Welcome to the first of many posts I’ll be writing where I’ll be discussing how a small business owner might approach the business problems that Marcus Lemonis solves if you didn’t have access to him or his money.
I’m a big fan of Marcus’ “People Process Product” mantra. As you know I believe that you’ve got to pay attention to, and understand your people and your data. And if you don’t, you won’t get the result you’re looking for…
I’ll discuss a few of the bigger problems in each of the businesses and how you might deal with them. And at the end of the article I’ll address the common theme to each of them.
Let’s jump in.
Standard Burger
This situation was full of opportunities and ultimately The Profit wound up investing four times what he originally planned on investing to save the small business…
An argument could be made that Marcus built a new business on the ashes of the old business.
The key issues in this business were:
1) Infighting and Lack of Control (people);
2) Micromanagement by people that didn’t understand the business they were in (process);
3) No financial controls (process).
Speaking as the former CEO of a closely held company with six shareholders I can tell you without a doubt that situations where there is no decision maker are a recipe for failure. This was among the very first things I fixed.
A business is NOT a democracy…
Someone has to be in charge…
And that’s one of the first things The Profit resolved by appointing a managing partner. If you’re in a similar situation with differing methods and points of view then you and your partners need to realize that this is your number one problem…
If you don’t resolve this problem, none of the other problems matter…
Period.
If necessary, hire a business coach or mediator and get this worked out.
The best time to resolve this problem is at launch. The Managing Partner should be identified in your shareholder agreement. And in the event that a member needs to be bought out, that process and calculation should be explained in your shareholder agreement as well.
The second issue is micromanagement and a lack of understanding of the business model.
Because I don’t know the partners in Standard Burger personally I can’t say with certainty what caused that behavior.
One thing is for sure; Micromanagement is a dead discipline.
In my career I’ve seen that it’s the result of one of two things:
1) Personal core values and culture, or
2) Fear and insecurity stemming from a lack of knowledge.
When a person’s core values and beliefs cause this behavior it takes a powerful learning experience to motivate them to make a change. If your partner(s) use this approach you’ll need to bring to their attention how it’s damaging your business.
The reason I say that the partners at Standard Burger didn’t understand the business they were in is that they had no idea what their costs and margins were supposed to be…
Regardless of the business you’re in, you should benchmark your company every two or three years at a minimum. I have rarely seen a successful small business that didn’t know what the costs and margins were in their industry.
You’ll notice on The Profit that Marcus Lemonis always knows what the numbers are supposed to be in the businesses that he invests in.
That’s not luck, and it’s no accident.
By knowing what the numbers are supposed to be, Marcus is always able to spot the problem and identify the opportunities very quickly. The fact that these partners had never benchmark-ed their business had a lot to do with the condition it was in.
And that carries us into the third problem.
No financial controls.
If you don’t know what your numbers are supposed to be, you’ll focus on the wrong things in your attempts to control them.
In the case of Standard Burger one partner took to spying on employees because he thought they were stealing and being wasteful.
I you ever find yourself thinking of doing this (and you may have to if it’s a legitimate problem) before you assume it’s the root cause of your lack of profitability, ask yourself if you added back the value of the assumed theft would it make your profitable?
If the answer is “No”, then you have more than just a theft problem.
The partners admitted to The Profit that they didn’t sit down and review their numbers on a regular basis. The box of receipts was a massive clue that no one was paying attention to the numbers.
I’ve not seen a successful business that didn’t practice regular financial reporting and review.
Marcus went on to find several other problems in the business, all of which could be accounted for in problem number one of my list above.
SJC Drums
I have a soft spot for manufacturing companies because I really love the idea that by tweaking the process you can have a massive impact on quality, capacity, and profits.
I’ve toured, audited, and been a part of some amazing manufacturing companies, and I’ve seen many that figuratively had money laying on the floor because of wasteful processes. You could almost sweep it up with a broom just by fixing a few things with their processes.
SJC Drums was the later.
The key issues at SJC drums were:
1) A falling out between the founding brothers. (people)
2) There was no production management. (process)
3) They had no entry level product to build their business and act as the mainstay for their business. (product)
The disagreement between the founders of the company was their most significant problem. And like I said with Standard Burger, if the shareholders aren’t right with each other, then none of the other problems matter.
The business won’t survive the relationship problem. And only a man with the heart and wallet of Marcus Lemonis would be willing to get in the game with you.
As you saw with both SJC Drums and Standard Burger, they were days from closing when Marcus arrived.
I’ll talk more about the specific problem that both of these small businesses shared and created for themselves when they ejected a founding member of the company.
Process? What process?
I wish I could say that I had never seen what I saw in SJC’s approach to production control, but unfortunately it’s very common.
Aside from not having a clear flow from step to step within their manufacturing process they had allowed themselves to fall victim to another problem – Production Interruption.
Manufacturing has a flow and rhythm to it. Breaking that flow is very costly. Staying in flow is worth an ounce of gold every hour. If that wasn’t true, Toyota wouldn’t have put so much effort into developing the Toyota Manufacturing System.
As you heard from the employees it was common for the remaining owner to interrupt one order that was being assembled so that another order, placed more recently, could be fulfilled.
That’s a huge mistake.
The result?
Back-orders were stacked up for months. Quality problems were created because of the continuous interruptions. And that lead to rework.
Low employee morale followed because they felt as though they weren’t accomplishing anything.
And they were right!
They weren’t…
In this particular case, it was a comment on leadership. In a business, the leadership must respect the processes. If you don’t, no one else will.
Yes, it’s your business and you have the authority to do whatever you want in your business. But if it fails, your employee will just go get another job, and you’ll be left to repay all the loans. Just because you’re allowed to do something, doesn’t mean you should.
If you’re a manufacturer and you haven’t read The Goal written by Eliyah Goldratt, I highly suggest that it be the very next book you read. It is unspoken required reading in the manufacturing world.
That brings us to the third problem. Their product.
The product that SJC turns out is amazing as proven by the A-List entertainers that played their drums to entertain millions of fans.
And if you’ve watched enough episodes of The Profit on CNBC you’ve noticed there’s one thing in particular that Marcus is always looking for to make sure that he recovers his investment…
A way to scale the business.
One of the keys to scaling any business is having something that you can sell to the masses with a solid gross margin. As SJC had shown, it was difficult to build a business solely on a high end product.
Sure, every once in a while the common man would save enough to make a once-in-a-lifetime purchase of an amazing drum set.
But for most people, SJC had priced the average Joe out of the market.
You may recall Marcus’ look of shock at their price point when he said that most people couldn’t afford a $2000 drum set let alone a $6000 drum set.
What typically happens in a situation like SJC is that the business falls behind on cash flow and then when a larger order comes in the business owner makes a promise to deliver that order to make sure they get paid on time so they can cover some bills. All the other orders in the business get interrupted and inefficiencies are introduced because employees waste time setting aside what they were doing to get ready to handle the rush job. And now the cost of labor and overhead goes up.
It’s like a snowball rolling downhill picking up speed and size with every revolution.
So if you’re suffering from a sales problem, one of the possible issues is that you’ve got a problem with what you’re selling in that you’ve excluded part of the market. If your product line is too narrow, sales will suffer.
Don’t go overboard with your product or service offering. It’s possible to have the opposite problem like Steve Jobs found when he returned to Apple. Apple had so many products that even their own sales people didn’t know which product to sell in a given situation. Jobs wound up slashing Apple’s product line from over fifteen computers down to just four.
If either of those situations is true in your small business take a look at what’s available in the market and follow the model shown to you in The Profit. Good, better, best.
The Big Problem They Shared
Both of these businesses created the same problem for themselves when they got rid of a founding member of the team…
Oddly enough they both chose to kick out the Innovator. They removed the one person who really understood their product and how to innovate…
The impact…
Standard Burger started making burgers out of frozen prepackaged meat. None of their patrons felt the burgers were special.
None of the remaining four shareholders had any understanding of how to blend flavors to create a world class hamburger.
At SJC Drums when Marcus asked the team to design an entry level drum set with a specific price point and margin, they failed.
The team had so little understanding of the product that they couldn’t innovate and design a product that would appeal to the larger market. They were locked in on how to build only high-end drum kits.
For each of these businesses kicking the Innovator out proved to be a massive roadblock to the success and growth of the business.
Stop for a moment and think about how important innovation is…
Every business must have the ability to introduce new products and change with their customer’s wants and needs.
If your business is going to survive for decades, you’ve got to have the ability to innovate.
Don’t box yourself in when you think of what it means to innovate. It doesn’t mean you have to introduce the next big thing that no one on the planet has ever seen. You don’t have to invent a product on the level of the iPod to be an innovator…
Innovation can be viewed as being relative to your own business, your own product, and your own processes…
Innovation can mean that you take an idea from another industry, put your own special twist on it, and install it in your company.
But innovation does require one thing: a fundamental understanding of the product and the market…
If you don’t understand how the flavors of individual spices play off of each other, then your hamburger will be average. If you don’t understand what makes a drum resonate the way it does then your drum set won’t resonate with your customers.
This level of understanding is so important that most venture capitalists won’t invest in a business that they either don’t understand, or can’t secure someone with the knowledge.
Don’t misunderstand me here. I’m not saying that you shouldn’t remove the person playing the role of the Innovator no matter what…
What I am saying is that if you lose that person, you need to find a way to fill that role again.
There are a couple ways you can do that. You can learn to do it yourself. Or you can hire someone who’s capable.
The Innovator isn’t a box on your Org chart, but you’ve got to have someone who’s always got their eyes open looking for the next great idea, and who knows how to implement it in your business.
In Closing
There were a lot of opportunities to be addressed in each of these businesses. Leave a comment below and let’s talk about them.
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