Situation: A company that manufactures and sells components to a large corporation has a dilemma. This customer is throwing more business their way, under favorable terms. At the same time, the company wants to diversify to reduce exposure to a single large client. The challenge is that alternate opportunities are not as profitable as those from this customer. As the CEO puts it, should they use limited resources to chase copper when gold is readily available? Do you diversify or optimize current opportunities?
Advice from the CEOs:
It is always dangerous to have all your eggs in one basket. Dedicate resources to develop alternative business opportunities, knowing that at first the new opportunities will not be as appealing as current opportunities with this large client.
Think back – has business from the large customer always been this profitable? In developing new business opportunities, one often must pay dues to develop opportunities for future profits.
Invest in business development to find new business opportunities outside of this large customer. Do this sooner rather than later. One never knows when a large customer will change strategic direction.
What are the company’s options and choices?
Stay the current course and accept the risks of this strategy or diversify.
Put some resources into studying options to diversify. If there is no gold out there, then maximize the cash from the current situation and invest it in something that will provide a satisfactory long-term return. If the large customer closes the door, then just shut down.
How could the company diversify? Geographically? Additional products to other customers? Put together a diversification plan and test it for feasibility.
Make sure that company’s and owner’s priorities are clear and not in conflict with each other.
What is the optimal size of the company?
How many customers are needed to support optimal company size and how much diversification is required for this?
What is the owner’s exit strategy and timeline?
If the objective is to stay small and exit in one or two years, why chase diversification? Think about what would be appealing to a potential acquirer. Perhaps it is just access to this large customer.
Situation: A component company is struggling to set financial goals. Its sales are dependent upon purchases by large customers whose orders are influenced by the economy and demand for their products. How do you set goals in a volatile economy?
Advice from the CEOs:
What are the principal drivers that define the market? Have they changed? If so, how? Focusing on principal drivers creates more clarity in a volatile economy.
Rather than looking at the company as a producer of components, focus on the critical value add that the company’s products provide to customers. By focusing beyond the product, strive to become a key partner to customers. This can allow you to develop retainer contracts with key customers rather than working solely on a project basis.
The Holy Grail is predictable recurring revenue, for example on a service contract basis. The establishment of retainer contracts can help the company move in this direction.
The company’s customers have increasingly placed rush orders because they have been hesitant to commit to steady production. This, in turn, increases the costs to the company because they are being asked to alter their production schedule to accommodate rush orders. It’s fair to publicize and charge expedite fees for rush orders, just as delivery companies increase their charges for expedited delivery. Expedite fees will cover the cost of altering production schedules and can also add cushion to company profits.
A portion of the company’s business is supplying consumable parts that the OEM marks up and distributes to end users for their equipment.
As an alternative look at parts manufacturing/sourcing, storage and distribution direct to the customer as a separate business opportunity and take this over from the OEM – it may be a nit to the OEM that they would be willing to give up for a reliable service alternative.
Situation: A company was created from IP originally developed by the founder at a large corporation that was not interested in commercializing it. The new company has now become successful and visible, with the large corporation as an important partner. The CEO wants to make sure that she has all bases covered to secure the future of the new company. How do you manage a key partner relationship?
Advice from the CEOs:
There must be clear agreement between the company and partner on ownership of the original IP – a legal document signed by both parties. You can bet that should a conflict arise, the lawyers representing the larger company will argue that their client owns the IP. Once this is secured, focus on developing and licensing software that you clearly own.
Develop contingency plans should the key partner decide to exit the business on which your relationship is based. Identify what other companies could replace lost revenue. Start to build these relationships.
If the partner helps to fund current development, take the money that you save and develop your own IP, independent of the partner relationship. As an alternative, at least develop critical components of the software as your own IP, without using the partner’s funding.
This will free you to develop other customer segments to broaden your business base.
What concerns does the partner have? Strategically, large corporations can be uncomfortable if they feel dependent upon a much smaller company. There are two things that you do:
Makes a concerted effort to assure that you are essential to the large corporation’s overall business.
Make change as painful as possible.
How would you get paid if the large partner exited the relationship?
Negotiate a contract with a 2-year window to any change that partner wants to make. This will provide you with the room to develop new clientele should the partner exit.
Have contingency plans to rebuild capabilities that might be lost and sell it to other clients.
Customize your software by client. In the process, you will develop new methods to keep your edge over competitors.
Keep critical parts of your processes “manual” so that they are essentially trade secrets and not easily replicable if the partner were to try to take over the IP.
Situation: A company sells specialized components to a large manufacturer. The manufacturer is building a new product and, for this product, is requiring that all suppliers be approved suppliers. The company sells other products to this manufacturer and is in process of becoming an approved supplier, but the manufacturer wants to start using the company’s components for their new product now. As a work-around, they have asked the company to teach someone else their IP until they are approved. Would you share your IP with another company? How important is it to protect your IP?
Advice from the CEOs:
This is a creative request from a large company to a smaller supplier. Absent a legal requirement that suppliers must be approved – not the case here – they are simply trying a bureaucratic ploy to get you to release your IP. Your component is necessary to them and they can’t get an equivalent component from anyone else. If they want your component for their new product, and want to release the new product on their internal timeline, insist on a waiver for the new policy until you have become an approved supplier.
Stand on principal. This is your IP and it is proprietary. If another supplier, a potential competitor, has the IP to do what you do, you don’t need to train them. If they need your IP to make the components you need to protect it.
Ask the manufacturer to put you on the fast track to approval supplier status. This is faster than teaching someone else your process.
Escalate this within the customer company until you find an audience.
Bottom Line – don’t give away your secret sauce. This request is unreasonable. Unless, of course, the other company is willing to give you satisfactory compensation for your IP.
Situation: A company has a long standing relationship providing an exclusive product to a major customer and has a negotiated price and volume contract for this product. The customer changes product design every few years, and the company is the favored supplier of certain components. The customer’s purchasing agent has asked to renegotiate price on the current contract. The company wants to maintain a good supplier relationship with the company, but doesn’t want to lower the price on its product. How should the CEO work with the purchasing agent?
Advice from the CEOs:
There are two distinct opinions from the group:
You have a contract in place for volume and price. If you yield on price now just to assure the remaining business on the current contract you are saying, in essence, that future pricing contracts are also negotiable even after the contract is negotiated and signed.
On the other hand, if you know that there is a model design change in process and want to assure a good ongoing relationship with the company you may choose to yield a bit on price for the remainder of the current contract.
The choice between these two will be a gut choice based on your relationship with the customer as well as your past history with the purchasing agent.
You might want to try a creative alternative. Check with your own component vendor and inquire about pricing if you place orders for your own remaining components on the current product today versus in several weeks. If there is a discount for placing the order today, call the purchasing agent and tell him that if he orders the remaining product on the current contract today, you will pass on the discount that you receive from your vendor. If you don’t get the order today, then you will lose the discount, and there may be a delay on your being able to deliver the remaining parts under the current contract.