When Bigger Is Not Better
Al Levi
I've known large companies that looked successful because they have loads of staff and a bunch of trucks. But if you looked behind the curtain, it might surprise you that many are not so big and powerful as they appear.
The lessons here about big companies gone wrong are worthwhile to a small company even if you never plan to get big.
A problem many large-dollar-volume companies have is that they believe that if their sales are big they'll be making big money. The facts don't always bear this out. And if they are making money, the profit is small.
One of the many pitfalls for a large-dollar-volume shop is how it earns those big dollars. Is it increasing sales at the expense of making a profit by doing new construction work or work that has a high percentage of material cost? More often than not the answer is “yes.”
A big company's owners and its employees fall too deeply in love with the company's own press. They begin to believe the company is invincible and ignore the need to seek help when they need it because they're feeling all too powerful when they look upon their fleet of trucks and offices teeming with people. They walk into the warehouse and look up at the inventory they've piled so high they need a forklift to reach most of it.
It's all so thrilling, but there's no safety net!
To make the owners feel even more comfortable, they begin to hire more staff with no real plan other than faulty thinking that, with more managers, they will make everything run better. But without repeatable systems in place, buy-in from staff and a business plan that everyone believes in, the company is precariously exposed. That exposure only becomes clear when it hits a serious bump in the road.
Many companies grew dramatically with the recent building boom by working for the big builders. The problem is when the building boom stops the work dries up and these companies are overexposed. It's like a bad game of musical chairs. You don't want to be too far from a chair when the music stops or you're out of the game.
There are problems even during a rising building wave when you work for these big builder types because they have to squeeze their contractors to get their profit. Despite billing big dollars, subcontractors don't get to keep a lot of the money. When the builders say jump, they have to respond, “How high?”
When is the greatest risk? As interest rates begin to rise, the stock market begins to stumble and the building boom begins to shrivel. Fueling the quick slide can be high energy prices and inflation pressure that, ironically enough, is created by the building boom. When this happens, the already razor-thin margins disappear as too many contractors bid for too few jobs. The load of trucks and the massive inventory expenses begin to sink these companies like a pair of concrete shoes on a drowning man.
The danger doesn't always exist with the end of an upward building boom. Companies can be losing money during good times if they're not paying close enough attention to what's happening. If they rode the economic wave in a crazed pace of expansion with little in the way of systems and processes to sustain them as a growing organization, they're in trouble during the good times.
When things aren't working well, they knee-jerk react by hiring more managers in a desperate attempt to get control of the mass confusion. This is actually counter to what they should be doing, which is fixing the systems and then deciding whom they should be dumping from their bloated staff. It's not something those at the helm of a big company are eager to do. That would mean learning how to run leaner and meaner until they learn how to shift the company to be effective and efficient. Better yet, they should begin to shift the company to more profitable work that's more stable during both the good and inevitable bad times.
Without a solid business plan, repeatable systems in place and buy-in from the staff, the company can be doomed to wonder where the money went. That is until it hits a serious bump in the road and now it's forced to find out - but often too late.
Simple Steps
Why would it be hard to take simple steps? It's not a lack of money. It's not a lack of brain power. It's just so darn easy to get caught up in the headiness of being a big player. The tendency is to protect the status quo whether it's working or not. And the bigger you are, the tougher it's going to be to turn things around. It's the difference between turning around a cruise ship vs. a speed boat.
What should they have been doing?
First off, stop stocking so much equipment and inventory. This is a false safety net. Get out of the supply house business and focus on being in the contracting business. The more inventory you stockpile, the bigger the drain on your wallet. Plus, it's much more likely to result in shrinkage (another word for theft).
Another common mistake is delegating the two roles an owner can never fully delegate - staying involved in overseeing the marketing, and understanding timely and accurate financial information. Whether an owner acts entirely as the marketing manager or the financial manager or just keeps a finger on the pulse, abdicating these two roles is a prescription for business disaster.
What can you do if you're one of these companies? Move fast to spread your risk by seeking to work for custom builders vs. the big builders. Go after the residential remodel work for the bigger ticket installs and build your service department. This type of work and these types of customers tend to keep buying, even in a downturn. They also give you more freedom when it comes to pricing for profit.
Get past your ego and accept that sometimes billing less dollars at a higher profit is a very worthy goal.
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