Why Businesses Struggle

Business Practices Part 3 - Optimism as a Business Plan

Optimism is defined as a hopefulness or confidence about the future or the successful outcome of something.

Optimism is a healthy state of mind to be in. When looking forward there is a focus on positive outcomes. You are encouraged to focus on what it is you seek and not to be blocked by fear of all of the negative outcomes.

In business, moving forward with rose colored glasses with only a focus on the outcome you desire without taking serious consideration of the possible pitfalls greatly increases risks and can put a company in a bad position.

Several times in my past I’ve walked the floor of factories that had been recently shutdown following bankruptcy. These businesses had employed hundreds of employees, purchased from many vendors and pushed products into the marketplace. Hopes had turned to disappointment for all involved.

It is an eerie feeling as you walk through a cluttered plant that once was so full of life and is now silent. With each step and word uttered, you hear only echos.

It is a sad and hopeless feeling of lost potential.

Two that come to mind were both victims of unbridled optimism.

The former Au’some candy company’s plant was left like it had been evacuated in anticipation of an incoming hurricane. There was still candy batches in cooking vessels, candy WIP on trays, dirty uniforms on the floor and general disarray throughout. They had come to market with what they thought was a revolutionary piece of candy that was actually very impressive. They made 3D Gummie characters. The Nintendo license included beautiful Mario and Yoshi characters and other fantastically rendered pieces.

How can you not be inspired by such a great product?

I’m sure optimism abounded when they saw their first production and the belief that their success was a sure thing.

They placed their unmitigated faith in two things.

1. Their untested Chinese built deposit line that had a dwell time of less than 1 hour to set the candy and had such a low output that was about 1/10th the speed of other Gummie production lines.

2. The market would be so excited with this novel piece of candy that they would be willing to pay a premium price for what was actually just a fancy Gummie Bear.

Their optimism drove them forward without properly vetting the two points above as possible substantial risks. Their product failed from a production efficiency and quality standpoint. In order to drive a respectable margin they expected the market to pay about 4 times the price of a bag of Gummie Bears. At the end of the day, a kid would look at the character and play with it for 10 seconds and then eat it. Mom’s most likely then said, “I’ll just buy the Gummie Bears.

The second plant was also a very sad experience as we toured it. It was the most beautiful food factory I’d ever been in. All glass offices with glass staircases going to the upper levels. The employee entrance looked like what you’d find at a stadium entrance for premier ticket holders. The cafeteria gave the appearance of a 4 star restaurant. No expense was spared in the factory with epoxy floors, wash down walls and world class equipment layouts for maximum efficiency. The one remaining employee who walked us through said it was the best place he had ever worked. What a waste.

Optimism.

1. They focused their efforts on all of the visual qualities of building such an impressive factory that presented unmatched employee facilities but the products they were making were really nothing more than commodity type items that began with a reasonable margin, but soon became low margin products that were in a market so saturated with competition. Their priorities and focus was on the positives of running a business without consideration of the risks.

2. Their main customer saw such early success in their product launches that they came back with the most aggressive and optimistic forecasts that forced the company to expand and add capacity without a contract to back up the optimistic projections. Those forecast were not just short but off by multiples causing the collapse of the newly upgraded and capacity enhanced factory.

There is nothing wrong with optimism. In life, having a positive outlook is a great way to live your life. Focus on the good and let the bad slide away without worry. In business, unchecked optimism and always planning for the best case scenario to play out usually will result in bad outcomes.

One of my favorite Podcasts is Freakonomics. In October they presented a three part series on how to succeed at failing. Since that is one of the main topics that I write about, I jumped into these episodes with optimism to find some good points to add to my writing.

The topic of a Pre-Mortem came up.

We are all used to a Post-Mortem when we finish a project and look back on how we performed and how we could have done better.

This industry expert suggested the Pre-Mortem and an excellent exercise prior to moving forward on an initiative.

With your team, while in the same room that you all decide to move forward optimistically on a project you complete one final task. He would then ask the entire team to project out 1 year and to imagine that their project has failed. He then went around the room and asked each person to give their opinion on why the project failed. This emoting of the possibilities for failure in the presence of such optimism is an exercise that he felt was necessary to bring everything forward of each and every pitfall that may cause their project to fail.

This concept inspired me to add this step to all future endeavors as the check off before moving forward with any project. It does sort of put a damper on the enthusiasm and euphoria that comes with a big initiative with high prospects of progress.

The final segment in the podcast was a comment from a CEO who is working on an enterprise that is likely to fail as it is trying to knock off Lyft and Uber. He states that he couldn’t disagree more with the Pre-Mortem. He doesn’t want his team to have any negative thoughts and only focus on the positives. I suspect that they will not be around long enough for us to see their service in any city near us.

Optimism as a Business Plan needs to have proper considerations and guardrails to protect your company from the pitfalls that are not identified prior to moving forward.

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