Tag Archives: Component

How Do You Build a New Channel? Four Cases

Situation: A company wants to increase business by building a new channel. The new business is different from the company’s base business, but won’t change the company’s focus on its base business. What lessons have been learned by other CEOs who have accomplished this? How do you build a new channel?

Advice from the CEOs:

  • One company created a new channel without changing the base business.
    • They responded slowly to the opportunity before deciding to change.
    • They needed to change infrastructure by adding more people.
    • They also needed to redefine the offering to meet the needs of new clients.
    • This involved adding additional data which had been accessible previously but hadn’t been presented.
    • At first the hand off wasn’t smooth. Hiccups that could have been foreseen with more planning were extra data fields and rough hand-offs. Future new releases will focus on improved process review and more challenging of assumptions, and more patience in the scoping stage.
  • The second company created a new branch with different products and operations, but maintained one financial and inventory management system.
    • The initial produce was sold and installed, utilizing union labor. The new product is sold wholesale business to businesses and is non-union.
    • After struggling with attempts to house both operations under one roof the new operation was moved to a separate location.
    • This enabled company to set up separate operations and to fully understand the financials of both operations. It also makes it easier to assess the viability of each business and to implement changes in one without disrupting the other.
  • The third company created a new offering to sell to the same customer base, with no change in the back-end systems.
    • The new business created an insurance model for the company’s services as an alternative to the original break-fix model.
    • The two systems use a common sales team, network engineers, and back-end system. Customers choose either insurance or break-fix.
    • The challenge was that the two models need completely different monitoring and incentive systems for the engineers. This took time for development and training.
  • The fourth company created two production operations: turnkey and component.
    • This called for different sales and contracting processes and separate production areas on the plant floor, with clear delineation but using the same back end, financial, and engineering support systems.
    • The component process is short-run, high value, high margin; the turnkey is high volume runs, lower value, low margin.
    • The challenge has been in setting up a new set of contract agreements and monitoring systems to monitor the financial success of the turnkey operation.
  • What is the common thread?
    • Put sufficient time into planning and evaluating options and challenges so that there is a solid understanding of the new channel before starting.

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How Do You Create Larger Deal Sizes? Six Options

Situation: A company has good deal flow, but the CEO finds that margins are significantly increased with larger deals. Larger deals reduce the overhead component, much of which is the same regardless of deal size. The company is dominant in their market and can provide multi-site and multinational services. How do you create larger deal sizes?

Advice from the CEOs:

  • One company with multiple consulting contracts has found that bidding for RFPs on larger projects has opened the door to larger contracts..
  • Another company has looked at cost of sales and its contribution to business wins. .
    • Under 6% was ineffective and over 12% did not generate significantly more business. Their target win ratio is 30%
    • Factors that positively influenced win ratios were positioning the company as the preferred bidder up-front, and avoiding sham RFPs which are already slotted in favor of a competitor that helped to spec the RFP:
  • When bidding on RFPs, if the company will not be the low bidder it is important to identify the critical non-price parameters where the company will offer a differential advantage.
    • Focus on large multi-site or international RFPs which are more likely to be larger dollar RFPs.
    • Look at supply chain management opportunities.
    • Offer to warrant results in exchange for a higher price.
    • Look at system-type opportunities where the company can offer a more comprehensive solution based on its depth and experience.
    • Look for situations where the company can develop an advantaged position.
  • What are the implications of these strategies?
    • It will require retraining the inside sales force to research and qualify RFPs.
    • It will shift the focus to project vs. outsourcing opportunities. The latter are more price and availability driven and don’t play to the company’s strengths.
  • Explore channel sales through the existing partner network.
    • Offer a referral fee to regionals for referring opportunities outside their scope. In return, hire them as subs on the project.
  • Take a look at the big engineering firms who work multinational contracts, and handle their mitigation matters with small teams.
    • Offer them a comprehensive approach that is less expensive, more consistent, and more visible than their current self-service approach.

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How Do You Control Insurance Expense? Four Options

Situation: A CEO has seen the expense of employee benefits, particularly the cost of health insurance, grow higher than the inflation rate in recent years. There are no indications that this will be reduced. Employees appreciate their benefits, and in the current environment the CEO is hesitant to reduce them. What alternatives are available? How do you control insurance expense?

Advice from the CEOs:

  • To control rises in healthcare benefit costs, consider offering high deductible health insurance combined with company contributions to HSA Accounts. This combination can be less than current health coverage and may reduce the cost inflation of these benefits.
  • Another alternative is to raise the deductible on medical insurance provided but cover the deductible differential for employees.
  • Consider a benefits administrator to assist in putting together a benefits package to reduce costs. There are many alternatives available.
  • Another big expense is Workers’ Comp (WC). The group shared strategies to control WC expense. Investigate those that apply to the company’s business model.
    • Make sure that the company is coded in the proper category – if not the company may be paying a higher rate than required;
    • Develop a proactive company safety policy, with documentation – this can gain discounts from some insurers;
    • Industry or trade associations have developed ADR components for association members to help control costs;
    • Investigate eliminating the medical coverage component on auto insurance for company cars that employees use to drive home. This may already be covered by WC;
    • Shop insurance providers for WC coverage – some will quote more competitive rates to get the company’s business;
    • Challenge the amount of WC reserves that are required for outstanding WC cases – the insurers may be assuming an excessive reserve to cover contingencies and charging the company for this excess;
    • If the company’s insurer is maintaining an employee on the WC list pending resolution of the claim for an excessive period, push them to resolve the case quickly;
    • Eliminate optional employees (e.g., officers) from WC coverage.

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How Do You Position the Company for Growth? Four Key Points

Situation: A company is completing the design of a new line of equipment which is expected to drive future growth. An important distributor for a company’s principal product – a consumable – also distributes equipment. The CEO is concerned that this distributor may perceive his new line of equipment as competing with their existing line. How should the CEO handle this? How do you position the company for growth?

Advice from the CEOs:

  • Meet with the CEO of the distributor and ask two questions:
    • Can they sell the company’s new line of equipment, as well?
    • Do they have any other source for the company’s consumable product?
    • If the distributor must rely on the company for the consumable, whether they decide to distribute the new equipment line or not, there should not be any risk.
  • The company has a wonderful opportunity to start doing business in a new way.
    • The company has a proprietary consumable and chemistry/formulation knowledge that will be difficult for others to copy.
    • The company now has knowledge of how to design equipment that utilizes the consumable.
    • Proprietary trade secrets may be more valuable than patents, presuming that the company can keep a lid on these secrets. Coca Cola and 3M have never sought patents on their key products. In a well-managed environment, trade secrets have a much longer life than patents.
  • Think about the sales mix in a new way, one that would address concerns about the annuity vs. capital equipment mix as well as improve overall profitability.
    • Focus on turn-key solutions. Use Hewlett Packard as a model. HP makes the most money selling paper and ink cartridges – annuity products; not from selling printers which sell less frequently than the cartridges. A busy office will spend far more on ink cartridges and paper per year than they spend on printers – and at a better margin for HP.
  • Combine the two prior points to leverage the new model.
    • Lease or provide the equipment at just above cost, in exchange for a contract commitment to purchase the consumable for a defined period.
    • Triple the cost of the consumable over time!
    • This should provide a more profitable and sustainable model. Adjust the cost of the ink upwards so that it pays. On a per-piece basis, the consumable at 3x or 4x current cost will still be a miniscule part of overall product cost. Further, the buyer won’t have to amortize the cost of the equipment over their production, making this an attractive option.
    • Concentrate on equipment design and outsource the manufacturing on a modular basis while keeping control of the one or two most critical components.

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How Do You Respond to a Price Increase from a Supplier? Six Points

Situation: A small company has a parts supplier for product that they sell to their most important customer. That customer’s specs are “copy exact” on components for existing products; also, their new products are usually based on existing components. The supplier significantly raised prices on the parts supplied to the company. How you respond to a price increase from a supplier?

Advice from the CEOs:

  • This is an extremely sensitive situation. One solution is to not to rock the boat. The reality is that the company needs the parts, and it will take a lot of effort to replace them with parts from an alternate vendor. Just continue the relationship. Quit worrying about it and milk it for as long as it lasts.
  • Find out what caused the supplier to raise prices. The supplier needs to understand that to preserve the company’s margins they may have to raise prices to the final customer. This may threaten both the company’s and the supplier’s business with the customer.
  • Make sure that the supplier understands the company’s costs: office, salaries, equipment, maintenance, and local regulations that are unfriendly to business and difficult to deal with. Ask them to reconsider or reduce the price increase.
  • Assure that the supplier understands the value that the company provides and the importance of this collaboration to the business and profits and bottom lines of both companies. Leverage this value to get the price that the company needs.
  • Renegotiate the relationship to assure that supplier can’t go around go around the company and sell directly to the final customer.
  • Start building relationships with alternate suppliers.

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Diversify or Optimize Current Opportunities? Four Options

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.

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How Do You Set Goals in a Volatile Economy? Five Thoughts

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.

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How do You Manage a Key Partner Relationship? Five Points

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.

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How Important Is It to Protect Your IP? Five Points

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.

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