Those fatal mistakes
Article Date: Jun 08 2007
It's often said that the best entrepreneurs are those who throw caution to the wind to ensure their ideas and dreams become a reality. I disagree with this point of view as innovative flair and business acumen do not always go hand-in-hand. If they did, the 5,400 UK businesses going bust every year would be dramatically reduced.
Neither do I believe, as some seem to, that the high level of business failure in the UK can be attributed to duffers, bluffers and bodgers, who should have been barred from incorporating in the first place.
What surprises me is that so many of these fatal or near-fatal business outcomes are at the hands of otherwise sharp, intelligent businesspeople who do not comprehend the disastrous consequences of their actions until it is too late. The majority of failures result from a small number of similar or identical errors. Here are some of the most common:
Banking nightmares
We have all heard about rags-to-riches stories, and swallowed tales of how super-successful, multi-national corporations have been built out of nothing. Back in the real world, however, a lack of ready cash is a death knell. This is especially relevant if your business has low profit margins. If you run up a large overdraft, you risk sacrificing your autonomy and become dependent upon the bank’s goodwill.
This is where your troubles may begin. If you run into cashflow problems, your bank can demand approval on every decision and major purchase. I have seen CEOs spend so much of their time attempting to appease the banks and even shareholders as a result of cashflow issues that they spend too little time with their customers. Lacking leadership, their businesses then fall into neglect.
There are many ways in which cash reserves can be boosted: negotiating better prices and terms with your suppliers, adopting lean processes and pressing your customers to pay on 30-day terms.
The David Brent Approach
Too many fledgling entrepreneurs prize popularity among their peers above accountability to customers. This is a classic mistake, but it never ceases to amaze me just how many businesspeople fall into this trap. It is vital to 'under-promise' and 'over-deliver' on your commitments to customers. You must be accountable - as indeed, all your staff must be - and do what you say you will do.
Cockiness
It's rare that a guide to startups doesn’t emphasise the importance of planning and market research. After all, this is basic stuff. However, even seasoned entrepreneurs can become overconfident and fail to plan properly.
One of the most frustrating cases I have ever encountered was that of a successful British furniture manufacturer that decided to counter competition from Eastern Europe and Asia by developing an expensive bespoke range targeting customers from the higher end of the market. The costs of developing the new range were more than £200,000 – but this budget did not include a sales strategy, trials or market research. The CEO believed that he already possessed an in-depth understanding of his market.
When the new range launched, it didn’t take off as hoped. Sales of the company’s other ranges dropped because existing customers felt ignored and unvalued. The CEO avoided receivership by the skin of his teeth, after launching a large-scale redundancy and cost-reduction programme.
Mirror, Mirror
The right recruitment decisions are key to the success of any business. However, too many entrepreneurs hire in their own images: they alight upon the candidates who dress the same and talk the same, or with whom they have the most in common. This is a flawed recruitment strategy, which can have terrible consequences.
One CEO I knew had made a good success of his small software company, generating the firm’s sales singlehandedly and growing its turnover from zero to £3 million. When he expanded into the financial services sector, he decided to hire his first sales director, and spent four or five months getting the 'right' person on board. The man he chose had an accomplished CV, came across very well at interview and had the 'right image': in other words, he reminded the CEO of himself.
Although the new sales director boasted a wealth of sales success across existing accounts, his track record for generating new business was non-existent. Predictably, he was unable to meet the aggressive sales targets for the first year. By the time he was sacked 18 months later, the wasted time and management costs were estimated at several hundred thousand pounds and the business had been dragged sharply backwards.
Had the CEO not been dazzled by appearances, and ensured that the preferred candidate had delivered and achieved new targets in his previous roles, these problems could have been easily avoided.
Happy Shopper
A well-timed acquisition can take your company to the next level, and planning and forethought are all-important. Too often, CEOs try to run before they can walk: they become so enthused by the idea of 'blazing an acquisition trail', they don’t stop to put on their thinking caps. The majority of failed acquisitions result from an inability to integrate one business within the other. I recall one database marketing company, which hoped to increase its market share by buying up a competitor.
On paper, the acquisition looked like a good fit. In reality, it wasn’t: its IT system was utterly incompatible with that of the original company and, for client security reasons, had to be retained. This was a very expensive mistake. The two companies had to remain as separate entities, and the resultant integration costs effectively doubled the acquisition price.
Both businesses were brought to the brink of receivership. If the chief executive had brought in professional help before the deal was signed, developed the integration plan more thoroughly and evaluated the potential issues, this would not have happened.
Although business leadership is a minefield for the unwary and inexperienced, it is worth noting that the principles for success and the principles for failure have something in common. They both revolve around tried and tested patterns and behaviours. Success is harder won, but if you keep your head and maintain a high level of discipline in your day-to-day business strategy, it is there for the taking. The choice is yours.
Ken Jacobson is the CEO of Vistage International (UK), the world’s largest chief executive membership organisation. He has been a director and/or chairman in a variety of technology and telecommunication companies, such as Intervoice where
he helped to more than double international revenues between 2003 and 2006 as senior vice president.
