What strategy decisions do you need to make to win in 2023? 

2023 looks to have major challenges that are slowly developing. And this is especially so when considering your strategy and how it might be impacted by the changing environment. One of the most important questions to answer to best prepare for 2023 is how can I maintain consistent financial performance if my customer’s needs or spending changes?

Jim Collins said that 

“The signature of mediocrity is not unwillingness change, the signature of mediocrity is chronic inconsistency”

This week we discuss how to maintain consistency if your customers are impacted, and how can you win in 2023 through the strategy lens.

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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.

 

Kevin Lawrence  00:13

Welcome to the growth whisperers podcast where everything we talk about is about building enduring great companies. Because that’s kind of what turns our crank, we like it. We get excited about companies that build value over decades, generations, whatever it happens to be in. So we study and work on with our clients every day. I’m Kevin Lourdes, in Vancouver, British Columbia, Canada. And I’m here with my co host, Brad Giles, in Perth, Australia, Brad, how’s it going today?

Brad Giles  00:45

It’s pretty good. I am turning my crank on endearing great companies as you put it, that’s going, going well, on this Christmas Day, I think this episode

Kevin Lawrence  00:57

is Christmas Day, this one’s launching, we’re not recording it on Christmas Day, we’re with our family. So for all those of you that celebrate Christmas, we wish you a merry Christmas. And for those who don’t Happy Holidays, and whatever you celebrate, I hope you’re having a great day today. Whether you’re working or with your family, whatever it happens to be. And maybe you’re doing both I don’t know. But hopefully you’re having a wonderful day. So, Brad, what’s your kind of word phrase or thought of the day? Well, it’s fun wondering what it’s family,

Brad Giles  01:29

it’s family, because certainly in our household in our culture, the holiday, that is the 25th of December, is really a chance to stop to enjoy a meal or a few meals with a family. And just slow down and look at things through perhaps a slower perspective. So yeah, it’s family.

Kevin Lawrence  01:58

Yeah, and I would tie into that connection, and just, you know, quality times with people you care about, everyone’s frantically running around and our culture and, you know, people come together on the 24th and 25th, in particular with families, and spend time together and tell stories and laugh and, and, you know, whatever rituals that they have in their family and just come together and have a great time and get reconnected. People travel all over the world to get back, you know, for the 24th and 25th. And then we have, you know, Boxing Day where many go shopping and, you know, others have lots a day for a lot of parties and things like that with friends. But it’s great time to connect, and we get re grounded and those people that you know help to bring out the best in us and whether it’s our parents or siblings or kids, whatever. It’s dad special time. So yeah, wonderful.

Brad Giles  02:51

Yeah. For us. For us. It’s very much about the beach, believe it or not. Some on the beach. Yeah, Christmas holidays. Yeah, it’s a lot of never thought about

Kevin Lawrence  03:04

that. That’s right, because it’s your summer for us. It’s winter. And it’s about you know, a great Christmas Day is when it snows. Oh, like we hope that we always hope for a bit of snow on Christmas and not so much that the relatives have a hard time getting around. But enough that it looks having a white Christmas because it looks beautiful. I guess that probably doesn’t happen for you to probably don’t have that concept down there, dear.

Brad Giles  03:26

Not at all. Not at all whatsoever. Not the idea of Christmas. That where it’s snowing is only on American television. That’s it? Yeah, we don’t know what it means.

Kevin Lawrence  03:40

I’ll tell you I could get handle a little bit of snow Sun a Sunday, Christmas would be nice. All right, well, let’s jump into today’s show. So you know, we’re talking. We’re on episode three of five in this five part series about planning to win in 2023. We had an overview, which was the first one, the last one last week was around people and how do we really think and optimize when it comes to our people? And today it’s your own strategy. And you know, when it’s really you know, in a downturn that we’re potentially heading into, we’re going to hope not but the the arrows are pointing in that direction. It’ll customers might need different things. Or they might need a different version of the same things and spending might change and it might not but we need to have our eyes wide open. And you know, in the the quote I shared last week from Art of War from Sun Tzu is about victorious Warriors win first than going to war, which is really thinking ahead and planning. It’s kind of the road we want to walk you down a bit today. And so that’s where we’re kind of going is how can you win when it comes to the strategy window that you look at your business through? How can you spend a bit extra time to be extra prepared and be on your toes so that you’re not surprised and having some on desirable or shocking surprises? Something caught, you know, maybe a little bit asleep.

Brad Giles  05:03

I think that’s, that’s, that’s really good. Like we’ve got a plan. We know. It’s a planning, right, but But equally, I come back to a quote that our good friend Jim Collins said, that is the signature of inconsistency is not unwillingness to change. The signature of mediocrity is chronic inconsistency. And so what we’re saying is like, we have a many companies broadly have a strategy, how are you going to be different how you’re going to create a unique and valuable position in the market that is different from competitors. And we may need to adapt given this environment, but we’ve got to keep the fundamentals in place. Pivoting is fine for startups where they haven’t been able to get product market fit. But pivoting is not something that a business that is enduring and lasting should be doing.

Kevin Lawrence  06:06

Over pivoting is a problem. Yeah. And some people get too caught up. By the way, Brad, I went and just I was just tweak that quote, because when you said it didn’t land, so I just looked, the signature of mediocrity is not the unwillingness to change. The signature of mediocrity is chronic inconsistency. Thank you. The first word, the first phrase was mediocrity. I was listening to it. And I was like, I got I had to clarify it. So no, no, thank you. It’s yeah, mediocrity is basic, often changing too much, and not being consistent and grinding out the things that matter most. And that’s, that’s, you know, it’s, um, you know, another quote from Jim is, it’s, you know, success is the relentless execution of the boring basics in your hedgehog, right? The boring basics that matter? Absolutely most. So we’re gonna dig into some more of that stuff that the first thing I wanted to talk about, example is that, you know, I was with a CEO two weeks ago. And I’ve been working on this for forces of growth, stuff from from my new book. And I was testing some assessments, but no matter what we had them figure out that they were spending about 10% of our time in the growth quadrant, and 60%, at least, or 70, in the improvement quadrant. And we could have a whole conversation about why they were in the improvement quadrant, what is it to do with their team or their foot, but the reality is, what they realize based on their growth goals, they probably need 60% of their time focused on the growth of the company. And that’s, you know, sales, marketing, mergers and acquisitions. Acquisitions don’t want to merge. New markets do that, but they’re there, they got a gap of 50%, they’re distracted with a whole bunch of other things said, definitely the pilot needs to be in the cockpit actively flying the plane, not messing around in the back, and dealing with the baggage or dealing with, with, with with the with the the customers. But they were they were they were way off and they had the epiphany and they really have to relocate their team. So the thing to really share is, you know, the key was strategy, you need to be focused on every business is different, but what is where, you know, around growth, or the opportunity part of your business, and not too much time spending problems or dealing with those other issues, because you’re gonna have to work harder to get the same growth in other CEOs said, yeah, he didn’t see it was like, you know, I’ve realized he spends, you know, 30 40% of his time in a growth quadrant. And he realized he probably needs to spend 60. And I said, Why 60? He goes well, because it’s going to be twice as hard to grow as it has been in the past. So if I want the same growth work worth rate, I probably need to do quite twice the work on growth to get the same growth rate I’ve had in the past. I was like, yeah, it’s brilliant point of it is spending your time where it matters and where it’s going to drive your business, which will be different than it probably was last couple years.

Brad Giles  09:08

So for our listeners who have a belly full of Turkey, and I’m thinking, what are these quadrants and the four forces. So we did an episode, I think it was episode 137, the four forces of growth. And this is the model that Kevin’s working on for his new book about the four forces of growth. So you can go back and have a look at that. But it’s a great point, Kevin, you know, we need to be consistent with what we’re working on and understanding

Kevin Lawrence  09:38

and where we’re spending our time. Yep.

Brad Giles  09:41

Yeah, yeah. So maybe we kind of begin as well by asking about your hedgehog. Looking to the uncertainty that is 2023. Let’s go back to the let’s get back to the Hedgehog, which is from Jim Collins. and ask three questions. What’s your core purpose? What are you deeply passionate about? What’s your economic engine driver? How do you make money? And then number three, is what can you be the best in the world at. And so the intersection of those three circles is the hedgehog concept. And that is the discipline that we maintain as we climb the mountain. That is our V. Hag. So in the uncertain times, we need to maintain that discipline, also.

Kevin Lawrence  10:28

Yes, and that’s a great to go back to those core principles that you’ve looked at and worked on over the years to get reground. And if you don’t have those guiding principles, you know, maybe sort them out pretty quick.

Brad Giles  10:40

Because they are the guardrails. So as you’re racing up the mountain like that, we should revert back to these fundamentals. And that is, you know, the basis of strategy is understanding these broad decisions that we make, we’re going to stick in,

Kevin Lawrence  10:54

right, who are we who aren’t we? How do we win? How do we not win all that stuff.

Brad Giles  11:00

So it reminds me of a client who was heavily reliant on government spending. They, they were always that they service that market, and they did it well. But the problem, they were concentrated in one area. And whilst it wasn’t the going into the down market that we’re talking about, in their world, it was a down market because a new government came in. And that meant that the new government had new priorities, and they stopped spending everywhere that they that they didn’t really wasn’t essential, let’s say, and so suddenly, their revenues just plummeted. And so understanding how does the strategy cater for those types of scenarios, and being prepared for that means that you don’t have to make terrible and difficult choices, if that happens when it’s too late. And MCU, Sunsoo quote from the beginning, that they’re going to war with a plan.

Kevin Lawrence  12:15

Yeah, and you know, and lots of governments are spending money like it’s going out of style. But if things tighten up in the economy, many sectors, some countries will tighten up spending, some will keep printing money, and that’s a whole different stretch. Yeah, that’s another thing to be careful of is your customer concentration, and how you set up based on where the market could go into different scenarios? Yeah, no other principle I think it was, is, you know, a client that, you know, we have, and we did this during COVID. We also did back in Oh, 910. And it’s just getting out to the out front, all people getting closer to the customer. And I get basically, I call it stop playing office, when times are booming people can spend a lot of time in our office and tweak things and manage things because there’s so much demand. But it’s it’s dangerous to spend too much time in your office. And some people say they can’t get out. Well, that’s a whole other conversation. But basically, you know, many companies and back then, and COVID, time for the number of times that executives get out talking to customers, meeting customers, meeting prospective customers. So one, they’re supporting the effort that’s out front, to generate their opportunities, but to their learning and hearing what the customer is saying and wanting. And you don’t get that being in the office, you don’t get that through reports. So basically get them back up front so they can learn and understand a heck of a lot more and not go ahead read.

Brad Giles  13:46

And in. I talked about that as the ambassador role. Yeah, in the book made to thrive. The five roles of a CEO, number two is the ambassador role. You’ve got to be out there if you’re the leader or a leader, and you’ve got to be understanding what’s happening, communicating with clients regularly. So that clients and employees and others but yeah, it’s a key role that you cannot forget. And you certainly can’t forget, because you’re worried about what’s happening. You’ve got to be out there knowing what’s going on.

Kevin Lawrence  14:18

Correct. And it’s easy to get bad habits in booming economies. Yeah. And you know, it’s the other company I’ve worked with in the US they had two company planes, just and they were amazing. They had this discipline nail, but they had two planes, so that they could go and see three and four customers a day. And they had big customers they did a lot of volume with and they would take four or five members of the exec team and hit four customers. And those, each of those customers would do 10s 10s of millions of dollars of business with them. And they will go and stop and see them regularly which allows them to keep their relationships keep in front and they show up with their work and executives seen when they were working on deals, right? Not the salesperson, not the head of sales, the head of sales and the executive team, which means that we’re here to do business like seriously here to do business. Now that was their strategy. And it worked incredibly well for them. And it’s not about getting a plane, or planes, but it’s about regularly being out in front of your customers, because it shows commitment, show force, show of how important a customer is,

Brad Giles  15:27

an effective strategy should organically drive customers to your business, because you’re meeting their needs better than any other competitor. It’s all about the customers and meeting their needs. And sometimes, in these environments, whilst we maintain, okay, we don’t want chronic inconsistency, we may need to adapt and understand. So going back and thinking about your core customers, and what are their needs? And are their needs changing in this new 2023 potential recession environment? Is their spending perhaps changing could actually create opportunities as well as some challenges and actually taking the time to understand in this new environment? What do we need to do? How do we maintain the integrity of our hedgehog and what we understand to be our strategy moving forward?

Kevin Lawrence  16:29

Yeah, and having the humility just to go be listening and asking and understanding, and the customers will be taught. But once CEO says, Every time I go out, I find way more opportunities than we can probably handle. But they said, they don’t get enough. Share your story, what not to do. And this was a story I remember very clearly in, you know, the the economic downturn, and this was a company that I worked with, I’m gonna be generic out of respect for the company, but they were booming, they had the highest EBIT, a percentage they’d ever had. And it was just a cash cow and money machine. And, you know, they had a strategy that was very clear, major national brands, and they were had all the same products and the same features and benefits. But they were like on a lesser known name. But the product was essentially the same, but not from a national brand. Think of it being, you know, like a knockoff of Apple. Yep. Right. It’s not as extreme because they weren’t in electronics, when give me an example. And if the Apple had all the features you wanted, it was $1,500, they would have all the same features. It wasn’t software dependent, so it wasn’t as challenging to convert. And, and they would have been $1,200, instead of $1,500. With all the features, all the stuff looks the same, just a different brand on it. So that was their strategy. And they done very, very well. Business was booming, going through the roof, everything. And then when the market changed in Oh, eight or nine, they got hammered hard, like really

Brad Giles  18:09

badly as in, they lost sales,

Kevin Lawrence  18:12

a lot of sales more than they should have, they dropped more than the market dropped. And what happened is these big national brands obviously got more compatible that they found when they actually went into the market. They no longer had any differentiation and competitive. They basically their strategy wasn’t at play. See what happened is the market was so booming, well, they were selling their iPhone, they’re no name iPhone, for $1,500. And the iPhone was $1,500. So they were right there. If the iPhone was 1500, with all the features, they had all those features, they were supposed to be 1200 to have a value difference. But they were actually at the same price. And the price it creeped up, not because of the strategy because there was so much demand in the market, it didn’t matter. Yeah. And what they didn’t realize is they given up their competitive advantage. But then all of their designs and their supply, everything was designed around a $1,500 unit. They had lost their way on being of a cheaper alternative. And it’s sad because it really hurt the business took a long time took out all the profits. Thankfully, they had stacks of cash at the time. So that was good. But these were good people, smart people. But during the boom, the CEO took his eye off strategy, and they were full blown execution mode. And basically they they drove them they drove away their own competitive advantage. They let it go. And when the market changed, their competitive edge was so weak that it really hurt.

Brad Giles  19:49

Maybe we’ll talk about this when we get to the execution section and we’re looking through our eyes trying to seek discounts from our suppliers or Go get better prices been in this environment. It might be worth considering. discounting. So what are we going to do? If customers ask us to discount now I’ve got my opinion on discounting. Do you think we should be discounting Kev, if we’re given the opportunity to win some more work in a downturn? No. I agree. No, why?

Kevin Lawrence  20:33

Danny, undisciplined person can lower price to get a sale. That doesn’t take any skill. It doesn’t know there’s negotiating terms and salespeople do all the time. But changing your strategy and starting to discount is a dangerous way to go. So I’ll give an example from the car world. I’m a car nut. Brands like Porsche. I know for sure. And I believe Ferrari. when demand drops, they make less units. So they don’t have to discount at all zero. So they modulate demand, American carmakers in the past, like the GMs. And the Fords. They don’t they don’t modulate production near as much. So when the market slows down, they have to discount like crazy 10,000 Off 20,000 Off $25,000 Off, you know, so it’s a different strategy. And if you want to preserve the value, particularly brand and things like that, you want to discount it all you want to avoid discounting at all costs, just just just constrain your supply, maybe don’t produce as much for a period of time. The only way it makes sense to discount if there’s a real way that you can discount and increase your profitability. Right, some people will go chase margin dollars and say, Well, you know, instead of doing a $20 million contract, with $12 million of margin, we’ll do a $30 million contract with 12 million in margin. That’s just that’s just not smart. I mean, sometimes look, you got to do things sometimes. And sometimes you have no choice, right? You’ve got fixed assets that you got to cover with some volume and things like that. But generally, that should be the very, very last option. And it’s just, it’s an undisciplined way sometimes. And sometimes maybe it’s a strategy. If you’re a discount brand. It’s different. I’m talking if you’re not a discount brand. So there should be a lot of other levers that you can pull first. But it’s the one your salespeople will come back with real quick and say you got to do

Brad Giles  22:48

because we need to make the gross profit budget so that we can pay expenses. That’s what they’re gonna say,

Kevin Lawrence  22:55

well, actually, they’re actually they’re gonna say we’re gonna need to do it so we can get her bonuses or hit her sales targets are good, our Commission’s Yeah, they often don’t care about the inner workings. So and they’re not bad people. I don’t blame them. But the reality is, discounting is usually that means you’ve got a lack of a strategic alternative. And but yeah, you might it may be maybe your industry gets more aggressive on pricing. But it’s it should be and I just heard this great quarter, but discounting And who was it in the last week that so for example, one of the clients that, that I worked with, and I’m trying to recall who it was, there’s so many great examples, one of these I know once and thing is, once you start in retail, for example, once you start going on sale all the time, and you strain your customers to expect discounts. It takes years to then train them to wait and pull pay full price. Yeah, because people started discount hunting all the time. So sometimes people have to do it. And it’s part of what they do. I think that just means you need to get more creative and find ways to do it. So you can discount and increase your margins and change the structure of the deal some way or you can discount and increase your net profit from it or your EBIT from it from other creative ways. Yep, fine. But that’s, you know, discounting the top line in a way that might benefit somebody else but but making sure that it’s more sticks for you. That would be the discipline try and stick to at all but if at all possible.

 

Brad Giles  24:29

Well, if we overlay the the strategy lens on to what we’re saying here, we want to avoid the industry standard price, okay, at all costs. Yes. Because with the industry standard price, all we’re doing is collecting the inputs of costs of labor and materials and real estate and whatever else. And then we’re just ending up at the average price to produce a theoretical average 10% But, or whatever percent, but Yeah, strategy tells us that we’ve either got to charge more than that by providing more value, correct way of additional options service, what have you, or we’ve got to provide more value by having a more efficient parmi efficient supply chain and efficient delivery method. So we’re either providing more value above the average price or below. And so putting that back to discounting, either, we’re saying, but what we’re saying is, if you can provide more value through that discounting, then that’s fine. And you may be able to actually discount by adding something in to a deal. In these

Kevin Lawrence  25:43

dots. Yes, there’s lots of things. And the point of it, I think, Brad, that you’re getting, is that put that creative energy onto how do we add more value? Yes, yes, yes. That’s it, like, how do we add, so I’ve got one of my clients, and we were just taking a look back. And when we started working together, their gross margin was 22%. Right, which is typical for their industry. But we also found that the best was getting close to 40%, not the average, they were at the average. But the best was 40. So we started hunting down 40% margins, and it took a few years, we got the whole company up to 32 points higher, most of which is sticking to the bottom lines, they have a much healthier bottom line. But the point of it is, is we started hunting it and we started thinking dramatically different, not linearly and logically, but strategically looking for value that we could create and creative things that we could do to charge more and or have a notably lower cost base and crank up the margins, which we did successfully. But it’s because we put and I have many examples of that. And it’s not about the economy, or just it’s looking for problems you can solve. The people are willing to pay more for or packaging it in ways that make it more attractive for them because they have different needs. Yeah. So very, very good point.

Brad Giles  27:11

Yeah. So where are we going with this? If we, if we look at it, what we’re saying tough environment and 23. We’re looking at it through the lens of strategy, which is about creating a unique and valuable position relative to the competition. And then we come kind of come back and say, we’ve got to be maintain consistency, we’re looking at the hedgehog around that. We’re trying to then say, it comes down to the plan. So you’ve got to be able to look at what your plan is delivering. Are you going are you going to is your plan going to be less effective? i You’re going to be not able to meet customers needs. I saw a great quote from Jeff Bezos recently. And and it’s really interesting because it makes us zoom right out, it says, I very frequently get the question what’s going to change in the next 10 years? I almost never get the question, what’s not going to change in the next 10 years? And I submit to you that that the second question is more important of the two because you can build a business strategy around that things or other things that are stable in time. So without going through that in great detail, like that’s a really important point, is your strategy, something that won’t change through this potential downturn?

Kevin Lawrence  28:38

And what pieces of it for sure, won’t change. And there might be some that you wonder about, but some of the fundamentals, you know, Collins calls it a relentless execution, on the boring basics, were those boring basics you gotta master because you know, they’re not going to change what the customer wants is going to be the same.

Brad Giles  28:55

And to that point, very quickly, Jeff Bezos goes on. And he says, I can’t imagine a future where people aren’t going to say, I wish that prices were a little higher, or I wish you could deliver a little bit slowly, a bit more slowly. So what are the other fundamentals of your strategy, the difference between you and the competition? And are they everlasting?

Kevin Lawrence  29:18

So another thing really quick and then we’ll we’ll wrap up but getting into that thing about profitability also at the root of the whole thing is he got to know where you make money and where you don’t and be creative about opportunities and a lot of people don’t have great granular profitability reporting. Part of this four forces of growth were built an assessment and behind and on the capital side, there’s a big piece on reporting. Most people’s reporting is very high level in general, and they don’t know the most popular profitable customers. They know the gross margin maybe, but not profitability per customer, not profitability per product or per region. And then the companies that we dial in reporting, you know exactly what’s what, where is the profit made? Where is it given back because of customers that you don’t make money on. So getting that profitability, and then you can make conversations interesting. I had one client that had a customer that was about 25 million a year of volume. And they came and they wanted further discounts. They demanded it in a tough time. Well, thankfully, we had profitability per customer data, which we reviewed. Well, we made 250 grand a year profit after everything was allocated, because there were a high maintenance. And basically, in the meeting, I go tell them to pound sand. That’s a nice way to say some bad words in our culture. Yeah, um, to get away, like, tell them that like, no matter again, I was able to say that I wasn’t making the decision. But I knew if we’re making 250 grand or $25 million customer, I’m not even entertaining the conversation. Yeah. Of a further discount. It’s no, actually we should increase your price. Yeah, but the thing is, we had the data to know not to even waste any time on it. And that’s the key. Right? And, and obviously, and there was no way to really there wasn’t a lot for a lot of reasons to really increase the margin of the profitability on that customer. But it’s understanding that, then then that makes it much more,

Brad Giles  31:30

that’s the kind of gift that you can give your competitors in a down market.

Kevin Lawrence  31:35

Yes. Go make yourself real busy with this client that you barely make a percent on? Is that a percent? That’s 1%. Yeah, it’s, it’s, it’s horrific. It’s less than 1% 25 2.5. It’s not much. It’s just 1%. And, and, and if you put a cost of capital on that, ya know. So, um, the idea here is really evaluate your strategy and look about where you’re making money, where you’re allocating resources and your focus. I mean, having you know, in that last piece, I talked about return on capital having and we’ll talk about that in the profitability section of the capital section. But knowing where you make money based on where you invest money is also a helpful thing to get into it. No one will works out there talking to customers, feeling touching, hearing the market, and making better decisions, and ideally, avoiding discounting unless that’s something that your whole industry is doing, and you’re forced into it.

Brad Giles  32:36

Very good. Good conversation. And you know what, it actually went down a number of rabbit holes, which I enjoyed, I hope that you did as well. So, yeah, look, it is that’s why we do this. You know, we’ve got other things to do on Christmas. We’re not really here on Christmas Day. So yeah, how do you win in strategy? I guess you’d begin by being consistent understanding the needs of the customers, all the things that we’ve covered off without going back to them. Now. Next week, we’re going to be talking about how to win in strategy. How to win in 2023, excuse me on execution. So I look forward to that one some interesting because, look, execution is how you retain the profit, which matters so much. So let’s move to close. My name is Brett Giles. This is the growth whisperer as my colleague you’ve been hearing chat is Kevin Lawrence in Vancouver in Canada. I’m in Perth, Australia. As you may be able to pick up by the difference in the accents that we have. You can find both of us we put out an interesting newsletter each week. If you enjoy this subject matter, you can find mine at evolutionpartners.com.au You can find Kevin at Lawrenceandco.com. And obviously also you can find us if you prefer to see our smiling faces on YouTube just by searching the growth whispers hope you’ve enjoyed the show I look forward to and I hope that you’ve actually had a good Christmas holiday, whatever you celebrate a bit of a time off bit of a break. Hope you’ve enjoyed the day. Look forward to speaking to you again next week. Enjoy your week. Have a good one.