The True Measures of Success

About a dozen years ago, when I was working for a large financial services firm, one of the senior executives asked me to take on a project to better understand the company’s profitability. I was in the equity division, which generated fees and commissions by catering to investment managers and sought to maximize revenues by providing high-quality research, responsive trading, and coveted initial public offerings. While we had hundreds of clients, one mutual fund company was our largest. We shuttled our researchers to visit with its analysts and portfolio managers, dedicated capital to ensure that its trades were executed smoothly, and recognized its importance in the allocation of IPOs. We were committed to keeping the 800-pound gorilla happy.

 

Part of my charge was to understand the division’s profitability by customer. So we estimated the cost we incurred servicing each major client. The results were striking and counterintuitive: Our largest customer was among our least profitable. Indeed, customers in the middle of the pack, which didn’t demand substantial resources, were more profitable than the giant we fawned over.
 
What happened? We made a mistake that’s exceedingly common in business: We measured the wrong thing. The statistic we relied on to assess our performance—revenues—was disconnected from our overall objective of profitability. As a result, our strategic and resource allocation decisions didn’t support that goal. This article will reveal how this mistake permeates businesses—probably even yours—driving poor decisions and undermining performance. And it will show you how to choose the best statistics for your business goals.
 
Ignoring Moneyball’s Message Moneyball, the best seller by Michael Lewis, describes how the Oakland Athletics used carefully chosen statistics to build a winning baseball team on the cheap. The book was published nearly a decade ago, and its business implications have been thoroughly dissected. Still, the key lesson hasn’t sunk in. Businesses continue to use the wrong statistics.
 
Before the A’s adopted the methods Lewis describes, the team relied on the opinion of talent scouts, who assessed players primarily by looking at their ability to run, throw, field, hit, and hit with power. Most scouts had been around the game nearly all their lives and had developed an intuitive sense of a player’s potential and of which statistics mattered most. But their measures and intuition often failed to single out players who were effective but didn’t look the role. Looks might have nothing to do with the statistics that are actually important: those that reliably predict performance.
 
Baseball managers used to focus on a basic number—team batting average—when they talked about scoring runs. But after doing a proper statistical analysis, the A’s front office recognized that a player’s ability to get on base was a much better predictor of how many runs he would score.

Moreover, on-base percentage was underpriced relative to other abilities in the market for talent. So the A’s looked for players with high on-base percentages, paid less attention to batting averages, and discounted their gut sense. This allowed the team to recruit winning players without breaking the bank.
 
Many business executives seeking to create shareholder value also rely on intuition in selecting statistics. The metrics companies use most often to measure, manage, and communicate results—often called key performance indicators—include financial measures such as sales growth and earnings per share (EPS) growth in addition to nonfinancial measures such as loyalty and product quality. Yet, as we’ll see, these have only a loose connection to the objective of creating value. Most executives continue to lean heavily on poorly chosen statistics, the equivalent of using batting averages to predict runs. Like leather-skinned baseball scouts, they have a gut sense of what metrics are most relevant to their businesses, but they don’t realize that their intuition may be flawed and their decision making may be skewed by cognitive biases. Through my work, teaching, and research on these biases, I have identified three that seem particularly relevant in this context: the overconfidence bias, the availability heuristic, and the status quo bias.
 
Overconfidence. People’s deep confidence in their judgments and abilities is often at odds with reality. Most people, for example, regard themselves as better-than-average drivers. The tendency toward overconfidence readily extends to business. Consider this case from Stanford professors David Larcker and Brian Tayan: The managers of a fast-food chain, recognizing that customer satisfaction was important to profitability, believed that low employee turnover would keep customers happy. “We just know this is the key driver,” one executive explained. Confident in their intuition, the executives focused on reducing turnover as a way to improve customer satisfaction and, presumably, profitability. 

Michael J. Mauboussin is the chief investment strategist at Legg Mason Capital Management and an adjunct professor of finance at Columbia Business School. He is the author of The Success Equation (Harvard Business Review Press, forthcoming), from which this article was developed.

What This Female CEO Learned About Gender Bias After Pitching 200 VCs

BY Erika Trautman

There’s no denying that female CEOs are still a rarity. We account for only about seven percent of CEOs in the start-up world. Female VCs are equally scarce, which means a female CEO is usually pitching to a male investor who is used to hearing pitches from other men.

So if the guys create the benchmark for a successful venture pitch, which they do by shear volume alone, what does that mean for how women are perceived by venture capitalists? Does that affect the fundraising process?

Many of the male CEOs I know pitch their startups with a “Billion Dollars or Bust” story and the successful ones are masterful storytellers.

I remember being amazed at the ease with which one CEO painted a picture of the massive value that his company would create. He peppered his story with just enough metrics to pre-emptively neutralize any doubts that might arise. He made his vision seem inevitable.

But listening closely, trying to hook into the tangibles that would make his vision come true, I found that those tangibles weren’t really there. They couldn’t be. The reality is that startups must navigate so many unknowns. It’s impossible to map out the route from seed to IPO. That mapping has to happen on the road.

And yet, that storytelling ability is critical in raising capital.

I think there’s an inherent challenge for women telling the “Billion Dollars or Bust” story, or at least there was for me.

Don’t get me wrong. I want nothing less than to reinvent online video to make it richly interactive. And I want Rapt Media to lead that billion-dollar expedition.

But the process of building a company is iterative and I focus on the next set of milestones and the next risks to be mitigated. If the guys are great at describing the view from the top of the mountain, then I’m the one focused on putting one foot in front of the other to get to the next ridge.

This is not uncommon for female CEOs. Mauria Finley, CEO and founder of Citrus Lane, has written about lessons-learned in fundraising. She says that too often, women “pitch based on their skills and competence, and they undersell their vision.”

So should female CEOs adapt to a more masculine style of pitching? I don’t think so. There is still subtle gender bias when it comes to how women are perceived that might actually make the Billion-Dollar story ineffective.

I first understood this from one of Rapt Media’s investors, Adam Quinton, who is an active early-stage investor and a professor at Columbia’s Graduate School of International and Public Affairs.

“When it comes to leadership behaviors,” says Quinton, “there is plenty of evidence that women suffer the double-bind, a sort of damned-if-you-do, damned-if-you-don’t scenario.” Because typical male behaviors are more commonly associated with leadership, women are often perceived as great team players, but not leaders. And yet taking on male leadership traits is often actually counter-productive," says Quinton.

“Women who step outside of the recognized feminine behavior patterns are typically tagged by both men and women as unlikable,” he says. “You’re really only going to be successful if you are authentic. People need to see you for what you are. You can flex things at the margins, but you can’t make yourself into a macho bullshitting guy if you aren’t one!”

Rapt Media has raised $3 million and in that time, I’ve probably given more than 200 pitches. I’ve tried pitching big vision. I’ve tried pitching demonstrated progress over time.
Ultimately, building relationships with investors who I like and respect, and who understand me as a leader worked best. This relationship building is a slower method for closing capital, but over the long run, it’s better for the company and our investors.

The good news is that, according to PitchBook, the number of venture deals going to female-lead companies has more than tripled, from four percent to 13 percent since 2004. This may be driven, in part, by the growing body of research that has shown companies with gender-diverse executive teams outperform those that are homogenous.

I think this will become a virtuous cycle. The more women that found and lead good companies, the more open VCs will be to different leadership styles, and that benchmark for what a successful pitch should look like will shift to include approaches that may be less stereotypically male.

But until we have more female CEOs, just remember: Be authentic. But be sensitive to what your audience wants to hear. Know that women founders do get funded. And recognize that fundraising is hard no matter who you are because ultimately, shrewd tenacity may be even more important than selling the dream.

Erika Trautman

Erika Trautman founded Rapt Media, a Boulder, Colo.-based creative platform for interactive enterprise video. Before Rapt Media, she founded and ran an Emmy Award Winning Production company, Outlier Films, and worked as a documentary filmmaker.

Leadership Lessons from Young Female Entrepreneurs

Andi Atteberry, founder of blingsting

Image credit: morningcupofstyle.com

 

Watch out world, there is a new breed of entrepreneur.

Millennial female entrepreneurs are disrupting industries, creating innovative products and ultimately, changing the world. The thing that I admire most about my fellow female entrepreneurs is that they are really doing it by their own rules. In the past, women have felt like they have to embody masculine characteristics to be successful. This isn't the case anymore.

Instead, lady entrepreneurs of Gen Y are embracing who they are, and aren't apologizing for it. There are a lot of leadership lessons to be learned from these 20-something-year-old business owners. Here are a few of the most important: 

Humanize your business. The why in business is just as important as the what. Especially with social media, the story and reasoning behind your business decisions are important to not only your customers, but your employees too. The extra explanation creates a culture of loyalty.

"Not being straightforward is a huge mistake," said Andi Atteberry, founder of blingsting. "Any time I have worked for a boss who has been vague about issues that affected me personally, it has created a lot of resentment and instantly jeopardizes trust." 

Embrace your inexperience. Ignorance is bliss. Zoe Barry, founder and CEO of ZappRx, a healthcare startup that gives consumers more control over the prescription process, was able to raise $1 million in funding with no real track record.

"I actually didn't know how hard it was going to be to raise the initial capital, and I went 18 months without salary or any guarantees," she said. "Not realizing the size of the challenge in front of me, I just assumed I could do it. I relied on my intuition and persistence and bet on myself over my track record."

Being new to an industry gives you the advantage of a fresh perspective; you can sometimes see the flaws that others can't because they have been stuck in the status quo for too long. That being said, female Gen Y entrepreneurs usually understand that they don't know it all either. To be successful, they have to ask for help, and bring in experts when needed. 

Be yourself. Being an entrepreneur is hard work; getting a business off the ground is a long, torturous process. You might as well enjoy the journey by having fun and being authentic. It is a lot less work if you start a business that embodies your personality and things that you are passionate about.

Blingsting's line of bedazzled pepper spray is not only sold in more than 250 small boutiques, the products are also sold in larger stores, such as Cabela's, Bass Pro Shops, Ace Hardware, Peninsula Beauty and Bealls. The success of the brand has proven that business shouldn't be so serious.

"We have a product that girls love, we are making good business decisions, and we are getting it out there," blingsting's Atteberry said. "And I personally believe that there is no one better suited to run a sparkly pepper spray company than a petite blonde who uses the words 'seriously' and 'totally' probably way too much."

Try having fun with it! If you don't, chances are you will be a miserable business owner.

Own your success. Women are notorious for not taking ownership of their success. This new generation of entrepreneurs is working hard, and they aren't afraid of their accomplishments.

"Women sometimes feel that they don't deserve success and are apologetic about it," said Sheena Sujan, founder and creative director of her self-titled line of luxury leather handbags with an impressive celebrity following. "Women should never apologize for being successful! We should be confident about our success and not chock it up to luck."

As an entrepreneur, you are your biggest cheerleader, so you must be confident and proud of your success. This attitude will be infectious, and continue to propel you forward.

The author is an Entrepreneur contributor. The opinions expressed are those of the writer.

Rebekah Epstein

Rebekah Epstein is the founder of fifteen media, an agency that works exclusively with PR firms to streamline media relations in a digital era. She specializes in business, lifestyle, fashion and beauty.

Using 'remarkable' source of data, startup builds rich customer profiles

Ivor Tossell

If there’s one thing that retailers want, other than the sound of ringing tills, it’s information about their customers: Where do they come from? What do they do? And how can we better encourage them to exchange cash for goods?

This has spawned all manner of labour-intensive efforts over the years, from customer surveys to cashiers who earnestly solicit your postal code at the Old Navy checkout to Air Miles or Optimum customer loyalty programs that diligently catalogue your purchases.

But what if there was a way to generate customer profiles without interacting with the customers at all?

RetailGenius, a product from a Toronto startup called Viasense, promises to algorithmically generate customer profiles based on a remarkable source of data: Anonymous location data that’s collected by big mobile carriers, from the passive pings that every single cellphone sends out as it goes through the day.

The data that RetailGenius uses is anonymized – it doesn’t have any way of knowing whose cellphone belongs to who; it simply has a gigantic plot of where thousands of cellphones were at any given time.

“We create a unique identifier between those signals, and we can see those signals move throughout the city,” says Mossab Basir, RetailGenius’ founder. “We can see those changes in your location but we never really know who it is.”

What the product does next is intriguing: Based on some 50 million pieces of location data a day, RetailGenius crunches the numbers to make inferences from where each cellphone spends its time, and generates customer profiles by the thousands.

For instance, if a given cellphone spends the hours between 7 p.m. and 6 a.m. in a single area, it’s a good bet that its owner lives there. If that cellphone spends its working hours downtown five days a week, its owner is probably a daily commuter. And if it visits a given retail store once a week, a picture of its owner’s habits living and shopping habits starts to emerge.

By lumping these inferred profiles together, RetailGenius can give retailers a picture of who walks through their doors. For instance: What are the top 50 postal codes that are represented in their customers? What kind of volumes of customers are arriving at the store? How long do they stay?

Of course, the key to this product is getting the data in the first place. Every cellphone stays in touch with the cell towers around it, even when you’re not using it – that’s how it always has a signal ready to use when you wake it up. These towers are arranged in a grid pattern that resembles cells (thus, cell-phones) and they’re always paying attention to how strong your signal strength is.

When your phone starts leaving the range of one cell tower, your call (or data) gets cleverly handed-off to the next-best tower. By triangulating these signals and factoring in signal strength, cellphone carriers can get a reasonable idea of where your phone is, even without features like GPS.

Basir says Viasense gets its data from social networks as well as major carriers, who are cautiously entering the “bulk data” marketplace, selling anonymized data for analysis. You’ll be hard-pressed to find reference to this on cell carrier websites; however, a Rogers spokesperson confirmed that the company has “a small number of customers who use aggregate, anonymous locator information to predict traffic patterns.”

Basir, who started his career in corporate branding before moving into startups and technology-focused marketing, says Viasense has raised a half-million dollars in angel funding. The 50 million location events a day his firm is processing – covering much of the GTA, at present – is just the start, he says. “The amount of data that’s out there from a big data perspective – that’s what really excites us.”

'Polished, Poised, Prepared': Confidence Tips from Women Entrepreneurs

Image credit: heidinazarudin.com

When you are a business owner, it doesn't matter how much funding you have, where your college degrees are from or whom you network with if you are not confident about your ideas.

At the end of the day, if you don't have faith in yourself and your business, you will most likely fail. Despite constant rejection and doubt, successful entrepreneurs are always able to find confidence from within. If you don't have unwavering faith in your idea, no one else will either.

As a fellow business owner, I understand that it can be challenging to silence the self doubt, especially when you are faced with a big decision or are constantly barraged by naysayers.

My fellow young female entrepreneurs always inspire me with their uncanny amount of determination and fearlessness. They aren't going to let anyone get in the way of their dreams. Here are some things we can learn from these ladies about finding your confidence:

Admit what you don't know. If you are aware of the things you don't know, then you have a lot more faith in what you do know. Part of owning your own business is being able to hire people to compensate for your weaknesses. No one expects you to be good at everything. If you have a good team, where everyone excels at a certain skill, you will gain more confidence that your ideas will be executed properly. 

Do your research. When going into meetings with potential investors, clients or customers, make sure you really know what you are talking about. You have to know the ins and outs of your industry.

Melissa Thompson, CEO and founder of TalkSession, shares how she finds her confidence before a big meeting with investors: "I spend a lot of time studying the market. I make sure to stay educated about the legal part of the equation as well as the practice and business portions. [Since I am not a doctor], I compensate by subscribing to medical journals, actually reading them, and engaging in conversations with industry specialists."

Heidi Nazarudin, blogger at The Successful Style and president of Blogger Babes, said, "My confidence is a mixture of style and substance. Knowing that I look amazing and that I have done my homework for the task at hand is a great confidence booster -- in other words, polished, poised, prepared."

Don't pay attention to any disadvantages. One of the first questions that I always ask Gen-Y female entrepreneurs is if they feel that being a woman is a disadvantage. Everyone I have spoken with so far has said "no."

Andi Atteberry, founder of blingsting, writes, "I don't put any energy into wondering if I have different challenges than any other leader or business owner because I am female. I think at the end of the day, if you are good at what you do, that's all that matters."

Just because they don't like your business, doesn't mean they don't like you. For entrepreneurs, the line between personal and professional is blurred. When someone rejects your business idea, it can feel like a personal attack because of all the time and energy you invest. Shop-Hers' founder, Jaclyn Shanfeld, explains how she gets over rejection and maintains her confidence: "I have thick skin and I'm able to separate myself from the opinion of others. I'm humble and passionate about what I do. A 'no' can't take that away."

Realize from the beginning that there is more to you than just your business. This way being rejected won't feel so harsh, and you can bounce back faster.

The author is an Entrepreneur contributor. The opinions expressed are those of the writer.

Rebekah Epstein

Rebekah Epstein is the founder of fifteen media, an agency that works exclusively with PR firms to streamline media relations in a digital era. She specializes in business, lifestyle, fashion and beauty.

Strategic Leadership: The Essential Skills

by Paul J.H. Schoemaker, Steve Krupp, and Samantha Howland

 
The storied British banker and financier Nathan Rothschild noted that great fortunes are made when cannonballs fall in the harbor, not when violins play in the ballroom. Rothschild understood that the more unpredictable the environment, the greater the opportunity—if you have the leadership skills to capitalize on it. Through research at the Wharton School and at our consulting firm involving more than 20,000 executives to date, we have identified six skills that, when mastered and used in concert, allow leaders to think strategically and navigate the unknown effectively: the abilities to anticipate, challenge, interpret, decide, align, and learn. Each has received attention in the leadership literature, but usually in isolation and seldom in the special context of high stakes and deep uncertainty that can make or break both companies and careers. This article describes the six skills in detail. An adaptive strategic leader—someone who is both resolute and flexible, persistent in the face of setbacks but also able to react strategically to environmental shifts—has learned to apply all six at once.
 
Do you have the right networks to help you see opportunities before competitors do? Are you comfortable challenging your own and others’ assumptions? Can you get a diverse group to buy in to a common vision? Do you learn from mistakes? By answering questions like these, you’ll get a clear view of your abilities in each area. The self-test at this article’s end (and the more detailed test available at hbrsurvey.decisionstrat.com) will help you gauge your strengths and weaknesses, address deficits, and optimize your full portfolio of leadership skills.
 
Let’s look at each skill in turn.
 
Anticipate Most organizations and leaders are poor at detecting ambiguous threats and opportunities on the periphery of their business. Coors executives, famously, were late seeing the trend toward low-carb beers. Lego management missed the electronic revolution in toys and gaming. Strategic leaders, in contrast, are constantly vigilant, honing their ability to anticipate by scanning the environment for signals of change.
 
We worked with a CEO named Mike who had built his reputation as a turnaround wizard in heavy manufacturing businesses. He was terrific at reacting to crises and fixing them. After he’d worked his magic in one particular crisis, Mike’s company enjoyed a bump in growth, fueled in part by an up cycle. But after the cycle had peaked, demand abruptly softened, catching Mike off guard. More of the same in a down market wasn’t going to work. Mike needed to consider various scenarios and gather better information from diverse sources in order to anticipate where his industry was headed.
 
We showed Mike and his team members how to pick up weak signals from both inside and outside the organization. They worked to develop broader networks and to take the perspective of customers, competitors, and partners. More alert to opportunities outside the core business, Mike and the team diversified their product portfolio and acquired a company in an adjacent market where demand was higher and less susceptible to boom-and-bust cycles.
 
To improve your ability to anticipate:
Talk to your customers, suppliers, and other partners to understand their challenges. 

Paul J.H. Schoemaker is the founder and executive chairman of Decision Strategies International (DSI) and the research director of the Mack Center for Technological Innovation at the Wharton School. Steve Krupp is the CEO of DSI. Samantha Howland, a senior managing partner at DSI, leads its Executive and Leadership Development Practice.

How Great Companies Think Differently

Artwork: Sarah Morris, Midtown—HBO/Grace, 1999, Gloss household paint on canvas, 213.4 × 213.4 cm

It’s time that beliefs and theories about business catch up with the way great companies operate and how they see their role in the world today. Traditionally, economists and financiers have argued that the sole purpose of business is to make money—the more the better. That conveniently narrow image, deeply embedded in the American capitalist system, molds the actions of most corporations, constraining them to focus on maximizing short-term profits and delivering returns to shareholders. Their decisions are expressed in financial terms.
 
I say convenient because this lopsided logic forces companies to blank out the fact that they command enormous resources that influence the world for better or worse and that their strategies shape the lives of the employees, partners, and consumers on whom they depend. Above all, the traditional view of business doesn’t capture the way great companies think their way to success. Those firms believe that business is an intrinsic part of society, and they acknowledge that, like family, government, and religion, it has been one of society’s pillars since the dawn of the industrial era. Great companies work to make money, of course, but in their choices of how to do so, they think about building enduring institutions. They invest in the future while being aware of the need to build people and society.
 
In this article, I turn the spotlight on this very different logic—a social or institutional logic—which lies behind the practices of many widely admired, high-performing, and enduring companies. In those firms, society and people are not afterthoughts or inputs to be used and discarded but are core to their purpose. My continuing field research on admired and financially successful companies in more than 20 countries on four continents is the basis for my thinking about the role of institutional logic in business.
 
Institutional logic holds that companies are more than instruments for generating money; they are also vehicles for accomplishing societal purposes and for providing meaningful livelihoods for those who work in them. According to this school of thought, the value that a company creates should be measured not just in terms of short-term profits or paychecks but also in terms of how it sustains the conditions that allow it to flourish over time. These corporate leaders deliver more than just financial returns; they also build enduring institutions.
 
Rather than viewing organizational processes as ways of extracting more economic value, great companies create frameworks that use societal value and human values as decision-making criteria. They believe that corporations have a purpose and meet stakeholders’ needs in many ways: by producing goods and services that improve the lives of users; by providing jobs and enhancing workers’ quality of life; by developing a strong network of suppliers and business partners; and by ensuring financial viability, which provides resources for improvements, innovations, and returns to investors.
 
In developing an institutional perspective, corporate leaders internalize what economists have usually regarded as externalities and define a firm around its purpose and values. They undertake actions that produce societal value—whether or not those actions are tied to the core functions of making and selling goods and services. Whereas the aim of financial logic is to maximize the returns on capital, be it shareholder or owner value, the thrust of institutional logic is to balance public interest with financial returns.
 
Institutional logic should be aligned with economic logic but need not be subordinate to it. For example, all companies require capital to carry out business activities and sustain themselves. However, at great companies profit is not the sole end; rather, it is a way of ensuring that returns will continue. The institutional view of the firm is thus no more idealized than is the profit-maximizing view. Well-­established practices, such as R&D and marketing, cannot be tied to profits in the short or long runs, yet analysts applaud them. If companies are to serve a purpose beyond their business portfolios, CEOs must expand their investments to include employee empowerment, emotional engagement, values-based leadership, and related societal contributions.
 
Business history provides numerous examples of industrialists who developed enduring corporations that also created social institutions. The Houghton family established Corning Glass and the town of Corning, New York, for instance. The Tata family established one of India’s leading conglomerates and the steel city of Jamshedpur, Jharkhand. That style of corporate responsibility for society fell out of fashion as economic logic and shareholder capitalism came to dominate assumptions about business and corporations became detached from particular places. In today’s global world, however, companies must think differently. 

Rosabeth Moss Kanter is the Ernest L. Arbuckle Professor of Business Administration at Harvard Business School and the chair and director of Harvard University’s Advanced Leadership Initiative. Her most recent book is SuperCorp: How Vanguard Companies Create Innovation, Profits, Growth, and Social Good (Crown, 2009).

Three Rules for Making a Company Truly Great

by Michael E. Raynor and Mumtaz Ahmed 

 

Much of the strategy and management advice that business leaders turn to is unreliable or impractical. That’s because those who would guide us underestimate the power of chance. Gurus draw pointed lessons from companies whose outstanding results may be nothing more than random fluctuations. Executives speak proudly of corporate achievements that may be only lucky coincidences. Unfortunately, almost no one provides scientifically credible answers to every business leader’s basic questions about superior performance: Which companies are worth studying? What sets them apart? How can we follow their examples?

 

Frustrated by the lack of rigorous research, we undertook a statistical study of thousands of companies, and eventually identified several hundred among them that have done well enough for a long enough period of time to qualify as truly exceptional. Then we discovered something startling: The many and diverse choices that made certain companies great were consistent with just three seemingly elementary rules:
 
1. Better before cheaper—in other words, compete on differentiators other than price.
 
2. Revenue before cost—that is, prioritize increasing revenue over reducing costs.
 
3. There are no other rules—so change anything you must to follow Rules 1 and 2.
 
The rules don’t dictate specific behaviors; nor are they even general strategies. They’re foundational concepts on which companies have built greatness over many years. How did these organizations’ leaders come to adopt them? We have no idea—nor do we know whether the executives even followed them consciously. Nevertheless, the rules can be used to help today’s and tomorrow’s leaders increase the chances that their companies, too, will deliver decades of exceptional performance.
 
Beyond Truisms The impetus for our research was the increasing popularity over the past 30 years of “success study” business books and articles. Perhaps the most famous of these are Thomas Peters and Robert Waterman’s In Search of Excellence (1982) and Jim Collins’s Good to Great (2001), but there are many others. The problem with them is they don’t give us any way to judge whether the companies they hold up as examples are indeed exceptional. Randomness can crown an average company king for a year, two years, even a decade, before performance reverts to the mean. If we can’t be sure that the performance of companies mentioned in success studies was caused by more than just luck, we can’t know whether to imitate their behaviors.
 
We tackled the randomness problem head-on. Finding what we assumed would be weak signals in noisy environments required a lot of data, so we began with the largest database we could find—the more than 25,000 companies that have traded on U.S. exchanges at any time from 1966 to 2010. We measured performance using return on assets (ROA), a metric that reflects strong, stable performance—unlike, say, total shareholder return, which may reflect the vagaries of the stock market and changes in investor expectations rather than fundamental company performance. We defined two categories of superior results: Miracle Workers fell in the top 10% of ROA for all 25,000 companies often enough that their performance was highly unlikely to have been a fluke; Long Runners fell in the top 20% to 40% and, again, did so consistently enough that luck was highly unlikely to have been the reason. We call the companies in both these categories exceptional performers. For comparison purposes, we also identified companies that were Average Joes. (See the sidebar “Finding the Signal in the Noise.”) 

Michael E. Raynor is a director at Deloitte Services LP, and Mumtaz Ahmed is a principal with Deloitte Consulting LLP and the chief strategy officer for Deloitte LLP. They are the authors of The Three Rules: How Exceptional Companies Think, forthcoming from Portfolio.

The right way to sell a family business

JACOLINE LOEWEN

Contributed to The Globe and Mail

Ms. McNally says her father and uncle decided to bring in an outside adviser and embrace the creation of a family forum to plan for succession. One of the tools introduced was a “three circle” decision-making model that directed three questions: Is this a decision for the family? Is it for the shareholder? Or is it a challenge for management? Each circle involved different stakeholders, which added complexity to the process, but it worked.

Even though the third-generation family employees were not shareholders, it was decided that it would be sensible to include them in ownership transition discussions because they held important positions in the company. As Ms. McNally’s father and uncle started to step back from day-to-day operations, they needed a plan to do it in an orderly way. Ms. McNally played a key role as change agent working closely with other senior managers.

Many owners underestimate the effort needed to prepare a company for ownership succession and the scrutiny of a buyer. They often think a fresh coat of paint is all it takes or that the business will sell itself. “However, this may not get you the best price or the right buyer,” Ms. McNally says.

Based on first-hand experience, the McNally story shows that a team effort is required to prepare a business for sale. Here are key actions to think about:

The classic chestnut – strategy
Regardless of timing, a business will be more attractive to a buyer if there is a defined strategy. Not only did McNally’s senior management understand the segments of the market that were most attractive, they developed a plan to capitalize on these opportunities and they had a proven track record that demonstrated credibility to buyers.

Figure out what drives profitability
Management realized that as the company grew it needed to focus on its systems and processes and bring them to a higher standard. This required them to extract information from Ms. McNally’s father and uncle and to institutionalize their knowledge into procedures and training that would be in place when they were ready to step away.

Hire your experts early
The shareholders wanted all of their advisers – lawyers, tax planners, family succession and investment bankers – to work as a cohesive team. This required all parties to have an understanding of each other’s roles and required effective communication within the team. The advisers were brought in early and they were given ample time to meet management, assess the go-forward leadership team, and become intimately familiar with the business and where it was headed so they could address the key questions that buyers would no doubt have.

“Selling a business and planning for succession is emotional,” Ms. McNally says. “It creates not only work stress, but family stress as well. That’s when you need to lean on your advisers.”

By 2010, the family forum moved into the final stage. All the preparation by management and advisers provided the family and shareholders with the ability to set realistic expectations regarding value and business fit in the event of a sale.

Ms. McNally and her husband Colin Brown now run a consulting practice called McNally Brown Group, which specializes in preparing family businesses for a sale.

Jacoline Loewen is a director at Crosbie, which focuses on succession advice for family businesses and closely held small to medium-sized enterprises. Crosbie develops customized strategies, particularly in relation to M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. 

Are Your Employees Connected To A Common Good?

They should be. A new study reveals the value in unifying around goodness.

What do you think your employees really have in common?

If you're honest with yourself, the answer is likely that it’s not much beyond an interest in your company. That shouldn't come as a surprise since employees come from all walks of life. It's important to have diverse thinking and interests, but shared values and a common purpose are also a must to foster a cohesive community of people within the walls of an organization. Walk from the finance department to the marketing department, from sourcing to engineering and more, and you'll see the differences that exist. Even within a small company, departments can divide the whole if not anchored in the organization’s common purpose and operating values.

As a result of globalization, many companies have employees located in different cities, states, and even countries, allowing cultural differences to be magnified. Even as remote workspaces and mobile technologies allow for more physical separation, society as a whole is searching for ways to create unity around common and shared passions. A study released in 2013 shows that 37% of consumers and employees want to feel the unity that stems from local causes, 35% want to feel it nationally, and 28% globally. Humanity has a shared desire to unite our communities, our countries, and the people inside of companies.

Common good makes for good business.
Companies with a social conscience that act, innovate, and mobilize around social needs are no longer unique revolutionaries--they are part of the new normal. When executed well, the power of engaging employees in and around a common cause that's connected to the core business is a very powerful force for good for both the business and the world at large. We work alongside major corporations, social entrepreneurs, and nonprofits, and there is absolutely no shortage of inventive approaches to engaging in the common good. Ingenuity that connects the resources of a corporation to solutions that deliver an impact are plentiful, but at times we see corporations struggle around ways to clearly articulate a strategy that makes sense to stakeholders and key players.

Common good gives profits a greater purpose.
As part of our strategic work, I recently met the founders of Profits4Purpose, a technology business that helps companies create a united and simple giving platform. Their solution is built on the belief that there is power in connecting relationships and sharing experiences, and by empowering individuals through their platform, they help companies increase their social impact on the world. Profits4Purpose started their business to accelerate and simplify the process for businesses that want to engage their employees in social good.

Profits4Purpose uses a "match.com" model in which they connect employee interests with needs and opportunities in communities. They also empower employees to create personal-interest groups that others can join. The platform enables companies to create a customized workplace giving destination, providing employees with personalized giving schedules (and personalized trust funds). They also provide tools that match employee interests and skills with local nonprofits and streamline all grant, sponsorship, and donation requests. Users receive access to a dashboard with thousands of volunteer opportunities, the ability to create personal giving foundations, and activity walls displaying the impact being made in real time--all delivered with a simple approach to creating relational and innovative common wealth.

Recently, Staples partnered with Profits4Purpose to offer their employees a voice as to where corporate donations are shared. Through their platform, Staples employees see their impact on a local and global level. In a company that is 100,000 strong, the unified voice rings loudly. 

Mobilize your employees for the common good.
If you look at the world of business today, it seems that most organizations fall into one of the following groups: those that have seamlessly connected their business to a common good and a dedicated cause, such as Warby Parker, FEED, Toms Shoes, and Krochet Kids. And companies like Target, Whole Foods, and Southwest Airlines that have a foundation or a focus on social good that is directly linked back to the communities they serve. Then there are other companies that are actively giving back and helping to make a difference in the world--but are not inventive in how they connect their common good to their internal culture or consumer community.

Regardless of which group your company falls into, there's always an opportunity to connect and engage employees at a deeper level to ensure that the pursuit of the common good is driving common wealth. 

Connecting to the common good makes common sense.
It's clear that today’s emerging workforce wants to make more than a living, they want to make a difference--and this is especially true for employees between the ages of 20 and 35, who will contribute to the common good with or without the support of their employers. A technology platform like Profits4Purpose can help ensure that employees get the support they need from their employers to help make a positive impact on the world. 

Shawn Parr

Shawn Parr is the Guvner & CEO of Bulldog Drummond, an innovation and design consultancy headquartered in San Diego whose clients and partners have included Starbucks, Diageo, Jack in the Box, Taco Bell, Adidas, MTV, Nestle, Pinkberry, American Eagle Outfitters, Ideo, Sony, Virgin, Disney, Nike, Mattel, Heineken, Annie’s Homegrown, Kashi, The Michael J. Fox Foundation for Parkinson’s Research, CleanWell, The Honest Kitchen, and World Vision.

Three ways for family businesses to stay entrepreneurial

Jacoline Loewen

Special to The Globe and Mail

The owners of Book City, one of Toronto's independent book chains, announced recently that they would be closing the doors to their flagship store after 40 years. As a final salute, CBC Metro Morning interviewed the store’s third generation owner, who shared the heaviness of that heart wrenching decision.

The reporter reminisced about how stores serve as land marks in our neighbourhoods and Book City was no exception: its iconic yellow logo brand was appreciated by Torontonians.

While in recent years customers have migrated to online book stores, the question remains: is there anything the family business could have done differently? Could succession planning have helped preserve the company’s legacy?

“For the most part it is easier, and generally more fulfilling to work ‘in’ your business than ‘on’ your business, so entrepreneurial families continue to dwell on the day-to-day tasks that come from operating a business,” says David Simpson, founder of the Ivey Business Families Centre. “Planning for future transitions, while always somewhere on the planning horizon, never seem to get done."

Many first generation - let alone third generation (3G) - business owners have gone the same route. They stick to a dated business model that served them well in the past; after all, change is risky.

Those who step into the family business, may become trapped by a significant and public brand created and developed by generation one and two. They put grandpa on a pedestal, his oil painting is in the boardroom and refuse to refresh the model.

Mr. Simpson agrees: "There may also be a tendency for second generation (or third) to have guilty feelings if the challenging questions that come with considering transitions – including potentially selling a business. This comes in conflict with the feelings of protecting a legacy that was provided by an earlier generation."

Yet, the entrepreneurial first generation would probably be the first to say "sell the business."

"I tend to remind this generation that the greatest legacy is to remain as entrepreneurial as the founders, and ensure a strong family tradition that includes knowing when a business doesn’t fit the times,” adds Mr. Simpson.

To help business families remain entrepreneurial, he offers the following advice:

1. Once a year, ask the hard question: “If we were starting out today, would this be the business our family chooses to be in?” This forces a family to remind themselves that a business takes time, energy, talent, capital and most of all relevance. Take out the emotional attachment.

If your family was in the buggy whip business as cars were arriving on roads, there would be little point in continuing as is. This question provides the nudge to reinvent the business, perhaps into a travel accessories and suitcase retailer.

2. If we conclude that this is a good business to be in, ask yourself this: “Are we the right ones to manage or steward the business further?” To survive in the global market, growth is vitally necessary. Expansion capital is available for companies over a revenue size threshold, and a family business can bring on board a professional CEO capable of managing a larger enterprise. There is no need to remain stagnant. The skill-fit question forces families to think like owners, and be less concerned about viewing the business as a source of family jobs. The best leadership of a business will change over time as requirements change, and families need to look to what serves the business best.

3. Let outsiders inside your tent. Mr. Simpson says outside eyes are critical: “Overall, remember that families often view their businesses as their babies, and human parents tend to be ill-equipped to value their babies. We either overestimate the ‘uniqueness’ of our child or are often too hard on our kids and overlook their hidden value as a result.”

(took out sentence and moved up as these are David’s words). Yet, so few family businesses take on an advisory board because they believe no one will understand their business as well as they do. Ensure that the business has an outside advisory board, or an active fiduciary board or at least a mentor with skills in the particular field. Engaging an advisory firm early and sharing your hopes and dreams will also ensure that a competent firm with transition experience can give you the hard reality of the day which helps families make decisions.

Jacoline Loewen is a director at Crosbie & Company, which focuses on succession advice for medium-sized enterprises, family businesses and closely held private companies. Crosbie develops customized strategies, particularly in relation to sale of companies, M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. You can follow her on Twitter @jacolineloewen and @crosbiecompany.