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’s primary objectives are to hone their business model and establish their first satellite office as a model for future expansion. An opportunity has arisen from a trusted source that could rapidly expand both business and opening of satellite offices by providing service to a single national client. How do you evaluate the tradeoffs between these options?
Advice from the CEOs:
What is the impact of this new option on client diversity? One of Porter’s fundamentals of strategy is to not have too much of your business dependent on any one customer.
What is the impact of this opportunity on your personnel, time and resources?
Are there areas in which this opportunity will save time and resources, for example by consolidating some back-office functions like billing and accounting?
If this opportunity will take an inordinate amount of time and focus, consider starting a new entity to take advantage of this opportunity.
Use a decision-making grid to evaluate the new opportunity versus your present strategy:
Identify the most important factors of both your current strategy and the new opportunity.
Weight the importance of each factor as a percent of with the total adding up to 100%.
Rank each opportunity against each factor.
Multiply the factor ranking times the weight for each ranking.
Sum the weighted rankings.
See whether the summed rankings support of contradict your gut feeling, and further analyze depending on the result.
Once you have identified the risks in this proposition, determine contract provisions that will reduce risks to acceptable levels. If the potential client is unwilling to yield enough of these points in the contracting stage to acceptably mitigate your risks, then walk away from the deal.
Don’t risk your entire company for one opportunity. Financial rewards are only a scorecard.
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.