How should entrepreneurs make decisions? Ray Zinn, the epitome of Silicon Valley entrepreneurship discusses the rigors of starts decisions.
Guy Smith: Hello again, and welcome to another episode of the Tough Things First podcast, where we engage Ray Zinn, the longest serving CEO in Silicon Valley. And we talk about entrepreneurship, leadership, executive management, and a little bit about society and how we all get along in life.
But today we’re going to have, I think one of the more interesting topics for my mind, and that’s the art of decision making for entrepreneurs. Because in my time in Silicon Valley, and nurturing a lot of startups myself, I have seen entrepreneurs absolutely lock their brains in trying to make some fundamental decisions and Ray, he doesn’t seem to have a lot of problems with making quality decisions quickly. So, we’re going to figure out how he does it.
So Good Morning Ray. Welcome again. Thank you so much for taking time with us.
Ray Zinn: Well, thank you guys. Good to be back with you today.
Guy Smith: An entrepreneur or somebody launching their own business, they have to make thousands of decisions. I mean, that’s pretty much their job is to make a lot of decisions, make them quickly, make them with a certain amount of quality. And yet a lot of guys and a lot of women, they kind of freeze up, especially on some of the big decisions. What is it that causes people to freeze, and not make the decisions that they need to make?
Ray Zinn: Well, Tom Peters in his book, In the Pursuit of Excellence, talks about ready, aim, aim, aim, aim, aim, and never fire. What we need to do, as Tom says in his book, is ready, fire, aim. That seems kind of counterintuitive, but back in the days when we had the battleships and destroyers, they would fire for effect. In other words, you would shoot a round off and see where it went, high or low.
The gunner officers would say, “Oh, you’re 20 feet high,” or “You’re 30 feet low,” or something. And so, you would adjust your aim. So it’s ready, fire, aim in that sense. Where you fire for effect, and then see. Don’t be afraid to make a decision, because you’re going to be adjusting it. So part of the decision making processes is to say, “Here’s the objective, here’s what I want to accomplish.”
Okay? Then you go ahead and you start executing on that decision. Then if it doesn’t work out like you want, you revise it and you back to the front again, back to the top. It’s a circle. Being able to do that ready, fire, aim is very important when making good decisions. You don’t step off the cliff and say, “Oh, now I need a parachute.”
You start out by saying, “Okay, what do I want to accomplish? What’s my goal?” And then you set a plan and say, “Okay, my first step is to do this.” If that first step doesn’t work, you revise it, come back to the beginning again. Then you change your process and go forward. Now in my case, I like to have some standards. Here’s the conditions that I will not go beyond. So then when time comes to make that decision, I don’t have to decide. I’ve already decided in advance.
For example, we had a policy at Micrel of having 90 days worth of working capital in place at all times, and there was three months. I made sure that I looked at my balance, I call it my business savings account. I looked at that savings account and I said, “Okay, do I have three months worth of operating capital?” I wouldn’t spend more money, I wouldn’t increase my expenses, until I had my three months of that working capital in place.
Then we’d look at which way the revenue is moving up or down, and then adjust our working capital needs based on where the business was going up or down. So again, having a business savings account was critical at Micrel, and we always had at least 90 days worth of working capital. In fact, at the end we had actually one year’s worth of working capital in our savings account.
Guy Smith: Well, and to take some of what you said, phrasing it slightly differently. It’s easier to modify and improve a 50 percent good decision that you made quickly, than it is to come up with a perfect decision. Because making the perfect decision will just take way too long.
Ray Zinn: Mm-hmm (affirmative). Analysis [inaudible 00:05:27].
Guy Smith: How does an entrepreneur get over that emotional edge of making more rapid decisions, imperfect as they may be? What is the psychological barrier that keeps people from shifting to that mode of making imperfect, but expedient decisions?
Ray Zinn: Well, that’s called zigging when you should have zagged. If you know what you want, in other words, if you have a goal in mind, and what type of people you’re going to hire, or what kind of product you’re gonna make. So, you have that those goals well set in advance. Then when it comes time to make the decision, you’re not stumbling over it, you move forward with confidence.
There is no perfect decision. All decisions have risk. And then you have to measure the amount of risk, to how you go and execute on that particular decision. As you just said, rather than jumping off a cliff, maybe you say, “Okay, what do I want to do here? What’s my objective? Do I want to do a free fall for a ways, and pull the shoot? Or do I just want to jump off a five foot … you don’t need a parachute if you’re jumping off a five-foot mount.
So, you just have to measure what it is it takes to, to execute on that decision. Then, make sure you have in place the all the requisite things that necessary for you to make decisions successful.
Guy Smith: Well, it’s interesting that you phrased it that way. General Colin Powell, he was once quoted as saying, that when he was making big decisions, he would study the problem until he had studied it about 65 percent of everything he would need to study in order to make a perfect decision, and then go with the gut.
And what you had said earlier was that there were certain parameters, such as having three months of operating capital on hand, as one of the rules that was in that 65 percent of what you needed to make a great decision. So I think the two dovetail together really nicely, getting some of those fundamentals pre-decided. Having that be part of your framework of the 65 percent that you need before you make a business decision.
Ray Zinn: Exactly. In other words, if you sat down and say, “Okay, here’s what I want to accomplish, all these different parameters,” four or five is typical. And say, “Here’s my inviolate rules, that I’m not going to violate.” So then you measure your decision against your five inviolate parameters, and then it helps you make that decision.
For example, coming up with the right product. If you say, “Okay, I’m going to be in the banking business,” then of course you weren’t going to go into real estate as you would, you stay in the banking side. If however, you’re in real estate advisory, you’re not going to try to go in, to become a banker. I have a friend who has a small airline company. And he said, “How do I get my customers from making me the bank?”
And I said, “Well then, you don’t act like a bank. Don’t stretch out their receivables, or let them stretch out the receivable, so that you become a bank. Because you will become a bank, if you don’t have these rules set down as to how you’re gonna handle these debts that are moving out; they become bad debts pretty soon.”
So, don’t let your customers, or don’t let your environment push you into becoming something you don’t want to become. If you’re a bank, act like a bank. If you’re running a retail business, don’t let your customers may make you become a bank, because you’re not going to be a very good banker. That’s kind of a crude way of making the comparison, but that’s the way you do it. Have these parameters set up, so that when you come time to make a decision, that you won’t violate the basic parameters of your company.
Guy Smith: Well, and this kind of gets into parameter setting for the organization and decisions. Once an entrepreneur grows their business at all, they have to start delegating. They have to start giving some decision responsibility to other people in the company. How does an entrepreneur migrate this skill to the entire organization? How does he or she get everyone in the company to make better, faster decisions, if they are not blessed with the entrepreneurial drive that the leader has?
Ray Zinn: Well, it’s back to monkey see, monkey do. If you are setting the bad example of decision making, they’re going to follow. If you have these parameters defined, okay, we won’t violate these parameters, then that gets migrated onto to your staff and your employees. Then they’re more likely to make the good decisions, so that you don’t have to make them for them. Or micromanage them as they say.
So again, monkey see, monkey do. Set the right example, you set the parameters, here’s the things we will not violate. This is sacrosanct. This is what we will be, and say who we will be, and we won’t violate that. Then of course, better decisions will be made.
Guy Smith: Well. And I think there’s also an opportunity, in terms of teaching the process. I remember you telling me a story once about, you had a redundant fabrication facility. You had already decided in your mind, that it probably needed to be shut down. If I remember correctly, it was your CFO who kind of agreed with that, but for the wrong reasons. You kept stalling the decision, until he thought it through completely.
Can you tell us that story, and how that was a teaching moment for him, in terms of how to correctly evaluate this decision?
Ray Zinn: If you’re referring to when we had to shut down [inaudible 00:12:00], it was 2003. To shut the fab down was going to cause it violate to one of the principles of always being profitable. So, we’re going to be darn if we do, and darn if we don’t. If we’d shut the fab down, it’s going to cause us to go into a loss position. If we don’t shut the fab down, we’re just going to keep, hurting our bottom line. We’ll make money, but it’ll affect our bottom line for years to come; probably three, or four or five years.
So, sometimes you have to eat ugly frog. And finally I decided, well, we may have to violate one of our basic parameters of always being profitable. So we had to give up that one goal for that ability to close that fab down, and take that write-off of that closing a against earnings. But then, it helped our earnings going forward.
So, it’s darned if you do, darned if you don’t. You’re going to violate when your basic parameters, and we did argue and fight about that for some time, before we decided to go ahead and shut it down. So, in the final analysis we did, we did close it down and we did lose money, a small amount of money. But it also, they found ways of reducing the loss by minimizing the impact of the company, which was good.
It would have been like three or four times the loss that we had, had we not at least try to minimize that loss as we were shutting the facility down.
Guy Smith: For people who have not read Ray’s books, Ray had one unprofitable year in 37. This was the year in question. if I remember correctly, the total loss for that year was about $50,000, which for a publicly traded semiconductor company is chicken scratch. That gives you a little bit of an idea about the nature of quality decisions and making decisions at a good pace.
Because it is this kind of formula that allowed Ray to be in business and to be consistently profitable for 36 out of 37 years. If you’re an entrepreneur, or if you’re an executive and you want that kind of success, go to Amazon.com right now. Get a copy of Tough Things First, because this is the new Silicon Valley bible, for how one goes about creating and enduring business, that’s going to last the generations. That’s going to be consistently profitable.
And which is going to do so in no small part, because the employees with inside the organization are satisfied. Ray’s company had the lowest employee turnover rate with inside of his industry. That was part of the profitability success. And you’ll learn about that, and other facets of management leadership with inside of the book Tough Things First.
Ray Zinn: While you’re talking about the value of the book, there’s a common acquaintance of ours, a guy that told us recently that, had he had this book, Tough Things First, back when he started his company many, many years ago, he wouldn’t have had to declare bankruptcy. He said, because he would have set the right parameters and goals for his company, and they would not have gone bankrupt.
So ,he was very, very fanatical about it. He said, “Boy, I wish every new entrepreneur could read this book. Tough Things First. Oh, this would save so many companies from going out of business.” You know who I’m talking about, right? That guy, without mentioning his name?
Guy Smith: Yes, I do. Yes, I do.
Ray Zinn: “Your book has value in helping companies stay in business and stay profitable.”
Guy Smith: Well, and one of the things that I do, and this is just exposing a little bit of myself, I worked with a lot of academic institutions, their centers for entrepreneurship. I have been handing a copy of your book to a lot of people. In fact, I will be meeting with a school here locally where I live tomorrow, and I will be handing off the book.
I’m getting the same reaction with all of these academic institutions who are catering to entrepreneurs, who have entrepreneurship centers. They read this book and they go, “If this doesn’t make our students more successful, then there’s nothing else out there that we can feed them, that will make them more successful.”
Their academia is seeing Tough Things First as a new critical resource. I think that’s a heck of an endorsement, because these universities are charged with making these student entrepreneurs successful right from the start.
Ray Zinn: Yeah, and they need to look into Zinn Starter, which is on our website, ToughThingsFirst.com. They can look a little bit more about Zinn Starter, and how we’re helping universities reduce the failure rate of new startups.
Guy Smith: Absolutely, they should. And for everyone in the audience, since we’ve already plugged the book, one other thing that I would like to ask a favor of you, is write and review this podcast. Whether you’re on iTunes, Google Play, Stitcher, doesn’t matter. Just click the button, give it your rating. And by all means, mention it to your friends. Word of mouth is how podcasts are most frequently adopted by new listeners.
So by all means, mention it to your friends, and tune in again next week for yet another episode of Tough Things First.
Ray Zinn: And also get a copy of our book, Zen of Zinn. Z-E-N of Z-I-N-N. You’ll find it very, very helpful, whether you’re a teacher, or a dentist, or a mother or a entrepreneur. It will help you as you go through your life, give you ideas and thoughts about how you can improve.