Lessons from 55 years ago……

“Before anything else, preparation is the key to success.”

Alexander Graham Bell – inventor of the telephone

Egyptian Airforce destroyed on the ground

As a very young boy at Primary School, I vividly remember the Middle-East Six-Day War in 1967. Our school Principal announced at Assembly that he was deeply concerned about it leading to another World War and we should all pray. As a farm boy, I caught the local school bus, which in those days also delivered the mail, newspapers and bread to local farms. I distinctly remember glancing at the newspaper headlines and viewing the photos over that week of the newspapers that lay stacked at the front of the bus near the driver. Within a week the news vanished. Israel had defeated the Arab armies of Egypt, Jordan and Syria.

Next month it is 55 years since the Six-Day War.

Are there some lessons for managers from this significant historical event?

The war between Israel, Egypt, Jordon and Syria was fought between June 5 and June 10 1967 and resulted in an overwhelming victory to Israel and included the capture of the Sinai Peninsula and Gaza Strip from Egypt, the Golan Heights from Syria, and the West Bank and the Arab section of Jerusalem from Jordan. In summary, the war was a pre-emptive strike by Israel within an environment of mounting tensions with its Arab neighbours, where war unfortunately seemed inevitable. Israel was geographically challenged, lacked strategic depth, was politically and economically isolated and was numerically inferior in population and the size of its military.

So how did Israel succeed so spectacularly against such overwhelming odds?

Israel had been planning for war for many years, and central to this was the use of their air force. This involved a pre-emptive strike to destroy the Arab air forces on the ground. The plan had been worked out and practiced for several years with Israeli pilots flying repeated practice missions against mock Egyptian airfields in the Negev Desert.

At 7:14 a.m. the entire Israeli Air Force (IAF) of nearly 183 planes, with the exception of just 12 fighters assigned to defend Israeli air space, took off, flying under the radar with the goal of bombing 11 Egyptian airfields while the Egyptian pilots were eating breakfast.  Israel needed to destroy the Arab air force on the ground as their bombers could devastate Israeli cities. Amazingly, Israel had no bombers to use in the attack and the raid was carried out entirely by fighter planes. Most of Egypt’s planes never left the ground. By 11:05 a.m., 293 Egyptian planes were destroyed. Israeli fighters then attacked the Syrian and Jordanian air forces. By the end of the first day, most of the Egyptian, half the Syrian and all of the Jordanian air forces had been destroyed on the ground. By the end of the Six-Day War, the Arabs had lost 450 aircraft, compared to 46 for Israel.

So how was success achieved?

Logistics, superior training, planning and better intelligence.

The Israeli ground crews had practiced the rearming and refueling of returning aircraft. They achieved this in less than eight minutes, thereby enabling the strike aircraft of the first wave to fly in the second wave and meant an aircraft could fly five missions per day. By comparison, NATO aircraft could only fly three missions per day.

The IAF pilots were highly skilled and had been training for years. They practiced low level flying which required exceptional skills over the Mediterranean at under 30 metres so as to avoid radar detection. Furthermore, every pilot had photographs of their targets and had been practicing on mock targets in the Negrev Desert.

The IAF, using the “concrete dibber” anti-runway bombs which created huge craters made it impossible for the Egyptian aircraft to take off. This made the aircraft ‘sitting ducks’ and they were later destroyed on the ground.

Dawn was always considered the best time for an air attack from the east as the sun was in the defenders’ eyes. This was when the Egyptian air force was on high alert. However, Israeli intelligence found that 7.45 a.m. was when all the Egyptian air force was on the ground and the pilots were having their breakfast. This is when the IAF first attacked.    

Within six hours after the first IAF aircraft had soared into the morning sky, Israel had laid the foundation to winning the Six-Day War. Although the pre-emptive strike was a gamble, it paid off.

Careful preparation and some luck had been rewarded

What other lessons are there for managers here?

1. Planning – never underestimate how important planning is and doing your homework. The IAF did their homework on their enemies, knowing when they were most vulnerable and where the planes were located. Sound intelligence laid the groundwork for success.

2. Logistics – efficient use of available resources. The IAF was able to increase the utilisation of their aircraft well above what was considered ‘the norm’. Furthermore, as the IAF lacked bombers a new strategy of using bombs to effectively ground the rival air forces made them vulnerable to attack from the air by fighter jets.

3. Practice – leaving very little to chance the IAF practiced and practiced minimising the risk of failure. As the saying goes, practice makes perfect. There is no substitution for practicing to improve performance and increase the chances for success.

What other lessons do you think there are for managers?

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What if………..

“what if, but what is”

Gary West coach of Anna Meares – Australian Olympic Gold Medal Cyclist

In mid-2012, I was in England attending a management training program which coincided with the London Olympics. Sadly, I did not attend any events.  However, one night over a cold beer in my hotel room I watched two women cyclists, the 2008 gold medal winner Victoria Pembleton and the 2008 silver medallist Anna Meares, slog it out in the women’s sprint. It was an intense battle of stamina and wills and in the mesmerising trussell Anna Meares eventually triumphed.

So, who is Anna Meares?

Anna was Australia’s first female cycling gold medallist. She was an 11 times world cycling champion and the only Australian athlete to win medals at four consecutive Olympics.

Meares, was a daughter of a coalminer and grew up in Blackwater central Queensland hundreds of kilometres from the nearest bike track.  When her elder sister Kerrie showed promise as a cyclist the family moved to the coastal city of Rockhampton as it had a bike track.

  • Athens 2004 – gold medal in women’s 500-metre time trial, bronze medal in 200m sprint
  • Beijing 2008 – silver medal in women’s sprint
  • London 2012 – gold medal in the women’s in and bronze medal in the women’s team sprint
  • Rio de Janeiro 2016 – bronze medal in the keirin

These results are remarkable but there is something that is exceptional about her Olympic record.  In January 2008 seven months out from the Beijing Olympics, Meares broke her neck after crashing in the World Cup competition, fracturing her C2 vertebra, dislocating her right shoulder and tearing her ligaments and tendons. She went within 2 mm of becoming a paraplegic or worse death. Within 10 days she was back on her bike. With intensive rehabilitation she was able to fight her way back and qualify for the 2008 Beijing Olympics. Not only did she manage to qualify, but she also won a silver medal. From a broken neck to a silver medal in seven months – a truly remarkable performance.

Whilst her dedication and intense training to get fit enough to qualify and win a medal is testament to her intense focus and a clear goal (link here) there is something that is more compelling. It was her attitude. She did not focus on ‘what if’ but ‘what is’. Meares do not dwell on what might have happened if she’d been more seriously injured. Her coach made her appreciate her current situation. She was thankful and became more determined and focussed.

As managers, Anna Meares provides us with a great lesson.

Focus on what you can achieve – what’s in front of you. Don’t dwell on what you can’t control.

Four years later in London, Meares went on to win a gold and a bronze medal in Rio.

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A Winter Olympics story ….doing a Bradbury

Doing a Bradbury…

“I don’t think I’ll take the medal as the minute and a half of the race I actually won. I’ll take it as the last decade of the hard slog I put in”

Steven Bradbury – Gold Medal Winner 2002 Winter Olympics

With the end of the 2022 Winter Olympics comes a great story from the past.

So, who was Steven Bradbury and why did he become famous?

In 2002 Bradbury was the first athlete from Australia, and also the Southern Hemisphere to win a Winter Olympic Gold Medal. He was a former short track speed skater, a four-time Olympian and was also a member of the short track relay team that won Australia’s first Winter Olympic medal, a Bronze Medal in 1994.

So apart from being the first Australian athlete to win a Winter Olympics Gold Medal what was he famous for?

It was in the manner of his win. Bradbury slipped into the 1,000m speed skating final when two of his competitors in the semi-final crashed and another was disqualified. In the final, in the last lap as his competitors jostled for medal positions, Bradbury drifted further and further behind. With just metres from the finish line, a pile-up took out every other skater and avoiding the collision, he glided past to claim the Gold Medal.

His win entered the Australian colloquial vernacular in the phrase “doing a Bradbury” meaning an unexpected or unusual success.

However, there is more to this than chance. Bradbury was from tropical Queensland, not a state conducive to winter sports. He travelled the world, living hand to mouth to complete internationally, and competed in four Winter Olympics. At one stage he needed to borrow $1000 from his parents to repair his car so he could get to training. He supported himself by making skating boots in a home workshop. The years of hard work and training included nearly bleeding to death when a skate blade cut an artery requiring 111 stiches in 1994. Also in 1998, he fractured his vertebrae.

What are the lessons here for business owners and managers?

  • Hard work and sacrifice pay off.

In our logistics business there were times when a key customer left putting the business under pressure. However, with the previous hard work in networking and business development they were quickly replaced. Success can be a matter of luck, but it rarely is.  

  • Having a goal and vision

Bradbury’s goal was to win an Olympic medal on his own. The 2002 Olympics was his last chance. Despite his setbacks he hung in there, even when it looked increasingly unlikely that he would be successful, he succeeded and achieved his goal.

  • Being in the race

Yes, Bradbury’s tactic was to hang in there. This paid off as his rivals slipped, crashed and went spinning wildly across the ice. We had a customer in our logistics business who tendered for a lucrative post office franchise at an Australian airport. He was 5th or 6th in line, and eventually won the tender as his competitors were one by one, disqualified as being unsuitable, for reasons ranging from having a criminal record to no experience.

The Stephen Bradbury saga is a great story that resonates.  

Can you think of some other lessons?

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Why do airlines offer cheap seats?

‘I don’t care what you cover the seats with as long as you cover them with assholes’

Eddie Rickenbacker – US aviator

It’s coming up to Christmas and in Australia it’s the summer holiday period. Yes, over the Festive Season unlike our friends in the norther hemisphere, we will enjoy sunshine and summer. Whilst the monthly blog is posted on 21st of the month, in December it is released early. After all, 21st December is very close to Christmas Day.

Summer holidays often means travel and with COVID restrictions lifting, air travel is often ‘front of mind’. Hence the December blog is about air travel

Today, flying as a form of travel is widespread and growing – so we, the general public, are affected by airline pricing. Airline ticket prices are not set and can vary significantly, with some airlines offering flights that seem to be ridiculously cheap.

Why do they do this?

Modern airlines have very sophisticated analytical programs that use yield management or dynamic pricing to maximise the seating capacity of each aircraft, while obtaining the highest price for each seat. As Rickenbacker’s quote implies, seats need to be filled. This is a concept relevant to many businesses, which is little understood. It is called marginal pricing and, if used carefully, can significantly increase a business’s profits.

What is marginal pricing?

Marginal pricing occurs when a business sells a product or service at a price that covers the variable cost of producing it. The marginal cost is the variable cost of producing an additional unit or service. The concept of marginal pricing assumes that the fixed costs and overheads are already covered by earlier sales.

How does marginal pricing work in practice?

With airlines, the marginal costs of getting additional revenue are very low. Once an aircraft takes off, the empty seat is gone forever. It is a perishable commodity and cannot be warehoused or sold on another day. The same can be said for scheduled truck deliveries with spare capacity. The marginal cost of additional passengers is virtually zero. This is why airlines can offer what appears to be drastically discounted fares.

The road industry provides a good example of how this works in practice. For example, the cost of operating a semi-trailer is $1,600 per day including variable costs – fuel, finance, tyres and maintenance, loading and unloading – as well as fixed costs and overheads such as insurance, registration, depot costs and the driver’s salary. This is based on traveling 900km per day and a freight carrying capacity of 22 pallets.

The semi-trailer is loaded with 18 pallets (82% capacity) with initial revenue of $2,160 ($120 per pallet).

•             Fixed costs and overheads: $450 per day

•             Variable costs: $1,050 per day

•             Marginal costs: $5.56 per pallet (loading and unloading a pallet).

With a spare capacity of four pallets, there is an opportunity for the vehicle to fill this capacity by using marginal pricing. The assumption is that no extra variable costs such as fuel and tyres are incurred, and the only additional or marginal cost is the loading and unloading of the additional pallets. According to the concept of marginal pricing, providing the marginal costs of $5.56 per pallet is included, and any additional revenue above this will fall to the bottom line as profit.

This is demonstrated in the following table:

Marginal Pricing of Semi-Trailer Delivery

This example clearly shows that the addition of three pallets loaded onto the vehicle, with revenue of $80.00 per pallet instead of $120.00 per pallet, increases the revenue from $2,160 to $2,400, with profits increasing from $559.92 to $783.24 per day, or 40%.

Within manufacturing, the marginal cost is the variable cost of producing an extra unit of output. Let’s use manufacturing 1,000 wheelbarrows as an example:

•             Variable cost of manufacture is $20.00 per unit

•             Fixed costs are $10.00 per unit

•             Overheads are $5.00 per unit

•             Total cost per unit for a single wheelbarrow is $35.00.

The total cost for 1,000 wheelbarrows is $35,000 (1,000 x $35.00).

However, the cost of manufacturing an additional 500 wheelbarrows is $10,000, as $20.00 per wheelbarrow is the variable cost of production. The manufacturer could sell the additional 500 wheelbarrows at $40.00 each and make a profit of $20.00 per wheelbarrow.

Marginal cost pricing is a valuable tool for businesses, providing an opportunity to increase profits significantly if managed – particularly with unused capacity, such as in a manufacturing plant and in services such as transport.

However, there are dangers in marginal pricing. As a business, you must know and understand your costs – and this includes the cost of the sales staff.

Are there opportunities in your business to increase profits by marginal pricing?

What are the dangers if you decide to implement this strategy?

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Are you an intelligent boss?

Are you an intelligent boss?

‘In a high-IQ job pool, soft skills like discipline, drive, and empathy mark those who emerge as outstanding.

Daniel Goleman – author of Emotional Intelligence

It is often assumed that good managers are intelligent, and this is what makes them successful. Is this what really occurs in the world of work? This depends on how intelligence is defined.

Do you consider yourself an intelligent manager?

What is IQ?

IQ stands for Intelligence Quotient, a common measurement of human intelligence. The IQ test was originally developed in France by two psychologists, Binet and Simon, in the early 1900s – and their work still provides the basis of the tests used today. IQ tests were further developed throughout the 20th century and have been used in many psychological studies as well as in business, education, the military and government.

What is EQ?

EQ stands for Emotional Intelligence and the concept emerged in 1995 with the publishing of a book called Emotional Intelligence by Daniel Goleman. It sold over five million copies. Goleman claimed that EQ discounted IQ in determining success.

Why is EQ now considered more important than IQ for success in business today?

Have you met or worked with people who are highly intelligent but have a low EQ? They frequently display a lack of empathy and initiative, are arrogant, refuse to listen to other points of view, are insensitive and argumentative, blame others, never hold themselves accountable and are unable to control their emotions.

I certainly have, and there is nothing more demoralising and frustrating than working for such people. Low EQ people often suffer from ‘I’ strain – ‘I did this’, ‘I did that’ and ‘I am very important just listen to me’. One of the main impediments to achieving better outcomes is allowing egos to override common sense. An important aspect of high EQ is being able to manage your ego.

People are considered intelligent if they can reel off facts, retain information or have high technical skills. However, this does not necessarily make them, or the organisation they work for, successful.

While we may, as managers, pride ourselves on our technical skills, industry expertise, and innovation, this does not make us successful managers or leaders. Being the smartest person in the room does not necessarily equate to success.In successfully managing organisations today, we are increasingly dependent on ‘soft skills’ that build relationships inside and outside the organisation. It is essential to be able to negotiate, collaborate and compromise by listening, communicating, being flexible, and being able to work with others. Management by walking around is a good example of using EQ skills. Poor levels of EQ can make or break customer relationships, create and perpetuate poor work environments and reduce constructive communication with managers, colleagues, peers and subordinates. Michael Gerber, in The e-Myth Revisited, .

According to Harvard Business Review, EQ is ‘the key attribute that distinguishes outstanding performers’ and is the leading differentiator between employees whose IQ and technical skills are approximately the same. People with high EQs tend to be happier and have more fulfilling personal lives – as they are more self and socially aware, manage their emotions and tend to be more engaged with other people and events.

The good news is that EQ can be taught. However, it depends on your mental outlook and willingness to change. It can be improved through coaching, training and good mentoring.

Here are three questions that you can ask yourself to gauge your level of EQ:

  1. How would your employees describe your leadership style?

Ask this to gauge self-awareness. Does it sound realistic when you answer this question? Do you mention any shortcomings you are trying to address?

  1. Could you do a SWOT analysis on yourself?

Would your colleagues or subordinates agree with your self-assessment profile?

  1. Do you know the interests and family circumstances of your work colleagues?

This is asked to gauge your level of empathy with others.

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How do you improve your business processes?

Process improvement…

‘Without continual growth and progress, such words as improvement, achievement, and success have no meaning

 Benjamin Franklin – one of the Founding Fathers of the USA

Against a background of continual distractions, including increasing regulations and competition, one of the greatest challenges for businesses is to continue improve their performance and profitability. Improved processes lead to better efficiencies, improved productivity, greater employee satisfaction and, ultimately, profits.

At its most basic level, there are four ways to improve productivity: 

  1. Drive better practices
  2. Innovate new practices
  3. Utilise potential practices
  4. Enhance current practices

Four Ways to Improve

In Japan, following the devastation of World War II, the concept of ‘quality management’ was developed and implemented by an American – W. Edward Deming. He became known as the ‘father of quality management’ and his work led to the amazing success of Japanese companies such as Toyota, Sony and Mitsubishi. The ‘Deming management method’ became known as the Plan-Do-Study-Act (PDSA) cycle, which imbedded learning into a cycle of continous improvement.

Plan-Do-Study-Act (PDSA) Cycle

The aims of this section are:

  1. Describe how important process improvement is to a business
  2. Introduce a methodology we used to improve productivity in our logistics business.

Our third-party logistics business’s specific niche was retail logistics. When the business was first set up, it provided floor-ready merchandising services (FRM©) to retail suppliers. At that stage, the business was not a traditional warehousing and transport business – instead, stock was processed in the warehouse in a way that enabled it to be placed in each individual retail store in a ‘floor-ready’ condition, underpinned by an electronic commerce system. Items were price and security labelled, placed on hangers if required and scan-packed to store level.

This required a more varied skill set than traditional warehousing. The production process depended on the type of merchandise – whether apparel, shoes, cosmetics or electronics. This required a flexible approach and a standard methodology. Each supervisor would organise and ‘set up’ the job, and plan and manage the FRM© process. The productivity of each job and section was measured and reviewed individually with the supervisors on a weekly basis.

The methodology was called ‘the W5H Check’ because it asked why, what, where, when, how and who. Before each job was set up, the supervisor used this checklist to maximise productivity – answering the questions on the checklist. This approach improved productivity by  reducing the number of times the goods were handled, minimising lifting and walking, questioning who was doing the work,  eliminating unnecessary tasks and simplifying the process. 

W5H Check©

We found that this process improved productivity over time as it was decentralised, empowered the supervisors to make decisions, and measured performance. The supervisors were encouraged to seek input from their staff on how best to improve productivity and were authorised to communicate directly with the customers. It was similar to the PDSA cycle used in the Deming method and included specific questions that required thought. The W5H Check© sparked a process of continous improvement that was driven by ‘hands-on’ supervisors who were given the authority to make decisions that were the best for the customer and for the business.

The benefits of this system included very low staff and supervisor turnover, long-term customer retention and high levels of employee satisfaction. When the business was sold, the majority of supervisors had been with the company for over 10 years.

What are the areas in your business that you could improve using the simple Four Ways to Improve test?

Do you think that the W5H Check© system would be useful in improving productivity in your business?

Are there lessons to be learnt from the example above, relating to pushing responsibility down to supervisor level?

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What are the foundations of a good business?

What are the foundations of a good business?

“You can’t build a great building on a weak foundation. You must have a solid foundation if you’re going to have a strong superstructure”

Gordon B. Hinckley – American religious leader

Deciding to go into business is the first step. The second step is to ensure that from the beginning the business has solid foundations. This is critical and is relevant whether your business is a start-up, or you are purchasing an existing business. Like a building constructed on solid rock, a business with a solid foundation will have a better chance of surviving the inevitable challenges, than one built on unstable foundations. Cracks will inevitably appear in a business over time, as they do in a building. By solid foundations I don’t mean a market niche, systems and processes, skilled employees and loyal customers which can be easily found in ‘how to’ management books, and on the internet.

When my partners and I were going into business, it involved a management buyout of an unprofitable business. We were eager to ‘have a go’ on our own and prove we could build a successful business. This leap of faith meant mortgaging our houses to raise the capital, not an unusual practice for funding new businesses. This certainly focussed our attention. Failure could mean losing the family home and all the implications associated with family life.

As with an elephant’s legs supporting the world’s largest land animal, having a solid foundation on which to build and support a business is essential. Luckily the previous owner had an excellent financial director who provided us, with some practical and useful advice;

”Protect your assets and limit your risks and liabilities”.

We also sought advice from external experts. As owners and managers, we didn’t know what we didn’t know. Seeking external expertise is essential. From our experience in setting up in business, the disciplines where external assistance is required in the following disciplines:

  1. Legal advice in setting up the business’ legal entities, including each owner’s private company which were shareholders in the business, establishing corporate structures that reduce the exposure to legal claims from avaricious ambulance chasing lawyers, completing shareholder’s, agreements, terms and conditions and suppliers’ agreement.

One of the lessons learnt was whilst the structure of the founding team set out the entitlements of each founder, we did not clearly outline our roles and responsibilities which lead to. performance and accountability becoming issues and was complicated by two family tragedies. This could have been managed more effectively if roles and responsibilities had been more clearly set out and a company board that held the executive team and founders to account had been established.

  1. Financial advice from a chartered accountant on business related finance issues, including insurance, taxation, banking and recommended corporate structure in combination with legal advice .

The main lesson learnt was to separate the business entity from personal affairs is essential. Unfortunately, I have witnessed some businesses getting into financial difficulty by not separating private and business affairs as well as a lack of discipline and  no clear understanding of the importance of keeping this separate. This is particularly relevant to family businesses.

  1. Strategic business advice from an advisor with business owner experience. There are two issues here;
    • seeking external advice
    • ensuring it comes from a consultant or advisor who has practical experience in managing and owning a business.

Too often there are consultants who do not have this experience and do not understand what it is like to have their money and house on the line.

In retrospect we should have sought in our logistics business external assistance in strategic planning.  Our annual budgets were built from the ground up and served as our business plan. The weakness became apparent in the vital areas of values, vision and a mission statement which underpin the budgets and business plan. These were missing. We did not recognise their importance. Values, vision and mission statement were only created when we established a webpage. We would have benefited immensely from engaging an external advisor earlier in the piece. The business although profitable would have been more profitable and would have developed more strategically. Professional external advice would have opened up opportunities through identifying strategic long-term customers, obtaining government grants and developing new networks.

In conclusion, the message is seek advice from those with expertise so the business has solid foundations, so when inevitably the storm comes the business has a greater chance of survival. Seeking external advice is not a sign of weaknesses. Elite athletes and sporting teams all have coaches. A business is no different. Also as a manager and business owner, on-going education is essential for continual success.

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What is a KPI?

Key Performance indicator

What is a KPI?

‘The most important performance information that enables organisations or their stakeholders to understand whether the organisation is on track or not.’

Bernard Marr – author and futurist

What is a KPI?

A KPI (Key Performance Indicator) is used to measure the process towards an organisation’s goals.

Most managers and business owners know what KPIs are, based on the concept that ‘what gets measured gets done’. However, in many instances, organisations do not know what to measure and this results in poor management, mixed messages and focusing on the wrong things. One mistake is to confuse KPIs with goals. The goal of a business may be to increase sales to $20 million – however, it is not a KPI.

One of our first customers in our logistics business was a major Australian retailer who built a new store in a major shopping centre. Retailers normally have a KPI which measures sales per metre of their retail area. The ‘whiz kids’ at the retailer’s head office decided to minimise the ‘in-store’ storage areas to increase the total sales area. Within weeks of opening the new store, sales were suffering. The stock could not be replenished from the back of the store because not enough stock could be stored there. This resulted in reduced staff morale and new requirement to operate an off-site warehouse to replenish the store daily, which increased costs considerably. This is an example of a poor implementation of a KPI. The challenge is to select the right KPIs.

Why are KPIs important?

KPIs, if structured correctly and measuring activities towards a business’s goals, can have a positive impact on performance at all levels of a business. For example, KPIs can empower staff by showing how they can make a difference to the business, as well as holding them accountable.

In our logistics business, we designed a system that collected productivity data by customer, job and product category. The warehouses were divided into sections, each headed by a supervisor responsible for the customers and staff in their section. Each week, we produced productivity data by job and customer – which we called ‘the marking rate’. This information was shared with the supervisor, empowering them to make a difference to the business, holding them accountable, involving their team and demonstrating how important their team was in the business. They were empowered, which increased their levels of job satisfaction immeasurably. The marking rate was a measure which drove the business’s profits.

Not only do some organisations have the wrong KPIs, they often too many KPIs. In my experience, the number of KPIs should be restricted to between three and five, otherwise they can become too hard to measure and manage. I have seen large companies with literally dozens of KPIs, which rarely relate to the company’s goals. The challenge is to identify the key indicators that help the business succeed.

What are the three main considerations in setting KPIs?

  1. Ensure they are simple and are easily measurable and understood.

For example, in long-distance road transport, KPIs could be revenue per kilometre, kilometre per vehicle and fuel cost per kilometre. These performance indicators are easily understood and measurable.

  1. The measures must be key indicators of performance and directly linked to strategy.

Using road transport, the strategy is to maximise both kilometres travelled and revenue – so measuring revenue per kilometre is sensible.

  1. Minimise the number of KPIs, thereby making them relevant to all.

KPIs can be more precisely developed by using Key Performance Questions (KPQ), which assist in objectively developing activity measures that lead towards meeting the business’s goals. Here are some examples:

  • What are the activities we should measure that lead to high customer retention?
  • What should we measure that indicates profitability by customer?
  • Are the current productivity measures linked to the business’s goals?

 

Are you chasing field mice or antelopes?

Lion anetlope

Are you chasing field mice or antelopes?

“A lion is fully capable of capturing, killing, and eating a field mouse. But it turns out that the energy required to do so exceeds the caloric content of the mouse itself. So a lion that spent its day hunting and eating field mice would slowly starve to death. A lion can’t live on field mice. A lion needs antelope. Antelope are big animals. They take more speed and strength to capture and kill, and once killed, they provide a feast for the lion and her pride. … So ask yourself at the end of the day, ‘Did I spend today chasing mice or hunting antelope?’”

Newt Gingrich – speaker of US House of Representatives

What is Gingrich’s underlying message?

Certainly, the Pareto Principle or 80/20 rule is implied in this quotation . However, there is another message for managers and business owners here, that is to focus with discipline on the issues that provide the best return for your resources of time, money and expertise. The danger is business failure, as explained by Michael E Gerber in The e-Myth Revisited – Why most small businesses don’t work and what to do about it. This is where a business owner and manager who understands the technical nature of the business but does not understand the business is likely to fail. In summary, they do what they are comfortable in doing and what they know, not what they should be doing.

Jim Collins in his book Good to Great: Why some companies make the leap and others don’t, describes how a ‘culture of discipline’ is evident in successful companies. This begins with disciplined leaders who display empathy, personal humility and intense focus. They do not suffer from ‘I’ strain and rarely appear in the media seeking celebrity. Before purchasing our logistics business, I worked for a privately-owned transport company. In an industry that was known for its larger than life personalities who courted the media, the owner was virtually unknown. He ran a highly successful business which was far more profitable than many of the publicly listed companies in the industry. He was extremely disciplined in strictly adhering to his market niche which enabled higher profits and greater customer service.

In another example of discipline, I managed a large division of a transport business in a large regional centre where the managing director was passionate about truck safety. This involved vehicle journey’s being monitored by on-board computers to prevent speeding, exceeding mandated driving hours and excessive idling as it wastes fuel. If drivers exceeded the speed limit by 5% in a week they were disciplined and if this occurred three times within 12 months the driver was terminated. Like the lion it was targeting the areas that significantly affected the successful operation of the business. Each week the performance of the trucks and drivers was given to me to action. I decided against the advice of my peers to post the results on the drivers‘ notice board.

Did the drivers react negatively to being compared to others as I had been warned would occur?

No.

Instead each week many of the drivers would compare their performance of their vehicles and themselves. Some drivers would personally seek me out to ask if there were problems with their vehicle and why for example their vehicle had appeared to be idling excessively. They became self-disciplined team members who were more accountable and didn’t need to be micro-managed. Fuel economy improved and more importantly our accident record was the best in the business despite having drivers’ company-wide who travelled the most kilometres each week. Within the ‘safety framework’ a culture of freedom and responsibility had developed.

For a business to grow or change in a positive way, the discipline required must be where consistent behaviours align with achieving the organisation’s goals. Note the words – “discipline” and “consistent”. The aim is for consistent productive goal-oriented behaviours to become habits. Habits once formed become entrenched, however they must be right habits and they must align with the organisation’s vision and goals. In the drivers’ example, safety and performance became a habit. With the niche transport company, the discipline was only remaining in its narrow market niche. Both examples required disciplined people acting in a disciplined manner, demonstrating that discipline must start at the top.

Here is another example. I was engaged to undertake a business review by a niche logistics business which had suddenly begun losing money. Determining the prime reason was relatively easy; the business had lost a major customer who had contributed the majority of their previous profits. This was only a symptom of what was wrong. A walk through their numerous warehouses provided some answers. The warehouses were dirty, stock was not in the correct locations and staff were inadequately supervised. Management was focussed on managing day to day crises, were not enforcing operational disciplines, rates had not increased in several years and customer service was inconsistent. Classic chasing field mouse behaviour.

The business review formed the basis of a new business plan. New benchmarks for performance were established and a renewed commitment to improving customer service was implemented. This was underpinned by imposing operational disciplines in the warehouse following consultative meetings with staff. Several managers and supervisors exited the business and a new general manager and senior management team were appointed. In the first year the company made a modest profit. In the second year, profits exceeded expectations, revenue grew through targeted strategic sales in the business’ market niche, prices increased, unprofitable customers were forced from the businesses, a warehouse was closed and new leases with more favourable terms were negotiated. This was a good practical example of what Jim Collins describes in his book, Good to Great: Why some companies make the leap and others don’t; disciplined people – first who; then what, disciplined thought; confronting the brutal facts, and disciplined action; a culture of discipline.

Being a successful business owner, leader and manager requires discipline. Lack of discipline manifests itself physically in examples such as untidy and dirty warehouses, poor telephone manners and uninspiring first impressions.

What are the antelopes you should be hunting in your organisation?

Have you identified the field mice?

Is it clear to others in the business?

Do the antelopes align to your vision, values and goals?

Discipline in the areas of accountability, teamwork, and attention to detail are required. Disciplined leadership is defined by is defined by sound habits, rigour, consistency and routines. A disciplined environment assists in putting both management and employees on their best behaviour leading to improving productivity and profits.

3 Major mistakes business owners make with financial reporting

3 Major mistakes business owners make with financial reporting

“Stay on top of your finances. Don’t leave that up to others”

Leif Garrett – USA singer and TV personality

Many business owners I meet tell me that their external accountants do their monthly accounts. In fact, one owner had his external accountant and his book keeper on site each week, and another waited 3 months to get his monthly profit and loss statement (P&L) which he didn’t look at anyway.

Did they provide financial reports that helped these owners manage their businesses?

This depends on the type of reports being created.

However, the answer is almost always………NO

What is usually provided is a service to input financial data and/or accounting services required for taxation purposes, that is to meet compliance requirements. The owners would then be given a profit and loss (P&L) statement, showing consolidated revenue less total costs to determine the profit.

Why is this a problem?

This is a problem because these P&Ls are not an operational P&Ls. This brings me to one of my favourite issues with managing businesses. The financial results that are being currently reported do not help in operating the business.

In my experience, there are 3 mistakes business owners make in financial reporting:

  1. Incorrectly categorised costs

Many businesses do not understand the difference between fixed, variable and overhead costs. Furthermore, external accountants generally do not categorise those costs as this is not required for compliance or taxation purposes. For example, it is important to know what your direct or variable costs are which vary with output or sales revenue. By not categorising costs correctly and having them in the correct section of the accounts, you cannot determine your gross margin, sometimes called your cost of goods sold (COGS) and net margin …….which leads to the next mistake…..

  1. Reports do not reflect operational needs

When costs and revenue are not placed in correct place, they will not help operationally. By consolidating costs rather than categorising them, a manager or business owner cannot easily determine which costs increase and decrease with changes in sales, or what their overheads are for operating the business.  It is essential to understand and identify each of the different costs and how they vary with activity. Often a single business has various components or different activities that make up the total business. In one of the examples above, the business was actually three different businesses, second hand vehicle sales, vehicle servicing and second-hand motor vehicle parts sales. This business owner’s revenues were consolidated and he did not know which activity was profitable and which was not…………..which leads to the next mistake…..

  1. Not knowing which parts of the business are profitable

So, did the business owner know if selling second had cars was profitable or whether it was worthwhile to continue to provide motor vehicle servicing?

No.

Therefore, the first step is to identify the different business activities. Once this is done, divide the revenue by activity and then assign to the different business units. For example, second hand car sales, spare parts sales and motor vehicle servicing.

The next step is to categorise the costs by type, variable or direct costs, indirect costs and overheads. Then assign these costs into business units. Overheads will be assigned to the consolidated business, with the P&L looking like this:

By reviewing the P&L, the business owner can see that Spare Parts is losing money and vehicle servicing has a Gross Margin of 63% and is the most profitable with a Net Margin of 48%. Furthermore, Overheads are 18% of Revenue, which would seem high and may warrant further investigation. As Spare Parts is losing $25,000 per year, possible managerial actions could be to increase prices or cease selling Spare Parts as a business activity which would result in an additional $25,000 in profit.

These are examples of what a good management or operations P&L looks like and how managers and business owners can make informed decisions.

Remember there are 3 mistakes in financial reporting:

  • Costs are incorrectly categorised
  • Reports do not reflect operational needs
  • Not knowing which parts of the business are profitable

As a manager or business owner is your operational P&L provided in a format you can use to improve your business’ performance?