The obsession with the balance sheet and making their numbers every three months hurts many building materials companies. It makes them an easy target for stolen sales and stolen customers.
I have learned that whenever a building materials company is losing market share or sales, it’s most often due to an overemphasis on finance.
Sound financial management is critical to the survival of any business. But just like any strength, it can become a weakness when it’s carried too far.
Lifecycles of Business
One of the most important business books I have read and continually refer to is In Pursuit of Prime by Ichak Adizes.
Adizes identifies ten stages in the lifecycle of businesses (for an overview, see this excerpt published in Inc.).
The stage you want to be in is Stage 5, which is called Prime. Adizes summarizes it as follows:
“With a renewed clarity of vision, companies establish an even balance between control and flexibility. Everything comes together. Disciplined yet innovative, companies consistently meet their customers’ needs. New businesses sprout up within the organization, and they are decentralized to provide new life-cycle opportunities.”
Too many building materials companies live in Stages 6 – 9. They are very easy to recognize both internally (by their employees) and externally (by their customers). These companies have reached a degree of success and are now focused on protecting what they have. As a result of this defensive stance, they have stopped most of the activities that made them successful in the first place.
Once they enter Phase 6 (Stability), it’s like they have turned 60 and are now protecting their nest egg:
“Companies are still strong but without the eagerness of their earlier stages. They welcome new ideas but with less excitement than they did during the growing stages. The financial people begin to impose controls for short-term results in ways that curtail long-term innovation. The emphasis on marketing and research and development wanes.”
By Stage 7 (Aristocracy), businesses start settling into their old age:
“Not making waves becomes a way of life. Outward signs of respectability—dress, office decor, and titles—take on enormous importance. Companies acquire businesses rather than incubate start-ups. Their culture emphasizes how things are done over what’s being done and why people are doing it. Company leaders rely on the past to carry them into the future.”
Businesses in Stage 8 (Recrimination) attempt to protect their success and assets in ways that start to manifest in more paranoid and hoarding behavior:
“In this stage of decay, companies conduct witch-hunts to find out who did wrong rather than try to discover what went wrong and how to fix it. Cost reductions take precedence over efforts that could increase revenues. Backstabbing and corporate infighting rule. Executives fight to protect their turf, isolating themselves from their fellow executives. Petty jealousies reign supreme.”
Businesses that make it to Stage 9 (Bureaucracy) become procedural and rigid:
“If companies do not die in the previous stage—maybe they are in a regulated environment where the critical factor for success is not how they satisfy customers but whether they are politically an asset or a liability—they become bureaucratic. Procedure manuals thicken, paperwork abounds, and rules and policies choke innovation and creativity. Even customers—forsaken and forgotten—find they need to devise elaborate strategies to get anybody’s attention.”
Most of the companies in these stages of decline see themselves as leaders whose strengths give them a degree of protection from competition. They don’t see the how vulnerable they’ve made themselves.
Building materials is an industry that is behind the times and slow to adopt and innovate. It got that way after getting used to being able to milk the cow for a long time. But in today’s world of overnight change and disruption, the cow can get slaughtered—quickly.
The Right Approach to Finance
Some investors have told me, “We don’t care about growth. We only care about the bottom line.” If you are one of these people who don’t want to grow their sales, save yourself some time and stop reading right now.
To me this is an investment in a semi-truck that simply goes back and forth, rather than a higher performance vehicle.
If I sound like I am beating up on finance, it’s just because I am taking a different view of it than the one I see in much of the building materials market. Excellent financial leadership is not optional. It is required in every company, especially today.
What I am advocating is a more balanced approach, one in which finance, sales, marketing, operations and other areas all have a voice and a valued role in the growth of the company.
When I am faced with something that is over my head, like finance, I deal with it by simplifying it. Here, then, are my 17 simple, common-sense rules and observations about companies who are over reliant finance.
1. If your sales are higher than your expenses, you will make a profit.
This is probably my simplest rule. The problem here is that financially driven companies can’t help themselves because they are always trying to optimize thei
Prematurely optimizing profits when they still have room to grow and haven’t optimized their sales opportunity first prevents them from reaching their potential. They settle for less market share than they could gain, which makes it easier for a competitor to take customers and sales from them.
It’s like they plan to have a winning season and as soon as they start scoring, their goal shifts from winning the season to making the most money right now.
- “We can get rid of the high-priced players who got us here.”
- “The stands are full, let’s raise ticket prices.”
- “We can cut back on advertising.”
- “I found a cheaper supplier for our jerseys and hot dogs.”
- “We can have fewer ticket takers. So what if the lines for our customers are a little longer?
2. You are either gaining market share or you are slipping behind.
Just like it’s hard to slow down a winner, it can be hard to turn things around when you are losing share—momentum works both ways.
Since they probably don’t have access to your numbers, you may think your customers don’t know your situation. But they have ways of figuring out who is growing and who isn’t. They talk to each other and watch what products everyone uses. They see who has the better marketing message and they notice the quality and quantity of sales reps each company deploys.
3. Cutting back on expenses can be addictive.
Cutting expenses is such an easy way to improve profits that it can become addictive. If it worked last year, cut even more this year. It’s also attractive because you can control and measure it, unlike those pesky and unpredictable customers.
This strategy should be used in moderation. Each time you use it, it becomes less effective and puts the long-term future of the company at risk.
Using expense control to create a budget that investors will like is also dangerously attractive because it enables you to estimate a safe sales growth number. It’s playing not to lose rather than playing to win.
4. Having no budget flexibility costs you sales opportunities.
I will frequently show companies growth opportunities that require a minimal investment, only to have them tell me, “I agree with you about this opportunity; unfortunatel
I will then ask them how much each additional million dollar
They also do not have an opportunity budget set aside because they know that it will be taken from them next year if they don’t spend it. Finance thinks that since you didn’t use it, you must not have needed it.
5. Many leaders only care about their performance while in their current positions.
To many sales and marketing leaders, any sale is a good sale. They are too focused on short-term sales growth and aren’t expected to consider the long-term implications of their actions. When they move on, they’re not faulted for what they have left to the next person.
Leaders at the most admired companies outside of building materials take a longer-term view of their jobs. If you are a brand manager at Procter & Gamble, your job is to manage and improve the value of the asset they have entrusted to you, such as the Tide brand. It has a value when you assume your job and will have value when you move onto your next position. The measure of your success is based on how much you improve the value of the asset.
All of these companies face challenges, either from a competitor, changes in the market, or a mistake they made. But because they tend to take a long-term view, it’s much easier for them to weather the challenges that every business faces.
Harley-Davidson, for example, became financially driven and started on a swift and steep decline when they were bought by AMF. It took them years to recover by shifting from a focus on short-term financial success to a longer-term view in which the company will outlast any individual.
Building materials companies that are stuck with the short-term view are very vulnerable to competition. Their success also becomes more dependent on their price rather than higher margin added value. Not good for the balance sheet.
6. Companies are and will continue to be threatened by disruptive forces in which the traditional financial strategies have less value.
As Elon Musk, Nest thermostats, panelized construction, tiny houses, online sales of building materials and other developments enter the building materials market, they will easily take business from short-term, financially focused firms.
What if your new competitor is financially backed by investors and doesn’t expect to make a profit for five years? And what if that new competitor plans to charge a lot more than you and succeeds at it? And what if they do it without needing to invest in a big factory—the big factory that had, until now, served as a barrier to new competitors?
Financially focused companies are also very much at risk from advances in materials and construction practices. What happens when you have been leap-frogged by a new material or a new construction practice eliminates the need for your product?
Obsolescence happens at a faster frequency and pace than it ever had before.
Companies with a longer-term view are continuously creating a higher barrier and cost of entry for new competitors.
7. A focus on finance makes companies very predictable.
There is a place for predictability. You want customers to know they can expect superior product quality and great customer service, for example.
But when your sales, marking and product development become predictable, you make it easy for competitors to take business away from you. You may be used to being the big boy in your category, but a smaller, more agile competitor can easily turn the tables on you.
When you are challenged by one of these competitors, you lose the upper hand. You’re forced into having to react to their moves, so you are now lagging behind and trying to catch up. Once this starts, it’s hard to turn it back around and force them to react to you.
8. Financial solutions to challenges need to be balanced by other approaches.
We all tend to rely on what we are best at to solve a problem. There is always a way to rationalize how our own personal strength is the best solution to the problem.
For example, if your strength is in sales and marketing, you’ll think the solution to almost any problem is more business. That’s simply not the case, but because it’s what you know how to do well, it’s how you’ll approach every problem.
- Likewise, an operations manager will tend to see the solution as improved productivity.
- An engineer will see the solution through tighter tolerances and even higher quality product.
- Purchasing, through lower supplier costs.
- A product design person, through better design.
- An HR leader, through fewer and more productive people.
- A customer service leader, through happier customers.
- And a financial leader will see the solution in terms of cost reduction and more control.
The best solutions come from a combined approach that will compensate for the areas in which the financial leader is not as strong.
Companies with a strong, singular focus, such as finance, have fewer options when it comes to problem-solving. Having so few problem-solving tools makes them very predictable and easier to outperform.
And even when they do try to take a different approach, it is always based on the past. If they want to grow sales, they’ll hire more sales people or spend more on marketing. It’s as if they haven’t heard of advances in online marketing, which are making big sales teams and expensive marketing campaigns less effective.
9. An emphasis on finance means an overemphasis on control.
A company that emphasizes control might as well hang a sign on their front door and on their website that says, “New Ideas Not Welcome Here.”
Control is also inefficient because sales reps and other employees are not empowered to make things right. Paperwork has to be filled out, reviewed and await approval—the customer can wait.
Requiring that every social media post be reviewed and approved makes much of the new media useless.
When the fear of doing the wrong thing overpowers the desire to do the right thing, the “best thing” becomes doing nothing—other than filling out the right report.
10. Financially focused businesses have trouble attracting top level talent.
Ad agencies are now having trouble attracting top talent and are losing out to tech and entrepreneurship. If “cool” ad agencies are having trouble, how attractive do you think a building materials company is going to be to the best young talent?
A company in Stages 6 – 9 will not attract the level of talent it needs. They will overpay for mid-level talent who will quickly learn just to shut up and take the check. The best ones will just leave when they have the opportunity to work somewhere more creative and exciting.
11. Don’t let sales and marketing get lost in financial language.
Sales and marketing people have their own language that is focused on sales and the effective use of the marketing budget. In a financially focused company, the sales and marketing people start casually using terms like asset allocation, capacity utilization, cash flow and EBITDA. It makes them feel important because that’s the language they hear around the office and in presentations.
They shouldn’t be worried about sounding smart. They should be totally focused on growing the sales of your products. Unless your sales people will be selling investment products, they shouldn’t let these specialized terms cloud their thinking.
12. Financially focused businesses don’t appreciate, value or use their assets.
Companies have many assets that don’t directly show up on the balance sheet, yet they have value and took time and money to create. These are assets like the company’s reputation, customer satisfaction, how they treat suppliers and having a good corporate culture.
Financially focused companies are so busy squinting at their balance sheets that they frequently fail to recognize or value these assets and discard them without a thought.
Wasting these assets is a huge mistake. They are the one that make customers more loyal. They make it harder for competitors to take your business. They make your customers more likely to pay a premium. They get you better employees without having to overpay them.
13. Raising prices arbitrarily frustrates customers.
Financially focused firms raise prices whenever they think they can, when they are forced to and when the competition raises their prices.
Unexpected and unjustified price increases are one of the biggest frustrations of a building materials customer. Financially focused firms become very arrogant and don’t see a need to explain price increases—and then wonder why their customers aren’t loyal.
The worst part is that they’re so focused on arbitrarily raising prices that they totally miss the opportunity to raise prices based on improved customer satisfaction. Companies like Yeti and Bose price in a way that has little to do with what the competition charges, but you won’t see financially focused companies thinking or acting this way.
14. Losing a sale or customer isn’t always about price.
If financially focused companies lose a customer or a sale, they simply assume it must be because they got a lower price. They never consider exploring what it would take to keep the customer.
They also don’t see a need to invest in their relationships with current customers to make it more difficult for a competitor to take their business (and, no, the annual golf trip doesn’t count).
Companies that have this “it’s all about price” mentality are easy to compete with. I love helping my clients take their customers—not with cheaper prices, but by being a better solution.
15. Financially focused companies don’t embrace new products and programs.
Since they are so focused on avoiding failure, financially driven companies avoid the risk of trying out new products, programs or ways of doing business. If they do cave and decide to try something new, they won’t put their A team on it.
Most new products fail, so trying them out is a lot like taking your money to Vegas. I would send my best gamblers, not my less experienced players. And if the less experienced players do start to gain some success, the A players will see it as a threat to their own position and status and work hard to undermine them.
You get better at adopting and implementing new products and programs through practice and learning from failure. Companies that avoid these never have a chance to get good at it.
They also have a natural aversion to innovations that threaten their long-standing economies of scale. Heaven forbid if a new product starts to catch on and reduces the capacity utilization of their existing plants!
16. Financially focused companies create silos and kingdoms.
Companies in Stages 6 – 9 create rigid silos and Game of Thrones-type kingdoms. This is all about their preservation and advancement. Bettering the company overall or meeting customer needs has lost all importance.
17. Declining companies measure activities, not results.
Making a sales call or completing the new website on time and on budget are measurable activities, but they may or may not achieve any results. Companies that don’t see this distinction are focused on tactics rather than more effective strategies.
This obsession with financial performance is especially true with publicly traded companies and those owned by outside investors. I understand why publicly traded companies face this pressure and why it takes a very strong, confident leader to trade off one-quarter’s performance for a bigger return.
But what I don’t understand is why private investors don’t demand better performance from the companies they have invested in.
If I have described your competitor and you take a more balanced strategy, you can easily outpace your competitor. If you are slipping into stability or worse, get back to what made you successful in the first place.
When you focus on your customers, the balance sheet will take care of itself.