16 Understand how businesses work

Most of us work in a business or business-like environment; even nonprofits and many government agencies have a predominantly business-like approach to the way they work. It therefore makes sense that you should understand the “rules of the game” for businesses in general. Doing so can help you contribute more effectively, and navigate your career journey more efficiently.

16.1 Businesses are people too

In most countries, businesses are, from a legal sense, considered entities in the same way that people are. Companies have individual rights and obligations, often pay taxes, can own and sell property, and so on. The Romans of the mid-500s (mid-500s A.D., that is) recognized a range of corporate entities; the word corporation itself comes from the Latin corpus, meaning a body, or more specifically in this case a body of people.

I want to take the comparison between business and person even deeper. Companies, like people, have needs. They have motivations, which often relate to those needs. Getting judgmental about other peoples’ needs is easy. For example, I cannot comprehend why the people in the condo above mine needed the yappiest little dog as a present this past Christmas, but here we are—they had a need, they filled it, and I don’t understand it. Anyone or anything with different needs or motivations than yours can be difficult to understand, and even easy to look down on, but it’s important to acknowledge that we all are different. Other people have needs that differ from your own, or may even be in opposition to yours. That is just how life works.

The same is true for businesses. Some people look down on businesses because “All they want to do is make money.” True, but that’s more or less the precise reason you start a business, so nobody should be surprised when that’s what the business’ primary motivator turns out to be. Of course, it’s worth noting that plenty of businesses do a lot more than just make money: many offer significant support to their communities, for example. Every business, like every person, has different motivations.

Like people, businesses engage in relationships. Like any relationship, everyone in the relationship is expecting to get something from it, and the relationship only works well if everyone is getting at least most of what they need. One-sided relationships aren’t healthy, are often frustrating, and are the ones most likely to end in a fight. So let’s talk about businesses and their relationships.

16.1.1 Businesses and their relationships

Probably the first kind of business relationship that springs to mind is the one businesses have with their customers. That’s an easy one, right? Customers get whatever it is the company sells, and the business receives money, and everyone’s basically satisfied with the relationship. There are degrees of “satisfaction,” though. I filled the car up with gas the other day: the gas pump worked, and the price . . . well, it was what it was. We don’t have that much price variability in my neighborhood, so I pay what I pay. So I suppose both myself and the business were satisfied, albeit on a somewhat vague, done-and-gone level. I mean, I’m not explicitly planning a return engagement, and I don’t dream wistfully of those minutes spent at the pump. It’s a good relationship that we have, but not a great one. It’s nothing like the relationship I have with a little restaurant called 7th & Carson, just a couple of blocks from my condo building.

I love going to “7th&,” as we call it around the neighborhood. The food is terrific, and I feel it’s an excellent value for the money. I look forward to the charred octopus in particular, although the chicken wings are pretty spectacular as well. I like the staff—Oscar behind the bar who always makes such great drinks, the chef who not only turns out excellent food but is also fun to chat with, and the owner, Liam, who’s got a delightful Irish accent and always makes us feel welcome. As a customer, I think I have a great relationship with 7th&. I enjoy telling people about that relationship, as you can see.

Like people, if not more so, businesses need relationships in their lives. A company with zero relationships isn’t going to go to therapy or stay home and play video games; that business is going to die. Businesses not only need relationships, they need good ones. Many companies go out of their way to try to foster good relations, even when those relationships get a little one-sided in favor of the customer (like the saying, “the customer is always right”). Businesses will often stay in toxic relationships a little longer than they should, making you wonder if there’s some sort of couples counseling for companies and their customers. For example, I’ve seen really abusive customers return to a store again and again, constantly buying and returning merchandise, and I wonder why the company doesn’t just cut them off and save all the hassle.

But customers aren’t the only party that businesses have relationships with. Businesses also have relationships with their vendors. They may have relationships with organizations like the news media, the local government (for licensing and inspections), and so on. However, the most significant relationship a business has is with its employees.

16.1.2 Customers and employees

You might argue that the customer is king, but I’d phrase it a little differently. A business is its employees; the relationship a business has with its employees is absolutely required for the company to, by definition, exist in the first place. A business with nobody doing any work is just an idea, not a functional entity. True, businesses are more tolerant of toxic relationships when it comes to customers, but that doesn’t make the employee relationship less critical.

I view the customer relationship a bit like meeting the relatives of your significant other. You know there’s going to be one or two weirdos in the group, and you’re prepared to tolerate them. Most of the rest are fine, and if you’re lucky, there’s a handful of really brilliant characters in the mix.

The employee relationship is a lot more like the friends you grew up with and have stayed in touch with your whole life. You all know way too many dirty secrets about one another, you’ve seen each other drunk too many times, and you’re a little too quick to upset each other sometimes. But you’re also comfortable with each other, which means you’re generally more tolerant when you’ve upset each other, and you tend to come back to each other. That doesn’t mean you’re “best friends forever,” though: even the best of friends can have a relationship go toxic, and while it’s always painful and dramatic, sometimes the relationship has to end. That’s how it is between businesses and employees, too.

Also, like any relationship, the quality of the business-employee relationship can fall on a spectrum. In the best relationships, both sides are getting what they need, they’re happy about it, and all’s well in the world. In the worst relationships, neither side is happy about it, nobody is having their needs met, and everyone else wonders why they don’t just call it off.

We hear the word “entitlement” a lot these days, and it’s really easy to point at someone who expects things to be a certain way and call them “entitled.” I’m going to choose to not use that word because I think it’s a little overloaded with sentiment. Instead, I’ll go back to that relationship analogy.

16.1.3 One-sided relationships

When I was just out of high school, I had a small group of friends who hung out quite a bit, and it was pretty common for us to wind up at a diner or burger joint somewhere in the evenings. Two of my friends stand out in my memory: one, whom I’ll call Jon, was always really up-front when he couldn’t afford to eat out with us. “I can’t, guys, I’m short until my next check,” he’d say. We’d all nod, and either we’d offer to cover his tab, or he’d go off on his own if none of us could. Often, one of us would go with him and do something else, or we’d all call off the eating-out altogether. Another, who shall be known as Shelly, would invariably wait until everyone had ordered, finished their food, and the check had come, before announcing she had no money. Shelly was annoying that way. I mean, we liked Shelly. She was fun, and she didn’t mind sharing popcorn at a movie, presuming she had the money to pay for the movie and the popcorn, but she’d always wait until the rest of us were basically on the hook before announcing that she wasn’t participating. After she’d eaten, of course.

Shelly was an example of a bad relationship. She was clearly getting something from the relationship, but the rest of us weren’t getting what we needed, which was some mutual respect and not being taken advantage of. If our group was the “business,” then Shelly was a lousy employee.

I run into many employees who are like Shelly. They seem to feel that a job is something everyone is supposed to have and that so long as they’re showing up most of the time, and putting in minimal effort, then they deserve to get paid. I don’t think of this as entitlement, although, again, that’s the word you hear a lot. I think of it as a sad, one-sided relationship.

I also run into many employees who are like Jon. They seem to feel that if they’re not interested in doing whatever the job is, that they should leave and go work someplace else. You can imagine which type of employee I have more respect for. Again, though, this is just a different place on the relationship spectrum, a place most of us would regard as healthy and desirable.

Jon and Shelly are, of course, extremes. Most of us are neither Jon nor Shelly; we’re somewhere in between. But if you were to think about your relationship with your employer, how would you characterize the relationship? And no, don’t think about how you feel about the business; give yourself an honest appraisal of how the business might feel about you. If you were in charge of “couples therapy” for your relationship with your employer, what observation would you make? What advice would you offer?

If it’s easier, modify the relationship analogy and consider the contractual relationship between you and your employer. You may actually have an employment contract, but if you don’t, pretend that you do. What does the contract require of your employer? What does it really require? If it’s silent on the length of a work week, for example, then you’ve no reason to presume it will be 30 hours or 60 hours; it “is what it is.” What does the contract require of you? Presumably, your job description outlines your duties. If you accepted the contract, explicitly or implicitly, then you need to hold up your end of it. The business needs to hold up its end, too—believe me, I’ve seen plenty of businesses that were at the toxic end of the relationship, and I’m not trying to make employees out to be the Universal Enemy. But I am saying that it takes two to tango; if you feel you signed a bad contract, or that the other party isn’t upholding its side of the bargain, then point that out. Bring it up! Discuss it, and ask for change. If the change isn’t forthcoming, and it’s important to you, then you can end the relationship.

A friend of mine, Bob, was in a particular job for about six years. He was hired to do software quality analysis, which is a fancy way of saying he watched a bunch of machines run automated tests against a bunch of other machines to make sure the second set of machines did what they were supposed to do. When they didn’t, he sent test reports back to the machines’ programmers, who made fixes so that Bob could do it all over again the next day. Bob got bored of this after about six months, which is completely understandable. (Smart companies have automated all of this these days, so they do not need a Bob at all anymore.) But Bob stuck with it. Sort of. Initially, he began looking at the broken code and making suggestions for fixes. The programmers were delighted by this because Bob was doing their job for them, out of his sheer boredom. Bob asked for a pay raise and was turned down. Maybe not a great call on the company’s part, because Bob was going above and beyond, right? But also maybe a good call, because all the company wanted Bob to do was what they were paying him to do. Everything he did “above and beyond” was fine, but nobody had asked him to. And that’s when the relationship went a little toxic, and it’s honestly when Bob should have started looking for another job elsewhere. But he stayed on for more than five additional years.

What’d he do in all that time? He caused trouble. He’d start rejecting code not because it failed its tests but because he’d spot stylistic errors. Basically, he’d reject functional code because he didn’t like the color shirt it was wearing, which wasn’t one of the criteria he’d been given in the first place. After getting yelled at about it, he started just fixing the stylistic errors he saw. Of course, these would sometimes create functional problems, causing the code to fail in the field—because Bob had passed it, so it was presumed to be working!—which would get the programmers yelled at. All the while, Bob would just remark how lucky the company was to have him, doing all this extra unpaid work.

Except the company didn’t want him to do it. They’d had an implied contract for Bob’s job and what he would be paid. That had never changed. Well, it had: Bob had changed it. He’d unilaterally renegotiated his contract, reinvented his job, and then gotten bitter that the other party to the contract wasn’t on board. From a relationship perspective, the company didn’t need this extra fuss Bob was causing, and eventually, the relationship got toxic enough that Bob was fired. Bob was that friend who moved in for a weekend and stayed for a month: “Dude, I like you and all, but this is not what I wanted the relationship to be.”

The funny thing is, some folks could argue that either Bob or the company was the original proximate cause of the problem. I mean, sure, the company didn’t want to pay Bob more to do a job they hadn’t hired him for—weird, right?!? Bob could have just gone back to doing what the relationship initially called for, but he didn’t. I argued with him and said, “You know, Bob, it’s like you moved in with a roommate, agreed that you’d both sleep in separate rooms, and then he finds you in his bed with him every morning. That’s gonna upset him. You changed the rules of engagement without everyone buying in.” Bob firmly felt the relationship’s souring was the business’ fault. And that’s how relationships work, right? Once they go wrong, nobody wants to own responsibility. So responsibility almost doesn’t matter—bad is bad, and sometimes the best you can do is end it before it gets worse.

16.1.4 Dealing with changes in the relationship

I’m not suggesting you quit your job. I am suggesting that you have a job because a business needed a skill or service that you could provide. Maybe they needed some programming done, or a network fixed, or some servers maintained. But the business had that need, and you came along and offered to do it. You presumably needed money and benefits and what-have-you, and you both agreed it was a fair exchange. The moment that situation changed, it was on one of you to say something. “I’m bored of programming,” you might say. “Do you have any other needs?” “No,” the business might have answered. “It’s programming or the highway,” at which point you’re the one who asked for the change in the relationship, so you need to decide if you can continue as it was or if you need to move on. Also, it can go the other way: “Hey, employee, I no longer need programming done. That is not a need of mine anymore. I’ve changed, and I need you to maintain the servers now.” “Well, business,” you might say, “I love programming and that’s what I signed up for and what I want to do.” The relationship changed. It would be sad if you had to leave because of a reason like that, but if you’re no longer satisfying each others’ needs, then the relationship can’t continue without becoming toxic.

Does that make any sense? Businesses are like people, and people change. The needs a business has today might not exist in ten years. The things you’re willing to provide to a business might not stay the same for five years. At some point, one of you will have different needs. That’s nobody’s fault, provided someone can speak up, acknowledge that the relationship no longer works, and see if there’s a new relationship that does. Where it gets toxic is when you know the relationship no longer works, but you want to keep plugging along and ignoring it. Just as in your personal relationships, that is never a good idea, and it’s what makes everything eventually end badly.

As you engage with the business, look at your relationship with it as well as at how others relate to the company. You’re absolutely going to run across companies who can’t maintain a healthy relationship with anyone. That’s a shame, and the bigger shame is when the people in that relationship aren’t able to recognize it for what it is, or when they’re trapped in some way and not able to get out of it. We’ve all heard stories about people who were in bad personal relationships that, for whatever reason, they didn’t feel they could get out of.

If you find yourself running a business, be mindful of that relationship. Employees aren’t “resources” to be utilized to their maximum potential and then discarded; your business is in a relationship with them. Sure, you need something from that relationship, but they do as well.

I think businesses go wrong when the people running the business stop thinking of the company as a person, and when they stop realizing that there’s a true relationship between the business and its customers, vendors, and employees. I think employees tend to go wrong when they forget that, too. Always approach relationship problems from the angle of “what could make this relationship better for both of us,” and see if that helps create a better situation or at least creates some clarity on whether the relationship can be good or bad.

16.2 How businesses really make money

When you work for a company, it’s really, really, really important to understand what the company actually does for a living, and how the company itself—or those with a financial stake in the company, like its investors—measure the company’s success. Gross revenue is rarely the most compelling metric about a business, and for many modern businesses, gross profit isn’t even the most important metric. I explain gross profit and gross revenue in Chapter 19, by the way.

Consider the story of MedVidCo, a company I’ve invented for this story. MedVidCo is in the business of making videos about medical procedures, and they sell their services on a subscription basis to doctors. Doctors pay over $10,000 a year for access to MedVidCo, and the company employs some of the most well-known doctors in the world to create their videos. Their library serves as an invaluable reference to doctors, who use the videos to learn new techniques, brush up on ones they’ve not performed in a while, and so on. MedVidCo has been successful enough that they’ve attracted several rounds of private investment to fuel growth, and they’ve just recently completed an Initial Public Offering, or IPO, to become a publicly traded company. Think of MedVidCo as “the Netflix of medical videos,” where you pay a flat fee for unlimited online access to stream anything from their entire library.

Joey is a salesperson for MedVidCo. He recently attended a medical conference and met one of the experts who creates videos for the company. They had a great afternoon chatting about how well the company was doing, and the expert brought up a point Joey had never considered. “Why,” the expert asked, “don’t you guys have us also create videos for ordinary people? You already have us experts, and we could cover topics like general wellness, explaining various conditions people deal with, and so on.”

Joey was intrigued but pointed out that ordinary people weren’t going to pay $10,000 a year for access to that kind of video.

“Sure,” the expert said, “but you’d sell it to them for like $100 a year instead. So you’d make less per customer, but you’d have tons more customers. Think of how much the revenue would go up!”

Joey took the idea back to the office after the conference and created quite a conversation within the Sales team. However, when they finally took the idea to their executives, the executives killed the idea almost without discussion. Joey was depressed. He couldn’t understand why a sensible company would turn their back on potentially millions in revenue and started wondering if he was at the right company. To be dismissed so categorically was disheartening, and it seemed like the executives just didn’t “get it.”

The problem here is that Joey doesn’t have all the facts about how his company makes money. He is unaware of three facts in particular.

First, no form of revenue is ever free. You always have to spend money to make money. In this instance, a new line of business would require new marketing campaigns, which cost money. You also have to worry about how long an ordinary person would maintain a subscription; If you spend $80 per subscriber in marketing, and make $100 for the first year, and then the person doesn’t renew, then you only cleared about $20. That’s not very good.

Second, no resource is infinite. While your video-making experts might be able to make content of interest to ordinary humans, if they did so, they’d have to temporarily stop doing content for your high-paying doctors. At $20 profit per ordinary-human per year, you’d need 500 of them to make up for one doctor subscription. Yet while your experts were churning out ordinary-human videos, you might start losing doctor subscriptions because you’re not turning out the quantity of doctor-level content they’re used to. This is called an opportunity cost, and it’s something we’ll discuss later in the book. It’s the cost you incur when you do Thing A instead of Thing B.

Third and perhaps more important, Joey doesn’t know a thing about how the public market values MedVidCo. It turns out that for their kind of subscription-based company, the two key metrics that tell the market how well the company is doing are Average Subscriber Revenue and Subscriber Retention Rate. With subscribers paying $10,000 and renewing regularly, the company looks fantastic. Throw in $100 subscriptions, though, and that Average Subscriber Revenue goes way down. Moreover, if those ordinary humans don’t renew as reliably as doctors, then the Subscriber Retention Rate goes down. All of a sudden, it looks like MedVidCo isn’t a healthy company and is instead doing fire-sale pricing to try to shore itself up. People start selling the stock, driving its price down, and making it harder for MedVidCo to borrow more money to fund future growth.

Now, sure, Joey’s executives could have explained all of that, and in a good company, they’d have done so. But if Joey were really a businessperson, he’d have asked those questions up front. He wouldn’t have assumed that raw revenue or subscriber counts were the main things everyone worried about; he’d have asked what the company’s key metrics were.

My experience with most executives (although certainly not all) is that they have no problem answering questions about how the company works, how it is valued, or what metrics they rely on to run the company. Most are eager to share that information if they can do so. What tends to rub them the wrong way, though, is people coming up to them with The Next Great Idea without bothering to ask any questions up front. Imagine being inundated all day, every day, with “great ideas” that fundamentally don’t fit how the company works, all brought by people who never took a minute to try to understand if their ideas were, in fact, “great” or not. You’d get irritable, too, and you might even stop paying attention to the genuinely good ideas that sneak through. That would be unfortunate, but it’s human nature to a degree.

Whether you’re trying to pitch a “great idea” or not, though, you should take an interest in understanding why your company exists, what motivates it, and what it considers “success”:

  • What problem does our company attempt to solve in the marketplace?

  • What are the key metrics we use to determine overall company health?

  • What resources do we use to run the business, and what are their inherent limitations?

  • Who are our customers? What do they see our company doing for them?

I almost added a fifth item to that list: “Who are our competitors, and what do they do differently?” That’s a question you should be asking, but it’s a loaded one. Once you know the answer, that doesn’t mean your company needs to try to do the same things as your competitors. You need to be very cautious about correlation: “Well, our competitors do this differently than us, and they’re making a ton more revenue than we are.”

Joey ran across the same thing. MedVidCo’s biggest competitor is HumanVideos. HV does a similar line of business, but they ship physical Blu-Ray discs rather than streaming videos. HV’s customers pay a one-time fee for each package of discs rather than a subscription fee. HV is also publicly traded, so it’s public knowledge that they make a lot more revenue than MedVidCo does. It was reasonable, then, for Joey to suggest that MedVidCo should also sell Blu-Rays to customers as an alternative to the streaming video library.

However, upon deeper digging, it turns out that HV’s market valuation—that is, what the public market feels the company is worth—is about what HV’s current revenue is. In market terms, HV is valued at 1x, or “one times,” their earnings. That’s not much, and it means the market doesn’t see a lot of growth potential. In other words, you wouldn’t invest much in HV, because they’re never going to earn much more than they’re currently worth.

MedVidCo, however, is valued at three times its current revenue, which means the market sees a lot of room for MedVidCo to get bigger. You see, HV could go out of business at almost any time because they rely on continuously selling Blu-Rays to new doctors, and more Blu-Rays to the same doctors. They don’t have any guaranteed recurring revenue; each new sale is a one-and-done thing. MedVidCo, in contrast, has recurring revenue. Even if a doctor goes on vacation for a month and isn’t watching videos, MedVidCo still took in their subscription fee. MedVidCo has to worry about renewals, but that’s often easier than booking a whole new sale. MedVidCo’s subscription model is part of what makes their valuation so high, and it’s something they’d lose if they added a Blu-Ray sales option.

Businesses can be complicated. They involve customer psychology and market forces, and they can involve truly subtle and complex measurements and considerations. You should try to understand as many of those as you can. Doing so not only makes it easier for you to have a healthy “personal relationship” with the company but can line you up to make better decisions, which will eventually line you up to take on more responsibilities, including—if it interests you—leadership. Not understanding the hidden details of the business means a lot of what the business does will seem inexplicable or even stupid, and that’s a terrible way to feel about a personal relationship that’s as important as the one you have with the company that employs you.

16.3 What does your business sell?

Do you know what your business sells? Consider the following three stories. While you’re reading, try to imagine what the company thinks it does for a living, and where there might be some room for improvement in its business models.

Now, obviously, these are fake companies, and obviously, I’m lining you up with trick questions. Try, for a moment, to forget that they’re trick questions. Put yourself into the day-to-day life of Terri, Martin, and Pat, whom you’ll meet in the following three sections. Try to see things from their perspectives. What, if you were them and they wound up in control of their companies, would you change?

Obviously, a problem with all three of these scenarios is that you won’t have the full download on what these companies are all about; you’re only getting a biased view from one employee. However, that’s how most employees operate, and it isn’t always entirely their fault. Many companies do a poor job of helping their entire group of employees genuinely understand what the company is all about. Often, that’s just because the company’s leaders haven’t thought to do so, and if someone asks, they’re usually happy to share. Let’s dive in.

16.3.1 Example 1: Terri’s International Bulbs

Terri works for International Bulbs. The company stocks an enormous range of light bulbs, from old-school fluorescent tubes to leading-edge color-changing LEDs. She’s employed as a programmer, working mainly on the computer systems that control the company’s warehousing and distribution center operations. In working on those systems, she’s noticed that the company tends to stock only minimal quantities of most bulbs. She knows from looking at the data that the company sells plenty of bulbs, but many times an order will come in that can’t be immediately fulfilled. Instead, there’s a delay of several days until the warehouse receives the stock and then ships it out to the customer.

What Terri doesn’t realize is that International Bulbs makes its money as a subscription service. Subscriptions are what make the stock market love the company because they have incredibly predictable revenues, and most of the company’s sales and marketing efforts can go toward winning new business rather than having to continually “re-win” business from existing customers.

The company’s warehouse works precisely as designed, which is to minimize the amount of back-stock they keep on hand. Back-stock is expensive: In most countries, under Cost of Goods Sold (COGS) rules, you can’t write off the cost of the goods you sell until you’ve sold them. So if you buy $100,000 worth of light bulbs, you pay income tax on that money initially, and only recoup the tax when you sell the bulbs. So you tend to try as hard as possible not to keep much back-stock.

Instead, Terri’s company does just-in-time (JIT) stocking. For example, if they know that a customer is on a quarterly subscription for a bulb, and they know it takes them a week to get that bulb in stock, then they can simply work the dates backward so that they order the bulbs, receive them, and then ship them to the final customer “just in time.” The customer doesn’t see any of that happening on the back-end. What Terri sees in the warehouse isn’t an “out of stock” situation; instead, it’s the stock being received precisely when it’s needed so that it can then be shipped out to the final customers right on time.

The question Terri might instead be asking is why International Bulbs doesn’t engage in drop-shipping, a practice where the company places bulb orders with its suppliers, but those suppliers ship directly to the final customer. There are times when that might not work, such as when International has to buy a massive case of bulbs and then break down that case to ship to multiple customers, but drop-shipping—when it’s practical—would be a way to save money by cutting out International’s “middleman” warehouse.

16.3.2 Example 2: Martin’s Theme Parks

Martin works for Global Themed Amusements (GTA), a company that owns regional themed amusement parks across the globe. Martin works in the Purchasing department, primarily focused on negotiating deals for maintenance supplies that are used throughout the company’s properties. Martin has recently been concerned about what GTA’s competitors are doing. While the competition is building ever-more-thrilling rides like multimillion-dollar roller coasters, the GTA parks tend to expand more slowly, and tend to install less expensive “dark rides.” The company also spends way more on retail merchandise than its competitors do—and the shops used to sell that merchandise often take up valuable space that could have been used for rides and other attractions.

This example is about understanding what your company sells and recognizing that it might not be what everyone “commonly” thinks they sell. In the case of GTA, Martin’s worried because the company is being overtaken in the thrill-ride department by competitors. However, GTA as a company doesn’t see themselves as being in the thrill-ride business at all. They see themselves as selling a family experience. They focus on attractions that families can experience together and that create strong and positive memories. One way they profit from those memories is by selling merchandise that reinforces the rides’ themes and imagery. Retail merchandise at the parks earns a strong 70% profit margin, which winds up paying for a much larger percentage of new ride construction than the parks’ admission fee accounts for on its own.

See, just because you see another company doing something similar to yours— building theme parks, for example—doesn’t mean they’re actual competitors. Good companies try to differentiate themselves from the competition so that consumers don’t have a simple A-or-B decision to make. If you’re selling a commodity like gasoline, consumers pretty much make a decision based on factors like price and convenience, which is why most towns have so many gas stations—they’re all fighting to be more convenient for some chunk of the population. It’s also why gas companies spend so much time trying to differentiate on the quality of their gas, or their rewards programs, or whatever. It pays to really understand how your company believes it differentiates itself.

16.3.3 Example 3: Pat’s Fruity Clothing

Pat works as a salesperson for Fruity, a high-end clothing brand that markets primarily to teenagers. Fruity doesn’t sell directly to consumers; instead, Pat’s job is to work with buyers from major online and brick-and-mortar retailers. Fruity’s clothing is pretty expensive—most items run 3-4 times as expensive as similar items from cheaper competitors. Pat gets frustrated that so many lower-end retailers won’t even consider stocking Fruity, and feels the company’s price point excludes them from many markets. That means Pat doesn’t make as much in commissions as would otherwise be possible, which is where the frustration originates.

Many businesses differentiate themselves through perception. Take Apple, which sells phones, computers, and other electronics that routinely cost hundreds more than their competitors’ products. How do they “get away” with it? By creating a brand that certain consumers want. In any given market, you’ll always have consumers who are price-sensitive and will go for the least expensive version of a thing that is available. You’ll also have consumers who are brand-sensitive and will go for the brand that they perceive as being the most valuable. None of those consumers are wrong; they’re just being met in the marketplace by different vendors.

This thinking is why car companies like Toyota, Honda, and Nissan have separate brands like Lexus, Acura, and Infinity. It’s why some people buy Rolex and others buy Timex. In the case of Pat’s company, selling into “lower end” retailers might indeed open up more commissions for Pat; it might also erode the “high end” brand that the company has worked to achieve.

I’ve worked for companies that play this “branding” game, and it can be tough. I’m mainly a price-sensitive consumer with things like clothing, and so for me, selling a pair of jeans for $110 seems silly when I can see other brands selling for $20. However, companies in those spaces deal with a far more complex range of issues than you might think. While both pairs of jeans probably cost a similar amount to make, the $110 pair is creating a much bigger profit margin, meaning the company doesn’t have to sell as many pairs. Moreover, consumers who are brand-sensitive will tend to buy more than just jeans: they’ll also buy shirts, shoes, and accessories, and they’ll often come back several times a year to do so. There’s an entire brand loyalty scheme at play, which usually doesn’t draw the price-sensitive consumer as much. Again, none of these companies are wrong—they’re just operating in different spaces, for various reasons, and with different risk/reward situations.

Sure, Fruity could charge less and be in a broader array of retailers, but then they’d be a different company. It’s unfair to ask a business to be someone different. After all, they were who they were when you got there, so if you want them to be someone else, then maybe you should be looking for a new line of work, instead?

As a quick aside, there are clothing companies that attempt to address every market, but they tend to do it with different brands. Consider Banana Republic, Gap, and Old Navy: three different brands with different styles and price points, but all owned by the same company.

16.3.4 Know the details of the business

The point of all this is to know why your company makes money and to know how they make money. Sure, there are likely other ways your company could operate. Those other ways aren’t wrong, but what your company is currently doing isn’t necessarily wrong, either. Ask questions that help you understand why your company behaves the way it does.

I’ll offer you a story that was told to me when I started asking those questions. “Why,” I asked, “is our fiscal year starting in February and not January?” Our CEO, a long-time operator from the department store days, laid out a calendar.

“You get four seasons in a year,” he said. “Each season is three months. The first month of each season is where you introduce the season and often make the most profit by selling new merchandise at full price. The middle month is your primary sales for those seasons and you tend to move the most units then, although often at slight discounts. Last month is your clearance.

“The first season is Spring clothing—February, March, and April, lined up with Easter roughly in the middle. Next is Summer clothing, May, June, and July, with the end of school right in the middle. Next is Fall, August, September, October, with back to school in the middle. Last is Christmas covering November, December, January.

“The reason we want January in there, and on the same fiscal year as Christmas, is so that your returns come in on the same fiscal year as the sales. Otherwise, because Christmas often has so many returns, you start your fiscal off in the negative, and that looks bad.”

It was an eye-opening story, and it explained a lot, all of a sudden, about the retail cycles I’d been working in for years without ever realizing it.

16.4 Understanding risk and reward

Risk is a fundamental concept in business that people don’t talk about enough. In any venture, any kind whatsoever, there is a risk of failure. Just driving to the grocery store involves risks: someone will hit your car, the store won’t have what you need, your credit card will be declined, or whatever. Risk is all around us. For the small, day-to-day risks, most of us have learned to mitigate what we can automatically: we drive carefully, we pay our credit card bill on time, and so on. However, most of the risk that most of us deal with on a day-to-day basis is within our control. We decide to drive carefully, we choose to check the store inventory online before we leave the house, we decide to pay the credit card bill on time. We can’t eliminate the risks, of course, but we can, through personal action, mitigate those risks to a pretty large degree.

Businesses are a little different. To start at the end of the conversation, the risks faced by businesses are rarely within the businesses’ control. Instead, a business relies on other people, its employees, to mitigate the risks. Think about how mentally challenging it would be if that concept applied to your personal life! Imagine that you’re planning a big family vacation, and some stranger is handling absolutely every last detail, and they’re not even really sharing those details with you. That’d make me a nervous wreck, although if I’m honest, I run across people on vacations all the time who do it just that way. They’re usually miserable because they couldn’t take any personal responsibility for their enjoyment, and their vacation planner forgot some crucial detail, and it all went wrong at some point.

However, I digress. People can choose to outsource their risk mitigation or handle it personally, depending on how much of a control freak they are. Businesses don’t have that choice. They always rely on other people, their employees, to deal with every possible risk.

So what risks are we talking about? Predominantly financial. Every business is, at any moment, just a few bad decisions away from losing everything, going bankrupt, laying off all their employees, and disappearing from existence altogether. The owners of the business are specifically the ones at risk because they’re the ones who put up all the money in the first place. That’s why the owners of the company get to share in the business’ success, although great businesses will, through bonus and other types of programs, try to share some of that success with the employees who helped make it happen.

Actually, bonuses are a good way to think about risk and reward. Suppose you work for a company that has a gain-sharing program, or profit-sharing program, or something similar. When the company makes a profit, the owners agree to set aside, say, 25% of that profit, and divide it up amongst the employees. Cool, right? At the end of the year, or quarter, or whatever, every employee gets a nice chunk of extra change as a way of thanking them for helping make the business a success. However, what if the company didn’t make a profit? What if it lost money? Would you, as an employee, expect to have money withheld from your paycheck? Almost nobody would, but it would be fair, right? If the business succeeds, you get a chunk of the profits; if it fails, shouldn’t you pay a chunk of the losses? Say the company lost $100,000—shouldn’t the owner take 25% of that, or $25,000, and divide it up as a deduction from everyone’s paychecks? After all, if it’s the employees who make or break the business, and if they share in the successes, wouldn’t they have responsibility for, and a share in, the losses?

I’m not aware of profit-sharing programs that do that, which is why they’re fundamentally not a way of sharing the risk in the business. See, when you have a proper share of risk, then you succeed when the company does, and you lose when the company does. Risk means you stand to lose something. The stock market is all about risk: When the companies you invest in fail, your stock value goes down, and you’ve lost money. That’s why stockholders are literally considered co-owners of their companies, and it’s why they get a say in how those companies are run, often by appointing a Board of Directors, who in turn, hires the executives who run the company daily.

Risk and a say in things go together. If you have no risk—that is, there’s no chance of you losing money—then you don’t get much of a say in how things are run. This is a basic rule every parent teaches their children, whether they realize it or not: “You live under my roof, you follow my rules.” As the parent, you’ve got all the risk, right? You have to hold down a job, make sure bills get paid on time, watch out for your kids’ health, and so on. All the risk, so you get to make the rules. Well, at work, most employees are “living” under their employers’ “roof,” and so the employer—the one shouldering all the risk for running the business—gets to make the rules.

I’ve spoken with many employees who don’t understand why the business doesn’t just do whatever the employee thinks they should do. “It’d be so much better!” they say. Nearly universally, those employees lack context about how the business makes its money, and nearly universally, they lack any actual share of risk in the business. I understand that it’s frustrating to work in an environment that won’t “listen to you,” but how much did your parents listen to you about proper television allowances when they were paying all the bills? However, when you finally moved out and got your own place, you could stay up and watch as much TV as you liked, right? Same thing in business: If you want a say, then you take the risk. Start your own business. Walk away from the sure-thing paycheck, the benefits, the 401(k), the free coffee, or whatever. Instead, worry about where your next check is going to come from. Worry about whether your employees are going to make the right decisions that day and keep the company running. Put up the money, take the risk, and you get to make all the decisions.

Another reason I find that companies get a little deaf when it comes to listening to employees telling them how to fix everything and make it better is that most employees lack sufficient context. They can’t see all the moving parts that make up a company. Not that the company is hiding anything; it’s just that businesses, especially large ones, are horrifically complex. Take the company I currently work for: We have to file income taxes in something like two dozen US states and a half-dozen foreign countries. That simple fact creates a level of business complexity I can barely comprehend. Literally every day-to-day company decision gets affected by that fact. “Should we rent some new office space so that we’re not so crowded?” becomes an epic question when you think about different states’ tax incentives, the depreciation rules on office build-outs, whether the office is located in a city where we’ve agreed to employ a certain number of people in order to get certain incentives, whether the lease comes out as a simple expense or not—it’s mind-numbing. You’d think it’d be a simple answer, like, “Well, if the lease is $3,000 a month and we’re currently making more profit than that, then sure!” but it isn’t even close to that simple. That’s why when I hear employees (not at my company, mind you) complain about petty things like whether the kitchen has the coffee K-Cup flavor they prefer, I start laughing so hard I almost cry. The day-to-day brainpower that goes into the seemingly simplest company decisions is so much that “coffee flavors” likely didn’t even make it on anyone’s agenda. Coffee flavor is something you can only complain about from the comfort of a nothing-at-risk position. The people managing the actual risks of the company, the ones charged with keeping it in business and making sure our paycheck gets cut on time? They’re probably delighted that the water is still running to the building, and less concerned about what flavor coffee people are making with it.

So. You want to have a louder voice in the running of your company? You want to be heard by the people in charge?

Start by making sure your voice is more than just noise. Learn what the business is for. Learn why it exists and how it makes money. Then learn how companies are run. That doesn’t mean getting a Masters of Business Administration (although that wouldn’t hurt), but you’re going to need to learn about business finances, business management, and a lot of other topics. You can do it—the people running your company didn’t drop out of the womb with that knowledge, right? They learned it someplace. You can, too. Then look for ways to put some skin in the game. People will take you more seriously when you’ve something at risk. So if that’s not possible at your current company, ask yourself if you’re ready to go to a different one or start your own.

Context. Business acumen. Risk. Those are what create a voice in business.

16.5 Further reading

  • Understanding Business 12th ed., William Nickels, James McHugh, and Susan McHugh (McGraw-Hill Education, 2018)

  • The Personal MBA: Master the Art of Business, Josh Kaufman (Portfolio, 2012)

16.6 Action items

For this chapter, I’m going to ask you to look at some of the details of your business, whether that’s your own or a company you work for. If you don’t know the answers, find them! Start with your own manager, but ask if it’s okay to contact others in the organization for their perspective as well:

  • What does your business really sell ? What is the business model, and how do the people with a financial stake in the company measure the business’ success?

  • What sorts of risks does your business routinely deal with—and what is your part in those risks? Are you at risk of anything other than possibly losing your employment if the business can’t afford to keep you at some point?

  • What are your business’ motivations? What sorts of things does the company measure to track its performance? Why does the company behave, at a high level, the way it does? Do you agree with its reasonings, or not?

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