Situation: A service company has developed the capacity to produce and sell a product. The CEO is considering two options for this new opportunity: create a separate entity for the new business or run the businesses in parallel under the current umbrella. How do you best exploit a new opportunity?
Advice from the CEOs:
Option 1: Create separate entity for the new business while the existing business continues in parallel.
How big is the potential win? The current company competes successfully for about 10% of the market. The new capability would allow the company to potentially compete for 100% of a larger market.
How different are the two opportunities? The current business requires specialized talent – it is a low volume, high margin business. The new opportunity is the reverse – high potential volume but lower margin. It is a more generic market with fewer specialized needs.
The separate entity option provides the most flexibility. The current model already functions well. A spin-off provides an additional option without losing what already exists.
Bring in another individual to develop and run the new entity. It’s a different game and requires a different focus. However, it will be a great opportunity for the right person.
The spin-off model will be more sustainable under separate management than under the current company.
Option 2: Operate both businesses under a single entity.
This option looks like a double compromise – it alters both the company’s current strengths and the fundamental business model.
A long-term alternative is to look for a financial acquisition for the current company. It produces good net margins, has good cash flow, a and spins off cash. This can be valuable to a financial buyer.
Situation: The founding
CEO of a technology company is considering options for the future. The company
is doing well, with two options for future development either within or outside
the company. How do you choose between strategic options?
from the CEOs:
expertise is less important than business experience, P&L experience, and fund-raising
success. A diversified background and successful experience as a CEO are as
important as specialty industry experience.
to pursue all options for the time being. See how the new opportunities mature
before making final choices, and either split time between the options or
assign good managers to oversee each.
agreements should be based on cash investment of the parties – not time and
#1 – Focus on the primary company.
challenge is that most of the Board members just see the numbers, not the
dynamics of day-to-day operations. They don’t know the CEO’s contribution.
that the Board understands the CEO’s contribution and is rewarding the CEO appropriately.
#2 – Focus on New Opportunity #1.
this option more like a product or a company?
this option as a product incubator rather than a single product company –
producing and spinning off a series of ideas for development.
can be done either within the primary company or as an outside effort.
#3 – Focus on New Opportunity #2.
development can be self-funding. Compared with manufacturing, software is
inexpensive to develop and requires little investment to scale and sell once
the code is written.
trick is to rigorously focus on market opportunity while minimizing cost.
staffing commitments. Use scarce resources to lock up irreplaceable
capabilities. Hire or offer equity only for significant contributions such as
IP development. For labor, use consultants, independent contract arrangements,
or look for what can be outsourced.
Option #2 this can be done either within the primary company or as an outside
A company is moving from sole focus on servicing a market to a split focus
including developing and marketing their own products. This is a significant
transition for the team. What is the best way to organize this effort? How do
you manage a business transition?
from the CEOs:
the company’s financials are great for their market, cashflow may be
insufficient to fully fund a development company.
development of new products can create conflicts if it creates competition for
resources between internal and external projects.
avoid this, create an independent company or entity – in a separate location.
Seek outside funding whether bank, angel or partner financing. The independent
entity can then buy resources from the primary entity at competitive rates.
years ago, another CEO utilized the strategy just described. The important
that venture is properly resourced.
that there is a balance between proven structure and creative application
best resources available at same rates that key customers pay.
free guidance but not free services – peer reviews are key.
third CEO had an opportunity to open a new business using the spin-off model.
allowed infrastructure sharing – with proper compensation and incentives
both entities were successful.
Properly implemented, this model works.
are four aspects to the challenge.
business plan for the new venture must address all four.
internally (vs. externally) creates natural conflict. Workers will tolerate change
in direction from clients better than they do from insiders.
Situation: A company wants to up its game by focusing on service. They are evaluating different options to provide customized services to gain a sustainable differentiating advantage over their competition. How do you enhance your customer service model?
from the CEOs:
the gaming industry one CEO sees an effective model focusing on higher level customer
service. The top games have allowed user customization using generic
customization tools. This allows the provider of the tool kit to serve a larger
number of users using a single tool kit to provide a wide variety of gaming
example from the gaming industry focuses on middleware developers. These
developers create an interactive knowledge base for customer self-service. The
knowledge base is monitored by the host company, and misleading or potentially
harmful input is excluded. The benefit is that this enlists clients to provide
their input on customer service as well as product development.
CEO sees this as a useful way to drive down customer service costs by providing
more tools and fewer bodies to perform the customer service task. The model’s
objective is for the customer not to need personalized service, but to be able
to develop solutions on their own using a flexible took kit. The host company
gains additional advantage because their user agreement allows them to take the
best models used by clients to spark their own product development.
fourth CEO sees lasting value in developing close relationships with customers.
They have developed tools that allow the customer to solve simple customer
service tasks but require company assistance for the more sophisticated
solutions. The company, in exchange for this added expense, learns from the
Situation: A company has multiple locations from which it both sells products and provides services. One location has been in place for several years and produces good revenue but consistently fails to be profitable. The CEO has met with the managers in charge of this location and has set broad objectives to demonstrate a trend toward profitability. However, she is concerned that these objectives won’t be met. How do you manage for profitability?
Advice from the CEOs:
To be effective objectives must be specific, measurable, and timebound. In addition, there must be clear consequences for failing to meet objectives.
If a business is not covering its own costs, there are three alternatives: increase prices, reduce costs, or both.
Calculate the revenue impact of a 1% cross-the-board price increase at the location or across the company. Is this enough to cover the loss? What about a 2% increase? What is required to produce profitability?
Historically, have the location managers been responsible for business results? If not, does it make sense to continue with these managers and to expect different behavior or results?
While the managers may be well-intentioned, do they possess the necessary business skills? Would training or education assist?
Once objectives are set and incentives are changed to make the managers’ pay dependent on profitability, the CEO may be surprised at their ability to comprehend and tackle the situation – with the CEO’s oversight.
How do you change pay and incentives without sending a negative message?
A person who is paid hourly has the incentive to maximize hours worked, not productivity during hours worked. If the manager is shifted to salary at the same level he receives now or lower, with the potential to more than make up the difference through regular incentive bonuses, it becomes easier to direct him to make efficient use of his time.
How do you change the roles and focus of the managers?
The customer development manager is the only one who can impact revenue – by bringing in more business. Bonuses are based on both new business acquired and total revenue received.
The operations manager cannot contribute to revenue within his current responsibilities but can look for places where the cost of operations can be reduced. Bonuses are based on cost savings achieved.
Situation: A company has built a solid core business and wants to expand its product portfolio by adding new business. Core functions can serve both existing and new business, reducing overhead on individual businesses. What pitfalls must the company avoid? How do you balance core and new businesses?
Advice from the CEOs:
New business activity cannot impact core business. The core business is the company’s bread and butter. It is important to make this clear to both employees and clients and to structure the handling of new business opportunities accordingly.
From a staffing standpoint, new business opportunities cannot impact marketing, service and operations staff supporting the core business. New business development activity and operations cannot result in a pull from their focus on the core business. This separation may be facilitated by placing the staff supporting new business in separate facilities, or in an area separate from the staff supporting core business.
In the case of support functions that will serve both existing and new business, recruit and hire staff to support the new business to assure that both existing and new business receive proper support.
Hire a new person, one with experience and contacts, to develop the new business opportunities. Look for a sales person who can bring in significant new business. This will pay for the individual quickly.
How does leadership communicate these changes to staff?
Meet with key managers to identify potential concerns. These may include impact on company culture and client focus. Use the responses gathered to develop a communication plan to allay employee concerns.
As new business opportunities are added, it will be necessary to bring in new, experienced personnel. Previously, the company brought in experienced personnel to build the current business. Be open and up-front about this and explain that as the company grows there will be new opportunities for existing employees.
The company’s objective is to improve the quality of the organization and to raise the boat for all. Current owners and managers will automatically benefit from the efforts of new people to expand the business.
Building new business opportunities as separate businesses diversifies the company and reduces the risk of overdependence on existing clients and key vendor relationships. This enhances the job security of current employees.
Situation: The CEO of a product and service company has seen her company struggle for several years. While the overall market has turned around, her company has not. She is tired of barely staying afloat and not making the kind of money that she a decade ago. Is the glass half-full or half-empty?
Advice from the CEOs:
What keeps you from hitting the numbers? Creating a forecast, budget and objectives allows you to establish a reward system for meeting and exceeding objectives. Once there is an upside, then not hitting the numbers means that a manager misses the upside and the financial rewards that accompany this achievement. This is often consequence enough, particularly if others are hitting their numbers and getting performance bonuses.
The glass is half-full. The past few years have been difficult. Review what the company accomplished during an extended recession. Look at how the company fares versus local competitors. Review positive changes that have been made and take credit for these. This will provide energy to move forward.
Given the company’s successes, sit down with the management and show them what the company has accomplished. Celebrate. Use this opportunity to set goals for next year. A good place to start is to set a bottom line profitability objective before taxes.
To be a great manager requires more than just a revenue and profitability target. People rally around a vision and a culture that they aspire to and want to enjoy. The role of the leader is to create this vision and culture. Do this, and revenue and profitability will take care of themselves.
Two more thoughts on whether the glass is half full or half empty to check your bearings:
What is your passion? If you love what you’re doing, what else would you do?
If you were doing something else, would you be making more money or enjoying more success?
Situation: A company is considering purchasing a line from another company to complement its existing product line. They would split commissions with the current owner, and gain an additional employee with knowledge of the products to be acquired. The purchase would add to the company’s offering, as well as rights to additional products. The CEO sees this as a low risk move. How do you evaluate an acquisition opportunity?
Advice from the CEOs:
In evaluating a commission split opportunity, will the commissions that you would receive exceed the cost of both the additional employee which you will add, plus the support that it will require to maintain the new business? Do the new commissions cover the anticipated costs, plus a reasonable profit?
Have you vetted the numbers to demonstrate that this purchase provides a suitable return on investment vs. other potential investments that you could make? Is the marginal revenue that you will receive greater than the marginal cost that you will bear? Is the ROI of the new line greater than your cost of capital? If not, what can you do to improve the return?
Looking at your current operations, do you have your existing shop in order? Have you calculated the metrics that will allow you to understand, where you’ve been, where you are, and which provide a clear vision of where you want to go? If not, the question is whether you are ready to take on another line.
The bottom line question is – how do you know that this acquisition is the best use of your funds?
Situation: Revenue for a product and craft business has been slipping. At the same time, their competition has been disappearing. It is clear to the CEO that demand is and will continue to be present because of the market that the company serves. The question is how to maintain the profitability to survive long-term. How do you build in a declining market?
Advice from the CEOs:
The keys to recovery in a business like this will be in two areas: improving sales and increasing margins.
To increase sales the choices are more aggressive marketing and selling to existing customers or creating new markets like previous generations did when they started the business. Consider services that you could bundle with your products to augment the ways that customers use them. It will be the responsibility of your sales and marketing teams to demonstrate these product/service bundles to increase sales both to new and existing customers. This will help to solve the revenue slippage.
The other side is ongoing efforts to reduce cost which will, in turn, improve your margins. Costs can be reduced in creative ways that are not obvious. These include improvements in purchasing, reduction of waste, recycling of component materials, and inventory controls. It will be the responsibility of your production, purchasing and inventory management teams to develop these solutions. Assure that these teams are recognized and rewarded for their solutions.
Look at the segments of your product offering. Are they declining at the same rate or are there differences? This will help you to focus your efforts, as a company, to grow market share even if the overall market is declining.
Other suggestions for increasing sales:
Take advantage of the craft trends. Do this with NEW talent – not tired talent.
Consider partnerships and collaborations.
Set up contests and craft classes.
Look at how other industries promote to the craft industry and follow their lead.
Situation: A company’s sales are bumpy. The CEO thinks that this may be due to a mismatch between products that they offer and their customers’ needs. They currently use online surveys to capture customer needs and input. How do you determine customer needs? How do you find your sweet spot?
Advice from the CEOs:
The most important first step for a smaller and growing company is to clearly identify the customer niche that they serve. This must be a niche where the company can out-serve their competition.
There are two types of niches to consider:
A product/service niche focused on a specific set of products and services – one where you can offer a differential advantage over your competition and become known for this, or
A customer niche – a specific set of customers that you dedicate yourself to serve in a way that provides a differential advantage.
An example of the product model is an individual who started an e-commerce site for lacrosse equipment – products not commonly stocked in sports stores. They offered a wide range of lacrosse products, built an online community, shared articles, etc. and became THE place for lacrosse players to get their equipment.
An example of the customer niche model is to focus on a population and build a concierge or member-only service. The niche here is the buying group. This can be employees of specific companies or government workers as examples. Costco grew using this model.
For an early-stage company, survival is about single pointed focus on that niche where you can provide better products/services or better serve your customers than anyone else. As you grow you can diversify based on the reputation and loyalty that you gained early on.
Look at competitors – how are they gathering customer preference information?
Look at your passion – is it products or people? Choose a niche that fits your passion.