

“Before you can begin any market research you need to know what sort of information you hope to gain. Just as you would ask a market research company to get you certain details about your target markets, so you need to be clear in your head about you hope to learn. Regardless of the type of business you hope to start, there are certain things that you will always need to know:

  • size of your target market, both in terms of number of firms and monetary value
  • trend for the target market (i.e. is it expanding or contracting)
  • main players in the target market and their respective market shares
  • general profile of your target consumer and their buying behavior
  • most profitable way to promote and sell your product or service to consumers”

“One form of research that can reap rewards for minimal effort is to talk to other businesses in the same field who are operating in different territories. If you’re not going to be a direct competitor, most business owners are more than happy to talk about how they themselves made a start and the challenges they’ve faced.”

“See what the competition is up to. There is nothing to prevent you visiting other businesses in the same field to see how they are set up and the processes they use. You can also, in a retail setting, get an idea of the prices that they are charging. Marry this with information you get from potential suppliers about the cost of goods sold, and you will not only know how profitable a particular product may be, but also whether you are able to undercut bigger players in the market.”

“Market research you undertake can be useful for highlighting opportunities in particular market niches that you may have overlooked, and can also be a good way for building up contacts (in the case of suppliers and business-to-business research) before you get started.”

 

*The New Entrepreneur: The Business Plan by Stephanie

There are certain sections that every well-written business plan will have:

  • Executive Summary. This section generally tends to be written last and sums up all of the details of your business plan
  • Concept. Here you describe your business idea and the business sector that you hope to enter, including the major players and the total value of the market
  • Market conditions. In this section you need to demonstrate that there is indeed a market for what you are going to be selling, how much of the market you hope to gain, and what differentiates you from your competition
  • Product or Service. Describe the product or service you will be offering, including the characteristic that distinguishes your product or service from those of your competitors. Include details about how you aim to take it forward in the future and what developments you hope to be able to make
  • Strategy. Here you can identify how you are actually going to run your business, showing that you have thoroughly researched your market and applied that research to your business concept. This section should cover all areas, from potential suppliers and the number of staff you will be taking on, to the type of customer you will be targeting and the marketing campaigns you will initially be running
  • Core Personnel. This is where you get to blow your own trumpet, and those of anyone you’re going into business. Think of it as a mini-CV, and describe what qualifies you to run this business, the qualities that you are going to bring to your role, and the skills you have to make the business a success. Do the same for any partners, collaborators, or anyone else who will have a hand in running the business
  • Financial Forecasts. The maths part. But don’t worry, it really isn’t all bad. You will need to make predictions of how you are going to spend your money. Granted, certain assumptions will be made, but you can outline what they are in footnotes or in an appendix. The forecasts that are absolutely necessary are: profit and loss forecasts for your first three years of operation; cash flow forecasts, again for the first three years; capital expenditure plans for each year; proforma balance sheets for the beginning and end of each year

“Of all the financial forecasts you prepare, the most important is probably your cash flow forecast. Not only will this let potential investors see how you plan to spend their money, but it will also give them an indication as to when they can expect to recoup their investment.”

“The executive summary will be the last thing that you write but the first section that investors or lenders will read. Think of it as your business plan’s elevator pitch – get it right, and they will read on for more details; get it wrong, and expect to receive a form rejection letter or email. It may seem like a daunting prospect, but try to keep it down to two pages of as much detail as possible.”

 

*The New New Economy: More Startups, Fewer Giants, Infinite Opportunity by Chris Anderson

“This crisis is not just the trough of a cycle but the end of an era. We will come out not just wiser but different.”

“The next new economy, the one rising from the ashes of this latest meltdown, will favor the small.”

“To all the usual reasons why small companies have an advantage, from nimbleness to risk-taking, add these new ones: The rise of cloud computing means that young firms no longer have to buy their own IT equipment, which helps them avoid having to raise money or take on debt. Likewise, the webification of the supply chain in many industries, from electronics to apparel, means that even the tiniest companies can now order globally, just like the giants. In the same way a musician with just a laptop and some gumption can accomplish most of what a record label does, an ambitious engineer can invent and produce a gadget with little more than that same laptop.”

 

*The Secondary Social Media Tools by Pete Hollier

“Social Media like Search Engine Optimization is a holistic process where all factors are utilized to achieve the projects goals. In such a competitive market place as businesses face today, companies must use all the tools available to assist in obtaining the competitive edge.”

“The complete set of Social Media Tools available is close to limitless and daily, new Social Media Tools arrive. Social Media is still in a growth stage requiring experimentation and learning. ”

“Selecting the correct Social Media tools for your business requirements will take investigative skills to determine what works best for your situation, but most of all making Social Media work for your business is about commitment and believing in the effectiveness and power of Social Media.”

 

*The Tools of Social Media by Pete Hollier

“Before beginning a project of any type it is a pre-requisite to know what tools are available, what tools are required, and a clear understanding of how to use the available tools.”

“Social Media offers numerous tools of varying types to businesses and consumers, knowing what is available, which Social Media tools you should be using to achieve your company objectives and how to use the tool for your business’s project can be confusing to even the saviest Social Marketer.”

 

What I Think

I think the common thread I see in the articles posted on this date is about trying something new and managing change. In the article about corporate governance, Board Stiff, one strategy to help prevent a recurrence of our current financial crisis is taking the form of a push for more independent directors in the board room. Some studies indicate this may actually have no impact or even be counter-productive because the independent directors have less experience and are not as well informed as the “good ole’ boys.” Coming at it from another direction, the theory of “professional directors” is getting some traction, presuming full time directors will have only one focus, even if they serve on multiple boards.

The Hanging Tough article also deals with being in a situation and not knowing what to do. In this case, the article studies how companies have done after a recession, when they pulled back, kept ad spending stable, or increased it during the recession. Looking at the various approaches to the same dilemma, those that “hunkered down” and tried to conserve what they had by reducing spending, seemed to do much worse than those who did not. The riskier strategy seemed to pay substantially higher dividends.

The articles dealing with social media clearly outline one strategy to “think outside the box” by trying new forms of media to get to the customer. This arena is nothing but multitudes of entrepreneurs in competition with each other, gambling on what the world will look like after Web 2.0 succumbs to Web 3.0.

This will be a long and interesting battle. We may not be able to declare a victor in this engagement for quite some time, because there are so many players trying to create a “new” business model out of slightly tweaking that of another player. The paradigm shift may seem radical, compared to where we were a few years ago, but contenders will probably rise and fall precipitously for quite some time with no clear winner, until the investors are able to count on a dividend and the check clears.

The series of  New Entrepreneur articles will hopefully provide a counter-balance to the seeming chaos of alternate strategies at work and in competition with each other, as the pre-eminent way to resolve an issue. These articles seek to provide a stable formula for testing options for a new business concept, business plan, and marketing program.

Most entrepreneurs must deal with change at one point or another. Using the multitude of tools available, such as the New Entrepreneur articles, can help you learn to watch how others have handled it, and to analyze why one succeeds and one fails. Eventually all entrepreneurs will have to make change. Fortunately, there are lots of ways to reduce the risk of making the wrong change. 

 

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If you enjoyed my impression of these articles, why don’t you read them for yourself and see what you and I missed or hit? Join the Applied Entrepreneurship group on LinkedIn. Membership is free and I try to post about ten articles a day there. We have some great discussions going and if you are an entrepreneur, we hope you will join us.

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Posted in Applied Entrepreneurship, Business life cycle, entrepreneur, Innovation, Perseverance, Planning for a business, Recession strategies, Social networking & media

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