Situation: A company lost money last year, but turned the corner with a profitable final quarter. One of the company’s divisions continues to lose money, though the losses are small compared to the total picture. The CEO is considering cutting this business. What factors should the CEO consider in making this decision?
Advice from the CEOs:
What expense factors contributed to the loss?
The biggest factor was allocation of vehicle and space expense. This division has seasonal revenue but carries the allocated expenses for the full year.
Make sure that your allocated expenses are fair to the business. Do overhead allocations reflect utilization? Unless closing the business eliminates vehicles or space, if you terminate this business these expenses will be borne by the rest of the company.
Study your allocations by shifting the allocation made to this business to other businesses. What is the impact on their profitability?
If you find that the current allocation does not reflect utilization and adjust accordingly, does the business still lose money?
If this division covers its direct expenses along with most of its allocated expenses, a small loss in this division may be preferable to a reduction in profitability of other businesses from closing the division.
How strategic is this division to the overall business mix?
Is this business essential to your product/service mix or just a customer convenience? If you terminated the business will customers be upset?
Do competitors offer this service, and would you be disadvantaged by discontinuing it?
What are the alternatives?
Can you raise prices to increase profitability and refuse business that does not meet this pricing?
Can you restrict the offering to less price sensitive customers?
Can you refer customers to other vendors or sub out this business?
Can you reduce the scope of the offering while adjusting pricing to enhance profitability?
Can you source other labor alternatives to reduce cost?
Situation: A company is considering a merger. The other firm competes with customers who account for 25% of the company’s current revenue. How do you maximize the value of this merger to the company while mitigating the negative impact on current business?
Advice from the CEOs:
The maximum risk from the combination is loss of 25% of current revenue. The merger makes sense if you believe you will gain upside which more than counters this risk.
Both companies have brand equity. Maintain both brands and to continue to promote them. Maintaining both brands will buy you time to replace business which is potentially at risk.
Talk to customers and get their perceptions of the pros and cons of the potential combination. Ask about any concerns that they may have. Understanding the pros, cons and concerns will help you to mitigate negative fall-out.
Legally, in a 50/50 split, the Chairman will call the shots. You will have little recourse to counter the Chairman if he decides to fire you. This individual has built his company through previous mergers. Visit and break bread with those who were principals of these companies at the time they were merged or acquired. This will tell you a great deal about the individual with whom you entrusting your future. You will also learn what the others did during their mergers to help plan your own moves.
Give yourself a back door or Golden Parachute after six months if the merger does not go as you anticipate.
Situation: A mid-sized company has learned that a much larger company is entering their geography and market niche. This company is known to enter new markets with a low pricing strategy to “buy” market share. How do you respond to significant new competition?
Advice from the CEOs:
Accept the fact that you will lose some business; particularly from customers who driven more by price than quality and service. The flip side is that these customers are likely not your best customers.
Research the reputation and business practices of the new entrant in their traditional territory. What is their reputation? What are their weaknesses? Do your homework by networking with their current competitors and customers.
Take a lesson from those who have survived a move by Walmart into their territory:
Boutiques survive Walmart – especially those that focus on personal service. Upgrade your customer base based on personal service.
Use your knowledge of the marketplace and your long term relationships to your advantage – including your reputation with existing customers when going after new customers.
You may remain more profitable than the larger company, on a per transaction basis, based on your knowledge of the territory or business niche.
Don’t assume that all large companies are Walmarts. Walmart has a unique set of talents and a tightly controlled process. This may not translate to other markets – especially those involving personalized service.
If you are a family business, consider promoting your “old world skill” and established reputation and expertise.
Key Words: Competition, Geography, Market Niche, Walmart, Price, Personal Service, Reputation, Contacts, Boutique, Profitability, Family Business
Situation: The Company sells customized products and pricing has been per product/per customer. A large client has proposed to purchase product rights across a number of products and uses. The technology is early in its expected 5-year life span. How should the Company set pricing to this customer?
Advice from the CEOs:
Start with a series of questions:
What is the value of your technology to the customer?
How much competition do you face?
What other solutions are available to the customer?
Based on this framework, ask contacts within the customer company open-ended questions that will reveal what is important to them including:
Planned use of the technology, and
Any protections that they seek.
You need to understand these before you can make decisions on pricing.
There are several pricing scenarios:
Set up a scale with a declining pricing driven by volume.
A large lump sum payment now, non-transferable if the customer is acquired by another company.
A large annual fee to cover a preset number of uses and volumes, with small increments for additional purchases.
The final arrangement will depend on the priorities of the customer.
Find out what the customer is willing to pay, but you set the terms.
Ask what guarantees they desire to protect their position. This includes:
The customer’s key risk factors.
Whether they want exclusive or usage rights. Exclusive is worth more.
Interview with Naeem Zafar, President & CEO, Bitzer Mobile, Inc.
Situation: Starting a new venture is a daunting task. You must determine market need and land your first few key customers on tight timeline and budget. What are the most important foci for the start-up CEO?
Advice from Naeem Zafar:
The answer lies in what I call the Three Clarities.
Clarity #1 – Deep Knowledge of Customer Pain Points
The fundamental point is that your eventual success is not about your technology – it’s your ability to understand and address the needs of your customer.
Research and talk to potential customers. Ask them about their pain and problems (and not about your product). What makes their job or their lives difficult? Learning these facts takes time, patience, persistent questioning, and open listening both for what they are saying and what they are not saying.
Once you have a clear idea about their need and can succinctly define it, you must determine whether your capabilities can address the customer’s need.
Clarity #2 – Understanding the Purchasing Behavior
Once you have identified your target customer, their need and your ability to meet that need, you must understand their current purchase behavior.
Have they ever bought from a startup before? What happened when they did? Are they happy or unsatisfied? Where are the gaps in satisfaction?
Particularly for a start-up with limited credibility, it is critical to identify those purchasers who will take the risk to buy from a new company.
From what you find, determine how you will frame a personal relationship with the likely buyer – how you will frame both your solution and the buying experience – and build a psychographic of the buyer so that you can quickly determine likely customer candidates.
Clarity #3 – Understanding the Decision-Maker’s Sense of Urgency
Who makes the purchase decision? In B2B sales is it the CEO or someone further down the organizational chart? Who approves the purchase budget?
Why now – do they have their ”hair on fire” so a decision must be made now?
The essential question is: what are the alternatives to not having your solution?
Interview with E.J. Dieterle, President & CEO, YES Partners, Inc.
Situation: As corporate wallets start loosening up, companies are looking at market expansion opportunities. International expansion is one alternative. In the past this was done largely by sending Expats. In more recent years there has been a trend toward hiring locally. How do you find the right talent locally?
Everything starts with the basics – a good job description.
Finding people is easier these days with social networks like MySpace, Facebook, LinkedIn, Xing, hi5, Spoke and Plaxo. However, finding the right people remains a challenge.
Invest time and effort to research your target market.
Which country is a market or has the most likely prospective clients?
What is your competitive advantage there?
For a hiring company without an existing presence in the local market it is also a challenge to convince good local candidates that yours is the right company to join. It is important to understand the local business culture and values, and also to offer career-paths to qualified candidates.
Don’t assume the need for multiple offices as you start. You can start with a highly mobile person working from home who knows the local language(s), customs, and who already has contacts in your target market.
It is often assumed that it takes one year or more for an Expat to be efficient locally, and that hiring locally often accelerates first years’ startup-time. However, the local person has to understand and “fit” into the corporate/head office culture.
Working with an international executive search firm to find qualified local talent with the right fit to your business and needs can greatly improve your odds of success.
Interview with Dirk Boecker, President, Toto Consulting
Situation: Through the technology revolution in medical diagnostics, products in some markets have become commoditized. For example, a proliferation of low cost blood glucose monitoring products has driven down price while increasing incidence and prevalence of diabetes has driven up demand. How do you create new value in a commodity market?
Taking a broader view of the market is key. Analyze the entire customer experience, not just your segment. Assess markets and industries surrounding your primary offering and look for un-served interfaces and gaps.
Where you find opportunity, elevate your offering to the next level by integrating your product as component. Create a compelling advantage but avoid unnecessary adaptation of your existing product or service.
Blood glucose monitoring is used to support insulin and diet adjustment in diabetics, a disease which is accompanied by a number of complications and complex to manage. Can your monitoring technology become part of a broader service offering, or even part of a personalized solution? Can you move higher up in the value chain?
Begin your transformation at the first signs of commoditization. Being first brings a huge advantage.
Once you identify an unmet need, consider working with related industry groups to create new standards addressing these gaps. Implementing the resulting standards will give you a new competitive advantage against your competitors.
Find other applications for your product or service. Consider new applications for the components used in your current offering. Find new customers outside of your historic customer base. Consider alliances with other companies experienced with the new opportunities you find.
Within your own organization begin a process that routinely analyzes the customer experience and general needs beyond your current offering. Working with an outside consultant can help by adding a new perspective.
Situation: The Company has had success with a few large clients but wants to expand their customer base for long-term growth. How do they differentiate their products in what is perceived as a commodity market?
Advice of the CEOs:
One company created differentiation by getting to know everyone in the business – building long term relationships, based on reputation and trust.
They spent time up front understanding the needs of customers that they wanted to develop.
As opportunities arose, they built relationships and asked questions to clearly define client needs.
While it takes time and patience, the objective is to be able to say “We know your business” – with credibility.
Study the business, sector, and customers that you wish to serve.
Leverage the success that you have had with large customers. Talk about how you helped subunits within your large customers. This makes a big customer seem more like a collection of small customers similar to your prospects and makes your experience relevant.
Let prospective customers know, when appropriate to the situation, that you are hungry and will go the extra mile for their business. Simply out-serve your competition.
Learn who currently serves your prospective clientele. Study these competitors, their strengths and weaknesses. Talk to their customers – learn what they love about competitors’ service, and what they would like to see changed. Find the holes in what they provide and fill these holes with a better offer.
Look for and encourage repeat business and references to new business.
Situation: The Company is considering options for both team and individual recognition. What have other companies found to be effective?
Advice from the CEOs:
One company has foremen compete on project quality, cost containment, and other measures. Bonuses are based on a mix of team performance, project difficulty and individual initiative.
One company uses year-end bonuses, but places more emphasis on frequent small recognitions: pedicure, manicure, going out for a meal on the company – things that let the employees know that they are appreciated on a regular basis. Any incentives paid are based on a mix of individual and team performance.
One company has completely eliminated bonuses. Salaries were raised to make up the difference, and individual incentives are created and paid during the year. Incentives reward specific accomplishments which are highlighted when the incentive is paid. Incentives are a mix of team and individual performance.
One company is very generous with bonuses – $5K to $10K at a time at the discretion of the CEO. These are paid face to face by the CEO and the individual is congratulated on their performance. However, the bonus recipient also signs a paper pledging not to talk about the bonus. If they tell others about their bonus, they are eliminated from the bonus pool. The company also uses publicly announced annual awards, performance-based monthly awards, shirts, etc. that are presented at company meetings. Interestingly, the smaller rewards and public recognition appear to have the most impact.
Key Words: Recognition, Bonus, Reward, Public Recognition, Effectiveness. Competition, Incentive