It’s too bad that Professor Jim Collins’ latest book, Great By Choice, wasn’t published during the good years, well before the Banking Panic of 2008. A lot more kitchen/bath dealers who would have read the book, and heeded his teachings, would still be in business today.
Collins and his team studied a bunch of companies that operated in volatile markets and succeeded spectacularly compared to the competition. A common management trait he found among these companies was simply this: they led with “productive paranoia.” Because these management teams recognized that business conditions can unexpectedly change, they constantly asked “what if” questions. In other words, management recognized that the most important decisions they could make would be those made before something happens.
Strategies for Success
The first strategy adopted in support of “productive paranoia” was building buffers and shock absorbers for unexpected events, bad luck or opportunities. Most often these contingencies took the form of building significant cash reserves.
Now it’s true that a high level of cash on your Balance Sheet is inefficient most of the time, unless invested in your business. But in rare scenarios – like surviving the Great Recession or buying a business to gain a hammerlock market share – easy access to this cash can keep you advancing on your “20-Mile March” to the promised land.
A second strategy used extensively by these successful, publicly held companies was to diminish, manage or completely avoid risk. They became expert in “time-based” risk – tying the degree of risk to the pace of events. They would go slowly with a decision when they could, and go faster when they must.
Witness the difference in management behaviors between those companies that were successful dealing with risk and those that were not:
The question the successful companies would ask is this: How much time is there before the risk profile changes? They would remain calm and let the situation unfold to gain clarity. Collins called this management technique “Zoom in, Zoom out.” These successful companies would “zoom out” by stepping away from their operations to gain perspective, calibrate the pace of decision-making time, assess the need for a disruption in the strategic plan and formulate a considered response to the change in conditions.
Once there has been disciplined thought given to the situation, the successful companies would “zoom in” to take disciplined action, focusing on supreme execution of their new plans and objectives. They would neither freeze up nor immediately react to fast-moving threats. They would think first, even if they had to think fast.
It’s been said that the only mistakes you learn from are the ones you survive! So, as survivors of the Great Recession, and with Collins’ “productive paranoia” conclusions freshly minted, let’s chronicle the lessons that should have been learned over the last five years:
- Build liquid cash reserves equal to at least 12 months of fixed expenses, including owner’s market-rate salary, to survive a second banking panic or capitalize on a grand business opportunity that presents itself;