A company is moving from sole focus on servicing a market to a split focus
including developing and marketing their own products. This is a significant
transition for the team. What is the best way to organize this effort? How do
you manage a business transition?
from the CEOs:
the company’s financials are great for their market, cashflow may be
insufficient to fully fund a development company.
development of new products can create conflicts if it creates competition for
resources between internal and external projects.
avoid this, create an independent company or entity – in a separate location.
Seek outside funding whether bank, angel or partner financing. The independent
entity can then buy resources from the primary entity at competitive rates.
years ago, another CEO utilized the strategy just described. The important
that venture is properly resourced.
that there is a balance between proven structure and creative application
best resources available at same rates that key customers pay.
free guidance but not free services – peer reviews are key.
third CEO had an opportunity to open a new business using the spin-off model.
allowed infrastructure sharing – with proper compensation and incentives
both entities were successful.
Properly implemented, this model works.
are four aspects to the challenge.
business plan for the new venture must address all four.
internally (vs. externally) creates natural conflict. Workers will tolerate change
in direction from clients better than they do from insiders.
Situation: Revenue for a product and craft business has been slipping. At the same time, their competition has been disappearing. It is clear to the CEO that demand is and will continue to be present because of the market that the company serves. The question is how to maintain the profitability to survive long-term. How do you build in a declining market?
Advice from the CEOs:
The keys to recovery in a business like this will be in two areas: improving sales and increasing margins.
To increase sales the choices are more aggressive marketing and selling to existing customers or creating new markets like previous generations did when they started the business. Consider services that you could bundle with your products to augment the ways that customers use them. It will be the responsibility of your sales and marketing teams to demonstrate these product/service bundles to increase sales both to new and existing customers. This will help to solve the revenue slippage.
The other side is ongoing efforts to reduce cost which will, in turn, improve your margins. Costs can be reduced in creative ways that are not obvious. These include improvements in purchasing, reduction of waste, recycling of component materials, and inventory controls. It will be the responsibility of your production, purchasing and inventory management teams to develop these solutions. Assure that these teams are recognized and rewarded for their solutions.
Look at the segments of your product offering. Are they declining at the same rate or are there differences? This will help you to focus your efforts, as a company, to grow market share even if the overall market is declining.
Other suggestions for increasing sales:
Take advantage of the craft trends. Do this with NEW talent – not tired talent.
Consider partnerships and collaborations.
Set up contests and craft classes.
Look at how other industries promote to the craft industry and follow their lead.
Situation: A company’s sales are bumpy. The CEO thinks that this may be due to a mismatch between products that they offer and their customers’ needs. They currently use online surveys to capture customer needs and input. How do you determine customer needs? How do you find your sweet spot?
Advice from the CEOs:
The most important first step for a smaller and growing company is to clearly identify the customer niche that they serve. This must be a niche where the company can out-serve their competition.
There are two types of niches to consider:
A product/service niche focused on a specific set of products and services – one where you can offer a differential advantage over your competition and become known for this, or
A customer niche – a specific set of customers that you dedicate yourself to serve in a way that provides a differential advantage.
An example of the product model is an individual who started an e-commerce site for lacrosse equipment – products not commonly stocked in sports stores. They offered a wide range of lacrosse products, built an online community, shared articles, etc. and became THE place for lacrosse players to get their equipment.
An example of the customer niche model is to focus on a population and build a concierge or member-only service. The niche here is the buying group. This can be employees of specific companies or government workers as examples. Costco grew using this model.
For an early-stage company, survival is about single pointed focus on that niche where you can provide better products/services or better serve your customers than anyone else. As you grow you can diversify based on the reputation and loyalty that you gained early on.
Look at competitors – how are they gathering customer preference information?
Look at your passion – is it products or people? Choose a niche that fits your passion.
Situation: A company has lost six people since the beginning of year – about 7% of employees. Currently the company doesn’t pay bonuses but increases salaries annually. The CEO has been considering creating a bonus pool, distributed based on performance points earned during the year, and including a component for employee longevity. How does your company award bonuses?
Advice from the CEOs:
There is fierce completion for good software engineers. You will lose people unless you focus on culture and pay bonuses of some sort.
Based on reasons that people left you need to start developing and enhancing your company culture.
Don’t kid yourself. You already have a company culture. Hire a consultant to help you identify it so that you are developing it along lines that you desire instead of by accident.
Make it clear that bonuses are not entitlements but are earned. There should be clear guidance as to bonus criteria.
Check out the following YouTube – “RSA Animate – The surprising truth about what motivates us” to see what motivates knowledge workers who are expected to develop creative solutions. The bottom line is that it is more than money!
An effective bonus program must have a bias toward performance – the metric is key. Be careful about the way you create metrics and incentives and be wary of unintended consequences.
Pay special attention to the quality and skills of your 1st and 2nd line managers.
Besides bonus, equity and culture – plan for 10% attrition. In your industry, this may be the norm.
Situation: A company’s accountants advise them to make distributions for tax purposes. Simultaneously, the company’s future is based on technology and staying ahead of the competition. This requires ongoing investment. Do you focus on taxes or investment?
Advice from the CEOs:
The focus of the answer is distributions and company morale, not tax planning. Think about the impact on the team. Are there considerable differentials in compensation within the company? If so, this may be impacting morale.
Differentiate bonuses from variable compensation. Make bonuses special. This starts at the top. The attitude should be that if someone works hard, they will be compensated. Once bonuses become assumed, they are just regarded as part of the overall compensation package.
Smaller geographical units can help retain a small company atmosphere and drive. As a company grows, similar results can be achieved with Tiger Team projects.
If the organizational structure enables this, foster friendly competition metrics between offices – and publish the results.
One company distributes performance data to top staff – with color-color coded red/yellow/green metrics based on performance. All red and yellow numbers require an explanation. The company has seen a significant reduction in red and yellow metrics since they started this.
At company meetings – publicize and recognize top 10 performers in various areas. Recognition boosts morale.
Company events boost teamwork and morale. These may include company barbeques, in-house cooking shows created and run by staff, and quarterly outings – bocce ball, tubing, sailing on the Bay.
Growth is accompanied by change. When a company starts it’s a mission. After 15 years it’s a job. This is a function of growth, and it takes ongoing creativity to keep individual employees excited about their job and role.
Situation: A company recently changed their BHAG (Big Hairy Audacious Goal) to focus on premium customer acquisition, but as a small-to-medium sized company has a 3-year focus instead of the typical 10-20 year focus of a larger company. They want to make this a company-wide effort. How do you make the most of changing your BHAG?
Advice from the CEOs:
First, it is measurable and specific – grow to 10 times your premium current customer base in 3 years. Your marketplace is changing quickly, so a shorter-term BHAG makes sense. Call it your 10/3 Program or 10/3 Challenge.
Is it too shallow? No – this is something that people can rally around. It represents significant company growth.
What happens when you achieve the goal? Celebrate in a big way, and then set the next BHAG.
How do you create excitement? Every time you hit a milestone, bring in pizza, or conduct a special event. Celebrate.
Success = Change. What does that next milestone mean for the company and your capabilities? This isn’t just about new clients, but also includes scaling your delivery systems and customer service. Rally your non-sales staff around these important tasks.
Create milestones not just around sales numbers but also around timelines. Tie incentives to achievement of BHAG milestones.
Conduct a company meeting to announce the BHAG, and announce progress in future company meetings.
Progress against milestones.
Share pipeline data to maintain excitement.
Develop scale-up programs and share progress of non-sales departments as they ramp up services.
Think about building a competition around the goal. As long as this fits your culture it can add excitement to achieving both milestones and the BHAG itself.
Note: The term ‘Big Hairy Audacious Goal’ was proposed by James Collins and Jerry Porras in their 1994 book entitled Built to Last: Successful Habits of Visionary Companies.
Situation: A company produces a high performance product which is priced modestly higher than competing products. They are finding customers resistant to cost increases, even when they acknowledge the advantages of the higher cost product. The company needs to develop a new way to position their product. How do you introduce a product to new customers?
Advice from the CEOs:
Don’t compete directly with existing technology. Position yourself distinctly, as a new solution to address unmet needs.
Sell your solution “for those times when you need to save time.” Once they start to use your product, they will find it simpler and easier to use than the old product and will convert themselves to your product.
Use the pitch: Book an extra client today because this will save you this much time. This plays to customers’ incremental revenue opportunities to justify the cost.
At conventions, conduct contests among attendees – try our product versus your old product. Those who can use it fastest, or below a set time have their business card placed in a jar for an iPad drawing several times a day.
Sell a lower priced “starter” kit – or provide a free sample with easy to follow directions. Once the customer is sold on the product’s advantages they will be less resistant to the modest cost increase.
Focus on specialty functions within larger target clients – the functions that will benefit the most from your product’s advantages.
Situation: A company provides both contract staff and consulting services. They have a large client for whom they provide staff, but not consulting. The client routinely requests discounted rates on contract staff from the company. The CEO believes that the client requests lower rates because they, in turn, offers consulting to their customers, using the company’s staff, and want to offer these services at a competitive rate. How can the CEO better respond to the next requests for discounted rates? In addition, is there a way for the company to market their consulting services directly to the large client’s customers? How do you balance two businesses?
Advice from the CEOs:
Don’t avoid the conversation on your rates. Make sure that your client knows that they are getting top quality services and that this is reflected in your rates.
Make the issue a price / quality trade-off. If cutting costs is important to the client, offer lower quality options at a lower price and let the client decide what will fill their needs. This positions you as flexible and willing to work with the client, without losing margin.
Offer modest discounts for incremental business, but not current business.
Tell the client sooner, rather than later, that your prices are as low as you can make them. Don’t wait until you are in pain.
How can you promote your own business to end customers via the staff that you provide for this client?
Give them business cards to give out that reflect your business, not your client’s.
Provide them with wear nicely embroidered “Company” shirts to wear at work.
Be aware that your desire to approach the client’s customers directly with your services will be a threat to your client and may result in them firing you as a provider of contract staff.
Situation: A company has been approached by a customer with a proposal that the two companies combine. The customer believes that the combined companies will represent a greater market presence than either presents alone. This may make it easier for the combined entity to gain business from larger customers. How do you merge two firms under one umbrella?
Advice from the CEOs:
For a company to merge with a customer is a tricky process, assuming that the company has more than one customer. The merger places the company in competition with its other customers who may respond by seeking alternate providers. If this happens it will create a short term hit to revenue. This possibility has to be modeled into merger financial forecasts.
Different companies have different cultures. This fact is often ignored in merger discussions because culture is difficult to quantify or measure objectively. However if you ask those who have been through mergers, culture conflict between merging entities is most often the reason for their failure.
It may make more sense for the company to focus on ongoing sales to the customer than to entertain a combination that would result in the current owners losing control. In declining the proposal, it is important to emphasize your interest in maintaining a healthy ongoing relationship with the customer.
If the customer offers terms that are appealing, an alternative to a merger is a limited scope joint venture as a trial project to test the viability of collaboration.
Establish with your co-owners a price at which you are willing to give up control. This will help you to refuse offers that are below this price.
Situation: A company is resource constrained and faced with a serious trade-off: do they focus on short term cash needs – immediate product improvements that will speed new product iterations to boost sales; or longer term strategic concerns – assuring that they have good IP protection on their technology before they launch new versions? When you are resource constrained, does it make more sense to focus on initiatives that will quickly produce cash or strategic concerns that will protect your future?
Advice from the CEOs:
Build two timelines – one for shoring up the patent portfolio so that you can safely build and launch new IP-protected versions of your technology and one for quickly completing product improvements to speed development of new product iterations which will generate cash. Assess both the energy requirements and the dollar risks and implications of each timeline. If you do not have the resources to do both in parallel, this analysis will help you to determine your best course of action. The risk analysis of each timeline should take into account what would happen if another company were to duplicate your technology and get to market with improvements before you do.
As a compliment to the above exercise, ask what happens if I don’t do either A or B? Do a SWOT and investment analysis on both. Which is the greater risk – launching with insufficiently protected IP or risking not being first to market?
These analyses will help you assess whether it may be feasible to accomplish part or all of either task with dollars in lieu of your own resources.