Truth and Consequences

Certain business myths have a profound impact on the decisions business owners make every day, yet some of them are only partially true and others are not true at all. Why then are we so susceptible to them? This is primarily due to our propensity to generalize.

The only way to be successful in business is to be a low-cost leader. No. Conventional business wisdom has identified numerous approaches resulting in comparable levels of business success, however the most commonly recognized are (1) creating products with highly desirable features (that are reliable and user friendly), (2) targeting niche markets, (3) providing exception customer services, (4) being a low-cost leader, or some combination of two or more of these approaches

To be successful you have to be first. Really? Try telling that to Microsoft who was not the first company to market word processing and spreadsheet software—yet today it dominates those areas. And what about Dell who certainly wasn’t the first company to introduce the personal computer to the marketplace—yet it is a successful household name today. Apple was first with the Apple Newton, but the marketplace wasn’t ready for a TabletPC, then. Being first does not necessarily guarantee success.

To be successful you have to be lowerpriced. That isn’t exactly what Lamborghini, Ferrari, Jaguar, Neiman Marcus, Tiffany’s, Barneys and Versace had in mind when they developed their product mix and pricing structure. If the only competitive advantage is ‘low price,’ chances are your business will fail, especially if you have a limited number of product or service lines. It only takes one dominant company in the marketplace to declare a price war and you will likely be wiped out.

My competition overcharges. This is a free market economy. It is possible to charge a lot—take Neiman Marcus and Ferrari for instance. However, it is impossible to overcharge because the customer can always choose not to buy. A company should establish its prices based upon its cost structure, level of service and more. Pricing products and services at a price greater than the value its customers perceive runs the risk of losing customers and going out of business—the same risk a company that charges too little is exposed to.

If it ain’t broke, don’t fix it. This myth exemplifies management at its worst. Look at any leading company in any industry and you will find that they perform so well because no matter how good they are, they are always desperately striving to be better. Lagging companies are typically complacent and satisfied with what they have achieved. When great leaders gain the advantage, they “put the peddle to the metal,” pressing forward harder than ever.

I’m a good cook, so I should start a restaurant or “I’m going to turn my hobby into a business.” Absurd. The first question you must answer is ‘do I enjoy cooking or do I want to run a business?’ Assuming you are willing to do all the mundane, but necessary things required to effectively run a business, these hobby turned – business enterprises usually close because the owner fails to grow the business. Typically, these business owners insist on doing everything themselves and believe no one else can do it as well as they can.

If I build a Web site, they will come. Wishful thinking. First, they have to find you. Conventional thinking is that you have less than seven seconds to create enough of an initial positive impression on a visitor to cause them to spend some time viewing the various pages of your site. Web traffic is controlled by a number of factors which impact the ability of search engines to index your site and your ability to attract the type of customers you are intent on reaching. Aesthetic design, ease of navigation, keyword-rich content and linking are just a few of the factors that must be considered and deployed effectively.

Cool idea—everyone will love this, but will they be willing to buy it? If the potential market isn’t large enough or financially inclined to purchase your product or service it doesn’t matter how “cool” it is.

My product is better, so I’ll be successful. Numerous critics and consumers considered the Beta video recording format superior to that of VHS, yet VHS triumphed. While quality is extremely important, without proper market timing and a cleverly orchestrated marketing plan there is little chance for success.

This product/service will sell itself. Maybe, but to how many and will those sales occur soon enough? It is sheer folly to believe sales will occur without effective marketing materials and a marketing plan. Marketing should be viewed as an investment. Done correctly, it will pay for itself many times over.

I am an expert at what I do, therefore I should be profitable immediately. This is typically not true. Even with a good sales plan, it takes time to develop recognition of your name and your brand, develop customer relationships and penetrate your target market. There is also a lag time in getting orders, producing and delivering a product (or providing services), and surviving the billing and collection part of the cash conversion cycle. You must have a plan to survive the start-up cycle, the periodic dry-spells that will inevitably occur and the customers who take your product/ service but don’t pay you on a timely basis (or at all).

Add more people to the job and it’ll go faster. True, up to a point. Communication can become more complicated and some productive employees are held back as they work to bring the newly added employees up to speed.

We are good friends, so we’ll work well together. Not necessarily, in fact, rarely. Friends’ work habits may differ and forgiveness sometimes excuses the necessary accountability required of a partner. In any event, don’t overlook a well crafted buy-sell agreement to prepare for the impact of future unexpected events.

Failure is bad—the opposite of success. A wise man once said people learn more from their failures than from their successes. Learning from our failures is an integral part of the journey to success. As long as failure is not the final result, we can chalk it up to “learning.”

Knowledge is POWER. Only partially true, otherwise the most powerful people in the world would be librarians. Actually, comprehending how information can impact and benefit you is where the power is derived. Since the substantial portion of an individual’s practical business knowledge is the result of personal experience, power comes from utilizing experience to effectively filter information and then act on it.

Every customer is equally valuable, or The customer is always right. This is dead wrong thinking. Some customers are more aggravation than they are worth and actually cost the company more money than they generate based upon the amount of special orders, re-work, special service requirements and slow payment of invoices. These customers must be fired.

Profit is all that matters. Wrong. Actually, cash flow is more important than profit. While profit is the ultimate goal and is very important, cash flow will determine whether or not you will survive in business long enough to be profitable. Protect your cash flow at all costs.

More customers are better than fewer customers. Not necessarily. If a company is inundated with demand and cannot produce enough product or provide enough service to meet that demand, delays may result in customer dissatisfaction and/or order cancellations. As this becomes known in the marketplace, potential customers may be lost and/or a competitor may swoop in and capture the available market share.

Giving your customer what they want will ensure your survival. Nothing could be further from the truth. You should provide them with what they need (which is usually different from what they think they want). Educating a customer about a better way of doing business elevates you from being merely a substitutable vendor to a valuable strategic partner. When your employees spend the time to discover the customer’s needs and identify new ways to create value for your customers, you gain a competitive advantage over your competitors and secure customer loyalty.

Your idea and trade secrets will be stolen if you don’t protect them. Partially true. However, competitive advantage in the marketplace is a result of how a company presents itself and executes its business and marketing plans. Even Coca-Cola’s formula (a secret that has been closely guarded for decades) is meaningless without the effective worldwide production, distribution and marketing system executed day in and day out by its employees.

What you think, matters. Absolutely false. The only thing that matters is what your customers think. And, if you only focus on customers who share your views, your potential market probably won’t be large enough to support your business enterprise.

Financial modeling is a waste of time. President Eisenhower probably said it best, “plans are useless, but planning is indispensible.” If, for example, your modeling calculations demonstrate it may take many multiples of your potential market to breakeven or achieve an acceptable rate of return on your investment, it is apparent the viability of your endeavor should be called into question.

I don’t need a business plan because I’m not looking for outside funding. Wrong. Warning: more than just spontaneous improvisation is required. A business plan is the first thing that should be developed. It will cause you to think past the warm fuzzy feeling of what a great idea you have, give you a sense of perspective about your business, cause you to uncover issues that you hadn’t considered but must addressed, formulate (method, system and control) solutions to identified problems and prepare you to answer the inevitable questions that will arise.

It’s what you know not who you know. Not necessarily. Business owners recognize they can’t do it all. Effective delegation to key employees is a must if the business is to grow and prosper. Who do they pick first? The people they know and trust, of course.

My MBA and/or Ph.D. matters. In the academic community, what your peers think is important—it matters. However, in business, what your customers think wins the day.

The most important part of my business plan is my idea. No. The idea is almost the least relevant part of a business plan. The key concerns center around the answers to six questions: (1) Who are the potential customers? (2) How many of them are there? (3) Why will they purchase your product/service? (4) What are the capabilities of your management team? (5) What risks are associated with the business? (6) How significant are those risks?

Great news—I have no competition. Troubling. This one should be approached with caution. There is usually a reason that there is limited or no competition— usually it means that there is limited or no economic opportunity. Proceed with caution.

Facts can easily sway people. Rarely. When individuals make a decision to change their behavior, more often than not it is an emotional decision. Facts that do not fit their conceptual view- point tend to be abandoned or ignored. Unless the facts are overwhelmingly compelling—so compelling they can’t be ignored—an emotional appeal will generally win the day.

Absent close supervision, workers will try to get away with whatever they can. The majority of employees try to do a good job, but are often frustrated by equipment not functioning correctly, poor training, lack of supervisory guidance and the failure of management to communicate clear expectations. It is important employees know what the company’s goals are, that they share those goals and commit to performing the duties required of them to fulfill those goals, that they are effectively incentivized to share in the success of achieving those goals and that they are motivated to invoke compliance on their coworkers through peer pressure.

Venture capitalists loan money to startups. No. Great ideas are not enough to motivate a venture capitalist to part with investment funds. A company must show a strong track record as a going concern for at least three years, a promising future growth potential, a strong management team, a business plan with a detailed strategy and that they are in the business of delivering a product or service that has at least a regional client base (and preferably a national one). Savvy investors only fund start-ups headed by experienced, successful business owners.

I can write everything off. No. This kind of thinking will, at a minimum, posture you for a close personal relationship with an IRS or State auditor. Your personal expenses do not fall under the company umbrella and the business expenses incurred should be clearly linked to business operations.

I can pay myself whatever I want. Partially true. It is true as long as there remains adequate cash flow to fund business operations, equipment replacement, marketing costs and other costs associated with future expansion; and as long as it is “reasonable compensation” as defined by the IRS, otherwise (depending upon the specific facts and circumstances) you may be exposed to a portion of it being deemed a constructive dividend subjecting you to additional tax and penalties.

As the boss, I set my own schedule allowing me more time to do what I want. Sure, as long as what you want is to spend 50 to 90 hours a week in the business. A nine-to-five approach typically rings a death-knell to any possibilities of business enterprise success. Being an entrepreneur is a lifestyle choice, not a job. It necessitates embracing significant demands on your time. Indeed, you do have more freedom running a business, including the freedom to fail—hence the burdens of responsibility and accountability.

Deadlines and competition stimulate creativity. Usually the opposite is true. Short intervals typically do not provide adequate time to fully absorb the scope of a problem and generate more than a limited scope fix. Deadline style creativity is most effective when employees have no distractions, a firm grasp of the urgency and a group dedicated and focused on coming up with a solution. When groups of employees are competing, solution generation is actually hampered because idea sharing between teams ceases to exist. Free exchange of ideas between teams and spirited discussions produce the most creative results.

You don’t need to understand any accounting to run a business. False, unless you have someone else that does to advise you. If you don’t have a grasp of basic accounting, you won’t realize your business is in serious trouble until it is too late to alter the course of the inevitable. A business is much like an ocean tanker. Neither one turns on a dime. Once a tanker is underway, it takes two miles to execute a turn and five miles to come to a full stop. You need to watch for the telltale warning signs and react accordingly to keep them on the proper course.

As you have probably figured out by now, achieving success in business is not the result of blindly believing any of these myths. A small business owner’s ability to adapt to changing business trends will determine the success he or she will enjoy—both personally and professionally. Success does not simply come as a result of having a good idea, or even a brilliant one. It is about bringing together a team that can take an idea, develop it into a product or service and market it to customers who are interested in purchasing it. It is that simple . . . and that complicated