I recently came across a brilliant passage in Shane Parrish’s book, Clear Thinking:
“Each moment puts you in a better or worse position to handle the future. It’s that positioning that eventually makes life easier or harder…
A good position allows you to think, rather than be forced by circumstances into a decision. One reason the best in the world make consistently good decisions is they rarely find themselves forced into a decision by circumstances.
You don’t need to be smarter than others to outperform them if you can out-position them. Anyone looks like a genius when they’re in a good position, and even the smartest person looks like an idiot when they’re in a bad one.
The greatest aid to judgment is starting from a good position. The company with cash on the balance sheet and low debt has good options when bad times come (they always do), and their options go from good to great. On the other hand, a company with no cash and high debt has nothing but bad options to choose from. Things quickly go from bad to worse.”
The best definition of stupid I have ever heard is failing to ask the question, “And then what happens?” I’ve never seen so many business owners and leaders out of position because they assumed the future would look like the past and were out of position when the environment shifted.
The world is changing rapidly, and many business owners are flat-footed, scrambling to react. The problem is they are out of position (usually too much optimism and offense and not enough critical “what if” thinking and defense), making too many unexamined assumptions, ignoring second-order consequences, and have no one helping them with their blind spots or asking the challenging questions… and now they are paying the price for “stupid”.
What Does It Mean to Be “In Position”?
If you have too much debt or too little cash, you’re in trouble when the environment shifts. But what else impacts your positioning?
Here are seven critical areas you should consider:
1. Excess Weight (Costs)
In 1912, the Titanic sank, and hundreds of people drowned because they were trying to tread water while clutching their 50-pound suitcase with the clothes they were planning to wear to the Gala when they eventually arrived in New York. Wrong problem. If you are treading water in the middle of the night in the freezing Atlantic Ocean, the problem is not the Gala in New York in a couple of weeks.
This is where 95% of all leaders fail when the environment shifts… They have a death grip on what might be needed for the future. As a result, they make the mortal mistake of hanging onto the 50-pound suitcase with all their might. Their reasoning: I will probably need this party dress once the crisis is over, so better hang onto it just in case… and they drown.
Excessive costs and excess capacity are that 50-pound weight. If the environment changes, excess costs and capacity dramatically reduce your chances of survival. You must be mentally prepared to jettison excess costs and become as efficient as possible as soon as possible. The longer you hang on to excess capacity and inefficient expenses, the faster you drown.
As a footnote to this section, keep in mind that 100% of big (Fortune 1000) companies that get into trouble start the turnaround effort by shrinking, not growing. They whack products, SKUs, inventory, divisions, people, and get medieval on all other extraneous and unnecessary costs in an attempt to find a solid base to begin rebuilding. As my mentor taught me 50 years ago, you don’t get healthy by growing a tumor.
2. Quality of Your Team
When times are good, you can get by with weaker players. But when times get tough, you need your A-players.
On a bumper sticker: “The harder the times, the better the people I need.”
If you’re carrying around mediocre talent, you’re out of position. Upgrade your team now, before the storm hits.
3. Revenue-Generating Machine
During good times, sales come easy. But when the environment shifts, sales become harder to come by. You must have a robust sales engine in place that consistently drives revenue, even in tough times. If your sales machine is weak, you’re out of position.
4. Pricing and Margins
If your prices are low and your margins are skinny, you have no room to maneuver when the environment shifts. You’ll quickly go negative if you must lower prices further to remain competitive. Healthy margins give you flexibility.
5. Fixed vs. Variable Costs
If 90% of your expenses are fixed, you have little flexibility when times get tough. You can’t quickly adjust your costs to match declining revenue. Businesses with a higher percentage of variable costs can adapt more easily.
6. Concentration Risk
Most small businesses rely on one or two customers that might represent 20, 30, 40 percent of their revenues. Or perhaps they have one key supplier, or a primary distribution or marketing channel that is key to the business’ operations. In most cases, a smaller business has an employee that is critical to the success of the business.
Each of these represent a “SPoF”… Single Point of Failure. When the environment shifts, you can be instantly out of position if one of these SPoF’s breaks. Being prepared with a “What If” sensitivity analysis before the shift occurs or the SPoF risk occurs is critical to avoid pushing the emotional panic button and going into a hyper-reactionary seizure.
7. Toxic Culture
Few things accelerate a decline faster or inhibit recovery and success faster than a culture that is broken. In fact, a lousy culture is a leading cause of being out of position.
Culture is NOT perks. Jelly beans in the kitchen, bringing your dog to work, and matching 401k plans are perks.
Culture is how you talk to each other. It’s how people treat each other and interact/behave with the rest of the team.
Culture is the “Rules of the Game”… It’s how we play together. Sadly, many business leaders allow their Values or Mission Statements to be a substitute for culture. These lofty visionary declarations are typically gushy aspirations and not concrete principles that are alive and nurtured throughout the company on a daily basis.
A strong culture can overcome a multitude of problems. A weak culture is the fuel that will burn the house down.
Here it is on a bumper sticker: Certainty is not your friend in business and investing.
As Howard Marks has said, “The less risk you perceive, the more risk there is.”
There’s a difference between a situation and a problem. A problem is solvable; a situation is not. When the environment changes, your job is to adjust your business model to accommodate the new reality regardless of whether it is a problem or a situation… Either can wreck you if you aren’t flexible and adaptable.
Jeff Bezos has repeatedly said Amazon’s success comes down to one question they regularly ask to avoid being out of position:
“Over the next 10 years, what’s not going to change?”
Amazon realized people will always want:
- Easy, frictionless buying experiences
- Fast delivery
- Wide selection
So, they optimized for those things. They positioned themselves to win by focusing on what won’t change.
Ask Yourself: Are You Positioned to Win?
Take a hard look at your business:
- Are you carrying excess costs?
- Do you have the right team in place?
- Is your sales machine robust?
- Are your margins healthy?
- Do you have flexibility in your cost structure?
- Is there a concentration risk that can be planned for or minimized?
- What is our culture: Healthy or toxic?
If you’re out of position in any of these areas, fix it now—before the environment shifts.
Remember, positioning matters.
Anyone looks like a genius when they’re in a good position, and even the smartest person looks like an idiot when they’re in a bad one.
Now, go think—you’ll thank me later.
-Keith
