Why do we often not see what is right in front us? Recently I’ve been working with several clients that could grow by leaps and bounds if only they could “see” the business opportunities that are right before them. All they need to do is open their eyes, open their minds, and re-define the way they and their people think about what they could offer consumers that they’re not offering right now.
Our Guest Blogger, Cheryl McMillan, has written a great blog about this very subject. Hopefully it might help you identify some risky warning signs which you are dangerously ignoring, especially those that are obvious to everyone around you but somehow not to you. We hope you enjoy it and if it sparks some self-revelatory a-ha moments, let us know!
A fictional scenario with real-world applications
“Frank” is the founder and owner of WidgetsRUs which is 20 years old and in perpetual growth mode. A typical entrepreneur, Frank is optimistic and full of ideas. To finance Widgets’, it needs cash and lots of it.
Before the last recession, Frank had a great relationship with his bank. Each year, the bank increased the amount on his secured line of credit (LOC). He frequently accessed his LOC but never borrowed the maximum, leaving funds for a “rainy day.” The bank’s interest was secured by WidgetsRUs inventory and accounts receivable. Fortunately, Widget’s secured assets grew as the company did, and the bank assessed Frank as a good risk.
Then, times changed. During one particular period, Frank almost ran out of cash after purchasing some heavy trucks to replace old ones that could no longer be repaired. He needed cash fast and had enough available on his line. He reasoned, “It’s not that much money and without these trucks, I will have an emergency. That’s why I have this line.” For the first time, Frank borrowed the maximum amount on his LOC.
The next year, Frank’s new sales staff sold a large account. Frank again needed more cash to fund his new customer’s implementation. The bank refused to increase availability on his LOC, but did offer to refinance the purchase price of trucks into long term debt with periodic payments over 5 years. “Great deal,” he thought. “Now, I can stop worrying about cash.”
Frank continued to set company sales records and request more debt from his loyal bank. Frank’s loan officer explained that the bank’s new owner was more conservative and wanted extra security: a personal guarantee of the debt. Frank rationalized that his new “hunter” sales person was very close to a few big sales and that his risk of losing his house wasn’t that significant. Occasionally, the hunter did make some large sales. But instead of reducing his debt, Frank kept the cash to finance his latest idea. Somehow, there was always enough cash to meet the company’s immediate needs. Subsequently, Frank became numb to cash flow worries.
One bright Monday morning, Frank arrived at his usual 7:00am, upbeat and excited about the upcoming week. At 8:00am, his Controller asked for an emergency meeting. Widgets’ biggest customer announced that they had just filed for Chapter 11 and the check that had been promised for this week would not be arriving. In fact, no cash would be available from this customer for at least 90 days. “And,” the Controller added, “we have borrowed our maximum on the LOC. Payroll is this week and we are $500,000 short!”
Frank was stunned and terrified. “How did this happen overnight?!” he bellowed.
Ignoring gradual signs of business distress is a really bad idea
I refer to Frank as the proverbial dead frog who is boiled alive by sitting in a pot of water in which the temperature gradually increases. Since the slow temperature increase is not immediately obvious to the poor frog, he chooses to ignore the gradual, but inevitable, signs of a problem until it is too late to save himself.
Because our brains will overload if we try to absorb all available information thrown at them, we develop filters to sort and prioritize incoming material. In other words, our thinking is greatly limited by self-imposed filters that create boundaries to the information which we can absorb. There are many models to explain this phenomenon (see the end of this blog for reading recommendations).
The point that I make today is that the gradual exposure to a risk sometimes makes us dangerously numb to it, and that focusing on just one part of the overall picture can come at the cost of completely missing another important one.
In Frank’s case, he focused solely on revenue growth. His luck with last-minute cash “management” (actually, mis-management) made him gradually go blind to the fact that he had no cash availability. In addition, his denial was deeply unconscious, which explains why he was so shocked when the inevitable happened.
Most of us are blissfully unaware of our blindness. Like Frank, we fail to recognize that our mental filters seriously affect our decision-making, in business and in life.
How can you increase your awareness of incremental change?
1. Discover your Enneagram Type
Your strongest filters are created by your personality. The Enneagram, a highly informative map of the ego, helps you learn more about your own blind spots, your unconscious thinking and your emotional filters. By dedicating time to quiet your mind and reflect, you can become aware, over time, of your habitual responses, “unfreeze” your old filters and broaden your perspective.
2. Involve multiple people inside your organization to challenge big decisions.
Since different people have different filters, asking for multiple views will yield more relevant data necessary for a more informed decision.
3. Get an outside opinion.
Create a group of trusted advisors. To bypass industry and company group-think, select these smart thinkers from the outside and from different industries. This is the model that Vistage uses and I have seen feedback from outsiders dramatically change my members’ lives and businesses. In fact, “Frank” was a member of one of my groups. Because the group members periodically reviewed his financial statements, they quickly recognized when his financial situation became more risky, prompting them to recommend effective interventions.
The human mind is amazing but can often benefit from others’ viewpoints
Many of its functions operate automatically, outside our awareness. However, our automatic unconscious decisions, especially incremental ones, can lead to unacceptable results. Take some time to reflect on your own company. What areas have gradually changed? Ask others to identify your blind spots before something unpleasant hits you on the head!
- Harvard Business Review, “Delusions of Success: How Optimism Undermines Executives’ Decisions” By Dan Lovallo and Daniel Kahneman, July, 2003
- Harvard Business Review, “Decisions Without Blinders,” by Max H. Bazerman and Dolly Chugh, January, 2006
- Chris Argyris cites “Ladder of Inferences” for his process that describes how data is filtered and impacts decisions.
- Christopher Chabris and Daniel Simons, “The Invisible Gorilla: And Other Ways Our Intuitions Deceive Us”