Small business. Big game

Introduction

This book is not about how to come up with a brilliant business idea, but about how to organize the work of a company so that its employees function as a genuine team and are capable of implementing a worthwhile idea. Experience shows that the brilliance of an idea is undoubtedly a plus, but if you look around carefully, you will find that most flourishing companies are not actually based on any revolutionary idea. What is revolutionary about McDonald's fast food, Starbucks coffeehouses, or products sold by the majority of chain supermarkets? Every business has its own expertise, of course, but the most successful companies offer their clients fairly ordinary products. Why then, of hundreds of competing fast-food chains, have only a few achieved great success, and of hundreds of grocery stores, why have only a few grown into large chains? In most cases, the secret is not in some special know-how or secret formula; it is in how a company is run.

It’s been twenty years now since my friends and I opened our first company. We were extraordinarily enthusiastic about having our own business and felt like travelers setting out in search of adventure. We all were in our early twenties, recently graduated from a higher education military institution, and knowledgeable about computer technology. The computer industry was just beginning to take shape, and it seemed to us at the time that our knowledge and skills were all we needed to create a successful business. Of course, we were apprehensive about the obstacles we faced, but the prospects were alluring. We had no money to buy ourselves equipment to show to clients, to create a minimum inventory, or to fulfill the other requirements of an official Apple dealer in Ukraine. We therefore decided to begin by selling users and official dealers all sorts of auxiliary devices such as external hard drives, scanners, and software.

We decided to deliver to order: We simply took orders, accepted prepayment, and then supplied whatever was needed. There was no talk at all of any sort of serious planning; we simply grabbed any order on which it was possible to turn a profit. No matter what the client wanted – instructional programs for preschool children, a professional scanner for a publishing house, a portable printer or a batch of modem cables – we took on the order. We very quickly earned the reputation of being fellows who could get anything for Macintosh computers. We found a suitable supplier in the United States – a small computer firm that bought everything we needed from various manufacturers and shipped it to us. Then we would deliver these goods to our customers. Our own equipment, meanwhile, consisted of nothing but a single computer on its last legs (good only for printing documents), a fax machine, and an electric kettle. A company that procured equipment used by oil refineries gave us a room in its office.

After several months of working by the maxim “We get what you need,” we already had good connections with authorized dealers, and thanks to this, we were able to land our first big fish. Even before we were an authorized Apple dealer, we purchased a shipment of computers from a dealer – a shipment that the customer had for some reason refused to pay for – and we sold that lot to another official dealer. Payment for these computers went from Switzerland to Turkey for some reason, in exchange for Hilal chocolates. Our profit from this transaction consisted of two computers, which became our primary asset and served us for many years to come.

After a while, we became an authorized dealer, and this enabled us to obtain new clients, which at the time were mainly western companies and organizations that had opened offices in Kiev. They were importing a significant portion of their computer equipment from abroad. The computers were mostly old and arrived the worse for wear, and they needed servicing and repair, so we earned a lot by providing such maintenance. Laser printers back then were very expensive and frequently broke down, and spare parts for them were expensive, too. So I simply went to a worker I knew at one of the Kiev metalworking plants and ordered a bag of spare printer gear wheels from him for twenty dollars, which enabled us to repair laser printers at a staggering profit. Electronics specialists whom I knew would repair computer power sources, which saved us from waiting a month for deliveries of spare parts and enabled us to solve a client’s problem quickly and earn something in the process.

Within a year is we rented separate premises in the city center and opened our own office. We had no money for redecorating, to be sure, so my partners and I refurbished the place ourselves, and we were able to buy office furniture for a song from a failed business. There was no money for an alarm system or guards for the office, either, and for several months my partners and I took turns spending the night in the office, doing guard duty. Business proceeded, and after a while, we began to earn good money on deliveries of desktop publishing systems, video processing, and computer animation. We were incredibly excited by our success, our profits were growing, the company gradually began to expand, and our first employees were hired. In our very first year as an Apple authorized reseller, we were first in the country for quantities of equipment supplied. That moment was the peak of our enthusiasm for the future of the company. But even then the first signs of impending problems began to appear.

From the first day of the company’s operations, my partners put me in charge of management, but I had no idea what it meant to run a company. It seemed to me that it took just a few things: agreement among partners and employees, personal competence, and personal example. But when we hired our first employees, I found that it was also necessary to allocate areas of responsibility, plan the work, and demand high quality performance.

Until then, the company had been essentially a sort of club, where everyone chose his favorite area of activity and pursued self-fulfillment in that area. And that was great! After all, if a person chooses his own area of activity, he usually acts it with the utmost responsibility. Look at how hard a person can work tending his own garden or engaging in his favorite hobby. It does not even occur to him that he may have worked too much or been paid too little for this work. When a person freely chooses the work that he is going to do, he feels really good about it and does his best. If he is forced to do something that he finds useless and unnecessary and does it under duress, he will, at the very least, be unhappy with the work. His productivity will also be very low; there is a good reason why they say that the lowest labor productivity was in slave-owning societies and prisons. Wise parents know that if they force a child to wash the dishes, that child will come to hate washing dishes more and more with each passing day and will, at best, grow up and hire himself a maid, and is at worst – is will spend his whole life with mountains of dirty dishes piled up in the kitchen. To get him a child to wash dishes on his own initiative, it is necessary first and foremost to inculcate a desire on his part to do so, to make an interesting game of it, and then the dishes will be clean and the child content, as well.

Managers often forget that a company’s most valuable asset is the creativity of its employees and their earnest desire to work. It must be noted that is actually not so much that managers forget to motivate workers to be productive; they just don’t know how to do it. Areas of responsibility need to be clearly defined, after all, and not only the dream jobs must be allocated but unpopular work, as well. So it was that in my first computer company I came up against the need both to clearly allocate functions and, strange as it may be, to require positive results from employees and partners alike. At the same time, I had no precise idea whatever of what the subdivisions and the functions should be, and therefore, in attempting to bring order to this work, I encountered many problems. And when I tried to manage the work of my partners, I came up against the idea of universal equality, which thwarted my attempts to impose order on their work. To some extent, I felt like a ceremonial VIP – formally acknowledged as chief executive but effectively without the power to insist on achieving positive results, since we were all equal partners.

By this time, the company was already three years old, we began to contend with tough competitors, and customers were becoming more demanding. In order to keep up and to develop, we needed more than just knowledge of computer technology and the desire to work. As in any other area of activity, increased competition led to decreased profitability. The standard markup when selling Apple computers was 32 percent when we began our work but fell to one quarter of that over these years. Of course, demand also grew during this time, and gradually this technology went from something exotic to a popular tool for desktop publishing. But in order to develop in this market, we needed real organization and effectiveness. We had no precise division of labor, and no system for planning and monitoring the execution of plans, and therefore we were unable to take advantage of the opportunities presented by growing demand, but we were nevertheless well aware of all the problems that came from the growth of competition.

At that moment, I became fully aware of my inadequacy as a manager, so I stopped enjoying my work to the extent I had when I was working directly with computers. Attempts to take control and manage the company’s performance and productivity only led to quarrels with my partners, which in turn impeded the management of employees. Operating efficiency was too low, and we were not only losing control of the company’s position in the market but also losing clients, although usually our bids won out and led to profitable contracts, allowing us to keep our heads above water. But I understood that unless we changed our methods of managing the company, our days were numbered.

The only problem I saw then was the differences of opinion with my partners, whose own ambitions, it seemed to me, kept them from allowing me to be an effective CEO.

If a person is incompetent, he cannot grasp what is actually the source of his problems. He therefore focuses his attention on some contrived reason for a specific problem, which of course does not help to solve the problem. This is how an unskilled computer user behaves when, in attempting to deal with errors, he completely reformats the hard drive and reinstalls the operating system. He does this over and over, but if the real reason for the computer errors is an overheated processor or memory failures, this will not solve the problem. Thus I, too, thought at the time that the only way to deal with the company’s problem was to reformat existing relationships. In the end, I did indeed reformat them, but not with the desired result. There were three partners, and I, finding myself in the minority, had to leave the company.

This sort of approach is common in small business that if something does not work out, an employee can change jobs, or the owner can open a new company, but as a rule, in this new endeavor he will sooner or later encounter the same problem again. I know many people who own several small businesses that are as alike as two drops of water in terms of their problems. This failure to change is tantamount to repeating third grade over and over again simply because the homework is too difficult in fourth grade-many actions are taken, but the result is poor.

After leaving that first company, I came to two conclusions. The first was that authority must be in the hands of one person, and the second was that there should be no co-owners at all. The first was true, but not the second. The problem was not in the number of co-owners, but in how I had managed the company and dealt with my partners. Fortunately, I stopped making such mistakes after that, and I was therefore able to create two successful manufacturing companies and one consulting company. But I did not immediately recognize the reasons for my first setback, and I had to seriously look into how to manage a group of people and organize their work.

The story of my first business is not unique. Many small companies are created based on the enthusiasm of a few people, grow to a certain size, and then at some point cease their development. But as is well known, that which is not developing is dying either quickly or slowly. Very often the great ideas of a company’s founders begin to be put into practice quickly and yield good results, and the business grows to a certain size, but then the company gradually withers and dies.

A friend of mine manufactures first-rate leather book bindings, and they are really very nice – wonderful leather, beautiful tooling, resulting in a very high-quality and aesthetically pleasing product. In my travels all around the world, I have seen many books in leather bindings, but I have not seen products of this quality in any other country. This enterprise is situated in Kiev, and about two dozen employees work there, most of them directly engaged in production. The company’s founder is a very intelligent, decent, and educated person. Employees work in that company for years at a time, and there is practically no turnover. The company pays a good wage, and relationships among employees there are quite relaxed and pleasant. It can be said with certainty that his business is a very stable small company. There is only one but here: His company has not grown for the last ten years.

When I spoke with him and asked him about his development plans, I saw that he wanted his products to be used by people throughout the world but that he was being held back by fear of the problems involved in expansion. He thought that the main thing keeping his company from developing was the threat of a reduction in quality and the difficulties associated with advertising and sales in new regions. Essentially he, like me in my first company, did not even see the true reason for the problems involved in expansion; he did not know how to organize the work or how to manage people, and what’s more, he was afraid to do so. Yes, he had a perfectly respectable income for a company of that size as well do satisfied customers. But despite being bogged down in the routine of operations, he himself worked with big customers, he himself managed financial affairs, ran production, and handled personnel. Such an array of duties would be hard to hand over even to his son, let alone a hired manager. No one would want to take on that whole headache. Looking at this situation honestly, the employees of this company had no prospect of advancement if the company did not grow. Therefore, even when a very talented and ambitious person joined the company as an employee, sooner or later that person left. Some company founders tell, with a mixture of pride and regret, that many of their former employees have started their own businesses. This is truly something to be sorry about. If these men and women have been able to found their own companies and have achieved some results, they could have made real contributions to their previous employers. It is obvious that a group of capable people can move mountains, but instead of a single company with tremendous results, the outcome is often several small and usually unsuccessful businesses.

The smaller a company, the less earning power it has. But what is interesting is that managers and employees of small companies have more problems than those of large companies. This is easy enough to understand. In a small company, most people are jacks-of-all-trades, performing a wide variety of functions. Thus quite often in a small trading company, a single employee takes orders from customers, works with suppliers, arranges deliveries, resolves conflicts, and collects receivables. A department head in a small company performs even more functions. It is therefore difficult to hire people to work in small companies, as a person must be prepared from the outset to perform a multitude of functions. Managing such employees in small businesses is even more difficult because when a manager requires one thing, an employee can always say that he is busy doing some other very important thing. It is also difficult to raise the level of professionalism of such people because there are too many different areas of activity, and it is even hard to know what training to send them to – computer courses or a seminar on advertising. It is hard to make an employee more productive when he or she has been doing too many different things; there has been no clear job definition for such an employer, so it is difficult to decide how to make that person more productive and focused through in-service training in computer courses or a seminar on advertising. And the most vexing thing of all is that, with all these difficulties, a small company does not bring in a large income, and this means that it cannot properly take care of its employees or make a substantial profit for its owners.

Take a look at the employees of successful small companies and you will find that they work long and hard, frequently more than the employees of big corporations. At the same time, they are paid less, and they have fewer opportunities for professional advancement and a more focused area of activity. Look at this from the point of view of a capable employee who wants to achieve much in life. What are his prospects in a small business? If he is very good, he will very quickly hit the ceiling. Even if he becomes the top manager in a small company, his problems will still outnumber his triumphs. At the same time, in attempting to achieve great results in his work, he will inevitably take on more and more related areas and accumulate duties, but for most of the time he will not be doing what he dreamed of, but simply coping with chaos. You could say that a small business has one thing going for it: It may grow into a big one.

In order for a company to continue growing for a long time, it must leap many hurdles, including people-management problems. As a consultant, I interact with a large number of managers and employees, and in small business, I often meet people who are not even aware of the rules of the game that they are playing or the laws of people management. Frequently, people who are simply good specialists become managers; they do their work capably but have no idea how to organize the work of their subordinates. Most of them think that a manager’s responsibilities are giving orders, establishing incentives, and imposing penalties. Even so, they don’t even know how to handle giving orders professionally, have no idea how to issue them correctly, how to monitor performance, or how to get informative and useful feedback. I am certain that you have dealt with these types of sales department managers, people who only recently were good salespeople, are competent in working with clients, but know nothing about what to do with their subordinates. Their favorite line is “Do as I do.” They naively think that the main duty of a sales department manager is to follow his superior’s example and advice regarding sales.

I was once such a manager, naively supposing that, since our company sold computers, the main thing was sales, and that all our success depended on that. I was quite a good salesman, and all the other employees of the company observed with pleasure how I did it. Of course, applause is gratifying to a person’s self-esteem, but it is impossible to create a successful company based on a principle of “the star and the rest”; for great achievements, teamwork is necessary.

Being a star is no simple matter, and creating a truly successful company and achieving great results using such an approach will not work. Real success calls for not only professional skill in sales or knowledge of production methods; the key factor is the ability to implement operations management. This is not an incredibly difficult thing, and the principles of managing a group of people are as old as the world. But it is also true that these principles are very difficult to apply in a small company in which every person and every cent counts. In this book, you will find answers to the fundamental questions about company management and, most important, how to apply this in practice, even in a small company.