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Archive for January 2013

Survey of business failures at the depth of the recession

Target Management Advisory carried out a small and random survey of 14 businesses that went out of business during the depths of recession in 2010.

The results show the fatal hazard of a rapid and significant loss in revenues for whatever reason in firms that were unable to adjust their cost of sales and/or had relatively high fixed costs to variable costs.

Short-term cash flow then swiftly became a problem,  stressing the impact of a dramatic reduction of cash at bank and/or straight revenue losses. Interestingly, no one in the survey reported business as normal that was destroyed by a cash flow problem because the bank withdrew facilities due to the credit squeeze. On the contrary, it was apparent from the responses that any lack of bank facility was due to the significantly reduced trading position of the company and the likelihood it would not survive in the short or medium term.

There were also no reports that bad debts or late payments by customers caused problems and there were no significant non-financial effects contributing to business failure, other than the unhelpful fall in the value of sterling for importers.

The survey was too small and random to say anything quantitative about demise and age, size and adaptability but it does highlight the disastrous effects of short-term cash flow problems even on nominally profitable firms.

This suggests that flexibility in managing output is important and more important than attempting some ambidextrous strategic response.

If you would like to discuss these findings further or talk about the possible impact of cash flow issues on your business, call me, Stephen Herman, on 07825-189263




Darwin’s Cathedral: Evolution, Religion, and the Nature of Society

One of the great intellectual battles of modern times is between evolution and religion. Until now, they have been considered completely irreconcilable theories of origin and existence. David Sloan Wilson’s Darwin’s Cathedral takes the radical step of joining the two, in the process proposing an evolutionary theory of religion that shakes both evolutionary biology and social theory at their foundations.

The key, argues Wilson, is to think of society as an organism, an old idea that has received new life based on recent developments in evolutionary biology. If society is an organism, can we then think of morality and religion as biologically and culturally evolved adaptations that enable human groups to function as single units rather than mere collections of individuals? Wilson brings a variety of evidence to bear on this question, from both the biological and social sciences. From Calvinism in sixteenth-century Geneva to Balinese water temples, from hunter-gatherer societies to urban America, Wilson demonstrates how religions have enabled people to achieve by collective action what they never could do alone. He also includes a chapter considering forgiveness from an evolutionary perspective and concludes by discussing how all social organizations, including science, could benefit by incorporating elements of religion.

Religious believers often compare their communities to single organisms and even to insect colonies. Astoundingly, Wilson shows that they might be literally correct. Intended for any educated reader, Darwin’s Cathedral will change forever the way we view the relations among evolution, religion, and human society.

Go to:http://books.google.co.uk/books?id=nMnfISTYnC4C&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false


UK paradox of rising employment and no growth

UK employment has held up surprisingly well during a difficult economic period – why? The OECD says:

  • The tendency of the UK labour market to perform better than might be expected given weak output growth has been visible ever since the global financial crisis broke out in 2008. Nearly four years after the onset of the crisis, real GDP in the United Kingdom is still 3.1% below its value in the first quarter of 2008, but employment is back where it started. This discrepancy has led some observers to speak of a “UK paradox.”
  • One partial explanation for the decline in UK labour productivity is that the recession has led to many high-productivity jobs being lost and some of those jobs being replaced by less productive ones. Full-time employment has fallen sharply since 2008, while part-time employment and self-employment have increased modestly. However, this probably is not the full story since the United States has experienced a similar change in the composition of employment.
  • A number of supply-side factors may help to explain the UK productivity paradox. For example, declining real wages may have induced the substitution of labour for capital. Retrenchment in the financial sector may also have played a role, since output per worker was very high in this sector prior to the crisis. Indeed, most of the short fall in productivity relative to the pre-crisis trend is due to the services sector, as well as to declining yields from the North Sea oil fields.

What do you think? Have you held on to employees – or are you a ‘zombie’ company? Zombie companies are businesses that, although generating cash, are unable to attract enough investment to start paying off their debts. After covering running costs, fixed costs (wages, rates, rent) they only have enough funds left to pay off the huge interest on their debts, but not the debt itself. This is why they are called “zombie companies” – they are still trading, and so half living, but not able to invest or grow to pay off their debts, which is why they are also considered half dead.


Success is defined by the ability to adapt

Although adaptability is important for company survival, it is important to be aware that selection is a powerful and dominant force.

But the search for greater adaptability might help postpone being cut down by the scythe of selection, especially if strategy is focused away from traditional strategic thinking about building market share or scale or a competitive product niche or the ability to be a low-cost producer, and success is redefined as the ability to adapt.

A recent study by Reeves and Deimler (2011) demonstrates that market leadership is now not often correlated with profitability, with the probability of this being the case having dropped from 37 per cent in 1950 to just 7 per cent by 2007. Similarly, they report, the volatility of business operating margins, largely static since the 1950s, more than doubled by the 1980s, as did the size of the gap between winners (companies with high operating margins) and losers (those with low ones). Reeves and Deimler also say that the percentage of companies falling out of the top three rankings in their industry increased from per cent in 1960 to 14 per cent in 2008.

Instead of just being really good at doing some particular thing, companies must now also be really good at learning how to do new things and reacting fast, even to weak signals of change. This requires some sort of rapid prototyping not only of products and services but also of processes and strategies.

Mail steve@targetmanagementadvisory.co.uk to find out more.



PESTEL: political, economic, social, technological, economic, social, environmental and legal drivers

The PESTEL framework is all about giving managers an analytical tool to look at different scenarios that may affect business strategies. Its aim is to help you work out how different environmental factors might impact on your business performance now and in the future.

The PESTEL Framework covers six interdependent environmental influences.

Political factors

  • Stability of government
  • Social policies
  • Trade regulations
  • Tax policies
  • Entry mode regulations

Economic factors

  • Disposable income of buyers
  • Credit accessibility
  • Unemployment rates
  • Interest rates
  • Inflation

Social Factors

  • Population demographics
  • Distribution of Wealth
  • Changes in lifestyles and trends
  • Educational levels

Technological factors

  • New innovations and discoveries
  • Pace of technological innovations and advances
  • Pace of technological obsolescence
  • New technological platforms

Environmental factors

  • Environmental protection laws
  • Waste disposal laws
  • Energy consumption regulation
  • Popular attitude towards the environment

Legal factors

  • Employment regulations
  • Competitive regulations
  • Health and safety regulations
  • Product regulations

The process lets managers better appreciate the main drivers of change likely to influence business strategies and to consider what is most likely to have an impact on overall performance.

Call Steve Herman on 07825-189263 if you would like to explore a PESTEL analysis of your business.



Approaching potential buyers

Approach potential buyers

Most sellers prefer to approach potential buyers through their adviser to help maintain confidentiality. Knowing that the business is for sale could upset your customers and employees. Competitors may also try to use the sale to find out your trade secrets.

Using your adviser also leaves you free to concentrate on running the business. Remember that the time taken up making initial contact with and providing further information to buyers can be significant.

The adviser starts by writing to or calling potential interested parties to assess their interest. After their interest has been assessed, the adviser sends a sales memorandum or summary brief to a shortlist of potential buyers. Before giving them any more information, the adviser assesses how serious they are. Your adviser may try to keep your identity secret in the early stages.

Prospective buyers are usually asked to sign a non-disclosure agreement (sometimes referred to as a confidentiality undertaking). They agree not to use or pass on any information they find out about your business.

Once buyers are seriously interested, they usually want to meet to ask more questions. Your adviser may sometimes ask them to make an opening or indicative offer before they meet you.

After this, you become involved in more detailed negotiations. For more information on selling your business, call us on 07825-189263.


Common methods of valuing a business

Common methods of valuing a business

There’s a range of ways to value a business. Valuations based on multiples of future earnings and the capitalisation of future cashflows are the most common. There are a number of common valuation methods:

  • Businesses with a record of sustainable profits are often valued at a multiple of earnings. Profits are adjusted for any unusual, one-off items to arrive at an estimate of ‘normalised’ earnings. Smaller businesses are usually valued at a lower multiple than similar, larger companies.
  • Mature, cash-generating businesses can be valued in a similar way but based on cashflow. Future cashflows are estimated and discounted – this is known as discounted cashflow. Long-term cashflow is worth less than cashflow due shortly.
  • An asset valuation might be appropriate for stable businesses with significant tangible assets – property or manufacturing businesses, for example. Your starting point is the value of assets stated in the accounts – known as the ‘net book value’. These figures are then refined to reflect factors such as changes in the value of assets or bad debts.
  • The cost of creating a business similar to yours can be used as a basis for valuation. Costs could include buying equipment, employing staff, developing products, attracting customers, and so on. It may be possible to estimate this ‘entry cost‘ as a benchmark of your business’ value. Of course, if the cost of entry is low there’s little likelihood of you achieving a successful sale.
  • In some industries, there are established criteria for valuing businesses, eg by the number of branches an estate agency has.

A potential buyer may use more than one method to get a range of values for your business. In the end, however, any price will be a matter for negotiation.


The Ambidextrous Organization

The Ambidextrous Organization


The Roman god Janus had two sets of eyes—one pair focusing on what lay behind, the other on what lay ahead. General managers and corporate executives should be able to relate. They, too, must constantly look backward, attending to the products and processes of the past, while also gazing forward, preparing for the innovations that will define the future.

This mental balancing act can be one of the toughest of all managerial challenges—it requires executives to explore new opportunities even as they work diligently to exploit existing capabilities—and it’s no surprise that few companies do it well. Most successful enterprises are adept at refining their current offerings, but they falter when it comes to pioneering radically new products and services. Kodak and Boeing are just two of the more recent examples of once dominant companies that failed to adapt to market changes. Kodak excelled at analog photography but hasn’t been able to make the leap to digital cameras. Boeing, a longtime leader in commercial aircraft, has experienced difficulties in its defense-contracting businesses and has recently stumbled in the face of competition from Airbus.

The failure to achieve breakthrough innovations while also making steady improvements to an existing business is so commonplace—and so fascinating—that it has become a battleground of management thought. For decades, scholars have spun theories to explain the puzzle and offered advice on how to solve it. Some have argued that there’s no way out of the conundrum—that established companies simply lack the flexibility to explore new territory. Some have suggested that big companies adopt a venture capital model, funding exploratory expeditions but otherwise staying out of their way. Others have pointed to cross-functional teams as the key to creating breakthrough innovations. Still others have claimed that a company may be able to shift back and forth between different organizational models, focusing on exploitation for a period and then moving into exploration mode.

We recently decided to test these and other theories by taking a close look at the real world, examining how actual, contemporary businesses fare when they attempt to pursue innovations that lie beyond their current products or markets. Do they succeed in achieving breakthroughs? Do their existing businesses suffer? What organizational and managerial structures do they use? What works, and what doesn’t?

We discovered that some companies have actually been quite successful at both exploiting the present and exploring the future, and as we looked more deeply at them we found that they share important characteristics. In particular, they separate their new, exploratory units from their traditional, exploitative ones, allowing for different processes, structures, and cultures; at the same time, they maintain tight links across units at the senior executive level. In other words, they manage organizational separation through a tightly integrated senior team. We call these kinds of companies “ambidextrous organizations,” and we believe they provide a practical and proven model for forward-looking executives seeking to pioneer radical or disruptive innovations while pursuing incremental gains. A business does not have to escape its past, these cases show, to renew itself for the future.

Exploiting and Exploring

To flourish over the long run, most companies need to maintain a variety of innovation efforts. They must constantly pursue incremental innovations, small improvements in their existing products and operations that let them operate more efficiently and deliver ever greater value to customers. An automaker, for example, may frequently tweak a basic engine design to increase horsepower, enhance fuel efficiency, or improve reliability. Companies also have to make architectural innovations, applying technological or process advances to fundamentally change some component or element of their business. Capitalizing on the data communication capabilities of the Internet, for instance, a bank can perhaps shift its customer-service call center to a low-labor-cost country like India. Finally, businesses need to come up with discontinuous innovations—radical advances like digital photography that profoundly alter the basis for competition in an industry, often rendering old products or ways of working obsolete.


The Banker and the Frog

The Banker and the Frog

A banker was walking in the park one day when she noticed a large frog sitting along the side of the pond.

As she was walking by, the frog suddenly piped up and said, “Excuse me…but…ummm… would you happen to be a banker?”

The banker responded, “Why yes, I am a banker. Why do you ask?”

“Well,” says the frog, “I was a forecasting economist, and my forecasts didn’t turn out so well. The CEO I worked for put a spell on me and turned me into a frog. The spell can be broken if a banker will kiss me. Then I can return to being a forecasting economist.”

The banker paused for a moment, then reached out, picked up the frog, put him in her purse, and began walking along.

After a few minutes the frog piped up, “Hey, what are you doing? If you will just give me a kiss I can walk along on my own and you won’t have to carry me.”

The banker stopped, looked down at the frog, and said “True… but you’re worth a lot more to me as a talking frog than as a forecasting economist.”