A gumption trap is a situation in which
an individual becomes blinded to taking actions that otherwise appear to
be in his or her own self-interest. The “South Indian Monkey Trap” consists of a hollowed out coconut
chained to an iron slake in the ground. The coconut is filled with rice and
has a small hole in the side. This hole is big enough for the monkey’s
hand to go through but too small for a fistful of rice. The monkey targeted
for capture comes along, puts his hand through the hole in the coconut, grabs
a fistful of rice–and is trapped–trapped “by nothing more
than his own value rigidity.” The monkey is unable to see that freedom
without rice is more valuable than captivity with it.
Closely held companies that get into trouble often fall victim
to some type of value rigidity. Just like our little monkey
friend who cannot let go of the rice even as he can see the
villagers closing in around him, companies that become distressed
are unable to respond in a positive way to changing circumstances,
even in the face of very strong evidence that such action is
necessary if they are to survive.
Due to prolonged periods of deteriorating performance, denial,
wishful thinking and perhaps even some incompetence, the businesses – and
sometimes the families themselves – must eventually confront
the consequences of their failure to act.
1. Reasons for a Company’s
reasons for a company’s inertia can take many forms:
the business refuses to rethink certain cherished beliefs, such
as a “requirement” to internally manufacture
everything it sells, that superior quality “costs too much” or
that the one and only route to prosperity is to get bigger.
it cannot recognize that its customers’ perception
of value has changed dramatically from what it has always been before.
it has underestimated an upstart competitor, especially a renegade
that is not playing by the “established rules”.
management is unwilling to rethink the size, location or compensation
system for its sales force or distribution network.
- Perhaps there
is a stubborn unwillingness to restructure or discontinue some
major activities of the business – a division,
product line or function – despite overwhelming evidence
that to continue the status quo is seriously hurting the company.
an aging patriarch will not let go, retire and facilitate the
inevitable transition to the next generation.
- Conversely, perhaps
the chief executive really is ready to retire, but is suddenly
faced with the stark realization that over all these years he
or she has failed to develop a successor.
- Or perhaps interfamily
relations are so dysfunctional that the ownership and management
are literally paralyzed – even
in the face of obvious danger.
- Finally, perhaps too much consideration
has been given to saving tax dollars, thereby thwarting possible
solutions to a broader business and family crisis.
- Typical symptoms
of a business heading for trouble can be categorized into two
types: the “quantitative signals” and the more
difficult-to-spot “intangible signs”.
2. Quantitative Danger Signals.
The quantitative symptoms of serious
trouble are recognizable, relatively easy to pinpoint and usually
unmistakable. Sadly, managers sometimes lack the gumption to acknowledge
- Loss of Market Position. A healthy company does not
give up its market share – certainly not without a fight
or at least a very good, well thought-out reason. It is not unusual
for profitability to look “good” while share is still
eroding, a fact which can create a dangerously false sense of
security leading to further inaction.
- Sales Growth Without Profit
Growth. If growth in sales over a period of time has not achieved
a corresponding profit increase, the company is headed for
distress. Whether because of price cutting, rising manufacturing
costs or excessive spending on marketing and sales expenses, sales
growth can actually make things worse if the additional business
does not earn the cost of the additional capital needed to
- Declining Gross Profit Margin. This
is perhaps the most critical measure of a company’s “competitiveness” within
its industry – how its products, quality, service, costs, and
marketing effectiveness stack-up versus the competition as perceived
by its customers. Changes in the gross margin always mean something,
and a business that sloughs-off the importance of these changes does
so at its peril.
- Declining Asset Productivity and Unsatisfactory Return on Investment.
Along with gross margin decline,
deteriorating asset productivity is one of the plainest warnings
of all and it often goes completely unnoticed. The failure to
address effectively the fundamental causes of the decline can,
in effect, result in liquidating the business. Continued decline
of ROI leaves the business with no means to make the investment
needed to stay competitive.
- Undisciplined Sales Mania. Businesses
that have difficulty distinguishing between a good sale and a
bad sale often find themselves knocking at the door of a crisis.
Aggressively pursuing strategies to get more business, expand
the product lines and customer segments, and extend geographic
coverage at any cost, results all too often in unprofitable products,
unprofitable customers, and runaway marketing expenses.
- Deteriorating Operating Cash Flow. For a business to be a net
user of cash during a period of rapid, profitable growth is not bad.
In fact, it is to be expected. Deteriorating operating cash flow
without a good reason is a warning signal.
Rising Debt. Economics literature teaches us that additional debt
can increase the company’s financial leverage.
Yet, debt levels spinning out of control will erode the financial
3. Intangible Warning Signals.
Review of financial, operating and
marketing performance can very clearly pinpoint eras of impending
trouble in closely held businesses. There is another group of warning
signals usually not so easy to see but at least equally crucial.
Failure to Meet Sales and Profit Plans. The reasons can be several:
many marginal product lines and a distribution system stretched
beyond its capabilities.
- Excessive price cutting in a number
of product lines where the company’s products are indistinguishable
versus the competition.
- Weak sales and marketing management.
- Low Expectations. Each
shortfall in performance is followed by a ratcheting-down
of expectations for the next year. Such willingness to reduce
standards of acceptability and, then tolerate failure to
meet the reduced standards threatens the onset of serious consequences.
- Lack of Accountability. Excusitis can pervade a closely held
business heading for trouble, and it is most dangerous when it
radiates from the front office. An era of procrastination can only
be stopped when top management accepts responsibility for the company’s
performance and stops blaming the economy, the competition, the
government, the customers, the minority shareholders, the children
of the minority shareholders, the directors, the lawyers, or the
- Top Management Isolation. Blindness, denial, and resistance
to change at the top is a crucial danger sign, and is usually
easy to spot. The physical environment inside the company can provide
some clues, but the best sources of this information are the “little
people” in the company. They usually see the true problems,
know which family members are not pulling their weight, know which
non-participating shareholders are either disruptive or key players
to initiate positive change, and what the true strengths and weaknesses
of the business are. They are usually eager to talk to someone.
All one must do is win their trust and listen.
- Failure of CEO/Founder/Owner
to Address Succession Planning. By definition, any closely held
business facing a transition to a new generation is in a crucial
and difficult period of its life. If the CEO is already at or
beyond normal retirement age and there is no one ready to take
over, the company’s future as an independent
family business is in jeopardy. The era of procrastination will
continue until this issue is addressed.
- Disruptive Spouses or Non-Working
Shareholders. It does not take long to discover their existence.
They can be perpetuators of an era of wrong-headed decisions
and almost immovable obstacles to solutions. They must be identified
and creatively confronted.
- Hidden Agendas on the Part of Family
Members, Shareholders or Non-Family Executives. To uncover this
problem can take careful digging, but if it exists the consequences
can be devastating to me business. A tendency towards organizational
paralysis when it comes to major decision making is one clue.
Another would be a company history alternating between periods
of family-fighting and relative peace.
- Turnover in the Financial
Function. Lack of respect for the financial function is often
a characteristic of any business headed for trouble, but there
can be a. subtle added dimension in a closely held one. Family
patriarchs often do not trust non-family chief financial officers;
and they either do not confide in them the way that they should
or simply shut them out. Beware of a constant succession of chief
- Technological Obsolescence. This problem can
sneak-up on a company –but
when it hits, the consequences can be devastating and often irreparable.
The recognition of this problem can be particularly stubborn in a
company that has been very successful in doing things its own way
for a long time. This symptom can be difficult to spot, but one tell-tale
sign is the emergence of small, upstart competitors starting on the
fringes of a market, breaking the established rules and doing things
in a way that evokes comments from established players such as “We
tried that once. It won’t work.”
4. Summary of a Few Universal Truths
- Numbers are Revealing. The onset
of more serious trouble is almost always foretold in the numbers
and it is usually years ahead of time.
- nternal Problems. While
the managements always blame external forces for their trouble,
most often, the real causes are internal.
- Entrenched Managers.
Managements are unable to deal with the situation because they
are unable to let go.
- Great Hey Day. Sometimes, the more successful
the business has been in its hey day, the more difficult it is
to accomplish frame breaking change.
- Top Managers. The blindness
and rigidity is most severe at the top. The little people in
an organization usually see the true problems – and
often have a. pretty good idea of what to do about it.
and Rapid Implementation of Strategies. Major frame-breaking
change must occur quickly before old hands re-think and re-trench.
Moreover, the synergy of a totally new approach implemented at
all levels is powerful.
5. Ideas on How to Stay Healthy
- Advice to Clients - in Advance of Trouble.
- Understand and Appreciate
the Difference between Marketing and Sales. Truly good marketing
people are hard to find. An early sign that the company does
not have one is when the person uses the terms sales and marketing
- Pay Attention to the Financial People. It
is easy to slough off the CFO, but he or she has the information
to identify the quantitative warning signals.
- Recruit the
Best People. Find the best people for the organization, set
demanding standards and really encourage independent thinking.
of Staff Department Build-up. People are an important, but
expensive asset. Make sure each one contributes to the economic
well-being of the company.
- Assure Accountability at the Top. It
is important for managers to set the tone.
- Stop Using the
Bank as a Crutch. Just because there is a banker willing
to lend a company more money does not make it the right thing
- Beware of Basking in the Glow of Past Successes.
Let the Tax Tail Wag the Business Dog. Frequently, business
issues should be of primary importance.
- Advice to the Monkey who is in Trouble.
What advice can we give the monkey who appears trapped and whose would-be captors are fast approaching?
Perhaps the best thing we can say is to:
- Stop yanking, sit
still for a minute and stare at the coconut.
- Rethink your
fundamental values and decide if what you always thought
was important really is. Is the rice really worth becoming
(or remaining) a captive.
Make sure you are not your own
worst enemy. Remember the monkey. All he has to do to save
himself is do what he already knows: let go of the rice.