The Death Spiral

Sometimes things just happen. Maybe we lose focus and take our eyes off the ball. Maybe we don't recognize the signs. Sometimes it happens quickly due to a loss of a major customer or loss of a major product line. Sometimes it is a slow, gradual process. Market share seems to evaporate; gross margin exhibits an extended period of decline. Morale suffers, employee turnover increases, net profit declines, costs seem to get out of control and losses become imminent. Some Owners, Presidents and CEO's who find themselves in a situation facing these warning signs may actually contribute to the creation of "The Death Spiral" if they aren't careful.

What is "The Death Spiral" and how do you know if your company is in one?

"The Death Spiral" is a fatal illness if not corrected immediately. This illness can be brought on by many factors including the process of building an infrastructure ("Ivory Tower") prematurely based predominantly on the self-gratifying needs of our ego. It can also be created by the circumstances mentioned in the opening of this article. Whatever the reason, the warning signs generally appear and, if ignored long enough, red ink from losses on the P & L statement will become the megaphone that finally gets your attention.

If it becomes an infrastructure problem that doesn't have a revenue stream of sufficient magnitude to support the fixed costs it generates, then the infrastructure must be torn down and rebuilt.

Unfortunately, however, late recognition of the problem can cause the CEO or Owner to resort to a mental mode of retrenchment that should be called "Panic Response Management."

Panic Response Management is, in effect, crisis restructuring. There's nothing wrong with crisis restructuring by itself. However, in an ego-driven situation, this restructuring is more apt to occur from the bottom-up versus the top-down. In other words, revenue producing functions or people may be prematurely cut. These people or positions may be, at a minimum, covering their variable expense and contributing to some degree toward fixed expenses. This creates a redistribution of fixed cost which may now jeopardize the profitability of some other segment or division. This can create pressure to close other divisions and business segments or cut deeper into revenue producing functions that are contributing at least a portion to fixed costs, thus creating "The Death Spiral."

To most of you, this may sound ridiculous or even laughable, but it does really happen. The right approach is to view restructuring from the top-down, including taking a serious look at corporate and/or family overhead. You begin this diagnosis by asking questions like the following.

? How do you define your business strategy?

? How do you communicate your strategy to the employees?

? How would you define your company's competitive advantages?

? What are your strategic initiatives?

? What changes have had a significant impact on your business?

? What keeps you from being the most efficient and effective source for customers?

? What competitive advantages do your competitors have?

? What is the competency level of your executive staff?

? How do you rate yourself with respect to the success of the Corporation?

? What volume does the top 10% of your customers represent?

? How many of your customers represent 80% of your revenue?

? Do you measure account retention and growth?

? What is the turnover rate of your sales force?

? What is your overall corporate turnover in personnel?

? What percentage of your customers consider you to be their number one supplier?

? Have your average sales per invoice increased or decreased over the past three years?

? What single thing has had the greatest impact on your company's profitability?

? What single thing has contributed the most to your decline in profits?

? How does your company compare to the industry par report?

? What metrics or industry surveys are available to you from your trade association?

? Do you have a strategic plan?

? Do you have business segment or divisional business plans?

? Do you have or promote a culture of cost containment?

? Do you provide functional leadership or do you dictate as a management style?

? Is there accountability within your executive staff and your upper management? ? Is there accountability within your sales force?

? Which departments and individuals are competitive strengths to the organization and which are competitive weaknesses?

? What initiatives do you have to improve highest delivered value?

Get each member of your executive staff to go through this exercise for each department. When all the soul searching has been done, meet with your executive team to review the entire process and formulate "The Real Deal." What is the situation you are really facing? If you are an outsider working for the owner or CEO it is quite easy to be objective. If you are the owner or the CEO it is often difficult to admit the facts.

If that's the case, it is highly recommended that you hire an outside pair of eyes to help you through this assessment process.

During the final assessment review you should be able to understand the scope and severity of the situation you find yourself in.

Develop a complete and accurate picture.

What is really wrong? What is unique about your problems, if anything?

Attempts to resolve problems and get back to profitability often fail because we don't understand the problems in general. We don't get details specific enough to formulate solid resolutions, achieving a complete and accurate picture of the situation.

? "The Real Deal" ?

This is absolutely essential so that everyone can see and understand collectively. This allows collaboration aimed at restructuring and regaining profitability.

Understand the purpose to be served.

The executive team must answer the question, "what are we trying to accomplish?" You need to be data and goal specific. Becoming profitable is an unacceptable response. You must identify all contributing factors to your lack of success. Then you must determine exactly what you should be doing and what your objectives are. You must develop a common understanding of and a universal commitment to the objectives not only by your executive staff but also by every employee within your organization. Failure to be data and goal specific often leads to disruption.

You can find a cure for "The Death Spiral." You can stop the spin. But, like convincing yourself to go to a doctor to get a professional diagnosis, you must start with a self-imposed reality check.

Step back; shut your eyes to the forest surrounding you and the swamp filled with alligators. Let your brain sort through the images created by your internal assessment. Deep down, the answers are there. You should now be able to clearly define and recognize the problem.

If the problem happens to lie within the executive staff and you own the company, don't languish in self-pity. Don't immerse yourself in the delusion that you're going to wake up tomorrow, look in the mirror, and see the "Jack Welch" of your industry staring back at you. Be smart enough to swallow your pride and ask for help. It's only a phone call away.

Dr. Eric "Rick" Johnson (rick@ceostrategist.com) is the founder of CEO Strategist LLC. an experienced based firm specializing in Distribution. CEO Strategist LLC. works in an advisory capacity with distributor executives in board representation, executive coaching, team coaching and education and training to make the changes necessary to create or maintain competitive advantage. You can contact them by calling 352-750-0868, or visit http://www.ceostrategist.com for more information.

Rick received an MBA from Keller Graduate School in Chicago, Illinois and a Bachelor's degree in Operations Management from Capital University, Columbus Ohio. Rick recently completed his dissertation on Strategic Leadership and received his Ph.D. He's also a published book author with four titles to his credit: "The Toolkit for Improved Business Performance in Wholesale Distribution," the NWFA & NAFCD "Roadmap", Lone Wolf-Lead Wolf-The Evolution of Sales" and a fiction novel about teenagers called "Shattered Innocence."

---

The Top 10 Things They Don?t Teach You In Business School

Here are 10 subjects that academia should be teaching their... Read More

Innovation Management ? forced into it!

Creativity can be defined as problem identification and idea generation... Read More

Internal Control - The Why and How

Many retailers do not have good internal controls in place... Read More

Look Good on Voice Mail

Your use of voice mail tells others a lot about... Read More

Romford Accountants: Accountancy Firm Roles and Responsibilities

If you own or operate a business in the UK,... Read More

Sharing the Reins: 10 Reasons To Sell Your Company To Your Employees

In 1987 I sold my business, South Mountain Company, to... Read More

Get Down With OCP: Evaluating DBA Job Applicants in an OCP World

Not long ago, weeding through DBA applicants with a tech... Read More

Productive Meetings: How to Make Your Meetings More Productive

There's one simple secret to effective meetings: set an agenda... Read More

Truth or Consequences: How to Give Employee Feedback

In the bestseller, Good to Great, Jim Collins discovered that,... Read More

Employee Retention: Keeping the People Who Keep You in Business

The retention of highly skilled knowledge workers is one of... Read More

Diversity Training: The Worst Possible Reasons to Request Executive Funding

You're on your organization's diversity committee. You have the best... Read More

Hiring Productive Employees: A Checklist for Assessing Their Appeal

The characteristics of job applicants have a strong influence on... Read More

The Seven Cs: Partnership Danger Signs - Conflict Becoming the Norm ? Part 2

A series of articles exploring the seven critical areas that... Read More

How to Save Money on Training

1) Use a live instructor. Adults learn best by doing,... Read More

How To Own A Business... Instead Of A Job

Every business is run by someone who took on a... Read More

Integrity... Should It Matter?

In our fast paced work culture, manned by technology savvy... Read More

Getting to Consensus

The need to get people in an organization to pull... Read More

10 Steps Towards A Stress-Free Introduction Into Management

Becoming a manager for the first time can be an... Read More

The Comfort Zone

The Comfort Zone I... Read More

Your Company Without Training - Any Questions?

Okay, be honest!Are you guilty of sticking in a few... Read More

What Makes a Good Appraisal Interview?

WHAT MAKES A GOOD APPRAISAL INTERVIEW?Here is a tip for... Read More

Leading Meetings: The Top Three Challenges

What do people really find challenging about leading meetings? Here... Read More

Cultural Awareness - an HR Perspective

The use of cultural awareness training has increased rapidly in... Read More

Classifying Motivational Needs

While there exist several useful definitions of motivation, for our... Read More

Training Managers and New Trainers

Training managers use many of the same interpersonal and analytical... Read More

Small Business Outsourcing: An Introduction

Outsourcing is the delegation of a business process to an... Read More

The Do?s and Don?ts of Giving Feedback

Being able to give effective feedback is not just a... Read More

Making Change Work

Shaky FoundationsWhilst over 60% of businesses will be looking to... Read More

Goodwill is an Intangible Asset

'Goodwill' is regarded as an intangible asset in a business.... Read More

5 Awesome Actions of Highly Creative Leaders!

How many times have you wondered why you are unable... Read More

Do You Hear That?

I read a report in the Toronto Star stated that... Read More

Leaders Versus Cheerleaders

Everyone wants to describe themselves as a leader. Everyday, new... Read More

Nonprofit Performance: Outcome Measurement Can Be A Good Thing

Does the idea of program evaluation make your stomach churn?... Read More