Small Business is Key to Our Economy

A leading Park Rapids banker has said he believes that the economy will not turn around until the housing market turns around. With the foreclosure rate increasing around 17% over last year, this is not encouraging. Taking that thinking a step further, one could say the housing market will not turn around until more jobs are available. In August of 2010, the United States had an unemployment rate of 9.6% while Minnesota was better at 7.0%. More jobs would mean more income and therefore more spending for homes and other necessities.

The fastest and most sustainable way to increase jobs is through small businesses. The Small Business Administration defines a small business as having fewer than 500 employees, although the definition does vary somewhat by industry. Details can be found at www.sba.gov/size. Nationwide, small firms represent 99.7% of all employer firms and over half of all private sector employees. They pay 44% of total U.S. private payroll and have generated 64% of net new jobs over the past 15 years. They produce 13 times more patents per employee than large firms. From these statistics it is plain we need to encourage and help small businesses succeed.

Statisticians will tell you that one-time events such as federal stimulus infusions are “special causes” and are not sustainable, as they do not change the process or system. To change the system, we need to understand the problems of small businesses.

Seven out of ten new employer firms last at least two years, and about half last five years. Very small firms with fewer than 20 employees annually spend 45% more per employee than larger firms to comply with federal regulations.

Premium increases and administrative costs of health insurance for employees is an ever-increasing challenge for small business. The new health-care law impact is yet to be fully understood but early indications are that it will heighten the problem, not solve it for small business.

Patricia Schaefer writing for Business Knowhow lists seven reasons for business failure.

1. You start your business for the wrong reasons, i.e., make money or not have to have a boss rather than a strong passion for the work, drive, and initiative.

2. You have not developed strong management and leadership skills.

3. You have insufficient capital and have not developed a long-range financial plan to fully understand how much capital you will need and when.

4. You have not selected the optimum location to reach your target customers.

5. Lack of planning. You will need a business plan for at least three years including marketing, operations, human resources, and financial plans.

6. Overexpansion. A little success at one location does not mean you will automatically be successful at other sites. Controlled growth is important to make sure you do not overextend your capabilities in marketing, staffing, financing, etc.

7. You do not understand how to capitalize on social marketing techniques. A professionally designed and managed web site is mandatory as a minimum.

Solving these problems of small businesses is key to job creation and therefore economy. Some are difficult like the administrative costs of regulations and insurance and may be out of our hands. Others can be solved with help. Free counseling is available from SBDC and SCORE to help with development of the business plans and management development. Free templates can be downloaded by going to www.score.org, clicking on Business Tools, and then clicking on the desired template. Sharing the plans and continuing discussions with local bankers will provide guidance on financial matters.

It is key to our economy for our small businesses to survive and thrive. To do this, they can take advantage of free resources on a continuing basis to help them improve, grow, and provide more jobs.

Dr. Deming used to put forward a theory in his famous seminars about jobs that has some relevance to this discussion. He said if you work to improve the quality of your processes (including your management process), your costs will decrease and your product/service will improve, your productivity will increase, you will capture more market share with better quality and lower price, you will stay in business, and provide jobs and more jobs. He would go on to say, “so simple.”

Upsizing Your Organization

Basic Business Cents

With all the talk going on today about downsizing, isn’t it time to think about upsizing? In my experience, you either grow or die. If you continue conducting your business as you have always done, the world will pass you by, at an ever-increasing rate.

Dr. Noriaki Kano stated in his October 17, 1994 paper titled, “Attractive Quality Creation”, stated:

“To survive, a company must win against competition in the world market. Needless to say, it must strengthen its cost competitiveness by perfecting its quality improvement efforts, downsizing and differentiating its existing products and services…. It is obvious, however, that the path of continuous downsizing eventually would lead to a company with no employees…. Therefore, to continue to survive and prosper, a company also needs to develop new products and services, create new markets, secure employment, and upsize the organization.”

We have moved from the Industrial Revolution to the Digital Revolution in which we are experiencing dynamic changes in communication and management techniques. It is, without a doubt, the most exciting period in all of the history of mankind. If we can learn how to be the masters of our own destiny through proactive efforts on our part, we can be the benefactors of the change instead of the debris.

A professor emeritus from the University of Minnesota in economics, Dr. Tor Dahl, has said that there are only two things that really matter in business; cost effectiveness and a monopolistic advantage. Cost effectiveness is attained by first identifying and charting work processes and then removing waste and rework from them. Finding the niche that will provide a monopolistic advantage is another challenge.

Some years ago most consumers had very nice manual 35 mm cameras that took great pictures if was everything set right. The problem was that most were not professional photographers and occasionally erred with the settings. The manufacturers were busy refining to the nth degree the perfection of these cameras. Konica Camera could not grow by competing with the major manufacturers and decided on a radical move. They took their engineers out of their labs and sent them to photo development shops where film was being processed and asked them to collect data on problems with photos the consumers were experiencing. This data showed some high reoccurrences of out-of-focus, underdevelopment, and a surprising find, blank film. Many people were loading their film incorrectly and were surprised when they found nothing on their film. All those wonderful photo opportunities were missed!

Armed with this data, the engineers went back to their labs and designed the automatic camera. Perhaps the photos were not quite as sharp as they were with the old cameras but at least the consumers could rely on getting pictures. Konica did not find a long-lasting monopolistic advantage as the other manufacturers quickly followed suit, but they did create a whole new market that could be shared. They did this by using a process to collect data on the unmet needs and even the unarticulated needs of the customers. As stated earlier, the world does not stand still and now the digital camera has created another revolution.

It is obvious that we will need to continue our efforts to increase cost effectiveness forever, but equal efforts need to be made continually to increase volume for our business by developing an advantage, which will result in upsizing. We are, in effect, downsizing our existing business as products/services become mature or stale with the cost effectiveness techniques. At the same time we are upsizing our new business to give us the needed monopolistic edge and thus constantly reinventing our business.

The Only Question You Need to Ask to Grow Your Business

Basic Business Cents

Most customer satisfaction surveys aren’t very useful. They tend to be long and complicated, yielding low response rates and ambiguous answers. In short, it is difficult to take definite action to improve the performance of your operation using the typical approach to this tool.

In our recent columns, we talked about satisfying customers is not enough; satisfied customers will switch when something better comes along. We need to move beyond satisfaction to delighting customers and creating loyalty. We also talked about how to identify those “delighter” features that move us into leadership positions. Now the question is, how do we test to know that we have succeeded?

Harvard Business Review published an article about this subject by Frederick Reichheld in 2003 titled, “The One Number You Need to Grow” and Business Week published a follow-up article by Jena McGregor in 2006 titled “Would You Recommend Us?” They said to keep the survey simple so people do not mind responding and focus on what is really important.

We said what is important is to develop loyal customers who brag about us and recommend us to their friends. So the only question that really matters is, “On a scale of 0-10, how likely is it that you would recommend this product/service to your friends or colleagues?” The scale range is from 0 (not at all likely) to 5 (neutral) to 10 (extremely likely). That cuts to the core of what is important in a hurry.

Then ask a couple of open-ended questions to get guidance for improvement--”Would you please expand on the reasons that prompted you to provide this score?” and “Please list suggestions to make this a better experience.” I have found that since you are only asking one survey question that does not take up much of the customer’s time, he is more willing to offer constructive comments to help you.

Scoring yourself with this system gets interesting. The 9 and 10 responders are considered loyal or delighted customers. The 7 and 8 responders are considered neutral or satisfied. The 6 and below are considered dissatisfied customers and are really giving you negative feedback. The percent of the total giving you a 6 or below is subtracted from the percent giving you a 9 or 10, which provides a score that can be used to compare and track progress. It is possible to get a negative score and very difficult to get a high positive score, but this simple survey really puts focus on what is important. Most of us would agree, the best way to attract new customers is referrals from existing customers. If we absorb the comments from the open-ended questions and act on them, our scores should continue to improve and our business will improve right along with it.

Market Creation

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Market Creation

In the last column we discussed how merely satisfying customers is not enough, we must provide better service or products than they expect. Their expectations are set by what we and our competitors lead them to believe they can get, so we want their expectations to be around what we offer. The question then is how do we discover the attractive quality features that allow us to delight our customers and become the leader in our field. Obviously it is not easy and it requires a focused effort.

The first step is to carefully define the aim of this effort. Exactly what do we want to achieve? Brainstorm with your key people all the possible objectives that you would like to see develop. Then sort them to define the few key objectives of the process and develop 2 or 3 open-ended questions to discover information on needs and wants in each of the areas.

Just listening “to the voice of your customer is not sufficient.” It is worthwhile to note there are some things your customers will tell you and some things they won’t tell you unless you have a method to obtain it from them. And, of course they may not tell you all their needs because they don’t know themselves but your method might make it clear to them. Also, just listening to your customers is not enough because there are other customers you would like to have that you should learn about their needs and wants.

Next visit with10 to 20 customers, potential customers, and lost customers, making sure you that you have representation of all three groups. Ask them the open questions and listen and record the responses, both verbal and observed body language.

After completion of this step, again meet with your key people and review the notes and select and prioritize the important needs and wants. Work can now begin on ways to satisfy those unmet needs and wants.

When some ideas have crystallized on how to deliver on these customer-delight features, think back to your visits and remember those people who were trying to use your products or service in ways for which they were never intended. Some call them people who “think out of the box.” Dr. Kano calls them “maniac or lead users.” Meet with them as a group, if possible, and bounce new ideas off of them. Again record their responses and note behavior. Not only do you want feedback on your ideas, but also brainstorm with them other things you could or should do. They can become a brain trust for you and will feel ownership in your success. In that way, they also become loyal customers.

The data should be maintained for further analysis and updated as time goes on. This process insures input from every possible source such as existing, new, potential, delighted, satisfied, unhappy, and lost customers. The data should also reflect whether they are a lead, mainstream, or trailing users, different sizes, different markets, so on and so forth.

Dr. Deming used to say, “If you want to be ahead, you have to get ahead.” Delighting your customers will make you the leader.

Delighting Your Customers

Basic Business Cents

Attractive Quality Creation

“Satisfying your customers is not enough! Satisfied customers will switch if a competitor offers something better. You must delight your customers so they will remain loyal” and brag about you was a message of Dr. W. Edwards Deming. Loyal customers will come to you if they are offered something better by a competitor and give you a chance to improve your offering of product/service. The difference between satisfied customers and loyal customers is best described by Professor Emeritus of the Science University of Tokyo Noriaki Kano in his work he calls Attractive Quality Creation. His work of almost twenty years is summarized in the following chart:

Kano uses the word Neutral for what I think of as being Satisfied and he uses the word Delight for what Deming calls Loyal. He says there are three kinds of quality—Must Be, More is Better, and Delighters. Lets use the purchase of a new automobile as an example.

Good brakes are an example of Must Be quality. We expect the new car to have good brakes and if it doesn’t, we will be very unhappy. If it does, so what? We expect good brakes and we are satisfied or neutral.

Gas mileage may be an example of More is Better quality. If the mileage is very poor, we will be dissatisfied. If it is about what we expected we will be satisfied. But if the gas mileage is much better than expected, we will likely brag to our friends and colleagues.

The Delighters are something we don’t expect, and if absent, so what, we were not expecting them and we are still satisfied. But when they are present and we like them, they become something of which we are proud and want to share the good news with our friends. An example from the original Ford Taurus was cup holders and nets in the trunk to keep grocery bags from tipping over. Today it might be built-in global positioning unit (GPS), outside temperature gauge, or back-up mirror. Note from the cup holder example, Delighters migrate to Must Be features.

Sounds simple. All we have to do is know how to measure customer satisfaction and identify new features to delight customers. Ah, material for future columns.

Accounting for Leaders

Basic Business Cents

Useful Accounting

May 20, 2009

As an engineer, I found accounting dull and boring. As a business owner I find it interesting and very useful, in fact a tool that I enjoy.

Software is available to do all the reports for you, but I believe like most things, it is best to do them by hand until you understand what is going on. Just like you don’t want to automate a bad process in manufacturing, you don’t want to automate a bad process in accounting. It is deadly for the leader to not understand the finances of the organization.

Accounting is defined as “The art of recording, classifying, and summarizing in terms of transactions and events of a financial character and interpreting the results thereof.” There are Generally Accepted Accounting Principles (GAAP), which cover the Income Statement (Profit and Loss Statement), Balance Sheet, and Cash Flow Statement.

The Income Statement is a tabulation of the revenue received over a period of time, the expenses over the same time, and the difference between them, which defines the profit or loss over that time frame. It includes noncash items such as accounts receivable, accounts payable, and depreciation. The expenses are listed by major category so as to provide more information as to where the money is going.

The Balance Sheet has three parts: assets, liabilities, and ownership equity. Where the Income Statement is over a period of time, the Balance Sheet is at one point in time. By definition, the net worth must equal assets minus liabilities.

The Cash Flow Statement is a listing of when revenue is actually coming in and when expenses are actually being paid. It tells you where your money is coming from-operations, financing, or investmests, and where it is going-operations, financing, or investments. It is an analytical tool that is useful in determining the ability of the organization to meet its obligations. Always a necessary aid for management, its importance is great in this economic climate.

As useful as these three tools are, they are a reflection of what has happened in the past. Management must predict the future. The Pro Forma Financial Projection shows potential of expected income, costs, assets, or liabilities in relation to some planned or expected act or situation. By taking the information on the Income Statement and then predicting results for the next year by month and the following two years by quarter, I have a tool that is extremely useful in making management decisions. It is a prediction that is fine-tuned each month as it is updated. Like any theory that is supported or disproved with data, it improves with use.

Myron Tribus once said, “Making management decisions by looking at the financial numbers alone is like driving a car by looking in the rear-view mirror.” The Pro Forma Financial Projection allows us to look forward and see the impact of our decisions.

Problem Solving System, Part II

Basic Business Cents

Fix the Problem, Not the Blame

Part 2

April 22, 2009

In the last column, we discussed the first three steps of a systematic problem-solving approach called the QC Story. Today’s column will finish the description of this useful tool.

4. Take action that will eliminate the main causes. Once the cause has been identified and proven, this step is relatively easy. Use data to evaluate several possible solutions to the problem. Take care to remove causes and not just symptoms of the problem. Care should also be taken so that the solution does not have detrimental side effects on this process or any other parts of the organization.

5. Study the results. Data should be collected to check the effectiveness of the action taken. Compare the situations before and after. If the results of the action are not what was desired, first determine if the action was implemented as planned. If the solution was implemented as planned, but the results are undesirable, it is necessary to test a different solution.

6. Standardize on the new method. After the desired results are achieved, develop a new standard and communicate it to everyone involved in the process. Provide training and devise a check system to observe compliance with the new standards.

7. Document the conclusion. Review the problem-solving procedure and identify what was learned. Note what worked well in the improvement process and what did not so others can learn for the future.

The final action is to redraw the flow chart of the process reflecting the changes and comparing the flow chart to the version done before the problem-solving action. Hopefully it is simpler as well as more effective.

This may sound complex at first but after you have gone through it a few times, it is fairly simple and valuable. A dramatic example of application of this process was revealed to me on a trip to Japan twenty years ago.

The world headquarters of Canon, Inc., a large manufacturer of cameras, copiers, and printers, is a beautiful building with a large and impressive lobby. But, I felt the display of data in chart forms in various places about the lobby were distracting. I studied them and found they were QC Stories about problems they were experiencing and progress they were making in solving those problems. When my host met me, I asked him why they were airing their dirty linen in front of the public like that and he said, “Oh, we get many good ideas from our visitors.” Thinking about it, most of their visitors are probably customers or suppliers who have a vested interest and knowledge to contribute to solve those problems. They knew all organizations have problems and there is no stigma with that as long as progress is made to solve the problems. They were not embarrassed to get help from wherever they might obtain it.

So we have problems, it is important we make progress in solving them. A systematic approach like this seven step process is indeed helpful.