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.
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.
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:
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.
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.
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.
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.
Ever think about growing your business with the plan to sell it someday, cashing in on your hard-earned work over the years? Or if you’re an employee with stock options, are you aware of the increases in value you can make with your efforts?
Then again, you may be an architect or doctor or other professional managing your
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business, knowing that the end game value of your client or patient list is small and not easily transferred to any buyer without attrition. In such a case, there is little advice here unless you think outside of your day-to-day profession and create a valuable leave-behind encasing your knowledge and experience that can be replicated and scaled to a large business – even if by others.
Is your business one that may be sold for profit someday?
Most businesses fall into the class of those that can be sold someday to a willing buyer. Even small community service-providers can be sold to buyers hungry to get into a business already in revenue with a steady customer base. And many businesses are created with the express purpose of growing them in size and attractiveness to be ready to sell someday to create some degree of wealth for the shareholders.
What if you’ve taken outside investors over the years?
Accepting venture or angel money is to create a contract between the investors and the entrepreneur that the business will someday be sold or even go public to create an exit for the investors.
[Email readers, continue here…] All businesses and their management should be aware and perhaps planning for the end game, and that includes boards of directors as well. It starts with each early step in the process of building the enterprise.
What creates value in a business?
Is your value proposition for an eventual buyer that you have some secret sauce that allows you to compete more effectively against competition? Do you already dominate a niche, no matter how small, that a buyer will someday want for itself? Do you have intellectual property that is valuable to you but might be more so to a buyer?
These questions are just a few that I’d ask during strategic planning sessions each year to fine tune the value proposition for an eventual buyer. And I’d go further. Investments into the company, whether from new money or reinvesting profits, should be directed first into areas that will increase the value of the enterprise at the end game. You do this for yourself and your shareholders, and you should be thinking of this regularly.
There is more money lost in businesses today from inefficient processes than any other single area. Yet this is not a place where most managers feel comfortable deconstructing and rebuilding. Somewhere out there is a consultant or future employee (or even suggestions from present employees) that will provide the roadmap toward making your processes run more smoothly, more quickly and more inexpensively. As a byproduct, process quality is likely to improve as well.
A more efficient way to do it?
No matter what your company produces, there is surely a more efficient way to approach the process. Start by carefully restating the goal for the process, such as “produce 500 quality units per day” and create metrics to measure the present output and quality (rejects or time lost) with this goal. Look inward, forming a “tiger team” from within your organization to define the steps presently taken to reach the goal, and make improvements in increments that can be put into effect and tested quickly. The best reward for those involved in improving a process is to receive the kudos from management and themselves for making dramatic improvements in their internal processes.
Consultants, outsourcing, and scrapping the system
If internal resources cannot handle the solution, it is time to find an outside resource that can. Either way, someone must start with creating a map of steps from start to completion, breaking it down to measurable sized increments. Look first at whether some steps are creating a bottleneck or quality breakdown affecting subsequent steps. If improving individual steps is not the solution, then scrap the process entirely and attempt to define a way to meet the goal through a differing route, such as outsourcing parts or the entire process, doubling the capacity of a segment of production, or redefining the goal itself.
All these efforts will help you to better know the process to a degree you never expected to achieve. And meeting the challenge of improving productivity is a great morale lift for all, as well as good business practice for the company and management.
How much risk you and your company are willing and able to tolerate over time? Most people believe that early stage companies should take risks aggressively because there is less to lose and much more to gain with each risky bet or decision. Common thinking goes on to address large, public corporations by expressing that the relative tolerance to risk is decreased, in favor of protecting the brand or financial health of the enterprise.
Business risk and the casino experience
Either way, as in a Las Vegas casino, the numbers of times risks are taken directly affect the average outcome over time. Take an extreme risk once, and you may win the bet. Your average is 100%. But for any sized company to continue to take major risks the averages will surely catch up and the rate of success falls to the mean, which we will assume to be 50% of the risks result in failure. Depending upon the size of each risk, this may be entirely acceptable, as in small bets at the gaming table.
Betting the farm on a single decision
But let’s raise the ante by addressing only those risks that are game-changing, those that “bet the farm.” Occasionally, a CEO must make a decision that commits all the corporate resources to a successful outcome. Using all the company’s cash and credit to produce a new product that is untested but shows every promise of success is one such bet sometimes made by CEO’s of companies large and small. Automobile companies are famous for making such bets on cars that won’t be on the market for 18 to 36 months from decision date, arriving at a time when gas prices and consumer preferences may have changed dramatically during that time.
[Email readers, continue here…] Some of those bets were unbelievably successful, such as the introduction of the Ford Mustang. Some were complete failures, such as GM’s emphasis upon design and production of larger cars and SUV’s even as consumers were voting with dollars for smaller, fuel efficient cars from foreign manufacturers. And how about the recent Ford decision to eliminate all but one sedan from their line-up? What might happen when gas prices rise again to untenable levels? SUV’s and trucks only? Would you have made that decision?
Decisions are made with available information
We must assume that the auto company CEO’s made their decisions to build based upon all available information, including consumer tests and market surveys. Many smaller companies just do not have the resources to do this in depth before committing resources which loom as massive to them toward a new product. Whatever the outcome, it is a safe statement that a decision-maker should commit major resources amounting to a bet of the business only when there is little alternative, that there is so much to gain that it overcomes the crippling loss that could occur.
There are only so many times a CEO can get away with succeeding with such risky strategies.
If you have been in management or an entrepreneur long enough, you will have experienced the gray area of decision-making where ethics, the law, your needs and expediency all collide. This is the time when you are paid the big bucks, and when others aware of your plight will be watching most carefully. It is also the time when you demonstrate your true courage to your contemporaries.
Gray area decisions. Knowing the facts.
I have a Ph.D. friend who teaches a graduate course in entrepreneurism at a local university. He uses the case method to place as many of these types of decisions in front of his students as possible each semester. And the responses from students are predictable. When faced with a gray area decision, the first response is to follow the letter of the law, the rules, the ‘right thing to do.’ The professor then injects one or more new facts into the case, and the students waiver, more and more as the new facts are analyzed, reducing their fervent enthusiasm for the “always right thing” stand. By the end of each case, most everyone has a position that has modified since the first impression. Then the professor reveals the action the company executive took to resolve the problem, often one not considered by the students.
A gray example: Is it OK to do this?
Consider the case of the company with goods on the dock ready for shipment, a company with an accounts receivable-based asset credit line that is already at its limit due to the calculation by the bank of availability based upon current receivables. The rules for “pledging an invoice” as collateral for borrowing call for attaching signed shipping documents showing that the goods have been picked up by the carrier, at which point the title transfers to the customer and the invoice from the company is “good”.
The senior manager, whether the CEO or CFO or head of shipping, walks over to the location where the shipment sits waiting for pickup, complete with paperwork waiting signature by the carrier driver. The manager picks up the paperwork, and using a blank page inserted into the stack, signs in place of the carrier driver. He then pulls out the now signed company copy and returns to his office with just that copy in hand. Within an hour, the bank receives a copy of the invoice with the signed shipping document attached, along with a very standard request to borrow the 80% of the invoice amount. The bank clerk approves, adds the amount to the loan and company’s cash account, and all is well. Or is it?
Adding facts to the case. Decision changes?
[Email readers, continue here…]Invariably the students correctly point out that the company manager falsified a document, which surely is against the law since an invoice was pledged to the bank that was not represented by a completed shipment. After this discussion, the professor adds that he forgot to tell the students that the shipment made it to the dock minutes after the day’s carrier pick-up and that payroll is due tomorrow and the cash must be in the bank today to cover the direct deposits. The only way to get that cash today is through the credit line borrowing, and after all, the carrier will pick up the completed shipment tomorrow morning. Now the students debate ethics against legality against pragmatism. Some hold their positions. A missed day of payroll is a small price to pay for even this small breaking of the law. Others state that the reputation of the company as a reliable employer is at stake, and that the employee loyalty will be shaken if payroll is delayed for even one day. The students divide somewhat evenly over the minor infraction.
Do we have all the facts? The balance shifts.
Then the professor reveals that the shipment on the dock is only a small partial shipment but that the invoice that was pledged to the bank was for the entire amount of the order. Now the students debate whether the manager should be fired, or the bank informed of the obvious falsification. And the professor adds that the manager in this case is the CEO himself.
Of course. The Kobayashi solution almost never surfaces.
Interesting enough, no student has yet suggested the Kobayashi Maru solution (remember, Star Trek?) where the CEO merely thinks outside the box or changes the rules. The CEO could have immediately called the carrier and offered a significant sum, say $500 for a quick custom pick up of the partial order, or called for the current location of the driver and found a way to load the shipment into a car or truck to meet the driver, or even plan to drive to the carrier’s dock itself.
So, what would you have done?
You get the idea. Decisions go from black-and-white to gray to black-and-white again, based upon relative knowledge of the facts and of course, the law. Just as a personal test, what would you do if you were the manager? Or if you were the shipping clerk observing this happening regularly? Or if you were the bank auditor discovering that this was a regular practice?
A CEO or manager’s life is not simple. But there are lines, both ethical and legal, that just cannot be stepped over, difficult as the result may be. Each of us is tested in subtle and sometimes very public ways often during our careers. It is a simplification to state that the “good guys finish first”, but looking back over long years of experience, there is a great deal of long term truth in that statement.