Selling your business? Find the emotional buyer

This is one of my favorite insights, since I lived this one in a positive exit from my computer business.

Types of business buyers expanded

Most people will tell you that there are two kinds of eventual buyers for your business: financial and strategic.  A financial buyer will analyze your numbers, past and forecast, to the n’th degree, and calculate the price based upon the result, after carefully comparing your numbers with those of others in the same and similar industries.  The object of a financial purchase is to negotiate a bargain, capable of payoff through operating profits or growth over time, or even of immediate profit from arbitrage – knowing of a purchaser that is willing to pay more for your company if repackaged, or even with no changes at all.

The strategic buyer

A strategic buyer is one that understands what your company has to offer in its marketplace, and how your company will add extra value to the purchaser’s company.  Strategic buyers look for managerial talent, intellectual property, geographic expansion, an extension into adjacent markets – and more – that will be achieved with the acquisition of your company.  Such a purchaser usually is willing to pay more to secure this new leverage, understanding that the value of the acquisition is more than the mere financial value of your enterprise.  Most investment bankers will coach you into helping them find you a strategic buyer, knowing that such sales are quicker, often less focused upon the small warts of a business, and yield higher prices than financial sales.

And the emotional buyer

There is a third class of buyer I discovered first hand when selling my company – the emotional buyer.  This rare buyer needs your company.  He must have you or one of your competitors, and now.  The buyer may be a public company attempting to defend decreasing market share and being overly punished by Wall Street.  You may represent the only obvious way to protect against obsolescence from a buyer’s declining marketplace, or failure to compete against others with better, newer technologies.

[Email readers, continue here…]  You may be a most successful direct competitor, one that the buyer’s sales people have observed jealously and nervously, sometimes even jumping over to your company as a result. No matter what the emotional focus, the buyer cannot continue to stand by and watch its business challenged so effectively.  The price negotiated is not at all the critical factor in the emotional sale.  It is the elimination of pain that drives the buyer to action.

A personal story

I experienced just this phenomenon and profited by the added value in the transaction provided by an emotional public company buyer for my business.  The potential buyer was a hardware company, aware that margins were decreasing and that software companies, once considered mere vehicles to help sell hardware, were now becoming the central component in a sale, mostly because hardware was fast becoming a commodity as prices dropped.

My buyer-candidate had previously licensed our firm as a distributor, a value-added reseller for its hardware.  As we grew to capture 16% of the world market in our niche, we successfully migrated from the single platform of the buyer-candidate onto hardware from any of its competitors – including IBM, NCR, HP and others.  At the same time, the buyer-candidate realized that we had become its largest reseller.

In one of many meetings with the buyer’s CEO, I “accidentally” dropped the truthful fact that his hardware now accounted for only about a third of our hardware revenues, down from 100% several years earlier.  It did not take but moments for him to realize that his largest reseller was giving his company only a third of its business, that his revenues were declining and ours increasing dramatically.  Simple in-the-head math shocked him into the realization that, if he could increase our use of his equipment in more sales, that he could slow or stop the decline in his revenues and he could migrate into a more software-centric company, much more highly valued by Wall Street, which was punishing his company for its decline and coming obsolescence.

Negotiating with an emotional buyer

Sometimes, you as seller don’t know the buyer’s deadline or even the reason driving it to a quick closing and higher price. That’s the fun of finding the emotional buyer.

For us, the resulting negotiation was rather quick and very lucrative for our side.  It was the first time I had witnessed an emotional buyer and appreciated the difference between “strategic” and “emotional” immediately.  Ever since, I have been urging my subsequent company CEO’s and boards to perform an exercise at regular intervals to seek out and identify future strategic and – if possible – emotional buyers.  We’ll describe that exercise in an insight very soon.

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Posted in The liquidity event and beyond | 1 Comment

Everything you do adds or reduces company value

Each decision you make to commit resources – your money or your use of corporate or personal time – affects the future value of your business.

Minor decisions, such as replacing employees who have left the company or replacing equipment needing updating, are usually considered operational in nature, and unless the business is changing direction, not relevant to this test.  But each commitment of resources of any substantial size for acquisition of new products, talent, even new companies, changes the value of your enterprise perhaps to a great degree.

Should I make an acquisition to increase value?

Let’s analyze the effect of a potential acquisition upon the value of your company.  We assume that you intend to sell the enterprise at some point in the future.  Let’s list some of the many reasons your company might find to make an acquisition.  New products, new geographic territories, elimination of a competitor, increase in revenues, consolidation savings, new talent, new distribution channels, and more are good reasons for a start.

Odds that an acquisition will be a success

Given these possible goals in making a good acquisition, there is one overarching question that you should consider before making that decision to acquire a company.  Know first that statistically, 80% of all acquisitions do not meet the intended objectives of the acquirer, making most all acquisitions risky.  The question to study in your board meeting long before making any offer to purchase a candidate business is: “Would this acquisition add significantly to our enterprise value  and attractiveness in an eventual sale?”

The alternative uses of your time and money

If the answer is “no” to the question above, and there are other opportunities for the use of cash that would add value, it would be wise to allocate resources to those opportunities.

[Email readers, continue here…]  Many companies find acquisitions to be a decision of “make or buy.” If the price of an acquisition is so high as to make the risk of creating the product or service yourself more attractive, that alternative must be discussed with your board. Remember to consider the cost of lost time if starting from scratch, and of patent or other branding considerations that would challenge a “make” decision.

After all, we are in business usually for the ultimate return we will someday receive from our investment.  If we are skillful in growing our business, the return from its sale will greatly exceed the total amount you will have earned from operations during the period of growth.

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Posted in Growth!, The liquidity event and beyond | Leave a comment

Can you profit by serving early adaptors?

I am a gadget freak, often purchasing new technologies in their first release.  And my closet is full of such gadgets, from early pen-based computers to early brick-sized cell phones to an electronic handwriting recognition pad received as a gift to test.  These early dives into new technologies serve a purpose for me. They keep me at the leading edge of new development as it is productized, even before mass production.  They allow me to preview new devices and technologies before release so that I might write about and speak about them in my “Tech Trends” keynotes.  And they are always the center of attention with my tech-savvy friends, some of whom are in the habit of asking, “So what’s new today” each time we meet.

Cost to the user and to the producer

The cost of such attention-seeking and research is relatively low for me, and certainly the reward of being sought out as a speaker addressing the trends in technology is enough in itself.

But I have been on the other side of the early adopter development process several times in the past, and can attest that it is great fun, but rarely profitable to be the first with any new product that requires simultaneously evangelizing or teaching the masses within the industry and marketing the new product offering.  The costs in playing such a dual role are many times that of those in positioning a new product in a niche already opened by another.  And statistically, the first product into a niche is very rarely the one to succeed.

Some great examples of second-to-market

Apple, for example, was nowhere near the first to introduce an MP3 handheld music player.  I had owned several before the first iPod was released.  Apple learned that their leverage was in the simultaneous creation of an easy-to-use retail music store for seamlessly downloading songs, podcasts and later applications to the device.  It did not hurt that Apple always seemed to trump the competition in design of the product and the product’s user interface too.

My “way too early” story

In 1986, while in the hotel technology business, I observed the back-room success of American Airlines with their new Sabre subsidiary and its creation of a “yield management” system to use massive data to project demand for an airline seat on an individual flight segment days and months into the future.  I was not alone among hotel industry executives curious for more information.  And Sabre was not talking to anyone about their magic potion.

[Email readers, continue here…] First Hyatt Hotels, then Marriott Corporation called me to their respective headquarters to consult with their executives on this subject under a non-disclosure with each.  I became even more excited about the concept applied to the hotel industry.  Both of those chains had very primitive modules in their respective reservation systems.  Marriott called theirs “tier pricing”.  If a future date was already booked at 80%, then they would eliminate any discounts below 10% from the “rack” or standard room rate.  At 90% they would stop discounting entirely.  These elementary steps were in the right direction but very primitive.

Seizing a too-early opportunity

So, I set about partnering with a small group of MIT graduates to produce specialized decision software for the hotel industry using the “LISP” programming language, created just for decision-making, allowing for coding inductive and deductive logic into the software.  I partnered with Texas Instruments, producer of a LISP computer, the TI Explorer.  We designed and produced special cards for the TI that would allow Apple Macintosh workstations to be used, with their handsome graphic user interface.

Then I designed what was then a ground-breaking new software system that could analyze tons of data from past guest stays on the same date a year earlier and other dates with the same day of week, add factoring for city-wide events on any future date such as pro football games and conventions, analyze the speed of increase in any night’s future reservations, and much more.

How it worked

Each night, the system was designed to perform its analysis using real advanced reservations data current to the moment and run the data through a series of rules I wrote which could be modified or added to by local hotel management, to automatically make pricing decisions and automatically implement them.  The system coordinated decisions between the reservations department which accepted individual or transient reservations and the group sales department booking groups at a discounted rate, allocating available rooms between each to achieve maximum revenue for any future date.

Our test sites

I found a willing test site in the Royal Sonesta Hotel in Cambridge, Massachusetts, whose management was thrilled to participate in an industry-changing experiment with new technology.  The system was priced at $150 thousand, but we calculated that the average decision implemented for the 300-room property should be worth $5 thousand, making payback within an amazing 60 days if all worked as planned.  Our company installed the system, integrated it with the Sonesta computer system which our company had previously provided, trained the staff, and began to measure the results after turning on the system in a live environment.  In the meantime, we sold a second system to a large timeshare resort in Orlando for the same price.  By agreement, Sonesta withheld payment until completion of the beta test period.

The real test: The industry trade show

The industry’s annual technology trade show came up during these tests.  The industry was abuzz about this “artificial intelligence” system and its purported early results, and I wrote the cover story for the industry magazine about the system, and organized a panel composed of executives from Sonesta, Marriott and other chains to present and discuss this newest industry marvel.  On the day and hour of the panel, it became obvious that the house was way overbooked.  We agreed to repeat the panel later that day for the hundreds of people unable to get into the large room.  We were a great success with a great, ground-breaking product.

Reality trounces early vision

And the next week we asked for payment from the test property, after sign-offs from all its managers but the top one.  The general manager was also an executive of the family chain of hotels.  He called me in, along with several of the second level managers so enthused about the system, and stated, “This is nice, but I could do this work on the back of a napkin,” shocking us all, and he refused the pay for the machine.  I challenged him immediately.

“Let’s disconnect the system from influencing the reservation system for one week,” I offered, “and let the machine calculate but not implement its decisions. During that week, you make your decisions each night on the back of your napkin.  At the end of the week, we’ll compare the effectiveness of each.  If you agree that our system was more likely to positively affect revenues on those dates targeted, you pay for the system.  If not, we’ll remove the test system and find another home for it.”

He agreed.  Management added a few new rules to the rule base and watched over the system each evening, anxious that there be no contest between this number-crunching wonder and a single manager’s intuitive guesses.

The moment of truth: Facing the “no decision” competition

A week later, I again traveled across the country to the property to meet with the same team and the general manager.  We printed out the week’s decisions, those not implemented.  We presented our findings.  And waited for the GM’s response.  “I did not bother,” he stated. “I have no doubt that I could have done this better if I’d taken the time; but I was busy this week.”

The final lesson: Too early to market is a fatal mistake

We could not argue with the money, even if we were right and all other managers desperately wanted to keep the wonder machine.  So, we removed the system.  After all that great press, I realized that the industry just was not ready for such a leap, giving up authority to a computer, even if at least one major airline had successfully done so.  I offered to repurchase the second machine from the hotel in Florida.  After all, what company can maintain such a small number of unique systems?

Our mundane, but profitable solution

I turned to Tom, our chief programmer, and directed him to use as many of the features of the knowledge based (artificial intelligence) system as possible, but to be reprogrammed into our standard reservations module using our BASIC programming language.  Tom’s team did just that, perhaps saving 70-80% of the functionality even if none of the leading-edge glitz.  We priced the reduced “feature” at $8,000 – and sold many over the years as mere add-ins to the reservation system.

After spending over a half million on the project (and receiving at least that in great publicity), I learned a lesson.  It is satisfying but rarely profitable to cater to early adopters.

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Posted in Finding your ideal niche, Positioning | 3 Comments

What two words are most valuable for your business planning?

One of the most valuable tools in an executive’s arsenal is the use of the question chain in planning meetings or to analyze scenarios that might result from an action.  The powerful words are “What if…” followed by an ever-deeper question that follows the possible results of an action, or a decision based upon the last “What if” question.

The beauty of the method

The beauty of this method is that it causes the person proposing the solution to think much more deeply than during the development process, unveiling many possible consequences to be considered before implementation of an idea or project.  When I use this technique, invariably the person on the other side of the question will at some point state, “I didn’t think of that.”

A few great examples

In a recent CEO roundtable, the executives discussed their experiences with the question chain.  Several had revealing things to say about their experiences.  One stated that he asked “what if” the U.S. dollar was to sink in value during the life of the foreign transaction.  The subordinate had not thought of this carefully enough and had no protections built into the agreement or any strategies to hedge currencies.  The net cost of such a failure to pre-think this event would have been in the millions, stated the CEO, but were successfully hedged against just as the dollar declined.

[Email readers, continue here…] Another CEO in the group offered his experience with the question chain relative to the availability of isotopes for his company’s medical instrument customers in the event of political turmoil in the countries where the nuclear material was exported.  As a result, his was the only company among the competition to continue to service his medical industry customers when just such an event occurred.

Use these often in your work

“What if” are two very powerful words when used together.  Use them more frequently as you manage your enterprise, not matter at what level you manage.

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Posted in Growth!, Protecting the business | 1 Comment

Catch up to your market or be lost!

Markets and competitors change. Are you being left behind?

Over the years, I have often heard the complaint from CEO friends that they have become so swamped by the demands of their growing businesses that they feel themselves further and further from the center of their industry, no longer at the forefront of information and competitive development.

The risk of the daily routine

It is a real risk for the successful entrepreneur that the daily demands of business make it more and more difficult to know the pulse of the industry, which becomes more and more risky as decisions are made and resources allocated to projects or products that may no longer be as attractive as before. 

Big bets on old business plans

During the past several years, some very big bets have been made by large companies and well-healed entrepreneurs in old media, newspapers and TV stations.  Although newspapers have a window in which to reinvent themselves by providing electronic delivery and TV the same by recasting into more niche markets through division of digital channels into niche-serving slices, I doubt that these bets will prove profitable in the end, because of the overwhelming availability of free media using the web.  Were these companies and entrepreneurs out to a long lunch during the media transformation? Or do they know something all of us commoners do not?

How can you do something about it?

First, speak to your customers often. What has changed in their business behavior over the past several years?  How will that affect you?  Can you develop a product or service to meet these new expectations?

[Email readers, continue here…]   Second, attend the right industry trade show.  Yes, I know. You’ve done this so many times that there seems little to gain.  But next time try this.  When the exhibit hall is open, walk to the back and sides, where new exhibitors, young companies, small entrants find themselves.  See what new ideas they have that are unaffected by the norms of bigger competitors.  (As an early stage investor, this is the first place I head during a trade show.)  Then, attend a few of the most interesting sessions to find what’s new.  You’ll be refreshed and perhaps surprised.

Don’t let yourself become stale

Above all, don’t allow yourself to be comfortable in your daily routine at your desk, heads down in operational issues.  Look up for customer needs that change. Look out for other companies just starting to bite into your niche. Look away long enough to consider strategy rather than comfortable and normal operations.   Be ahead, not behind your industry thought leaders as they begin to execute their plans.

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Posted in Growth!, Positioning | 2 Comments

Have you experienced your “Every Three-Million Dollar Crisis?”

Here is a phenomenon I discovered over time when dealing with many small start-ups in their early revenue period.  A very predictable series of rotating crises seemed to befall most every one of these young companies.  These became so predictable that I could accurately label them as occurring about every $3 million in gross profit (or revenue for service companies).  By defining this in terms of gross profit, we can include distributors with 15% gross margins as easily as software companies boasting nearly 100% gross margin.

Explaining the rotating series of crises

There is a rotating series of predictable crises that most often reveal themselves like this:

The first crisis: organizational

At approximately the $3 million gross margin mark, the company often has grown from founders to about 20 employees, or an estimated $150 thousand in the same measure, per employee.

Of course, venture-funded startups with long product creation times do not fit this mold as easily, often funded for long periods of losses with many more employees at hand in development positions.

[Email readers, continue here…]  But at or around the 20-employee mark, the founders usually find that two things occur.  The original management span of control is exceeded, and management must be delegated to one or more middle managers to maintain efficiency in the workplace.  Second, some of the original employees, occasionally one or two friends of the founders, are discovered to be falling behind as more professional employees show them up to be less competitive in their jobs.  So, management reorganizes the structure of the organization to fit the new needs of the growing enterprise. The risk is real: that the first person hired to step in as middle manager below the entrepreneur doesn’t last for a year, often as a result of the entrepreneur’s inability to let go of those processes and let the new manager perform, no matter how talented or experienced the new manager.

The second crisis: quality

At about the $6 million mark, in my experience, revenues have ramped to the extent where the original product standards of quality are challenged, as is the speed and efficiency of customer service. Changes need to be made quickly to preserve the reputation of the company, adding a quality control function if not present, adding more QC steps in the process, addressing the number of customer service people on the line, creating longer hours to serve a larger customer base.

Failure to respond to this predictable crisis quickly labels a company as a provider of poor quality, which seems to travel unbelievably fast among your industry’s gossip machine, helped by competitors anxious to point out your problems.  And once you’ve fixed this, the perception of a fixed problem lags the reality by many months, making this a particularly tough crisis, common as it is.

The third crisis: working capital

At around the $9 million mark, the company suffers a most predictable cash crisis, one where the costs of growth in working capital and infrastructure creates the need for new sources of funds from investors, banks or asset-based lenders.  If the company is not profitable, these channels for capital are not as easily tapped, extending the crisis and challenging the health of the enterprise.

And the surprise…

At around the $12 million mark, the company finds itself having traveled full circle, and in need of reorganization again along with a bit of house cleaning, pruning the poorer performers from the ranks.  That seems to happen around the 80 employee count, a time a little beyond when the company should have transitioned to a professional human resources manager to help solve this and future employee crises.

Do these crises strike you as familiar? 

They should, even if the dollar amounts are out of alignment with your experience, since some companies are funded well enough to skip the first financial crisis and some so efficient as to skip the first organizational crisis.

Well, with this insight, you should be equipped to spot early signs of each crisis and plan around them in time to avoid the full impact of each in turn. Let’s hope you and your management team recognize and react – now that you know the “every three-million-dollar crisis” and its signs to watch.

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Posted in Hedging against downturns, Protecting the business | 1 Comment

Can you defend your pricing niche against your competition?

This week, we continue our series on marketing and positioning. There can be nothing more important in your business planning that selecting the proper pricing niche, making your story clear using that niche, and the defending your position against the competition. So, here comes the lesson and your challenge…

The five major niches

There are five major classes or niches a company should examine and make its own in calculating positioning in the marketplace.  They are:

  • Price
  • Quality
  • Service
  • Innovation
  • Elegance

Your challenge: to find, position, and defend your niche

Think about your positioning. Companies that compete on price rarely compete against others who emphasize service or quality.  There are exceptions, based upon cost of sales. For example, Internet resellers have a better chance to combine price and quality than those with much more fixed overhead occupying a bricks-and-mortar physical presence in the community.

Assume that you are not an Internet retailer with many competing products to sell. For you, it is important for the image of the company to be known for one of the above attributes above others.

Here are a few examples to help you

[Email readers, continue here…]  WalMart is known for lowest prices, often for identical merchandise found in other stores for more.  But few go to WalMart for quality brands, understanding that they accept Wal-Mart as the low-priced leader.  Nordstrom’s competes on service above all, quality second and price a distant third.  We enter a Nordstrom’s store expecting superior service and know we will pay a price for this.  Apple charges a premium for innovative products, with quality second and service third.  Mercedes offers a premium automobile with its customers expecting luxury first, quality second, service third, and price a distant fourth.  If Apple released a $229 notebook computer, it would damage the brand and reduce the value of owning an Apple computer in the minds of existing customers.

Your niche selection drives everything else you do

The very image of a company is influenced by your niche decision, as is every decision following it.  In many markets, there are poorly defended niches, even markets with dominant players.  For example, the tech company, Asus, found this golden opportunity in the notebook market and moved in quickly to overtake all other manufacturers with low prices.

The danger of competing on price

Competing on price alone is the most dangerous strategy of all, since other well-capitalized players can easily join the competition merely by dropping prices upon existing products, of course at the expense of its previous positioning as described above. In our past example above, Asus was able to grab the mantle of price king while maintaining reasonable quality and even provide a bit of innovation worthy of applause by those of us market-watchers looking for examples of good strategic price positioning.

Questions for you and your team

Where do you think you can excel within these five positioning alternatives?  What competition would you face?  Can you defend your offering against that competition?  Can you select and defend several of these at once, such as quality and elegance? Or quality and service?  These are worth a team discussion, even for mature companies, with other decisions such as pricing, positioning, advertising and which market segments to concentrate upon – all following that choice.

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Posted in Finding your ideal niche, Positioning | Leave a comment

Why buy IT? Why buy MINE? Why buy NOW?

What a powerful set of three questions.  These are so succinct, so well defined, so precise that everyone in sales and everyone involved in marketing must be able to answer these three questions without pause, and convincingly.   Turning these into statements instead of questions provides a framework for the sales presentation from the highest levels of collateral materials and marketing support, to the salesperson on the front line.  It would pay you to work over this set of questions in a special session with sales, marketing and senior management in the room at once.  It is that important.

Why buy IT?  

Can you, your sales people and your marketing staff answer this succinctly?  Is your product or service one that responds to a customer need, real or perceived?  This question deals with the offering in general, not yet with your version of the product.

In general, there are three types of products or services: those a customer needs, those a customer wants, and those a customer believes he does not want or need.  Your marketing and sales effort must be focused entirely upon making your product solve an urgent customer need.  Sometimes, companies do this by creating demand where none existed before, such as for Listerine in the early days with a campaign to eliminate halitosis, the dreaded bad breath that consumers had no name for and did not think of as a need before that most successful advertising campaign.

FedEx did not respond to a need for overnight package and letter delivery; it created the need with its clever advertising campaign. Car manufacturers used to make expensive annual model changes just to create a need in the minds of consumers who then viewed their present cars as obsolete. “Why buy it?”

Why buy MINE? 

Product differentiation is absolutely necessary to make a sale when there is visible competition, as there usually is in any sale.  Your marketing and sales people must know how to state clearly, with as few words as possible, the reason why your product best responds to the customer’s needs.

[Email readers, continue here…] There is quite a difference between describing features, as many untrained sales people do and most engineering types almost always do, and describing benefits as a good sales person does.  What the product does is less important than why the product solves the customer’s problem, and how the product does so in ways obviously better than the competitor’s product.   This story should never be left to the sales person to make up, or each will make a different story for the purpose of a sale, not always aligned with the company’s market positioning and rarely as precise and compelling as that created by professional marketers.

Why buy NOW? 

Without creating a sense of urgency, a sales person will have trouble closing the sale, allowing competitors another chance to make their case – often with the advantage of hearing the customer recount your benefits as he heard them.  It is not a good place to find yourself and is one where the odds of finally closing the sale drop considerably.

Provide incentives for the sales person to use as needed to create the sense of urgency needed to push the customer over the line and commit now.  Give him or her latitude for a discount up to a maximum percentage, dunning commissions by at least that percentage to make sure the tool is not used until needed.  Provide a deadline after which the price will increase, the sale will end, the product will be re-allocated to another customer, or a tax credit will expire.  Make the urgency clear with the sales person, so that no customer who waivers will fail to be offered something to make the sale now.

An example of how not to do it

Recently, a roofing insulation sales person had my attention as he described his company’s sale that would end the next Friday, and he made sure I understood that the Federal tax credit for such energy-saving home improvements would be applicable to this sale. He went on to state that the $4,500 cost would qualify for a tax credit (not merely a less-preferable tax deduction) of $3,000, or $1,500 for each of the two bundled services he offered.  Something seemed very wrong to me about this credit, which I had recalled to be 30% of the actual amount paid.

Because the sales person was not credible in this one area, I told him that I would check on the credit and call him a day later.  Of course, it took all of a minute using my search engine to figure out that he was attempting to apply his credit offer to the retail price, not the sale price, and twice for two products instead of once for the installation as a whole.  I am sure other customers fell for this, but I was angry enough for this falsification of the facts that I called the sales person and not only declined, but read him the riot act in the process.

Why buy now?  Be sure there are no misrepresentations anywhere in the sales process.

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Posted in Positioning | 2 Comments

Faster is sometimes more valuable than better.

And doing both well usually wins the day.

This is one of those arguable insights, where both sides win.  Dell is a great example of emphasis upon fast, creating a customized computer in 48 hours or less, bringing in assemblies and components just-in-time to make the assembly line.  However, if Dell quality were poor and returns high, the company surely would not have survived on speed of response alone.  If someone were to ask, “What is the secret sauce, Michael Dell?”  Dell’s response would be something like “Quality custom computers more quickly than the competition.”  And in this company example, both quality and speed are the critical factors in competitive advantage.

More examples of fast above better

Think of McDonalds.  Its reputation is based upon fast food in a minute, with quality that is acceptable but not discernibly above the competition.  Or one of the instant auto service companies where an oil change is fast and inexpensive, but the number of inspection points far fewer than at a dealer location.  Speed above quality.

We have become a society not used to paying even a little extra for speed, but willing to pay much more for quality.  How about the $14 hamburger at a restaurant, compared to fast food?  We pay for the quality of product and service, happily defining our own tolerance for cost versus quality and speed.

An important decision for you

[Email readers, continue here…]    So, in planning for your niche to defend, one of the first decisions is between quality and speed. We will soon examine the entire gamut of pricing structures in future weeks, but let’s start with this one.  It is fair to repeat that quality and speed together are the winners in this contest, not one alone.

Questions for your management team

Which will you want to accent for your competitive advantage?  How will your customers react to your positioning?  Will you make more in revenues and profits with one against the other?  Where is your competitive landscape?  Is there a more aggressive competitor in one (speed) as opposed to the other (quality)?  Can you “knock off” the competition in one of these areas more easily than the other?   There are great questions for your next strategic planning session or board meeting.  Try them.

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Posted in Finding your ideal niche, Growth!, Positioning | 2 Comments

Are you the bottleneck in your organization?

At many board meetings, I can be counted upon to ask, “Where’s the bottleneck this month?”  Senior management is usually prepared with an answer, and a good discussion of resource availability and application follows.  Sometimes, the bottleneck is not so visible to the CEO.  In those instances, I follow with: “Do you notice people waiting at your door, telling you that they were waiting for your response or decision, even if you were unaware of this?”

The moment of realization

More than occasionally, this questioning leads the manager or CEO to realize that he or she is the bottleneck through having created a hub-and-spoke decision process, with that person at the center of each process.  Once the bottleneck is identified, the solution often comes quickly, requiring little if any board action as management focuses resources on the bottleneck to remove the latest impediment to efficiency.

An easy lesson in bottlenecks and their elimination

There is a great book, “The Goal – The Process of Ongoing Improvement” by Eliyahu Goldratt. The book was written to describe in simple terms the use of statistical analysis to remove bottlenecks in a manufacturing environment.  I have used that book’s lessons to teach process improvement to many types of businesses, including software development, supply chain management and retail fulfillment.  I recommend that you drop everything and buy this book, read it, and if you find it as powerful as I did, purchase copies for your management team, followed by planned discussions among team members about removing bottlenecks and improving efficiency throughout the organization.

How dangerous is a bottleneck?

[Email readers, continue here…] Every resource behind the bottleneck is slowed from its most efficient pace until the resource ahead of it works its way through the constraint.  In most companies, that means everyone is less efficient because of (perhaps) you.

In a manufacturing or production environment, that means people are stuck at their positions with completed work waiting for the process to move on.  Or worse yet, more and more production is completed behind the bottleneck, only to sit as work in process, un-billable inventory of parts or services.

What happens to resources behind the bottleneck?

Behind or after the bottleneck point are people with too little to do, just like those in front of the bottleneck.  But these people or machines have nothing to show for it, no way to accumulate inventory during the wait, just lost time waiting for the next process to squeeze out of the bottleneck.  It is the worst form of lost opportunity within a production environment, all cost and no output.

It is not about maximum utilization of the bottleneck

Then there is the bottleneck itself, usually operating at maximum efficiency given the present resource size and ability to perform.  If the resource is a machine and operator, would a second machine and operator remove the bottleneck and provide for a smooth flow?  Add second shift at that station only? Add faster machine or faster operator?  Allow fewer rejects from that point in the process?  Attack the bottleneck from all angles to remove it.

Big gains from (sometimes) small effort

The amazing thing about this process is the large amount of gain from focusing resources upon a comparatively small point of constriction – small based upon cost and time to fix.  Work this question into you next management meeting and see if you are surprised by the results.

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