Situation: A company is launching a new service – using existing technologies to address a new market. The CEO is curious as to whether it makes more sense to create a separate firm or corporation, a division within the current structure, or a new brand to take advantage of this opportunity? Do you launch a new brand or a new company?
Advice from the CEOs:
Because you are utilizing an existing process in a new market, don’t create the additional conflict or complexity that you might by splitting this into a separate entity just yet. Utilize the collaborative talent within the company to create a new brand rather than a new division or corporation.
Adding the additional overhead, accounting and other complexities of a separate entity is overkill – start it as a division or a brand.
Use this as an opportunity to grow your overall company brand. Create a series of icons to represent the company’s various capabilities. The icons will also help you to describe the range of capabilities of the company to prospective clients.
The market which you are addressing is early stage. By developing this new market as a new capability of your current well-respected brand, you have the opportunity to become the category leader.
When another CEO created new capabilities as extensions of existing technology he followed the following route:
Create a sub-brand as you develop and start to develop the new capability;
If it is successful and grows, develop it into a division;
If the capability grows to the point that you attract and decide to take outside funding to accelerate growth, create a separate company so that you don’t give away ownership of the parent company.
Think “effective vs. efficiency.” Start with efficiency. Add effectiveness (dedicated people) as opportunity proves itself out.
Situation: A company will be losing a client in the near future. However, the client is still buying from the company as sole source supplier while they develop alternate suppliers. Should the company raise prices, and if so by how much? Is it timely to raise prices?
Advice from the CEOs:
A factor in this decision will be your history of raising prices in the past. If you have increased prices to keep pace with inflation and your costs, look at the frequency and magnitude of these increases. Provided that the increase that you are considering is not out of line with past practice, it should not come as a surprise to your client. If you have not raises prices in the past, be prepared for push-back.
However you decide, be sure to maintain the relationship. You have a long relationship with this client and you never know what their future needs will be. As to the amount of the price increase, if they are reducing the volume of their purchases, you can raise your prices by 10-20% based on the loss of volume to cover your overhead.
Be prepared with logical arguments to explain the price increase to the client.
If your discussions with the client’s representative have become tense, it may be better to have someone else within your company lead this discussion. It’s OK to tie the emotional component – having to lay-off employees, etc, – into your story.
If you have an advocate within the client company, involve them in the discussion and give your advocate the ammunition that they need to support your case.
Adjust your staff and costs to fit the new reality.
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?