Podcast Episode 63 – How to Escape the Mediocre Middle
IN THIS EPISODE:
This week on the Growth Whisperers, we’re digging into Part 2 of the discussion about the plan for your business.
Are you planning to keep your company or are you planning to sell it? Or, if you don’t have a plan either way, are you stuck in what we call the mediocre middle?
That is, you’re not working towards positioning your company for sale, and you’re not planning on how to build for the long term. As a result, you and your company end up suffering the consequences of inaction living in this middle ground.
And you’re not doing it consciously. You’re busy running your business and that takes a lot of time. And sometimes leaders don’t even realize that they need to make the strategic commitment to either selling or keeping their business.
We really challenge you to make a decision. Choose to sell and march in that direction. Or plan on keeping your business for 20, 30, 40 years – and make different sets of decisions. Just don’t choose to float around.
This week in part 2 of 2 we discuss how to escape the mediocre middle and provide the tools to help you understand where you are on the time horizon and the things you will need to do to your business in order to endure.
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EPISODE TRANSCRIPT
Please note that this episode was transcribed using an AI application and may not be 100% grammatically correct – but it will still allow you to scan the episode for key content.
Brad Giles 00:13
Hi there, welcome to the growth Whisperer is where everything we talk about is building enduring great companies. And especially so this week we always do. But now a little bit more. So this week we’re talking about part two of a two part episode on building great, enduring great companies. Oh, get it out. Get a Kevin, I hope you’re able to get some words out this morning. I’ll try. I’ll do my best, Brad. Good. How are you today, my friend,
Kevin Lawrence 00:42
I’m doing good. As always looking forward to our episode. I mean, for the listeners and the viewers to know like we, we really have a lot of fun preparing for these and kind of, you know, smashing our brains together around different concepts. And you’ll, I’m usually quite pleased with what we come up with. And, you know, and what’s coming out of today. And the previous episode is some stuff on as we’re working on some new creative work together with the output of a brainstorm. And one thing led to another thing led to for us some really powerful thinking, and I’m really excited about sharing it. So yeah, I’m looking forward to the show today.
Brad Giles 01:21
Awesome. So we’re going to begin as we always do with Word of the Day, word of the day. So we encourage people to start meetings with a word or phrase, just to kind of lighten things up, set the tone, get an understanding of where one is at. And for you, what might be your word of the day or phrase.
Brad Giles 01:40
Yeah, my phrase, my word, I’d say it’s just his relationships. And, and just the value and I am recently so insanely grateful for the relationships that I have. Now, at the end of the day, you know, you can have stuff, you can have money, you can have all kinds of things. But at the end of the day, the people that you get to spend time with are what really make it all worthwhile. And if I look back over the past week, and think about relationships, and new and spending some time with some good friends, some time with my son, some quality time with my daughter, and just the people that I’m surrounded by, and the quality of the relationships is the quality of my life, I guess is the way I would somebody. So maybe the phrase is my word became a phrase, Brad, the quality of your relationships is the quality of your life. And I have an abundance of amazing people that I’m fortunate enough to call friends. You know, really, really good friends. And we’re there for each other and taking care of each other. So yeah, that would be it. The quality of your relationships is the quality of your life.
Brad Giles 02:55
Well, that’s lovely mine, you know, that is lovely. It just warms my heart and mine comes here it comes incredibly cold compared to that one. And it’s one that you and I had spoken about recently, but it’s really been playing on my mind. And that is that. If it is not a law of nature, it’s an opinion. It’s not a law of nature, it’s an opinion, so many people, so many people have so many things that they sprout is being facts. But it’s probably just an opinion. So gravity, for example, is probably a law of nature, it’s very hard to say that’s an opinion. yet. At the other end of the spectrum, there are some things that people say, which are in actual fact really just their opinion, but they’re making them sound like facts. So I heard that from a guy called Shane Parrish who I kind of have listened to for a while and like the way that he thinks, and yeah, it just really resonated with me. And so that’s my phrase of the week.
Kevin Lawrence 04:13
I love that. So for the people that think the world is flat, they would say that it’s not an they must be able to say it’s not a law of nature, therefore it must be an opinion that the world is round, and that the world could be flat. I can I’m kind of sure it’s kind of think it’s a law of nature, isn’t it broad, but the world is round.
Brad Giles 04:39
I cannot believe that you rise that because that there was a seed that I was thinking about in relation to today’s topic, like in the previous days, and that is if you go high enough above the earth, you can see the curvature of the earth and it’s Same, huh? Yes.
Brad Giles 05:03
If you get enough perspective, you can see the truth. Yes. But if you’re right on the ground and you’re too close to it, you can’t see past the end of your own nose, and you can’t really get the perspective.
Brad Giles 05:16
Yeah. So, yeah, flat earthers. You know, they just don’t look for the science, they look for things that validate their opinion. And that’s not, you know, necessarily it. Yeah, it’s not a law of nature, it’s an opinion. And lots of people’s opinions. You know, quite accurate. others not so much. So. So
Brad Giles 05:45
My phrase of the day, the quality of your life, is the quality of relationships is the quality of your life. Is that a law of nature? Or is that an opinion?
Brad Giles 05:55
That’s an opinion, you know, it is? Well,
Brad Giles 05:58
but if you look at a look in the animal kingdom, the relationships that you have in some with the some of these pack animals, is their strength and their ability to hunt. And their ability to eat, like, I’m just you know, is that the quality of their life, the quality of their relationships, because if you take a pack hunting animal,
Brad Giles 06:20
you know, like wolves, they rely on each other,
Brad Giles 06:23
they do the quality of their relationships probably is the quality or the even the length of their life. I’m sure we get what we get. We could spin this any way you want. But I actually wonder if it’s a law of nature, or if it’s an opinion, I mean, it is an opinion I have. But I wonder if it’s a law of nature. For you. I’m a killer whale. I just saw, by the way, as I was sitting here today on the phone with a friend, and I was looking out. And they and I said, there’s a whale, they actually thought I called them a whale, which was not weather, which was a miscommunication on the phone was a whole other conversation. But I saw the whale out the window, and it was blowing when the whales come up to the surface, and they blow or they blow air out and make a thing that shoots up in the air. And I don’t know why I’m talking about whales. What was it got me there I
Brad Giles 07:13
was law of nature,
Brad Giles 07:17
So killer whales are also pack animals that hunt together and rely on each other. So is the quality of their relationships. We don’t need to go down that road. That’s not what the show is about. But I wonder if that could be considered a law of nature?
Brad Giles 07:34
Yeah, and I know. It’s an interesting concept. And I couldn’t convince
Brad Giles 07:40
you, I could go find some flat earthers and figure out how they make their arguments for things that may not be and then I can probably find a way to convince Well, we don’t need to go there.
Brad Giles 07:49
We do not. So this is part two of two. This is the second episode, there is a first episode, if you’re listening to this episode, I’d probably recommend that you listen to the first episode before the second episode may make a bit more sense today. Correct. So today, in part two, we’re going back to the same question, are you planning to sell or you’re planning to keep your business? Or are you in this painful place called the mediocre middle, which we talked about a lot in the previous show? And really what we were talking about in a previous show, a real quick summary for you is that, you know, the no plan is great for vacation, sometimes, sometimes not always, or Sunday afternoons. But it doesn’t really work for business. And, you know, the avoidance of plan or freedom from plans doesn’t give you freedom, it actually gives you more pain. And you know, having a strategic plan, and having a shareholder plan for what you’re going to do with this business for the long term, which in many ways would influence Partition Plan? And then really, how do you know you’re in that mediocre middle and the root of it is, you tolerate a lot of stuff, you might not even think about it, you may not be even thinking about the difference between you know, if I was to build this business for 30 years, or flip it in three,
Brad Giles 09:06
but no matter what the business is probably draining you in a bunch of ways. And that that would be a root symptom. And you know, the phrase that we’ve kind of talked about, is it, you know, are you having to endure your business? Or is your business giving you endurance? And as a sort of a distinction? That’s what we talked about in this last show. So today, in our show, we’re talking Well,
Brad Giles 09:28
how do you get past that if you happen to be in that mediocre middle? How do you either get to the point where we would, you know, ideally recommend you try to get to it’s the ideal place to be is building it to keep it for a long term. If you’ve built an amazing asset that produces value and purpose and cash, why would you get rid of it? Although if you choose to exit in the short term, you know, that’s another choice. And you know, you could make that too. So we’re gonna get more into some of the How to around it. Anything you’d add to that there, Brad? Yeah, I just want to reinforce concept from last week very quickly. And that is, if you own a business, you are either building it to sell it, you are building it, to keep it or let me reinforce that you have a plan to sell it, you have a plan to keep it. Or the third point is you are stuck in the mediocre middle. And so many people are stuck in the mediocre middle. Last week, we spoke about the what and this week, it’s really about how do you understand and how do you? What do you do about that? So yeah, let’s, let’s jump into it. So like we spoke about not a few moments ago, if the higher that you go up, the greater perspective you get, you can begin to see further and eventually you can see that the earth is curved. So it’s about the time horizons, if all of the thinking that you’re doing is on a really short term basis, like, you know, at this point in the year, kind of middle of the year, I just want to get through to, you know, the end of 2021. That’s all I want to do. That’s all I’m focused on. If you’ve got that short term horizon, you’re kind of at one or 2000 feet, you can’t see that far. And you can’t think that far. But if you go up higher, higher, higher, again, you can see a lot further away. And you can think beyond the next year, but on the next quarter on the next year beyond the next few years. And you can begin to get different perspectives. And going back to what you said, Are you enduring your business? Or are you building endurance into your business or something like that? That’s really what we’re saying is that if you have to work with your business, like we said in the last episode, for 20 years, if you waited to that business for 20 years, wouldn’t you build the business that you really want to?
Kevin Lawrence 11:57
Exactly. And so to help us today, the starting point, is to really look at this look at your business through time horizons are, as Brad talked about, you know, almost zooming out to see it in perspective. And really, there’s two different tracks, you can look at it, if you want to look at it from an economic point of view, looking at your business through the next market cycle. So right now, for example, in many economies in the world, we’re at a high point in an economic cycle, massive growth, like in Canada, things are incredible for most businesses, where the owner we call the economy’s very frothy, there’s just all it’s just booming, all time highs and lots of things, lots of our clients like record profits, it’s incredible, considering we’re coming out of a pandemic. And so, you know, when when the cycles after a period of boom, there’s a softening at some point. And then there’ll be another boom, and then a softening. So if we’re at a peak or approaching a peak, you never know, it would be looking through the next trough to the next peak and really thinking about that. And generally, that’s at least a decade into the future, but really thinking about, okay, what do we have to do through the trough to then better capitalize on the next peak, the second that some family businesses kind of might look at, they might look at it that way or another way is looking at the next generation of leadership and whether it’s family or not family business. But basically, the timeframe at which the CEO and executive team are completely replaced, ie 100% 80% of them are replaced. So we’re working with a company action in Canada, it’s been around more than 100 years. And we’re working on helping them with succession for a CEO. And I think for a fall four or five of the key leaders in the athletes for and so so we’re going to work with them on assessing internal candidates and helping them to make the right choices with some tools that we have to help them do that. But this is a three to five year project to get that right. But they’re starting now because they’re, you know, and for a while they’ve been thinking about when they have this next executive team. So whether it’s next market cycle, or next CEO and executive team taking it through the next growth, the growth curve, you’re really zooming out to think about that and getting well beyond the daily tactical or even even more, more, more typically what we call strategic decisions. Yeah. So if you zoomed out a little bit, a little bit more, a little bit more. You could imagine something that looks a bit like a sine wave. I don’t know if you know what a sine wave is. But if you can imagine something that goes up and then hits a peak and then it goes down and then hits a trough and then it goes up again. So it’s going up and down and up and down. A bit like a continual roller coaster. So in a conceptual model, that kind of what the economy does, it goes up and then it goes down. Or maybe that’s what the industry does now, except for it’s on a bit of a tilt. Because right, it goes to a new high generally, and then the low is a lower, low and the high as a higher high. So it’s a bit of an angle. It’s in many ways. It’s kind of like a heart rate, monitor your heart rate when you’re in the hospital, which, you know, I recently found out about, and you can see your heart, your heart, you know, they’re checking your heartbeats, whatever going up and down. And except for they just put that on a slant as it grows.
Brad Giles 15:37
Yes. Yeah, that’s right. So if you think back to, I don’t know, 2006 2007, things were pretty hot, then you go back to about 2009 or 10, where the GFC, things were pretty not. And then what’s happened since then is things have become hotter again. And eventually that will turn and things will go down. And so it’s, we can’t be very specific about the time horizon, but it’s not quarterly. Right? And it’s probably not nearly you’re zooming out further than that, to think about the multi decade ups and downs at the beginning. And then kind of asking, well, where are we at? And you mentioned at the moment where, you know, things are hot, we’re kind of on the up, if not the top? And then where’s our industry? Relative to
Kevin Lawrence 16:28
got it, Brad, it’s like, you know, it’s, it’s basically and we need a name for it, because it actually will have the name. Because there’s tactical, which is like a year or so there’s strategic, which is generally three to five years for most companies. And then there’s almost cyclical, or something else like that cyclical would be different, where you’re looking at that 10 to 15 year time horizon. And then Collins has the b hag. Yeah. And that’s, that’s like, Don’t closer for most company, he says 10 to 30 years, but it’s generally, you know, that’s a 2030 year time horizon for a lot of the companies we work with. So it’s this. It’s almost Yeah, tactical, strategic, and then a cyclical point of view, and there’s a better name for it.
Brad Giles 17:16
I think that’s not bad. Let’s that’s it. It’s Yeah, like, that’s a good start. And maybe we’ll, we’ll keep that. But the point, the point is, so many people are caught up in the moment, right now, it’s hot. And, and people are guided by often emotions, or sentiment. And if you can zoom out far enough, you can say to yourself, Well, you know, we’re almost at the top, that means, at some point, things will begin to go down. And when things begin to go down in the economy, or the industry or, you know, our clients industry, or whatever it is, when things begin to go down, we will need to take a different set of actions, and we need to be prepared for those actions. And that’s the reason that we’re saying this talking about cyclical is endurance, because the only way that you can endure is if you can endure these cycles. If you could have you could build a fantastic company on the way up. But when things come down, if you’re saddled with too much debt, and you can’t service that debt, given the new operating environment, you’re not going to endure.
Kevin Lawrence 18:32
No, because you’re dealing with different forces. And as I was, as you were talking, I looked up cyclical. And I found another word reason was seasonal, right? You go through a season of growth, right? And a season of kind of plateaued in a season of decline. seasonals another word out, we’ll get that word later. But you just need to be able to handle the different environments, even with it. And this is it. Your strategy is excellent. But then it’s almost on a different axis where you’re looking at the different environments. And what can you do today? Because right now in the economy, there’s a lot of people like caution, Canada, I mean, we haven’t really had a notable slowdown. Close to 20 years, we had a little blip in Oh, seven away, but Canada didn’t get affected that much. So first, a lot of people if you’ve been in business for 19 years, it’s like, you know, like people think the world’s flat you think the world is growth? Yeah, like you don’t know you actually haven’t experienced any different. But what we’re talking about is knowing that things are cyclical, and that you need to see to the other side of the next cycle. That’s it. So if it’s been almost pure growth for 20 year, close, close, knowing that it’s going to do this and then it’ll know it’s going to dip and then it’ll go back up again for those who can’t see my hand moving on the screen.
Brad Giles 19:59
So It’s being aware of it and planning for it and then looking at your business through its ability to endure that and come out stronger versus blind positivity.
Brad Giles 20:12
There’s a famous investor, by the name of Bill Ackman. And I heard bill speaking maybe two weeks ago, maybe three. And he, he said he was talking about inflation. So the hot thing at the moment is inflation. People are talking about, you know, lumbers up 100% Steel’s up this much, and so forth, so forth. And that’s the other thing that we’re seeing is a shortage of workers, certainly where I am and in other areas as well, here here as well. Yeah. And so when there’s a shortage of workers, often that drives wages up, and the thing that bill’s said, when they said is, is transitional, or is it permanent? And what that means is, is this just for the pandemic, and like, we just, it’s, it’s all the stimulus money that’s making this problem? And he said, here’s the thing, it’s very hard to take away a pay rise. Yes. And, and so that’s, that’s where the inflation on the labor market comes from. And if, if you say we’re going to pay more so that we can get enough workers like your where is the point where you go, Okay, now, we’re going to come back to where we were, like, no one does it almost with wages in generally, it’s very hard for it to go back out commodity prices can go up and down. Yeah. And we’re having this discussion with a lot of companies right now. Brian? Yeah. Because getting workers in, for example, in some countries, like Canada and US immigration is required for a bunch of the labor pool like, right, yeah. Why are they here? Yeah, but but but with COVID, and a lot of the immigration halted, then there’s less labor pool coming in. And so absolutely, conversations we’re having in companies is that as wages are getting more expensive, you know, as you pay market, where the other current market wage for new people, well, sooner or later, you need to equalize it for existing people as well. So it’s not just one person getting paid a higher amount. Over time, everyone at that level probably will have to in the whole, the whole thing moves up a notch, which drives the cost base of every company up? Yes, and prices have to go up to support that cost base. And so in the end, you know, the real money going to those employees actually isn’t that much different? Because they get an increased pay. But then inflation goes up. So that almost takes them back to where they were in the whole system just moved up a notch, which is inflation, except when you’re zoomed out and looking at this roller coaster, this cyclical this sine wave, yep. And whatever be the economy, or your industry or your clients, industry, and demand decreases for your product, and you’ve got these established higher wages. What are you going to do about it? This is about building an enduring great business. What are how are you going to deal with that you may have no choice but to put those wages up. But if you’re thinking about the fact that that will eventually go down, and you will have these new higher costs. Yeah. That is how you will do right.
Brad Giles 23:27
Yes. And exactly. And again, it’s zooming out to see what’s really going on, which takes time.
Brad Giles 23:33
Yeah, and I need and there’s a lot of variables to understand this. So. So if you go back and look at this, really, it’s, it’s about zooming out and looking beyond, you know, beyond to the next cycle, which is that be that cyclical thinking, not just strategic, or that next generation of leadership, but it’s a longer term, standing farther into the future, and thinking about all the things we’re doing today, and how it’s gonna impact us 10 years down the road. And so you need the certain right group of people looking at this, and you need the right questions or the right conversations to do it. And most people, as we talked about in the last show are so caught up in shorter term thinking, which is excellent for running the business. Right, you need to when you’re tactical and execution, you got to be thinking shorter term, but someone, ideally is thinking about the strategic timeframe, three to five years, and the cyclical timeframe of probably 10 to 15 years. So I’ve got two questions for you, Kevin. Question number one, when will be the top of the market? And question number two, when will it go down?
Brad Giles 24:42
Absolutely. What I can tell you is that the day that we hit the peak, I’ll probably be able to tell you the week after. So whenever it happens soon thereafter, we’ll probably know. And then and then and how much it goes down and everything else. I will absolutely be able to tell you, in hindsight, because we have no freaking idea. No, no, but I can remember one time I was sitting in the Middle East. And we had brought in these economists to help us get a sense of what was going to happen with currencies. And I sat there with their best abilities and their most confident opinions, to predict currencies and where they were going to go. And as someone said, at the end of the meeting, and respectfully, these were very well educated, they were doing their best they said, of economists could accurately predict any of that they would be the richest men and women in the world. And they’re not, because it’s impossible to call
Brad Giles 25:49
white for it. Are you ready? I’m here, we can’t predict the top. And we can’t predict when it will go down. But it’s a law of nature, that it will, it will, it’s a law of nature, this is
Brad Giles 26:07
beautiful, Brad, but it’s true. It is we know that it will go down, no idea what happens or why. And you can trace back sometimes, but it will go down. And then it will generally go back up again. That’s that is what it’s done for how many years? Yeah, and that’s why even when we get to some of the things that you need to do, that’s why this thing called a balance sheet is really important. Because your balance sheet needs to work when it goes up. And knowing that it goes down your balance sheet, you know, needs to be able to endure that. And it’s like your boat needs to be able to endure Big Stone storms, storms, if
Brad Giles 26:49
you’re in the ocean. And if you’re in the mediocre middle, right, you’re not planning to sell and you’re not planning to keep. If you’re in the mediocre middle, you’re not conscious of the fact that it will go down and you’re not preparing for that. quite likely. And some people in the mediocre middle are really conservative, and they might have you know, a whole bunch of cash in the bank or not have a lot of who knows. But the point of it is it’s being conscious of that fact that it will go up and down. And what are you doing to thrive during that not hold on by the end of your fingernails? So time horizons is the piece that we’re talking about. And really what we want to share with people today
Brad Giles 27:34
is is that, you know, if if you know that the cycle is gonna change recurrent cycles. So if you’re in a boom cycle, like we are in Canada and Australia, in the US and other countries, let’s just because we know it’s gonna go down. We know that. And as Brad has identified, we don’t know when, but we know it’s going to go down that is a law of nature. And so far a law of economics or principle of economics.
Brad Giles 28:03
What if knowing that the economy will go down and it will know it’ll hurt some? What is the one thing in your business you should be tweaking now or, or bulletproofing, or to future proof your business for this next economic slump? And whether it’s two months or 24 months or 42 years? I don’t know, I have no idea what you generally based on history won’t be 42 years. But what is the thing that you know, you need to just take a second right now and think about it, knowing the economy will slow down some amount at some point. In the nearer, nearer future, what’s the thing you need to do to better position yourself to do very well when it slows down? So here’s an example is a guy called jack stack, wrote a book called The Great game of business was famous for buying a company called srg. holdings, I think from international. Thank you. Yes, SRC holdings from International Harvester I think it was. And because the company was basically losing money and was going to go out of business, turned it around. And subsequently, I think he built 60 companies greater than $50 million. Like he’s no slouch in this area. In any case, so jack takes this view, the enduring great long term view and what jack and his team do is they say on the up with accumulating cash, so they’re on the down, we can buy assets. And I remember when I met jack in the US, and he told us the story, and I don’t think it’s out of school. I can say it, he said it was something like they were buying land at $2,000 a square foot, when in the upswing, it was like $15,000 a square foot or something like that. probably heard
Brad Giles 30:00
of them. I’ve heard him tell that story. But basically, yeah, they were picking it up for next door to free. Yeah. During the downtime when things are when there’s distressed assets on the market?
Brad Giles 30:11
Yes, yeah. So if there is a down coming downtown coming, at some point, do you have the balance sheet to be able to weather the storm a, and then be able to pick up distressed assets that will make a meaningful difference on the next upturn. Because they will just like it’s gonna go down, it’s gonna go up. Yeah, and it always does. And you know, that when it goes down, there’s a lot of interesting a lot of people they get hurt in that process. And because, you know, they don’t have the cash to finish. So a lot of, you know, real estate and things like that kind of get hurt in that process with a delay. Interesting that when companies start to grow, it’s not as widely known, but more of a fact is, is that when the economy starts to grow, again, more companies go bankrupt, because on the way down, people’s cash flow improves for a period of time, because they’re carrying less inventory in or catching all those receivables are coming in, and the previous month sales have been higher than the current month sales. So generally, if they do it, right. Most companies can do okay, in an initial downturn. Now, after a long time, it hurts. But when it cranks back up, again, people getting cash crunches. Because if they if it picks up too fast, they can’t cash flow, the growth, which is a whole other piece that jack talks about a lot as well. So. So basically, you got to be prepared to win no matter what cycle you’re in and looking at the next cycle is an incredible way to endure. And it’s a great way to pressure test your company. Yes, it might be working great today. But is it gonna work great when the company when the economy is slipping? Yeah, and going down, right when there’s a contraction. So so we’ll want to do is want to kind of take a look and give you a sense of thinking where you’re ill when things go down, whether it’s the economy overall, it could be something in your industry, because you know, there can be there’s the macro economy. And then there’s industries within economy like oil and gas right now is has been for a while a little slower, even though while the general economy is a macro has been doing quite well. So we’ve got nine, nine different principles we’ve shared in previous podcasts that we talk about, about building an enduring, great company. And I think we’re going to take a look and take a look at some of those. Hey, Brad, is that the plan? Yeah, that’s right. So based on where your industry is at, based on where the economy is at, based on where your customers industry is at, that’s the kind of framing that we’re beginning within them. We’re saying, think about these nine principles to build an enduring great business. And then ask yourself, so where is that? And do I need to do any work around that? So the first point, of course, is strong culture and behaviors. That’s the first principle. And so where you were at in terms of this cyclical movement at 100,000 feet that we’ve discussed yours? Do you have a strong culture and behaviors that can withstand the way up or the way down? or whatever’s coming?
Brad Giles 33:16
Yes. So if the economy or your industry continues to boom for another five years, is your culture or your culture and behavior strong enough to hold it together and sustain that growth? Or if there’s a decline, or your culture and behavior strong enough to face a reversal in the economy? And where things are going the other direction? And that’s the question, and what might you need to dial in? In either scenario around your culture and your behaviors?
Brad Giles 33:48
Yeah, yeah. And so importantly, before we move on to number two, we spoke about the example of jack stack buying land cheap, but that was shoring up their balance sheet, or that was utilizing the balance sheet the best way, these are all of the nine things that you’ve got to consider moving on to number two, a long term vision. So when things are going south, when your revenues are perhaps dropping, declining or staying stagnant or not growing at the rate they used to, do you have a compelling long term vision that’s going to ensure that people stick around and know what they’re working on.
Kevin Lawrence 34:29
Yeah, and it gives people that EU North North Star that Southern Cross to be able to focus on and to stay thinking about as they go through it, because they know there’s something great on the other side, they’re just going through a transitional phase. But is that vision compelling enough for what you want to do, by the way, and this is we’re talking in context, if you want to enduring keep this business for the long time. But Heck, even if there’s a downturn and you’re planning to sell, you might have to hold on to the business a bit longer, and having that same time vision for people to focus on is is critical. And a lot of times you find with companies, they have a vision, when it gets lost, it’s not front and center like a big magnet pulling it forward. So that’s the second one long term vision, it will do well, if you continue to boom for the next three to five years, or will it do well, if we go into a stage of decline, whether it’s in your industry or the economy overall, the third, and again, this is a great one to pressure test both sides of the coin continued growth or slowdown, and is your strategy that gives you a sustained competitive advantage. You know, if we continue to boom for three or four or five years, well, you’re configured a competitive advantage still be strong business still give you a notable advantage. And a competitive advantage means you have a better ability than average to secure the work you want or sales that you want, at the margins that you want, and don’t have to give up margin to get business. So ideally, your mark, your gross margin is stable, and if not, if not growing. And the same thing, if there’s a decline, does that advantage actually work in a decline? Maybe your competitive advantages, it only works in a boom time, maybe that doesn’t work if the market goes the other way.
Brad Giles 36:13
I had that exact same situation with one of the clients that I work with. And it was an amazing advantage on the way up and at the top. And even a little bit as we started to decline. But you know, in their industry, we’ve just had four or five years at the bottom, just bouncing along the bottom. And people in the industry would say, this is the worst we’ve seen in our whole life, like, you know, even the old time and say, it’s never been this bad. And it was like that for four or five years. And it didn’t work. And so we just had to, because the competitive advantage wasn’t strong enough to sustain through those down times. And we couldn’t evolve it during the downtime. All we could do was keep cutting to try to keep the business going. We did successfully. And now of course it’s on the way up and it’s going gangbusters. But the strategy that delivers a sustained competitive advantage should be able to endure through up and down of the cycle.
Kevin Lawrence 37:16
Yep, absolutely, absolutely. And it was interesting as a client that I was thinking of, as you’re saying that, that Brad, and I’ll save that one for the next one. So that’s a competitive advantage. It’s absolutely critical that it works, you know, and or maybe you have an alternate version of it if the market shifts to the other direction. And that whole idea of this is zooming out and thinking of the long term and not keeping a rose-colored glasses on all of the time, can we actually flip to a different strategy or, or tweak our strategy to be relevant in a different market? governance, you know, you’ve got governance and the way that you run your business and governance so that things run properly, whether it’s how decisions are made or authority is done. And the question is, you know, is your governance working if the economy continues to boom? And still, as I said, or if we slip into another market cycle? Is your governance? Does it have the speed? Does it have the safeguards? Does it have the risk management in it to help handle a different type of environment? Again, most gun companies in the last 20 years have been in North American market have seen a fairly stable growth and not had to think about a down market. So is your current what might need to change your honor governance to be able to, to weather that storm? Yeah, and so that, that’s relative to the size of your company, you’re going to five or a $10 million company governance is not something that needs to be completely ignored, as opposed to say, a $250 million company where it may become more important. But it’s still a consideration, if you like, if you would like to endure for the long term governance has to be a part of what you do. I have a team that I work with, not that larger business kind of 10 or $15 million, and they get one of the big four accounting firms to audit their numbers every single year. Now, that’s because they’re, they’re planning to keep not because they’re planning to sell. Because you might say, oh, they’re doing that. So they’ve got strong long term books so that they can No, no, no, they’re doing that, because they’re planning to cave. Am I recommending that you do that? Not necessarily. But that governance element is what works for them. It is and our larger clients, many of them have audits not and not because the bank requires it, because they just want to make sure everything is being done right because the shareholders are farther from the decision making and the cash and it’s just a way to make sure the systems are tight and there’s not any one weak systems but also opportunities for cash to go walking out. The door is Also interesting as some larger clients when we were getting about 100 million a year in revenue, but there’s multiple partners. So when you have multiple partners, you often need to have defined ways that decisions are made and agreements. When times are good, unless you’ve got some greed, some with between the partners or or, or personal conflicts, people are generally good when things get a little bit tight. And there are things like cash calls and things like that partnerships can get strained. So it’s like put the governance in good times, don’t wait till the bad time to try and sort that stuff out. So the next one is execution systems to make sure the most important things or priorities are identified and completed. So, you know, if your execution systems are tight, they’re tight. Execution systems can pivot pretty well in good times or bad. But it’s just to make sure you have tight systems. And most importantly, that we find is that every quarter use, zoom out, and make sure the blinders aren’t on. And you just don’t execute the annual plan, because you said you were at the beginning of the year. Sometimes you have to take you know, notable turns midstream, you know, one of our clients that more, almost doubled their revenue, and more than doubled their EBITDA in the last year through the pandemic, which is incredible. And it’s an amazing company. But it’s incredible. But we were looking at every quarter like a year, like our we took our execution system in an incredible boom. And every quarter looked at everything clean slate, like an annual planning session, just to make sure and now that some things are changing for them in the economy, and it might decline, we’re gonna do the same thing. Again, just tweaking the execution system because of the different cycle. This state that I live in Western Australia, we have 10% of the Australian population, yet we contribute 30% GDP. Okay. And yeah, so really, yeah. And we’re 1/3 of the geography, geography, geographic country landmass? Okay, so the state economy is an extreme boom, bust, we’re either in an extreme boom, where it’s a struggle to find people, or we’re in an extreme bust. And because it’s mining based, it’s ultimately sounding sounds like our province, which used to be primarily resource. it’s changed in the last 20 years, but used to be primarily a resource base. And it was like,
Brad Giles 42:36
yeah, we’d love to get some tips from you on how to move away from that. But you know, we’re like the Silicon Valley of mining and resources here. Yes. So it’s extreme. And what we’ve learned is that you can, many companies lose money on the way up, and they lose money on the way down. Okay. So poor execution can occur on the way up, because it’s a desperate scramble. And these execution systems get dropped or lost, because we’re so busy trying to execute the big projects that we’re getting, or the big things that we’re doing and chasing all of that growth. So that’s not that’s specifically not working capital requirements. That’s not growth sucks catch. That’s just bad execution on the way up and bad execute on the way down because everyone’s busy. So
Brad Giles 43:27
and sometimes they’re executing, knowing and thinking that they get cleaned up as they go forward, they’re kind of pushing the problems ahead.
Brad Giles 43:34
Yeah, at the moment, I’m dealing a lot with those kind of problems. So knowing that you need to have the execution systems, and the priorities identified on the way up and on the way down, and it may be different. So let’s move on to number five, you’ve got to ensure that you’ve got the data to make the right decisions. If you want to build an enduring great company, people who are managers, their job is to make decisions not to collect data, like you know, people who are going out to collect leaves in the forest, their job is to receive the data that is provided to them and to make decisions. So where are we at six, in the cycle that we’re talking about here? And the ups and the downs? Where is your industry at? Right? And what are the what’s the data that everyone needs to make at this point in time.
Kevin Lawrence 44:25
And, and generally, a lot of times what happens for companies is when in a boom time is that they’re focused on revenue, and they often neglect cost because there’s so much revenue and growth happening. And the companies that we work with that have been through a few cycles, the they’re a little wiser for it, or sometimes just the culture, but they tend to pay a lot more attention to costs. They watch the costs of the growth, and they don’t assume that the growth will cover the costs and time so it’ll be like watching overheads always and watching the SG and a expenses or the specific agenda overheads, another term overhead, but looking at the operational costs of the Minister of costs and keeping a handle on them, you know, of course your company needs another person or to an accounting team. But if you do mathematically, does it it is it warranted based on your industry, if accounting should be point 9% of revenue, and you’re running at 1.2, you know, you may have another issue. So it’s, you know, cost discipline and, and, and data to help you know, and again, so different, you might be looking for different data in a down market than an up market cost being an example, principles, seven, consistent profit generation and growth. So the whole idea is that the most enduring great companies consistently generate great profit and they keep tension around it. Now, it’s not that they’re afraid to reinvent, reinvest, they do reinvest, but they have a
Brad Giles 45:52
discipline around creating profitability, they have a skill around creating profitability, and one of the big ones is that they truly review whether it’s weekly, you know, jack, SRC, in his book, regular business would have you be doing a weekly. But you know, for a lot of companies, they you know, they would, at minimum, do it monthly, but a full p&l review of every line item and making a handful of decisions to improve profitability, and the performance of the company based on the numbers of the month. Again, ideally, it’s done weekly through KPIs and other things, or nsrc, even through the financial statements, but real discipline around profit, easy to get loose around it. And good times, like I talked about with the expense example. But but but even more discipline required to succeed without and challenging times.
Brad Giles 46:40
And then next, of course, balance sheet to endure the biggest storms, the biggest storm cyclically is what goes up must come down. It’s a law of nature, if you will. And so how I knowing that these challenges are coming, knowing the stuff that we spoke about before, about if your wages are going up, okay, your revenue, or you know, the amount of demand that you’ve got may reduce over time, how are you going to withstand that storm that will eventually come so that you can endure?
Kevin Lawrence 47:18
Yeah, and you know, in boom time, sometimes we can get in shorter term thinking we can get seduced into thinking that things will continue as they are. And again, zooming out, what’s the word chest, how do we set ourselves up to not only do you know, handle the storm, but to be able to capitalize on it, because now the storms shake, a lot of things loose, a lot of trees will fall over in the forests, a lot of opportunities open up. And if you’re there with a strong balance sheet, or ideally, a stack of cash, a big mountain of cash, you can make some of your best moves ever. And finally, principle nine a people magnet machine to attract and develop future leaders. And you know, people make the difference tennis as the last one on our list could be the first you could argue, but it’s critical is that you know, in the booming times, are you attracting and building the right people on your team? And then are you setting yourself up for the downtimes. So even it’s is, it’s as simple as that I’m just having a flexible workforce, or are outsourcing some parts of your business. So that if you do have to scale back, you don’t have to lay people off, you just use less of an outsource service provider or, you know, one of our clients is in the business of providing short term employees to the medical industry. And and and it and when things slow down. They just use less of that service provider. And again, they’re not you know, having to change the core team. There’s many, many things around that people making the machine. But it’s really what do you doing. So for example, right now, in a booming economy, lots of companies are doubling down on recruitment, because it’s harder to get people, right. And you can either pay a lot more or invest more in recruiting, for example, we talked about that a little bit earlier. So what would you add to the people magnet machine
Brad Giles 49:09
probably two things. First of all, your employee promise your employee value proposition, and then the virtual bench. So first of all, the employee promise, so no matter where we are in the cycle at the bottom, at the top, in the middle, how are you building your employee promise your employee value proposition so that the top a players that a players in your industry are going to want to come to work with you? That’s the people magnet machine and then secondly, how? How are you going to identify if you’re, let’s say we’re at the top of the cycle, how are you going to identify who are the A players that are going to be out of work in two years, or their company’s gonna go under.
49:59
Because if you are thinking to the next cycle? You want to know that some companies are going to take a dip? Yeah. And if you’re strong and focused and run your business, well, some of that amazing talent might lose faith in the companies that they’re in. And you might have an opportunity for yourself there.
Brad Giles 50:15
Yeah. So, again, when you zoom right out, and you can think cyclical, who are the top 10% of people in the whole industry? Do you know who they are? And are you tracking what’s happening to their companies so that you can strategically target them to try to poach them from those competition?
Kevin Lawrence 50:36
Exactly. So that’s the whole thinking of what do you need to do to look beyond the next market cycle, in all these different aspects of your business, as we went through those, some things would have popped into your mind, some different things that you might be able to do to set your business up, not only for that dip, if you’re in a boom, but then the next boom to be notably stronger, and being ready for the next dip, and then the next boom and the next dip, and being able to thrive no matter what happens. So no quick kind of summary of the show. Again, this is part two of where you’re planning to sell, or you’re planning to keep your business or are you stuck in a mediocre middle, you know, in the mediocre middle, you’re a passenger on this journey. And we do not want to be we don’t want to be in the driver’s seat, want to drive towards selling, or drive towards keeping this thing for 10, 20, 30, 40, 50 years. And, you know, we talked about in particular, looking at time horizons, and if you’re going to be in this building, during company, you need to go from there’s the tactical, you know, you’re so strategic three to five years. And then there’s cyclical, and then like 10 to 15 years that most cycles are. And then there’s that vision, which is you know, 25 or 30 years down the road. But sometimes you got to be thinking about cyclical and a bunch of your decisions to make sure you’re set up to thrive no matter what happens, and really encourage you to pick the thing you know, you need to do in more of a shorter version of what we’re thinking. If the market were to change. And then a longer version, what do you need to do to ride that next wave or capitalize on the next boom? Anything else you’d add on there, Brad?
Brad Giles 52:18
No, I think that’s, I think that’s a good, that’s a good cover. Really, what we’re saying is, if you want to build an enduring, great business, you’re either planning to sell or you’re planning to keep if you if you aren’t doing one of those two, then the third point is that you’re stuck in the mediocre middle. If that’s the case, and you want to understand how to move forward, you need to zoom right out. Think about the whole economy or the industry in a cyclical manner, and then begin to put yourself where you are against these nine principles of building enduring great company.
Kevin Lawrence 52:57
Yeah, awesome. So hey, thanks for listening. This has been the growth whispers podcast, with Brad Giles and Kevin Lawrence. For Brad you can go to evolution partners com.au, or for Kevin Lawrence and co.com. Or you can go to YouTube and just search for the growth whispers Hope you have a great week.