As the CEO Forum was about to begin the Executive Session, a company owner and CEO approached the group facilitator. “Hey, I have a pretty sticky issue today. Mind if we tee it up with the group?” The facilitator readily agreed.
The CEO kicked off the issue by explaining that his company manufactures a diagnostic product that is used by high-tech businesses all over the world. They have a sterling reputation for high quality and virtually no errors. However, recently their technicians in Europe discovered that one feature on their highest selling product was routinely failing to produce accurate results. Rather than admit this to their customers, the technician contacted the corporate office in the United States to ask for guidance.
The CEO and his executive team met for several hours to consider the issue and decided to survey the customers who had purchased this particular product to ascertain how many of them were using the flawed feature. To their relief, after a few days, they found that no one in the domestic market was using that feature. However, the news from Europe was not so comforting. It was discovered that several of the high-performance race car manufacturers were, in fact, using the feature. Other customers in international markets were not employing the feature, but Europe was a problem!
“So…” the CEO asked, “what do I do?” “If I admit that our product is faulty, these automotive companies will likely have to recall a significant number of vehicles. That could amount to millions of dollars of cost to them—and could result in a huge cost to us. I fear that this could destroy my company. I employ 80 people. They all count on my company for a living. The risk seems too high!”
The facilitator opened the discussion up for questions from the group:
A lively debate of these options ensued, with the CEO leaning toward option 1 for all non-automotive customers, and option 2 for the auto companies. However, one of his fellow group members asked an important question at this juncture: “If you go with the upgrade/retrofit decision for the car companies, how does that assure you that the vehicles that have already been tested are safe?” The answer was clear, “It doesn’t.”
At this point, the issue boiled down to risking lives versus risking jobs. As our CEO pondered this dilemma, one of his fellow CEOs asked the most important question of the day, “When you have made your decision—and you look in the mirror—who will you see? Will it be a leader of extraordinary courage in the face of an agonizing decision, or someone else?”
There was an extended pause before our CEO responded. The he said, “I know what to do. I will contact the auto manufacturers tomorrow morning, explain the problem to them, let them know that we have a solution to fix our product, but that those vehicles that have already been cleared for high speed use need to be recalled to be retested—thereby allowing us to confirm that they are safe. I realize that this puts my company at risk, but it’s the right thing to do—and that is how I will explain it to my executive team. For the domestic and non-automotive international markets, we will go with option 1—and if necessary option 2.”
The Rest of the Story…
Our CEO did exactly as he indicated in the CEO Forum. To his surprise, the reaction of the European auto-makers was without rancor. In fact, they each expressed gratitude for our CEO’s honesty and desire to assure the safety of the drivers of their high-performance vehicles. Because of the high cost of these automobiles, relatively few had been sold, making the recall far less extensive and expensive than anticipated. In fact, except for the cost of sending technicians to the field to make the necessary changes, no further costs were passed along to our client. For other domestic and non-automotive customers, the other options proved effective in resolving the issue.
Perhaps most importantly, the man whom our CEO saw in the mirror was someone both he and his team could respect!
The CEObuilder coach called his client to schedule their monthly coaching session. He was stunned by what he heard the CEO say: “Don’t bother to come. I’ve decided that my industry is just too competitive and the stresses are too great to continue in business. I have an appointment with a bankruptcy attorney next week to wrap things up.”
Our coach immediately suggested that it was more important than ever that they get together. “Don’t throw in the towel yet; let’s get together to see what we can do to solve your problems.” The CEO was insistent. “No, I know that my banker is ready to call my loan. I’m avoiding his phone calls, but I know he’s concerned with our last several financial statements—and I just don’t know what to do about it. It’s just time to admit that we’re done!”
It was clear that the request for a coaching session was falling on deaf ears. However, knowing that this fellow had been a member of CEObuilder for many years, his coach tried a different tactic. “You know that your fellow members will be devastated if you don’t come to our next meeting to explain what is going on—and to say goodbye. The meeting is day after tomorrow—and you should be there.”
There was a pause on the other end of the line. Then the CEO agreed. “Yes, you are right. They are my dear friends. I owe them an explanation and a proper departure.” With that, the conversation ended.
Two days later, the Executive Session began with the coach introducing the CEO by saying, “This is our friend’s last CEO Forum with us. I will turn the time over to him to explain.”
Our CEO repeated what he had shared with his coach, adding “I’ve just lost the bubble. I have run this business for twenty-nine years—and have always been profitable, but the competition today has driven my margins lower and lower. I just can’t figure out how to survive any longer.”
The afternoon was absorbed with great empathy for this good man, but no solutions seemed to emerge. However, one thing became very clear: none of his fellow members were willing to let him shrink away into the night. One of them suggested a tool used periodically by CEObuilder to bring additional attention to especially tough problems. “How about a Tiger Team?” he suggested. “A few of us could meet tomorrow at your office to look over your financial statements –and help you develop a strategy for dealing with your bank.”
Without a moment of hesitation, three more members of the group (all CEOs) volunteered to continue the meeting the next day, along with our CEO and his coach. Our CEO was hesitant at first, then overwhelmed. With emotion, he said, “I guess it can’t hurt. I so appreciate your friendship and concern for me…”
The next day the Tiger Team met at the CEO’s business. Together, they dug into his financials, focusing intently on his customers and the gross margin each contributed. After several hours, a significant problem emerged. His mix of business included several large customers, along with about a dozen very small ones. The gross margins for the larger ones were quite acceptable, but the small ones had almost no margin at all. In fact, some were losing money.
The Tiger Team suggested that it made no sense to sell to small customers at such low margins—and bluntly asked why they weren’t charged more, perhaps at even higher gross margins than the big customers. The answer proved to be extremely significant. Our CEO responded, “Well, those guys are my friends. Some of them were among my first customers. I have always given them a good deal.”
After a while, the Tiger Team took a break, using the time to walk the plant floor with the company’s production manager. They asked questions about the flow of raw materials into the production process, and then into finished goods and delivery. One member of the team asked about specific jobs on the floor. To his surprise, he found that most of the jobs in process were for the smaller customers discussed earlier. “What is the rationale for doing these jobs instead of the larger, more profitable ones?” he asked.
The answer was surprising. “The boss has emphasized the need to get these small jobs out as quickly as possible so that we can then push the big jobs through without disruption. The only problem is that we seem to always have an endless flow of small jobs, so sometimes we don’t get to the bigger ones on a timely basis. We even recently lost a huge order because we were late too often on an earlier job for that customer.”
Back in the office with the CEO, the Tiger Team wondered what the impact would be on the company’s revenue, profitability, and cash flow—if the smaller orders weren’t part of the mix. A little number crunching showed that revenue would decrease slightly, but profits would increase, as would cash flow since more profitable jobs would be completed sooner.
While this made sense, the CEO was troubled. “Are you suggesting that I fire my friends?” he asked. “Not fire them,” was the response. “Simply raise their prices to acceptable margins, which by the way, should be higher than your larger customers.”
“But that does effectively fire them,” our CEO complained.
His fellow CEOs responded, “Wouldn’t they be fired if you shut the company down?”
“Yes, I guess they would be.”
With that the Tiger Team began to work with the CEO to develop a strategy of divesting of his unprofitable customers. This moved into creating a financial plan to present to his banker. Before the team departed, they suggested that the CEO call his banker and arrange a meeting to discuss the plan. He did this, and much to his surprise, he found the banker to be quite cordial.
The Rest of the Story…
The meeting between our CEO and his banker proved to be very beneficial. While the banker expressed his concern for the deterioration of financial performance over recent months, he was pleased to see that the CEO had a coherent plan for turning things around. He confirmed the bank’s willingness to work with him, asking only that they meet regularly to discuss how well the plan was working.
Our CEO went through some difficult conversations with his old friends who resented the price increases they faced. Ultimately, however, he was able to find them other companies with whom they could do business. Most importantly, he did not have a conversation with a bankruptcy attorney. Instead, his thirtieth year in business proved to be among his most profitable!