A CEO is concerned that too much of her company’s business is focused on two
few customers. The loss of a single large customer can potentially mean a significant
hit to revenue and profitability. How do you diversify your customer base?
from the CEOs:
If current cash flow is good, the company should consider purchasing diversity by buying a company.
Consider acquiring a supplier that is in good shape, but with lower margins. They will have the infrastructure to run their own operation, and the purchasing company will have the additional profitability to make the combined entity more interesting.
Given the company’s existing cash generation potential, there are creative ways to finance such an acquisition.
Why is this a good strategy?
Purchasing another company can instantly expand the customer base.
Diversifying the company opens additional options to build long-term sustainability.
A purchase strategy can bring in a ready-made and smoothly running infrastructure in the form of the purchased company.
Diversification can boost the value of the combined company on a more diversified business base. It might allow the company to combine low volume, high profit lines with high volume, lower profit lines. There are advantages to each of these business models.
Where can such a company be found?
Look both inside and outside of the current geographic base.
A candidate could be a higher volume but lower profit supplier of one of the company’s current customers that does not compete with the company’s current offering. Alternately, look at companies with more diversified customer bases in a related industry.
Look at the niches that the company’s current customers serve.
What similar niches exist? Are there acquisition candidates there?
Look at the functionality that the company’s products add for its clients. In what other industries would similar functionality be of value?
As these questions are asked, look for candidates that have complementary customer sets, customer bases, and geographical reach.
Situation: A company buys several important components from a single US supplier. They are considering an offshore source for one of these components which makes up a large portion of what they purchase from the supplier. Does off-shoring make sense in this case, and how do they mitigate the risk? How do you change suppliers for a key product?
Advice from the CEOs:
The key consideration is the off-shore partner’s ability to reliably make the component at the price promised. If they can, why not outsource offshore?
The decision depends upon two additional factors: the amount that you stand to save by off-shoring your source, and the potential cost to you of inconsistent or unreliable components from the off-shore supplier.
If the cost of failure is high, a modest savings is less valuable. You may want to wait until you have higher volume and higher potential savings before looking at off-shore sources.
In the US, we assume – with some security – that a pilot run predicts a large run. Historically this has not been shown to consistently apply to offshore suppliers.
Can you afford to invest and potentially lose the amount that it would cost you to secure your first production order from the off-shore source?
If the answer is yes, invest the time and effort to visit the supplier, and secure resources to monitor their production – your own or a trusted partner’s. Your presence and interest are very important.
The principal challenge will be quality and consistency of raw materials, and varying age of production equipment used to produce your components.
Are you concerned that your current supplier might cut you off?
The CEO is not sure, but has identified this as a risk.
If this is the case, start now identifying second sources for other components made by this supplier – if only to keep them honest in price, quality and delivery.
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 founder CEO, after many years building a business, has lost the passion that he had early on. He needs to hire someone to succeed him, assuring the ongoing growth and value of the company while minimizing ongoing personal involvement. How does a founder hire his (or her) replacement?
Advice from the CEOs:
When a founder has lost the passion to continue running a business it is time to move on. Passion is critical to meet the day-to-day demands of a business.
Before you start looking, decide whether you will continue to have a role in the business, and what that role will be. Will you remain Chairman of the Board and give up the CEO role? If so, are you ready to let go of the CEO role so that the right person can take it on? Typical company structures for Chairman/Top Manager roles are:
Chairman focuses on growth strategy, select PR and critical relationships.
CEO/COO/GM handles operational planning and day-to-day management.
The candidate that you seek will have the following profile:
Good energy, loves the business, but not ready for the risk of building a company.
When the right person has run the business for you for a few years that person may become your exit strategy.
Go to your next trade show with the mindset to find the right person. Many of the best candidates will be on the trade show floor – now working for someone else, but inwardly looking for their next opportunity.
Spread the news ahead of time that you’re looking. See who seeks you out.
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?