Bringing the zombie business back to life

A recent post set out the generic “strategic architecture” of a business system. Those principles have an important implication …

Over the years, I have come across many “zombie” businesses – companies or business units that just about stagger on from year to year, but never manage to develop their full potential. (And of course, others that do not even manage that, and die!)

How does a business get in this state?

The critical issue is that:

… every business needs some minimum input of effort and spending, simply to sustain its current resources and performance – and needs to make more of both inputs if it is to build those resources, and so capture its potential and grow its profits into the future.

That post on the strategic architecture explained how resources (properly specified!) drive performance – customers drive sales; a strong product range wins those customers and sales; staff drive product-development, customer-capture; fulfilment of customer demand and customer support; and capacity (physical or IT) must be enough to fulfil demand.

… but with no input of spending and effort, all of those resources will decline – no marketing spend or sales effort and the customer-base will be lost; no product development effort and the product-range will become obsolete and unwanted; no hiring and training and the staff resource will be lost; no capacity maintenance or replacement and we will not be able to fulfil demand

Figure 1: Recycling current cash flow to sustain and grow future cash flows

Note that – with the exception of physical plant – we are not talking about “capital investment”, but recycling of revenue! – the budgets for marketing, R&D, training and maintenance.

Recycling cash flow

Column 1 in the figure above illustrates that extreme case – spend nothing, so make strong current cash flow, but see future cash flow decline. (None of the recycle spending at right of the figure).

Column 2 shows how recycling just enough cash flow to prevent resources declining gives a sustainable cash flow, but not growing – the zombie case.

Column 3 shows how recycling more spending cuts current cash flow, but builds those resources and drives growing cash flow, albeit from a lower base.

Of course, we all know this, so no business ever makes zero spending on these issues. But we do see “slash and burn” psychopath CEOs who make a name for transforming profitability by going down that path – then using their reputation to move on to the next unfortunate victim!

More often, we see the middle path – spending just enough money and effort needed to keep things from dying.

WHY do we do it?

… because of the near universal obsession with financial-control ratios. Keep those labour costs less than 15% of revenue – don’t spend more than 5% on marketing – limit training spend to 3% of labour costs – don’t spend more than 2% of revenue on maintenance …

I still recall those strategy retreats from my corporate years, where we would lay out grand plans to build the businesses in our Division. Then the CEO and CFO would take each business-unit leader aside, and squeeze them for every percentage point of profitability in the next quarter to meet “investor expectations”. (See what investors really want here)

So here’s a question – If you had $100 to save, would you rather get $10/year interest every year, or 7%/year but see both the investment and future interest grow strongly? Why, oh why don’t we ask the same question for our business? – and tell investors that’s what we are doing!

What to do?

Pretty simple, in principle (though the detail is not so simple!).

  • Estimate how much effort and spending is needed to keep each of those resources at a healthy scale and quality
  • Estimate the growth you need for each of those resources into the future, consistent with each other, not achieve the business and profit development you believe is possible (using a model, of course)
  • Estimate the additional effort and spending needed to achieve that growth

If this results in unacceptably poor short-term performance, by all means pull back on that rate of effort and spending – BUT revise-down your expectations for future growth in performance too! Do not expect the same business growth if you are not willing to put in the investment to make it happen.

Next time (probably) I plan to explain a related issue with financial “strangling”. CFOs may think we can get most of the potential future profit growth by spending much less than is needed. More often, putting in half the spending on an issue, like marketing, delivers much less than half the opportunity.

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