I finished Jim Collins’s latest book, Great by Choice, not too long ago. The premise behind the nine years of research that went into his book is this simple question: “Why do some companies thrive in uncertainty, even chaos, and others do not?”
The question was not just intellectually compelling for me, but so relevant to what kitchen/bath dealers have been experiencing since the Panic of 2008, the ensuing Great Recession and the four years of anemic recovery that still lingers with many of us today. Collins’ research revealed that some companies and business leaders navigate this type of world exceptionally well: “They don’t merely react; they create. They don’t merely survive; they prevail. They don’t merely succeed; they thrive.”
Collins labeled the seven publicly held companies featured in this book “10Xers” because they outperformed their industry indexes, and the stock market in general, by at least 10 times over 15+ years. His complete data set from all of his research covered the evolution of some 75 corporations. So, his findings were distilled from more than 6,000 years of combined corporate history. Moreover, Collins’ findings reinforced many of the best business practices revealed in his previous books: Built to Last, Good to Great, and How the Mighty Have Fallen.
Economic turmoil is predicted by many business experts to be the new normal. Indeed, Collins expects it to be the case for the next few decades! So many of Collins’ conclusions can be instructive for kitchen and bath design firm owners as they try to develop their businesses into engines for wealth amid a climate of world economic chaos. Studying leaders operating in extreme circumstances revealed the stark differences in their makeup compared to leaders operating in more normal economic environments. And, it’s these exceptional leadership qualities that kitchen/bath dealers will need to muster for themselves to be successful going forward.
The Need for Fanatical Discipline
Collins discovered that 10xers had divergent, successful outcomes under difficult conditions, principally because they displayed very different behaviors. One such critical behavior was a “fanatical discipline.” Discipline essentially is consistency of action – consistency with values, with long-term goals, with performance standards, with procedures, etc. over a long period of time.
As I have stated in previous columns, kitchen/bath firm owners and designers have historically lacked discipline, much less a “fanatical discipline.” Indeed, they revel, even flaunt, their independence and creativity. It’s long been my perception that thousands of kitchen and bath design firm owners did not survive the Great Recession largely because they lacked the necessary discipline.
Absent was the discipline of preparing an annual budget, of developing and using a strategic plan, of following a written sales process and of squirreling away 12 months of fixed operating expenses for an emergency fund.
A July 2010 kitchen/bath dealer survey – conducted jointly by the SEN Design Group and Kitchen & Bath Design News – confirmed this pervasive lack of discipline. For example, 83% of the respondents did not develop an annual budget. Yet no responsible kitchen/bath owner – or sales designer – would attempt to remodel someone’s kitchen without a detailed floor plan and estimate. Together, they represent the only way that a client will end up with a project that would satisfy their needs and aspirations, and the only way that a dealer/designer would achieve their desired gross profit goal on a project with a fixed sales price.
But apparently kitchen/bath design firm owners haven’t made the connection that this same kind of detailed planning is required to reach their financial goals in terms of annual revenue and net profit. The SEN/KBDN survey also revealed that fully 90% do not prepare a business plan or a strategic plan. Is it any wonder, then, that only a handful of kitchen/bath dealers in this country have achieved durable financial success by, for example, expanding to successfully operate multiple showroom locations?
Developing Fanatical Discipline
Essentially, as a group, kitchen/bath dealers have lacked the discipline of becoming well-rounded businesspeople. That must change for kitchen and bath design firm owners to thrive in the new normal of constant economic upheaval. Below are a few key actions that owners can take to develop a “fanatical discipline” for themselves, while injecting a greater dose of discipline into their operations for more consistent growth in revenue and net profit.
- Prepare a three-year budget. Why three years? Because it creates a much better vision for where your company can be heading. But develop the budget the right way. First, project a conservative revenue total for substantially completed projects per year, broken down per sales designer. Second, estimate the necessary sales and administrative expenses in support of achieving the income figure, including market-rate salaries to you, as the owner, and your staff. Third, estimate your other income (design fees that don’t materialize into projects, rebates, cash discounts, interest from investments, rents from sub-lessors, etc.) and other expenses (i.e. interest on loans). Fourth, project the desired net profit. Fifth, reverse engineer to what the gross profit (in dollars and in percentage) must be to finance the budgeted overhead and desired net profit for the projected total income. Dealers who commit to this particular budgeting methodology will awake to the direct connection between a company’s gross profit percentage and the correct pricing for every one of the projects they complete in any given year; indeed, most will no doubt need to consider a fairly substantial price increase. But your marketing messages and tools will be sharper and more effective to attract better quality clientele. And you, your salespeople and your support team will become far more disciplined about achieving the minimum gross profit percentage for every single job sold.
- Adopt a strategic plan. In my opinion, a strategic plan is a more effective management tool for systematically developing your operation than a conventional business plan. First, it disciplines the owner to write down his vision for what his company should look like when it’s all grown up and, perhaps, ready to be sold for a premium price. Second, operational definitions for that vision are measured annually, on a scale of 0-10, to identify the “gaps” that exist between your company’s current development standing and where it wants to be when it is fully developed (9s and 10s). Third, the focus on these “gaps” disciplines the dealer’s entire team to identify and implement critical success factors to close them. Completing five-to-six critical success factors each year would constitute what Collins calls a consistent, and necessary, “20-mile march” to ultimate business success.
- Hire an industry-specific business coach. A coach will not only help create a blueprint for success in concert with the dealer, but will hold him accountable for completing the action steps in his strategic plan by the established target dates. But there is not any shame in hiring a professional coach. After all, many Fortune 500 CEOs have executive coaches to develop their leadership skills and guide their decision-making. Only by having many, many months of completing assignments on time, and witnessing firsthand the incremental improvements in company performance, will kitchen/bath dealers begin to acquire the “fanatical discipline” Collins talks about in his book. For dealers now in their 50s, expecting the sale of their businesses to largely fund a comfortable retirement within a decade or so, embracing a “fanatical discipline” can’t come soon enough.
- Implement industry-specific management software. A full cycle kitchen/bath dealer management system, with modules from client relationship management to project estimating to contracts to electronic ordering to Quickbooks integration to production scheduling, intrinsically injects discipline into an operation while elevating the productivity of all team members. Built into this software, which is scheduled to debut at the Las Vegas Kitchen & Bath Industry Show this month, is an interactive budgeting system that empowers sales designers to quickly and confidently be retained on projects. By closely following, and mastering, this disciplined sales process with prospects, designers have the potential to double their sales volume in approximately one-half the time.
Implementing all four of these action steps is very likely to radically transform the financial performance of a kitchen/bath dealership. It’s a new year. Are you ready to embrace a new-found discipline to running your business and thereby position yourself to thrive in a perpetual state of economic uncertainty?
Ken Peterson, CKD, LPBC, is president of the Chapel Hill, NC-based SEN Design Group. For more in-depth information on topics featured in this column, attend a sales or business management seminar in your region conducted by the SEN Design Group and co-produced by Kitchen & Bath Design News. Peterson welcomes comments, questions or concerns; he can be reached at 1-800-991-1711 or firstname.lastname@example.org.