Preface: A fruitfly is ancient in 40 days, a mouse at 3 years, a horse at 30,
a man at 100, and some species of, tortoises not until 150 years. Quote from Leonard Hayflick
Credit: Jacob M. Dietz, CPA
Imagine that there are two hikers travelling on foot from California on the west coast to Maine on the east coast. The long trek involves desert, nearly endless plains, and many, many miles. Hiker 1 consistently treks 20 miles per day in good weather and bad weather. He does not exhaust himself when traveling is easy by pushing too hard, but he also does not relax too much when traveling is difficult but keeps marching. He marches with discipline.
The second hiker, however, travels with less discipline. When it is easy, he hikes many miles, risking exhaustion from too much exertion. When it is hard, he stays in his tent, delaying the reaching of the goal.
Is there anything we can learn from these hikers that helps in our vocations? This hiking example is adapted from the book Great by Choice authored by Jim Collins and Morten Hansen. The authors teach us about business discipline. In their research, they explain principles and benefits of 20-mile marching discipline for business.
Disciplined Widget Production Plan
How could 20-mile marching apply in a business? The specifics of a 20-mile march would vary from one company to another. Let us look at a hypothetical manufacturing company, ABC Manufacturing, LLC.
ABC Manufacturing, LLC manufactures widgets that it sells to homeowners. ABC’s 20-mile march is to increase annual production of widgets by at least 10% every year, but not more than 15%. Their 20-mile march goal, in this hypothetical example, was set by the company after careful consideration.
The company wants to grow, but not too fast. They realize that at least 10% growth in the production of widgets is necessary to keep the business growing fast enough for the business to reach its goals. If the company does not consistently reach 10% growth, then the goals of the company are not accomplished.
Although the goals of a company will vary from one company to another company, the goals of ABC Manufacturing involve funding a certain percentage of an orphanage in another country. Another goal is for the founding owner, Abel, to be able to phase out of the business by a set age and turn it over to 5 of his children. The company must be profitable enough to support them and their families while continuing to fund part of the orphanage. After doing the math on how to reach these goals, and some other goals, Abel clearly sees that the company should strive for no less than 10% production increases each year.
Furthermore, Abel realizes that too much growth would be counterproductive. Abel abhors excessive debt loads. He calculates that he could not sustain more than 15% production increases without pulling his equity-to-asset ratio too low. The lower the equity to asset ratio, the higher the liability load.
Abel also strives to slowly teach his children how to lead the business. He realizes that if the business consistently grows production by more than 15%, then he will thrust his children into too much responsibility too soon. Although Abel deeply desires to see his children eventually reach those heights of responsibility, he wants to prepare them thoroughly for it.
Discipline to Make Difficult Decisions
ABC Manufacturing, LLC did not realize how challenging their march would be when they set out to annually increase widget production by 10%-15%.
In year 2, reaching 10% seemed very difficult. In April, the flu kept 2 of the most productive workers off the shop floor for 1 week each. Furthermore, one of the machines caught fire. Fortunately, the local fire department put the fire out with minimal damage to the shop, but the machine was nonfunctional for two weeks.
Abel’s stress level was high at the end of April. He was not only missing the 10% production growth goal; he was slightly behind the previous year’s production. So, what did Abel do?
He took a pen and a notebook and went to a park. Abel did not want to languish in mediocrity. He knew if his competitors saw him, they would probably laugh and think he was wasting his time at the park. But Able took this clarity break because he knew he needed new ideas if he wanted to reach his 10% production growth goal. He thought and prayed and doodled all morning.
Fortunately, one of his doodles was a new way to organize one of the machine workstations. When he went back to the shop and tried the new layout, the employees were delighted. The new layout allowed them to produce widgets faster.
Later in the year, Abel hired a new employee to assist with manufacturing widgets. The new employee and the new design helped ABC hit 11% growth that year. Abel could not control the flu or the fire. Abel worked on what he could control, hiring a new employee and redesigning the layout.
The next year, no one got sick and no fires damaged the shop. Furthermore, a dealer from a nearby state called and told Abel that he found a new customer for ABC. The new customer, however, would only switch to ABC’s widgets if ABC were able to supply all their widget needs. Abel realized that he could not supply enough widgets unless he doubled production.
Abel groaned inwardly at the decision. He did want to eventually grow the business. If he doubled production, he might even be able to fund the orphanage completely, instead of just a portion of it.
Abel declined to double production. Although no external economic force prevented him from growing, Abel resolutely stuck to his goals because he knew they were good goals established for good reasons. He knew that if he would double production that year, then he would need to reach a debt level at which he was uncomfortable. He also knew that he would need to place his son Seth in a management position before Abel felt Seth had enough experience to manage.
The Fruit of Discipline
Eventually, ABC’s disciplined growth strategy, not too slow and not too fast, paid off for the hypothetical Abel. He was able to turn the business over to his children, who were all capable leaders with years of experience leading in the company. The company had grown sufficiently to be able to easily support them, as well as fund a greater portion of the orphanage.
We looked at a hypothetical company that exercised discipline in their business. Now, let us look at a hypothetical company that failed to march properly.
XYZ Manufacturing, LLC builds homes. XYZ’s 20-mile march is to increase annual home sales by at least 20% every year, but not more than 25%.
In year 2, sales were difficult to close. Although on paper the goal was to increase sales by at least 20%, the founder, Cain, did not bother comparing sales until after the year was over. After the year was over, he realized that he only increased sales by 5%. Cain was very frustrated at the lack of growth.
The next year, the economic winds changed, and home sales soared. Still stinging from not reaching his goal the year before, Cain pushed hard to close sales. He realized that his employees were working as hard as they could, so he hired two new crews. He did not have the working capital to outfit the new crews with equipment, so he went to the bank for a loan. After securing the loan with his personal home, he outfitted the crews with new equipment.
Later, some empty lots came up for sale in an area near where he had built some homes. Although Cain had never purchased lots before, he decided to purchase 5 lots to increase his profits as he tried to catch in his sails the economic winds that were soaring sales in his region.
At the end of the year, when Cain asked his accountant how sales compared to last year, Cain was stunned to learn he had increased sales by 95%. At first, he felt a little bad about zooming past his 25% maximum goal. Then he remembered that he had failed to reach his minimum goal the year before. He decided more of a good thing must be a good thing, so he disregarded the 25% maximum and pushed for rapid growth again the next year. He purchased 5 more empty lots for development, and he started yet another crew.
Halfway through the year, through no fault of Cain’s, the economic winds changed. He could not find enough work for his crews. He started subcontracting two of his crews to a general contractor at a rate that was not enough to cover all the overhead. He decided to sell the empty lots to generate cash flow. Unfortunately, the lots only sold for about 70% of the price for which he had purchased them. The amount earned from selling them barely covered the loans he had on them.
What happened? Cain lacked discipline. When things were difficult, he failed to measure his progress and take steps to increase sales. He had a poor year.
He also lacked the discipline to hold back when things were going well. Again, he failed to measure his progress during the year to see how things were going. At the end of the year, when he finally realized he had overstepped the maximum goal, he just continued to overstep it instead of pulling back. The extreme growth left him highly leveraged and exposed to economic risks.
Exercise Discipline in Business
Although your company is probably not literally marching, it may benefit from setting a figurative 20-mile march and sticking to it. The march that your company goes on may look very different from the marches of these imaginary companies.
Are you on a march? If you are not, considering grabbing a pen and a notebook and going to a park. What should you measure, and what should the minimum and maximum be? If you pick a great march, then it may motivate you to focus on what you can control and change that. It may leave you less exposed to economic changes. It may move you steadily towards your long-term goals instead of languishing in mediocrity. Happy marching!
This article is general in nature, and it does not contain legal advice. Contact your advisors to discuss your specific situation.