Chapter 2
Common Lies Companies Tell Themselves

I have seen great ideas wither and die because companies tell themselves lies that are ingrained in their corporate makeup, and thus they fail to fix problems. This is why one of the biggest problems in optimizing a company's profitability is not external (unless the market strategy is extremely flawed). It is the culture of the company.

So what are these lies?

"WE'RE SO MUCH BETTER THAN THE COMPETITION, WE DON'T HAVE TO WORRY"

This is corporate chutzpah or arrogance. IBM, General Motors, and Ford, all major companies with great resources, fell into this trap. They underestimated their competitors and took their eyes off the ball. IBM failed to realize that it was not "keeping up" with more agile companies in the PC market and lost its position through sheer arrogance.

Ford, GM, and other U.S. carmakers failed to see the strategic steps of the Japanese carmakers, failed to understand the Japanese carmakers, failed to understand the consumers' desire, and have lost tremendous share to offshore companies over the last 50 years. Toyota is now the largest auto manufacturer in the world, but Ford and GM are struggling to stay alive. I will revisit the Ford and GM problems since there are many other problems in these companies. But at many points in their histories these companies have been poster children for Arrogant Corporation Syndrome.

For example, I was once being interviewed for the board of one of IBM's "enterprise" businesses. The business had developed a new method of creating DVDs, was about to go into the DVD publishing business, and professed to be seeking guidance in this area. During the interview I asked how IBM was picking titles, because I saw the enormous potential of information flow, through the computer, of this new medium.

The thing to remember in all of this was that the people who were running the enterprise were all born and bred IBM "techies." They stated that they were picking titles without any outside input and were selecting titles that appealed to them individually and that they believed the market would accept. In addition, IBM was afraid to lend its logo and name to the new enterprise, so they had to come up with a separate logo for the effort.

I think their first interactive DVD was about the sex life of the tsetse fly or something equally interesting. Of course I'm being facetious, but I told them they were doomed to failure because of their arrogant approach. I told them they needed to view themselves as publishers, not as IBM, and pick products with mass appeal. Second, they should arrange to utilize IBM's considerable brand recognition in their marketing.

Needless to say I didn't make it onto the board and the venture disappeared, much to my chagrin.

"OUR PROFITS ARE SO GOOD THEY CAN'T BE IMPROVED"

Many executives are reluctant to reexamine their profit structure for fear of embarrassment if they discover an overlooked area of profitability. I can't name the number of times I've been told that an area is doing the best that it can and I should seek profit enhancement elsewhere. This slams the door on investigation, on structure modification, on pricing, and on other areas of improvement. The only way to get past this is to:

Convince the affected executive that you are going to make a hero out of her if she will let you look.

On a less desirable basis, have the CEO force the issue.

The facilitator in this instance must have the full support of those in command and the indication that there are no protected areas or sacred cows that are beyond scrutiny. The ideal is to have a team that bands together to achieve common profitability goals. Quite often I have had to replace people who were not receptive to this concept and continued to be obstructionists.

"OUR BUSINESS MODEL IS AS GOOD AS IT CAN POSSIBLY BE"

One of the major exercises I go through in every company I help is a reexamination of the business model to determine if it is flawed in any way.

Quite often a company will be marketing to the wrong customers or selling the wrong product or service. It would be like opening a pork rib joint in a highly religious/kosher or Muslim neighborhood. It just wouldn't fly. I have also found companies selling to the least profitable part of the market just because it's "easier," or selling to buyers because of the high volume they will take despite the fact that the business is at an extremely low profit level. It is amazing how many companies invest money, people, and time in flawed or suboptimal ventures.

For example, I was once the CEO of a wax-refining company that was losing many millions of dollars per year and had been doing so since its inception. The initial marketing concept for the company was to sell microcrystalline waxes to a small but high-priced user market (pharmaceuticals, food, etc.). In concept this top 5 percent of the business would more than cover the cost of the other 95 percent the company would sell at breakeven or a loss or burn for energy.

There was only one small problem: Since microcrystalline waxes have an enormous impact on the physical characteristics of the products in which they are used, extensive testing at great cost would therefore be needed to introduce a new source of these waxes. In addition, quantities of microcrystalline waxes used in any single product were miniscule. In view of these factors, no level of pricing incentives could convince end users to switch from their existing suppliers to us. The probability of selling product was nil. In Chapter 3, I talk about what I did to solve the problem, but what I had was a severely flawed market strategy. This was after more than $100 million had already been invested in assets.

"OUR PRICING MODEL CAN'T BE IMPROVED-BESIDES, WE'RE CHARGING THE MAXIMUM WE CAN GET"

When I tell my clients that I always get a price increase that adds to profits, I always get a mixture of disbelief and horror. Most companies fight price increases like a virulent disease because they fear a loss of volume. The greatest resistance to price increases, no matter how well thought out or benign, is internal.

In this book I will illustrate through various techniques how every company, with few exceptions, can drive dollars to the bottom line through pricing. I have never failed to achieve price increases for a client successfully unless internal resistance was so great that it was unwilling to take a chance.

This area is the most frustrating for me because it takes so much to achieve. At one company I was involved in, it took almost a year and many meetings to achieve a price increase that the entire company endorsed.

"OUR COST STRUCTURE IS THE OPTIMUM IT CAN BE UNDER THE CIRCUMSTANCES"

No one likes to admit that there is a better or cheaper way to do something. I have seen companies pay as much as twice the going rate for a service or product because it was difficult or inconvenient to obtain competing bids or because of prior relationships. The U.S. Government is a prime example of purchasing inefficiency in action. Of course companies must strike a balance among price, quality, and delivery, but often the worst offenses in cost structure occur when there is no regular review process. In one company, by merely reviewing the manner in which we insured our facilities and casualty insurance we saved $1.2 million per year in premiums.

In this book I will discuss most major cost areas and some devices to lower costs; however, the caveat is that all costs must be continually reviewed to determine if they can be further optimized.

"OUR ORGANIZATION IS SO GOOD THAT I (THE CEO) DON'T HAVE TO BE INVOLVED ON A DAILY BASIS"

A sure sign of trouble exists when the CEO or any executive thinks that he can operate the business on autopilot. I was recently involved with a small private company whose president had a passion for sailing. His business was failing, but rather than face the problems, he would find any excuse to leave and sail. It was obvious that he hated the process of fixing the business and was escaping into his hobby because he couldn't face day-to-day problems.

I have also seen executives who think that operations are doing so well that they don't have to monitor or control the company. Both approaches are equally faulty. Companies need controls in place and need guidance from someone who has a vision of the future. Companies can operate for a short while without daily leadership but soon begin to falter when the strategic guidance begins to falter. The Walt Disney Company began to falter when Walt died. It was a local joke that the corporation was being managed by WWWD (What Would Walt Do). It wasn't until new visionary leadership stepped in that the company began to grow once more.

"OUR ORGANIZATION IS AT ITS OPTIMAL LEVEL"

A question I ask participants in my various seminars is, "If you had to discharge someone in your organization today, who would it be?" There is always a name associated with the response, which proves to me that almost every organization is suboptimal in nature.

Keeping an organization "right sized" is one of the most difficult tasks a manager can perform, and often this painful process is delayed because of emotional issues associated with the process. Most companies have taken the "easy" method of offering early retirement or block reductions in staff based on longevity. These methods are faulty because early retirement denudes the knowledge base and block layoffs get rid of high-energy, high-potential individuals.

In Chapter 6, I will discuss a scientific and logical method for adding and reducing personnel that is dependent upon talent and need rather than pure numbers of people.

"COMPLACENCY IS NOT A PROBLEM IN MY COMPANY"

Complacency is the enemy of all companies and avoiding it is an everyday job of every manager. When a company becomes complacent, it has begun to slide down the slippery slope of failure. If anything, the speed of communications-emails, Internet, and fax-has made the cost of complacency more severe. I don't know about you, but I find that I must work even harder to keep up and keep ahead of events that affect my markets and my business.

"FRAUD IS NOT A PROBLEM IN MY COMPANY"

It is estimated that fraud plays a major role in fully 50 percent of business failures. I must admit, having been CEO of over 100 companies, I have found fraud in some form in each of them. It is especially true in troubled companies, since someone in the company wants to "get theirs" before the ship sails. The lessons of Enron, WorldCom, and Tyco have exposed all of us to fraud and waste in the corporate arena. In Chapter 18, I will discuss how to detect fraud and what to do about it. I will discuss some things employees don't consider theft but really are. I will also show how to empower the organization to deal with fraudulent behavior on the part of employees, including senior executives.

"MY BANK LOVES ME"

For some reason most companies and executives elevate their banking relationship to that of an amorous affair. Maybe because it involves money. I hate to disillusion my readers, but your banker is a vendor who sells you money and charges you for the privilege in the form of fees and interest. Like any other vendor, he or she should be treated well and kept informed of the company's performance; however, he or she should be measured against other vendors of the same type. In Chapter 17 we will discuss the care and feeding of your banking relationships, how to treat personal guarantees, and how to have fallback positions in case your banker fails you.

Now that we've examined the lies companies tell themselves, let's look at the reasons why companies don't reach their full profit potential.

These are the 12 deadly failures of management:

1. Failure to recognize changing market conditions and act on them

2. Failure to resolve internal conflicts and resistance

3. Arrogance

4. Overspending during good times

5. Failure to continually rationalize the organization

6. Failure to act on substandard performance

7. Inability to think "outside the box"

8. Failure to delegate

9. Failure to define market strategies

10. Failure to demand implementation of marketing plans

11. Failure to tie compensation to corporate performance

12. Failure to plan for the cash needs of the business

These failures spring from some of the lies companies tell themselves, plus mistakes that I will discuss later in the book.

One of the toughest things for a manager to do is to continually self-review his decisions and actions to determine if he is falling into the traps that these twelve failures represent.

As you read through this book, and as you make decisions on a daily basis, refer back to this list and ask yourself honestly if you are guilty of any of them. Then consider using the techniques and solutions I present to work through the problem.

One thing that I do that may be helpful is to take a few quiet moments at the end of each day to be introspective and ask myself if my actions truly reflect the principles of management that I espouse, or if I have lapsed because of inertia or other distractions. The key to good management is the ability to be self-critical enough to admit mistakes and correct emerging problems.

© 2008 Marvin A. Davis.
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