5 Wrestling with Goliath
We use “Goliath” as shorthand for the things we face in business that seem overwhelming and impossible. We may feel like no matter what size our companies become, someone or something is always bigger. Perhaps a key employee who provides a knowledge base you don’t have threatens to quit or a big customer says she’ll drop your services unless you drop your price (even when you have grown your business to accommodate her company and it represents 30 percent of your volume). This is the chapter about those big things that wake you up in the middle of the night. You lie in bed worried about your family and how to provide for them, the eighty or so other families who count on your company for their livable wages and health insurance coverage, the community programs that depend on your sponsorship, and whether your business can keep going for the long term or even until next week.
You are not the only one who has been there. Lisa starts us out with a story about her largest distributor getting into financial trouble that spilled over into her business and put the entire company at risk. Margot remembers how her largest customer dropped her entire line after she had ramped up to meet the projected orders for the next year. Joe tells us how a previous client called him and claimed he’d stolen an idea and had no right to use it. In times like these, adrenaline courses through your body. You feel like you’ve been punched in the stomach, and you fear that everything you have built is a house of cards that can come tumbling down. These times feel like the toughest of the tough stuff. At the end of this chapter, we distill a few reminders that have helped us when we faced our own Goliaths.
The Multilegged Stool Rule, or Don’t Put All Your Eggs in That Solid-Looking Basket
LISA
My Goliath story is about dealing with a great distributor in the Boston area when Vermont Bread Company was in its early years. This distributor grew at 50 percent per year, did all of our billing, and made all of the calls to store buyers, and his sales volume represented over half the total sales by our company. We were quite fat and happy—until one day we weren’t. After a decade of rapidly growing his business (and ours), our distributor got involved with a shady crowd and was persuaded to move his assets into a shell public company. That was the last anyone saw of his assets. He started kiting checks and whistling and dancing on the collection calls from us. When the dust settled he owed us $195,000.
At the time, we were not a large company, and we had only a $50,000 line of credit. We were sweating. Our stores started calling and screaming about poor service and out-of-stock products. One chain refused to sell our bread until we could resolve our issues. There was no other independent distributor in this market, so making a switch wasn’t an option. And starting our own distribution company was beyond our limited resources.
Even though we could have come up with several ideas we would have liked to do to that distributor, we had to focus on finding solutions. How in the world would we keep going, pay our bills, and meet payroll this week? We searched our network and found a great lawyer who could help us negotiate with the new owners (the original guy and his new partners) of the distribution company. We agreed to continue to supply them if they gave us a $75,000 down payment on what we were owed. Luckily, they did, so we had enough for payroll for a while. Then we needed to find sources of cash to help us through. My partners and I cut our pay. I did a reforecast. We used our personal credit cards to pay bills. Unfortunately, it just wasn’t enough to plug the cash flow hole left by the distributor. We still needed to find a short-term cash answer.
Out of desperation, we did what most entrepreneurs never want to do: we swallowed our pride and admitted our mistakes. We acknowledged to ourselves that we never should have let this one customer become large enough to have the power to sink us. It was our failure for not balancing his sales with other revenues. Knowing that gave us the tools to get out of the mess in the long term. We called our bank—the one that had given us the $50,000 line of credit—and our suppliers, and we told them what had happened and said that we needed help. The bankers and suppliers responded well because we had never blindsided them. We had a history of telling them the bad news as well as the good news. We paid our bills when we could and called them with a plan when we needed them. We got extended terms in exchange for loyalty and regular updates. Our suppliers and bankers helped us get through, and we learned something valuable in the process: the importance of the multilegged stool. If a stool has just one or two legs, it will fall over. In business terms, you need to match your largest accounts with others of equal or larger size.
Remembering the multilegged stool rule really helps as your business grows bigger and larger accounts come your way. It might seem easier to just stay small and not deal with big Goliaths, but I sometimes feel frustrated when people try to convince me that small is beautiful. You can’t really say no to a big account because then you are saying no to growth. If you say no, you stay very small. If you say yes, then your next job is to find another account that is equal in size to that one. This was a lesson that kept smacking me upside the head while I was at Vermont Bread Company: Don’t put all your eggs in that nice, solid-looking basket.
This solid-looking basket rule kept returning for us. In a time of consolidation of customers and suppliers, most of us in food manufacturing were facing this problem again and again. In our case, when I sold Vermont Bread Company, we were scrambling to match our largest and best customer. This customer was only one-third of the way through build-out plans for the East Coast and still growing fast. It would have been so easy to be lulled into ignoring the multilegged stool rule. This company was easy to deal with, its leaders loved us, its corporate values were aligned with ours, it paid its bills early, it never took a credit, and it grew at over 50 percent per year. We worked so hard just to keep up with it, but we knew from experience we had to balance it out. One way to remedy this is to always have a multilegged stool that won’t fall over if one leg is pulled out from under you.
We did survive the distributor disaster, and when a company comes through something like that, the memory becomes the story of a hero’s victory—or, to quote a friend, “more fun in the telling than the doing.” In the middle of it, we never felt like heroes. Embracing our values of transparency and honest communication in the midst of a significant financial crisis like that one can be really tough. You are not always sure you can survive. But Goliath is not as tall as he looks. You usually do survive to tell the tale. And the lessons you learn from it can be invaluable as you journey forth.
When Smaller Is Better
MARGOT
I was always a little afraid of large companies. I didn’t think they would really know how to sell Birkenstocks because a customer needs education. Customers can’t just pull Birkenstocks off the shelf like they can other shoes. People who have never worn Birkenstocks before might think the shoes don’t fit and they’re too odd. For this reason, I started out selling to individual retailers. I would tell them about the shoes so they could educate their customers. I liked working that way, but of course as the company got bigger, larger companies became interested in selling the product. It is difficult to say no to that kind of growth.
The first large company I dealt with was Nordstrom. Nordstrom is a prestigious account, especially for shoes. If your shoe brand is in Nordstrom, you feel you have arrived. The first Nordstrom account that came to us was a men’s department in Portland, Oregon. I went to the store and trained the salespeople so they could educate customers about buying Birkenstocks. This department did very well for several years until the manager was promoted to a different position and the sales dwindled. In the meantime, other Nordstrom stores in other cities had bought our shoes, and we had trained their salespeople. But when customers saw them on the shelves, they didn’t necessarily buy them. Because the salespeople were compensated in terms of how many shoes they sold each day, they didn’t want to spend half an hour with a customer, educating the person about Birkenstocks and hoping for one sale. The excellent results in Portland were entirely due to the manager there, who understood the product and was a champion for it.
Even when a big company is a huge supporter of your product, that is still not enough sometimes. In another department store in Costa Mesa, the manager of the women’s shoe department was enthusiastic about our product and had given us big orders at first. Then all of a sudden, we didn’t hear from her anymore. I called the buyer and asked why she wasn’t ordering our sandals. She said, “We are selling them very well. As a matter of fact, I’m out of them, and I’m sending customers who ask for them to a nearby retail store that carries Birkenstock because I can’t buy any more from you. We buy sandals as a department category, and we are totally overstocked with other shoes. We have to sell all of those before we can buy more of yours.”
When you sell to large companies, another problem you run into is competition. Larger companies have a tremendous amount of resources, and they might decide to copy your product, sell it at a lower price, and undermine your sales. A couple of years later, we sold to L.L.Bean. At first we sold to the big retail store in Maine. I visited the sales manager and explained the shoes to him so he would understand how to educate the customer. The store was huge. It was open twenty-four hours a day, and the manager of the shoe department was very good to us. He sold Birkenstocks at full price for two years. Then the mail-order department wanted to talk to us. Our salespeople went to Maine, and L.L.Bean put our shoes in the catalog for a number of years.
Business was wonderful until the company decided to put a similar, cheaper product in the same catalog a few pages after ours. We had no warning that L.L.Bean was going to do this. The price difference was enormous, and our sales numbers started dropping. We had expected a big catalog order but then had to scramble to redo our forecast. We were now asking ourselves, “How can we get the necessary cash to keep us afloat? To whom can we turn for additional credit?” We had budgeted for and anticipated sales that never materialized. We couldn’t sue the company because we didn’t have a copyright on the design of the shoe; we had only a copyright on the name “Birkenstock.” The parent German company never thought of patenting the design. We did inquire about it, but by then it was too late—a company can’t do a retroactive patent. Because of our name recognition, if L.L.Bean had used the word “Birkenstock” in the catalog, we would have been able to take some action.
This situation had an impact on everyone, including our supplier and our customer base. Our supplier, the Birkenstock company in Germany, was just as affected as we were, having built up manufacturing capacity and ordered supplies for the sales. Having to tell our contacts there that these sales would not materialize was embarrassing and humiliating. It helped that we had built a solid relationship with them over the years. We were able to cancel some orders and delay the shipment of others that had already been produced.
Our customers were also affected. They suffered the most from the price-cutting L.L.Bean introduced into the marketplace. Independent retailers made up our largest customer base. Somehow we had to come up with ways to help them. Other suppliers might have adversarial relationships with their retailers, just trying to get the most profit out of a deal, but I believed we would do well only when our resellers could also prosper. We decided to create special-edition products, styles, and colors just for them. We gave them complete marketing materials to go along with these products; then we sold them at promotional prices. These special products took a while to produce, and in the meantime we were running “lean and mean” at headquarters. Everybody pitched in. Our bankers were understanding. They were inquisitive about how we were going to replace the lost volume, but they trusted us to pull it off, and we did.
This story is about holding on to the value of quality over cost. Doing this can be very difficult when an entrepreneur is facing the Goliath of a competitive market. Quality and price are often at war in the marketplace. Well-meaning retailers have often said to me, “The only thing wrong with Birkenstocks is they last too long. I could sell a lot more if they broke down sooner!” Luckily, neither I nor Mr. Birkenstock gave in to that temptation. One of our core values was that quality would win out over price, and we trusted people would discover that quality is more economical in the long run. The look-alikes in the L.L.Bean catalog were inferior in quality: they weren’t as durable, and they didn’t provide the same benefits as Birkenstocks. It took a while for the public to realize this, but they finally returned to the “real thing.” This experience with L.L.Bean reinforced my belief that the drive for “cheaper, cheaper, cheaper” is partly responsible for the economic messes like the one we are in right now. This concept can perhaps be most easily seen in the food industry: cheap food is produced with the help of subsidies so that the big outfits gain, but the organic farmer is struggling. This is an example of when Goliaths can harm not only the marketplace but also the individual.
Whenever something like this happened with the larger companies, the Goliaths, I wound up feeling okay about it because it brought me back to my own values. I believed in a quality product, and my heart was really with the smaller, independent retailers. I liked to nurture the smaller stores. I admired the store owners for their pluckiness and courage. They had to be multitalented in order to do everything the big stores did, including marketing, advertising, store design, and community relations. And they did it all with limited resources. It wasn’t easy for them, so supporting them was a joy to me. In return, the smaller retailers remained loyal and dedicated to our product. Their values were aligned with ours, so they were a better fit for our company.
That philosophy paid off for us in the long run. Though some retail stores disappeared from the industry with consolidation, many of the specialty stores that carried Birkenstock remained. In the end, the “many small” outweighed the “one big.” What a blessing that was.
Contracts Help You Get Clear
JOE, CREATIVE MACHINES
When you run a small business, you can sometimes have the illusion that a big job—the breakthrough job—is right around the corner and will assure everlasting success if you land it. In our business, when a big job like this comes along and there’s a bunch of hype, everyone in the industry knows about it. One such project was the Experience Music Project, financed by Paul Allen in Seattle. A lot of companies were trying to get involved with it because it had a huge budget. The project was about rock ’n’ roll, which is fun and cool. I worked on it a little bit, and it opened a few years later. It was okay, but then other jobs came along. I had more exhibits to build. Life went on. In this line of work, and maybe in other industries as well, no one job is going to push us over the edge and make us grow so much that we can think, “Now we’ve made it.” That’s an illusion that, as entrepreneurs, we have to get past.
The problem with growing very fast with one big job is that the growth is very expensive and difficult. By itself, growth is a full-time job. If we were really going to make a profit, it would probably not be one job that grew us really big because we would need every penny to get that big, and then our company would be poised for that level of growth. If another job of similar size didn’t come along, we’d have a problem. A company like ours isn’t very scalable. It isn’t like we have ten people making widgets and if we had a hundred people we could make ten times the number of widgets. It’s much more interdependent than that. Our staff has a unique mix of talents that isn’t always transferable to another project.
Another form of Goliath is dealing with larger companies within the industry. I work in a small industry, and in some ways we’re all dipping out of the same pot. I had a turning point a few years back, when I almost got in big trouble with a larger company in our industry. The experience taught me that business works best within a framework of contracts, letters of intent, the Uniform Commercial Code, and so on, all of which define a predictable sphere.
What happened was this: My company was paid by Company A to build some exhibit prototypes. We had a nondisclosure agreement saying we couldn’t show the prototypes to anyone until they had been shown in public. But after that, they belonged to us, Creative Machines. We showed them in public and then when the opportunity arose to win an important job, we shipped these prototypes to Company B, where a prospective client was visiting. We were partnering with Company B to try to get a job with this client, and the prototypes would help the client see what kind of work we did. We were completely up front about the circumstances surrounding the prototypes—who designed them, who built them, who paid for them, and so on. What complicated matters was that Company A was trying to win the same job.
When the people at Company A found out we had used the prototypes that they had paid us to fabricate, they were angry. Company A’s vice president called me and said, “Why did you do this? We’re going to blacklist you.” I replied, “I was very clear with the potential client what everyone’s relationship was, and we had every contractual right to do this. We never misrepresented who designed what and who built what. The prototypes were ours to do with what we wanted by contract. We’re allowed to display these publicly or do anything at all because the nondisclosure agreement is over.” Saying this didn’t calm the vice president. But as I was trying to explain my situation, I made a statement that changed everything. I said, “You can always count on me to act within the bounds of legality and ethics to advance the interests of my company, just like you would do for your business.” After a long moment of silence, he spoke again and was relieved and satisfied with my response.
In a situation like this, irrationality and emotionality al -most never works. A calm, level approach is much better. The person who had tipped off this vice president was very emotional. That scares other businesses. When I told the vice president that he could always count on me to further the interests of my business within the limits of legality and ethical behavior, he could understand because I was just another businessman like him. Company A has continued to work with us, and the guy who tipped off the vice president has never worked for that company again.
That’s why I like contracts, up to a point. You definitely need them when your company starts to be big enough to deal with Goliaths. If you are relying on the other person’s good feeling and emotion to keep your business relationship solid, what’s to say that the emotion won’t turn bad? I don’t mean to say that if the other person is emotional you can’t have a good business relationship, but you should have clearly defined rules, especially as your company gets bigger. Now, even for small jobs that I do for friends, I insist on a multipage letter of agreement so everyone is crystal clear about what is going to happen, and I can ultimately protect those relationships. The balance between business and friendships is especially important when you are dealing with Goliaths.
What We Learned
Dealing with Goliaths can feel scary, but these entrepreneurs lived to tell their Goliath tales, and so can you! Here are some things you might want to consider when a situation goes awry with a Goliath:
Understand the big picture. Remind yourself that getting a sense of the long view is helpful but difficult to do in the middle of a tense situation. Try to take a step back and see that this moment is only one part of a very big picture. That might give you the strength and foresight to be able to pick up the pieces and take action.
Know your company and why you are running it. Holding on to what makes our companies strong can get us through our encounters with Goliaths. When the going gets tough, pick up your product, read a rave customer review of your service, or reread your mission to remember the values that are your bedrock. This may sound hokey, but it helps.
Remember what you value most. Knowing where you are willing to compromise and where you will not vary from your core values is the foundation of knowing who you are. Even if a Goliath promises to pick you up and take you to the next level, if you don’t feel like you can adhere to your value system at the same time, then the ride might not be worth it.
Remind yourself that nobody goes it alone (sanely). Another way to reconnect to the long view is to voice your fears and concerns to another business owner you can trust. On a day Lisa was facing multiple big issues—a key customer and a key employee wreaking havoc on the same day—she called a friend in distress, whining, “It’s all a house of cards.” Luckily, the friend had more perspective and big-company experience so he could say, “It’s no problem really, Lisa. Even the biggest organizations feel like a house of cards.” Rather than scaring her, these words helped her see that everything is a work in progress, and other businesses have similar problems. She wasn’t as alone as she had thought.
Do it afraid if you have to; just make sure you do it. Another way to say this is that when we feel like something is overwhelming, turn and face it. Many times the shadow thrown is much larger than the actual Goliath.
Know that many rivers lead to the ocean. These stories teach us to find another way. Even if the alternative is not pretty, knowing that Goliath isn’t the only option helps you to find another path out of the mess that dealing with Goliath might have created.
PRACTICAL TIP
Do Something Completely Silly
When you’re feeling overwhelmed, do something that makes you giggle like a child. Make s’mores, jump in ocean waves, roll in a pile of leaves, finger-paint, play a practical joke on someone who will laugh, have a pillow fight, do your favorite card trick on an unsuspecting friend, or play the music of your teen years as loudly as you can stand and sing along.
Focus on the Next Step Only for the Next Hour
What is the one action you can take for the next sixty minutes that will address an issue in your company? Do that one action only for right now.