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The pivot is something entrepreneurs are familiar with as a move that comes when something else fails or is bound to fail. So why should leaders plan a pivot when everything is going great? In this Tough Things First podcast, Ray Zinn explains the plan to pivot should come early.
Rob Artigo: Ray, most people treat a pivot like a fire drill. Something breaks and then they scramble. You’ve talked about pivoting before. Today, I want to talk about the part that comes earlier. Why do we plan to pivot while things are maybe still working, or even before we really get started?
Ray Zinn: Well, let’s back up a minute. Let’s talk about why pivots are necessary.
Rob Artigo: Okay.
Ray Zinn: So in the 37 years that I ran Micrel, I had eight downturns, eight, E-I-G-H-T. That’s a lot. And so the longer you’re in business, the more frequently you’re going to run into these down cycles. And so, you have to plan for that. In other words, you got to accept it. It’s there, it’s real, it’s going to happen.
And most people just think that the trees grow all the way to the moon or something. They don’t think about that something bad’s going to happen. In fact, when you flip a coin, 50% of the time it’s going to be heads, other 50% is tails. And that’s the way it is with things going great and things going not so great. It’s about 50%. So, planning to pivot is absolutely crucial, because that allows you then to be prepared for that change, that downturn.
What we always did is we maintained enough cash and enough reserves so that, six to nine months, so that we could weather our way through a downturn. A downturn typically lasts about a year and a half, between a year and two years. So, let’s say an average year and a half. So therefore, you have to have enough reserve to hold you through that recovery as you would. So that’s the main plan in being prepared for pivoting as you would.
Rob Artigo: Yeah. So, why plan to pivot while things are working? I mean, like you said, you had the capital to pivot if you needed to, but why are we doing it when, I guess maybe we don’t feel like we’re challenged? We are just doing it because… We’re doing it because it’s necessary to be prepared.
Ray Zinn: It’s like putting in a fire detector after you’ve already burned your house down. It’s too late. Once your house burns down, it’s too late to put the fire detector. I guess they call it smoke detectors.
Rob Artigo: Yeah.
Ray Zinn: You want to plan for these eventualities because they’re going to happen. And that’s the key to planning for a pivot. Sometimes it’s an economic cycle in the economy, the business changes either up or down. Sometimes it’s a product change. We know right now we’re going through a big AI, or I guess they call it now an SI revolution, and people are worrying about their jobs. “What do I do if AI or SI takes over my…”
Rob Artigo: You mentioned downturns, and any kind of change, you said you have some thoughts. I want to drill down into that a little bit. When you plan for the turn or the next turn, what are you actually planning? Are you planning a new product, a smaller headcount, a different customer, or just the cash that you mentioned?
Ray Zinn: All the above. All the above. It’s planning, having enough cash to weather yourself through the storm. It’s also cutting back, getting your costs within line, based on the market conditions at the time. It’s also product changes, evolution of products, like I mentioned a second ago about AI affecting your job or your company. It could be some other catastrophe happens, some other world crisis, but they will happen. I mean, to assume that nothing ever goes bad or nothing changes is absolutely insane.
Rob Artigo: Well, here’s the hard part. A plan to pivot might look to some people like doubt. Maybe the people might see the leader as being uncertain about the current plan. So, how do you build that option of pivoting without telling the team the mission is optional? You want them to still be on mission, but you’re also planning for the possibility of change.
Ray Zinn: That’s part of the culture though. I mean, the culture we had at Micrel was we were always planning for change. We knew it. We accepted it. I ran a lot of economic models prior to any particular year. I ran some models, and then I added in a economic downturn in that model. We were prepared. We knew exactly how much we had to compensate.
Rob Artigo: Worth noting that you’re an economist by training, not just a businessman.
Ray Zinn: Well, education.
Rob Artigo: Education. Yeah.
Ray Zinn: Well, I’m an engineer also, but I also have a master’s in business. So I have that economic education, experience. And I knew the industry. I knew the market that I was in. That’s the key to being able to pivot properly is to know your market, to have that knowledge of the direction of the market. It’s all part of planning.
I know in flying my plane, we have to plan for certain amount of headwinds, certain amount of fuel consumption, certain amount of weather issues we have to deal with, and that all has to be planned in. If we don’t, it’s going to be a catastrophe. In fact, most of these airplane crashes are due to people not planning properly for the conditions that they might experience.
Rob Artigo: While I was researching this and writing the script for the podcast, I found a term called sunk, S-U-N-K, sunk cost. And one description I heard was that it can be a trap, because in this sense, you’ve spent the money, you’ve hired the people and you’ve told the customers. What has to be true, Ray, before a planned pivot is the tough thing and not just an excuse to quit something?
Ray Zinn: Well, we’re talking about sunk costs. I mean, those are fixed costs. Those are costs that you already have incurred and that you’re going to be continue to incur, rent, utilities, head count, people that you have to have, that you can’t let go. Those are all these, they refer to as sunk costs. So you have to have that. You have to have it built in. And so you know what your variable costs are and which ones are your non-variables.
And then you factor those into the model that you’re trying to develop. One of the keys is these companies that grow too quickly, and so therefore their sunk costs or costs of operation are skyrocketing and then they have a hard time being able to cut back. And so, growing too fast, now grow fast is fine, but growing too fast is not. And so you have to be prepared for not growing too fast.
Even though maybe your investors, maybe your board, maybe your employees, whoever, then they want you to grow fast. They just want, as they call it, hellbent for election. They just want to fire away as though nothing’s ever going to go bad and nothing’s ever going to happen.
Planning for these eventualities is necessary. We’ve got this Iran war that we’re currently in. We though we were going to be done in a couple of days, and here we are seven months later and we’re still dealing with it because the adversary or the competition, in case of a business plan, they’re also out there trying to keep themselves upright and they’re planning for pivoting as you would.
Assuming that you’re the only one that’s got control over your outcome, your results is really ridiculous. You got to assume you have competition, you got to assume you’re going to have unforeseen changes happen, whatever they might be, either economic, market, product line, things change.
And if you just go back, look over the history, when Adam Smith wrote about the wealth of nations and the advent of the railroad, the railroad made huge, huge changes in the economic conditions of our country, and people weren’t prepared for that. They weren’t prepared for the impact of the locomotive.
And now today we have artificial intelligence or superior intelligence or whatever your preference is, and people aren’t prepared for it. I mean, they literally, in fact, they’re fighting it. Rob, people fight change. They hate change because it means they got to do something. But change is with us. We have to do something. We always have to do something, whether it be health issues, family issues, economic issues. There’s all kinds of things that we have to plan for. To assume that nothing’s ever going to happen, that things are always going to be rosy is where companies fail.
Rob Artigo: Let’s go back to what you mentioned about cash. You’ve always kept months of working capital.
Ray Zinn: Six to nine months.
Rob Artigo: Six to nine months, on purpose. So is the plan to pivot mostly a money plan or is money just what makes the other decisions possible?
Ray Zinn: They’re both. They’re both. It’s both, to help you plan and to be prepared for the plan. It’s like extra fuel on your airplane. So if you put more fuel than your destination requires, that’s extra load, that’s extra costs. But if you have a problem, if you have to divert to an alternate airport or you have some winds or the weather changes or whatever, you’re going to be glad you have that extra fuel on board.
So planning for eventualities is crucial. For example, back to aviation comment, you’re required if you’re flying part 135, which is for higher as you would, you have to plan to have an alternate airport. You have to be able to fly to the alternate and plus 45 minutes extra. So, not only do you have to have fuel enough to get to an alternate airport, but you have to have 45 minutes beyond that even.
So, if your plane will only hold enough fuel, for example, across the US, if your plane will only hold enough fuel to get you from point A to point B, and you don’t have that alternate baked in plus the extra 45 minutes for wind conditions and stuff, you’re going to crash. You’re going to run out of fuel. So, even though you’ve got to carry this extra load, the extra weight of the fuel, you still have to do it to have those reserves. We call it reserves.
Rob Artigo: Well, let’s drill it down to on a personal level. We talk about both the personal here on Tough Things First and on the corporate or company level.
On the personal level, you sold Micrel and then you had to make a change in your life because you weren’t going to the same office every day to do work. You had to make some changes. So a person who’s listening, who is going through that sort of thing, what is the first tough thing in a personal pivot before they announce anything or make any major public statements about what they’re doing?
Ray Zinn: Well, you got to go back to your plan. What was your plan? You have to plan it. So you look at your plan. Is your plan incorporating the changes that you’re experiencing? Whether it be retirement, whether it be changing jobs or changing product line, changing from one location to another, you look at your plan and say, “Okay, here is the plan that we have for this particular condition,” whether it be health, financial, business issues, employee issues, all those have to be baked into your pivoting.
And if you can’t pivot or aren’t able to pivot, you’re dead. I keep going back to this airplane analogy because it’s important. It’s an easy comparison to make. I know of airplane crashes that could have been easily avoided, but they had to carry extra fuel. They had to be extra prepared. They had all the information about the alternate airport. They had that all baked into the flight plan and they have to have the weather updates. You got to get those weather updates on a regular basis.
If everything goes right, you don’t need all that, but you got to plan for things not going right. And that’s what we did at Micrel. That’s why we were, 36 out of 37 years that we were profitable is because we were prepared for eventualities. And as I said, it’s that fifty-fifty flip a coin. Half the time it’s good, half the time it’s bad.
You know in your life that not everything goes rosy every single day and you have to have alternate plans if things don’t go right. It’s like, go back to that flying again, having that alternate airport baked in, planned in, have the fuel on board to be able to get there. And then some reserves. I know of this one incident that happened with this individual, very experienced pilot, he was flying down to the San Diego area and he did have an alternate in, but what happened was is when he flew to that location and the alternate airport was also bad weather, and then he had to find another airport.
Well, he ran out of fuel and crashed and was killed. So that’s why the extra 45 minutes was baked in there, is because not only was his alternate airport bad, but then he didn’t have enough fuel to get to another airport, which is like a third airport and he ran out of fuel. He paid the price.
Rob Artigo: I’ve looked at your daily plan. You work out in the morning and then you get to work at a certain time and you had sort of what time you were going to be home and have dinner with your family type of schedule. On an intraday sort of pivoting thing, we’re not talking huge product changes and customers and things like that. But, here you are going throughout your regular business plan, you know what you’re going to do, at this time you’re going to be there, you’re going to go do this, you have a schedule, you’re going to do that. Did you build in this concept of second nature, be prepared to pivot, into your day so that you didn’t get thrown off? If something changed, you could easily just switch directions and handle it?
Ray Zinn: Absolutely. I mean, it’s that scout model, be prepared. And that’s the key, is to have that preparation so that if something happens, you’ve got it covered. We have these large ponds here at the ranch and the purpose of them is not just to catch fish or recreation, it’s also for fire protection. So we put them in place. It’s expensive to have them, maintain them, but if there’s a fire, you’re going to be fortunate you have them. I remember in 2007, because we had the ponds, we were able to put a fire out that could have been devastating. I mean, completely devastating.
And so, it’s like insurance. Pivoting is really insurance. That’s the bottom line. And so you have to have an alternate route and an alternate capability to survive whatever catastrophe or disaster that’s coming your way.
Rob Artigo: Wow. Good advice, Ray.
Listeners can join the conversation at toughthingsfirst.com. Questions and comments are welcome there. Follow Ray on X, Facebook, and LinkedIn. And of course, pick up Ray’s books, Tough Things First: The Essential Leader and the Zen of Zinn series one, two, and three, now including the new book, Zen of Zinn Daily.
Until next time, do the tough things first, right, Ray?
Ray Zinn: Absolutely. That’s part of pivoting is doing the tough things first.
