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8 habits of highly successful CEOs

Dec 1, 2005 12:00 AM


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Management Outlook

In 2005, business conditions improved a bit, but the industry’s challenges have remained largely unchanged. Although sales rose slightly, overcapacity and murderous price competition remain the rule.

The most recent PIA Ratio Studies indicate profits have improved slightly. Similarly, a NAPL survey found that more than 60 percent of the responding printers reported business conditions are better. But “better” is a relative term—this is only a partial recovery from the printing recession that began around the time of the 9/11 terrorist attacks. Most printers have such low expectations that any ray of hope makes them feel better, despite the fact that so many are experiencing true financial hardships.

It’s instructive to note that the majority of firms participating in NAPL’s survey do not believe that conditions will remain as good as they are today. Widespread fears of a downturn may be attributable to hurricane fatigue, energy concerns, bird flu or U.S. foreign policy. Or maybe these printers are accepting the printing industry’s economic facts.

The big three problems
Most companies are barely getting by. The studies—and our firm’s experience—suggest that only about 25 percent of all companies generate enough profits. Three problems account for most profit shortfalls:

  1. Most companies aren’t generating high enough sales volume from month to month. Problem sales months often kill an entire year’s profits, and even normal sales months don’t generate the kind of profits companies need to earn.
  2. Few companies are producing work efficiently. Producing a job without a screw-up shouldn’t be equated with producing a job well. Most plants’ performance is at least 20 percent below managers’ own production standards, and even further below what might be considered good performance.
  3. Lagging firms haven’t found a way to set themselves apart in competing for their customers’ business. They’re using price cutting as their major competitive strategy.
Unless firms can earn sufficient returns—more than 12 percent EBITDA—they simply can’t hang on for the long term. That’s why the number of business units in our industry declined by almost 20 percent over the past five or so years. Unfortunately for the remaining companies, the attrition rate isn’t rapid enough to make things much easier.

What successful CEOs know What can we learn from that small minority of profitable U.S. printers? What’s the secret of their success?

The answer lies in the CEOs. The most successful CEOs maintain a relentless focus on:

  • 
  • Having enough sales, month-in and month-out.
  • Producing work cost-effectively and quickly.
  • Finding new ways to add value for customers.
But it’s equally important for managers to avoid big mistakes. Deciding not to do something, however, shouldn’t be confused with being lazy or passive. Remember Entwhistle’s Second Law: Deciding not to act is a decision. Failing to decide is a failure.

1. They’re not fooling themselves.
Profit leading CEOs know that they can’t wait patiently until all their competitors have been driven out of business.

The top performers accept that the seven glacial forces (see sidebar) are not going to recede—no matter how much they wish for things to change. They know they must accept reality and proceed with doing whatever it takes to succeed.

2. They’re not biding their time in hopes of hiring a sales hero.
Sure, every printer could use an additional salesperson—especially one who can bring a juicy book of business. Many CEOs seem to be holding their breath and hoping for this to happen.

Top-performing CEOs aren’t waiting for that fantasy to come true. They know that managing sales is their single biggest challenge. Although these managers are constantly looking for more good salespeople, they work hard every day to maximize the results from their existing sales force. They build sales performance plans, work on knowing how much business is coming in, and aggressively use pricing to fill up seasonal slow periods, while trying to find better ways to compete. They work closely with their salespeople, and hold them accountable for generating the results the company needs.

Smart CEOs develop a solid partnership with their sales forces and continue to work together in selling the right services to the right customers. In fact, they work with their salespeople just as if they’re real employees with real jobs to perform!

3. They’re not depending on technology as a cure-all.
For almost two decades, some printers have greeted new technology with a motto inspired by “Field of Dreams: “If we buy it, they will come.” That approach hasn’t worked since the 1980s, and even then it only worked briefly for a few firms. Despite all the glamorous claims of new technology, few companies have ever established a meaningful or sustainable competitive advantage purely based on novel technology or unique equipment.

Too many CEOs have learned this painful lesson: New technology doesn’t sell itself and adding more of it doesn’t guarantee more sales. Unless printers are increasing sales, what will they do with the added capacity that new equipment creates?

Savvy CEOs know that being on the cutting edge doesn’t matter very much. The real priorities are throughput and processes that work smoothly and quickly. Profitable printers are building their plans for growth around tangible steps for improving responsiveness, competitiveness and flexibility. They’re using technology, but they’re as a tool, rather than a cure-all. Many are putting their MIS to better use, and they’re integrating order processing all the way onto the shop floor and into their production equipment. But the secret isn’t in the technology; it’s in the CEOs’ commitment to making the entire process work.

4. They’re not depending on new equipment to fix their manufacturing problems.
Just as superior CEOs aren’t relying on new technology for digital salvation, they’ve also learned that even the best new equipment doesn’t produce manufacturing results by itself. Anyone can buy equipment. It’s how you use it, and how much you use it that makes the real difference.

New equipment can offer dazzling productivity, but the most effective CEOs are going well beyond new equipment and are focusing on the nuts and bolts of what’s going on in their plants. They’re setting meaningful production standards, taking a look at actual performance, and creating a step-by-step process for improving production results. The profit leaders aren’t waiting. They make it happen by setting worthy goals and ensuring they’re met. They also realize the importance of speed and agility and are simplifying and standardizing their processes. Not only does this reduce their companies’ costs and errors, it’s easier for these printers to be more responsive to customers’ ever-increasing demands.

And, while they’re working on getting the productivity manufacturers have promised them, these outstanding executives are also working on attaining sufficient sales to use the added capacity generated by the higher productivity.

5. They’re not relying solely on pricing to be competitive.
When you’re up to your ass in alligators, it’s easy to forget that you need to drain the swamp. And when you’re short of sales, there’s no time to figure out a long-term strategy for competing more effectively. So pricing is a logical short-term tool for attracting price-sensitive business.

But relying solely on pricing to be competitive is not a viable long-term strategy. Yes, pricing is an important element, and many printers aren’t flexible enough. But the winning CEOs know that they have to offer something beyond low prices to compete for new business. They know that they have to offer clients something extra—or else they’ll be in trouble that even the lowest prices can’t fix.

The best CEOs understand that they must set themselves apart by offering superior results—adding value in ways that have little to do with equipment or technology. So they do a better job for their clients. They’re smarter, more creative, responsive and reliable, and they’re easy to do business with. They make their clients feel that it’s smart to do business with them, and they work hard to prove to new prospects that there are real benefits to starting a new relationship.

6. They’re not recklessly borrowing money.
For many years, there has been a seemingly unlimited amount of financing available to printing companies. But how many companies have gotten into difficulty by committing to new equipment because the financing was available?

Most CEOs are happy to borrow money first and worry about repaying it later—usually from unknown future cash flows generated by profits from unknown sources. It’s a high-risk strategy built on hope rather than reality.

Profit-leading CEOs don’t borrow money simply because it’s available. Sure, lenders may want to lend to them, and equipment manufacturers certainly want to sell them equipment. But that doesn’t mean borrowing the money is a good idea. Smart CEOs are only borrowing when the investment makes sense, when they have a plan to put the new resources to good use; and when they can prove to themselves that they can earn a sufficient return on the investment to generate the cash required to repay the loan.

These CEOs understand that if they just keep adding debt, eventually their balance sheets will catch up to them and become a limiting factor. So they focus obsessively on generating the meaningful profits they need to compete over the long term.

7. They’re not waiting for a return to the good old days.
The profit-leading CEOs are realists. They don’t delude themselves, and they remember that the good old days weren’t really that good. Memory has dimmed and the pain has subsided, but it felt pretty bad at the time.

So those top-performing CEOs just deal with the challenges they face. They don’t wring their hands when certain types of business go away—like the vanishing annual report business. And they don’t waste time complaining as run lengths for product literature get shorter and shorter, and turnaround times get faster and faster.

They’re not wasting their time complaining about customers becoming even more difficult. They’re adapting to the changes. They realize that they’ve got to get closer to their clients, and they’ve got to become more important to those clients.

And when they receive a lengthy RFP, they don’t roll their eyes and throw up their hands. They take it as an opportunity to think carefully about the client and their business, and determine ways to compete more effectively. So when major clients say they want to reduce the number of vendors from 79 to five, they don’t complain or spend time worrying about it. They figure out how to be one of the five—and preferably one of the top two or three.

8. Above all, the top CEOs don’t avoid dealing with reality.
Outstanding CEOs know that even if the economy does remain reasonably strong, a rising tide won’t lift all boats.

The companies that are doing quite nicely somehow continue to do so. In good times and bad, they still find a way to be profitable. If they earned reasonable profits at $5 million in sales, they usually earn reasonable profits at $10 million or $15 million in sales.

Conversely, companies that struggle to earn a profit at $5 million in sales cling to the notion that reaching $10 million in sales will somehow cure all their problems. But it’s become clear over the years that the companies that were struggling at a smaller size don’t seem to gain any special wisdom that helps them to earn money after they’ve grown.

Those same struggling companies rarely benefit from improving economic conditions. Results may improve a bit, and anxiety begins to recede. But when things soften a bit, the CEOs of the foundering firms usually act surprised, and look for someone to blame when their modest profits turn to losses.

Profit-leading CEOs remain relentlessly focused on the need to earn significant profits, even in difficult times. They never stop looking for ways to improve their results. They don’t sit back and wait for a strong economy, and they take no comfort in telling themselves that everyone else is struggling.

What to expect in 2006
2006 will look a lot like 2005. Not much better, and not much worse. Over time, however, a steady stream of companies will eventually run out of blood or money and will drop out of the race.

It can’t happen fast enough to help the remaining competitors. But the erosion appears to be as inevitable as the high cost of hiring that fabulous salesperson you just interviewed. You know, the one with a superb book of business that’s guaranteed to make all the difference in your sales and profits.

But that’s another story for another time.



Rosen redux
Much has happened since last December’s article (“Will you survive to PRINT 05?”). We’ve worked with 29 more companies, making a total of 552 over the past 18 years, and we’ve also worked with several of the largest financial institutions lending to the graphic arts industry.

We’ve seen the forces at work in the industry and how CEOs are dealing with them—some very successfully and, in too many cases, not so successfully.

The seven glacial forces—revisited
Last year’s article—and the discussion of the seven forces driving our industry in particular—elicited a lot of reader feedback. Many told us that these forces sounded exactly like conditions at their companies. These forces, which are likely to influence industry for the foreseeable future, include:

  • 
  • Substantial underutilized capacity that’s not likely to disappear.
  • Murderous price competition as companies scramble for enough business to keep their plants busy.
  • Increasingly unpredictable sales volume: Sales have always been variable, but never have they been as unpredictable from month to month. This leaves most companies with a few problem sales months that can ruin the whole year.
  • Rapid technological change creates a continuing need to invest.
  • Increasing capital requirements that stem from increasingly expensive equipment.
  • Increasingly difficult customer behavior, as they learn how to beat up printers even more systematically, while demanding higher levels of service and a broader range of services.
  • Ownership issues that arise as owners must consider making an endless round of new investments without being able to earn satisfactory financial returns.
Have you seen any changes in these seven challenges? E-mail me at RRosen@RHRosen.com, and I’ll include them in a follow-up article.

What’s up in M&A?
We’ve all been seeing more news of merger activity in the press. Some fairly large companies have been selling and buying. In fact, we’re seeing more deals being done by larger companies—as both sellers and buyers.

I’ve listed selling first because many of the deals represent owner fatigue, and the initiative has really come from the sellers. In many of these cases, large companies have acquired long lists of commercial printers, but didn’t understand the peculiar dynamics of operating the smaller companies, or couldn’t earn the kind of returns they were expecting. Many of these larger companies simply didn’t want to keep investing in supporting printing operations that consumed large amounts of capital without generating meaningful profits.

At the same time, an aging group of individual printing company owners is entertaining thoughts of retirement at a time when they’re also facing the need to commit additional capital to their businesses. This is the motivation behind a number of other deals we’ve been seeing.

But below the radar screen, there are lots of smaller deals taking place, involving normal-size companies operating in the same markets. These aren’t financially oriented transactions. They’re operating transactions involving competitors or neighbors in the same markets, who recognize there’s more money to be made in combining forces. But they’re going far beyond just changing the names on the stock certificates. They’re combining operations to build on shared strengths while squeezing out extra costs and reducing excess capacity.

Some of the deals are motivated by one owner wanting to fund his retirement, but in many cases both of the owners are remaining active, combining forces to deal with the industry’s murderous competitive situation. The profit improvements can be beautiful to behold when where there are solid operating plans in place to make the deals work.

However, in all too many cases, these deals don’t result in meaningful operating changes, and prove to be disappointing. The deals weren’t bad ideas, but the disappointment shouldn’t be a surprise. After all, unless a deal meaningfully reduces costs, increases sales and makes the new company better able to meet customer needs, then why should anyone expect it to improve results and create value? What does the future hold in this area? Given the industry’s unyielding competitive environment, we think there are lots more deals coming.



What every CEO should know
“The Graphic Arts CEO” book/CD package reveals the secrets of profit-leading CEOs. “Set the right priorities,” advises author Bob Rosen. “Commit to a plan of action and then execute the plan relentlessly.”

The 350-page book features specific examples from Rosen’s work with hundreds of graphic arts profit leaders. The CD offers customizable forms and financial models. “The Graphic Arts CEO” costs $159; to order, see www.napl.org.



Bob Rosen is president of R.H. Rosen Associates (Pittstown, NJ) a consulting firm that specializes solely in the graphic arts. Contact him at RRosen@RHRosen.com.