Top 60 mistakes made by Small and Medium Businesses and how to avoid them

Marketing & SalesategyFinance & Indicators

Human CapitalOperations

Strategy

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Markeeting & Sales Operations Financnce & Indicators Human Capital



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Strategy

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Strategy

Opera

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HECTOR D. DEBERNARDO

MARGARITA HURTADO HERNANDEZ

Top 60

mistakes made by

Small and Medium Businesses

and

to avoid them how

To get the e-book, either in English or Spanish, e-mail us to

[email protected]

1

Copyright 2014 by Hector D. Debernardo y Margarita M. E. Hurtado Hernandez. All rights reserved.

No part of this book may be reproduced and transmitted in any form and by any means without the written permission of the publisher, except in the case of brief quotations used in book reviews and critical articles.

Published in Mexico byHector D. Debernardo. Empresa 113-5, Insurgentes Mixcoac, 03920 Mexico DF, Mexico. [email protected].

First edition. March 2014.

ISBN: 978-607-00-7773-9

Original title in Spanish: “Las PYMES. Principales causas de fracaso y cómo combatirlas”, by Hector D. Debernardo and Margarita M. E. Hurtado Hernández, Ediciones Fiscales ISEF, 2008.

Translated by Cecilia Martinez Lavin Castañeda.Cover and layout design by Ana Cecilia Flores Calderón.Intellectual property advisor: Jorge Molet Burguete.

Top 60 mistakes made by SMB and how to avoid them

Senior management consultant and independent board member.

Mentor to executives and family business successors. Writer and

lecturer.

He has collaborated with more than 100 manufacturing, commercial and

service companies in Mexico, Argentina and Spain.

Expert in the areas of operations and project management, strategy

design and commercial planning, innovation, change management and

family businesses.

Author of the books "El Puente. Mejore los resultados de su empresa

aplicando el pensamiento sistémico" and "Top 60 mistakes made by

Small and Medium Businesses and how to avoid them". Guest author of

the book "Contabilidad y gestión" by Ph.D. Enrique Herrscher. He

presented articles at international congresses on practical applications

to businesses of the system approach.

Founder and CEO of www.puenteempresarial.com, which was

conceived as a means for the fast publishing of contents and tools for

executives and business owners.

Hector D. Debernardo

[email protected]

2


Graduate studies professor and advisor in the areas of Operations

Management and Project Management, at Universidad Panamericana

(Mexico). Collaborator at Instituto Panamericano de Alta Direccion de

Empresa - IPADE (Mexico).

He occupied several executive positions at the Centro Panamericano de

Investigacion e Inovación, which was owned by Universidad

Panamericana and IPADE, and was responsible for the Goldratt

Institute's activities in Argentina.

Former associate professor at Universidad Tecnologica Nacional

(Argentina) and at Universidad de Navarra (Spain). Gave workshops for

excecutives at Universidad Austral (Argentina), Universidad de La

Sabana (Colombia) and Escuela de Negocios IDEA (Argentina).

He has a degree in Nuclear Engineering (Instituto Balseiro, Argentina), a

Ph.D in Industrial Engineering (Universidad de Navarra, Spain),

graduated from the Innovation and Technology Senior Management

Program (IPADE, Mexico) and from the Independent Board Members

Development Program (Universidad Anahuac, Mexico). He is an expert in

all Theory of Constraints disciplines (Goldratt Institute, USA).

Member of the Theory of Constraints International Certification

Organization (TOCICO) and of the Universidad de Navarra's Alumni

Association (Alumni Navarrensis).

3


Margarita Hurtado Hernandez

[email protected]

Academician oriented towards the application of knowledge in order to

obtain positive results in organizations through business training and the

higher education of young professionals.

Agro-Industrial Engineer (Universidad de la Sabana, Colombia), Ph.D. in

Industrial Engineering (Universidad de Navarra, Spain) and graduated

from the Executive Management Program (IPADE, Mexico) and the

Developing Women Leaders in University Administration Program

(UCLA, USA).

Current Director of the Industrial Engineering Bachelor and Professor of

the Operation Management Department at Universidad Panamericana

(Mexico). Leader of research projects on how to improve the

performance of an organization through the system approach.

In collaboration with Ph.D. Hector D. Debernardo, she founded

www.puenteempresarial.com as a means for the fast publishing of

contents and tools for executives and business owners.

As a consultant, she has participated in improvement projects for

companies in Colombia, Spain, Argentina and Mexico.

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As an academician, she has participated in undergraduate and graduate

programs at universities in Colombia, Spain, Argentina and Mexico.

Co-author of the books "El Puente. Mejore los resultados de su empresa

aplicando el pensamiento sistémico" and "Top 60 mistakes made by

Small and Medium Businesses and how to avoid them". Technical

content reviewer of the Spanish translation of the book "Supply Chain

Management", by S. Chopra, P. Meindl. She presented and published

articles on the practical applications of the system thinking at national

and international congresses and magazines.

Faculty Advisor of the Institute of Industrial Engineers (IIE) at

Universidad Panamericana - Mexico City Chapter. Member of the

evaluation committee for articles presented at the System Dynamics

Society's annual congress, sponsored, among others, by the

Massachusetts Institute of Technology (M.I.T.).

5


To those who are always with us, even though we are not near them


Table of Contents

1 Not planning the company's future.

2 Not understanding the natural variability of the business and of the environment.

3 Serve markets with a high probability of crashing simultaneously.

4 Segmenting resources.

5 Not having clear what are the elements that determine the company's ability to make money.

6 Not having clarity about the company's priorities.

7 Engaging in businesses that demand large amounts ofcapital before generating revenues.

8 Believing that continuous improvement consists in doing the same things with less resources.

9 Mix up growth with development.

10 Limited innovation.

11 Believing that any new technology can help the company.

12 Not taking advantage of the favorable effects of globalization.

13 Not taking advantage from strategic alliances.

14 Not taking advantage of subcontracting.

STRATEGY

Why did WE write this book?

Why should YOU read this book?

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CHAPTER 1

19

22

24

24

28

25

27

28

29

33

34

31

30

35

pag.

13

11


MARKETING & SALES

15 Lack of clarity about who the customers are.

16 Lack of clarity about who the competitors are.

17 Lack of clarity as to why does the market buy what our competitors and our company supply.

18 Not listening to customers, potential customers or non-buyers.

19 Supporting the market offer only on the sale price.

20 Having an erroneous idea of market segmentation.

21 No brand ownership.

22 Establishing prices based on costs.

23 Carrying out an unsuitable promotion for the target market.

24 Accepting collection terms longer than the ones the business can manage.

25 Using an unsuitable sales process.

26 Not being familiar with the skills, knowledge and attitude that salespeople must have.

27 Underestimating the duration of the sales process.

28 Underestimating the repurchase cycle.

29 Selling to customers more than what they need in the short term.

30 Depending on a very small customer portfolio.

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CHAPTER 2 pag.

37

38

38

43

39

40

42

43

44

45

46

47

48

49

51

49


FINANCE & INDICATORS

53

54

55

57

58

59

61

62

63

pag.

31 Not planning or executing plans.

32 Underestimating the importance of quality.

33 Not honoring the commitments acquired with customers.

34 Assuming that reality will be the same as forecasts.

35 Having a wrong inventory profile.

36 Believing that the company is losing money whenever any resource is inactive.

37 Buying more than needed in the short run.

38 Depending on a single supplier.

39 Having an unsuitable post-sale service.

OPERATIONS

40 Not measuring or following up on results.

41 Always give more importance to more expensive resources.

42 Erroneous calculation of the required working capital.

43 Mixing up profit with liquidity.

44 Using an unsuitable method to determine product profitability.

45 Add value beforehand.

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CHAPTER 3

CHAPTER 3

65

65

66

68

69

70


46 Not having the right person at every position.

47 The entrepreneur and the director.

48 Allow oneself to be guided by feelings instead of results.

49 Mixing up property, operation and family.

50 Performing tasks that should be carried out by collaborators.

51 Not creating a motivating environment.

52 Having unsuitable people training and retention processes.

53 Measure collaborators' performance using the wrong indicators.

54 Not giving feedback to collaborators.

55 Not being honest with collaborators and hide conflicts.

56 Believing that the solution to problems is out of reach.

57 Allowing other people's negative influence.

58 Letting fears paralyze.

59 Not taking advantage of other people's experience.

60 Not being honest.

The triumph of a new “SPECIES”.

AN AFTERTHOUGHT

HUMAN RESOURCES

10

CHAPTER 5 pag.

73

74

77

79

81

82

84

85

86

86

87

88

89

91

92

90


Why did WE write this book?

If you, dear reader, are an entrepreneur, you have our admiration. It is

not easy being one. It is necessary to have a proper understanding of the

environment and of the customers' needs, to know your competitors, to

ensure a reliable operation, to take care of the finances, and to observe a

number of government regulations.

Companies, either very small or very large ones, are systems comprised

of material resources, information and people that interact among

themselves in order to achieve goals. They are complex, given the

amount of elements and connections between them and with the

environment.

On the other hand, progress in the areas of telecommunications and

transportation contributes to a greater integration of the world. In

consequence, the difficulty to understand it and to decide how to

perform within it, increases constantly.

Finally, China and India are following the path along which Japan and

South Korea, among others, passed through decades ago.

What should be done in this context? Is it possible that small and

medium businesses (SMB) can survive? Can they continue being the

country's greatest job creators?

In our job with SMB, we have found that most times, their failure is due

to internal and not external causes. The increase in the environment's

complexity and foreign competition contribute to the amplification of

the negative consequences of the mistakes made, but they are not the

underlying problem.

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The statements in the preceding paragraphs are good news indeed, even

though they can sometimes be interpreted as negative facts. They are

telling us that in most cases, success or failure depends on the company

itself, and not on factors beyond its control. It is possible, then, to survive

and grow in the international context envisaged for this century.

Although many of the concepts that will be presented in this book have

proven to be very effective for companies of every size, the main goal of

this book is to contribute to ensure the survival, development and

growth of SMB.

Our current way of thinking and acting is the result of the exchange of

ideas and experiences shared with friends, entrepreneurs and

distinguished authors. Angel Baguer Alcala, with whom we worked

during the years we were living in Spain, and Eliyahu Goldratt, with

whom we have interacted several times, have had a significant influence

on us.

Dear reader, we would be delighted to receive your comments on how

did this book helped you improve the performance of your business!

Mexico City, December 2007.

Margarita Hurtado Hernandez

Hector D. Debernardo

[email protected]

[email protected]

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Why should YOU read this book?

In a small city in a country which economy is mostly agricultural, there were three electronic engineers who were college classmates and who shared the dream of developing and selling hardware. Their revenues only allowed them to live modestly. They were having trouble finding a way to succeed.

At that time, a single company provided telephone services to the entire country. Its quality was very poor: communication was frequently lost while speaking, it was difficult to get a home line and most public telephone devices did not work properly.

One day, one of the telephone company's employees, Dan, was staying in a hotel and had an idea. He imagined a device capable of showing the user the duration and cost of the call while speaking and, at the same time, was able to indicate the receptionist how much to charge for such a call.

Since he knew nothing about electronics, he began searching for someone who was able to design such product, and that was when he met the three young engineers.

The first meeting was not very productive. They were tired of investing time in projects that produced no revenues. They doubted the idea could be a commercial success and decided that this time they would not take the risk. They asked Dan for the money equivalent to several months of their revenues as their fee to design the device. He did not have enough cash, but he did have two things: his car, which market value was approximately the amount requested by the engineers, and the conviction that his idea would be a great business.

A couple of weeks later, Dan came back, on foot, and gave them the money. He had sold the only asset he possessed in order to make his idea come true. The message was convincing. The engineers were impressed.

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That is how a partnership between these four people was born. Let's call it Ingevision.

When the national government decided to privatize telecommunica-tions, it demanded the winning companies to significantly improve the public telephone service. Ingevision took advantage of this situation in order to obtain a profitable growth for several years.

How did they achieve such a success?

The technology developed by Ingevisión for hotels was also useful to manage groups of telephone booths. They created a simple business model:

The owner of a commercial area made all of the necessary investment in order to turn it into a public telephone center, best known as telephone booth or telecentre.

One of the telecommunications companies provided the telephone lines.

Ingevision sold to the owner of the commercial area all the electronic equipment necessary to manage calls.

It was a real win-win solution:

Telephone companies were able to meet national government's requirements with a very low investment.

The owner of the commercial area obtained a significant percentage of the retail price of each call, at a time when rates were high.

By manufacturing and selling the devices and equipment to operate each commercial area, Ingevision obtained excellent profitability.

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As every time a win-win solution is found, all parties involved exceeded their initial expectations. Ingevision achieved a market value that only one of its partners could have imagined several years ago, when he sold his car.

This story illustrates one of the ways in which a SMB starts. It is referred to as proactive start up and it is comprised of three key elements: vision, know-how and opportunity.

The other way to start up a business is the one we refer to as reactive start up, in which circumstances provoke the creation of the company. It happens, for example, when a person or a group has specialized know-how which starts being highly demanded by a growing market sector. It may also occur when someone who was employed for most part of his life is laid off and, as a result of the pressing economic situation he was experiencing, and after several failed attempts to find a job, decides to start a business.

Regardless of the way in which they are created, all SMB experience similar problems. In the next pages, we will analyze the ones that, in our opinion, are their main causes of failure and we will suggest ways to avoid them in order to significantly increase the likelihood of survival, growth and development.

In order to facilitate the reader's permanent consultation, we have grouped such causes according to the five functions that are common to every organization:

Strategy, which main purpose is to establish the company's direction.

Marketing & Sales, which main purpose is to create a bigger and better demand.

Operations, which main purpose is to satisfy current demand.

Finance and Indicators, which main purpose is to support and monitor the value generating areas.

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Human Resources, which main purpose is to ensure that the company has the right person at every position.

The approach of this book is from the market to inside the organization. The proposed methods are closely related among themselves and their purpose is to solve problems simultaneously and not in an isolated way.

We are human beings and it is natural that we make mistakes, even though we do not like it or do it unintentionally. Maybe the biggest difference between a big company and a SMB is the lower ability to recover from the negative consequences of bad choices. This is why it is important to learn from mistakes made by others.

5 functions common to every organization

Strategy

Marketing & Sales

OperationsFinance

& Indicators

HumanResources

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“The only human being that does not make mistakes is the one who does nothing”

Anonimous

“With so many mistakes to be made, why do we always repeat the same ones?”

Anonimous


To get the e-book, either in English or Spanish, e-mail us to

[email protected]

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Top 60 mistakes made by Small and Medium Businesses and how to avoid them