The Entrepreneur's Strategy Guide: Ten Keys for Achieving Marketplace Leadership and Operational Excellence

The Entrepreneur's Strategy Guide: Ten Keys for Achieving Marketplace Leadership and Operational Excellence

Tom Cannon

PRAEGER

The Entrepreneur’s Strategy Guide

The Entrepreneur’s Strategy Guide Ten Keys for Achieving Marketplace Leadership and Operational Excellence

TOM CANNON

Library of Congress Cataloging-in-Publication Data Cannon, Tom, B. Sc. The entrepreneur’s strategy guide : ten keys for achieving marketplace leadership and operational excellence / Tom Cannon. p. cm. Includes bibliographical references and index. ISBN 0-275-98904-6 (alk. paper) 1. Entrepreneurship. 2. Businesspeople. 3. Success in business. 4. Leadership. I. Title. HB615.C36 2006 658.4'21—dc22 2006018355 British Library Cataloguing in Publication Data is available. Copyright # 2006 by Tom Cannon All rights reserved. No portion of this book may be reproduced, by any process or technique, without the express written consent of the publisher. Library of Congress Catalog Card Number: 2006018355 ISBN: 0-275-98904-6 First published in 2006 Praeger Publishers, 88 Post Road West, Westport, CT 06881 An imprint of Greenwood Publishing Group, Inc. www.praeger.com Printed in the United States of America

The paper used in this book complies with the Permanent Paper Standard issued by the National Information Standards Organization (Z39.48-1984). 10 9 8

7 6 5 4 3 2

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Contents

Tables and Figures

vii

Preface

ix

Acknowledgments Introduction

xiii 1

PART A: CONSUMERS AND COMPETITORS— YOUR STRATEGIC FOUNDATION

11

Key One: End-User Benefits for Growing Niche Markets

33

Key Two: Pricing That Pleases Two Masters

56

Key Three: Infotech-Strengthened Channels and Supply Chains

74

Key Four: A Targeted and Frugal Sales and Marketing Mix

101

Key Five: Customer Services That Generate Repeat Business

126

CONTENTS

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PART B:

PROFIT-PRODUCING MANAGERIAL AND OPERATIONAL STRATEGIES

141

Key Six: Dynamic, ‘‘No-Gaps’’ Business Planning

155

Key Seven: People Power through Teaming and Empowerment

182

Key Eight: Leveraged Development, Production, and Outsourcing

204

Key Nine: Problem Solving and ‘‘Do-Your-Own’’ Turnarounds

218

Key Ten: Linking Growth Strategies with Profit Plans

234

Appendix A: Small Business in the United States

263

Appendix B: Intellectual Property Protection

266

Appendix C: Entrepreneur Magazine’s Annual Software Guide

270

Appendix D: Alternatives for a Manufacturers’ Agency Agreement

271

Appendix E: RMA Annual Statement Studies

274

Appendix F: The Start-Up’s Initial Operating Requirements

278

Notes

281

Annotated Bibliography

287

Index

295

Tables and Figures

TABLES A-1: A-2: A-3: A-4: 1-1: 1-2: 2-1: 3-1: 3-2: 3-3: 3-4: 3-5: 4-1: 4-2: 4-3: 4-4: 5-1: B-1: B-2: B-3: B-4: 6-1: 6-2:

Kipling’s Six Journeymen Psychographics—Generational Consumer Characteristics How Customers Rate Your Competitive Standing Early Promises of the Internet and Information Technology, circa 2002 Market Niche Profiling Worksheet Competitive Evaluation of Benefits and Strategies Melloy & Son Construction—Cash Flow Projections: Next Calendar Year Principal 21st Century Distribution Channel Strategies Distribution-Selectivity Characteristics and Guidelines Alternative Distribution Strategies for LMN Paper Company A Self-Test of Your Company’s Infotech Readiness Competitive Evaluation of Distribution Channels and Supply Chains Elements of the Marketing and Customer Service Functions Prospecting Roadmap for InfoCom Associates Marketing Budget of Phoenix Roofing, Inc. Publicity and Low-Cost Promotion Options Weaknesses in Your Direct Customer Services Functions Random Motivations for Pursuing a Start-Up Fitness Checklist for Start-Up Entrepreneurs Early Small-Business Growth Stages A Managerial Mainline of Strategic Decision Areas and Issues Sales Assumptions for Vecchi Marketing Plan Summary Financial Preview—Modern Furniture Project

14 15 29 31 46 52 68 79 83 87 92 100 102 106 117 119 129 145 146 148 153 174 177

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6-3: 7-1: 7-2: 9-1: 9-2: 9-3: 9-4: 10-1: 10-2: 10-3: 10-4: E-1: F-1:

TABLES AND FIGURES

Requirements for Success of Buckeye Furniture Venture Leadership Techniques of CEOs Critical Elements of a Sound Managerial and Control Plan Warnings from Your Financial Performance Numbers Warnings from Your Customers and Marketplace Warnings from Your Internal Business Operations ‘‘Do-Your-Own’’ Turnarounds Significant Characteristics of Small Business Strategy The British Clockmaker’s Diversification Planning Matrix Profit Planning Dynamics for an Ongoing Small Business New Venture Screening Procedure—Control Sheet Financial Data and Ratios for Retail Gift Stores Five Litmus Test Questions for Start-Ups

179 187 199 222 224 225 232 236 243 254 259 276 279

FIGURES I-1: A-1: A-2: 2-1: 3-1: 3-2: 5-1: B-1: 6-1: 6-2: 7-1: 9-1: 10-1:

The Small-Business Planning Cycle A Simplified Model of Consumer Purchasing Four Unruly Competitive Characteristics Outdoor Sports Breakeven Analysis—Original Strategy Vecchi Distribution Channels Planning Worksheet West Lebanon, New Hampshire Shopping Center, April 2005 Customer Generating Cycle—Anatomy of a Repeating Sale The CEO’s Managerial Work of the 21st Century Planning Profile of Nonferrous Metals Producer Phases and Steps in the Small Enterprise’s Planning Process Diversification and Empowerment Planning Wheel The Problem/Cause/Solution Track Project Screening Task Force Voting Sheet

4 23 26 64 76 82 138 152 162 165 190 227 258

Preface

My book aims at contributing toward greater and longer-lasting success for today’s small businesses and tomorrow’s start-up entrepreneurs. You represent the vast majority of America’s enterprises, and are the backbone of our economy. Census Bureau statistics for the year 2000 revealed that 98 percent of all U.S. enterprises have fewer than 100 employees. A surprising 90 percent have fewer than 20 (as shown in Appendix A). Experts’ analyses of the census data suggest that as few as half of each year’s start-ups can expect to survive for more than four years. It is my desire to help improve that performance. Some years ago a consulting associate brainstormed with me to build a success and failure list from a review of our smaller client assignments and their leaders. We were seeking to obtain better insights on how best to serve them. The list below reflects my current update. Each one of these simply stated factors, often in some combination, conjures up the face of one or another client. These issues are among the major problems of small businesses on one hand, and reasons for success on the other. My book addresses both dimensions.

          

Small-Business Loser: A product or service in search of an elusive market A declining, static, or slowly growing market A ‘‘me-too’’ offering that lacks distinctive user benefits A price too high for the value to the customer Unsatisfactory quality of product and service offerings Fuzzy and scattered shotgun marketing Failure to match buyers’ shopping-location preferences Unreliable order fulfillment and follow-on customer services An unachievable breakeven level, often never calculated Insufficient funds to reach and sustain positive cash flow Managerial overload and failure to delegate

PREFACE

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Lack of experience in the pressures of meeting a payroll Failure to construct a complete profit plan Poor problem-solving ability with the above. Small-Business Winner: Stays deeply familiar with users’ needs that must be met Always alert to competitive threats and new opportunities Stream of innovative offerings with superior user benefits A decisive leader, motivator, delegator, and team builder Excellent judge of talent; fair, direct, and firm manager Loves working with people more than things Outstanding and timely accounting and financial counsel Understands the operating ‘‘nuts and bolts’’ of a small firm Focuses on the critical numbers and their bottom-line impact Self-assured and confident self-starter willing to take risks Builds and maintains a complete, competitive profit plan Market-oriented leader; entrepreneurial spirit; having fun!

In our free-enterprise economy such checklists will never be a complete inventory of the variables for decision making. New types of opportunities, hurdles, and pitfalls will always occur. Change is an essential aspect of the entrepreneurial challenge. The small business leader should be eternally dissatisfied with the status quo and be alert for innovative options. Of all of the positive and negative factors, the first, and most critical for start-ups and ongoing businesses alike is problem solving. You must quickly identify and solve the root problems and their internal causes. (See Key Nine.) My motivation for the book is a hope that it will help reduce small business failures and increase the success rate. It is targeted at two categories of readers. The first and largest group includes the existing small business CEOs and their senior managers. Many are either still struggling for positive cash flow, or moving from entrepreneuring to professional management, or seeking profitable growth via diversification moves. The smaller group is the start-ups and would-be start-ups planning to take the plunge. It is unclear how many of these are neophytes versus seasoned business people desiring to leave the large corporation. This heterogeneous group accounts for more than 750,000 incorporations annually. The start-ups’ poor survival batting average cries out for major improvement. My insights on how to help improve small firms’ achievements did not come overnight. As I reviewed my consulting career, and my clients’ trials, failures, and successes, a line of questions began to take shape. Among the most relevant issues that influenced the structure and content of my book were those related to small business objectives, positioning and operational strategies, completeness of profit planning, leadership, and importantly, a deep understanding of your consumers and their needs.

PREFACE

       

    

    

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What significant aims should leaders of small-businesses and start-ups be trying to accomplish? Sustained and growing profitability Superior users’ benefits for competitive advantage Customers’ repeat business and positive word-of-mouth selling Independence and success at being one’s own boss Opportunities to innovate Great fun and challenge Keeping the business abreast of the infotech state-of-the-art Impeccable ethical conduct of all activities What products, service offerings, and marketplace strategies should you develop? The best possible benefits that fit users’ applications User value clearly worth the price Offerings positioned where customers prefer shopping and service Targeted, persuasive, and frugal selling, marketing, and sales closing skills Error-free order fulfillment and follow-on service over the offerings’ life How can you best meet the requirements for success of the foregoing to achieve profitable growth? The right people, teamed, empowered, inspired, and managed strongly Dynamic, flexible planning and a clear operational roadmap Operational innovations that can gain leverage and productivity Skill in rapid mastering of the small business hurdles and problems Effectiveness in setting and achieving a complete profit plan

These are the main issues that influenced the structure and content of my book. Early on, I found it highly preferable to treat two basic strategic directions separately. The first are the externally focused strategies that position the small business in its marketplace. The second are the inside managerial and operational strategies needed to implement the first successfully. This sequence fosters more accurate and timely understanding of what the customer really needs now and ahead, and what is most likely to defeat competition. It provides a truth test against incomplete internal perceptions. Effective formulation and execution of both sets of strategies requires a firmwide marketplace orientation. Motivational and innovative leadership, teaming, and selective empowerment of your people are prime factors. You also must employ all of the advancing information technology that is proven to be profitable and competitive for you. You do not have a ‘‘go–no go’’ choice because the Internet has leveled the playing field for all. You will continue to face new infotech applications that you must evaluate. Lack of a complete, viable, and competitive profit plan caused many of the dot-com and e-commerce failures of 2000 and 2001. But this was not a new

PREFACE

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problem. It has always reared its head. The CEO must blend successful traditional strategies with the advancing infotech. Do not err by discarding the older strategies that still work best. Complement and strengthen them with all advancing information technology that can work profitably. For the neophyte entrepreneur, I have included a litmus test of five critical initial issues to meet:      

Do you have credible evidence of the start-up business model’s viability? Have you secured all clearances needed to operate? Have you arranged enough funding to reach positive cash flow? Are you confident you can make that first sale and perform the ‘‘nuts and bolts’’ of a tiny business? Are you a resourceful problem solver? Are you certain you are ready to entrepreneur and do you expect to have fun?

The lessons of recent years on ethical practice are unchallengeable. Assure that your entire organization heeds them. Insist on the highest integrity and business ethics with all company personnel. Select your outside partners and associates with this requirement clearly in mind. Maintain an impeccable business ethic track record with your venture. My book includes almost a hundred anecdotal case briefs with traditional and/ or infotech options. Some are disguised to protect confidentiality. The case selection includes a few large company examples that are scalable to the small enterprise. In addition, a number of relevant case briefs, guidelines, and scenarios are gleaned from the business press. Ten sets of keys are the heart of the book. It does not attempt to be a comprehensive ‘‘Management 101’’ treatise. It does highlight winning and losing strategies of small companies, and how to manage them productively and profitably. My consulting career in marketing and enterprise-wide strategic planning began with eight years in Cresap, McCormick and Paget, one of the major post– World War II management consulting firms. Next, I served as a ‘‘captive’’ internal consultant in IBM for six years. Since then I have practiced as an independent consultant to large, medium, and small firms, and to prospective entrepreneurs. Most recently, I have gained penetrating insights about the problems of the very small enterprise while serving as a volunteer SCORE consultant to about sixty small businesses and start-ups. My thanks go to the many hundreds of client personnel and their associates who have contributed over the years to my understanding of the requirements for small business success. This book represents my strong belief in our free enterprise economy, in the importance and vitality of small businesses to it, and in the continuing innovations small entrepreneurs must keep contributing. I hope it presents fresh challenges and leads to great successes for both established small businesses and start-up entrepreneurs.

Acknowledgments

Since my book covers a long span of management consulting, the contributors to my experience must number almost a thousand names and faces. My heartfelt thanks go for all of the positive and negative lessons those relationships produced. Several random experiences relate especially to my exploration of small business and start-up requirements for success. Very early I learned that just a smile, prompt service, and a fine product could win my delivery of the Saturday Evening Post to Ted Wells (a champion snipe racer at one of the international events held in Geneva, Switzerland), along with many other Wichita, Kansas, customers. Roy Hawk, a drug store pharmacist, showed us curb hops how to earn big tips, particularly from the ladies, as we took orders and placed refreshment trays at their car windows. Later, Jack Spines hired me to be his clothing company’s campus sales representative at Wichita University. On daily duty at the store, Clarence Millhaupt, his men’s department head, taught me how to win over men, young and old, mothers, wives, and lady friends with customer-centered attention and sales-closing demonstrations. From my academic years I must highlight the Harvard Business School’s case method which virtually never let the professors lecture. A new case was assigned as the point of departure for each hour of every class session over the two years. The Socratic method forced students to study THE FACTS of each case before identifying problems and presenting their solutions—a lifelong key to successful client help. Among these teachers, Fritz Roethlisberger stands out as a brilliant questioner about the small company’s people dimension. He had worked with Elton Mayo in their pioneering study of human relationships at work in Western Electric’s Hawthorne Plant in Chicago. I must thank the dean of the School of Business at the University of Kansas, Leonard Axe, and the eight Harvard MBAs he hired to install the case method for juniors and seniors—the first time it had been done at that level. This experience

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ACKNOWLEDGMENTS

led me and Jack Wichert, a fellow marketing teacher, to collect suitable undergraduate-level cases. We co-authored a book of text and cases, for which Jack was the inspiration, organizer of content, and chief humorist. He was, unknowingly to either of us, preparing me for future business writing. Following my brief time at KU, and throughout my consulting years, a number of lessons stand out sharply. As a young consultant at CMP, I received my first coaching in field interviews at the side of William C. ‘‘Cat’’ Gordon, joining him in market research visits to some of McGraw-Hill’s magazine editors-in-chief. On an assignment with Willard McCormick, we spent days riding with the Borden Company’s salesmen and store delivery people, executing Willard’s credo that ‘‘understanding the front-line salesman’s job is one of the first essential requirements for helping the client.’’ Earle Angstadt, a friend but not a client, gave me an early lesson while he was president of Abercrombie & Fitch in New York City. Among numerous innovative promotional approaches, he initiated dramatic special presentations to stir interest and attract new shoppers. For example, he brought in two New York Giants players to introduce a new computer football game. In another instance, he drew shoppers to a new department by craning a flashy new Thunderbird car to the seventh floor for sparkling ongoing presentations by an attractive model. He was one of the first ‘‘out-of-the-box’’ innovators I can recall. Much later, as CEO of McCall Patterns, he successfully instituted a winning two-pronged strategic program to become ‘‘the fastest growing brand share’’ and the lowest cost producer in his industry. During six years at IBM as a ‘‘captive’’ consultant, I worked with a number of divisions inside the company. Among the most helpful to my seasoning were Dick Bullen, Bill Simmons, Warren Hume, Dick Warren, Ralph Pfeiffer, and Sam Roberts. My most exciting learning experience at IBM was as an implementer in Frank Cary’s 1960’s Industry Marketing reorganization of the Data Processing Division. This program is described in Key Seven. Since consulting on my own, I have benefited from direct contact with several hundred client people. Among them, Rowland Brown, president of Dorr-Oliver, then CEO of Buckeye International, and later OCLC (Online Computer Library Center) has contributed most to my seasoning and the legitimizing process I have been going through as a consultant under fire. Other clients and friends to whom I am particularly grateful are Jake Carder of Dortech, who had confidence in engaging me, a consultant, to switch temporarily to line management and run a related start-up for him; Eric Ferguson, a dear friend and challenging entrepreneurial investor for whom I evaluated numerous new ventures; David Lighthill, a client who advised me on financial duediligence tests of the viability of new ventures, and whose mentoring planted the seed for my SFP (summary financial preview) approach, presented in Key Six; Tom Lawson, of IBM, EMI, and then my client as president of Ultronic (see Key Ten); the late Warren Barker, both from our CMP duty together and as a longterm free-lance associate of mine; Ora Paul, a senior executive of Vermont’s

ACKNOWLEDGMENTS

xv

SBA and SCORE organizations; and Chris Brown, a fellow volunteer SCORE associate, with whom I exchanged many client learning experiences. My business editor at Praeger Publishers, Nick Philipson, has been an enthusiastic and instructive booster of this project. He has stimulated me to ‘‘net it down,’’ simplify, and clarify the key elements of my message to small businesses and start-ups. I am most appreciative of Nick for his guidance and confidence throughout the project. Finally, I am most grateful to my beloved spouse and partner, Dorothy, who has been a frequent sounding board and critic, based on her common sense and her own entrepreneurial experience. Moreover, she is delighted that my book is nearing publication, so it will free me to return my attention to her ‘‘Honey Do’’ list.

Introduction

The purpose of a business is to create a customer. —Peter Drucker

Running a small business is first and foremost about obtaining and keeping loyal customers at a profit. Long before the Internet, the late Peter Drucker, in his pioneering management classic, stated this overriding objective loud and clear.1 A deep understanding of today’s individual end users, business-to-business customers, and competitors continues to be the dominant strategic foundation for the small enterprise’s pursuit of profit. This book’s main objectives are to help today’s small businesses survive longer and keep growing profitably, and to provide realistic guidance to the new entrepreneurs who are contemplating start-ups. The urgency of these objectives is underscored by the importance of small business to the U.S. economy. Appendix A reports that 98 percent of all U.S. enterprises have fewer than 100 employees, and only half of each year’s start-ups are expected to survive for more than four years. Throughout the book you will meet a number of successful small-business leaders and a number of those who were not so successful. Here is a small sampling. Adam Bristol scaled down a profitable general electrical contracting service into a much narrower, but faster-growing and more profitable niche of a ‘‘metoo’’ industry. He concentrated on the hard wiring of the computer’s telecommunications connections for offices, plants, and warehouses. He initially avoided the software dimension. He always stressed impeccable, on-time service to warrant premium pricing and became the first preference among business customers and individual consumers in his market area. Fred Hindley ate away at his family inheritance with a ‘‘me-too’’ outdoor sports accessory that was superbly crafted. However, the high cost necessitated a price way above its users’ needs and numerous competitive, commodity-status

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INTRODUCTION

brands it faced. Fred had never calculated the breakeven volume levels required to start producing positive cash flow. He gave up on the product, and began looking for other ‘‘products in search of a market.’’ But, he still was not putting the needs and expectations of the customer first in his strategizing. Deborah Edelhuber, with her husband, turned a natural weather disaster to their property into a thriving seed business with the wildflower crop that sprung up from the devastation. They began propagating the seeds and wholesaling them to garden centers in the area. Their success led to a Web site selling online directly to consumers. Harvey Harris, with backing from his father, launched an innovative and highly popular annual remembrance calendar business that touched a latent consumer desire. His most attractive offering began generating stupendous order backlogs. However, the unexpectedly high initial sales rate far exceeded his plans for the human resources and operating facilities he needed. His venture was taken over by another entrepreneur. He had obtained the customers but was unprepared to serve them when so many clamored for his product. Michael Dell rewrote the rules in the 1980s for direct marketing and Internet selling, product design, manufacturing, and order fulfillment of personal computers. By a combination of internal operations and astute outsourcing of state-ofthe-art components, he was able to leverage his resources for much lower prices. He quickly became the dominant source for personal computer customers. Drexel Wright and Beth Bloom, his wife, saved their company, Quaker Construction, from bankruptcy and failure after Drexel had overly diversified his small service business. They successfully executed their own turnaround into a smaller niche of related products and services that enabled them to take greatest advantage of their core strengths. Customers and the IRS bought in. Bob Carlson made a highly successful career with a series of six start-ups in competitive, niche markets of OEMs (original equipment manufacturers). He attributed his success to sticking with proven, traditional strategies and no-frills management practices. He made innovative improvements in low-tech components for end products ranging from outdoor cooking grills to medical devices. ‘‘Dwell on what the market needs. Don’t over-plan. Concentrate on seeking a marketable idea. Don’t force a new venture; check it carefully against its application. Go where your customers and prospects cluster, for example, industry trade shows and conventions. It is less expensive!’’ EMPHASIS ON THE STRATEGIC DECISION-MAKING CYCLE A number of the many small business leaders you will meet have profited from advancing information technology and the Internet. Others have continued to rely mainly on the traditional managerial practices and strategies that have worked well for generations. Both strategic emphases can continue to be highly successful if they fit your venture’s success requirements.

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The Internet’s Compacting of Windows of Opportunity The new information-based capabilities have shortened your time available to react to changes in consumers’ needs and competitors’ strategic innovations. But they also have introduced profound opportunities for productivity improvements and cost savings that will help your bottom line. To date, this positive impact has been most significant with the supply chain. But the application of information technology has been accelerating rapidly to marketing, sales, and all of the other critical business functions. Infotech-enhanced competition from many directions leaves entrepreneurs no go–no go choice. They must seriously consider all such options that fit their model and can be profitable for them. Traditionally, businesses that did formal planning were accustomed to relying heavily on an annual planning cycle. Strategic planning now must be dynamic, flexible, and more innovative. Customers’ and competitors’ immediate online access to your marketplace’s information has shrunk your window of opportunity. You must respond more quickly to changes in consumers’ needs and preferences, in order to counter competitors’ new moves, and to launch your own initiatives.

The Book’s Focus on the Strategic Decision-Making Cycle My book mainly addresses the firm’s overall strategies and their planning, decision-making, and operational requirements for both the going concern and the start-up, as pictured in Figure I-1. Both start-ups and ongoing businesses begin such work logically with Steps One, Two, and Three, and proceed in repetitive cycles over time. Steps Four and Five are the principal small business planning and strategic decision-making aspects. They provide the basic direction for the operations of Step Six. A solid profit plan, Step Seven, requires iterative actions among all seven steps. The start-up entrepreneur usually has much thinner information and experience to contribute to Steps Four to Seven. Many start-ups and would-be start-ups slight a comprehensive approach, particularly in the first three input activities. Looking internally, rather than with an objective, outsider-based perspective, explains much of the so-called ‘‘product-in-search-of-a-market’’ syndrome that characterizes many limping and failing start-ups. DETERMINE HOW YOUR ESTABLISHED BUSINESS OR START-UP MATCHES A GENERIC HIERARCHY OF SMALL-BUSINESS OBJECTIVES AND STRATEGIC OPTIONS Business strategy is a deep subject with countless variations and combinations of options available to the small-business leader. Human ingenuity and our free marketplace dictate that there may never be one best strategic pattern for

4

FIGURE I-1.

INTRODUCTION

The Small-Business Planning Cycle

business. However, certain generic characteristics are commonly acceptable fundamentals for a winning profit model. The CEO’s trip through the book’s strategy keys should begin with documentation and comparison of his or her own current model against the generic options shown in the sidebar. A small venture always has an implicit strategy even if the entrepreneur has never formalized it fully. The smallest company should develop at least an outline to attune all key players to the same game plan. For starters, consider your current position within the five fundamental levels of the sidebar. Then as you proceed through the ten keys, identify your best options for constructing and strengthening your own hierarchy of decisions. The first level represents Peter Drucker’s position, and the fourth the concept and main presentation of this book. Levels Two, Three, and Five are from the pioneering work of Michael Porter, which he presented in two immensely popular publications of the 1980s. Both Competitive Strategy and Competitive Advantage are still in print and widely used. The first one was in its 60th printing and

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A Hierarchy of Strategic Objectives and Strategies Level One. The Main Strategic Purposes of the Enterprise —Create a customer and innovate —Make and sustain a profit over time Level Two. The Two Ideal Strategic Objectives —Occupy a profitable and growing industry —Develop winning competitive advantages Level Three. The Prime Alternative Aims of Strategy —Cost leadership —Differentiation —Variations of the first two for selected business segments Level Four. Key Strategic Directional Decisions and Core Strengths —In market positioning, and —In management and operations Level Five. Essential Strategic and Tactical Actions at the Operating Level —The front-line operating functions in your value chain

had been translated in nineteen languages by 2004. Porter continues to consult worldwide, write, and exercise significant influence in these areas, both in the classroom and with all types of clients.2

Level One: The Main Strategic Purposes of the Enterprise Are all of your associates committed to ensuring that every action will contribute to obtaining and keeping Drucker’s customer? Do all plans and actions help achieve your financial goal of bottom-line profitability? Are your people always performing with impeccable ethical actions?

Level Two: The Two Ideal Strategic Objectives Have you chosen to operate in an industry that first, is profitable, and second, has realistic future growth and profit prospects? With a new venture, you may be pursuing only a local market, for example, a new concept for a leading restaurant, or the best personal or service business for your immediate community. Alternatively, you may be targeting regional, national, international regions, or total global scope. Whatever the scope, and whether just starting up or already running an ongoing business, can you clearly develop and execute strategies and operations that will improve your competitive positioning and increase your profitability? What are some of your options? If you are not in a growth industry, are you in danger of

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INTRODUCTION

eventually maturing into an uncompetitive or profitless mode? Do you see opportunities to convert or start repositioning your business in growing markets? If you are contemplating a start-up, you should consider advice offered some years ago by Norm Brodsky, who already was a successful initiator of six new ventures. He said, ‘‘So you have an idea for a revolutionary product in a business that doesn’t even exist yet? Unless you’re Thomas Edison, you’d better pass.’’ Brodsky cited three pithy arguments.3 ‘‘Number one, I want a concept that’s been around for 100 years or more. OK, maybe less. The important thing is that it’s an established concept, one that everybody understands. There is nothing more expensive than educating a market.’’ ‘‘Number two, I want a business that is antiquated. I don’t mean old fashioned, but a business in which most companies are out of step with the customer.’’ ‘‘Number three, I would establish a new niche based on my know-how, for example, a huge, modern storage facility in the city for archival retrieval closer to my market’s needs.’’ Level Three: The Prime Alternative Aims of Strategy Consider Porter’s three overarching characteristics of your strategic options noted in the above sidebar. Should you be pursuing significant low cost and price leadership in your industry? Or, should you focus basically on meeting consumers’ essential needs with more highly differentiated user benefits? With either of these two options, should you apply a second focus on one or more particular segments of your total customer mix?4 Level Four: Key Strategic Directional Decisions and Core Strengths Parts A and B of this book each present five selective sets of strategy options that should be viewed as among the most significant make-or-break issues for the small business. The keys of Part A concern positioning the venture competitively in its marketplace. The Part B keys are a selection of internal, strategic managerial and operational issues and options. The core strengths and strategic drivers the ten keys require should power your major competitive thrust and momentum. They are your growth engines. Level Five: Essential Strategic and Tactical Actions at the Operating Level The impressive works of two leading strategists, Michael Porter and Thomas Friedman, clarify the strategic opportunities along the value chain. Porter focuses on the full range of internally- and externally-oriented operational functions as the front line for strategic success. He contends that the company’s front line is the locus of most of an enterprise’s strategic and tactical decisions.5

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Porter urges the entrepreneur to focus on its two value-adding dimensions. The first is along the operational flow and sequence of the business. For a manufacturer, it could involve inbound logistics (parts, materials, supplies); operations (building products); outbound logistics (order fulfillment); marketing and sales; and customer service. The second dimension is how productively and innovatively you are getting your work done at every step of the operational flow. At each stage this can involve strategies and tactics in human resource management, technology development, and procurement. Porter’s extensive work with a broad range of enterprises concluded that ‘‘Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product. Each of these activities can contribute to a firm’s relative cost position and create a basis for differentiation.’’ A number of cases and options cited in my ten key chapters illustrate operatinglevel strategies that link to and implement a major directional strategy. Thomas L. Friedman’s innovative works, The Lexus and the Olive Tree in 2000 and The World Is Flat, 2005, present his comprehensive perspective on the global changes being effected rapidly and unceasingly by the galloping information technology advances.6 In his latest book, Friedman chronicles the diverse ways infotech is fostering a wide array of outsourcing options to the global locations where they can be performed most economically. He delves deeply into the ideological, political, social, market-expanding, and economic issues that are profoundly changing many aspects of the world’s marketplace. One of Friedman’s long-term implications for companies of all sizes in the U.S. economy is our requirement to replace the digitizable work we will continue to send abroad with innovations that create new jobs at home having higher levels of added value. This has always been a major creative strength of America’s free-enterprise economy, much of which must happen on the front line of the value chain in large and small companies. IMPLEMENT YOUR OBJECTIVES WITH TWO CLOSELY-COORDINATED GROUPINGS OF STRATEGIES AND ACTION STEPS Two broad generic groups of strategies are the heart of the book. All are aimed at accomplishing Peter Drucker’s main business objective of creating a customer. They stress definitive targets from two distinctly different viewpoints; first, your external marketplace world, and second, your internal operations. Part A begins with a lead chapter on the Consumer and the Competitor. It spells out a number of characteristics, trends, and issues that you should review periodically to keep up with the inevitable changes in your marketplace. Then the five keys of Part A explore your company’s face to your marketplace, and your market positioning in it. They define you to your customers. They determine the offerings and benefits users need, and address your competitors’ ever-changing

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challenges and issues. They help you plan the principal strategies and policies that establish who and what you are now to your customers and prospects, and what you are endeavoring to be. These are the external, ‘‘What?’’ aspects of your strategy that are readily known by your competition, customers, and prospects. Initiating your planning with them gives you greater objectivity relative to what the marketplace really requires, not just what you think they need. Part B’s first chapter and a supporting Appendix F raise the leadership issues facing the new entrepreneur with ‘‘a litmus test for the start-up’’ that challenges his or her motivations and readiness to meet five ‘‘go–no go,’’ make-or-break questions noted in the Preface.7 The test is also a helpful early screen for the established small business that is beginning to appraise a diversification and judge the individual who will head it. The chapter then reviews the body of managerial practices that industry has developed over time, and how the emphasis of such practices can be expected to change. Part B’s five key chapters offer a selective and critical set of internal, ‘‘Howto?’’ strategies that are particularly applicable to developing, implementing, and maintaining strong and winning market-positioning strategies. These five sets of managerial keys are not intended to constitute a comprehensive ‘‘Management 101’’ survey. They cherry pick the most critical aspects of the firm’s basic game plans, particularly planning, developing people power, operational productivity and outsourcing, problem solving, and keeping growth and profit strategies tightly linked into a complete profit plan. Initiate the external (Part A) and internal (Part B) issues separately. Then blend and resolve the two viewpoints to assure an outward-looking, customerneeds-oriented strategy. Obviously, the external and internal strategies interlock continuously in the real world. But addressing them separately at the start of your strategic planning has several advantages in addition to objectivity.   

It provides a clearer vision of your toughest competition, and how you can maximize your competitive advantage. It isolates and clarifies the realities and issues of your operational capabilities and core strengths. It encourages innovation and removes the reactionary habit of pursuing business as usual. KEEP YOUR OBJECTIVES, STRATEGIES, AND BUSINESS PLANS ACTION-FOCUSED, CURRENT, AND WELL DOCUMENTED

My emphasis is primarily on the strategic issues, choices, decisions, and planning requirements the small entrepreneur must face. Virtually all business strategy has long-term implications and strategic commitments. But in-depth strategizing by the small business and start-up must concentrate on the soundness of short-range plans. There is no future without being able to reach and sustain positive cash flow.

INTRODUCTION

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Your small business strategies must be fully consistent with a clearly articulated mission and objectives, and must present a definitive road map and directions to pursue. They must be defined in practical, action-specific terms that are well understood by all who will be responsible for implementing them. Every change in direction or emphasis should be documented and communicated promptly to those who need to know. However, this does not require generating and maintaining an inches-thick document in order to be an effective guide for a sound profit plan. In fact, a brief plan is the most desirable. For those who need more detail, it can be reinforced by what has been referred to in industry as a ‘‘digital cockpit,’’ a password-protected computer database kept up to date with essential backup files to amplify the base version. This is the most effective and time-efficient way to keep all ‘‘need-to-know’’ parties informed. INTRODUCTION TO PROFIT PLANNING PROJECTS This closing section presents a feature you will find at each chapter’s end. Its aim is to emphasize the particular chapter’s strategies and issues that are among the most essential steps for a complete profit plan. Pertinent chapter worksheets help apply the issues to the company’s own situation. The two starter projects involve where you stand now, where you are going, and future options under consideration. The chapter projects build toward a profit plan, so a minimum documentation for your own planning can be useful as you proceed through the keys. 1. Outline Your Current Goals and Strategies. If you do not have a written plan now, prepare a minimum outline. This should identify the company’s main goals and their supporting strategies along the lines suggested by the five-level hierarchy. 2. Set Up an Agenda for Tackling Critical Current Problems and Alternative Objectives and Strategies You Are Considering. Identify any gaps, competitive weaknesses, inconsistencies, or conflicts in elements of your present strategies and operations. Which are most critical and represent slippage or potential Achilles’ Heels? Also, list any active projects for future commitment, their objectives, and current status. Include only those for which you have made responsibility assignments and committed funds and resources.

PART

A

CONSUMERS AND COMPETITORS— YOUR STRATEGIC FOUNDATION Make Profiling of Your Consumers and Competitors the Foundation for Your MarketPositioning Objectives and Strategies

Are we selling seats on railroads or airlines? Suites on grand ocean liners? Or rather, dependable transportation? Always on-time arrivals? Comfortable and courteous service? Adventure? Pleasure? An exotic new experience? —Ted Levitt, 1960

Years ago, Ted Levitt, a marketing consultant and professor, started asking us to begin thinking and planning with the consumer’s mindset, and to keep asking ourselves, ‘‘What Business Am I In?’’ For example, he would challenge the travel services to design, market, and promote their brand and their product as ‘‘An unparalleled scenic spectacular for your pleasure going west across Canada.’’ He would be against pitching ‘‘Ocean voyages and resorts.’’ He was calling for new, consumer-based thinking. He would approve of Club Med’s watchwords—‘‘We Sell Fun!’’1 In his classic article, ‘‘Marketing Myopia,’’ Levitt expanded on Drucker’s overarching mandate that the customer should be the company’s prime interest. He was asking business executives and planners to match the demands of their marketplace closely in all dimensions. Product specs and service features must be designed, presented clearly, and sold in terms of benefits that meet their end users’ primary needs, are superior to competitors’ offerings, and are priced at a level worth their delivered value. Levitt would review Scottsdale’s ad and say, ‘‘They’ve really bought in to my point!’’ Top Ten Reasons to Stay & Play at Resort Suites of Scottsdale Ten: It does not snow in Scottsdale, rain is rare, and it is never muggy or buggy. Nine: Time to get away? Eight: Shop till you drop, massage till you tingle. Seven: Let us eat!

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Six: A chance to play the great works of the masters. Five: If variety is the spice of life, then Arizona golf is crushed chili peppers. Four: Scottsdale is the type of place where you’ll never feel like a stranger. Three: Investing in the GOLF BANK returns quick dividends. Two: You can call a personal vacation planner and they’ll do all the work. One: At Resort Suites of Scottsdale, YOU are always #One.

This Arizona golf resort’s ad targeted directly at the customer’s viewpoint, motivating interests, and vacationing issues. The resort emphasized the benefits through a mood setting of inviting pictures and brief, descriptive text. They stayed away from the physical descriptions of the course layouts, menus, and hosting facilities.2 The head of an ongoing small business and the entrepreneur initiating a startup venture must always keep focusing on the consumer and the competitor. Relatively few products or services can make the first sale and keep generating repeat business on their physical merits alone. At the outset of each planning cycle, and continuously in between, you must ask yourself such questions as:





What are the benefits that count most with our customers and prospects? Which of their most compelling needs, wants, and desires are we satisfying? Are we presenting our offerings from the perspective of their applications? Or do we have a mistaken view of their needs that is driving our strategies? What benefits are our most successful competitors offering? How are they marketing and presenting them to the market? Why are they beating us?

Repeating customers are your most valuable assets. Keep all of your people focused on building lasting relationships and treating every one as a significant account. Aim for repeat business and ‘‘word-of-mouth’’ sales power. Consider satisfied customers to be a cult-like following of unpaid salespeople who reduce the unit costs of your prospecting, selling, and marketing. Whether your business is a product or a service, and whether you are serving the ultimate consumer or business-to-business buyer, think consumer. Your odds of winning are best when you have a deep understanding of your consumer and your competitor. Penetrating insights about both parties become the strongest foundation available to you for objectives, strategies, and marketing plans that are winners. The five market-positioning keys in Part A are built upon your continuing marketplace analysis and perspective.

PROFILE YOUR CONSUMERS AND THEIR BUYING PATTERNS In-depth understanding of your customer is the first step toward your marketing and business planning. Ensure that all of your people understand how the company’s bonding with customers can be strengthened by the particular roles

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and responsibilities of each of your functions. One time-tested market-profiling approach borrows from Rudyard Kipling. His ‘‘Six Journeymen’’ suggest classic, starter questions and a framework for broadening our understanding of our consumer. Who? What? Why? Where? How? When? Add a seventh vital question to these; namely, How Much? The seven queries can be a stimulating and comprehensive structure to use in profiling each of your distinct customer categories. This approach can be applied to all types of small businesses and start-ups, both firms catering to the ultimate consumer and those serving the business-to-business markets. Table A-1 raises a number of questions and issues that can deepen your insights about your consumers, your competition, and how you should position your company’s overall strategic presence in your marketplace. They can help clarify your entire range of market-positioning requirements, competitive challenges, opportunities, and strategies. They suggest strategic managerial and operational options as well. Enlist the participation of your employees and outside partners in boring beneath the surface of your consumer and competitor analysis. Profile your current customer roster to determine the best new prospects you should pursue, and to sharpen your understanding of the distinct market segments you are serving. Work with key associates in brainstorming sessions to outline and document the salient points about your target consumers in each of your product/ market segments. Make the profiles readily accessible to all concerned. Refine them through continuous inputs from your field marketing and distribution associates, and your managerial and operating teams. Periodically review them with key customers who can help put your own people on notice about changing marketplace requirements. Also, review the issues of Table A-1 to help clarify your strategic options in the following areas:








All you can understand about your target customers and prospects: their needs, wants, desires, and the benefits of most interest to them Market segments where your current offerings and benefits fit best What you must do to win market share and keep them buying New sales opportunities for added products, new applications, and service offerings Promising new customer categories for your present offerings Your most profitable segments Unprofitable customers and segments to consider abandoning.

TABLE A-1. Kipling’s Six Journeymen (Put a check in front of each question or issue that warrants your attention by your planning or operations associates. Add any issues unique for your business. Then take the necessary actions.) 1. who are your consumers?

2. what do your consumers buy?

Customer classes or niches you serve? Their longevity and repeat business? Percent sales growth or decline by classes? 80:20 rule: any risky sales concentration? Gross margin impact from account losses? Any marginal or unprofitable accounts? Losing too many sales to prospects? Why? Major competitors? Why? How compete? Strongest growth market niches served? Demographics of best classes? How pursue? Any homogeneous subgroups to pursue? What new-customer markets to pursue?

Unit and sales trends—each product and service? Age distribution of all present lines? Maturing? 80:20 rule applied to products and services? Price comparisons with competitors’ offerings? Offerings’ gross margins? Best? Fading lines? Any gaps in products or services? Any distributor and dealer needs for fuller lines? Major competitors? Which hurting most? Why? New products or services in development? Any ‘‘shelf items’’ ready to put on market? Offerings competitive for best customer niches? Any fading niches to abandon?

3. why do your consumers buy?

4. where do your consumers buy?

Benefits for each product and service? Benefits touted before features? Benefit strengths by customer niche? Benefits vs. competitors by niche? Benefits vs. price as design options? When last explore needs with customers? Have routine for customer inputs? Business-to-business vs. end-user inputs? Meeting market demo- and psychographics? Do all associates focus on benefits?

Where does your market prefer to shop and buy? Where can they buy currently? Where find broad lines vs. specialized items? What is your supply chain? Your competitors’? What recent supply changes—you or competitors? What strategies differ from competitors? What differences in infotech logistics? What gaps in distribution locales? Distribution locales by customer class? Opportunities for wider geographic scope? Non-conflicting private-label options? Web site purchase vs. store shopping options?

5. how do your consumers buy?

6. when do your consumers buy?

Importance of word-of-mouth for you? Repeat buying based on trial and performance? Key differences—end users vs. B2B? Influence of your brand image to new buyers? Must shop and compare the physical item? Advice and endorsement of associates? Pore through direct mail and catalogs? Shop around for info and new ideas? New ideas from TV and radio media? Surf Web by subject or Web site address? Strong response to impulse buying? Significant increases in online shopping?

Seasonality and cyclical patterns? Fads? What repeat timing by product? Application? JIT opportunity for inventory reductions? Rising maintenance problems and expense? Tired product nearing end of market appeal? Higher productivity from technical advances? Meet a regular need vs. discretionary want? Sales appeal of upgrade or new version? Planned obsolescence that backfires? Computerized monitoring of order timing? Favor best price—commodity status? More 24/7 shopping opportunities?

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WHO? Sharp identification of your target consumers lies at the heart of your marketing strategy. Your most logical point of departure is a careful definition of the specific categories of customers whom you hope will be your most fruitful prospects. This is a strategy of niching; and the start-up frequently begins pursuing only one. More niches develop with the young company’s market acceptance and growth. Growing Customer Niches for Ultimate-Consumer Products and Services. Population growth and the increasing acceptance of Web shopping combine to place a greater premium on astute and profitable niching of ultimate consumers. Your alternatives may include targeting consumer groupings by specific product use, geography, age ranges, ethnic origins, lifestyle, women in business, personal and household service needs, and numerous other combinations of demographic and psychographic characteristics. The homogeneity of a viable critical mass is key to niching. Two categories of particular note are lifestyle niching and ethnic markets. Lifestyle Niching. Many consumer-product marketers have been successful at tracking the changing demographics, psychographics, and latent demands and interests of America’s turning-adult generations. Table A-2 outlines six such generalizations about potential markets over the decades since World War II. A seventh demographic grouping, Generation Y, followed. These were the

TABLE A-2.

Psychographics—Generational Consumer Characteristics

Adult Generation

Year Born

Age Group: in 1995 in 1999

% of Adults in 1995

Money Motto

Sex Mindset

Favorite Music

depression G.I. Generation

1912–21

74–83 78–87

7

Save for a rainy day

Intolerant

Big bands

world war Depression

1922–27

68–73 72–77

6

Save lot, spend a little

Ambivalent

Swing

postwar Silent Generation

1928–45

50–67 54–71

21

Save some, spend some

Repressive

Frank Sinatra

boomers i Woodstock Group

1946–54

41–49 45–53

17

Spend, borrow

Permissive

Rock & Roll

boomers ii Zoomers

1955–65

30–40 34–44

25

Spend, borrow

Permissive

Rock & Roll

generation x Baby Busters

1966–75

19–29 23–32

26

Spend? Save?

Confused

Grunge, Rap

Source: Fortune magazine, June 26, 1995.

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THE ENTREPRENEUR’S STRATEGY GUIDE

estimated 70 million children of Baby Boomers, born in the 1980s and 1990s. Many grew up in affluent conditions. Sharpen your understanding of the principal lifestyle trends where your offerings may fit most powerfully. Pursue this through consumer interviews, your sales reps and distributors, Web surfing, store shopping, ad agencies, market research firms, focus-group specialists, editors of your industry’s trade press, and ongoing monitoring of your competitors. The key is to identify all of the critical issues concerning your consumers’ needs, wants, preferences, and objections. The experience of a specialized restaurant chain was a costly example of what your niching plans must discover before making major commitments. The founders of Austin Grill, a growing chain of high-volume, Tex-Mex restaurants, had been successful in major cities by catering to young clienteles with affluent demographics. Expanding into city suburbs in new markets, they chose a major Florida suburb with disastrous results for their newest operation. The founders had learned that a Chi-Chi’s had already failed in the same area. But they apparently neither determined why nor developed profiles of consumers’ characteristics and preferences in the new market. They compounded their risk by building a larger restaurant than previously. They had not discovered before making the commitment that the upscale, sophisticated dining prospects they were targeting in that market did not really care for their style of Mexican food.3 Ethnic Markets. Transcending lifestyle strategies as niching opportunities is the rapid growth of significant ethnic market niches in America. The sidebar summarizes some of the most important of these, based on data from the U.S. Census of the year 2000.4 One source estimates that by 2100, the African American population will grow to 85 million and account for 15 percent of the U.S. total; Asian Americans to 75 million or 13 percent; and Hispanics to 190 million or 33 percent.5 In 2005, Texas became the fourth state with whites in the minority. All of these minority groups have grown faster than the overall U.S. market. None of the above ethnic groups represent homogeneous niching prospects as a whole; all must be separated into sub-niches for targeted marketing. The advantage is that they are reachable much more economically by minority radio, newspapers, and other specialized media that are growing rapidly. Kim Gordon cites three rules that should govern your choices of ethnic strategies for reaching

Major U.S. Ethnic Markets in 2000

African Americans Hispanic Asian and Pacific Islands

Million People 34.7 35.3 10.6

Percent of U.S. 12.3 12.5 4.0

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your target consumer. First, identify unique needs that most often will require tailored products and special promotional appeals. Second, say the right things. Speak the language that communicates understanding of the key issues of the subgroup. Third, always test-market your approach, and beware of the difficulties if there is no competition!6 Business-to-Business Customers and Their Advisors. As with ultimate consumers, you must determine which niches and prospects for your commercial, industrial, or institutional offerings provide your greatest competitive advantage with the fit of your benefits, price/value, and services to their applications. However, whom you must influence and sell is often much more complicated than with the ultimate consumer, who often is the user, or a parent, grandparent, sibling, or friend. The purchasing agent of a business is often just the tip of the iceberg. You may need to influence separate individuals or groups—those who develop specs and design their products, customer service people, marketing managements, financial overseers and controllers, and senior management. Your best customer focus may be by industry, business operational function, servicing requirement, technological emphasis on state-of-the-art, business size, geography, or the customer’s pricing strategy. Identify not only the users but also all other influencers who contribute materially to making the buying decision. A typical example is in the construction trades where major influencers of the clients’ buying decisions can include general contractors, architects, design consultants, and even state regulatory bodies who set building codes. If you are selling components, you may need to target your prospects’ product development and engineering units to influence their selection of components and design features as they work toward final design. WHAT? Entrepreneurs often become overly intrigued by the ingenuity they have built into their products and services, and the raves from their family and friends. They give too little attention to determining their consumers’ views and how the latter regard the ability of the offerings to meet their requirements. The sellers fail to translate for the user what each feature and characteristic should mean in terms of benefits and improvements over their present solutions. Review your approach to this key Kipling question by asking:





How effectively do your offerings meet your consumers’ most critical needs? Do you deeply understand how your offerings must fit your ultimate or business consumer’s application? Have you identified precisely the prime user benefits for each of your offerings? What they require in follow-on servicing? When did you last seek customer inputs, or enlist them in product planning?

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Are you regularly searching for benefit-enhancement opportunities for your present lines? For product-line gaps and additions? State-of-the-art features or changes? Changes in pricing and terms?

Consequences of Not Seeking Customer Feedback. A midwesterner, Rich Walmsley, had been honing his metalworking skills since he was 14 years old, and after high school he started a job-shop repair service. He developed a one-step attachment to a tractor for mowing, bundling, and laying hay in rows to be seasoned before collection. He began making enough sales to keep another metalworker busy full time working with him. However, he hated the selling part of his business. Before long, he started experiencing competition, and needed to offer new accessories and product upgrades to improve sales and profits. Rich continued to rely on his own ingenuity for line innovations and improvements instead of querying his satisfied contractor customers. He expressed great reluctance to call on and ‘‘bother’’ them after their hard, daily workdays in the fields. Because he was not always comfortable selling, he also hesitated to enter trade shows with their advantage of many prospect and dealer contacts at low cost per contact. At his infrequent trade show appearances, Rich almost resented visitors to his booth ‘‘poking around’’ and raising what he considered to be critical questions about his designs. He was missing opportunities for feedback from his customers on product improvements or new products for other applications. Yet he was unhappy with his low rate of growth and repeat business. Once he started initiating feedback from customers, prospects, and distributors, his offerings made better matches with farmers’ needs. He eventually sold the business at a modest profit to a major manufacturer. WHY? Taking Ted Levitt’s cue, you will win, and keep your clientele returning, if the benefits you offer are superior to your competitors’. This is particularly critical if you have a struggling and tired ‘‘me-too’’ offering that you have not differentiated from the crowd. Search for superior benefits your user can derive from your outstanding features and characteristics, or enhancements you could make. You must be diligent in determining why customers stay with you, why others have left, and why you still do not interest prospects. Formalize your in-depth pursuit of Why? with such issues as:







Why have your best customers stayed with you over time? Visit them on their home ground and seek the reasons in their words, not yours. Look at their applications for how they are using your offerings. This could reveal benefits you have not touted, and perhaps additions or innovations for your lines. Do your offerings match favorably with the benefits users say they want? How do your benefits compare with your competition?

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How much will your consumers pay for superior benefits? Why have you lost accounts or key bids? Do you keep customer loss records and hold post mortems? When did you last visit a lost account or debrief a sales rep?

Factors That Influence Why Ultimate Consumers Buy. Ultimate consumers take home their shopping bag of physical items. However, their main motivation for their purchases is the benefits they expect to receive. And it does not really matter too much whether they are explicit in voicing their reasons or just intuitive about their selection. Three generic reasons to buy have been marketers’ traditional points of departure for determining their market-positioning and promotional strategies. Characterize your consumer categories in one or more of these three levels of buyer motivation:




First, Needs they must meet to satisfy the conditions of their living situation. Second, Wants that are not essential, but help accent lifestyles, and are gratifying. Third, Desires that represent a further stretching of their discretionary spending and a strong desire to enhance a life style.

David Bangs has offered a psychological approach involving a number of reasons why ultimate consumers buy. Check which are strongest with your consumers?7 For each of your own classes of offerings, brainstorm which of these motivations best fit your situation. How does your analysis match the most compelling benefits you are now offering or should be developing and pitching to consumers? And which motivations are your competitors stressing? Why? Factors Influencing Business-to-Business Consumers’ Buying Decisions. Bangs offers a different set of important buying factors to consider for the businessto-business market. Business- or industrial-product buyers, aided by their decision influencers, accept the physical product over their delivery docks. However, they are buying a combination of benefits. Which ones best fit your offerings? Can infotech applications strengthen your benefits package?8

Eight Major Reasons Why Ultimate Customers Buy —To —To —To —To

fill biological needs gain security save time lessen anxiety

—To —To —To —To

satisfy sensibilities satisfy aggressions gain recognition achieve status

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Additional Ultimate-Consumer Buying Motivations —Satisfaction of the senses —Stylishness —Convenience —Knowledge —Comfort

—Imitation of others —Profit —Pride —Pleasure —Fear

—Curiosity —Saving money —Self-expression —Self-actualization —Gaining an advantage

Motivations that Persuade Business Customers to Buy —Dependability —Discounts for bulk orders —Price and quality —Relationship with current vendor —Customization —Market exclusivity —Value —Delivery schedules —Guarantee —Safety for the purchaser Such motivations as these mainly concern how your offering and order fulfillment services stack up against your most challenging competition. Particularly with large business customers, you also are likely to face more subjective and judgmental hurdles. Look for:






Low-price biases or other personal aims of a purchasing agent Poor internal understanding of your benefits and the demands and preferences of the market Technology choices of the product designers ‘‘Old-boy’’ relationships of senior influencers or decision makers Financial constraints unrelated to your specific proposition

WHERE? Where your customers and prospects buy is covered extensively in Key Three. The Where? market-positioning options have been increased and complicated by advances in the infotech state-of-the-art and ingenuous combinations of channels and supply chains. A major consideration is how adaptable your customers are becoming to the processes of shopping and buying online and how well they are accepting the online shopping cart approach. Your customer profiling of Where? should cover the following issues:


Geographic scope of your present customer base—local, regional, national, multinational, and global. What expanded geographic scope options do you have?

CONSUMERS AND COMPETITORS








21

Types of present distribution channels and supply-chain units, and their performance trends; your selectivity policies, for example, intensive, selective, or exclusive distribution through retailers or dealers or your owned retail presence in shopping centers, strip malls, and discount stores. Locations of your firm’s facilities and field sales representation for advantageous access to customers—headquarters, plants, sales offices, field representatives, wholesalers, retailers, customer service centers, factory stores, and research labs. Changes in your consumers’ preferences for channels, buying procedures, and customer services; how your current distribution and supply chain strategies fit such preferences; or do not.

With the proliferation of direct catalog marketing and the Internet, your strategic Where? choices have become considerably more complex. The Internet and e-commerce have fundamentally increased both business consumers’ and ultimate consumers’ choices of where they desire to shop and make their purchases. The Where? changes will continue to increase in both geographic scope and types of distribution channels. Many questions shown earlier in Table A-1 apply to both traditional and infotech-based supply chains. Shopping at One Location, Buying at Another. A major trend in where the ultimate consumer shops and buys is being recognized more broadly. Shopping around is in no sense a new Where? phenomenon. For many years, it has explained the growth and success of the urban, suburban, and strip shopping centers, the discount malls, and the direct mail catalog business. Nunes and Cespedes contend that ‘‘the customer has escaped’’ from the confines of traditional distribution channels strategy. They claim that buyers are changing increasingly to shopping at one or more locations for information and comparisons, and then buying where the same or a reasonably comparable offering is the least expensive.9 The authors refer to this as ‘‘value poaching’’—using high-margin retail sources to research, then jumping to cheaper price channels to buy. The manufacturer, distributor, retailer, and direct marketer need to be concerned about this sophistication and aggressiveness in shopping and hunting for bargains. Nunes and Cespedes argue that the change is spreading among four buying types: habitual shoppers, high-value deal seekers; variety loving shoppers, and high involvement shoppers. The authors argue further that no longer will customers stay in the channels that were designed for them by the suppliers. Today’s customers ‘‘channel surf’’ with abandon, including not just on the Internet, but also canvassing multiple sources in traditional outlets and discount clubs. Among the reasons Nunes and Cespedes offer to explain the dramatic change are:



Shoppers have become more adversarial and aggressive for bargains They have become more strategic, waiting for eleventh-hour sales

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They are better equipped with more information and technology Product quality, availability, and prices have become transparent The number and types of channel outlets have proliferated.10

The requirement all this imposes on the planners of channels strategies is to design for buyer behaviors, not customer segments. Nunes and Cespedes conclude that this requires designing pathways across channels. Vendors of some types of products for ultimate consumers can resist such movements. The list probably will include offerings that can still demand and profit from exclusive distribution channels, such as unique and high fashion lines, and high-value products that depend heavily on proprietary technology or design. But many manufacturers will need to pursue a much more open and varied channels strategy than ever before. This will require adding more of the services and accommodations that have been responsible for consumers’ maverick moves. HOW? How people buy ranges on a wide scale from the simplest repeating or impulse decision to a complex and drawn-out shopping foray. The worst case can become an exasperating process—extremely frustrating and irritating for both buyer and seller. Most of us have bought an unfamiliar product or service on sheer impulse, yet it usually was triggered by at least a latent desire and a vision of a potential new use or application. Or the trigger may have arisen as a substitute for some item or service that was not delivering outstanding benefits. We are always looking for a better price or something new, or a better way! Web searching and surfing have given both ultimate and business-to-business customers more productive ways of shopping and comparing offerings than physically visiting the marketplace. How vulnerable does this leave you, and, conversely, in what new ways can you beat competition with new infotech approaches? Ultimate Consumer Buying Scenarios. The U.S. Small Business Administration has offered a scenario at the complex extreme of the buying process, as shown in Figure A-1. This set of scenarios was drawn up prior to the Internet era, so it does not directly identify how surfing, dot-com, or e-commerce enter into the process of demand creation and marketing. The World Wide Web becomes a new issue to be added to the figure’s steps of Problem Recognition, Conviction to Act, and Search and Evaluation. In the infotech age, how differently are your consumers shopping and making their buying decisions? In what kinds of situations are your customers’ buying patterns becoming more efficient? What distribution channels will buyers use? How much of the ‘‘shop here, buy there’’ trend described by Nunes and Cespedes is affecting your business? How can you make it easier for your customers to

CONSUMERS AND COMPETITORS

FIGURE A-1.

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A Simplified Model of Consumer Purchasing

Source: Fox, Harold W., Understanding Your Customers, Management Aids. Number 4.001, U.S. Small Business Administration, 1986, page 5.

obtain information about your offerings and close the sale with you? What part can Web sites and dot-coms play in your customers’ buying process? What competitive threats do you already face from these approaches? Business-to-Business Customer Scenarios. How business customers buy is also subject to wide variations in complexity, ranging from a purchasing agent, a visit or phone call to a Staples, an Office Depot, or a B2B hub (business-tobusiness order fulfillment center). At the extreme, the process can be quite complex, involving the buyer’s and supplier’s design teams working closely together for months for a new part or component.

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WHEN? You need to have a clear picture of the When characteristics of your customer base and the prospects you are pursuing.








What are your consumers’ repeat and seasonal buying cycles? Their differences by application? Do your marketing policies and practices suit such timing? What are the product-aging and obsolescence characteristics of your industry? How do they affect your offerings, upgrades, and innovations? What is the impact of state-of-the-art technology on your lines? Are you confronted with new time preferences of consumers, for example, days and hours of access to you, as influenced by their new online alternatives for shopping, ordering, trouble-shooting, and other customer-service needs? Is the 24/7 practice a factor for you? What is the developing impact of the growing Internet shopping and buying sources on when your customers prefer to shop and buy? Should you match their expanded access time to reach sources? Do you need to speed up your introduction of enhancements and innovations? And at what added cost?

The When dimensions that enter into consumers’ buying patterns and preferences include numerous strategic and tactical elements, as the side bar shows. HOW MUCH? Your customer profiling can help you quantify many of the relevant issues underlying Kipling’s questions. His designation of six journeymen did not

Factors Influencing the Timing of Purchases














Offering a regular need versus a discretionary want Going for a custom-designed or configured option Preferred shopping by time of day or day of week Matching the longer hours of discount clubs and outlets Timing constraints, for example, for working mothers Seasonality of use Cyclical need or interest A product’s normal replacement life Planned obsolescence by the manufacturer Competitive marketing and promotional initiatives Price wars Triggering impulse buying by ads, point-of-sale, publicity Entry of technological innovations into the market

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require this seventh question. But the small businesses and start-ups do; and in several strategic dimensions. As you perform consumer profiling, How Much? asks you to develop forecasts or ‘‘guesstimates’’ on such strategic issues as these:













The size and potentials for each of the product/market niches you are serving by customer category and present geographic scope—in dollars and units, estimated market share, and growth trends; pricing tolerances, cost/profit requirements, breakeven levels under alternative sales volume scenarios, and price-level options you may be considering; analysis of customer profitability by application segment; customer size— largest and smallest; product or service mix; distribution channels; determining which growth niches and which of your strongest competitive products and benefits should be most profitable; market estimates for new market-positioning options, geographic expansion or contraction, added product lines and services, changes in distribution channels; expected costs of new sales and marketing initiatives with present lines and strategies; working capital and capital-requirement forecasts for significant strategic changes in your customer base and target; highlighting any ‘‘cash cows’’ with financial pro formas and strategies for them; Investments for upgrades of your infotech capabilities in order to meet competitive supply-chain issues and options.

The process of profiling your customers and prospects is toughest the first time. Its purpose is to challenge the relevance and adequacy of your current market-positioning strategies. It should produce some new insights about your managerial and operational strategies, and is a must with any new ventures or diversifications you are considering. The second and subsequent times around get easier as you develop new insights about your accounts. Plan at least annual reviews and include key employees and associates in the exercise. They are all consumers, and it is an excellent way to cultivate in them a positive customer consciousness and servicing viewpoint. CLOSELY WATCH THE UNRULY COMPETITIVE ENVIRONMENT AND PROFILE YOUR MAJOR DIRECT COMPETITORS FREQUENTLY Those who play a lot of poker and win consistently, rarely tamper with their game by trying to second-guess the classic competitive forces beyond their control. John McDonald, in analyzing the theory of games, described four dominant characteristics of the competitive environment (see Figure A-2). Recognizing and thinking through the four conditions helps you stay more alert to both potential threats and opportunistic conditions for initiating your own surprise moves.11

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FIGURE A-2.

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Four Unruly Competitive Characteristics

Source: Derived from text by John McDonald, Strategy in Poker, Business, and War (New York: W.W. Norton, 1950), p. 1.

Your potential problems begin with imperfect information. You do not know all of the direct and indirect future threats you may face. You most often lack knowledge of your competitors’ secrets until they have committed them to the market. You frequently can be unaware of some of the potential problems inside your own organization. Also, you should never take your customer’s strategies for granted. A real sleeper is the customer who, unnoticed by you, makes fundamental changes in his application that lessen or wipe out his need for your offering. It takes the development of close and personal customer relationships to avoid being caught in this situation. You and your competitors always have the opportunity for choice of action. You should assume that your competitors have a shelf inventory of options ready to surprise you—product improvements and new offerings, pricing changes, sales policies, new sales and marketing programs, new technologies. You should be similarly prepared. There is also the ever-present moving target; that is, your interdependence on the actions of others. Further, the element of chance is always lurking—A product or service breakthrough by you or your competitor, a technological discovery that obsoletes present methods, your company’s unexpected substandard performance, or powerful unforeseen external changes beyond your control are factors that can affect your sales adversely. The external factor can be a hidden, lurking threat. One of the entrepreneur’s most difficult, if not impossible, challenges is to keep informed and ahead of all of the adversarial conditions beyond the company’s control. It does not take a rocket scientist to identify the competitors who are competing directly for sales to your customers and prospects. Anticipating any threatening indirect competition is much tougher. Many external factors hold significant competitive possibilities—economic, technological, sociological, environmental, governmental, political, ideological. Indirect developments leading to setbacks in any of these areas can be totally unpredictable. But stay alert anyway.

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Surprise Damage from an Uncontrollable Outside Factor In the early 1990s, the Behlen Corporation, a subsidiary of the Wickes Corporation, was in a profitable niche of the agricultural industry providing grain drying and storage equipment, silos, and prefabricated buildings to regional markets. A new general manager, Tony Raimondo, had just been employed to reorganize and grow the business when his market received an unexpected and devastating blow for Behlen. In the summer of 1993, the federal government cancelled the grain storage subsidies to farmers, replacing them with soil bank allotments to keep farm acreage idle.12 Literally overnight, this collapsed the country’s $300 million grain storage market and rendered obsolete some of the company’s key lines. Revenues toppled and losses reached seven figures. The affected division was spun out and its management, led by Raimondo, began exercising turnaround strategies and seeking new markets. They restructured product lines and embarked on an aggressive acquisitions program. They succeeded in reducing significantly the magnitude of their exposure to the factors that had been beyond their control. Within a few years they were again making impressive profits and studiously watching their flanks. Always keep an agenda item open on your periodic environmental review sessions for What-if?s. Keep brainstorming your external vulnerabilities, and rethinking your contingency plans. And always try to anticipate the unexpected. Recall Michael Porter’s significant work on strategy and competitive advantage that was referenced in the introduction. He contended that competitive advantage—the economic basis for sustaining superior performance—can be achieved in three principal ways, (1) lower costs; or (2) differentiation of offerings that delivers greater value to the buyer and thus commands a premium price; or (3) one or more combinations of the first two for different sub-segments of your business. Porter contended further that rules of competition determine an industry’s and a company’s attractiveness. In Competitive Advantage he identified five forces that influence the elements of long-term profitability: the intensity of rivalry of present industry competitors; the threat of new entrants; the threat of substitutes; the bargaining power of suppliers; and the bargaining power of buyers. A deeper understanding of your competitive standing can result from his elaboration on these five sets of factors.13 Use them as a checklist for focusing on your competitive strengths, and for pinpointing your weaknesses. Ruling out industrial espionage, there is much you can do defensively to keep regularly informed of your competition. With the pervasive reach of the Internet, you can now avoid or at least minimize costly outside market research services. However, the best defense often is to rely on a strong offense. One of the prime ways to stay competitive and improve market position is a continuing productdevelopment agenda to innovate or improve the benefits you offer your customers. This should involve ‘‘partnering’’ with your major accounts, or at least regular,

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periodic reviews of their experiences with your offerings, to discover innovative alternatives. Sharply Define Your Major Competitors’ Differences As you proceed through the grubby work of consumer profiling, clarify the competitive differentials you discover. They are essential inputs for most aspects of your strategic planning. Begin by focusing on your two or three most serious competitors to identify critical clues for:





Forming and updating your strategy and its major elements Strengthening your own offerings with refinements, additions, line pruning, or pricing changes Spotting candidates for discontinuing any declining items or lines, due to issues of profitability, severe competition, or declining market demand Contingency planning, including indications of any threatening competitive moves

How does each key adversary show up in your Kipling analyses of consumers? Where and how are they hurting your business? Which of their weaknesses can you exploit? Remember that, if you are watching alertly, competitors’ marketpositioning strategies should be visible to you as soon as they have committed them to the marketplace, just as yours are to them. Use Kipling’s journeymen to stimulate comparisons and identify alternative strategies that can improve your competitive advantage. In pursuing this knowledge, also try to gain some understanding of how your main competitors manage and operate their businesses. Comments of customers and suppliers, articles in the trade publications, presentations at industry conferences, visiting competitors’ trade-show booths and Web sites are all pertinent sources for ‘‘getting inside their minds.’’ Always review the profiling of your principal competitors at least annually, and whenever else you gain critical new market intelligence about serious threats. Look for gaps in your strategic plan, unfavorable conditions to remedy, and favorable differentials that you can capitalize on more strongly. This exercise comes more quickly and with deeper insights once you have profiled them the first time. The overriding goal of your competitive profiling is to identify what you must do with your market-positioning and managerial strategies to ensure that you maintain or improve your competitive advantage. Table A-3 can assist in clarifying your relative strengths and weaknesses in your industry. Have your key associates join you in gathering and evaluating inputs about, and from, your marketplace. Include visits to key customers, field reports from salesmen and distribution partners, customer service trouble calls, Web site surveillance, and trade articles in your industry and association publications.

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TABLE A-3. How Customers Rate Your Competitive Standing (Base the five major ratings on managers’ account visits and field reports from sales, distribution, and customer service personnel)

Customers’ Ratings of Us*

Principal Competitors and Their Main Strengths and Weaknesses

——— Product and Service Offerings, Benefits and Pricing Features fit the application User benefits are best User value worth the price Current state-of-the-art Periodic upgrades and innovations ——— Channels, Supply Chains and Order Fulfillment Suit consumers’ shopping locations and preferences Efficient ordering, re-ordering and delivery Productive and timely inventory planning ——— Sales Representation and Support of Customer Sensitivity and courtesy to customer Clear presentation of benefits and policies Excellent training in use of offerings Quick response to questions and needs Invite critiques of products, policies and service ——— Customer Service, Trouble Shooting and Maintenance Rapid response to requests for help or service Timely preventive maintenance programs No delays in parts replacements and repairs ——— Customers’ Overall Image of and Regard for Us Always has been highly dependable Expect supplier to be here long term Supplier understands applications and needs Supplier is keeping up with the state-of-the-art Periodic enhancement of offerings and services Enthusiastic word-of-mouth salesmen for supplier Welcomes and values partnering opportunities Clear understanding of supplier’s objectives *(þ Ahead; 0 Even; – Behind)

Analysis of the two principal factors beyond your control—your consumer and competition—should always come before updating your marketing strategy and plans. The five market-positioning keys of Part A flow from that analysis. Together they clarify the face your company is projecting to your customers and prospects, how you want them to regard and favor you, the competitive position you occupy and why, and any changes or innovations that your business plans must address.

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REINFORCE YOUR COMPETITIVE ANALYSIS WITH ‘‘DO-YOUR-OWN’’ MARKETING RESEARCH Before the Internet, two levels of market and marketing research were essential: primary field-based research and secondary research. It was a cardinal sin to bypass the printed sources of so much information and knowledge that someone else had already uncovered. Re-inventing that wheel prolonged the research, and was duplicative and costly. The company often chose to engage outside research services for most of the primary work. Now the Internet and the World Wide Web enable the small company to perform much of its own market and marketing research at considerable savings of cost and time. The small entrepreneur can surf the Internet for knowledge base that already exists, and can learn much online about new opportunities and competitive threats. You can also keep tabs on your competitors’ selling, pricing, and marketing strategies, policies, and programs via their Web sites. Using Table A-1 as a guide, take full advantage of this resource to keep abreast of your marketplace in all of its dimensions.







Geographic expansion and new product/market diversifications Changes in buyers’ needs and specifications Surprise competitive moves, such as new offerings, new types of user benefits New processing technologies, and impending price wars Competitors’ success with dot-coms and e-commerce forms, or switches of your competitors and customers to infotech-based supply chains The entire ‘‘open book’’ of your industry’s marketing strategies.

Watch your competitors’ and major clients’ uses of the Internet and information technologies. If you do not follow suit, you run the serious risk that your newest generation of consumers will favor digital and leave you. Identify crossindustry niching opportunities to establish outsourcing services that relieve other companies of specialized, so-called ‘‘grubby work.’’ Can you profitably market your unique know-how on specialized services that would free other firms to concentrate their resources and time on their areas of core strength? Can the World Wide Web help you go beyond marketing research to identify new strategic options as Goldcorp did? Online Discovery of Lower-Cost Ways to Locate and Mine Gold Goldcorp, Inc., mining in western Ontario, harnessed the Web using online contests to seek new, low-cost ways to find gold. They staged an international contest to obtain expert advice on locating more gold at their Redlake mine. The contest drew in 51 plans from geologists, mining students, and consultants at

TABLE A-4. P R O S

C O N S

P R O S

C O N S

Early Promises of the Internet and Information Technology, circa 2002

wider geographic scope Virtually global reach Instant worldwide communication Expanded prospecting and sales potential

faster timing Significant enhancement of long-standing JIT (just in time) strategies Instant notification of the new offerings, prices, policies, company news Conduct of group projects and collaboration among multiple and remote locations

stronger sales power Searchout and screen ‘‘best’’ prospects Provide comprehensive information and educate uninformed shoppers and buyers Opportunity to ‘‘pitch’’ a hard sell ‘‘eyeball-toeyeball’’ without external distractions Increase prospect exposure for impulse buying

Over-extended geography for dependable order fulfillment and customer services Stretches ongoing costs of maintaining a market presence Local face-to-face competition for your remote building of lasting customer relationships

Less lead time to keep competitive advantage with new offerings, prices and policies

Exposes sales proposition fully to competition Harder to simulate face-to-face closing tactics and pitches for some offerings Difficult to match hands-on shopping for new, complex, customizing offerings

buying efficiencies Great online ordering of familiar, repetitive, multiple items, and changing item mixes Customizing of specs; e.g., Dell Computers Better informed buyers Expands customer choices

more powerful supply chains Dot-coms provide a novel, easier way to shop Major manufacturers and middlemen gain tighter control of supply chain via B2Bs, and command lower prices Best B2B opportunities in fragmented industries of suppliers, business users, or both

new economies of scale A promise of ‘‘geometrically’’ increased efficiencies in many functions Wider geographic market scope a major contributor of higher unit volumes Theoretically lower cost per prospect reached Deeper interchange with users on their needs Higher speed and efficiency in disseminating technical application and service solutions

Difficult to assure precise match with unique characteristics; e.g., garments

Dot-coms’ delivery of orders often costly and undependable Individual suppliers in B2B risk ‘‘instant’’ competition on price; suffer lower margins, loss of competitive advantages Infotech requirements of many B2Bs proving too costly and complex; many large B2Bs losing ground to more specialized variations

Many promises unrealized due to failure to achieve anticipated sales volume levels

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a lower cost than they would have incurred engaging mining experts. Some of the contest entries helped them find six million more ounces! Other small mines then started developing their own contests. As a result of this fruitful experience, Goldcorp began extending digital applications to the mining process. They started stringing fiber-optic cables throughout their mines that enabled geologists using Palm hand-helds to make rapid analyses of the drilling results.14 One important part of your competitive situation analyses should be continuous Web-based research of new online marketing applications and what is now working profitably. Rethink the ambitious early claims for the Web, a number of which are outlined with their pros and cons in Table A-4. Inventory where you, your customers and prospects, and your major competitors stand currently with infotech, using the table’s claims and any subsequent advancements. Then add to your strategizing agenda any options that promise profit potential. PART A: PROFIT PLANNING PROJECTS If you previously have been doing some form of Kipling-level profiling or market-segment planning, you should update those conclusions with any new insights from this chapter. If not, you are encouraged to initiate the following projects and assign responsibilities for updating and refining them on a continuing schedule. 1. Initiate Customer and Competitor Profiling. Profile your current business. If pursuing more than one significant set of customers, select your most important or critical category for your first exercise. Also, start with your strongest competitor. Reach significant profiling conclusions for each of Kipling’s journeymen. A time-saving approach is to cherry-pick the formats of Table A-1 and Table A-3 as guides, adding other pertinent questions that fit your situation. 2. Designate Ongoing Marketing Research Assignments and Responsibilities for Each Significant Product/Market Category. Make each designee the focal point for spearheading Internet and field research, and for collecting the inputs of others and setting up the profiles on a password-protected digital cockpit. These two projects can become fundamental inputs to keep your profit planning realistic and reasonably surprise-proof. And do not forget to look for Goldcorp-type strategy options in the course of your market research.

KEY ONE

End-User Benefits for Growing Niche Markets Achieve Brand Leadership with Superior Benefits That Gain and Hold Competitive Advantage in Your Market Niches ‘‘He always has the best solution for us!’’ ‘‘He meets our deadlines for new projects without fail!’’ ‘‘When our systems have issues, he’s here almost immediately and gets us back up with amazing speed!’’ ‘‘His technicians never leave a mess of wire ends, parts packages, or lunch bags and cans!’’ ‘‘His higher prices are more than offset by the speed, efficiency, reliability, and quality of his services.’’

If you asked Adam Bristol what business he was in ten years ago, his simplest answer would have been, ‘‘I connect computers and phones to telecommunications networks.’’ His loyal customers then and now offer the same high plaudits. His highly recognizable brand and name in his market area, was and still is Current-Concepts Corporation. Many elements enter into establishing brand leadership in any type of endeavor. Probably initiated many years ago by Madison Avenue, this concept has spread from advertising and business competition to entertainment personalities, public service, and even the political arena. This key emphasizes the user benefits of a company’s product or revenue-producing service. Brand identity is perhaps the most critical issue for the market’s recognition of the company and what it is doing for its customers. With this first market-positioning key, we consider what we are selling, for what applications and specific end uses, and against what competition. Our challenge is to convey convincingly what benefits we believe our offerings will give the customer. Thus, it is essential to determine how well they fit users’ needs, how satisfied they are with us, what influences their choices of suppliers, why we win, why we lose, and how we can assure repeat business through

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enhancements and promotion of our benefits. Consider how a small, young company established a favorable brand recognition that has developed a strong and growing base of repeat customers. TURN A MULTI-SERVICE BUSINESS INTO A NARROWLY NICHED PROFIT GENERATOR Adam Bristol had developed his career interest while attending college and working part-time for a general electrical contractor. A fast learner, he began venturing on his own after college. His impeccable contracting service quickly developed repeat business from area contractors and customers. Soon he was obtaining premium prices and fees. Adam became swamped with new customers, virtually all of them coming to him by word-of-mouth. Homeowners and business customers praised his meticulous attention to flawless installations and cleaning up after the job. Electricians were notorious for leaving behind a mess of wire ends and insulation, sawdust from drilling new passages through walls, and discarded conduit, wall receptacles, packaging, and lunch residue. ‘‘Get in, work fast, complete your assignment, clean up your mess, and then quickly get out’’ was Adam’s watchword. He realized that he was reaching the limit of earnings he could hope to achieve as a solo contractor, even with the pricing premiums he could command. So he started hiring electricians and training apprentices to gain some profit leverage on his own expertise. But this did not satisfy him. Training and supervising his employees detracted from his own productive time quoting and working on jobs. When the trainees wouldn’t meet his standards, he fired them. When they became proficient, they left him to see if they could replicate his approach and compete on their own, often failing. Adam began studying the patterns of his jobs. The most interesting trend involved computer and other office electronics wiring applications for small companies who were either expanding their information capabilities, or automating for the first time. A strategy of narrower specialization began forming in his mind. He began pursuing the fastest growing and most lucrative types of work, and specialized entirely in the wiring applications required by information technology. He chose to stay initially with the very lowest technical level, the ‘‘physical layer’’ of information networking—connecting wires. He chose to leave the rapidly changing software and telecommunications aspects to others. His jobs involved connecting computers, printers, modems, fax machines, copiers, scanners, conference TV, and the like to electric power sources, telephone lines, LANs, WANs, the Internet, and companies’ private Intranets. He targeted offices, labs, and plants in business, government, and other non-profit institutions with great success. Adam had proved the wisdom of narrow niching, but as competition intensified he closely tracked each technological innovation in data-transfer connections. He upgraded his service at every advancing stage—through higher quality

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cabling to support computers, full data transfer using switches and routers, optical fiber, voice transport via more sophisticated phone systems, and Voice Over Internet Protocol (VOIP), an integrated, computer-based concept. As of 2006, he was an acknowledged leader offering state-of-the-art services in ‘‘unified telecommunications solutions using data, voice, and video systems.’’ He was continuing to prosper with a small, loyal complement of ten technicians, the size he preferred for doing his own thing. MATCH EACH KEY PRODUCT OR SERVICE FEATURE WITH A SUPERIOR BENEFIT Too many entrepreneurs are overly intrigued by the ingenuity and resourcefulness they have built into their products and services, and the raves from their family, in-laws, and friends. They give too little attention to determining their consumers’ views and how independent users regard their offerings’ ability to meet their requirements. They fail to translate for the consumer what each superior feature should mean to the user when compared with their present solutions. Long-term repeating customers are your number one marketing and service goal. Emphasize and sell benefits first, features second. Then keep them buying as long as you continue to deliver highly competitive values that are worth the price for their application. Satisfied repeating customers become your best sales force through their ‘‘word-of-mouth’’ influence. Never forget that you can get even more word-of-mouth effect from dissatisfied customers. Once you have created the benefits that win customers, you must go all out to keep them coming back! It has been estimated to cost five or six times as much to gain a new customer as to retain one over time. You can risk losing one-half of your customers after five years. You must make it profitable and beneficial for them to stay with you. This is what brand leadership is about. Keep all of your people focused on your customers’ needs to assure that you continue delivering superior benefits and building lasting relationships with them. Treat every customer as a key account. Enlist all of your associates and employees in this endeavor. And you’ll profit more if your customers cluster mostly into one or more related niche markets. Make certain that every key feature of your product or service contributes to superior benefits, and is rooted in strong core competencies. Look for the many ways your product, its development and production, and its presentation help deliver benefits to your consumers. Always listen carefully to why the consumer chooses competitors’ offerings over yours, or vice versa. The possible conversions from features to benefits are legion; a few possibilities are shown in the sidebar. The Belkin Corporation, of Compton, California, makes a strong benefits presentation on the packaging of their USB Hi-Speed Cable for connecting computers to printers and other peripherals. Other brands can be purchased at a lower price, but Belkin gives you reasons for paying a bit more to get

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Converting an Offering’s Features to Benefits Product specifications

Superior performance in use; longer life; reliability without breakdown; more fun; simplified application; innovative solution; replace inferior product in the application

Colors & sizes

A wider variety of usage matches; up-to-date fashion leadership; custom fit

Assembly instructions

The easiest and quickest installation steps; low-cost application

Operating instructions

Ease of use; time-saving productivity; lower training costs; reduced manpower

Quantity discounts

Lower front-end outlay; calculated savings over time; convenient replenishment encouraged

Parts replacements

Cost-saving design; instant availability to avoid shutdown; reduced service expense

Remote monitoring

Avoid plant closing; timely scheduling of preventive maintenance

‘‘unsurpassed’’ quality. Review the features and benefits list from the package of one of the connecting cables Belkin offers. USB2 Hi-Speed Cable — 40 Times Faster








Molded-Strain Relief and PVC overmolding to ensure a lifetime of error-free data transmissions. Undermold Shield helps to prevent Radio Frequency and Electromagnetic interference (EMI/RFI). USB Logo guarantees cables are 100% compliant with current USB specifications. Gold-Plated Copper Contacts provide maximum conductivity; ensure no data loss. 20-Gauge power wires to support 480 Mbps data rate. Impedance Matched twisted pair construction to minimize cross talk, ensuring high-speed, error-free data transmission. Foil and Braid Shield complies with fully rated cable specification reducing EMI/RFI interference.

Leapfrog Competitors with Design, Craftsmanship, and Innovative Product Options Betsy Stuart founded Elms Puzzles, Inc., in the early 1980s, and began challenging the quality king, Stave Puzzles, with new and innovative features and

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benefits. Her market target was the elite aficionado who wanted the very best handcrafted jigsaw puzzles mounted on mahogany plywood. Still going strong in 2006, Elms is in the top tier of the wood puzzle category, with very few competitors. The short list includes Stave, long a dominant factor at the high-quality level, and Rainy Lake Puzzles of Minneapolis, Minnesota.1 Among the unique Elms puzzle subjects are dazzling prints, rich with complicated pictures and robust hues. They range from medieval tapestries to vibrant prints of contemporary art. Some customers want reproductions from their art collections and their choice memorabilia—their own artwork and favorite photographs. The Forbes Collection exclusively licensed Elms to produce a line of elegant hand-cut puzzles, including their collection of Faberge Easter Eggs. The line has a wide range of superb subjects, with straight, round, or irregular, edges, ranging in price from $100 to $3,000, and higher for custom jobs. Employing six cutters, Stuart ships about 2,000 puzzles annually from Harrison, Maine. Each puzzle is separately crafted, and the craftsmen can incorporate the customer’s special requests for unique designs of individual pieces. In 2002, Stuart established a Rental Club, for a one-time membership fee of $50, with rentals ranging from $30 (under 300 pieces) to $140 (for 1,100-piece puzzles). Competitive strategies include the very best in design, the careful craftsmanship of Elms cutters, the customizing and licensing options, and the continuing introduction of new, fun designs. Stuart gets revealing inputs on what interests her market from the orders for custom puzzles, and she goes regularly to boutiques to present her lines and to meet her market. Also, she and her husband research wood puzzle history, and he has amassed a collection of some 200 vintage designs. Their rental option is unique, and helps to expand their market niche. They have a clear vision of what their elite, highly specialized, discretionary market wants. How can you best proceed in your business to keep generating and sustaining what your market really desires? Or break into a new market that has had a dominant leader historically, and continues strong, as Stave Puzzles does? Think Like Your Customers and Learn Their Perceptions of You Your reason for existing must center on your customers. You must live in their shoes. Get your entire organization thinking like them. Exert your collective efforts to develop what they really want, not what you think they should have. You must get into your customers’ minds, understand their needs and applications, their preferences for suppliers and brands, and reasons for their preferences. You also must keep alert for changes in the users’ applications that would negatively impact your business with them. The surest way to know what the customers think they can obtain from you on a repeating basis is to ask them! You have no guarantee that your customers’ view of you is what you want it to be. What do you want them to feel about their benefits from your offerings? And,

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Questions Consumers Ask That You Must Answer Favorably 1. How does your pricing compare with my current supplier? 2. What are the three most important things you, the vendor, want me to know about your product or service? 3. Why should they be important to me, the prospect? 4. How does your product or service rate when compared with others? 5. How do you feel your company is better and different from my current supplier? 6. Why should I believe that you know what you are doing? 7. How do you make it more convenient for me to buy than does my current supplier? 8. How can I be sure you’ll be around for the longer term?

just what are their specific needs—their reasons for choosing you? An excellent point of departure to discipline thinking like your customer is still a line of questions raised in a 1996 Upstart publication.2 Green and Williams suggested eight consumers’ questions aimed at producing answers in their minds that favor you. Read the questions in the sidebar, frame your answers, then bite the bullet and go to representative customers to test their acceptance or rejection of your claims. Develop Superior Benefits by Listening Carefully to the Customer’s Critical Application Requirements In 1999 the volunteer fire company of Grafton, Vermont, desperately needed to replace its 1968 International fire engine. The truck could only go six or seven miles per hour up Grafton’s steepest hills to a fire. Its cost of maintenance kept rising prohibitively. Its lights sometimes failed at night. Reliable performance and driving safety were critical for the volunteer firemen. The firemen’s association and the fire chief raised $300,000, enough donations to replace that truck and overhaul their ‘‘more up-to-date’’ 1973 Ward La France. Stan Mack, the fire chief shopped for the best manufacturer who would listen seriously to a large list of unique specifications to fit the fire company’s requirements. The manufacturer most interested in his needs was American La FranceFreightliner, a subsidiary of DaimlerChrysler. They were asked to produce a design that met the requirements of the very small town and stayed within Grafton’s budget. Both the fire chief and Freightliner were highly pleased with the resulting joint design. The manufacturer requested that delivery be delayed long enough to show off the new design. They were incorporating it into their line, and wanted to promote its innovations at their next annual manufacturers’

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trade show. The new truck filled Grafton’s bill impressively, and enhanced the vendor’s understanding of the benefits its small-town markets needed. Clarify Issues Raised by Your Customers’ Perceptions Your aim with the customer queries is to clarify the various factors that contribute to your present competitive advantage or disadvantage. Be most alert to uncover the critical issues. What benefits in your present lines are most responsible for your current competitive advantages? Or, conversely, for your competitive disadvantages? Unless you intend to give your offering away at a losing price, your market will demand, alone or in combination, such competitive differentials as the list shown in the accompanying sidebar. The benefits both ultimate consumers and business-to-business buyers seek are many and varied. They come in many forms and virtually unlimited combinations to make a winning marketing strategy. Clarify the combinations that are most vital for your product and will keep your customers’ patronage. Which vital needs of your customers are your competitors satisfying more effectively? And where do you find the new ideas to beat them? Turn Your Own Employees into ‘‘Devil’s Advocates’’ As an integral part of finding and developing better products and benefits, bring your employees into the consumer mindset. Get them to draw upon their own experiences as customers. Prior to an office brainstorming session, have all of your attendees ask themselves, ‘‘What’s one of the biggest purchases I’ve ever made?’’ Exclude the buying of a home. Have the group participate in a

Selected Benefits That Small Businesses Should Offer











High quality, reliability, durability, long operating life, and completely dependable and prompt servicing Greater user-friendliness in operation Superior performance productivity, and freedom from breakdown A competitive initial price with matching value for the customer and you, and more economical to use Acceptable timing in meeting availability and delivery promises A resupply or repair source available quickly as needed, including just-in-time ( JIT) access to reduce your inventory costs, while assuring continuity of your operations Innovative approaches to your application that further improve productivity and reduce costs State-of-the-art solutions for your customers’ needs

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Kipling’s journeymen routine with one or two of their own examples. Encourage questions and challenges along the way. Then, focus the entire group on profiling your company’s major offerings with representative customers in mind. Understanding their perceptions of you is essential. You can’t be too meticulous in thinking about how they may be viewing you. Partner with Key Accounts to Better Understand Their Applications and Develop Stronger Offerings and Benefits Making a few key customers your partners can help you develop benefits that establish niche leadership. This can also prevent or deter customer switching so you can gain the economies of long-term repeat business with loyal customers. It helps to ‘‘lock in’’ loyalty in both directions. Choose your partnering candidates with these questions:





Who, by their steady patronage and repeat buying, will help you maintain a regular sales flow and growth trend? Who will teach you their applications and help you understand their needs more deeply? Who will suggest other related products you could consider adding to your lines? Who will work closely with you, share their secrets to help you stay on the leading edge, and even participate with your development of the product improvements and innovations for future shared success? UPGRADE A ‘‘ME-TOO’’ BUSINESS INTO A REVITALIZED ‘‘ME-TOO-PLUS’’

Every business eventually needs to upgrade or eliminate an un-differentiated, ‘‘me-too’’ product or service when it has become a price-sensitive commodity. A ‘‘me-too’’ restaurant, deli, or lunchroom is a frequent failure story for smallbusiness ventures. This experience keeps recurring because of the seemingly low cost of entry and the ease of ‘‘cooking up’’ a meal—any standard meal. However, too many new ventures offer a nondistinctive and boring menu, a de´cor not conducive to ‘‘hanging out,’’ or an initial underestimate of what they need in order to survive on a small nest egg while trying to do their own thing. The tired, commodity-stage product or service can continue to make a contribution to overhead for only so long in the status of a ‘‘cash cow.’’ Continuing it can make sense where you have a superior cost and pricing advantage, and have a chance of maintaining it without promotion or added investment in the face of commodity-level competition. But before your P&L statement signals a drastically sinking ship, you need to decide whether to abandon the product or initiate aggressive renewing steps.

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Alternative Paths to ‘‘Me-Too-Plus’s’’








Re-engineering for higher performance and greater efficiency Higher product or service quality for longer life and fewer breakdowns More attractive and aesthetic design and construction A lower price due to simplified production methods and service steps More versatile uses built into your product More reliable initial and ongoing customer service and training Getting ‘‘out of the box’’ with better ways to meet customers’ applications

Converting to a ‘‘me-too-plus’’ can proceed in a variety of directions, embracing aspects of all of this book’s ten small-business keys. The sidebar lists several avenues for converting a ‘‘me-too’’ into a ‘‘me-too-plus.’’ A potential ‘‘me-too-plus’’ venture can take advantage of considerable history and know how to help structure it. The task is to elevate the ‘‘me-too’’ offering from a competitive copy to a distinctive product or service. You must build innovative features that could appeal strongly to particular segments of its market. An entrepreneur proved this in the following situation. Expand the Applications for a Mature, ‘‘Me-Too’’ Offering A seasoned military and commercial pilot started FlexLiteUSA, Inc., after he was laid off by a major airline in 1989. The pilot founded a new company by developing significant improvements in an old lighting product for a longestablished application. Relatives had steered him to a stopgap job selling lights for highway exit signs. During a sales call he found a customer using exit lights of obviously inferior quality made in Taiwan. The product was an 18-inch light rope consisting of a plastic tube encasing a series of tiny incandescent light bulbs.3 The ex-pilot quickly realized the potential for an improved product that should find a ready market as a low-cost, low-energy replacement for large bulbs then being used in many exit signs. He decided to improve the product and market it, and formed his new company. He visited manufacturers in Taiwan, secured a licensing agreement, and hired his first employee to help start selling the original line. He found a sturdier plastic as well as stronger brass bases for screwing the light rope into conventional light sockets. He then applied for a patent for the new product, which he named Excite, and began identifying and promoting its applications in addition to the original exit signs. These included light ropes for use by mechanics and repairmen. Gradually improving business enabled him to add three more employees. He secured certification of his improved product design from an independent testing organization, the Underwriter’s Laboratory of Illinois. With this promising start, the company developed new applications for the light rope. One of the most popular versions had lines of up to 300 feet, both continuous

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single strips and 100-foot sections, connectible with waterproof plugs. The company developed a large and growing market of firemen and rescue workers to provide trails in and out of buildings. FlexLiteUSA, Inc., was thriving in 2006, strong evidence of entrepreneurial opportunities to bootstrap a new business by making innovative improvements in an old product with new applications. Take On a Giant with Significant Service Upgrades and Benefits Antenna Audio was a small London company that merged with Arts Communications and Technology in 1998. They had been struggling to break into the audio-tours market for museums, historic sites, and cultural attractions. A contract to develop the audio package for tours of Alcatrez Penitentiary in 1987 had been their first win as a neophyte in an industry dominated for 30 years by Acoustiguide. Antenna beat them out by abandoning the traditional fact-filled, fixed-sequence, single-tour-path, ‘‘lecture’’ formula. Instead, they gave the tourist animated accounts by former guards and inmates reciting a bloody siege, solitary confinement, the sounds from a nearby yacht club, and other human-interest storytelling.4 Antenna went on to ‘‘develop the first high-memory, random-access audio appliance, called the Gallery Guide. Its technology lets visitors choose what they want to hear from deep memory banks (up to 50 hours of content). The visitors go where and when they want to go, choosing their own viewing sequence.’’ With this imaginative and creative new approach, Antenna was able, in ten years, to establish continuing contracts with many of the world’s most significant cultural museums and sites. Clients included the National Air and Space Museum, the Vatican, the Louvre, the Hermitage, the Chinese Museum of the Terra Cotta Warriors, Graceland, and the New York Metropolitan Museum of Art (which Acoustiguide had held as a client for 30 years.) All of these successes cut heavily into Acoustiguide’s world market share. Antenna, from its very small start, began winning with its flexible, deep information tour guide, and by 2005 had won more than 500 leading sites worldwide. This innovative company had strengthened its leadership in audio and visual interpretation as well as resort-industry applications, and also telematic services, using GPS to deliver material relevant to a person’s location. As the Internet and wireless technologies developed, Antenna continued to introduce innovative audio techniques and content, providing a dramatic example of converting a ‘‘metoo’’ niche industry into a ‘‘me-too-plus’’ with exciting ‘‘value-addeds.’’ FOCUS ON HOMOGENEOUS MARKET NICHES AND BE CAUTIOUS ABOUT DIVERSE CONGLOMERATIONS Superior benefits and sharply targeted consumer niches go hand in hand. Together, they constitute a powerful road to repeat business and the low-cost

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sales power of word-of-mouth referrals. Concentrate on those growing niche markets where you can best leverage your core strengths and focus your sales and marketing. You will gain significant competitive advantage against competitors who are generalizing on too many different kinds of markets. The ‘‘pure’’ niche player has a mission of serving only homogeneous groupings of customers who share the same basic characteristics and commonalities of their applications. The more narrowly you define and target a niche of consumers or a critical application, the greater is your opportunity to capitalize on the things you do best, gain efficiencies of specialization, and come up with winning offerings and benefits. The huge proviso, of course, is that your niches are large enough to be profitable. Also, they should be growing at a healthy rate! Take a cue from Roger Pryor and don’t scatter your shots. The small company can’t be all things to everyone. Sharply niche your user benefits and market targets. Apply Core Strengths to New Applications for a Familiar Market Niche Two young engineers left successful careers in a large engineering firm to found Green Mountain Technologies in 1992. They saw the benefits of applying materials handling technology and computers to composting of waste by municipalities and other public and private waste collection systems. Michael Bryan-Brown settled in Northern New England and his partner, Tim O’Neil, in the Northwest. Their mission was to bring the science of composting to operators through state-of-the-art technology and system innovations. Their initial GMT product lines to be marketed nationally were ‘‘Containerized Compost Systems’’TM and ‘‘The Detainer.’’TM Containerized Compost Systems are large-scale linkages of customengineered modules and components for small municipal wastewater treatment plants that process bio-solids, food waste, manure, fish waste, and paper sludge. The Detainer is a line of smaller, truck-handled systems for ludge and septage dewatering of wastewater sites at processing plants, factories, and wastelands. Both systems offered significant new customer benefits. They process biosolids and food waste and produce a salable compost product to cover some of the client’s operating costs. Their capital and engineering costs and system maintenance are relatively low. They have modularity for easy expansion, with composting capacity variations from 1 to 100 tons per day. Also, computerized controls can run the systems unattended, with automatic monitoring and record keeping. After successfully marketing a number of these systems, GMT partners applied their core strengths and innovative ideas to a third, smaller standardized product. They developed a low-cost, food waste composting system designed specifically for onsite composting. ‘‘The Earth Tub’’TM is a rotational-molded cylindrical container standing 48" high, with an upper diameter of 89" and a lower

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diameter of 64". It has a volume of 3.5 yards and a throughput capacity of 100 to 200 pounds of waste per day. The Earth Tub created markets in a new niche for GMT—schools, universities, restaurants, hospitals, and other institutions generating high volumes of organic waste. It offers the basic benefits of GMT’s custom systems, but taps a vast new market of much smaller installations at a low cost. It is a sanitary way of replacing an institution’s waste collection expense with a flexible onsite system that yields re-salable compost. Furthering their innovative pioneering, the two partners then expanded into a new service, compost management software and instrumentation with their ‘‘Windrow Manager Software.’’TM The system facilitates composting waste collected in windrows, static piles, or concrete tunnel systems, and is accompanied by a handheld Pocket PC and probe for sampling field temperature and oxygen. Their highly successful ventures keep growing through innovation of user benefits in pursuit of GMT’s founding mission.5

Profile and Prioritize Each Category of Customer Niches A natural growth strategy is to pursue more than one related niche. With a customer base and a profit track record, you already have the beginnings of formalizing multiple niching strategies. Start by separating your current list of accounts into homogeneous groupings. Differentiate them by their demographic and psychographic characteristics, usage applications and patterns, shopping and buying practices, and geographic concentration. View all of your present and prospective customer niches as separate profit centers or discrete marketing segments. Analyze the cost of maintaining or developing each, and determine those types most profitable for you to serve. Eliminate or de-emphasize your marketing to those niches that are either less

Factors for Prioritizing Your Customer Groupings 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Percent of current revenues from each grouping Your current profitability with each group Relative market size, growth, and profit potential Your relative competitiveness within each Comparative benefits that you can deliver Competitiveness of your supply chain Major differences in how to prospect for customers Partnering opportunities with key accounts Exposure to new consumers and applications Least vulnerability to design technology Least vulnerability to infotech-based competition

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profitable or not making a contribution to your overheads. Determine the importance of each different grouping to you by clarifying such issues as those suggested in the sidebar. Support your evaluation of these issues with a thorough analysis of the significant niches in your marketing strategy along the lines specified in Table 1-1. Make separate niche assignments in your headquarters or field organization for developing the table’s information, keeping it current, and coordinating the identification and development of recommended niche strategies. If you use key accounts managers in your sales organization, consider assigning the appropriate niche planning responsibility to them. Set Your Niching Strategies and the Plans for Their Implementation Consider including the following elements of an effective strategy and operating plan:






















Place first priority on the best niches for your benefits: Are you concentrating your development and marketing efforts on highest potential markets for your features and benefits? For your core strengths? Validate niche demand and growth prospects: Have you developed satisfactory proof of demand and growth for each niche? Do you foresee gaining an adequate market share? Is each group’s reachable market large enough to cover direct costs, allocated overheads, and profit objectives? How soon? Have you chosen narrow enough specializations for meaningful focus, yet wide enough for economies of scale and room for growth? Inventory your essential core strengths: Have you the needed core strengths in development and production? Distribution channels, supply chain, sales, and marketing? Financial resources? Technology leadership? Weigh the competitive odds: What are your odds for achieving significant competitive advantage? How much do the odds differ by niches? What niching priorities should you set? Set competitive pricing: Are you convinced that your offerings can continue to be priced competitively? Do consumers recognize the values and accept your price/value relationship as superior? Find benefits-development partners: Are you taking advantage of partnering with your key accounts to develop the benefits they really need and want? Undertake internet niching research: Are you exploring the Internet and information technology for procedures that could improve the competitiveness of your niching strategies? Evaluate career opportunities: Can new growing niches provide key associates with more promising, exciting, and lucrative career opportunities? Set future strategies for your ‘‘non-niche’’ accounts: Screen the customers falling outside your priority niches to determine how much you should

TABLE 1-1.

Market Niche Profiling Worksheet for ______ Segment

Review Dates and Reviewer: (attach supporting notes, data, and exhibits as needed) Niche Description: (attach brochures, videos, other)

Market Size and Offerings Categories

Established User Applications

Major Competitors

Your Competitive Position

Differentials—Why?

Major Customers

Key Prospects and Types

Prospecting Approaches (Internet/Print/Field Research) Company Sales History ‘‘Word-of-Mouth’’ Referrals Trade Publications Conferences Dodge Reports Smokestack Calls Other ______

Buying Decision Factors (Ranked) Persons Deciding or Influencing (Type and Names) Chief Engineer Operations Manager Purchasing Senior Management CEO Architects Consultants Municipal Boards Other ______

Principal Decisions and Reasons: Lowest Price Price/Benefits Evaluation Match with Application and Problems Quality of Offering Customer Service Responsiveness Maintenance Record and Cost Long-Time Business Relationship Close Personal Ties, ‘‘Old Boy’’ Status Other ______

Sales Objectives and Strategies Goal Statements and Numbers Business and Geographic Scope Core-Strength and Market-Drive Focus Corporate-Image Aims Leapfrog vs. Improve ‘‘Me-Too’’ Outsourcing Partnering and Alliances Channels Used Direct Sale Distributors Sales Reps Internet Other

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continued Direct Salesforce

Salespeople Sales Reps: Programs and Agreements Sales Commissions and Incentives Trade Shows and Assn. Conferences Key Accounts, Sr. Mgt. Sales Prospecting Approaches Distributors and Supply Chains Terms and Territories Own Stock or Consignment Inventories—Products and Parts Perform Customer Services Customer Services Headquarters Service Dept. Guarantees and Warranties Parts and Inventories Field Service Reps Advertising and Promotion Business Publications Yellow Pages Direct Mail Publicity and PR Point-of-Sale; Other Media ‘‘Guerrilla Marketing’’ Internet Programs Company Web Site Electronic Supply-Chain Systems or Elements Project Design and Status Interactions Sales Prospecting and Market Research R&D and Partnering Programs Internal Development Projects Underway Key-Account Partnering/Joint-Venture Projects New Projects in Market or Field Test Agenda/‘‘Wish List’’ of Problems to Solutions




emphasize them in the future. Evaluate their relative profitability and contribution to overheads. Do you need to keep all of your ‘‘non-nichers’’ to preserve their contributions to your overhead? To maintain the interest and allegiances of your key distributors and sales channels? Will your continued pursuit of non-nichers detract from achieving your overall goals? Plan for a reserve of niche offerings: Do you plan to establish a ‘‘shelf inventory’’ of offerings/benefits to counter competition quickly? Keep ready to counter competitive surprises and generate new approaches of your own.

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Exercise great caution when diversifying into markets involving unfamiliar offerings, end users, and middlemen. Your small business should depart from related niching only if you feel you have exhausted current options, and have thoroughly profiled the new niches. Then, try stretching your imagination and that of your associates with brainstorming to find and develop the innovative opportunity.

TAKE YOUR EXPERIENCE AND CORE STRENGTHS ‘‘OUT-OF-THE-BOX’’ INTO INNOVATIVE VENTURES Innovating is arguably the greatest fun of all of the benefits and niching strategy options. However, most small businesses cannot justify setting up the imposing invention think tanks of the Fortune 100. A cardinal innovating rule for the small entrepreneur is to be particularly cautious with a new idea that only you, your spouse, and in-laws view as a bona fide need. Obtain impartial assessments to avoid an offering with too limited user appeal or reinventing the wheel with nothing new to distinguish it. After all, how many ‘‘Better Mousetraps’’ can there be? Migrating your strengths and benefits to new products, markets, and applications may offer greater growth potential than upgrading into ‘‘me-too-pluses.’’ The depth of understanding and experience with your established core strengths, and their transferability and marketability are the main requirements for such migrations. The sidebar suggests a few situations you might explore to exercise your associates’ imagination in ‘‘getting out of the box.’’

Strategies for Opening New Product/Market Niches









Lower-cost, scaled-down versions of your product for new user niches with smaller capacity requirements Customization options for prospective buyers who desire uniqueness, or want variations in your main configuration (e.g., Dell Computers) Outsourcing to specialized cross-industry services that unburden tactical operations and free up your resources for more critical work Marketing revenue-producing offerings derived from unique expertise that you developed originally to serve your own operations or activities Changes in production processes that enable you to price for another market State-of-the-art technology added to the product for a higher level of productivity and price/value tolerance Adding ‘‘Lexuses or Cadillacs’’ to your line of ‘‘Toyotas or Chevrolets’’ hoping for a brand transfer to more affluent buyers Adding ‘‘Toyotas or Chevrolets’’ to trade on your ‘‘Lexuses or Cadillacs’’ brand hoping to benefit from a quality image

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Consider three innovative small-business entrepreneurs who applied individual expertise and educational preparation to entirely new endeavors, and a fourth who took opportunistic advantage of a chance brainstorm. The Perseverance of a Prolific Inventor–Creator of Toys and Scientific Breakthroughs Lonnie G. Johnson, of Smyrna, Georgia, began his career as a highly productive aerospace engineer. He had graduated from Tuskegee University in 1975 with a master’s degree in nuclear engineering. He worked at the Air Force Weapons Laboratory in Albuquerque on space safety projects. In 1979, he joined Jet Propulsion Laboratory in California working on the Galileo spacecraft.6 During experimentation at home, in 1982, with a prototype cooling device developed for an atomic battery, he got the idea for a new toy. He ultimately marketed it as the Super Soaker, billed as the world’s most powerful and popular squirt gun. Johnson patented it in 1983, but the gun was not perfected and taken on by a manufacturer until 1989. In 2001, it was still being marketed by a Hasbro subsidiary in 14 models priced at up to $60 each. The secret of Johnson’s invention is its deft storage and release of energy to fire volleys of high-pressure water up to 50 feet. The design enables a child to operate the pumping action. Sales success of the Super Soaker enabled Johnson to found his own firm, Johnson Research and Development, in 1991. He is a consummate inventor, with 60 patents and 20 more pending. His company, which employed 14 people in 2001, develops new products, specializing in areas like heat transfer, thermodynamics, and fluid dynamics. The Johnson Tube is 25 percent more efficient than conventional heat pumps and air conditioners. It was a refrigeration system developed for the Galileo Probe and the Mars Observer Project. Johnson’s company continues to explore advancements in thermodynamics, fluid dynamics, and toys. When Inventors Digest asked Johnson what advice he would give a struggling neophyte, he replied, ‘‘Perseverance! There is no short, easy route to success.’’4 He might have added—Don’t look too far from your own core strengths; extend your inventive productivity from the base of talent you already have. A Start-Up Driven by the Deep Expertise and Commitment of the Inventor-Entrepreneurs The founders of AnthroTronix, Inc., Silver Springs, Maryland, were both seasoned professionals and budding entrepreneurs endeavoring to ‘‘do their own thing’’ with a new start-up. Corinna Lathan and Jack M. Vice wanted to develop and market an invention by Lathan for therapeutic treatment of children with speech, learning, and physical disabilities. Initial funding for the start-up was obtained through a grant from the U.S. Military and the Department of Education.7

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The product, JesterBot, is a robotic toy, which is activated by its young patient to mimic him. The child wears leg- or armbands, or a hat embedded with radio transceivers and sensors. A wave of the hand or nodding of the head sends radio signals to the JesterBot, which mimics the child’s actions. The visual feedback creates a sense of play and control. The robot can also be programmed to guide a child through games. In 2000, the project was in the testing and development phase at Mt. Washington Pediatric Hospital in Cheverly, Maryland, where six kids had been working with the robot. Several technical improvements were needed. Its target niche was estimated at 4.5 million children between the ages of 3 and 14, within a huge market of toys for disabled kids. Lathan had been interested in rehab for a long time, and brought to the venture a master’s in aeronautics and astronautics, and a Ph.D. in neuroscience from MIT. Following a professorship of biomedical engineering at Catholic University she started zeroing in on JesterBot while working with disabled children. Following their success with that therapeutic toy, the founders expanded their venture into a dynamic human factors engineering concern. They have become leaders in therapeutic, motivational, and educational needs of children with disabilities. Extend Your Innovative Technical Expertise from One Application to Another Major Growth Market Thirteen years after World War II, in the era of the Cold War, a small systems engineering group in a large industrial corporation took on a missile defense project for the U.S. Department of Defense. They were quite successful in the design, development, and installation of major U.S. missile launching systems, notably the Titan missile bases across northern United States. Along with this work, the group gained considerable experience in developing large-scale, automated materials handling systems for the U.S. Air Force. The group’s leader, Frank B. ‘‘Jake’’ Carder, spun the unit out of his parent company to start a pioneering business in automated freight handling systems for commercial airlines. He found a new parent organization, Dorr-Oliver, to take on his unit, which they named Dortech. Several major international airlines engaged Dortech to design cargo terminals and develop and install sophisticated automated storage loading and unloading systems. Clients included KLM, SAS, Alitalia, Lufthansa, and Varig, along with TWA, Northwest Airlines, Braniff, and several other major U.S. airlines. The company quickly became a leader in large container handling, providing the entire system of conveyors and loading vehicles that interfaced the airplane with automated multi-level warehouse storage systems. As the industry’s vision and anticipation of huge all-cargo airplanes did not grow to the magnitude anticipated, Jake expanded his systems to automated pallets and containers for mixed cargo and passenger flights, and new concepts of

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passenger boarding and exiting. His target always was the benefits that meant significant savings in costs and service time, and important competitive advantages for his airline clients. In our free-enterprise environment, and even more so in our infotech age, a lot of innovating also gets done via inquisitive observation and brainstorming. The small entrepreneur or would-be entrepreneur stays alert for the rare opportunities of sheer chance. The key is to have a questioning mind and be an astute observer of what’s going on around you. Or, just be lucky! Then the entrepreneur is still confronted with the odds against becoming viable. Seldom is it a bolt out of the blue, rather the alertness to match up the rare and chance inspiration with a recognized or latent need, as we will see below. Discovering a ‘‘Once-in-a-Million’’ Innovation While Observing Nature on a Daydreaming Outing One summer day in 1948, George de Mestral, a Swiss amateur mountaineer, engineer, and inventor took his dog for a nature hike. When they returned home, both were covered with burrs. George wondered how the burrs’ filaments were organized to cling so tenaciously to each other and to his pants. He put one of the seed-bearing burrs under his microscope and discovered all of the small hooks that hung so viciously to the tiny loops in the fabric. George’s mind must have jumped to something like ‘‘Why wouldn’t this pattern of nature make a good fastener and closing device for garments and maybe all sorts of other things?’’8 He designed a unique, two-sided fastener, one side with stiff hooks like the burrs and the other side with soft loops like his pants’ fabric. Working with a weaver from a textile plant in France, he perfected his hook-and-loop fastener. By trial and error, he discovered that nylon, when sewn under infrared light, formed tough hooks for the burr side. He finally patented the design in 1955, and called his invention ‘‘Velcro,’’ a combination of the words velour and crochet. The rest is history—and very successful history at that. George’s patent was for his Velcro Brand Hook and Loop Fastener. It is still a registered trademark owned by Velcro Industries. George lived a long and quite comfortable life; born in 1907, he died in 1990. However, don’t count on emulating him easily, or coming up with a once-in-amillion innovative dream storm like Velcro. When George got the seeds of inventing Velcro on that lazy summer day, he had at least three essential traits of a successful entrepreneur. He had an intuitive marketing instinct for a consumer’s need, and he could project his thinking ‘‘outside the box.’’ He also had the guts and determination to bring an unexpected new idea to fruition. Velcro’s success story is one of huge magnitude, and one of the lightning bolts! It illustrates another maxim, ‘‘When you trip over an opportunity, don’t hesitate to seize the moment. Someone else might beat you to it!’’

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TABLE 1-2.

Competitive Evaluation of Benefits and Strategies Major Suppliers’ Benefits Strengths and Weaknesses

Our Ratings* ______

Benefits of Current Product and Service Offerings Features, benefits, market share of each offering Solution to users’ application problem and need Cost-effectiveness of fit for users’ application Relative breadth of line to match the application

______

Niching Strategies Product/market segments featured and served Segments providing leading economies of scale Supplier leadership positions by segment; Why?

______

Pricing Best price/value match for customer Competitiveness of terms, discounts, quantity buys Initiatives with special incentives and offers

______

Customizing and Added-Value Choices Receptive to varying application requirements and customizing for parts, components, assemblies

______

Partnering with Key Accounts on New Offerings Joint planning for upgrades and new offerings for —Users’ present applications —Users’ other applications

______

Companies’ Overall Offerings Strategies All-around performance in serving users’ needs Economic benefit and profitability for customers State-of-the-art leadership Leadership as lowest-cost provider

*þ Ahead; 0 Even;  Behind

Consider the opportunities for both related diversifications and unrelated innovative opportunities. Table 1-2 offers a worksheet approach to assist you and your associates in a thorough evaluation of where you stand with customers relative to your competition, and how you can leapfrog them. Use the items in the checklist that fit your situation, and add any others that constitute your winning and losing selling factors. Periodically brainstorm the possibilities using group sessions that focus on each major offering or product line. Judge your new options in relation to your best customers and strongest competitors. CONSIDER TWO BASIC OPTIONS FOR PROTECTING YOUR INNOVATIONS Your creation of winning benefits and superior features requires some form of strategic protection of your intellectual properties unless you have an iron clad

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monopoly. Such protection has become substantially more complex and difficult with the global online reach of the Internet. One basic issue is the fundamental choice of relying on the full body of legal protection versus counting on a continuing stream of innovation to keep ahead of the pack. The large body of U.S. state and foreign law provides four principal classes of protection and redress through patents, copyrights, trademarks, and trade secrets legislation. Appendix B summarizes pertinent information about their specific protections and time lengths, filing information, original costs, ongoing expense, and enforcement actions required. The appendix material is drawn mainly from a comprehensive and regularly updated Web site source, www.ipwatchdog.com. The small business executive is cautioned and urged to seek competent legal and patent expertise when any proprietary information is at risk. All four legal measures should be of interest to the small business. Perhaps the largest exposure to cost and management time requirements is with the patent protection issue. Over the years this danger has been heightened by evolving changes in the patent law. The more rapid pace of such changes underscores the need of the small business to seek competent expert counsel when weighing the alternatives of lead time versus protection through legal alternatives. Economic Issue: Reliance on Lead-Time Innovations Versus the Ongoing Costs of Intellectual-Property Protection The issue of whether the small business should seek patent protection for an invention is not clear-cut. The patent does give you the right to exclude others from producing, marketing, or using your idea, but not necessarily the right to make it. Also, when granted, it is a ‘‘negative monopoly’’ that normally lasts for 20 years from the date the application was filed. But you are betting on success. The frontend patent costs are lost if your invention does not become a viable business. As Appendix B indicates, the cost of patenting a new idea with minimal technical complexity via a nonprovisional application currently can cost from $7,000 to $10,000. With fairly simple propositions, you may be able to take advantage of the shortcut available to the lone inventor or the small business. The U.S. Patent Office offers a lower cost, ‘‘do-your-own’’ provisional application approach that could cut initial costs. However, you should seek competent advice from a patent attorney before taking either route. The added cost of a periodic string of additional patented improvements could extend your protection almost indefinitely against the scrambling of those who would copy you. However, beyond the initial filing costs, you will face periodic maintenance fees to the Patent Office over the patent’s life. Also, you are exposed to ongoing legal expense for policing competition and fighting violations. This could result in a considerable loss of time and dollars and might not be successful. On the other hand, the better strategy may be to rely on your headstart and timing. Consider whether you have realistic prospects for continuing

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technological or other enhancements, and new products to refuel your competitive advantage. The dollar outlay for filing, protection, and enforcement might better serve you to invest in continuing product enhancements instead. Consider a case on each side of the patenting issue. Losing a Brilliant Product for Lack of Patent Protection In the mid-1970’s, an inventor started selling his new product, Astraltune, to skiers in the Rocky Mountains. Astraltune was a personal stereo with headphones. The inventor did not apply for a patent, and his claim to the idea ran out after one year.9 In 1979 the Sony Corporation introduced its ‘‘Walkman’’ to the market for a price of $199.95. One explanation for developing the Walkman is that Akio Morita, then the Sony president, wanted to listen to music while playing tennis. Another is that during a factory visit a worker told him he wanted tunes to listen to while on the assembly line. A third version from Morita’s autobiography is that his co-founder of the company, Masaro Ibuka, responded to Akio’s desires by having an engineer modify Sony’s earlier product, Pressman, that was being sold to reporters as a tape recorder. They removed its recording appliance and speaker, and added a stereo amplifier and light headphones with sponge earpieces.10 The Astraltune inventor registered claims, but was never awarded any royalties. It is unclear whether Sony ever knew of its existence. His missed opportunity was staggering! The Cost of Patenting a Specialized Product for a Narrow and Highly Competitive Niche The inventor of an innovative attachment for racing mountain bikes applied early for patent protection at a cost that reached almost $25,000. He was a competent mountain biking enthusiast, and introduced the product to several leading race winners who liked the idea, and were willing to sponsor it. By making appearances at trade shows along with targeted advertising and promotion, he developed initial interest with biking aficionados, and distributors and dealers serving the market. However, the inventor failed to foresee other strategic issues and roadblocks that had nothing to do with intellectual property protection. The racing bike market attracts hundreds, if not thousands, of ‘‘gimmicks’’ each year, and the serious racing fraternity is notorious for trying out and abandoning most for the next novel accessory. Also, it is difficult to get the distributor and dealer to push low-cost, single items. They are confronted with thousands of line items in the fast-moving, bicycling state-of-the-art, and the design complexity of this device required it to be priced at the high end of its category. The alternative cost of direct sale and follow-on service to the serious biker could have been prohibitive. As detailed later in Key Six, the product had retained very limited distribution.

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The patent issue is critical for the small entrepreneur due to the issues of protection, competition, high early cost, and managerial distraction. Wherever you initially stand on the issue, you should carefully check out both sides. But do not be quick to engage the so-called invention-assistance services. Find a reputable intellectual property attorney whose credentials you can verify readily.

KEY ONE: PROFIT PLANNING PROJECTS Benefits, niching, and the next key, pricing, are the most significant primary strategic issues for the startup and the early-stage small business. Customers almost always match user value and price as the determining influences on their buying decisions. Competitive strategies for the two must be set in tandem. Variations of the two keys can be paired in multiple combinations of strategies, costs, and resulting profits, making for a very tricky profit-planning requirement. Consider two projects to review the benefits side of the coin. 1. Define the significant features of your offerings in terms of users’ benefits. Taking advantage of your Kipling profiling and key customers’ inputs, develop benefits statements for use in your sales and marketing programs that pertain to each current product or service. 2. Explore rejuvenation of a ‘‘me-too’’ to a ‘‘me-too-plus.’’ If you have a ‘‘metoo’’ situation begging remedy, choose it for brainstorming exercises and new strategies. Identify any opportunities to rejuvenate it or improve its ‘‘cash-cow’’ potential. Determine whether any of your ‘‘me-too’s’’ should be de-emphasized, phased out, sold, or discontinued. If you don’t have a ‘‘me-too,’’ pick a related situation of a struggling competitor in your industry where you have no comparable offering, but might consider developing one. Try to ‘‘go them one better’’ with superior features, benefits, design, production cost savings, and profit margins. Use this exercise as a for-real experience in pushing your associates ‘‘out of the box.’’

KEY TWO

Pricing That Pleases Two Masters Set a Price That Produces Positive Cash Flow and Is Well Worth the Value Your Consumers Receive

Know and cover your costs—all of them! Keep your breakeven point from moving upward! Your customers will accept a higher price with consistently superior benefits and services! But do not overprice a commodity!

Your price is a key positioning strategy in users’ eyes. It helps them rank you with your competitors. It helps them perceive your value to them, just as it did with Adam Bristol and his niche electrical contracting service. It is essential that your price covers all costs and profit targets, and it must be compatible with your other market-positioning and managerial strategies. Always test your strategies and prices with breakeven calculations. Then use cash-flow projections to simulate and validate the feasibility of your total business plan. Most of the time you will be pricing for profit, except for rare objectives, such as promotional loss leaders or closing out inventories. For profit pricing, do not arbitrarily add a fixed percentage. Refine your target price considering the many varied and intriguing pricing strategies available to you. Only then is your prospective offering ready for your judgmental test and the marketplace. Are you charging enough? Will it beat out competition, yet be high enough to yield a fair profit and still give customers the full value they perceive? Do you understand what factors your users consider to determine whether they are getting the value they are paying for? To what other products or services are they comparing your offering? How do those who buy convince themselves that you are giving them the best value they can get for their money?

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DON’T OVERLOOK HIDDEN OR OBSCURE COSTS WHEN SETTING YOUR PRICES Don’t give away potential gross margins and bottom-line profits by default. Include all direct expenses, applicable general and administrative overheads, trade markups, and margins for contributions to G&A and profit when setting your price. Include realistic depreciation and amortization charges to spread the cost of capital items over their useful life. Don’t try to recover your total capital outlay immediately. You will be sending your price beyond consumers’ tolerance ceiling. Rather, take advantage of your allowable annual depreciation based on the IRS estimates of the product’s life. Raise Prices to Cover All Costs and Match the High Value Provided to Customers Vecchi Stone Reserves, a rock quarry serving construction projects, was enjoying success in meeting competition from larger, established competitors. Stan Vecchi, the founder and owner, was surprised and pleased when he won a significant construction job in head-to-head competition with a giant of his industry. For some years, he had worked with his father operating a profitable stone masonry business, and then a small quarry in another state. Stan was mining a large quarry of high-quality gneiss, a granite-like stone. The deposits yielded a variety of attractive stone for foundations, fireplace fronts and hearths, siding, terraces, garden paths, and other structural and decorative applications. His markets included residential, public, and commercial projects, and his ten-year quarry lease had ample reserves of preferred quality and variety. He was a self-starter, a fast learner, and an outstanding salesman. A shrewd judge of people, he ran a tight operation, and had great expertise in renovating used heavy equipment for his business. In the initial stages, he was his own chief salesman and quarrying supervisor, as well as scrambling to keep up his accounting records ‘‘on the run.’’ In his second year, Stan’s quarrying operations were starting to move into black figures, and he set some ambitious growth and profit targets for exploiting his ample stone reserves. He needed funds to expand selling and acquire equipment that would improve the productivity of his quarrying activities. He brought in a consultant, and they began with a review of his quarry operations, costs, pricing, and marketing. He had won some big contracts, not by cutting prices, but by the high quality of his stone and his prompt order fulfillment services. He knew he had a much-desired, premium product for his markets. The pricing review revealed that he had missed some expense elements and had been too optimistic on others. These omissions and assumptions are briefed in the sidebar; and he began addressing the operating issues the review had raised. Although Stan felt he was pricing high enough to cover his overheads and a modest bottom-line profit, he decided to raise prices for some of his offerings. He

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Opportunities for Refining Vecchi’s Quarry Pricing






Over-optimism about the productivity of his quarry work crew, downtime, and worker turnover. He had no quarry supervisor initially. Lack of current or reliable financial and operating performance data. His accountant was proving to be unsatisfactory for his type of business. Insufficient allowance for depreciation: he had effectively overhauled used equipment at the start, but was not factoring in the higher replacement costs. No allowance for the hard-to-measure, real costs of overloads on his time: no one else supervising the quarrying or selling, and difficulty with cash flow planning; Some reluctance to price higher than a powerful major competitor in the area, which led to a lower gross margin and price than necessary. He was not optimistic enough about the pricing power of his high-quality stone and superior customer services.

obtained help reprogramming his PC accounting system to yield more current performance and financial information. He also found a new accountant to help refine his cost assumptions and start delivering more timely financial summaries. The in-depth examination of cost and pricing was most constructive on both the gross margin and operating aspects. He hired a quarry supervisor, and began raising his prices without loss of business. In fact, he kept beating the major competitors in most bidding confrontations. In the ensuing months, he and the consultant turned their attention to his marketing activities. For the near term, he continued to be his own strong salesman and marketer. The Cost and Expense Elements You Need to Corral Your pricing, with help from your accounting and finance professionals, must capture all of the critical costs and expenses of your offering: When you and your accountant have identified all of the cost and expense elements for your particular situation, you are ready to begin relating costs and alternative prices. If you have limited experience in managing a small business, you must be careful to avoid mixing capital items with expenses in the costing calculations. A small business owner penalized himself in the marketplace by confusing balance sheet and P&L expenditures. Mistakenly Including Capital Asset Numbers in Setting Prices Rich Walmsley was an innovative fabricator of attachments and devices for small farm tractors whom you met in Part A. He was confusing ‘‘apples and

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Minimum Components of a Profitable Price















Ultimate User’s Price—Your target selling price for the end-user (before middlemens’ discounts, if you are using them) Trade discounts and middlemen prices—keep adequate leeway in your selling price for the customary markups for any middlemen that your marketing and distribution require Direct costs—out-of-pocket costs for producing and delivering each type of offering, including allocations of any direct costs shared by multiple items Depreciation charges—allocations of all depreciation and amortization charges directly related to the offerings, taking full advantage of the IRS useful-life standards Gross margin target—your target for net sales less all direct costs of sales in dollars and percentages both for individual items and in the aggregate Selling and G&A—the pro-rata share of each category of the firm’s sales, marketing, general, and administrative overhead expenses that collectively must support your gross margin target Interest—your pro rata, debt financing expenses Profit before taxes—your financial performance target

oranges’’ in setting his prices. Rich’s two main problems appeared to be poorly targeted sales and marketing effort and high prices. He used no salesmen, reps, or dealers, and rarely participated in trade shows. He was relying on very small, text-only ads in a variety of trade publications for loggers, farmers, and distributors. His poorly targeted marketing approach was yielding too few sales and no repeat business. To set prices, Rich was combining his operating costs with the costs that were accumulating in his growing inventories. This inflated the margins he thought he needed. The extra cost burden of adding the assets locked up in inventory was pricing him out of the market, and detracting him from attention to his weak marketing program. The correction made him instantly more price-competitive in the market, but made his estimates of production and carrying costs for inventories versus orders more critical.

CHECK YOUR PRICE-SETTING STRATEGY AGAINST THE PRICING LADDER Determine where your target customers best fit in the range of optional price levels available to you. If you are at the high end, are you pursuing those who will pay top dollar and keep buying because they are convinced they are getting the very best offering and values available? And, are there enough of these prospects to pursue profitably? Or, on the lowest rung, are you competing on a commodity

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Main Rungs in Your Pricing Ladder






Maximum Your market Will Bear Optimal Profitable Level Breakeven at Realistic Volume Sub-Floor for Special Goals Your ‘‘China’’ Price

basis for customers who are seeking the very lowest price in the market? Can this level deliver positive cash flow to you? One of your first steps is to determine a bracket or range of price levels from your breakeven cost floor up to what you believe the market will bear and customers would be able and willing to pay. The prices you set will need to support your profit goals and what you hope to accomplish with your marketing and operational programs. Set the price with the best chance of optimizing profitably among the first three rungs of the ladder. 1. Maximum Price Acceptable to the Market. This is the highest price you think the consumer will recognize as the best value to meet his or her needs, the top limit or ceiling of what you believe your market will bear over time. Strong competitors often are the determiners of the top price level. 2. Optimal Price Range. Choose a realistic point between ceiling and breakeven (B/E) that can optimize your risk with profit growth. This will be the price/volume relationship most likely to deliver a total dollar gross margin with the best chance to meet or surpass breakeven levels and your market-share targets. The proviso is that you have commensurate benefits to offer. 3. Breakeven Price. Your normal price floor must include all direct and variable costs per unit of output, and your fixed and semi-fixed expenses and other overheads that are incurred before your profit before taxes. This level should also cover any amounts you need and plan to take as owner’s withdrawals. If this price is well above your comparable competitors, you need to replan or consider offering other options. 4. Sub-floor Price for Special Goals. Sub-floor pricing is an extremely high risk for most small businesses, unless they have abundant financial resources and backing. Jeff Bezos, the founder and CEO of Amazon, argued for this fourth pricing option in the early stages of his venture. He contended that you should not try to optimize before you have accomplished your market position with a ‘‘land grab’’ that provides a customer base for starting to prove the viability of a profitable business model. Bezos had initiated an unusually strong and timely first-mover model that attracted huge IPO capital. It took a number of quarters to begin achieving bottom line profits and preserving cash.

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5. The ‘‘China’’ Price. If your offerings are competing head on with Chinese sources, this will be an issue for you. It is a major concern of business-to-business sub-contractors competing with China’s rapidly expanding industrial might. ‘‘The China price is the low, low level that American suppliers must match to keep their American customers. It is the price at which Chinese manufacturers can deliver the same goods and services.’’ U.S. manufacturers increasingly are asking valued suppliers ‘‘What is your China price? That is what we’re now willing to pay.’’1 This problem will not go away for the present small-business generation. The Chinese labor supply, currently at less than one dollar per hour, is abundant. This low rate enables the Chinese competitors to spend far less on production technology (just use lots of people) wherever such technology would normally be a major American strength. In the near term, Chinese industry will continue improving its technology through partnering with Americans and others, but still maintaining a cost and price advantage, as will low-cost producers in other countries. As noted in the Introduction, Thomas Friedman has argued convincingly about this growing global phenomenon which will not go away.2 ANALYZE BREAKEVEN FREQUENTLY TO GAUGE PRICE AND COST IMPACT ON CASH FLOW You could be flying blind and scattering your dollars to the winds without a breakeven calculation to test your viability and credibility. It is essential to determine what unit and dollar sales volume is needed at a particular price to break even with a given set of strategies and programs. Such analysis further clarifies how much more volume you need in order to reach your profit goals. Given realistic and accurate input data, a B/E analysis enables entrepreneurs to visualize almost immediately what impact any workable change in the variables can have on the demand level needed to break even. With the B/E analysis you can project your approximate profit potential at any increasing level of sales or changes in cost assumptions. This involves determining and market-testing what programs at what cost should hope to gain the added volume. The quickest and simplest way to get a ballpark figure is the formula in the sidebar. When analyzing unit sales, breakeven is the number of units required for total costs and revenues to be equal. B/E analysis is a starting point for dealing with the

Simple Breakeven Formula Total Fixed Cost in $ Number of Unit Sales ¼ Required to Break Even $ Contribution of Each Unit (Net Unit Price less Direct Unit Cost)

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unknowns of future cost containment, and the uncertainty of demand and competition. It is an essential technique for optimizing a company’s plans and programs to find the most profitable combination of marketing strategies and pricing. Consider the pitfalls of one small entrepreneur who failed to take this step. Product Costs Far Exceeding What the Market Would Bear The founder of Outdoor Sports Accessories Company, a mid-Western manufacturer of a ‘‘me-too’’ product, was suffering continuing and mounting losses by overlooking breakeven calculations. Fred Hindley, the principal owner, had never made a breakeven calculation for his manufacturing business. He was well into his third year when he sought marketing advice from a consultant. His product idea had stemmed from his own love of the outdoors and his concern for the care of the environment. Inherited capital apparently was sustaining his dream of becoming a successful entrepreneur. His offering, a utility pack similar to others already in the market, was of higher quality construction than most, but did not possess any really unique benefits. He needed to price it at the high end of competitive offerings because of its high construction cost and the low production runs from his cottage-industry suppliers. Also, Fred had always been reluctant to visit retailers to get a sense of why they were not reordering and what consumers were willing to spend. He was certain he should know what to sell. Applying the latest numbers to the above breakeven formula, the consultant demonstrated that Fred was fighting a no-win situation. The critical calculations were conclusive.











Assumed Price to Consumer: Average price of $26.00 for a merchant’s markup of 29 percent on his sell price, or 41 percent of Outdoor’s cost of $18.50 to him. Net Unit Price: $16.65 ($18.50 to the retailer, less 10 percent sales agent commission of $1.85). Normally, use your manufacturer’s or service provider’s selling price reduced by any outside sales commission or middleman markup to leave flexibility for changing the assumed sales method or commission rate. Direct Unit Cost: $9.82—the production cost of each unit of revenue. This generally includes materials, labor, packaging, order processing, billing and delivery, other repetitive items generated only with each unit, and pro rata direct supervision costs. Total Annual Fixed (G&A) Costs: $49,300—a summary figure for all of Fred’s other costs or expenses. These should include all costs needed irrespective of sales volume and are not expected to change during the year. Include current annual depreciation or amortization charges for all pertinent capital items. Also, semi-fixed costs may be incurred periodically during the year to ratchet up marketing programs or production capacity in stages.

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Fred’s Current Breakeven Calculation $49;300 ¼ 7;218 units $6:83(18:50  1:85  9:82)

Fred needed to sell more than 7,200 units per year to start covering his product costs, business overheads, and owner’s withdrawals. Unfortunately, his latest year had been his best to date, but with only about 4,200 unit sales. The sales were made to specialty retailers through the efforts of an independent sales representative handling additional lines and working strictly on a sales commission. Fred had not received one repeat order from the retailer accounts during the past year. The dynamics of breakeven planning and the quantitative assumptions for the above calculation are portrayed graphically in Figure 2-1. The chart illustrates Fred’s annual expectations based on his current price and costs for the situation the consultant first discovered. The vertical axis represents total annual dollars, and the horizontal, thousands of unit sales annually. The legend at the bottom of the figure defines each line of the chart and the dollar impact of Fred’s original assumptions. Breakeven is the point where lines E and C intersect. This indicated a requirement for around 7,200 unit sales for the year under Fred’s current strategy. Summary figures under the horizontal axis show estimates of potential profit before taxes. Annual sales of 12,000 units should yield over $32,000, or 18,000 units, $73,000. Achievement of a profit was extremely unlikely with Fred’s original strategy, which included an excessively high product cost and no marketing other than the sales rep commissions. Higher pricing was clearly not an option. Fred and the consultant developed an alternative scenario with a simpler product design yielding a 25 percent decrease in unit production costs, and a lower price of $13.50 to the retailer. They also assumed spending $2,000 per month in modest trade promotions with selected retailers. In addition to the sales rep, the assumed marketing would include selected approaches to discount clubs, airport shop concessionaires, and specialty retailers. The consultant, without success, urged Fred to get out and meet his market. The new plan would require an estimated breakeven of 15,300 units, a sales increase of about 265 percent above the 4,200 for his highest previous sales year. Fred looked for related products to partner with, hoping to interest their producers in joint promotions with him on the retailers’ shelves. It became clear that his commodity-stage product could not be expected to become profitable. After some convincing based on his earlier market experience, Fred abandoned the item and once again began seeking other ‘‘products in search of a market’’ that he might develop.

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FIGURE 2-1. Outdoor Sports Breakeven Analysis—Original Strategy

This breakeven calculation and rough-guide charting approach is a quick, broad-brush way to visualize the impact of pricing changes and envision the major elements of a profit plan. When the analysis begins to appear favorable, the charting quickly displays the impact of strategy changes affecting all of the cost and revenue assumptions. However, a breakeven analysis is just the first step in

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developing pricing alternatives between your cost base and what your market will bear. Next, perform two additional analyses to test the viability of your pricing and market-positioning strategies:



Create cash flow projection simulations (CFPs) with line-item detail Test your numbers against judgmental pricing and competitive strategies. ESTABLISH A ROLLING CASH FLOW PROCESS TO EVALUATE NEW STRATEGIC ALTERNATIVES

The short lives of many start-ups and embryonic small business ventures warrant re-emphasis on three prime requirements that pricing must meet for small-business survival: #1: CASH! #2: CASH!! #3: CASH!!! One of the first stringent pricing and profitability tests of a start-up’s potential should be monthly cash flow projections for the initial twelve months or more. This is also essential for the established small business that is either readying a new product or service for market, planning major moves in market positioning and operations for an existing line, or continuing in the status quo. In other words, every small enterprise! The cash flow projection is one of the initial justifications a lending banker or a venture capitalist will require. As the entrepreneur, it should be one of your own essential tests, and your monthly cash requirements projector as well. Assumptions for a Start-Up Planning a New Cleaning Service Following some years of working productively for a commercial cleaning service, Donna Marcus was planning to initiate her own venture. She was stretching her wings part-time while retaining a supplemental restaurant cashier’s job to support her children. A consultant offered her the following advice for her preparation of a cash flow projection. ‘‘Based on our conversation today, I am enclosing a form for making monthly cash flow projections (CFPs). This may be more than you need to get started parttime. But, you certainly should work it out in anticipation of your full-time cleaning service using employees. It will be instrumental in helping you plan the timing of that move. ‘‘First, develop a list of all of your one-time, front-end costs in order to start your own service. You enumerated:

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Commercial vacuum cleaner and attachments Foamer for carpets Hand cleaning tools Initial stock of cleaning supplies Appropriate utility vehicles

‘‘Second, develop estimates for:





Your average weekly wages as cashier—days and take home per hour Your weekly client receipts, days at $______ per hour for comparison Tax withholdings by your customers Any other predictable income

‘‘Third, itemize all of your present expenses:







Regular household expenses Sitters for your children Rent or mortgage payment Existing loan payments Vehicle and other operating expenses Anticipated new loan payments

‘‘I suggest that you make your CFP estimates on a weekly basis for the first three months ahead, then convert to monthly. Also, add to your current client and prospect list any additional prospects in your geographic market area, and start developing some ideas on how best to reach and start interesting them. Do not hesitate to call me about any or all of the above. Good luck with your new venture!’’ The consultant had phone discussions with Donna for a few months, and a year later kept sighting her two trucks with logos ‘‘everywhere’’ in the area. Use Rolling Cash Flows to Estimate the Impact of Alternative Expansion Strategies Harold Melloy had been running Melloy & Son Construction, a growing specialty construction business using new, highly productive technologies, for four years. He was enjoying strong two-digit revenue percentage increases with commensurate profit improvements. His expertise stemmed from working previously in a related business. Hal’s profitability was due to his sales acumen, tough-but-fair personnel approach, and operational talents. He always gave meticulous attention to delivering the highest quality, on-schedule performance through the ten to twelve men who comprised his technical crews. Because of his company’s superior benefits-delivery record, he was able to command the highest service pricing in

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his industry. He, in turn, benefited materially from the word-of-mouth spreading of his reputation. Hal had developed a healthy balance sheet with a small, positive cash position. He was achieving an enviable net profit margin, and possessed strong sources of additional funding. Hal was in the process of setting financial goals for the next three years, which would include a major expansion he was planning to initiate a year later in another geographic market area. He developed three-year scenarios for several levels of expansion with varying mixes of price increases, direct sales volumes, trade promotion, and other costs. With the help of his accountant, Hal installed CFP software for quickly testing the impact of a number of future alternatives. The format of the program enabled him to make instant changes in assumptions without redundant re-entry of the overall schedules. As he learned about and refined the capabilities of this routine, it dramatically sped up his later projections of alternate scenarios for the prospective geographic scope expansion. The summary format of Hal’s CFP is shown in Table 2-1. This first year ahead was monthly and was an extension of ‘‘business as usual.’’ He followed it with two more years of quarterly projections for the new proposition. Each summary section of the exhibit (A to I) was supported by one or more schedules of the detailed assumptions and forecasts for the indicated revenue and expense items. A CFP software program computes the impact of all numbers sequentially for the time periods covered. The U.S. Small Business Administration and banks offer CFP worksheets. Also, QuickBooks Pro and its successors come with a CFP program, or you can customize your own on Lotus 1-2-3 or Excel. Table 2-1 illustrates the advantage of the technique as a strategic pricing and business development tool. Hal’s model started with his cash position at the beginning of the first period, and he posted estimates to the form’s line items in monthly sequence. The table shows his estimates only for the first year. He projected ahead for two more years. In the final version of your CFP, a blank column should follow each month for recording actual results in order to track divergences and sharpen your estimating savvy. Hal produced and tested three different scenarios—forecasts of revenue increases of 15 percent, 25 percent, and 35 percent respectively, with accompanying direct and overhead cost changes. As section J of the exhibit shows, a 15 percent sales increase should produce estimated first-year cash flow of $7,700, rising to $93,000 at 25 percent, and $174,000 at 35 percent. The monthly forecasts in Table 2-1 are based on a sales increase of 35 percent for the coming fiscal year. Hal set and reached his goal at the highest level. The CFP is a powerful strategic planning process when you harness it and keep estimating ahead regularly. New strategic options and new competitive threats are increasing at a faster pace. Such windows of opportunity or crises leave the entrepreneur less and less time for taking effective action. The availability of a

TABLE 2-1.

Melloy & Son Construction—Cash Flow Projections: Next Calendar Year Monthly Estimates ($000)

A-cash on hand B-cash received: Revenues Loans Equity Paid In

Jan

Feb

Mar

Apr

15.4

19.2

29.3

27.7

86.0

77.0

78.0

85.0

May

Jun

Jul

19.6

49.5

80.6

109.0

109.0

97.0

Aug

Sep

Oct

96.2

106.8

110.1

85.0

78.0

81.0

Dec

12 Mo. Totals

92.4

113.9

NA

109.0

138.0

1132.0

Nov

C-total cash available

101.4

96.2

107.3

112.7

128.6

158.5

177.6

181.2

184.8

191.9

201.4

251.9

NA

D-cost of sales/direct costs paid: Direct Personnel Costs, Including Travel Materials, Supplies, Inventory Changes Vehicle & Equipment Expense Repair, Maintenance, Rubbish

39.3

34.9

45.3

50.8

44.6

43.5

39.4

41.0

41.2

57.8

53.6

44.3

535.7

2.3

2.3

2.3

2.3

2.3

2.3

2.3

2.3

2.3

2.3

2.3

2.3

27.6

25.6

18.6

17.6

25.6

18.6

18.6

25.6

18.6

18.6

25.6

18.6

18.6

251.2

3.7 9.3 2.0

3.6 5.5 2.0

3.7 7.7 2.0

3.6 8.8 2.0

3.7 7.9 2.0

3.6 7.9 2.0

3.7 7.9 2.5

3.6 6.4 2.5

3.7 6.4 2.5

3.6 6.4 3.0

3.7 6.4 3.0

3.6 6.4 3.0

43.8 87.0 28.5 973.7

E-marketing expense Sales, Dodge Reports, Promotion F-general & administrative expense: G & A Management and Personnel Office Rent, Utilities, Professional Services G-other cash transactions: Lease Payments on Vehicles Capital Purchases Owner’s Withdrawal

82.2

66.9

79.6

93.1

79.1

77.9

81.4

74.4

74.7

98.7

87.5

78.2

I-cash position (month end)

19.2

29.3

27.7

19.6

49.5

80.6

96.2

106.8

110.1

92.4

113.9

173.7

J-cash position with sales increase of15 percent 25 percent 35 percent

7.2 13.2 19.2

6.3 17.3 29.3

6.3 10.7 27.7

27.4 3.4 19.6

13.5 18.5 49.5

1.6 41.6 80.6

3.2 50.2 96.2

0.8 54.8 106.0

6.9 53.1 110.1

36.6 29.4 92.4

31.1 42.9 113.9

7.7 92.7 173.7

H-total cash paid out

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sophisticated rolling cash flow process helps you move quickly to test the impact of different price levels and new offensive or defensive market-positioning and operational strategies. CHECK PRICING’S CONSISTENCY WITH YOUR OTHER MARKET-POSITIONING STRATEGIES Pricing is the second key component of the market positioning strategies for the small business. Broadly, your price tells your customers how you value the benefits you are offering. It gives them a gauge to use against the values they see and accept for their application. Also, it forms one of the bridges between the market-positioning strategies and the company’s requirements for internal management and operations. Remember the questions raised in Key One concerning how your customers view you, and the possible contrast with how you think they do! Pricing is one of the most important contributors to their image of you. One small business executive began to realize that he was confusing his customers with a multitude of options—product, for-fee service, and pricing—by trying to be ‘‘all things to all of his customers.’’ Offering Too Many Confusing Product and Pricing Alternatives Harriman, Inc., had pursued a policy of offering many options and prices for its product line and services for the oil field and machinery and equipment markets. George Albright, the head of this well-established and successful business, was in the process of challenging, renovating, and simplifying his pricing and marketing strategies. ‘‘My line is cluttered with too many products, a number of which are not moving too well. I offer a lot of optional services to complement my product line. The result of trying to meet almost every account’s ‘customized’ preferences is at least a dozen different combinations of products and services. The customer can order ‘plain vanilla up to a banana split’, and the price elevates accordingly. Administering the delivery of service to all of these variations is costly and time consuming.’’ ‘‘The 80:20 rule with my customer list is more like 90:10. A small number pay a premium for my extra services, but I’m afraid most of these are marginally profitable or unprofitable accounts. I’m also losing too many customers who say my prices are out of line with what they need. I’m ready for some fresh thinking about my dilemma.’’ George concluded he must simplify. He classified all of his accounts into a four-box schematic and calculated the relative profitability of customers within each category. He then prioritized the categories of customers he wanted to keep and those who were marginally profitable or losers. To simplify the number of options he was offering, he grouped all of the services into the four groups, and

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Harriman’s Simplification of Account Groups Cash Cows High value; not price-sensitive

High Service Willing to pay high price for extra value

Very Price-Sensitive Unbundled, few options offered

Strategic Accounts Sources of new ideas for his lines

adjusted his pricing schedule accordingly, offering only one schedule with terms per group. In each group he bundled together as one price per item all pertinent add-on extras formerly offered and priced separately. Within the next year he lost fewer accounts than he had expected, and his profits began moving up. Brainstorm Your Judgmental Pricing-Strategy Options to Enhance Competitive Advantage Sharpening the pricing process is much more than an arithmetic breakeven calculation or positive cash flow projection. You need to factor in what your competitors are doing and offering, and how the benefits of your own line will be compared with such competition. You must relate your pricing decision to your marketing objectives, strategies, and programs, and to your managerial and operating decisions and facilities. In addition, you should consider alternative product features and benefits that could improve the customers’ perceptions of your relative price/value for them. Carefully determine how you can use your consumers’ shopping approaches to plant in their minds the recognizable reasons why your offering will be best for them. A number of judgmental considerations and strategies might represent appropriate alternatives. Consider the following variations and expect them to be either complementary or conflicting in various combinations. 1. High Pricing to Emphasize Superior Benefits. Set a relatively high price to validate demonstrably superior new user benefits your consumers will recognize. Price high for uniquely high quality products, performance benefits, and exceptional service. Stress these differences in sales pitches and promotional messages that clearly convey a superior image of your products and company. 2. Higher Pricing Needed to Recover Higher Costs. Match your general cost and expense increases with defendable price rises, if salable to your customers due to higher user values. Noticeably greater customer benefits that you can add economically should work well for you unless you are fighting commodity-level competition. 3. Cost and Price Reductions to Answer a Price War or Improve Competitiveness. Avoid matching price cutters until you have exploited opportunities to

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add value-enhancing features economically. For example, consider using JIT to reduce supply-chain costs. Or investigate outsourcing to take advantage of other vendors’ state-of-the-art, R&D investments, and greater economies of scale. When considering a serious program of cost reduction, you must ascertain whether you can retain your competitive product quality and benefits and increase unit volume, while fielding a more competitive price. Another use of this option is to put internal pressure on your functional heads to improve productivity in your manufacturing, R&D, sales administration, and supply-chain logistics. Key question, have you already become a commodity? 4. Low Pricing with a Cost Leadership Strategy to Maintain a High Economy of Scale. Stimulate increased volume with a lower price to spread overheads and gain productivity in your production. 5. Low Introductory Pricing to ‘‘Buy’’ Markets. Start low with an untested new product, or to penetrate a totally new market, encourage new buyers, and stimulate ambitious volume increases. However, use great caution to avoid ultrathin margins that could be difficult to expand later. 6. Aggressive Pricing to Move Inventory. Offer excessive or obsolete inventory at a lower price using different channels of distribution when available, such as odd-lot houses, distress-sale merchants, bankruptcy vendors, or dollar stores. 7. Combining Price with Superior Benefits for ‘‘Razor and Blade’’ Sales Power. The Gillette Company is the outstanding historical practitioner of this strategy. Among the more recent successes is Dell Computer’s printer and ink line, with an attractive price, features, and benefits that make the printer a strong producer on its own. With the exception of a few printer models, the ink cartridges initially could only be purchased directly from the company, conveniently by e-mail or phone orders. However, since H-P and others market their ink cartridge lines separately through Staples or other office equipment suppliers. Dell recently has been selling more cartridge types through independent channels. 8. Pricing Based Opportunistically on Supply and Demand. Any current list of pricing strategies should consider the supply/demand phenomenon for oil and gasoline. A 2005 letter to the editor of the Darien Times (CT) blamed the differences in local prices as the result of so-called ‘‘zone prices’’ by the oil company suppliers. A retired oil company executive countered in a letter to the editor that zone pricing was not a significant factor.3 He contended that the oil companies ‘‘typically establish their wholesale prices to dealers based on the company’s costs and their assessment of the wholesale prices of competitors. Their individual price/volume strategy also can differ from company to company and area to area, and the locations of dealers’ stations. Individual dealers in turn set their own retail prices based on their local competitive assessments, other services offered, product cost, operating cost, and price/volume strategy.’’ On May 7, 2005, three dealers on opposite Darien corners posted differing prices of $2.399, $2.439, and $2.539 per gallon for unleaded regular. Their prices

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for the special grade were $2.539, $2.559, and $2.639; and for premium grade, $2.599, $2.659, and $2.739. A flip-side strategy of the gas price surges of 2005–6 is to depart from the pack and price below them to gain volume. If you are the highest price in your market, calculate what volume you would need for your gross margin to reach or exceed a breakeven price five, ten, fifteen cents or more below your highest market area’s competition. You might be surprised at this opportunity alone, and, in addition, gain new regular patrons for your other products, such as Jiffi Mart type items, and your superior auto repair and maintenance services. This should be a serious alternative to weigh, not just for the retail station, but also the distributor and oil producer. On a broader scale, the high gas prices should provide a major incentive for the domestic auto producers of hybrid and alternative automotive fuel systems. Looking ahead, the American auto manufacturers and their small business OEM suppliers should be concerned. Toyota is developing ten hybrid electric models for sale worldwide by early in the next decade. Toyota anticipates that these entries, if not challenged aggressively, could raise its sales to 25 percent of U.S. hybrid sales and fifteen percent of the total world vehicle market by then.4 9. Price Improvements from Reducing the Sizes of Product Offerings to Meet Other User Benefits. Consumers’ desire to lose weight was the major motivator of alert producers of snack foods who improved product contributions to overhead by offering smaller portions based on calorie count. In 2005 both Procter & Gamble and Kraft introduced 100-calorie packs of their favorite snack items. Sales of the larger package sizes did not suffer, and the new versions were beginning to show significant higher-margin contributions. Although pricing strategy was not the dominant aim, the strategy suggests similar opportunities in other consumer-goods areas.5 A judgmental consideration with most of the foregoing strategies is to think through how consumers will react when they view and compare your price. Barry Farber suggests that you visualize how the sellers of your offering will handle the price issue when in front of their customers. They must be able to approach the sale with much more than price to pitch. If they cannot distinguish its features and benefits then they will lose to the lower priced alternative. Farber advocates four front-line selling essentials that your price and value must meet:6 1. Sell your true value. Your sellers need to understand that the value matches or exceeds the price you have set. 2. Generate enough activity. They must feel that your product generates sufficient demand for them to refuse a price cut confident other customers will be willing to pay. 3. Know when to negotiate. The sellers must anticipate that the offering has enough margin for them to negotiate when significant sales volume is apparent.

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4. Be confident. They must be confident the offering and follow-up service will be well worth the price. The nine foregoing sets of strategies just scratch the surface of options for small business. Broad, online access to competitive prices and pricing policy have increased competitive intensity and reduced the timing safety factor. The new Internet and infotech-based options are forcing small businesses to deeper consideration of their pricing and other marketing strategies from two viewpoints.



Thinking defensively: Are your competitors, both small and large, threatening to eat your lunch with new infotech approaches? Assuming the offensive: How can you take advantage of these same new options to surprise and leapfrog your adversaries?

KEY-TWO: PROFIT PLANNING PROJECTS Unfortunately for too many small companies and start-ups, Fred Hindley’s experience in Outdoor Sports Accessories is not unique. It is imperative that breakeven analyses and cash flow projections be performed before launching, and then early and often in the formative stages. A prerequisite for the following projects is to assure yourself that your internal numbers people, and particularly your accounting and financial planning services understand your business, and are timely and accurate with financial performance reports and filings. 1. Calculate and Chart Your Current Breakeven Levels. If you are basically a one-offering business, apply the breakeven formula presented earlier in this chapter to your total financial situation for the current year. If you have more than one discrete business segment, begin with the one most significant offerings category. First, identify all of its direct costs and expenses, and then make assumptions for its share of the business-wide marketing, general, administrative and fixed costs, and target contributions to overheads and profit. Develop a simple line chart to define the segment’s price and breakeven. Then repeat the process with each of your other significant segments. 2. Create a Cash Flow Process to Test Your Current Breakeven Assumptions. Set up your own software routine or use a commercial program such as QuickBooks Pro that you can use repetitively with different offerings and changing assumptions. This will define current breakeven levels and monthly cash requirements. It will also give you a ready capability to run instant tests of pricing, marketing, and operational cost strategy options. Keep a current cash flow program mounted in your computer for each discrete business segment or profit center. This will provide a ready-to-run capability for rapid response to defensive situations and offensive strategic opportunities.

KEY THREE

Infotech-Strengthened Channels and Supply Chains Match Consumers’ Changing Shopping Preferences with Cost-Effective and Responsive Channels of Distribution and Supply Chains Be where your customers can find you. Avoid back ordering a single sale. Don’t make more than you can sell. Never miss your delivery commitments. Always fix a customer’s real problem!

These are tough challenges, and even the giants of industry suffer from over- and under-stocking. Your distribution and supply-chain goals and strategies must meet numerous exacting service requirements. From the highest level of strategic decisions to the front-line operations, three distribution and supply-chain aims are prime: 1. Distribution Channels That Meet Shoppers’ Location and Servicing Preferences. Basic changes in distribution and advancements in the functioning of supply chains have been accelerating in the last decade. Keep abreast of these changing trends. Place your products where and how ultimate and business-to-business customers can best locate them, obtain complete information, make the buying decision, and be assured of continuing service throughout a long-term relationship with you. 2. Timely and Productive Sales Support, Order Fulfillment and Follow-On Services. Maintain timely but not excessive levels of inventory. Be prompt with order fulfillment and customer services, and responsive sales and training assistance. Make your service level worth not only users’ purchase price but also their anticipated servicing costs during the life of your offering. Employ proven infotech-enhanced and cost-effective procedures throughout your supply chain. You will need to match, not only your small competitors, but also the larger concerns which often can pose your major competitive threats.

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3. ‘‘Seamless’’ Channels and Supply-Chain Partnering. Foster close, partnering relationships among all of your company’s in-house and outside functions. Eliminate duplication of functions. Keep your in-house people in tune with all of your independent channels and supply-chain partners. This key and others have cases on the traditional distribution-channels that still work best, along with the advancements in applying infotech to the administration of supply chains. The cases include a few experiences of large corporations that should not be dismissed as irrelevant for small businesses. Many of their new processes and procedural simplifications, can and are being scaled down for profitable use by small businesses.

EVALUATE THE EFFECTIVENESS OF YOUR CURRENT DISTRIBUTION STRATEGIES Begin your analysis of future distribution options by challenging your present strategy against changes in your customers’ preferences and practices. As the small company moves from start-up to an expanding local business, the distribution channel issues and options increase. How long can entrepreneurs and their staff continue to ship direct and depend on their own sales efforts? Or continue to meet all customer service requirements without outside partners? Which of your competitors have become increasingly threatening? And why? Have they changed their traditional distribution strategies? Begun using more infotech enhanced supply chains? Online commerce has opened the door to potentially widespread changes in consumers’ buying practices for both ultimate consumers and business-tobusiness buyers. To date, their impact has been greater on distribution and supply-chain strategies. However, the more recent infotech applications for marketing and sales have been increasing rapidly. One of the most important early developments was the B2B hub, initially referred to as an e-business platform. Early entrants included Verticalnet, SciQuest, FreeMarkets, Global Sources, and Onvia. The most far-reaching and ambitious of all was Covisint, fostered by the major auto manufacturers. It had huge ambitions but had to retreat and be broken up in 2004.

Distribution Channels in Use by Vecchi Stone Reserves Stan Vecchi, whom you met in Key Two, began re-evaluating his stone quarry channels with the diagram shown in Figure 3-1. The purpose of this worksheet was to clarify his current distribution strategy before getting account inputs and considering alternatives. His consultant posed a line of questions for him to probe on visits to key accounts of each type shown in the figure.

FIGURE 3-1. Vecchi Distribution Channels Planning Worksheet

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1. What are the buying and stocking patterns of my dealers, and are they changing in significant ways? 2. Am I missing sales opportunities with bigger jobs because I am the only field salesman? Should I hire a salesman or rep for more thorough market coverage? 3. Can I simplify and increase productivity of my supply chain? 4. What infotech and other service changes should I be considering? 5. Should I expand my geographic market scope? Where and how? Stan was the principal contact for his regional dealers and the major contractors and their architects. After the first couple of years, he hired a sales assistant who managed the direct yard business at the quarry, and backed him up as needed on both dealer and account calls away from the quarry. He was not using a routinely scheduled call pattern, but felt that the outlying dealers needed virtually no technical product or application support. Was he correct in this? Most of his dealer communications were related to outages in their yard inventories and special hurry-up orders. He made periodic visits to keep up to date on trends, developments, and competition in the dealers’ markets. At times they brought him in on major bidding negotiations. Stan knew he should be spending more time throughout his market area, calling on contractors and important dealers. Such contacts could alert him to major jobs pending and keep him more in the minds of his prospects. He recognized that as his business grew throughout and beyond his market area, he would need to add outside sales personnel. He was also concerned about the investment, slow turnover, and managerial distractions of his yard sale business. The analysis and some stepped-up field visits helped Stan clarify the product and service requirements of each channel and the timing for increasing his account coverage. He tabled a decision on retaining his purchased yard-sale items to get another year’s experience with that operation. Ongoing small business CEOs should periodically step back and reassess how well their current strategy is meeting their customers’ needs. Chart your own distribution process and carefully review every step and partner in your supply chain. Keep abreast of what is new in your industry? EXAMINE THE NEW CHANNEL OPTIONS FOR PRODUCTIVITY AND PROFITABILITY The basic issue of channels organization is a choice between a direct, companyowned operation and partnering with independent distributors and retailers, or some combination of the two. The channels and supply-chain issues for the manufacturer involve a two-directional flow: inbound parts and components, and outbound order shipments or services to the ultimate user or business-to-business customer. Key Eight reviews the inbound flows in relation to procurement and

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outsourcing strategies. This key is concerned with the outbound flow, and such strategic issues as the following:       

A direct sales force and/or independent sales agents and reps? Field branches and warehouses and/or independent distributors and wholesalers? Owned or independent retailing and factory outlets? Selectivity policies—intensive, selective, or exclusive retailers? Use of a B2B hub or supply-chain service for some traditional roles of channels? Realistic geographic scope options? With what alternatives of the above? Various types of strategic alliances?

Principal 21st Century Distribution Channel Options Many of the latest structural alternatives for distribution channels, both traditional and information-based, are shown in Table 3-1. Changes and additions are certain to continue, although probably not as rapidly as the online enthusiasts believed prior to early 2000. Many classic distribution options will survive, although specific functions are being redistributed among new and old partners, along with new forms, such as significant variations and scale-backs in the original B2B hubs. Numerous types of dot-coms also pose opportunities to supplement traditional channels with infotech-based supply-chain and marketing alternatives. Both consumer and business-to-business enterprises have choices in all four major groupings of the traditional channel forms shown in the table. Parallel opportunities are also increasing in many of the four Internet-based groupings. The permutations and combinations are countless and could fill a separate volume. Consider a few of the most significant current distribution trends and issues.

Proliferating Discount Distribution Models for Cost Leadership Discounting has been a significant strategy for consumer-product distribution for many years. A very early case in point was in the furniture industry. In the 1950s a then-new business model, the Levitz Furniture Company, appeared with a markedly different strategy at the low price end of the quality retailers. Over not too long a period, the revolutionary Levitz concept cut into and shrank the lowend constituencies of the major vendors, particularly among younger families. Levitz was one of the early low-price, mass merchandising leaders. Many other types of discount shopping outlets also are not new, but have ballooned in recent decades.

TABLE 3-1. Principal 21st Century Distribution Channel Strategies (Highlight your channels and note major competitors on a separate form for each main product/market segment)

Traditional Channels manufacturer direct to customer Direct Sale using own salesforce and/or Agents or Brokers, Sales or Manufacturers Reps

Trade Show sales Direct Marketing: Mail Order Catalogs Direct Mailings, Letters Telemarketing Media Advertising—Response invited Sales to Buying Syndicates Other–

Major Competitors

Internet-Based Channels

Major Competitors

manufacturer direct to customer Own Web site (Dell)

Online Shopping Channels (QVC) Auctions (eBay) Exchanges Bartering Online Kiosks in Malls Online Communities Other–

manufacturer retailer customer Owned Retail Branch Stores

manufacturer online retailer online customer Owned Online Retailing

Independent and Chain Retailers Factory Store/Mall Outlets Discount Clubs (Costco, Sam’s, BJ’s) Buying Syndicates (for Dept Stores, etc.) Other–

Independent B2Cs (Amazon.com) Associations (1-800-FLOWERS) Associates Programs (Amazon) Online Kiosks in Malls Other– (continued )

TABLE 3-1.

continued

Traditional Channels manufacturer wholesaler/distributor retailer customer Owned Distributors

Major Competitors

Internet-Based Channels manufacturer online middleman business customer B2B Hubs: Business-to-Business Independents Vertical Hubs (VerticalNet)

Full-Function Wholesalers Agents or Brokers Sales or Manufacturers Reps Other–

Functional (Horizontal) Hubs B2B Hubs: Supplier-Owned (Covisint, defunct) Peer-to-Peer Networks Other–

manufacturer 3rd-party alliances –Private Labels

manufacturer 3rd-party online alliances Potential for using selected channels above

–Licensing –Franchises –Joint Ventures

Major Competitors

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Growing Discount Retailers in Suburban and Highway Strip Malls Discount retail distribution has become a prevalent strategy for many classes of consumer and business-to-business goods. First, it was the flight from the city center. More recently, we have witnessed the rapid growth of discount clubs, factory-outlet malls, the Wal-Marts, Home Depots, Lowes, Staples, Office Depot, Best Buys, and countless smaller specialty retailers. They have grown dramatically through their lower prices, broader selections of frequently purchased items, positioning in store clusters for impulse shopping, and open hours often approaching 24/7. The three surviving major wholesale clubs—Costco, Sam’s, and BJ’s— continue to stock the most popular brands. However, they are displaying more and more of their own private labels alongside the big brand names at lower prices to gain sales and higher margins. All three cater to both ultimate consumers and industry. Small businesses with highly recognized brands and significant market followings must treat seriously the offers of the clubs to carry their lines. Apparently, few refuse the opportunity. Today, shoppers for consumer goods are streaming to the highway malls in shopping centers. West Lebanon, New Hampshire, is a small Northern New England community straddling a highway adjacent to the Connecticut River. This town and its principal market area have an estimated population of about 85,000 people. With no state sales tax in New Hampshire, it draws the populace of a number of nearby towns in eastern Vermont, which impose a sales tax. Figure 3-2 shows the combination of discount-chain outlets, specialty stores, grocery retailers, and food vendors present in the West Lebanon strip in 2005. Notice how few of the major national chains and discounters are missing from this relatively small center of shopping population. The retail presence is a mix of discounters and cost leaders, commodity services and products, fast-food outlets, and specialty stores positioned opportunistically to take advantage of the huge drawing power and shopper traffic of the strip. If your business can take advantage of the malls’ shopping power in your market areas but you haven’t visited them lately, do so to identify opportunities and competitors’ initiatives that you may be missing. Distribution Selectivity Strategies One of the traditional strategic issues has been choosing where to reach your shopper within a range from intensive, through selective, to exclusive retail outlets. Should you blanket the market with as many retailers as will take your product in a defined geographic market area? At the other end, should you make a highly exclusive placement, employing only one dealer or representative in any market large enough to support a profitable operation?

FIGURE 3-2. West Lebanon, New Hampshire, Shopping Center, April 2005

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The West Lebanon Strip demonstrates how the specialty stores are locating themselves to take advantage of the powerful draw of shoppers by the major discounters. Within the one-mile stretch of highway along Route 12, the consumer can visit a mix of highly differentiated offerings and services, as the figure reveals. This phenomenon has been accelerating rapidly all over the United States. Table 3-2 outlines some of the main considerations entering into your selectivity decision.

TABLE 3-2.

Distribution-Selectivity Characteristics and Guidelines

Product/Market Characteristic

Factors Favorable to Intensive Distribution

Factors Favorable to Selective or Exclusive Distribution

Unit Value

Low price

High price

Price Stability

Vulnerable to severe price cutting

Suggested price reasonably well maintained

Frequency of Purchase

High repeat sales

One-time or infrequent purchase by any one customer

Brand Loyalty

Will switch if must go to another outlet for original brand choice

High acceptance or insistance

Product Performance Differences

Little or no real difference, product has a commodity connotation

Major differences in product performance distinguishable by customer

Exposure to ‘‘All’’ Shoppers

Unplanned, impulse buying opportunity for a widely used product

Product or service for selective market segments

Technical Complexity

Need assurance of accompanying instructions and factory response

Great. Requires specialized knowledge or training to understand and use effectively

Selling and Demonstration Requirements

Customer selects, or is easily influenced by packaging or display

Considerable effort at pointof-sale requiring special training and sales skills

Repair and Service Requirements

Minimal or no local support; assurance of factory response and performance

Significant, with major dealer investment in parts and facilities

Distributor Inventory Investment Required

Low relative to turnover and obsolescence risk

High, with obsolescence risk and dealer uninterested in investing if it has to compete unduly with others carrying same brand

Dealer or Distributor Competition

Commodity category offering, often must be carried by middleman as a full-line service to customers

Middleman won’t promote if too much competition is readily available to customers

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The three traditional selectivity variations continue to be the generic range of options for the vast majority of both individual and business consumers’ shopping missions and locales. They will continue to be important for all customers who find it more convenient and trusting to examine the offerings physically than to order by phone from a catalog, or go online. Intensive distribution strategies for consumer products are aimed at broad coverage of your market for convenience goods and shopping goods. You heighten your exposure to impulse shopping of your own brand, and reduce your vulnerability to cyclical declines by specialized classes of middlemen. Selective distribution for particular types and qualities of products helps you minimize dealer and distributor competition operating in the same marketing area. You gain greater assurance of middlemen’s support for shopping and specialty lines. Exclusive distribution suits a basic strategy of differentiation with unique or high-value offerings. Your aim is to eliminate dealer or distributor competition to maintain their high interest in stocking, sales, and service. You assure the best possible representation to a given market. Growth Through Exclusivity and Strong ‘‘Word-of-Mouth’’ Patronage Trader Joe’s is a one-of-a-kind, imaginative retail chain of gourmet delicacies, ethnic specialties, and unusual departures from commodities, all reasonably priced. Joe Coulumbe founded it in 1958 in Pasadena, California, and it grew into a chain of Los Angeles convenience stores called ‘‘Pronto’’ markets. By 1967, he was facing rugged competition from the newer 7-Eleven chain, and decided to reverse direction with a highly proprietary line. His target clientele was ‘‘welleducated, well-traveled, and underpaid people who liked to be entertained and educated by what they eat.’’ His buyers traveled worldwide to discover new products at exceptional values. He established a ‘‘taste panel’’ of 18 employees who rigorously tested and improved on the unique food and wine discoveries before adding the most ‘‘addictive’’ products to their fifteen categories of items.1 By 2006 the company had expanded to around 250 neighborhood stores. Trader Joe’s was adding retail outlets rapidly in upscale markets along the eastern seaboard, and spreading into major Midwest market centers. Over 80 percent of its 3,000 items are private Trader Joe labels, reasonably priced, and attractively displayed. They do not rely on national brands and many items cannot be price compared. The corporate style has been described as dorky; all employees from store hands to the CEO wear colorful Hawaiian shirts. Attentive clerks throughout the stores assist with product queries and help patrons locate items. The whole experience is an impulse shopper’s delight. It uses an exclusive geographic location strategy, depends largely on word-of-mouth selling power, and the limited selection prevents one-stop shopping.

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A recent shopping bill from the nearest Trader Joe’s (three hours away from this author) listed the following purchases, only a few of which had been on the shopping list: TJ-branded cooked, frozen, and seasoned rack of lamb (in eight rib packs); Jalapeno pepper jelly; smoky peach salsa; crispy white chocolate chip cookies; bold and smoky Kansas City barbeque sauce; roasted corn tortilla chowder; triple ginger snaps (14 oz); almonds for homemade biscotti; pecan pieces; peeled baby carrots; Cioppino simmer sauce; imported English Lemon Curd; apricot rhythm preserves; McCann’s steel-cut Irish oats; English toffee; an orchid plant just starting to bloom; and a variety of tortilla and nachos chips. On this trip we passed up many interesting coffee blends and a variety of frozen souffles. ‘‘Trader Joe’s is a high-excitement, exclusive distribution strategy well worth the extended travel.’’2 KEEP CURRENT ON THE TRADITIONAL AND CHANGING FORMS OF INDEPENDENT MIDDLEMEN You can eliminate the middleman, but you cannot eliminate his functions. Just ask a large number of failed B2B hubs. Follow the brilliant success of Jeff Bezos, a super dot-com survivor, who initially had to retreat part way back to more traditional wholesaling functions. At the outset, Jeff Bezos, founder of Amazon.com, saw his start-up’s stock prices soar on highly touted, great expectations, only to drop by more than 90 percent over a year and a half. His well-known products and values were low priced and virtually risk free for the customer to commit to without the need to comparison shop. Patronage continued to grow because of comfort with a new kind of shopping experience and a high level of promotion. Amazon’s initial inability to break into the profit circle consistently suffered from extremely high costs and overheads of maintaining inventories and performing timely order fulfillment and customer service. He was forced to go to traditional warehousing facilities and services, but continued to grow with his successful online retailing model. In recent years, he has developed an outstanding supply-chain process and technology, and his profit record continues to improve. From 1994 through 2002, Amazon had incurred $2.9 billion dollars of losses, well covered by his IPO’s tremendous initial proceeds. Since 2002, the company has been registering substantial revenue and profit growth. Analysts attribute the improvements to significant increases in international sales, additional product lines, higher operating margins, lower interest expense, and broad acceptance of the online marketing model. Some middlemen have been replaced over the years, with their marketing and logistics functions assumed by manufacturers or new types of supply-chain entities and infotech-enhanced processes. For example, Michael Dell’s early PC business model took over the middleman’s product configuring and selling functions, initially with his direct sales force, and then with direct online selling of PCs. His

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direct strategy scooped IBM’s use of middlemen for its PC line, and subsequently Gateway and Compaq had to begin selling directly online. But all were required to assume many of the former functions of their middlemen. Dell has continued to be first in the United States and has gained dominance in world markets. Strong advocates of the B2B hub phenomenon have argued that the merchant middleman is one of the most threatened traditional distribution institutions, because of infotech. Yet he will survive in many industries that still need an essential outside partner for the supply-chain and for marketing and customer service. But the B2B model for the small business is unsatisfactory when it reverts to price-only competition and drives the participant into red ink. A Classic Case of Traditional Distribution Alternatives The LMN Paper Company was a manufacturer of fine papers for the book and magazine publishing trades. They were considering a basic change in distribution strategy and sought the help of a consultant to review alternatives. The company had been selling two-thirds direct and one-third through merchants. The four plans that LMN and their consultant considered most seriously are outlined in Table 3-3. Plan B was the strategy in effect. The other three options illustrate the close intertwining of distribution strategy with the other major business functions in marketing, product line planning, the sales organization, and customer service. Plan A would be a complete change to direct sale. Plans C and D included several significant ways that merchant middlemen could reinforce the company’s sales and marketing efforts selectively. LMN decided to move ahead cautiously, staying with Plan B initially, strengthening the in-house functions of its third point. However, they also decided to continue researching a later modest expansion in the direction of Plan C. The roles assigned to independent merchant middlemen take many forms and combinations, as the LMN options suggest. Depending on the type of business, they may include prospecting, selling, education of the customer in the product’s use, stocking to assure rapid delivery, parts, repairs and maintenance, and the convenience of offering associated products and services of other suppliers. A given company’s channel partners may be a combination of stocking merchants and agent reps for different business segments and geographic coverage. An Industrial Distributor’s Online Database for Customers Resourceful middlemen have been using computerized databases and the early software-based order fulfillment processes for years. Livingston & Haven Industrial, of Charlotte, North Carolina, has been in business since 1947 with bases of operation in four southeastern states. They distribute hydraulic and pneumatic devices including fluid-powered drives, valves, and other parts for a wide range of end applications from elevators to airplanes. Their mission is ‘‘Innovative Productivity Solutions for Manufacturing.’’

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TABLE 3-3.

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Alternative Distribution Strategies for LMN Paper Company

Plan A—Direct Sales Program 1. A sales program similar to the direct sales approach used by the W Company 2. Direct contract and making-order sales secured from large and medium-sized converters, book and periodical publishers, and moderate-to-large-sized commercial printers 3. Essentially all sales made through LMN’s own sales force, which would need to be expanded signficantly in size 4. Comprehensive advertising and sales promotion directed to end-users of paper 5. Methods for rapid shipment of LCL and LTL quantities in competition with merchant service.

Plan B—Reinforced Sales Program (present customer emphasis) 1. Continuation of present basic emphasis (2/3 direct and 1/3 merchant sales) 2. Maintenance of present large-volume, cost-plus tonnages, with flexible policy to take advantage of volume tonnage opportunities, both direct and merchant 3. Strengthening of the business primarily through internal measures, including: —Establishment of resident salesmen in key geographic areas —Determination of most popular grades and structures to emphasize.

Plan C—Limited Merchant Sales Program and Selective Direct Effort

Plan D—Comprehensive Merchant Stocking Program and Selective Direct Effort

1. Merchant contract sales and stocking paper sales through selective merchant distribution involving: —Development of limited merchant grades of coated papers to be sold only to stocking merchants —Mill stocks for rapid service of merchant orders —Advertising, promotion, and sales training assistance to merchants —Selected direct selling among large merchant customers 2. Intensified direct selling where merchant representation is unworkable, with gradual reduction of dependence on largest direct accounts.

1. Establishment of position with merchants comparable to Companies X, Y, and Z, through: —Development of a broad merchant grade structure of stocking lines —A substantial mill stocking program —Geographic assignments to merchants on a selective basis, but only if they will stock; also possible elimination of merchant-broker sales 2. Reduction of emphasis on largest, direct contract accounts 3. Cultivation of direct sales to profitable accounts specifically excluded from merchant franchises.

L&H sells products, does repairs, and helps monitor customers’ inventories. For years, they have maintained computerized historical databases for accounts, suppliers, and catalog information. In 1999, as technical leaders in their industry, they created an Internet access to these databases, which they promote as ‘‘Secure Customer Rooms.’’ Each customer has confidential password-protected files accessible 24/7 and containing information on every aspect of the account. The ‘‘Room’’ contains L&H’s comprehensive catalog information, eliminating the printed catalogs at savings of $100,000 per year.

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Each customer’s individual files include past order history, information on its types of machines, and lists of all hydraulic parts the machines need, whether previously ordered or not. Each ‘‘Room’’ also shows current order status, a menu of frequently purchased items, and customer-specific pricing. Customers’ current inventory and status changes are kept updated by e-mail. Another benefit is an online digital photo capability on repairs underway in L&H’s shops.3

Early Expectations versus Emerging Realities for the B2B Hub Year 2000—‘‘Covisint, the auto industry’s giant B2B hub—hottest new E Business Platform strategy, and a massive threat to their sub-contractors’ competitive selling and profit margins!’’ Year 2003—‘‘Supplier, beware of the giant! Otherwise, prepare to lose your competitive advantage to an impersonal buying process.’’ Year 2004—‘‘Covisint has been chopped up and sold by the Big Three!’’ In 1999, General Motors and Ford threatened a massive negative impact on thousands of their small vendors when they announced plans to establish a major shared B2B hub for the bulk of their purchasing. They soon persuaded Daimler Chrysler to join; later they recruited Renault and Nissan to initiate the plan in Europe and Asia respectively. Announcing ‘‘NewCo’’ in February 2000, and renaming it ‘‘Covisint’’ in May, their objective was to revolutionize the heart of the industry’s established and lucrative supply chains. The partners expected to require their existing subcontractors and suppliers to participate broadly in this digital venture in order to keep getting their business. Covisint’s announcement had sounded a shrill threat to the auto-industry’s small OEM suppliers. The promise was to become a huge auction site, with the pervasiveness of an eBay. By January 2003 they had signed up more than 76,000 members. The Covisint partners had made some progress, disclosing in May 2003 that their privately held partnership had reached about $25 million in annual revenues. But they still faced extremely complex problems of unifying and tying in the logistical processes and systems of members with their B2B hub.4 Covisint continued to face a number of practical problems, and their board began looking for a buyer in 2003. They still had not solved the complex interfacing problems with their members. The auction part of their business model was not popular with the auto industry’s suppliers. The latter felt squeezed by price deterioration from the fast-paced online bidding. Many were concerned that the portal would eventually replace their own online supply-chain systems. In 2003, Covisint sold their online auction segment to Free Markets, Inc., and closed out their relationship with Commerce One, their software provider. Finally in 2004, Compuware Corporation acquired the remainder, their business-tobusiness exchange and Web portal, naming it Compuware Covisint.5

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In many industry sectors the B2B hub concept had been initiated and touted as the future heart of the supply chain. It took off like a dry forest fire, promising to rewrite the rules and replace old forms of wholesalers, distributors, and agents. Vertical hubs concentrated on the supply chain for a single industry or a related group of offerings from supplier to business buyer. Horizontal hubs sprung up to concentrate on specialized applications common across industries. Most of these were mainly business-to-business markets, particularly those with many buyers served by numerous suppliers offering a wide range of products and services. Bullish venture capitalists envisioned thousands of hub opportunities. So, the rush was on, but with far fewer successes than expected. Numerous new hub ventures were stifled by small suppliers’ fears of losing long established, favored-customer relationships. They feared that if they were bundled into one large pool, they would lose even the advantages of small benefits to undue price-only competition. Another serious problem was the lack of readiness of participating suppliers’ or business users’ own information systems to interface readily with the B2B hub. A number of these early initiatives are survivors. Many others have failed or scaled down their scope to more compatible and manageable levels. Such problems will ultimately be solved, and B2B hub forms of operation will be adjusted, to take advantage of the time and cost savings inherent in the basic infotech concepts. It behooves most small businesses to track progress of these infrastructure services, evaluating them as possible supply-chain partners, as models for the company’s own supply-chain processes, or, defensively, as applications that competitors may already be using to take business away from them. IMPLEMENT PROFIT-PROVEN, SUPPLY-CHAIN INFOTECH ENHANCEMENTS IN PHASES Infotech order processing and fulfillment has been one of the major applications learned from the giants. Infotech experts have helped the small company leverage the large companies’ pioneering moves. The fundamental process steps frequently can be scaled down and streamlined to require much less expensive software and hardware systems. Dell’s early strategies demonstrated the profit possibilities of using supplychain technology to maximize rapid, on-time shipment of orders, eliminate back orders, and drastically reduce inventories of parts, components, and finished products. Michael Dell established online supply-chain linkages with component suppliers to take much of the risk out of inventory obsolescence. His direct-sales model tied producing to orders received, which enabled him to keep very minimal inventories on hand. He rarely lost bad inventories from surprise technological innovations. From the outset he could price up to 10 percent lower than his competitors.

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More recently, small business leaders broadening infotech acceptance and growth has started shifting from adapting the advancements of the majors to initiating their own innovations. The drivers are the powerful cost savings and productivity enhancements to reduce the costs of production, marketing, and service. Small entrepreneurs who have not yet started upgrading their order fulfillment and logistics operations with Internet and other online applications, should step back and take a look at how supply-chain strategy is rapidly changing and growing in productivity. The editors of the Harvard Business Review began a series of pertinent articles in their October 2004 issue, drawing four basic conclusions for starters.6 







‘‘First, it is critical that your supply chain maintains a balance between maximum availability and minimum inventory of your offerings.’’ The smaller you are the less you can assimilate the cost of overbuilding. ‘‘Second, increasing revolutionary changes will involve more specialists and more business functions and business units.’’ The small firm must participate to survive, but it will not be inexpensive, and the neophyte definitely should not try to go it alone. But, keep infotech your servant—not the master or dominant driver of your small firm’s entrepreneurial strategy. You need a profit contributor, not a swallower. ‘‘Third, the major corporations, at least, are facing a more interconnected and interdependent global economy.’’ The small business that serves business-tobusiness customers is not immune to infotech-enhanced competition of any size. Review Friedman’s comprehensive documentation of the outsourcing of digitizable infotech applications to clarify your own issues of vulnerability to outsourcing of your industry’s functions to low-cost foreign competition.7 ‘‘Fourth, the most controversial organizational and strategic challenges occur where supply and demand converge. This often involves outsourcing and off shoring.’’ Such strategies head the small company toward more sophisticated infotech capabilities and supply-chain management.

Enlist experts to help you scale down and apply the best of the majors’ advancements that can fit your needs profitably. Consider the fundamentals of the process General Electric first used in order to start applying the new infotech to one of its divisions. Their approach is an applicable guide for companies of any size. Getting Rapidly Up to Speed after a Slow Infotech Supply-Chain Start Even the immense size and scope of a General Electric should not preclude infotech lessons for the small venture. They admittedly were relatively

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Features of GE’s Infotech Conversion Process        

Enter orders as fast as or faster than phone. Control employees’ access to the system. Track shipments and access system 24 hours per day. Match shipment received with order placed. Get the right order on time. Search for plastics by name, number, or characteristic. View purchasing histories. Get certification sheets on each item’s characteristics.

late starters in applying infotech to supply chains, but wasted no time catching up. One of Jack Welch’s first moves as CEO was in the Polymerland Division that he had managed early in his career. Working closely together, Welch and division management developed an implementation approach that was readily transportable to other divisions throughout the company.8 First, focus on what the Web can do for the customer, not GE. Use the Web to improve customers’ purchasing experiences. Mount information and encourage customers’ feedback, enabling them to manage more of their interactions with the company. Customers want speed, security, and accuracy. This process saved the division up to four cents per dollar. Over 75 percent of online orders required no human intervention and went directly to the warehouse. Customers were ‘‘growing’’ from their use of the Web. They responded to procedural changes and started making suggestions for further improvement. The approach led to very rapid installation of refinements. A valuable added benefit was the personal contact during the transition that was highly appreciated by the division’s customers. Second, ferret out long-established flaws in your business practices. For example, warehouse schedulers were logging orders with the last date of the year as a flag, figuring they could insert the right date later. When the system went live, customers saw discrepancies. This led to behavioral changes, not just corrections in detail. GE gained a competitive edge based on fundamental business processes. But they knew that staying ahead of competition would require new big leaps in service. As of May 2000, Polymerland planned to offer other products and services its industry needed, for example, machinery and equipment, logistics support, even people. The division also was considering linking with other GE units to help manufacturers decide on the best plastics for their jobs, and was beginning to monitor pellet levels in users’ inventory silos to trigger automatic online ordering for replenishment.

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Phase-In Infotech State-of-the-Art to be More Competitive and Cost Effective Small entrepreneurs who are just beginning to think about or develop significant infotech processes should attend to ‘‘First Things First.’’ If you are at that stage, before tackling sophisticated e-commerce sales and marketing programs, place first priority on comparing your present strategy with competition in your industry. Clarify your customers’ preferences, and inventory your infotech capabilities beginning with the self-test in Table 3-4. If your ‘‘Nos’’ are preponderant, you have some significant catching-up homework to do. Start inventorying what information technology you now have up and running compared with the state-of-the-art. Get advisors to help you start determining your personnel requirements, what front-end costs and investments you will require, how much time you will need to catch up with competition, and how you can accelerate. A number of logically phased information building blocks are economically available to small businesses. Most firms that have not already done so should

TABLE 3-4.

A Self-Test of Your Company’s Infotech Readiness

Yes

No

—

—

Do you have a Web site? If so, are your customers, sales organization, distributors, and suppliers using it productively? Have you mounted— — Useful historical and up-to-date digital databases? — Products and suppliers? — Customers and targeted prospects? — Sales performance records? — Employee personnel? — Financial history and pro formas? — Your current business plans?

—

—

Can you network among your employees and partners?

—

—

Do you understand the status of infotech applications in your industry and their economics?

—

—

Are you keeping up with information-savvy competitors?

—

—

Do you check your competitors’ Web sites regularly?

—

—

Do you know what information technologies they use? How effectively?

—

—

Are B2B hubs or other supply-chain models eroding your sales and profits? Stealing your accounts? Do you use them? If so, are they profitable for you?

—

—

Are you and your staff ready for the new technologies? Do you have savvy experts in house?

—

—

Have you identified infotech sources and software to guide you?

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enter the information economy in carefully crafted phases, taking evolutionary or incremental steps. A prudent upgrading approach might proceed in the following sequence, one or a few building blocks at a time, and not necessarily taking all six steps in the first phases: 1. Computerize your internal operating information. Establish a computerized, quick-response system for your financial reports and analyses, product, pricing and policy information, pricing and breakeven analysis routines, rolling cash flow calculations, and current business strategies, plans, alternatives, and contingencies. 2. Set up an informational Web site to communicate offerings, policies, and programs rapidly to your customers and prospects, and to monitor your competition. 3. Mount comprehensive historical databases for customers, distributors, and suppliers, password-protected for the individual account’s, with 24/7 access. 4. Develop online supply-chain capabilities in a phased sequence of steps, starting with online sales and order processing and order customization services. 5. Consider the pluses and minuses of participating in some form of B2B hub as supplier and/or customer, but with great caution, evaluation, and pretesting. 6. Explore appropriate ‘‘Bricks & Clicks’’ adjuncts to your current sales model. Review the Increasing Availability of Infotech Tools Many software applications are continuing to be developed to help the small business enhance its operations with infotech. Check out the May 2006 Entrepreneur magazine. Each year the editors publish a comprehensive updated summary. The issue for 2006 contains almost 200 software programs for small to midsize businesses. Appendix C lists the categories. The editors have made downloadable versions of the entire collection available on their Web site. This valuable resource is major evidence of the advancing state-of-the-art of information technology and productivity for the small business. It is a ‘‘must-refer.’’9 Increase Users’ Benefits and Grow Your Customer Base with Infotech U.S. Sports Camps, Inc., of Kentfield, California, provides online administrative and marketing services to a variety of seasonal sports camps nationally. These ‘‘sleep-away’’ enterprises conduct one- to two-week intensive training camps in any one of fifteen sports. College coaches run the training operations and hire their own staff. Founded in 1996 by Charlie Hoeveler, the company

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established a Web site in 1998 to provide 350 camps with streamlined registration processes, simplified scheduling and faster online payments, plus online marketing to grow sales. They set up a tie-in with Nike, and started intensive direct mail and publication advertising in such magazines as Tennis and Golf Digest for camps on college campuses. Campers register into the USSC database, where they can make travel arrangements via the Nike Sports Camp Travel Desk on the Web. The information is sent to each client camp. Inauguration of this Internet approach enabled USSC to reduce its seasonal staff by 20 percent while handling 20 percent more business paid by credit card. It also reduced calls by coaches, who could then log onto a separate administrative site for up-to-the minute attendance rosters. Campers served and annual revenues grew rapidly. In 2004 more than 13,000 campers registered at the site, and by the 2005 season the company was offering 500 camps for registration.10 The Compelling Need for ‘‘Seamless’’ Teaming Internally and with Outside Partners The more infotech becomes a regular, day-to-day reality throughout your operation, the more you run the risk of dehumanizing the personal relationships and processes that make the small business work. A critical requirement in taking the above steps is to maintain a seamless communication among all parties. The small business that has not ventured very far into information technology should consider the supply chain as its initial priority for state-of-the-art infotech. However, the small firm must go beyond the technology to help, not hinder, the human interchange dimension. Support and foster the building of trust and lasting relationships with customers, suppliers, and middlemen. Be alert for communication blockages and provincialism inside the company that may have grown through diversification into multiple functional or profit centers. Infotech can help break down so-called ‘‘functional silos’’ that tend to develop in the form of political ‘‘entitlements’’ within units of a corporate culture. Equally important is infotech’s role in fostering lasting, quid pro quo partnerships among the company’s outside channels and supply-chain partners. These viewpoints reflect the essence of a recent panel of supply-chain management thinkers and doers convened by the editors of Harvard Business Review. The panel’s consensus was that people and relationships are rapidly becoming more important than the new technology in and of itself. While the panelists’ affiliations and focus were on the large companies, most of their principles and examples can be scaled down to fit the small company as well.11 Your first step toward this end should be a meticulous definition of your essential supply chain functions. Carefully define the roles and steps of both your in-house functions and independent distribution partners. Develop each process in a single sequence from producer to consumer. Look for and eliminate overlaps and gaps in relation to consumer satisfaction.

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Apply supply chain infotech as an enabler, not the primary distribution strategy. Fit the infotech systems and entities such as B2B hubs into the company’s underlying basic functions and processes. Don’t try to force the reverse. Begin with technology-independent planning of action steps for each distribution and supply-chain procedure. This is essential because, within the supply-chain function, organizational responsibilities are likely to be changed by the new technology. Then adapt state-of-the art options, modifying your current procedures only where you can preserve the integrity and cost efficiency of the necessary functions that they serve. Test every new approach with scenarios.

The above three steps need precise definition, because the demarcation line between the front end of the sale (influencing, getting, and placing the order) and the back end (order fulfillment and customer service) will not be as clear as in the past. Inside your company, use infotech to promote cross-functional communication and coordination of key decisions. Instant online access keeps the operating functions talking and planning together. Break down the walls of the functional silos to ensure compatible and non-contradictory decisions relative to the overall marketing and business goals and strategies. Don’t make the mistake Volvo made when its factory lots and dealer floors developed a glut of green cars. This prompted marketing to offer deep discounts that resulted in a sales surge, only to be misinterpreted by production planners, who significantly increased plant assembly orders for green models, thus recreating the glut.12 Let communication help move strategic emphasis from cost control to greater value creation for the consumer. Do not let pressure on the purchasing agent for ‘‘lowest cost’’ close the door to marketing’s goal. For example, a too-stringent cost target can wipe out funding for improvements in quality and versatility that would support a higher price, market share, and gross margin. Use a range of interactive communications capabilities shared among your functions and selected key accounts and suppliers. Include planning inputs and team participation for supply chain logistics, outsourcing, markets, applications, benefits development, pricing alternatives, and technology. Share proprietary information in your development projects with trusted partners. Such participation can build trust and valuable long-term customer/supplier relationships. EVALUATE THE INTERNET FOR SELECTIVE GEOGRAPHIC AND PRODUCT/MARKET SCOPE EXPANSION Major distribution strategies for business growth have always included expansion of geographic scope and density of market coverage, both domestically and on a global scale. Thomas J. Watson, Sr., IBM’s founder, was a pioneer in

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global expansion using strategies that were not yet widely popular. When IBM was much younger and smaller, Watson, Sr., set up country-based companies and staffed and headed them mainly with nationals of the particular country. This had numerous benefits for IBM in its international positioning and growth. 

     

Senior managements’ ‘‘knowledge of the territory’’—market characteristics, competition, channels options, local customs and protocols, legal and regulatory requirements, currency exchange Sharper definition of prospects’ requirements and preferred benefits Getting into full operation on a faster timetable Reducing or eliminating language hurdles Recruiting and training of nationals Relationships with government and regulatory bodies Establishing vested interests and monetary incentives with the nationals

IBM leaders over the decades have continued this strategy. Most recently, in late 2004, they announced their landmark sale of their PC business to Lenovo, China’s largest personal computer maker, retaining an ownership interest of 18.9 percent. The concept is unlikely to be immediately applicable to very small businesses. But it is a realistic option for any company moving on to international or global scope.13 Geographic expansion has always been uneven for both ultimate-consumer and business markets, and for different types of products and services. A small business cannot assume that even expanding its geography domestically is an easy path to greater profits. A pre-Internet consumer-product case illustrates some traditional problems. Trying to Go National with a Successful Regional Business Mrs. Tucker’s, a successful producer of shortening and margarine, had a strong brand and market position in the Southwest. The company’s new owners, with no previous business experience in packaged goods, were interested in expanding to national marketing and distribution. They took the initial step of hiring a brilliant senior sales executive and some product-marketing managers from one of the leaders in the packaged household products industry. The entire organization approached the expansion plans and programs with great enthusiasm from the outset. However, they backed away from the national strategy after the initial year of disappointing sales and prohibitive costs. Entrenched competition for supermarket shelf position among the commodity-level product line made gaining new customers in distant geographic markets extremely difficult. The store-level slotting fees, and the cost of store detail personnel to work the chain outlets were prohibitive. The new owners discontinued the national strategy and returned Mrs. Tucker’s focus to its original profitable regional niche.

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Could such an expansion have been launched with today’s Internet reach? With hindsight, it is highly unlikely that Internet marketing and service could have overcome the combination of factors Mrs. Tucker’s had faced in the new territories without major new benefits for consumers and middlemen:   

Existing competitors’ dominance in a commodity business far beyond the company’s previous geographic scope The high cost of entry with national marketing of a ‘‘me-too’’ product line The importance of local warehousing and delivery of the product types.

Consider starting to exploit geographic expansion that reaches more of your niche potential with strong benefits and combinations of traditional and online strategies that complement each other. Continue to use traditional strategies for an established commodity-type line. Couple them with online networking to extend your reach only if you can solve the physical logistics, personal sales representation requirements, language, and added costs of the extended geography, and currency exchange differences abroad. Converting in one move from traditional strategies to a totally stand-alone, dot-com model as the only basic marketing and distribution mode has been proven to be wildly risky and deficient. Conversely, numerous companies have gone to ‘‘Bricks & Clicks’’ models with the online part serving as supplementary channels. Primarily retain the traditional channels in their established geography, while cautiously introducing a bit of the new elsewhere. It’s a less risky way to upgrade your infotech and test the feasibility of going further, or completely into online. The existence of a real market, costs, repeatable revenues, bottom-line profit, and timing should still be the classic small-business performance issues when considering dot-com type ventures. Expanding Both Range of Services and Geographic Scope Online Atkinson-Baker Court Reporter, Inc., was the first such legal service to go online to expand both the range of services and the geographic scope of an existing regional niche service. Its founder, Sheila Atkinson-Baker, is an experienced West Coast court reporter who serves both lawyer clients and the courtreporting industry. Her team of high-caliber reporters record thousands of deposition proceedings each year, and she manages a ‘‘tangle of schedules and logistics.’’ A-B’s Web site has comprehensive files on reporters’ career information, and on rules of discovery that differ from state to state. Setting up her Web site in 1995, she hired 30 geographically dispersed court reporters. She later launched a password-protected online service for legal clients. Her company’s annual revenues and number of employees have grown significantly. By 2005, she had affiliations with 140 professionals.14

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Atkinson-Baker accomplished all this by developing an impressive range of time- and labor-saving services for her online operation. They included:       

Court reporter scheduling Checking of legal-event calendars Viewing invoices online Recruiting and screening court reporters English translation and transmission of shorthand notes Unique rules of discovery in force in different states Proceedings of thousands of depositions each year

Third-Party Strategic Alliances to Expand Distribution and Market Exposure Table 3-1 includes four popular types of alliances and partnering: private branding, licensing, franchising, and joint ventures. They offer the small business a variety of multi-distribution, marketing, and leveraging options for expansion and growth. Licensing can expand your brand’s reputation to additional related markets, and add revenues closer to your bottom line. As a franchiser you can gain broader, faster, and less costly distribution and market exposure accompanied by significant profit leverage on your core strengths at lower risk. As a startup franchisee, you can shortcut the initial stages of research, planning, proving a market, and mastering the ‘‘nuts and bolts.’’ Private Branding to Expand Geographic and Distribution-Channel Scope Cody-Kramer Imports were faced with the challenge of increasing U.S. sales of Grether’s Pastilles, a Swiss-made candy product they were importing. The company had limited finances for promotion and faced formidable national competition. These factors argued strongly against trying to expand their market share with an aggressive promotion of their own brand. The two owner-partners chose to grow their business through a combination distribution/private label strategy. Their initial departure from their Swiss brand was to try to convince clothing-store chains, including Brooks Brothers and Ann Taylor, to carry the tins as impulse items at the cash register locations. After being turned down initially, they succeeded in placing private brands with the Gap’s Old Navy division and several other clothiers. When sales through these channels were insufficient, they ultimately succeeded in placing their products, branded privately, with Starbucks, Trader Joe’s, Target Stores, Neiman Marcus, Eckerd and CVS. As sales expanded, they next obtained rights to produce and market hard and soft candies under the Snapple brand, obtaining distribution with Target, 7-Eleven, Eckard, and later, Wal-Mart.

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As the Cody-Kramer owners pondered their next steps, they recognized several major issues that would affect the ultimate success of their private-branding strategy. They knew they would ultimately need distribution through the major grocery and convenience store chains, with their costly slotting fees for retail shelf and aisle space. Also, they might need to keep refreshing their benefits and enhancements to maintain strong repeat business in the face of private label copies.15 The wholesale clubs provide another significant alternative channel for both long-standing and new commodity-type products. However, the small supplier must be careful not to jeopardize its position with its other channels, particularly if using an exclusive retailer policy. As the clubs continue expansion of their own private labels to the disadvantage of a name brand, the small company may find it attractive to offer its product under private labels to protect its economy of scale. DETERMINE THE COMPETITIVENESS OF YOUR DISTRIBUTION CHANNELS AND SUPPLY CHAINS The small company’s distribution- and supply-chain strategies must fully support the firm’s basic mission. Many variables are at play in your development of objectives and strategies for these aspects. Moreover, all five market-positioning keys are closely inter-related and inter-dependent. Table 3-5 is a suggested format for periodic, in-depth evaluations of the functioning and effectiveness of your supply chain. Go through the table comparing what you are doing or not doing relative to each major competitor. Look for innovative options no one else has tried. You can always get help from information infrastructure experts for a fee, but it can be overkill if you are not watchful. Give it a go with your own people and your accountant first, upgrading your internal computer systems. Then reach for the necessary technical expertise to establish Internet-based strategies and systems for the ‘‘back end’’ of your selling and fulfillment processes. KEY THREE: PROFIT-PLANNING PROJECTS 1. Rate Your Competitive Distribution-Channel and Supply-Chain Standing. Chart your current approach along such lines as those illustrated for Vecchi in Figure 3-1. Then proceed to your comparison of direct competitors per Table 3-5. For each company rated, summarize what you already know about their supply-chain strategies and procedures and the channels they are using. Assign responsibilities for tracking and closing any gaps in your knowledge of their practices. 2. Identify Channel and Supply-Chain Options that You Should Seriously Consider. As you work through project one, consider the options in Table 3-1. Establish and prioritize a list of changes in your strategies that you should investigate. Then assign investigative responsibilities.

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Competitive Evaluation of Distribution Channels and Supply Chains

(Assign ratings only at the A, B, C, D level. Compare and rate on separate forms for each distinct product/market segment.) Differences, Strengths, and Weaknesses of Our Company and Major Competitors A—Basic Channel Strategies 1. Principal channel choices 2. Geographic scope and emphasis 3. Internal/outside partner mix 4. Distribution outlet selectivity 5. Strategic alliances 6. Infotech processes 7. Other key strategies B—Supply Chain Processes 1. Inventory planning 2. Inventory management 3. Order processing 4. Order fulfillment 5. Post-sale customer services C—Organizational Entities—Owned and Outside Partners Execute Table 3-1 summaries of all channels used by our company, outside partners, and major competitors for sales, distribution, and supply-chain services. Post key entities above to maps covering our geographic scope. Include locations of sales offices and reps, warehouses, servicing facilities. Summarize logistical advantages and disadvantages in serving customers D—Overall Performance Comparisons 1. Positioning where consumers prefer 2. Supplier responsiveness to users 3. Teaming and avoidance of duplication 4. Innovative partnering with customers 5. Supply chain state-of-the-art Customers’ overall favorite supplier for timely and cost-effective services

3. Establish a Phased Plan for Moving Your Infotech Capabilities Toward the State-of-the-Art. Begin with an inventory of your present infotech capabilities and processes, seek outside expert help as needed. Use the infotech self-test of Table 3-4 as a guide, and set up a sequenced progression of ‘‘first-things-first’’ projects. Close in on the state-of-the-art with proven and cost-effective infotech systems and processes.

KEY FOUR

A Targeted and Frugal Sales and Marketing Mix Stress a User-Targeted Marketing Model, Precision Consumer Prospecting, Sales Closing Expertise, ‘‘Guerrilla’’ Promotion, and Profit-Tested Infotech Enhancements Marketing is everything that takes place between the producer and the consumer.

The neophyte entrepreneur who never took Marketing 101 faces a bewildering array of strategic and tactical marketing functions and challenges. In practice, the broad definition of marketing encompasses all five keys of Part A, along with the chief marketing executive’s responsibility for delivering planning inputs to those responsible for the managerial and operational keys of Part B. This key complements the other four market-positioning keys by focusing on selected selling, prospecting, and promotional issues, alternatives, and strategies for the firm’s marketing mix. Table 4-1 outlines the main elements of these responsibilities. Groups J and L of the table outline marketing’s most critical interconnections and responsibilities for initiatives with other company functions. One essential role is the specification of preferred offerings and user benefits, and participation in product planning, development, and market testing. Another is determination of the selling and marketing model to pursue, as exemplified by the brilliant startup strategy that led to ultimate dominance of the personal computer industry. Michael Dell forsook a college degree to further his enthusiastic preoccupation and love affair with building and rebuilding PCs. He had been 14 years old in 1979 when he got his first computer, an Apple II. As a 1984 freshman at the University of Texas in Austin, he began working out of his dorm room to rebuild, sell, and deliver PCs to fellow students and other individual consumers. His initial market consisted of other enthusiasts who ordered directly from him. He got so ‘‘into it’’ that he withdrew from college following that first year to form and start staffing his own venture, much to the disappointment of his parents. He founded PCs Ltd., with $1,000 seed money. Dell’s pioneering approach became a

TABLE 4-1.

Elements of the Marketing and Customer Service Functions

A. selling Definition of your sales job(s) Targeting sales prospects Developing presentations and sales closes Trade show prospecting and selling Key account marketing Customer partnering Cultivation of market influencers Private label and licensee accounts Other strategic alliances B. sales management Sales recruiting, selection and training Sales compensation, commissions, incentives Management of Salesforce: Sales personnel Systems engineers Application specialists Retail and consumer detailers Call reports evaluations Lost sale critiques

D. sales administration (Key Three) Order taking, validation and processing Liaison with order fulfillment function Liaison with supply chain partners E. promotion and point-of-sale Brochures, catalogs, promotional literature CD-ROMs, floppies, audio and video, DVD’s Point-of-sale materials, displays, samples Truck and service-vehicle signs Coupons and ads on cash register receipts Restaurant placemat ads On-location kiosks

Direction and Motivation of Channels and Reps: Owned retail and distributor units Independent wholesalers and distributors Chain and independent retailers, franchisees Selling agents, manufacturers reps, brokers Independent supply-chain hubs

F. direct marketing Direct salesforce Trade shows, fairs, expositions, conferences Direct mail campaigns Mail-order catalogs Bingo card decks Newsletters and house journals Key-account mailings and executive contacts Telephone marketing Sponsored house parties Door-to-door selling E-mail marketing and communications Web sites and home pages

C. sales policies and pricing (Key Two) Pricing strategy and schedules Terms of sale Middleman and agents’ agreements Guarantees and warranties Returns and replacement

G. media advertising Yellow pages, listings and display ads Newspapers: local, regional, national, trade Thomas’s register, listings and display ads Magazines, incl. advertising and feature sections

Television: spots and infomercials Radio spots and programs Outdoor ads: billboards, road signs, sky writing Institutional and ‘‘corporateimage’’ advertising Online banners, ads and Web site links H. publicity and public relations Press releases: news and feature articles Sponsorship of non-profit agencies and events Public service ads and appearances Charitable donations Church bazaars Web site and other online placements I. market and marketing research Ultimate consumers and prospects Business customers, prospects and influencers Direct and indirect competitors Channel and supply chain trends New technologies and applications J. marketing plan development Maintenance of current strategy profile Ongoing competitive situation analyses Offerings, benefits and niching strategy (Key One) Pricing and price policies (Key Two) Channel and supply chain strategy (Key Three) Customer service strategy (Key Five) (continued)

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TABLE 4-1. continued Other marketing strategies for the five keys Shelf inventory of commitable strategies Contingency plans and strategies K. customer service (Key Five) Service rep recruiting, training, supervision New-customer orientation and training Channel and supply-chain training Field offices for reps, parts, repair work Service rep call-desk assistance

Service performance analyses and needs Infotech supply-chain and service procedures L. coordination with other functions Negotiate five market positioning strategies Negotiate operational support of marketing Maintain digital cockpit for marketing plan Make Inputs to Other Corporate Functions: Recommendations for enterprise objectives

Target benefits for product development Purchasing and outsourcing strategies Production and quality control needs Human resource requirements Participation in Formation of Enterprise Plan: Development of corporate marketing strategy Definition of requirements for success Marketing section of enterprise plan

lasting profit model thanks to his innovative market positioning, managerial, and operational strategies that ultimately led to making him the wealthiest billionaire in Texas by 1998, just fourteen years after he quit college.1 When he started his business, Michael was convinced that IBM, Compaq, Apple, and others’ sale of their PCs through dealers and resellers didn’t make sense. He concluded that their strategies were based on ‘‘a marriage of the unknowing buyer and the unknowledgeable seller.’’ He rightly judged that his competitors could be beaten with his ‘‘direct model’’ that eliminated and assumed the functions of the middleman. He staffed his start-up with sales people whom he trained to be specialists. They sold directly via the telephone, then face-to-face contact, and later a modest amount of local advertising.2 Initially, Dell had only one product line to master, but he encouraged his prospects to customize their purchase with their own combinations of features and specs. He was taking each order, then ordering the specific parts and components, assembling, and delivering the finished product. So he was never stuck with the costs and technical obsolescence of an accumulating inventory. Dell has continued his direct sales model with the Internet. When Tim Berners Lee created the World Wide Web around 1989, some of the company’s technical support people had begun using it for online file transfers, but not selling. In 1994 the Dell Web site was launched and soon became the very important direct sales channel it continues to be today. The success of the strategy from the outset prompted IBM, Gateway, and others to follow suit.3 Dell’s direct sales model is a preferred strategy for a start-up or early-stage small business with very limited financial resources and only the hope for, or the bare beginning of, a customer base. The new entrant’s time and resources

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must be targeted as directly as possible on the points most likely to produce sales. Even when the prospective offering can demonstrate important benefits for the consumer, there is too little leeway to risk dissipation on broad institutional advertising and generalized promotional effort. This key places a high priority on targeted consumer prospecting, sales closing expertise, selective use of specialized selling assignments, frugal ‘‘guerrilla’’ marketing and promotion, and initiating only infotech-enhanced sales and marketing options that can be profitable for the small firm. GIVE TARGETED PROSPECTING A PRIMARY MIX PRIORITY Virtually every new and growing business faces two opposing problems with the customer mix—avoiding dangerous concentration on a few dominant accounts, and culling out the unprofitable ones. With no thanks to the seemingly natural phenomenon of the 80:20 rule, balancing the mix at both ends must be a continuing concern. Always keep similarity of applications and market needs in mind to avoid the cost and inefficiency of seeking types of business unrelated to your own. For the going business, a company’s own customer list is the preferred point of departure. Too often it is not analyzed deeply enough to reveal distinctive or emerging differences in customers’ groupings based on their demographics, psychographics, and the needs of their applications. Careful profiling of each niche being served can yield significant clues for the kinds of prospects to seek and target. Years ago, ‘‘smoke stacking’’ was a preferred sales prospecting practice for many types of products, office and production supplies, and services sold across industries. Sales personnel were assigned geographic districts or territories to canvas methodically by calling on every facility that had a smoke stack, or otherwise looked like a business prospect. For selling office products and services in New York City, the Empire State Building was a classic example and a salesman’s ‘‘territory dream’’ with its one hundred or so floors of offices. Depending on the offerings, a company’s salesmen might serve only that building, or even sequential groups of floors, with several other sales territories covering the rest of the building. Using a ‘‘Rifle Shot’’ to Prospect for New Customer Niches In his early business years, L. L. Bean, the Maine sporting goods retailer, expanded his customer base by rifle shot prospecting for affluent hunters and outdoor sportsmen. He went to Maine’s state office that issued game licenses where he obtained lists of names and addresses of the out-of-state licensees. His direct mail promotions were highly effective producers of new, affluent customers both for catalog selling and visits to the stores when they came to Maine.

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Using Multi-Faceted Prospecting Programs and Services You met Harold Melloy, the founder of Melloy & Son Construction, in Key Two, where his rolling cash flow approach was reviewed. Hal’s company provides specialty subcontracting services for new construction and renovations. Hal usually is brought into a job after it has been awarded to his direct customer, normally a general contractor. Much of his work is repeat business from contractors who have benefited from his superb record of on-time, high-quality, state-of-the-art work. He has established a practice of regular, periodic calls on these clients, to learn of any hidden problems with his services, and to keep him in mind for their upcoming work schedules. He also becomes acquainted, and keeps in touch, with the principal organizations and executives who award the general contracts. To keep alert to other job opportunities in his markets, Hal subscribes regularly to F. W. Dodge’s monthly and weekly regional reports. These comprehensive lists of new bid announcements, awards granted, and progress reports on projects underway are a ‘‘must’’ tool for keeping current on his marketplace. Important sources of prospect lists include magazine publishers, retailers, and others willing to sell their lists, the Yellow Pages, specialized industry directories, Thomas’s Register and ThomasScan on the Internet, trading association membership lists, highly satisfied customers, and the mailing list houses. Most mailing list brokers can sort their name files into various combinations of consumer characteristics. They are quite adept at resourceful compiling of combinations for both the individual and business client. Setting Criteria and Priorities for Finding and Converting the Best Prospects A small infotech service organization, InfoCom Associates, was a start-up in its third year serving a range of for-profit and not-for-profit organizations. Their infotech services included Web site design, database development, the computer infrastructures of small firms, and related consultation on infotech application installations. In most cases, they were able to obtain ongoing contracts or retainers for Web site maintenance and related services. The three founding principles were experienced professionals with complementing information technology backgrounds. They were successful in obtaining several continuing accounts within their first eighteen months of operation. To complement their own main areas of expertise, they sought outside marketing advice, and one of the early projects was the development of a business prospecting roadmap, as shown in Table 4-2. The partners began pursuing the roadmap that the exhibit recommended. They had readily concluded that, because of the sales development time required in their types of services, they needed to keep a significant number of active prospects and proposals outstanding at all times. The first roadmap priority was most critical to their success, if cultivated effectively. Priority Two, the services

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TABLE 4-2.

Prospecting Roadmap for InfoCom Associates Prioritized Categories of ICA Prospects

One, Current ICA Clients Seek additional applications from your clients Encourage their ‘‘word of mouth’’ referrals to other prospects

Two, Clients of Financing Choices, Inc. Develop Web site formats that fit FCI’s own client offerings Work with your FCI client on joint selling of services to their clients

Three, Active Prospects Follow up on outstanding bids Complete and present bids in development or pending Make initial presentations to preferred active prospect list

Four, ICA Partners’ Network Prospects Review and expand each partner’s current networking list Prioritize and schedule partners’ prospect presentations coordinated with schedules for first three lists

Five, Surf Internet for Added Niches Look for industry categories with inferior Web sites

Six, Modern-Day ‘‘Smokestacking’’ Seek niching prospects in Yellow Page classifications with significant space

firm, Financing Choices, Inc., offered ICA the potential of opening its doors directly to many more prospects in FCI’s clientele, whose principals had been bank workout specialists and commercial bank lending officers. ICA was focusing initially on its own county and another large adjacent metropolitan area. However, they were prepared to take on national assignments as well. They were using radio spots and publicity to project an image of creativity, productivity, and leading-edge Web site design. Prospect brainstorming by the partners suggested targets with significant display, scheduling, and educational opportunities among the following: Auto and antique dealers Bookstores, colleges, and universities Chambers of Commerce Church organizations Ethnic organizations Fine restaurants and hotels Landscapers and architects Libraries, museums, and art galleries

Local area fire, EMS, homeland defense Local clubs and associations Pet services Senior citizens organizations Small professional organizations Specialized construction services Theaters Travel services

Take Advantage of Trade-Show Participation for Prospecting, Selling, Distributor Support, and Competitive Research In the hierarchy of preferred sales closing options, the face-to-face selling to one prospect, when done convincingly, has no equal, if you have mounted the

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manpower to do enough of it. Also high on the list is the eyeball-to-eyeball contacts of the trade show where the entrepreneur can market and close at a considerably lower cost per sale. But there are many additional benefits to going where your various marketplace factors are ‘‘massing up.’’ Attend trade shows and conferences for direct selling, prospecting for new accounts and middlemen, market testing, promotion, support and motivation of your distributors and selling agents, and competitive market research. The shows give you unmatched access to concentrations of your market’s participants and competitors. This exposure to customers and prospects can save considerable time and cost, and is an excellent way to introduce new employees to your industry. Trade-show participation takes careful research and advance preparation. A newcomer to an industry should go to association directories to identify the best shows. Or, go to Google and other search services for many listings of trade shows and conventions with sources to contact for participants, schedules, and applications. Also ask customers and manufacturers’ agents. Get the advice of trade-journal editors and check their publications for pending schedules. Send for booth application materials. If in doubt, visit those that look most promising before making commitments and putting down deposits. When you have decided on show candidates, determine what you want to display and give to visitors. Develop lists of invitees and set up schedules for visits by significant customers, prospects, and middlemen. Plan extra events and entertainment for the most promising customers. Give yourself adequate lead time for the preparation of a booth and props, handouts, computer display programs, attention-getting and interest-building show events and presenters. Before plunging in to the preparations, carefully develop budgets and estimate travel and attendance costs. Schedule all employees and associates you want to join you. Be sure to provide for capturing the identities of all promising visitors; give-away prize drawings can help with this. Prepare for timely post-show follow-ups to continue the steps in getting accounts and making sales. Quiz seriously interested visiting customers and prospects about their needs and the problems they need to solve. Also, schedule enough time to visit competitors’ booths and try to learn from them. To get a jump on this, identify ‘‘must’’ contacts from the advance lists of suppliers planning to show. Extend Your Marketing to Influencers of Your Customers’ Buying Decisions Make sure you are presenting your case to all of the people who will be participating in the buying decision. Ultimate-consumer offerings might be decided by the end user, a gift purchaser, a spouse or parent who has to live with the choice, a grandparent, store buyers, middlemen in the supply chain, or some combination of these influencers.

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DEVELOP SALES CLOSING EXPERTISE AND SPECIALIZED SALES ASSIGNMENTS FOR EACH DIFFERENT TYPE OF SELLING JOB Give priority to defining face-to-face selling and sale-closing strategies with every type of ultimate and business consumer, middleman, and influencer of the buying decision. Work hard to develop and encourage the word-of-mouth selling power that satisfied repeating customers provide. Do not forget that the cost of securing one new customer can be five or six times that of one repeat sale. You cannot count on word of mouth if you have not developed strong closing expertise, consistent delivery of superb customer benefits, and impeccable service. For buyers and sellers alike, how to close the sale continues to be the primary marketing-mix issue in both e-commerce and traditional bricks-and-mortar selling and marketing. Closing success always requires a strong request for the order. This can range from simply making it extremely clear and convenient to order right now to the other extreme of a superbly targeted presentation and demonstration that goes to the heart of the prospect’s critical requirements. Seek maximum direct sales impact from your marketing dollars by concentrating on your best benefits and the most direct and targeted methods for closing sales. Combine and apply them to each element of your marketing mix for a hardhitting ‘‘pitch’’ that sells. Put AIDA to Work with All of Your Selling and Promotion ATTENTION! INTEREST! DESIRE! ACTION! Insist on applying AIDA to every selling and marketing medium you use. Seek customers’ commitments with every marketing dollar spent. For the small business, a Web site that consumers know about and modest institutional promotion can help with your market’s image. However, generalized ads seldom target your user sharply enough to warrant a large buying commitment. Making AIDA Work in a Surprise Situation Some years ago, Leonard Duncan, a college professor, had reached the part of his marketing course dealing with direct mail, beginning with the sales letter. He wanted to demonstrate the formidable challenge of making it work in the absence of person-to-person contact. He planned a selling demonstration to simulate making a personal sale and clarify the problems of closing a sale by letter.

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Len chose a handheld, double-edged razor-blade sharpener called the Blademaster for a surprise pitch to his classes. This consisted of two molded and hinged plastic blocks with two metal posts mounted off center. The blocks closed on and positioned the blade’s two corresponding holes tightly when the blocks were shut. A cord running through the center made the posts revolve with a rotary motion swiping both sides of the blades over honing blocks placed inside, to sharpen the edges. Len had found that his Blademaster could increase a doubleedged Gillette blade’s life by four to six times or more. Len’s AIDA routine went something like this: Attention: He went into his first class a few minutes late to be certain his students were assembled and settled in their seats. His first remark was ‘‘before we get into today’s assignment, I have something you might be interested in seeing.’’ Interest: Without any explanation of what he was up to, he took the Blademaster out of his pocket, inserted a double-edged blade over the posts, closed the blocks, and pulled the cord back and forth, explaining and diagramming on the blackboard how it worked. He wrote its name on the blackboard and passed it around the class. Desire: He explained how blades were made at the rate of 300 per minute with machine inspection, how they needed ‘‘an absolutely perfect cutting edge but did not always get it,’’ and how ‘‘the swiping action of the Blademaster on the honing blocks removed most imperfections.’’ He used the blackboard to equate the number of blades saved by extending their life, and how quickly the original cost of the Blademaster ($3.00) would be offset by the added blade life. Action: When the students’ hands-on had finished, Len said, ‘‘Unfortunately, you can’t get the Blademaster around here, but I have such conviction in the product that I have sought a special arrangement as distributor in this area for the manufacturer. I’m prepared to take orders today for those of you who may be interested. You guys and gals have a use for the product, but not only that, Christmas is coming. The Blademaster would make an excellent stocking present for your dad, brother, sister, sweetheart. So, if you want to order, just sign this sheet now and your order will be filled in plenty of time.’’ To Len’s great surprise, over 90 percent of the class signed up, some for more than one. He was flabbergasted, and told them it was just an exercise to illustrate the elements of AIDA, and what a sales letter had to overcome to be effective. He added, ‘‘Anyway, I can’t do this as a teacher; some might think you made your purchases to influence your grade. So, there is no deal, sorry! And incidentally, please don’t tell my next class what I’m up to. I want the lesson to work for them, too.’’ The students persisted with their interest in obtaining the product, and Len and an associate obtained the distributorship. Most of the students in all of his classes followed through with their purchases. And, Len did not get fired! Have you had successful personal selling experience? What about the sales people or candidates you will be relying on? When did you last question your sales presentations and those of your sales personnel, reps, and middlemen? Do you

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routinely critique lost sales? Are you keeping current on what your customers and prospects really want and expect to get from you? Are you all good listeners and communicators? Are you excellent closers? When did you last challenge or change your sales strategies and pitches, partners, or sales organization arrangement? Do they match your company’s resources and the present requirements of your customer niches and geographic locations? Do they excel over your competition? A person in charge of inside administrative work in a small residential real estate firm had an opportunity to buy the business. The owner was getting ready to pursue other endeavors. The administrative associate sought a consultant’s guidance and it quickly developed that he planned to continue the administrative activities and hire others to sell. The selling owner had been the principal and only sales broker. The prospective buyer had no grasp of home selling and lacked a sales personality. He had no intentions of taking on that responsibility personally; he would hire that resource. Reluctantly, he accepted the consultant’s advice to either plunge into selling before deciding to make his purchase commitment or abandon the takeover idea. He chose the latter. If you are a neophyte entrepreneur with limited or no experience in selling products, ideas, concepts, and most of all, selling yourself, then test your sales skills and interest before you try to succeed in a start-up or in running an ongoing small business. It requires a lot of enthusiastic and confident marketing! Raise and test the same issue with the key people and partners you wish to bring on board. Broaden Your Sales Coverage and Scope with Selective Use of Manufacturers’ Agents The questions frequently asked by the small entrepreneur are whether, when, and how to use manufacturers’ agents. The issue may be either a distributionchannel or marketing strategy or both. Several alternatives can be viable. You may choose to:




Use agents as the entire sales force for a start-up or as a means of cutting sales costs of an existing operation Add agents selectively to build up sales production in certain existing or new geographic markets Use them only in certain application niches or specialties beyond the company’s capabilities and experience. Or they might be best for an initial thrust into a new type of application with the possibility that you would replace them later with your own sales personnel.

Recall Green Mountain Technologies from Key One. When they started their new business, the two partners did all their own direct selling of the ‘‘Containerized Compost Systems’’ to municipalities. However, they engaged manufacturers’ agents with designated geographic territories or regions for the ‘‘Detainer’’ line. Later, when they developed The EarthTub, as reported in Key

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One, they turned to manufacturers’ agents to sell the new product in many of their geographic territories. This third line was marketed to different sets of prospects from their first two established systems for processing and composting waste. They screened and signed up new agents operating in the United States and offshore with experience and accounts in schools, universities, restaurants, and hospitals. In addition to the basic go–no go questions are the tricky issues of how to define the agents’ market scope and areas of responsibility. You need to avoid disturbances or conflicts between them and other representation you already have in place. Fuzzy assignments can be confusing to customers and prospects when solicited by multiple sales personnel, both claiming to be the company’s authorized representative. There is also the important question of fair compensation, which can be a serious problem when two or more parties feel they have the same sales or territorial responsibility. You also need to be clear about exclusions, such as corporate or house accounts that will be off limits to the agent. See Appendix D for a topical outline of agency agreement subjects for a consumer or business-to-business product line. It suggests a number of aspects that help eliminate confusion about the assignment. Always review a specific contract with your firm’s legal counsel. Give Strong, Continuing Support to Your Channels and Other Supply Chain Partners Partners in your distribution and supply chain need many of the same marketing and service components as those that are essential for your own sales and marketing organization. The array of support often includes the activities shown in the sidebar. In addition to these kinds of ongoing supportive activities, the small business must make certain that its plans and strategies are always consistent with what it is trying to accomplish through its channels and supply chain. A dramatic case in point was the adverse impact a toy company’s new strategies were having on its long-established retailers.

Support Available to Your Distribution Channels and Supply Chains






Training them in your offerings and their applications, including periodic demos and seminars at their locations Special, on-the-scene sales support, plus scheduled key-account visits Expertise in field diagnosis and solution of problems Prompt, accurate delivery of orders and inventory replenishment Online access to current info on products, prices, terms, policies, shipping availability, and order placement, plus comprehensive historical databases recording the partner’s experience with you

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Diminishing Retailers’ Support with Toys that Became Loss Leaders Years ago, the Ideal Toy Corporation was second only to Mattel in U.S. sales of traditional toys and games. The company enjoyed a dedicated following in the toy trade dating back to the founder’s introduction of the stuffed teddy bear which became so popular during Theodore Roosevelt’s presidency. Ideal pioneered the toy industry’s use of heavy TV advertising with a highly successful game, Mouse Trap. This action game was a huge success and encouraged them and other toy manufacturers to continue to exploit the TV medium aggressively. Significant revenues accrued to the winning toys and campaigns, but the losers outnumbered them heavily. Frequently, Ideal’s TV-promoted products survived no more than one, two, or three years at the most, not long enough to amortize and recover the hefty front-end outlays for product development and costly national TV advertising. A consulting team brought in to conduct a marketing audit for Ideal uncovered considerable trade dissatisfaction with their disproportionate emphasis on the TV-based marketing strategy. Their greatest competitors were Mattel who focused mainly on ‘‘staple’’ product lines with its Barbie Dolls and Hot Wheels, and Hasbro, with its GI Joe line. The pricing of these products was not burdened by TV costs, and the volumes produced by their ‘‘cult-like’’ popularity gave the trade more comfortable margins. In contrast, Ideal’s TV emphasis converted the winning TV products into low-margin or ‘‘loss leader’’ items. A retailer had no choice but to stock these items or lose customers to other stores. Ideal’s management was quite surprised to learn that they had created such dissatisfaction and animosity from their trade. However, they never were able to balance their lines with the development of popular staples that would not require the huge TV expenditures. Eventually the company disappeared from the market. Use Key-Account Managers for Stronger Client Relationships and Marketing The small entrepreneur should test every marketing action and expenditure as a sale-closer and customer-keeper. Emphasize development of lasting customer relationships that lead to an ever-growing roster of satisfied repeat customers. Think about their needs in their terms. Make them partners in your planning of products and services. Save their time and dollars with your sales administration and customer service processes. Be on time and exacting with your delivery of all of the customer benefits you have promised them. Such requirements are musts for companies of all sizes, and should be included in every sales assignment. Ideally, the small business leader would hope that he or she could accomplish all of these goals with every customer. The practicality is that only the smaller percent who account for the most current volume and growth potential (e.g., the

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Selected Account-Manager Assignments






Make one or more sales persons responsible only for large accounts. One large account might be one salesman’s only ‘‘territory.’’ One senior sales person might handle several effectively depending on call frequency needed, geographic dispersion, or special client/company projects. Set up so-called ‘‘house accounts’’ with senior-level client contacts to be maintained on a schedule by the CEO or other senior management. Where geographic territories and districts are the mode, assign the best sales person a key account in addition to the other accounts in his or her territory. Make key-account appointments where a special partnering project is to be undertaken, such as joint development of new features, products and benefits.

20:80 rule or even 10:90) can be afforded the greatest attention, if the company is to make its profit targets. Making key account manager assignments helps meet these requirements, and should be considered seriously by companies of all sizes. It is the best way to assure deep understanding of your major customers’ changing needs, and monitor how your company is performing in all areas. It facilitates obtaining key accounts’ continuing inputs to benefits enhancement. Its single face to your customer avoids or eliminates conflicting representations to such accounts by different employees and associates. And the account relishes a full-time representative concerned only with its problems. Some of the variations include those shown in the sidebar. STRESS USER-TARGETED, ‘‘GUERRILLA MARKETING’’ AND PROMOTION Table 4-1 listed many traditional advertising and promotion options (note groups E to H) that are available to support a company’s sales strategies and programs. However, major media such as magazines, radio, and TV, can be quite costly for the start-up or small business with limited scope. The normally tight budget and limited financial resources of the small firm dictate a more frugal, hardhitting, and primarily selling-dominated marketing mix. Make your promotional dollars work hard developing sales and repeat sales. Do not dissipate them with costly institutional advertising that does not have an AIDA-type thrust. The frugality requirement argues strongly for incorporating Jay Conrad Levinson’s ‘‘guerrilla marketing’’ in your mix of sales and marketing strategies and tactics.4 The Creator and Avid Champion of ‘‘Guerrilla Marketing’’ In his books, audio tapes, newsletters, seminars, consultations, and presentations at industry conferences and conventions, Levinson advocates ‘‘using the big

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ideas of the major marketers without spending big.’’ You will not find ‘‘guerrilla marketing’’ conveniently reduced to a ten-word summary from his writings. Rather, he sees it pervading all aspects of small-business marketing. His insistence on using the most effective approaches at the lowest cost permeates his entire message, no matter in what form or medium he is delivering it.5 Levinson asserts that the start-up entrepreneurs with little or no formal study of or experience in marketing should learn all they can about the textbook marketing approaches and the standard, ‘‘expensive’’ marketing. Then use their ingenuity to find ways to use the big ideas by spending less and exercising them in more targeted and less costly ways. He admonishes business-school graduates and marketing majors who get into small businesses to forget all the traditional stuff. Rather, they should match their meager budgets with the frugal practices of ‘‘guerrilla marketing.’’ Several basics stand out among his deep convictions. An example from Levinson’s writing is representative of the many ‘‘frugal dollar’’ gems he presents throughout his prolific publications. Exploit the low-cost regional ad space that is often available near press time in many of the prestigious magazines and newspapers. For example, you often can buy a regional ad at the last minute for as low as 10 percent of its national cost. An extension of this approach is to place a bargain one-page ad for your offering in one issue of a magazine such as Time. Then print point-of-sale posters of this ad with the caption, as advertised in Time.6 Levinson also urges the small business to make use of bartering in a two-, three-, or even ten-way swap with radio stations or newspapers. A stereo dealer wanted radio commercials but felt that he could not afford the cost. He offered to trade recording equipment but the station just was not interested. The station was interested, however, in constructing a new lobby. The stereo dealer found a contractor who wanted new stereo equipment. Result: the contractor received

Selections from Levinson’s ‘‘Guerrilla Marketing’’ Concepts












Welcome and thrive on change. Relentlessly track the changes in the marketplace to identify new business opportunities and new marketing appeals to help win consumers. Make use of the biggest marketing brains, but convert their strategies and tactics to ‘‘bargain basement’’ approaches. Talk to your markets in their language. Be pro-active. Hit the pavement with street teams—dispensing free samples and fliers. Promote your company’s products at the grassroots level. Conduct more personal, two-way communications with consumers. And listen to them to understand their real needs. Work hard. Keep a lean, hungry mentality. Stretch your dollars and take shortcuts. Make the minimum investment in each part of your marketing mix. Do not change a program until it quits working or you have a stronger approach. Stress relationships, imagination, and big dreams, not dollars.

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$5,000 worth of stereo and television equipment; the radio station got its new lobby; the stereo dealer received $5,000 worth of radio time. Yet the dealer’s cost was only $2,500 in equipment. In fact, it became even less, because he traded discontinued merchandise that would have had to be discounted. All three parties were happy.7 Read any of Levinson’s latest editions and keep them as comprehensive references. He provides chapter and verse on marketing practices and principles for many types of promotion. His writings cover detailed, step-by-step processes, tactics, and appropriate applications for marketers to use. He recommends that the marketing newcomer and veteran alike periodically review, consider, and test against their current practice. Then either reject or incorporate the best with the lowest ‘‘bargain’’ cost. A Marketing Mix Based on ‘‘Word-of-Mouth’’ Sales Momentum Perry Phoenix, owner of Phoenix Roofing, Inc., enjoyed a significant flow of new prospects via the ‘‘word-of-mouth’’ power of satisfied customers. He specialized in metal, standing-seam roofs, but also offered wood shingle, slate, and asphalt. Perry had grown up in the area and was well-known and highly trusted. His roofing processes covered the full range of both new construction and replacement roofing. Perry was serving three categories of customers, largely within 100 miles of his home-based business. Individual homeowners came to him mainly by referrals or through their general contractors. He was held in high regard by area contractors and architects active with major commercial, industrial, and government buildings. The contractors subbed jobs to him, or recommended him highly to others. Perry sought a consultant to review his sales and marketing program and help determine whether a change of emphasis and amount budgeted was in order. He had been in the business for about eight years and was operating profitably with an extremely small marketing budget. Due to the strong word-of-mouth references, he was able to keep a crew of eight to ten installers busy virtually year round. His total promotional outlay was only $2,500 to $4,000 per year. But looking ahead, he wanted advice on more definitive planning of his overall marketing effort. Following a review of office operations and the standing-seam construction process, Perry and the consultant concentrated on four key marketing questions. First, given the long roof life and infrequent replacement, was he pursuing a large enough market area? Perry had already concluded that he should consider expanding his geographic market scope. He had begun bidding on several more distant jobs. He knew that he was less likely to rely as much on word-of-mouth in such areas until he started developing local track records for reliability and quality, and the visibility of a growing number of successful, local installations.

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Second, how did prospects go about finding a roofer? Four factors entered in most of the time, but they differed with the residential and commercial/industrial markets.

Word-of-mouth reference Builder/architect referral See a job in progress Yellow pages

Residential Prospect

Commercial/ Industrial

1st rare 2nd last

rare 1st rare last

Third, what factors were thought to be most important in choosing among several qualified contractors?

Satisfied customer reference Reliability and guarantee Price Builder/architect referral Impression roofer makes Roofer availability Observe jobs in progress

Residential Prospect

Commercial/ Industrial

1st 2nd 5th rare 3rd 4th 3rd

rare 1st 3rd 2nd 2nd 4th rare

Fourth, what was the competition in Perry’s area, what services were they offering, and how were they marketing? Perry identified seven competitors in his current market area. Of the seven, two were quite large firms, both offering standing seam. One was long-standing and apparently relied almost entirely on word-of-mouth and periodic newspaper ads. The newcomer was not nearly as fully automated with his standing-seam installation process, but represented a strong, future threat. At the time, Perry had relatively little competitive information for the outlying potential market areas. The discussions indicated the need for more extensive field marketing research. The current year’s marketing activities were identified and a worksheet started for the next year, as shown in Table 4-3, which outlined Phoenix Roofing’s marketing mix. It was based on his commitment to jobs for some months ahead, his program options, current marketing activities, competitors’ activities, and a first-draft schedule for the next year. He and the consultant reviewed all of this and agreed that only modest increases in the marketing budget should be made until such time as expansion was being planned. Perry had truck and road signs developed, and continued his preparation for a presence at a dedication, later in the year, of a covered bridge he had roofed. He

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TABLE 4-3.

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Marketing Budget of Phoenix Roofing, Inc. Promotion Budget Current Year

Total Marketing Mix Selling and Prospecting Salesforce: Perry Phoenix, owner, only salesman Prospecting: word-of-mouth referrals; drop-ins; track area building permits; leads from Perry’s installing crew Regular schedule of contractor and architect calls: T&E Promotion and Point-of-Sale Trifold store fliers in two main markets Diner place mats ($75/10,000) Truck signs and road signs at work sites Brochure—handout and mail, pictures tricky jobs, roof types and specifications, special detail work (composed by Perry) Giveaway handouts for contractor use

2495

Publicity and Public Relations Booth at Governor’s dedication of covered-bridge job (metal roof by Perry) Press releases and articles featuring unusual jobs; also illustrated articles on standingseam technology and processing steps Other Mix Programs Keep alert for other options through the year. Monitor competitors’ programs; seek suggestions from suppliers and trade publications

4240 No changes No changes

100

400

360 300

360 300 250 500

250

Direct Marketing Periodic letters to contractors, architects, town engineers Media Advertising Local area Yellow Pages Weekly local area (10 weeks, 5 lines) State Trooper magazine

Next Year

200 480 440 700

115

480 800 Evaluate results before continuing Keep alert for new opportunities 200

500

agreed he should have a more consistent routine of calling on the contractors and architects, and began working with the consultant on an attractive and punchy ‘‘do-it-yourself’’ brochure as a handout or a mailing piece for prospects. The two men concluded that media advertising should continue to be used sparingly, but that Perry should stay alert for free publicity and news release opportunities with any unusual or innovative jobs he undertook.

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Perry Phoenix’s pragmatic and frugal marketing mix strategy showed strong instincts of Levinson’s ‘‘Guerrilla Marketing’’ philosophy. Due to his excellent track record and word-of-mouth momentum, his planned budget was quite small— an increase from $2,500 to only $4,240. However, his future marketing mix planning would consider a number of the free publicity and low-cost promotional options shown in Table 4-4. The list suggests a virtually limitless variety of frugal strategic and tactical options the small business or start-up might consider. In the years following Perry’s work with his consultant, the roofing and reroofing market continued quite strong in his principal market area. However, so did the competition. He lost several of his lead job supervisors and best craftsmen who went into the roofing business for themselves as a result of his training. He had taught them well, but, unfortunately, had not had even limited-time, nocompete contracts with them. In some instances, they could not afford to develop Perry’s full-function approach, instead opting to use sub-contractors for their businesses. In such cases, since the subs did not carry liability insurance, these new competitors’ own risks were higher and most did not do well. Perry found it much more difficult to attract good replacements and was forced to shrink his own staffing to one crew and back away from his previous expanded geographic coverage strategy. All this turned out to be a great blessing in disguise. He continued to make a significant number of bids with higher pricing. As a result he was participating in much more of the actual work on site and producing greater profits than ever. In addition, his downscaling required no increase in his modest annual marketing and promotional budget. It was a significant lesson in avoiding over-expansion, earning more, and having more fun at his livelihood. Pursuit of ‘‘Cult Brands’’ to Develop Growing and Highly Cost-Effective Markets A powerful selling- and marketing-cost saver is the last but not least strategy on the list of Table 4-4. As a cult gets underway and builds momentum, its members and proponents become no-cost sales assistants squarely positioned in the midst of your target niche. The deliberate pursuit of cult brands is not for everyone. However, consider whether your product or service has reached, or has the potential to become, a cult brand with a fanatically loyal following that goes on and on. Can your line emulate the success of a Harley-Davidson? An early Apple Computer? A Coors Beer? And what will it take, when reaching a cult status, to retain that loyalty? Melanie Wells, writing in a 2001 Forbes article, contended that you usually cannot create a cult, it often just happens, starting small and growing slowly. She reviewed many success stories, as well as fads like Hula Hoops and the Razor Scooter, that enjoyed rapid surges, but failed to grow and sustain a significant, long-term market presence. Among the consumer appeals Wells identified that

TABLE 4-4. Publicity and Low-Cost Promotion Options Check Interest

Check Interest

Strong Word-of-Mouth: Unsolicited Requests to customer

Public Notices and Signs: Bumper stickers Posted signs Public bulletin board notices Vehicle signs Skywriting Placemat—diners Church and school bulletins

Media Releases: (newspapers, magazines, radio, TV, Internet) Newsworthy articles Press releases Media kits Calendar notices Newsletters: own, other Web sites and links Chat rooms e-mail newsletters Bartering for space Info Cassettes and Kits: Video cassettes Audio cassettes Info packets Infomercials DVD-CDs Event Appearances: (booths, talks, seminars, personal contacts) Industry trade shows—booths Charities—donations Professional conferences Seminars Fairs and expositions Social events Sponsoring community events Handouts: Business cards Fliers Samples Brochures Desk reminders Special event notices Barter:

Point-of-Sale: Fliers Sales receipt imprints Shelf and package notices Novelties: Pocket knives Key chains Calendars Pens and pencils Sports novelties Freebies: Tickets Coupons Samples Discounts for trials Donations to non-profits Affiliations: (booths, talks, seminars, personal contacts) Rotary, other business clubs Chamber of Commerce Industry associations Civic organizations Religious activities Community and school groups Internet communities Other Internet parties Other Options: Ads in non-profit newsletters Gifts to charities CULT marketing (many above items)

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Melanie Wells: Cult-Brand Goals






Stir strange passions Seize the imagination of a small, homogeneous group Meet a user’s need to be part of something larger, to belong to something Promise freedom from corporate authority Attract extreme manifestations of customer loyalty

can result in a cult consumer brand are the superior benefits shown in the sidebar.8 Any small business, particularly one serving ultimate consumer markets, could profit from applying the acid test of a ‘‘cult potential’’ to its line of offerings. Consider using this standard of unique superiority when evaluating the aggregate benefits you are building into your new product or service. Do likewise when upgrading your established line against your competition. You cannot always be successful with such a stretch, but it can help you push your planning and marketing team to get out of their comfortable box. Wells also warned of the dangers of trying to build or otherwise make a cult happen ‘‘overnight.’’ There can be significant risks, including:






Having your brand captured by a fringe group Making a change strictly for cost savings, as happened to the Mazda Miatra when they changed a cup holder Manipulating your product supply—Beanie Baby Diluting your product’s quirkiness—Snapple Having loyal fans ‘‘hijack’’ your brand—Tommy Hilfiger

All of the market-positioning keys play important parts in cult development starting with Key One’s definition of superior benefits for growth niches. The added possibilities include sound pricing strategies in Key Two; sharply targeted choices of distribution channels and your supply chain, Key Three; the frugal marketing mix, and dependable service of the fifth key, with its role in generating profitable repeat business. EXPLORE AND TEST THE INCREASING RANGE OF PROFITABLE INFOTECH MARKETING MIX OPTIONS Following the dot-com disasters of 1999 and 2000, a much-awaited change in e-commerce marketing-related activities began turning positive. Much of the initial growth had stemmed from well-chosen infotech supply-chain applications. Such innovations took advantage of current product-line and pricing information,

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sharper forecasting, leaner inventories, and ‘‘instant’’ communications with suppliers and customers. The large corporations still account for a considerable share of the impressive performance gains underway. Start-up and early-stage entrepreneurs often cannot afford the luxury of engaging major media to promote their Internet-based marketing and service. One of the most time-tested entries into bricks and clicks marketing is to break the ice with a Web site that provides online access to detailed databases for product, pricing and policy information, and tips on applications, effective use, and maintenance. Avoid massive dollar advertising that relies mainly on generating huge numbers of Web site hits, but produces only miniscule conversions of surfers to customers. Instead, determine what consumer-buying practices are most likely to start you moving toward critical mass with a well-reasoned bricks and clicks marketing approach. A helpful discipline for considering new online marketing opportunities is to define and prioritize the different types of buyer motivations and preferences that best describe your particular proposition and its customer and prospect list. Begin by grouping your current customer base and potential prospect categories into buyer types ranging from ‘‘easiest’’ to ‘‘most costly and difficult’’ to convince and sell. Consider targeting some of the following consumer groupings amenable to online marketing and service via online approaches. 1. Current Customers Who Favor Your Offerings. Assume that most of your present repeating customer accounts know you, like your offerings, buy repeatedly, and know how and where to obtain them. They are your best word-of-mouth sales assistants, and the most likely category to take advantage of additional online sales and servicing strategies that fit their needs. Use your Web site to facilitate their order processing, including customizing, and keep them informed of your upgrades, new offerings, prices, sales policies, and servicing needs. Use every opportunity to convince them that you are their best source. Start testing online sales and marketing approaches with them. 2. New Prospects in Expanded Geography and/or with Additional Offerings. Expanding your business into new geography and/or adding new offerings to existing customer types probably are the most prevalent infotech marketing strategies to date. Atkinson-Baker, the regional court reporter, accomplished both with great success, as cited in Key Three. Many companies of all sizes have taken this sales and distribution route. Some applications involve only order fulfillment from mail order catalog selling. Others go to the other extreme with separate regional or offshore entities using their own marketing, distribution, and service facilities. 3. Shoppers Looking for Best Buys. These consumers who already are using competitive brands will respond favorably if you can convince them of your superior benefits and services. But, they need to be able to find you. This should be one of your first thrusts toward new prospects. Distribute where they shop, using point-of-sale appeals that pitch your benefits, and refer them to your Web

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site. Publicize your Web site through ‘‘guerrilla marketing,’’ local promotions, publicity, mailings, and other traditional media serving your major prospect types. Also, establish linkages from other Web sites with higher visibility than yours. To make online publicity work for you in such instances, it is important that your products and services can be persuasively demonstrated and their benefits visualized effectively via the Internet, even during the shopper’s first exposure. Entice them with special trial offers. 4. Consumers Seeking Easier Order Fulfillment. Take advantage of online strategies to simplify ordering and speed up the delivery of your product or service. One of the few successful early bricks & clicks applications was 1-800FLOWERS. It has continued strong. PeaPod, a division of the Stop and Shop food chain, offers local online ordering and same-day delivery with special incentives to the user for enlisting neighboring shoppers in the service. 5. Consumers Attracted to Comprehensive Online Catalog Shopping. For many years a wide range of manufacturers and middlemen have thrived on printed catalog sales completed over the phone. Many, such as Land’s End, have developed computerized databases to simplify and speed up order taking and fulfillment. Countless large and small vendors in increasing numbers are now taking advantage of the internet to replace the more costly printed catalog with online ordering, encouraged by amazon.com’s pioneering example. The small company doesn’t always succeed, particularly if it is not presenting offerings with a proprietary protection for its product or service. One small entrepreneur adept at locating rare books initially profited by setting up a Web site and discontinuing his quarterly catalog at considerable savings. His profit started to improve, but eventually his clientele began drying up, switching to the very large scale operators, in his case, bookfinder.com and Amazon. Even his deep experience with his subject categories and resourcefulness in tracking rare items could not keep his business going. He had no proprietary lock on his service, often an essential requirement for small-company success. 6. Consumers Purchasing Customized Products Online. Dell’s direct sales model is an outstanding application. Another example is of uniquely designed, high-value, modular homes sold online. The buyers contribute to the design by working online with their contractor, architect, and modular-home manufacturer. Within very broad parameters for the room modules and custom configurations, they can communicate innovative ideas rapidly, input their own distinctive desires and specifications, and approve the final plans. The indoor, factory-building process achieves superior quality control at significant cost savings. Start-to-finish cycles are much shorter than site-built homes of comparable quality, with the modules assembled in place on site by the factory people in one or a few days depending on house size. The local contractor then completes the utility connections, other finishing steps, and his punch list. 7. Consumers with Rare or Unusual Needs. Oddball Shoe Company, of Portland, Oregon, was founded by Seth and Zac Longacre, 6 07 0 0 and 6 06 0 0 tall,

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respectively, who needed huge shoes for their size 16 feet. After fruitlessly searching for suitable shoes to wear to a wedding in 1997, they decided to exploit a unique opportunity. The two business school graduates researched the major footwear manufacturers as sources for stocking their start-up, a bricks and clicks venture. They established a specialty store and began retailing a huge line of oversized shoes (up to size 20) both in their Portland retail outlet and over their Web site. With the success of this venture they expanded their offerings to include clothing lines in large sizes. In 2005, the brothers were continuing to operate both a store and an online business. They featured many shoe brands in 15 styles, and also were offering insoles, socks, hats, sweatshirts and shirts.9 8. Early Adopters of Innovative Ideas. Early in the DVD craze, Netflix, of Los Gatos, California, started a new subscription venture for home delivery of movies from an online library of around 40,000 fiction and nonfiction films indexed under many subject classifications. Subscribers registered a want list of titles from which Netflix would mail the next DVD from the customer’s list when it became available. The price for the service varied depending on how many titles the subscriber wanted to have in float or receive at any one time. As soon as the Netflix distribution center received a return, the next title would be mailed up to the float maximum of the subscription. For example, a three-DVD plan was $17.99 per month. By the end of 2004, Netflix was serving 2.6 million members from 30 distribution points throughout the United States. The venture was an overwhelming success, prompting Wal-Mart and Blockbuster to enter the competition with similar approaches. Wal-Mart subsequently announced its withdrawal from the business, but Amazon was contemplating entry.10 9. Customers Desiring Simplified and More Rapid Order Selection of Multiple Items. ArtSource, an art-gallery consulting service for corporate and institutional clients maintained a huge catalog of its entire collection of suitable art works for clients’ headquarters. The gallery helped its customers substantially reduce a laborious and time-consuming screening and selection process. They established a Web site that replaced the entire illustrated, full-color print catalog. It enabled the client to enter screening criteria, set up its choices in its own separate online gallery, and then choose and review the selection with client associates before making a final commitment. This eliminated the costly fullcolor print catalog and its two annual updates, as well as the cost of picture reproductions and priority mailings. It also simplified and speeded up both the client’s shopping and the gallery’s responding time to clients’ specific preferences.11 As of 2005, the company had expanded its collection to around 50,000 pictures, posters, and other art forms. Their great variety, efficiency, and cost-effectiveness was serving a number of markets, including corporate, hospitality, health care, senior living, and government clients. 10. Prospects Who Can Profitably Outsource Their Secondary Functions to You. You may have new opportunities in numerous cross-industry functions where you have developed infotech-enhanced expertise for your own operations. Many small companies find profitable customer niches performing noncore, ir-

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regularly needed work across industries more economically than their individual prospects. Applications include communicating product recalls, processing of legal settlements, test marketing, special human resources assignments, and newlocation data for personnel relocations. Other small firms have developed niches for regularly recurring services that a client considers secondary, a detraction from its main functions, and more economical to outsource, such as proxy solicitations for corporations’ annual stockholder meetings. 11. Relentless Price Hunters. This is the type that has made discount retailing so immense over the last several decades. It includes bargain hunters who know of your offering, but want the lowest price irrespective of relative benefits. They do not understand or honor your values on balance. You can not win them, except with markedly superior benefits convincingly marketed to them. Unless your strategy is to be the lowest-price leader in your industry, consider other targets before dissipating funds on the price hunters. One of the exceptions is intermittent use of the Internet to sell your excess or obsolete inventories, or unload to odd lot and distress-sale vendors. 12. Compulsive Shoppers and Surfers. Attempting a direct pitch to these kinds of web surfers can only result in a very low percentage of bona fide prospects and completed sales unless you can link them to you from other sites they have a strong reason to visit. You may get some hits from these customer types when they are surfing and happen to hit areas you are pursuing. However, do not dissipate your promotional dollars with efforts that are not sharply targeted. If the prospects’ compulsiveness is the only link you are pursuing, abandon thoughts of going after them. The foregoing cases just scratch the surface of the many applications the small business can exploit to complement direct selling with online marketing options. Keep attuned to the new approaches both in your industry and outside. Get out of the box by encouraging brainstorming for innovative strategies and approaches. And always assume that your competitors’ development of new infotech marketing applications will continue unabated. COMPARE YOUR MARKETING MIX WITH THE MIX STRATEGIES OF YOUR MAJOR COMPETITORS Set up a process for challenging your marketing mix on a regular schedule. Keep yourself and your key associates continuously alert to any differentiating moves that can gain market share and profit improvement for you. Focus selectively on the principal topics of Table 4-1 that are pertinent to your type of business, current situation, and performance trends. Include any relevant findings from previous end-of-chapter projects. Among the continuing questions you should apply to this process are those in the accompanying sidebar. Rate your competitive standing and search for unique strategies and planning programs that you should consider.

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Competitive Marketing Mix Evaluations (Strong or Weak Ratings) —Effectiveness of your definition and communication of user benefits? —Consumers’ understanding of your company’s preferred message and image? —Targeting of marketing mix at the best growth-market niches? —Sales-closing capabilities? Who wins? Why? Who loses? Why? —Share of marketing dollars targeted at influencing the close? —Relative productivity in other marketing support activities? —Support record with field sales, channels, supply chain, and sales agents? —Up-to-date profiles of major competitors’ marketing strategies, mixes, results? —Accurate estimates of cost and effectiveness of mix programs? —Development programs ready on the shelf for new offerings and mix options? —Overall composition, balance, and relative strength of your marketing mix?

KEY FOUR: PROFIT PLANNING PROJECTS 1. Compare Your Current Marketing Mix with Major Competitors and Their Online Marketing Strategies. Begin by identifying new online options among the twelve customer types characterized in earlier in this key. Look for other groupings in your own customer base. Then rate your competitive standing against the above eleven questions. 2. Designate Individuals Responsible for Ongoing Tracking of Opportunities and Weaknesses in All Key Elements of Your Sales and Marketing Mix. Assign individuals for in-depth study of the competitors giving you the greatest fight in each market segment or niche. Make similar assignments to a key player in product development and every other operational function that supports your market positioning strategies. Change them to keep a sharp lookout, not only for new options, but also for mix strategies that are suffering from the global outsourcing trends documented by Friedman.12

KEY FIVE

Customer Services That Generate Repeat Business Assure That All Company Functions and Outside Partners Are Providing Consumer-Responsive Services at All Times Customer service is fulfilling every promise and anticipating and exceeding every customer’s expectations.

Customer service is a pervasive responsibility and a major ingredient in the never-ending effort to perpetuate repeat business. The successful enterprise always has had a traditional set of requirements common to an enterprise of any size, plus those unique to a particular market segment, and others unique to a specific account. As the one-person start-up progresses into a thriving small company that is beginning to diversify, the performance assignments start differing in scope and increasing in specialization. Another significant strategic opportunity has been developing in recent years—the conversion of selected ‘‘smart service’’ approaches into revenue and profit generators. This advancement is discussed in a later section of this key. The traditional direct service responsibility centers in the functions of customer service and the supply chain. But it also depends on support from the other market-positioning functions and your outside partners. Along with the values your offering is delivering, the marketplace-oriented service aspects are essential field generators of repeat business and favorable word-of-mouth sales. You must get them right. Always remember that word-of-mouth works both positively and negatively. A negative reputation usually spreads more rapidly with service problems. Aim at compounding its positive impact. With every service contact with your customers, you must help establish or maintain the momentum that builds profitable and growing repeat business. The classic direct customer service goals include:  

Getting the order right and overseeing its timely delivery Responsive product service, parts replacement, and inventory replenishment

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Diagnosing and helping customers use your offering effectively Meeting performance and product quality problems rapidly Providing effective preventive maintenance procedures Identifying service-improving product changes and procedural innovations.

Recall Adam Bristol from Key One. Productive and dependable on-time performance, and meticulous care of the customer’s site contributed materially to building his electrical contracting service. In another case, a start-up by an immigrant seeking the ‘‘American dream’’ has consistently rated high on customer service as he has grown his profitable venture over many years. Aslanis Seafoods supplies retail supermarkets worldwide with the highest quality products, processing, and supply-chain services. Gus Aslanis, a Greek immigrant to the United States in 1957, knew the fishing business from his early life in Greece. After working in Philadelphia for Acme Markets and, later, the Penn Fruit Company there and in New York City, he started his own small business in 1974. He bought fish, processed it, and then delivered it as a one-man operation. Growth followed rapidly due to his attention to top quality, on-time delivery, and always-dependable account service. In 1984, BJ’s Wholesale Club, based in Medford, Massachusetts, hired Gus to set up their fish department. His expertise, energy, and dedication have led from a one-man start-up to a $900 million company supplying about 20,000 retail supermarkets around the world. Each year Aslanis processes more than 20 million pounds of ‘‘fresh frozen’’ seafood with very rare complaints, using ice from filtered water, a new state-of-the-art technique. The impeccable quality of his products and his persistent rotation and maintenance of fresh stocks in his customers’ cases and tanks have regularly earned Aslanis the U.S. Department of Commerce’s certification in its HACCP (Hazard Analysis Critical Control Point) program.1 CONSTANTLY STRESS CUSTOMER SERVICES AS A MAJOR REQUIREMENT FOR REPEAT BUSINESS Unlike Gus’s success, many start-ups and ongoing businesses do not grasp how essential their service strategy is for maintaining a growing repeat-order business. Norbert Johnson, a seasoned veteran of small business consulting in the Northeast, has voiced a set of requirements for the continuing growth and profits of countless struggling and successful ventures and start-ups he has served over the years.2 Making Discovery and Solution of Customers’ Festering Problems a Prime Priority A couple had modernized their forty-plus-year-old furnace with a System 2000 Furnace that could be zoned to fight the rising cost of fuel oil. They specified that their installer, a heating system vendor and fuel dealer, provide

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Ten Commandments of Exceptional Customer Service Helping the customer is priority #1. Satisfaction of the customer is first; everything else is secondary. Customer is satisfied when value is greater than price. Customer is dissatisfied when value is less than price. Customer does not equal a problem; customer equals an opportunity. Look through his or her eyes. A dissatisfied customer should get extra. ‘‘Extras’’ must give reason to return. Save the customer, not the sale. Treat the customer like a lifetime partner.

additional heating zones. They wanted the flexibility of shutting off unoccupied zones when children and grandchildren were not in residence, which was most of the time, and would mean a significant saving in oil consumption. One of the four new zones was to serve only the upstairs master bedroom and bathroom. The new arrangement was highly successful with one exception. The master bathroom never heated up in response to that zone’s thermostat settings, a significant discomfort during winter. The customer made repeated calls to the fuel dealer’s sales manager who had planned the system and supervised its installation. He never visited the home, but did send service reps to try to identify the problem, always without success. The customers vowed to make one last appeal for help before switching to another supplier. They learned that the sales manager who had designed and supervised the work had been replaced. He had left no project details or audit trail of the promised installation, and apparently never had informed his superiors of the problem. The company assigned a seasoned supervisor to make everything right ASAP. The old house with its maze of circulating pipes was a confusing network. He and one of his top service men independently traced System 2000’s piping and connections. They discovered that the master bathroom had been connected erroneously to a different zone from the bedroom it served. They quickly corrected the hookup without charging any labor or parts costs. With the exception of the above-mentioned problem, the fuel dealer was always a quick responder. The customer’s entire history of fuel pricing, deliveries, and quick trouble calls by courteous service men was an outstanding model that was in marked contrast with the customer’s previous supplier. Finally, motivated to save the account, the oil dealer was quick to resolve the problem to the customer’s complete satisfaction. Table 5-1 outlines a number of recurring service problems that prevent highlevel customer satisfaction. Most of the table’s seven groups of difficulties are the

TABLE 5-1. Weaknesses in Your Direct Customer Services Functions (Check major functions and individual items needing attention) TROUBLE AREAS IN YOUR OWN COMPANY’S SERVICES A—Order Placement and Fulfillment Outmoded order placement routines Poor order status and tracking procedure Orders not delivered in time Wrong offering shipped B—Product Availability Users’ timing and volume of needs not shared Backordered too often; inventory outages Item discontinued pending a revised version C—Service Call Responsiveness Late responding to service requests Unreliable results of service work Too frequent servicing required Call desk busy; difficult to reach Insensitive or confrontational attitude Service reps poorly trained Lack field service reps: supplier and/or channels No customer follow-up on service rendered Lack ongoing service performance tracking Preventive maintenance not offered

D—Effectiveness of Product Use Sketchy customer training How to use product not presented clearly Confusing or incomplete user’s manual Frequent breakdowns not corrected Product and application not well matched E—Product and Performance Quality Promised features not met Claimed quality not delivered Faulty shipment: flaws and omissions Sloppy quality control in production Product failure trends and incidents not tracked F—‘‘Seamlessness’’ of Supply Chain Internal and external duplications of functions Incomplete communications Uncoordinated planning Functional ‘‘fiefdoms’’ G—Other Unique Company Needs

COMPETITIVE DIFFERENTIALS H—Traditional Competitive Differences Competitors enjoy the market advantage with: —Price, terms, and policies —Better sources for same item —More dependable supply —Better match to application —Word-of-mouth following and momentum —Commodity product with distinctive benefits —Preventive maintenance routines and scheduling —Outstanding supplier interest in customer —Collaborative shipping services —Customer relationships management software —Customers receive Norbert Johnson’s ‘‘extras’’ —Other:

I—Industry’s Infotech State-of-the-Art Competitors’ superior systems and processes: —Online data for offerings, prices, terms, services —Interactive inventory status and re-ordering —Online scheduling of service rep routes and calls —Password-protected customer and supplier files: order history, open order status, placing orders, servicing record, special product requirements —Online shipment tracking; RFID —Online trouble shooting and software routines —Online photos of item repairs in progress —Remote diagnostic monitoring 24/7 —‘‘Smart service’’ enhancements —Other

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main concerns of the companies and people with the customer service titles. A later section addresses the frequently neglected or defaulted supporting roles and responsibilities other company functions should play. Rate your own firm’s trouble factors within Table 5-1, groups A to G. Then consider which of your competitors may be beating you in groups H and I. Learn all you can about how they are conducting their customer service. Schedule at least annual and quarterly reviews for this check up, and quickly re-examine and resolve problems and their causes at any time a crisis looms. If your evaluation has significant unsatisfactory conditions, then review closely the sources you should be drawing upon regularly to keep abreast of this essential determinant of repeat business. Seek clues in all of the following ways:        

Early warnings from your P&L statements Customer complaints and account sales declines Lost-account summaries and post mortems Negative field reports from sales personnel, channels, and supply-chain partners Slippages in sales by market segments Track records with order fulfillment and trouble calls Merchandise returns and cancellation of sales contracts Visits to accounts that you have neglected or disappointed

Tapping in to these sources, do not stop with definition of the direct service problem. Look for any contributing problems and their causes in product planning, procurement, production, order fulfillment, and other operating functions.

BUILD SCENARIOS OF YOUR CUSTOMERS’ REQUIREMENTS FOR SUCCESS IN ALL AREAS YOUR SERVICE IMPACTS With your internal performance data and problem analyses as hunting clues, go to representative samples of your end consumers for in-depth discussions. Seek greater understanding of all applications your offerings must serve competitively. Probe with two basic questions. ‘‘First, what are your most critical requirements for your own business success and how may I give you stronger support? Second, if I am to be, or continue to be, your first-call supplier, what services will you require of my organization to help you meet those needs?’’ The answers will help you define your customers’ requirements for success and how you must support their application from their viewpoint, not yours. A brief scenario in the business-to-business market is illustrated by a plastics molder’s success in selling to and servicing the major auto manufacturers.

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All-Out Customer Services to Keep Their Customers’ Auto Assembly Lines Running Buckeye International, Inc., of Columbus, Ohio, was a major steel foundry that initially produced railway steel castings for the under-carriages of freightand passenger-car rolling stock. They diversified by acquiring three small Ohio plants that fabricated injection-molded plastic parts for the automotive industry and major appliance manufacturers. The parent company made an unsatisfactory attempt to consolidate the overall management of the three plants under one head. This failed, and the new president allowed the three small entrepreneurs to run their businesses as had been their differing styles before acquisition. Their success continued to depend on top-quality moldings and JIT order fulfillment services to keep the Big Three’s assembly lines running full time. The automakers kept their parts inventories at each plant location quite low and often required Buckeye to meet order surges that would exceed the standing production schedules. In such situations, the Buckeye plants always had to be ready to run extra- and weekend shifts to keep their premier customers’ lines running. Often, the molding-plant heads would be called upon to fly the special orders to the customer locations. Each entrepreneur had his own small plane and was always ready to accommodate the emergency shortages. They also served their appliance customers with the same high level of rush outputs and flight deliveries. Other aspects of Buckeye’s customer services included rapid response to take on a variety of value-added projects. The automakers often made requests for changes in plastic compounds, design of the molds, more simplified parts designs, and added-value services such as metalizing of bumper and dashboard parts. Their ‘‘Big Three’’ customers preferred to eliminate such secondary processes that they viewed as distraction from their main assembly operations. All benefited from their OEM suppliers’ better economies of scale. Ask your customers and prospects to clarify their success scenarios. Then, together, determine the areas where they feel your products and support would be

Buckeye’s Key to Building Lasting Relationships with Key Automotive Customers 1. 2. 3. 4.

A deep appreciation of customers’ needs and vigilant attention in each plant Key-account selling by the CEO, plant heads, and manufacturers reps ‘‘No-fault’’ production and on-time delivery of accurate parts and components Prompt emergency service to the accounts to keep their production lines running 5. Continuing research on value-added services to replace accounts’ secondary processes 6. Flexibility for new production layout and scheduling consistent with economies of scale

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critical for them, and work out the conditions under which they would deal with you. Work closely with them to define new offerings and services you could render, and any current features and benefits they would like you to consider changing. The overall process of scenario building can establish an excellent partnering relationship. This kills several birds with one stone. Not only does it clarify your service performance musts, but it can identify additional sales opportunities for you:    

Product and benefit improvements Procedures leading to cost and price reductions Additional products and services to offer Better insights on marketing strategies and service processes.

Develop Two Customer Service Scenarios When Marketing Through Outside Partners You have the best chance of getting to the heart of the end-using accounts’ needs and disappointments through your direct dealings with them. However, when you are using one or more layers of middlemen, the trouble signals will be less obvious and often conceal the fundamental causes at the user level. You are more likely to uncover how you must improve service to your middlemen than get feedback on problems with your end users. Monitor your differing requirements at all channel levels. Your service strategies when using independent partners must be twopronged: service commitments to end users, and services to your outside channels. At the end-user level, you need to assure performance of such requirements as:       

Timely availability and delivery through your supply chain Optimum inventory levels Accurate order fulfillment Orientation and/or training in use—both pre- and post-sale Rapid access to trouble-shooting aid Ready product and parts replacement and repair Preventive maintenance programs

When you have a significant number and variety of end users to serve, the first cut of structuring your service scenarios should follow your Kipling profiling and segmenting of product/market niche groups. Conduct selected consumer interviews or focus groups for each, and for the needs of some of your largest accounts. Avoid duplicating services when teaming with independent middlemen for marketing and distribution. As discussed in Key Three, the tricky problem with outside channels is to avoid costly and conflicting duplication of service functions and assure ‘‘seamless’’ teaming by all partners. Key Three’s discussion of

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the LMN Paper Company suggested a variety of service activities that could be assigned to the independents. LMN was selling both directly to large end-using accounts (two-thirds) and through merchants to a variety of business-to-business markets (one-third). The company supported its middlemen with advertising, promotion, and sales training, and with trouble-shooting and technical application support nationally, where the distributors’ expertise did not qualify. They recognized the need to simplify the processes, and launched an overhaul that eliminated most overlaps and redundancy. Their definition of a few key scenarios for the most important business segments led to significant cost reductions. REINFORCE YOUR CUSTOMER-SERVICE FUNCTIONS WITH PROVEN INFOTECH STATE-OF-THE-ART The positive impact of infotech on customer service bears re-emphasis. Most Fortune 500 companies found their greatest and earliest opportunities to profit from infotech in the supply-chain enhancements. Much of the progress of the majors relates to scale, but Key Three has also shown a number of service applications that are within the reach of the very small firm. Cost-Effective, Collaborative Shipping Processes and Alliances Small businesses need competitive logistics planning. They often pay two to three times what they should for shipping. Customers want the right product at the right time, without damage, and with the right documentation. Shippers want cost savings and cash flow benefits, faster transit times, and immediate proof of delivery for shorter invoice cycles and faster payment. Your customers have a right to expect the most cost-effective logistics services available. Many large companies, and some smaller ones, are taking increasing advantage of collaborative supply chains for moving products to OEM’s, and to the market’s, distributor and retail channels. This involves regular partnering that schedules combination loads when they can match shipping origins, routings, and destinations. The collaborative arrangements offer significant opportunities for productivity improvement and savings. However, participants must have a strong back-office infrastructure and be prepared to re-engineer rigid supply-chain procedures.3 BOWLES’ SEVEN IMMUTABLE LAWS OF COLLABORATIVE LOGISTICS 1. Must result in real and recognized benefits to all members 2. Must allow members to dynamically create, measure, and evolve collaborative partnerships

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3. Must support co-buyer and co-seller relationships 4. Must provide a flexible security model 5. Must support collaboration across all stages of business process integration 6. Must support open integration with other services 7. Must support collaboration around all five of the essential logistics flows— information, products, assets, documents, and capital

Online Databases for Your Customers, Suppliers, Employees, and Key Associates Establishing a Web site and mounting instant online information databases have already been stressed as two of the earliest steps for the neophyte just starting to embrace infotech. You will recall from Key Three the pass-protected individual database files that the seasoned distributor, Livingston and Haven, instituted in these areas some years ago. Such approaches provide the foundation for accelerating profitable growth, and educating all of your employees in the requirements and opportunities for infotech. One major caution is in order, however. Many of the infotech advancements tend to take the human, person-to-person communication factor out of the equation. The essential supplier/user friendly exchange can still suffer, particularly when replacing the live response with a recording. Maintain continuing person-to-person dialogues with your marketplace, partners, and associates.

Call Centers, Help Desks, and Customer Service Reps Reinforced with Infotech Many companies have upgraded the quality and responsiveness of technical service assistance by harnessing the Internet and infotech. It is standard procedure for your service reps to be equipped with toll-free lines, caller ID, voice mail, digital messaging for voice, call forward, email, fax, and wireless. In mid-2003, Wal-Mart mandated 100 key suppliers to be prepared by January 2005 to track the en route shipments of pallet loads of merchandise using radiofrequency identification chip technology (RFID). Such technology makes the current whereabouts of every shipment instantly locatable by customers and suppliers. Wal-Mart did not develop, nor were they first to introduce RFID into the new supply chain. However, as a giant operator, their move will have a profound impact on suppliers and small businesses.4 The global shipper, DHL International GMBh, also will add impetus to this development. They announced in mid-2005 that they are developing a global infrastructure that will let them affix an RFID tag on every package they ship by 2015.5

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Rapid Online Scheduling of Service Calls Progressive Corporation, an auto insurance underwriter and the first such insurer to go online, has a comprehensive Internet-based system for rapid response to the accidents of its insured policyholders. Via web-linked laptops, wireless, satellites, and cell phones, Progressive’s system directs its claims adjusters to hurry to the site for ‘‘counseling, crash-to-cash service, and towing help, often before the police, wreckers, and drivers’ lawyers arrive.’’ The field reps use digital cameras and wireless links to ‘‘analyze damage, access clients’ policy files, check replacement values on the Web sites of service shops, and hand out claims payments on the spot, sometimes within twenty minutes!’’6 Instant Database Backup for the Service Rep. Both your service reps who man your call centers in-house and your field reps (armed with laptops or instant communication with their home base) can benefit by computerized databases at their fingertips to augment the training you give them. Support them with instant references keyed to each of your offerings. Include customer request files, order fulfillment status, operating diagrams, graphics, and procedures for your product and service offerings. These should cover the most likely trouble spots and steps for their solution. Develop online catalogued summaries of application problems your customers and reps have solved in the past with user references that your rep and customer would be free to access directly from their customer’s site. Automated Software Accessed Online by Users Organize the above information into a completely automated online software package that can carry the customer all the way through to completion. An outstanding example is the array of self-help that Hewlett-Packard has developed for their PC printer trouble shooting. Their approach comes with the product you buy and it loads into your PC. If you have not used this package, run through it to experience the air-tight logic stream that helps you get back into operation without costly and time-consuming long-distance phone calls or rep visits to your shop. Customer-to-Customer Interactions Online Another approach is one developed and used by Cisco Systems. A few years ago, Cisco established a Web site, Cisco Connection Online, to get customers to resolve product-usage problems by talking with each other. Many customers exchange experiences and problems with their application of Cisco’s products, and often work out the problems in a ‘‘chat’’ mode. Cisco monitors and captures such input, refines it, and incorporates it into its published standards available to all customers in a customer chat room.7

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Remote Diagnostics for Products and Systems at Customers’ Locations An increasing number of vendors ship their machinery and equipment out the door with imbedded chip systems to monitor the product’s performance in real time. The monitors are connected online to the supplier at all times the machinery is up and running. They are programmed to signal and diagnose stoppages or malfunctioning, and even to monitor performance on a ‘‘preventive maintenance’’ schedule to alert both customer and vendor of impending operating trouble. CONSIDER ‘‘SMART SERVICE’’ STRATEGIES TO CONVERT SPECIAL CUSTOMER-SERVICING REQUIREMENTS INTO REVENUE AND PROFIT PRODUCERS Leaders of major companies, notably IBM and GE, were among the earliest to take significant advantage of revenue and profit potential in customer services. Glen Allmendinger and Ralph Lombreglia have reported comprehensively on advancing strategies for converting costs into profit for the servicing functions.8 The imbedding of chips for smart services goes well beyond RFID and the remote diagnostics mentioned above for signaling preventive maintenance needs. Such newer options are not sales promotion gimmicks. Rather, they offer higher levels of innovation and added value to warrant the higher prices and revenues. The sophisticated embedded devices and their infotech networks can keep you connected with the operating performance of your product and feed you precise data on problems it may be encountering in operation. They can identify where your product’s operating cycle is working in relation to the customer’s application cycle, report operating status and your product’s behavior, generate profiling of application sequences, and map locations and logistics of servicing and delivery routes. They can measure sales and buying patterns, signal a need to replenish inventories, and proceed to reorder against minimums your customer has established. At still higher levels, imbedded chip systems can expand your opportunity to partner with customers and other third parties. Such innovations interconnect operating processes that increase added values and lead to higher revenues and gross profits for you. Allmendinger and Lombreglia review four forms or levels of smart services that can accomplish these functions in numerous combinations: 1. Imbedded Innovators in your networked product send back information to help optimize service delivery and eliminate waste and inefficiency.

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2. Solutionists deliver a broader scope of high-value services more reliably and cost effectively, such as the above examples. 3. Aggregators are the hubs that collect and process usage information. 4. Synergists are chip systems that pull together data and integrate solutions from several partners. As with many advancing information technologies, the large companies develop highly sophisticated and productive application processes that eventually can be scaled down to the smaller firm. Be alert for such opportunities. INSTITUTE A COMPANY-WIDE CUSTOMER-SERVICE STRATEGY AND PLAN A Challenge to the Small Business CEO: Can you name any employee, outside partner or associate with no role to play in delivering some aspect of superior customer service? Challenge any disbelieving associate not in a direct service function to argue that his or her area does not have either a positive or potentially negative impact on customer satisfaction. Just as small business leaders must keep stressing the customer and marketing viewpoint in their planning, they must also insist on outstanding service-related performance in every customer contact and every action related to the competitiveness of the company’s offerings. Along with the direct customer-servicing functions discussed so far, are the previously noted service-influencing aspects of the internal operations involved in the offering’s development, production, pricing, and presentation. Think of all five market-positioning strategies as essential stages of a continuum, a Customer Generating Cycle, illustrated in Figure 5-1. To varying degrees, a part of every company function has the potential of detracting from or contributing to repeat business and positive service. Often such areas do not receive adequate managerial focus on their needed contributions to strong customer service. The smaller the firm, the higher is the percentage of its employees who are in frequent contact with the customer. This gives every person a clear and present responsibility and opportunity to contribute to their customers’ satisfaction. As the company grows, such roles get easier to slight or forget about by employees not in daily contact with the market. But the requirement cannot be dodged. The side bar outlines some of the problems in key marketing-related areas of product development, procurement, production, and information systems that can make a service difference. The CEO must keep the direct service function and all other operational elements working together at every stage of the enterprise’s customer generating cycle. Two types of programs can be most helpful in this endeavor.

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FIGURE 5-1. Customer Generating Cycle—Anatomy of a Repeating Sale

Conduct Workshops and Training Programs with Every Function Schedule joint sessions of your key inside and outside associates to review and refine your present customer service strategy and plan. Then introduce it as a ‘‘work in progress’’ with a company-wide retreat or workshop. Entertain unlimited inputs and challenges. This approach accomplishes three objectives. It advances the education in everyone’s unique role in service. It helps all to buy in through their participation in refining it. It leads to a better plan. Follow periodically with a variety of approaches to keep the service requirement high in everyone’s consciousness. Conduct multi-function workshops. Include periodic performance audits, exercises in communications skills, and problem-solving sessions on tough customer-relationships situations your com-

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Potential Service Weaknesses Outside the Direct Service Functions 









Benefits enhancements or innovations: product development’s offering does not meet all critical needs of the user; largely a wrong match for the application; limited or no customer dialog; inferior competitive offering Price/value matching: overkill of features and benefits for the need; expensive parts and repairs; difficulty enhancing a commodity-status product; excessive procurement policy and cost Product’s state-of-the-art: design lagging behind competitors; ignoring better usage features; inferior materials and components; unproductive production process; lax quality control; ‘‘Functional silos’’ and people compatibility: poor communication between marketing, channels partners, and internal operations; duplication of responsibilities; broken promises and double talk among functions; ‘‘customer is wrong’’ attitudes; questionable competence in key skills and experience Lagging infotech capabilities and processes: outmoded and spotty order fulfillment and order tracking; incomplete or slow access to marketplace intelligence; failure to keep informing all who need to know; misconceptions about not being able to scale large-companies’ ‘‘smart-service’’ infotech advancements down to the small firm

pany is experiencing. Consider changes in the allocation of functions between inhouse and outsourced services, partnering, or the possibility of ‘‘smart services’’ as for-fee profit centers. Establish Account-Relationship Responsibilities for Key Employees An additional approach can be taken to meet a goal of treating every customer as a key account. Assign one carefully selected account to each supervisor and lead specialist not directly involved in sales, marketing, and customer service. Choose accounts with issues related to the employee’s responsibility areas. Make this an ongoing contact responsibility and relationship for them to learn from and report on periodically. Such assignments can have a two-way benefit by giving a little more special attention to the customer and ensuring that the designated employees are getting into regular touch with the realities of their marketplace. Assignments might be made to meet a particular need outside the sales and marketing functions, such as pre-testing a new product or benefit, pricing and sales policy planning, probing for more effective service approaches in specific problem areas, or evaluating the feasibility of an infotech application. Periodically rotate account assignments to expand employees’ know-how and productivity.

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KEY FIVE: PROFIT-PLANNING PROJECTS 1. Rate Your Company’s Weaknesses and Strengths in Customer Service. Use Table 5-1 and the above indirect-weakness list to identify trouble spots and competitive deficiencies. Involve every function in company-wide workshops to identify where their area could affect service more positively. Give particular attention to your relative infotech state-of-the-art, including ‘‘smart service’’ options any competitors are pursuing. 2. Develop Customer-Needs Scenarios for Each Major Product/Market Segment. Draw upon the first project with selected visits to key accounts and partners to develop scenarios, such as Buckeye’s definition.

PART

B

PROFIT-PRODUCING MANAGERIAL AND OPERATIONAL STRATEGIES Employ Five Sets of Management Keys To Position, Lead, and Manage Your Business for Competitive Advantage and Profit CREATE! MAKE! SELL! COUNT BEANS! Small business is quite simple. Going public gets in the way. Don’t make it too complicated! —Jack Braitmayer, Entrepreneur

Looking back on a successful career as a manufacturer of chemical components to OEM’s, Jack Braitmayer was reflecting on his relatively few bedrock essentials for the long-term success of the small business. Don’t make it too complicated the way pundits do. Taking over Mona Industries, a chemical specialties producer in 1961, Jack grew Mona from $1 million revenues to a profitable $40 million over 35 years. His markets were OEMs, selling them specialty ingredients for such end products as shampoos, household and industrial detergents, lubricants, textile processing aids, and wetting agents. His experience as CEO convinced him that the individual entrepreneur virtually never possesses the abilities in all four of his success requirements, and rarely three of them. The trick is to know when you should hire someone better at these functions, so that your company’s growth and profits can continue. This is extremely difficult for many entrepreneurs to do. In their earliest years, both Michael Dell and Bill Gates had the good judgment and advice to bring in seasoned senior management talent when severe growth problems started confronting them. Too often, the entrepreneur misses the timing for turning to managerial and operating expertise. The principal aim of the five managerial keys in Part B is to help both operating CEO’s and start-up risk takers develop, manage, and execute their marketpositioning strategies with clarity, practicality, and simplicity. The keys focus on

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five selected managerial issues that have been found to be most troublesome for the small business and the start-up. A major problem is maintaining consistency among the managing and operating capabilities, customers’ needs, competitors’ challenges, and the firm’s market-positioning strategies. CONSIDER HOW A HIGHLY SUCCESSFUL ENTREPRENEUR EXPLAINS HIMSELF It is enlightening to review the candid explanation of Jim Clark on how he kept finding and establishing new billion-dollar enterprises. Clark was the cofounder of a number of new ventures, including Silicon Graphics in 1981, Netscape in 1994, and Healtheon in 1995, which merged into WebMD in 1999. A 2005 interview with Clark stressed his eight guidelines for entrepreneurship.1 1. Get there a little bit ahead of the pack with over-the-horizon thinking and acute technical skills. 2. Best traits? Discontent and anxiety. Good ideas will happen. Who gets there first are those with the most anxiety and a prototype. 3. A start-up’s first priority? Cash flow and cash flow positive; next goal is profitability; be quick and efficient; don’t waste time making decisions. 4. When you invest, what are you looking hardest at? People before the idea; a good team makes an average idea a great company, not the reverse. 5. The founder rarely makes a good CEO, especially with a technology background. You must put survival and success ahead of your ego. 6. Don’t start with an exit in mind. That’s wrong; the object is to build long term, it is a much bigger exit. 7. What kills you before you start? A lack of common sense about what will sell. Be pragmatic, ask customers, test the market; don’t try to make it do everything. 8. Will technology companies still be the next earth shakers? There could be another confluence of technologies markets. I don’t know what, but have no doubt something is coming. Also, read Michael Lewis’s book, The New New Thing, and how Clark’s continuing innovations led to new billion-dollar enterprises. He lives to innovate, even with his avocations, such as his installation of 27 computers to help operate his boat, Hyperion, one of the largest sailboats in the world.2 As you progress through Part B, you will read about numerous differing management concepts and leadership approaches in both for-profit and notfor-profit endeavors. Evaluate all of them for new ideas to incorporate in running your own show, or outworn ideas to discard. There is no one school solution!

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TAKE AN EARLY START-UP LITMUS TEST FOR SUCCESS Many seeds for failure of a start up are planted by flawed initial strategies and timing before the door opens for business. It is imperative for the new risk taker to answer fundamental ‘‘go–no go’’ questions at the earliest possible time. An objective litmus test of the soundness of the prospective venture should be one of the first considerations. Five testy questions are particularly critical for the neophyte start up. The need to satisfy such questions has been proven time and again in work with many small clients making their first do-your-own commitments. Seed money or a children’s college nest egg has been lost ignoring them, and successful ventures have been launched heeding them. Many ventures fall victim to the first question, but all five must be faced! 1. Does My New Venture Show Significant Prospects for Being Viable? Am I pursuing a superior product or service for a growing market that really needs it? Have I, or anyone else, already sold one? Has my research been adequate to understand the essential strengths I will need? Who and where will I find my customers? How can I best reach and persuade them? Who will my major competitors be and how will my offerings compare against them? One in every ten start-up companies has some chance for success, but too few of those passing the first screen succeed! A vintage-car buff who did not own a classic car but was a reasonably good auto mechanic wanted to go into the repair of classic models. When advised to do more homework on the requirements of that business and develop a start-up plan, he replied, ‘‘I’ll do that after the maple-syrup sugaring season is over.’’ His motivations weren’t that strong, and he never came back for help. 2. Can I Achieve the Necessary Compliances and Permits to Operate? Can I get the clearances to set up and operate my business where, when, and how it should be positioned? Before I start investing in the start-up, am I certain the right operating locations will be approved? A pet lover planning early retirement from a corporate job was hoping to start a kennel on his home property of five acres. He researched some aspects unfamiliar from his own career, including the how’s and what’s of running a kennel, the technical veterinary requirements, accounting and financial planning, and the liabilities he would face. He was a fast learner, but had not investigated zoning, attitudes of neighbors, and the permits and compliances that his current location might not meet. He was faced with either rethinking his venture and deciding whether to start looking for an allowable landsite and location or changing his retirement ambitions. 3. Are Adequate Start-Up Funds and Ongoing Funding Available to Me? Do I have the financial resources and ready access to additional funding sources I will need if I am to reach and sustain positive cash flow? Two professional men, a doctor and a lawyer, built a most attractive upscale retirement facility in a highly desirable

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location. They quickly sold the first eight units, obtained deposits, and developed a waiting list for expansion. Within a year after closing the sale to the first occupants they ran out of cash and credit, and were forced to declare bankruptcy. 4. Am I Confident I Can Make Sales and Cope with the ‘‘Nuts and Bolts’’ of Meeting a Payroll? Am I prepared to manage the operational details of the business? Do I understand what is required to meet a payroll consistently? A retired production manager from a woodworking plant had an opportunity to buy a small convenience store at a rural crossroads. He obtained financials and tax returns from the owners and sought the help of a consultant in evaluating the deal. Before the consultant had time to review the situation, the buyer closed the deal fearing he might lose out on it. He planned to bring in a son who also lacked any relevant experience to help run the operation. The young man tragically died in an accident before starting to work. His father had misjudged the value of the inventories included in the buy-out package, and floundered with the unfamiliar operation before giving up the business and losing his out-of-pocket start-up expenditures. 5. Am I Ready for Entrepreneuring, and Do I Expect to Have Fun? Am I certain I am suited for my prospective venture’s significant demands? Physically? Mentally? Experience-wise? In terms of family support and cooperation? Can I innovate? The founders of Green Mountain Technologies, whom you met in Key One, rated outstanding in all of these issues, particularly with the development of distinctive offerings and user benefits, plus their selling expertise. They were selfstarters and sharp with the critical numbers. The two were highly compatible, and on a strong success path. Their motivation was powerful and they were enjoying every facet of the ‘‘do-your-own-thing’’ challenge. Entrepreneurial Motivation: A First Step Toward Being Your Own Boss. Am I venturing for the right reasons? How sound and realistic are my motivations for being my own boss? Am I really a self-starter with the patience, fortitude, and guts to see it all through? Clarifying and testing the real motivations is an excellent point of departure for start-up entrepreneurs. Compare your own drive for independence with the sample of reasoning, or rationalizing, shown in Table B-1. Under almost any given set of circumstances, all of the motivations could be valid and reasonable objectives for taking wing. Every expressed viewpoint in the table comes with plenty of motivation to succeed. However, they can also possess Achilles’ heels. You must be confident you know how to meet the start-up obstacles. Your concept and approach must be consistent with the requirements for success of your chosen venture. And your motivations will not work if you have not addressed and planned for viable market-positioning strategies and policies. Those reading this book as neophyte entrepreneurs searching for help with a start-up should assure themselves that their motivations are sound. Have they realistically confronted the issues specific to initiating and managing a start-up. Besides checking your qualifications and readiness against the five litmus questions, complete the fitness checklist for start-up entrepreneurs in Table B-2.

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TABLE B-1. Random Motivations for Pursuing a Start-Up I have an ingenious new idea that can fill an unmet need.
It’s a brainstorm. I’m convinced ‘‘everyone needs it.’’
It’s a ‘‘new’’ opportunity I’ll trip it as it goes by before someone else beats me to it.
My relatives and close acquaintances think it’s fantastic, and the market will too.
Now I’ll use my inheritance to meet a lifelong dream. I want to be my own boss, do my own thing; I’m tired of working for others.
I want the challenge of accomplishing something on my own.
I’m fed up with the bureaucracy; it’s inefficient, political, and too slow moving.
My bosses don’t share my convictions, and won’t support my initiatives.
I don’t really believe in the leadership and business approaches of my superiors.
My temperament will never adjust to being just a ‘‘company employee.’’ Others must need my particular expertise.
My experience, insights, and capabilities are ahead of the pack around here!
I can see innovative applications that neither my company nor industry buys.
I could move the ‘‘state-of-the-art’’ ahead faster on my own.
I can provide services that a customer or prospect would prefer to have others mess with. I want a better and more gratifying life for my dear ones and myself.
I envy the comforts and luxury other enterprising individuals have accomplished.
I miss the living style I grew up with.
I don’t want the deprivations my parents went through. I want to accumulate an estate and a more secure future for myself and my family.
I have big debts to clear up.
I want to establish a going venture that my sons and daughters could go into.
My own venture could make me independently wealthy. This job’s a bore and no challenge; I want to have some fun!

With these new insights about your contemplated venture, re-examine your comfort level for your motivations per Table B-1. For those who wish to quantify the fitness ratings, the key in the lower right corner of the table may be a useful check against judgment. Keep in mind, however, that many highly successful entrepreneurial case histories would have been scored failures. They succeeded with little more than a most unusual and brilliant offering, highly intense drive and guts, most fortunate timing, and a clear fix on profit requirements. As strictly judgmental tools, the litmus and fitness tests can help the newcomer in three ways. They can detect shortcomings that argue for terminating the venture. They can highlight aspects needing more homework. Or, hopefully, they can provide a strong affirmation to proceed at full speed with the venture before someone else initiates something like it, or better. Don’t put yourself at risk if you are unable to readily establish conviction with favorable odds. Double-check the soundness of your entrepreneurial motivations and review the ten keys. If you can’t come up with improvements or a better idea, then stay in the present job for now and avoid exhausting a nest egg that might

TABLE B-2.

Fitness Checklist for Start-Up Entrepreneurs

a-desire and motivation (Doing your own thing)

b-positive people skills (Managing a small business)

c-entrepreneurial drive (Self-driving attitudes and attributes)

( ) Strong desire to be own boss ( ) Crave financial independence ( ) Confident self-starter ( ) Workaholic with great stamina ( ) Determined to finish tasks ( ) Not a large-company person ( ) Must prove you can win on your own

( ) Enjoy working with people ( ) Astute judge of others ( ) Strong leader, motivator, controller ( ) Team organizer and builder ( ) Careful listener and communicator ( ) Know how to meet a payroll ( ) Develop successors ready for key jobs

( ) Believe strongly in free enterprise ( ) Customer is King or Queen ( ) Marketing mindset dominates ( ) Outstanding sales closer ( ) Confident taking calculated risks ( ) Planner and problem solver ( ) Idea stimulator and innovator

Note Needed Strengthening:

Note Needed Strengthening:

Note Needed Strengthening:

d-critical numbers savvy (Business Finance 101 knowhow)

e-readiness to venture (Have your own fun and success)

judgmental fitness ratings Current rating for every sub-box:

( ) Costing and pricing acumen ( ) Understand overheads and depreciation ( ) Rolling cash flow projections ( ) Profit planning and budgeting ( ) Breakeven analysis and price setting ( ) Understanding P&Ls and balance sheets ( ) ROI and investment spending options ( ) Continuing tracking of critical numbers

( ) Excellent health and energy ( ) Supportive spouse and family ( ) Have a winning business idea and model ( ) Do ‘‘no-gaps’’ business planning ( ) Have access to adequate funding ( ) Essential associates on board ( ) Totally committed to goals and succeeding ( ) Intend and expect to have fun

(þ) every sub-box that fits strongly (0) every realistically fixable sub-box (
) every unrealistic sub-box Category has 6 or more Pluses and realistic fixables: ( ) A-Desire and motivation ( ) B-Positive people skills ( ) C-Entrepreneurial drive ( ) D-Critical numbers savvy ( ) E-Readiness to venture

Note Needed Strengthening:

Note Needed Strengthening:

No. of Majors with 6 Pluses and Zeros: 5 ¼ Very strong prospects 4 ¼ Quite likely to work 3 ¼ High risk 2 ¼ Don’t try until you achieve a marked improvement in all five

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better go for the children’s college education some day But don’t stop seeking if the urge is real! BE PREPARED FOR CHANGING REQUIREMENTS OF THE EARLY SMALL BUSINESS STAGES Few first-time entrepreneurs can fully appreciate in advance the complexities of moving from a brilliant, or at least great, idea to market acceptance and continuing profitability. Buoyed by the excitement of starting to develop their own thing, they seldom anticipate how rapidly their seed money can dissipate. Or why. The early demands on the boss can quickly descend into a 24/7 work-andworry week. This burden is readily accepted as a given, a personal cost of entry. The positive feeling of starting to make the venture succeed masks the growing overload on the leader’s shoulders. His or her managing can deteriorate easily into fighting fires and scrambling to plug unanticipated gaps in a loose business plan. As early sales successes build, there can be a danger of neglecting the first important customers. The entrepreneur eventually must build marketing capabilities and a strong outside sales effort. Over a company’s first three to five years, the major requirements for leading a small business can change dramatically. The life cycle of most small businesses has as many as six predictable stages, with the sixth always undesirable, but not inevitable. Make-or-break time comes early, particularly during the first three. 1. 2. 3. 4. 5. 6.

Start-Up Launch Early Survival Profitable Growth Merger or Acquisition Maturity (and Cash Cow status) Obsolescence and Decline

A summary of significant managerial challenges in the three earliest stages of the small business life cycle is presented in Table B-3. Based on actual success and failure cases, the three stages highlight a flow of essential and often subtle changes from entrepreneuring toward a balanced managerial emphasis. The intent of the table is to outline goals that should be in place by the end of each stage. Initial success through Stage One is a positive cash flow. Success by the end of Stage Two can be measured by the extent to which powerful entrepreneurship has been complemented with the addition of superior ‘‘professionals’’ in management and critical specializations. You will continue to believe you are on a success path in Stage Three if you are comfortable starting to pursue diversification and increasingly profitable growth options. In these scenarios, however, it is unreasonable to expect that the one-, two-, or three-person start-up could meet all of the conditions of Stage One on the first day. This is more likely to happen if the entrepreneur brings extensive applicable

TABLE B-3.

Early Small-Business Growth Stages

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Needs of the Entrepreneur Strategic Marketing Leadership

Stage One: LAUNCH Define, Launch andNurture a Viable Small Business

Stage Two: SURVIVE Surmount Problems and Hurdles of the Early Years

Stage Three: GROW PROFITS Achieve and Sustain Significant Profit Growth

Develop a viable product/market model with a COMPLETE PROFIT PLAN

Develop market-positioning strategies within a COMPLETE PROFIT PLAN

Establish an in-depth focus on your customer from the outset

Keep in close touch with all of your key accounts and overall marketplace to spot early warning signs and remedy competitive disadvantages quickly

Be alert for opportunities to diversify with a COMPLETE PROFIT PLAN in growth areas that can use your core strengths and superior benefits Make lasting customer relationships the number one operational priority of your associates and outside partners

Bring in professional management for matching with your entrepreneurial talents on a timely schedule

Delegate and decentralize in order to season your managers and supervisors for coping with growth

Train key associates to develop strong capabilities for rapid problem detection and solutions

Foster initiatives for innovating and getting out of the box throughout your organization

Lead the sales effort in developing a customer base that keeps repeating Personnel and Managerial Development

Select strong associates and outside professional services and partners, particularly in selling, marketing, and infotech applications Provide inspirational market-driven leadership and tight control

Financial Resources, Stability and Control

Raise sufficient funds to reach positive cash flow and meet all payrolls Find a strong accountant who knows your business requirements Master the critical numbers you need to plan, manage, price and control

Growth and Profit Drivers

Start a planning agenda for product improvements and program innovations to counter competition and provide growth opportunities

Practice frugality in all marketing and operating activities Employ rolling cash flow projections to fund emerging opportunities and prevent over-reaching with your expansion planning

Maintain financing sources for growth and opportune new developments Be ready to do fast self-turnarounds whenever needed to right the ship

Continuously monitor your marketplace and internal operations to uncover unfavorable trends and surprises Keep contingency plans up to date for worst-case scenarios

Utilize outsourcing and strategic alliances to leverage your resources and core strengths for profit growth

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experience, a cadre of seasoned associates, and risk money to the new venture. A well-planned one- or two-person start-up probably will begin launch day much closer to the minimum of Jack Braitmayer’s four elements:





Create—if you can present a highly differentiated offering with superior benefits. Make—if it is competitively costed and priced with a higher value to the user. Sell—if you have superb sales talent, and sharply identified prospects to convince, or even some prelaunch commitments to buy. Count Beans—if you understand and have competent technical advice on all of the critical numbers and have a routine in place to capture and examine them.

The principal intent of Table B-3 is to emphasize the most critical goals of the first three business stages. It also clarifies the magnitude of the managerial requirement and the all-important people dimension. The most essential ingredient through every stage is the caliber of the people and the changes in managerial approaches that must occur. One extremely important consideration is that you do not discard the time-tested management fundamentals that the new information technology has not rendered obsolete. There are still a number of classics that defy change. DEVELOP ALL OF THE ESSENTIAL MANAGERIAL REQUIREMENTS OF THE SMALL BUSINESS Some years ago, the Association of Consulting Management Engineers, the self-appointed ‘‘conscience of management consulting,’’ defined their ‘‘classic’’ elements of managing as the three-faceted, eleven-step agenda in the sidebar.3 ACME established a fundamental and still-valid framework for managing that is certain to survive for a long time. The Internet and infotech do not invalidate any of the eleven essentials. The situation parallels the old distribution axiom ‘‘You can eliminate the middleman, but not his functions.’’ Infotech is an outstandingly significant ‘‘how to’’ advancement. It collapses time, combines responsibilities, and reduces the separation of geography. It has already demonstrated the enhanced productivity of managing—planning, operating, measuring, and controlling your enterprise. But it does not displace any of the ACME elements. For the entrepreneur who has had limited exposure to ‘‘Management 101’’ concepts, a contemporary segmentation of key functions, issues, plans, and actions for managing is presented in Figure B-1. The CEO’s job in core is to direct, lead, communicate, motivate, and control the company’s people and functions in all six facets of the outer ring. The six contemporary sectors are applicable in varying degrees and with some nomenclature changes to the major functions of virtually all companies of any

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ACME’s Eleven Managerial Elements A—Establish Objectives 1. 2. 3. 4. 5.

Gather information Synthesize information Plan Decide Promote innovation B—Direct the Attainment of Objectives?

6. 7. 8. 9. 10.

Organize Communicate Motivate Direct, guide, or counsel Develop people C—Measure Results?

11. Measure, evaluate, and control

size. Their content and emphasis can vary widely depending on the mission, objectives, and strategies of the particular firm. The difference lies in whether the management of all six is too much for the small entrepreneur with very few employees to perform, or can be spread wisely among managerial cadre and technology pros as a company grows. As background for the five keys of Part B, traditional and contemporary issues and requirements of each outer-ring sector are outlined in Table B-4. The two exhibits present a useful managerial mainline for the small-business CEO. The small company’s leaders should find it advantageous to check their own practices periodically against the pertinent sector descriptions and issues. A number should suggest opportunities for both the small business and the start up. Take a moment to audit your organization’s strengths, weaknesses, neglect, or failure in those detailed components of Table B-4 that apply to your type of endeavor. Note a plus or minus for your own current rating, as a reminder to evaluate new approaches and take appropriate action. CONSIDER FIVE SETS OF MANAGERIAL AND OPERATIONAL KEYS FOR MARKET DOMINANCE This book does not attempt to examine the full range of management practices. Rather, it deals selectively with five essentials that small businesses have

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FIGURE B-1.

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The CEO’s Managerial Work of the 21st Century.

found crucial for implementing their market-positioning strategies in order to grow and diversify profitably. Key Six: Dynamic, ‘‘No-Gaps’’ Business Planning Key Seven: People Power through Teaming and Empowerment Key Eight: Leveraged Development, Production, and Outsourcing Key Nine: Problem Solving and ‘‘Do-Your-Own’’ Turnarounds Key Ten: Linking Growth Strategies with Profit Plans

PART B: PROFIT PLANNING PROJECTS 1. Re-examine Your Motivations and Attributes for Being Your Own Boss. The first-time, small-business entrepreneur should review his or her evaluations of Tables B-1 and B-2, as should those who are struggling to

TABLE B-4. A Managerial Mainline of Strategic Decision Areas and Issues (Check areas of weakness or opportunity) Area One: Needs, Problems, and Opportunities

Area Two: Mission, Objectives, Strategies, and Plans

Area Three: People and Organization

— Keep searching in depth to catch changing needs of your customers; partner with key accounts on benefits? — Track your competitive pluses and minuses with all five marketpositioning strategies and programs? — Encourage marketplace feedback on productive operational innovations? — Follow the infotech state-of-the-art in your industry closely to identify any that your operations could profit from?

— Set effort-stretching missions, objectives, and profitability goals? — Pursue realistic strategies, plans and budgets; assign responsibilities clearly; quickly inform all who need to know? — Assure plans’ compatibility with your core strengths and consistency with regulatory and environmental factors; also currency of contingency plans? — Make sure your business plan has no essential element missing for executing a complete and doable profit plan?

— Imbue your leaders and staffs with market-orientation and customer focus? — Strongly team and empower key people both internally and with outside partners and associates? — Stress a control approach that uses strong risk/reward performance with timely incentives and penalties? — Provide management development programs and career opportunities to keep your best people with you?

Area Four: Projects, Programs, and Operations

Area Five: Finance, Control, and Infotech Services

Area Six: Brainstorm, Innovate, and Change

— Insist on continuing inside/outside interchange on market requirements for R&D and production? — Stress productivity, costreduction and simplified processing in all operations? — Leverage operating resources and core strengths with selective outsourcing? — Ensure ‘‘seamlessness’’ among internal functions and with outside partners? — Follow pertinent trends in technology and adopt state-of-the-art operational methods that fit profitably?

— Clearly fix accountability for financial and physical resources, and for all functional assignments? — Engage highly competent accounting and financial advisors; call upon them to help educate key managers? — Keep up a frequent presence in all locations; engage in interchanges with everyone; make surprise visits? — Stay abreast of infotech state-of-theart; install cost-effective applications; make them user-friendly to your staff?

— Stimulate an ‘‘out-of-the-box’’ attitude throughout your organization; hold periodic sessions and retreats? — Seek innovations within your current position—with offerings and benefits; new market niches for core strengths; a leading technology; rare people talents; leading market reputation and momentum, strong partners? — Always welcome and honor a way-out brainstorm idea and evaluate it? — Screen all significant departures and innovations meticulously?

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succeed with an enterprise already underway. Are your original motivations still appropriate occupational aims and are you meeting them? Are your business plans and managerial approach in synch with them? If not, what changes in mission, strategies, tactics, and managerial style should you be considering as you move on into the five keys of this part? 2. Check Your Performance with the Six Crucial Areas for the CEO. If you have not done so, take a few moments to rate your own managerial strategies and practices in the six groups of issues presented in the managerial mainline of Table B-4. Do this in conjunction with the first project. Some detailed issues may not relate easily to your type of operation, but the six major areas should fit almost any business venture, and serve as useful guides for your review of the five keys of Part B. Even if you are not a first-time entrepreneur, visit the two projects. You may discover a few new perspectives to employ in your pursuit of greater entrepreneurial achievements, profits, and career gratification.

KEY SIX

Dynamic, ‘‘No-Gaps’’ Business Planning Set Up Flexible Planning Processes that Minimize Gaps and Rapidly Meet Competitive Threats and New Opportunities Before we meet with your associates, could you and I start by reviewing your business plan? —Consultant to CEO in their first meeting at the plant Since I haven’t had to ask my banker for funds for some time, I don’t have an updated written plan. You’ve seen the plant, so I’ll just talk you through what we’re trying to do and where we stand. —CEO of a small business beginning its third year

Assuming the small business has proven it has a viable concept that the market wants and needs, the overriding purpose of the well-constructed business plan is to increase the odds for continuing success. The process of developing an allinclusive Enterprise Plan helps the firm’s leaders to:





Identify problems they were not certain they had Discover essential strategies and action steps that had neither been considered nor well developed Keep all concerned individuals on the same wave length with an action roadmap and audit trail for performance evaluation Improve the odds for converting their hopes and dreams for the future into reality.

Risk management is a basic function of the business plan. You want to assure the most effective allocations and uses of your human, physical, intellectual, and financial resources. You want a planning process that reinforces the commitments of all who are vital to the success of your operations, and makes them vital parties to the plan’s development. Finally, you want to attract and retain the strongest

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Three Basic Purposes of the ‘‘No-Gaps’’ Business Plan 1. Operating Blueprint





Assure meeting users’ needs No missing elements or gaps Allocate resources better Assure viable and realistic plan

2. Funding and Lines of Credit





Justify bank loans Convince equity backers Assure supplier credit Gain and retain investors






CEO’s direction and control Associates know their jobs Manage risk successfully

3. Attract Strong Participants





Outstanding hires Major suppliers Outside partners Expert advisors

possible employees, associates, and outside supporting services. All of these managerial concerns are integral parts of the management of risk. The plan must be complete, but not necessarily lengthy, as long as it covers all requirements for success. A well-documented business plan should be kept up-to-date for three principal uses. Preparing and presenting your plan for one or another of these three purposes may require different formats and content. But your first cut of plan content should address the interests of all three audiences. Then, you can tailor selective presentations and emphasis for each category of recipient. Another function of the plan for a start-up may be to convince your spouse and in-laws you are for real. An Exciting Start-Up that Became a ‘‘Runaway Success’’ for a While Harvey Harris, the owner of the Grandmother’s Calendar Company was talking with a major distributor of his print-shop product, a personalized annual hanging calendar. It had spiral-bound, monthly sheets, 11 by 17 inches, each containing a calendar with key birthdays, wedding anniversaries, and other special dates to remember on the bottom half, and a colorful montage of family snapshots or other memorabilia on the top half. ‘‘I had no idea my orders would get so far ahead of me. As I have told you, I recently bought new specialized scanning and four-color printing equipment, but the orders are flooding in too fast. We still have only enough two-shift capacity to produce half the backlog of my direct customers and my distributors’ accounts for their Christmas-gift trade. I really misread my market. Now I’m racking my

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brain to see how I can get caught up. Can you give me a little more leeway for my delivery dates?’’ The founding entrepreneur had conceived of his new business while putting together a do-it-yourself annual calendar for his grandmother. At the time, the overall U.S. calendar industry was estimated to account for annual sales of almost $1 billion, and versions personalized with photos had been marketed for some years. The Grandmother entrepreneur, who had been managing a local supply business, believed that his approach was distinctive and highly marketable due to the elaborate set of new features he was offering. His ordering kit was quite user-friendly, and he shifted the layout function to the customers. Their job was to affix the montage for each month onto the top half of separate 11-by-17-inch sheets, and list the customer’s special commemorative dates on the other half. The company listed the standard holidays. Each order was almost ready for reproduction when it arrived at the plant. He encouraged customers to include their most prized features in the montages. Each initial calendar kit cost $20, including the first calendar, a price $5 or more below the less elaborate offerings of competitors. The price per copy for six or more calendars was $16, with a premium of $10 per order for a twoweek turnaround. A nine-calendar order was about $160. He quickly established distribution through a variety of sales channels nationally, including greeting card retailers and mail order houses. Market acceptance was outstanding, and by the third season his continuing rapid growth required the installation of more sophisticated scanning and printing equipment. The smaller, lower-quality starting equipment had begun to break down. He was employing more than a hundred workers, and his booming sales were exceeding all expectations. Unfortunately, the highly seasonal sales pattern was swamping the plant with orders at the rate of 1,000 per day as Christmas neared. The almost ‘‘instant’’ popularity of his product had forced him to increase daily capacity by 300 orders. By early December, it became apparent that his bargain prices could not cover costs. Harris was forced to inform his distributors that he could not deliver any more Christmas calendars. But to his great credit, he began thinking how best to return the original photos to their customers. The Grandmother’s Calendar Company failed, and at Harvey’s urging, a responsible group of its distributors convened at the plant almost immediately to return all of the unprocessed calendar kits. They were keeping faith with the many customers who, after ordering, had entrusted treasured family pictures and memorabilia to the company for copying. The year following the company’s failure, its surprised former customers received direct mailings from a new Golden Moments Calendar Company from the same city with an offering kit for a very similar proposition. However, it was at a noticeably higher price for both the starter kit and additional copies and features. For example, a nine-calendar order cost about $240, but was of high quality.

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With assurances of satisfaction fully guaranteed, the ordering customers received their calendars for Christmas in good quality and ample time for the holiday gift season. The successor company had taken the necessary precautions to get the plan and its execution right. Five years later, the new company was still marketing its offerings at the higher price levels.1 On hindsight, Harvey Harris should be complimented for the guts to develop and launch a remarkably successful new venture. He should be given credit for innovating such huge initial sales. The underplanning was a tough, unexpected lesson that befalls many budding entrepreneurs. His experience contributes positively to clarifying one of the essential ingredients of a successful profit plan. The plans for both an ongoing business and a start-up must cover all foreseeable requirements for sustaining an ongoing program or establishing a new venture. Understand and plan for the expertise and numbers of people required for management, R&D, sales and marketing, operations, and service. Cover the necessary types and specifications of equipment that needs replacement, upgrading, or additions. Determine your business’s comfort level for the working capital to meet payrolls, other operating expenses, and capital equipment purchases. Anticipate the need for development projects. Draw upon regular contingency planning to anticipate the unexpected. ESTABLISH A ‘‘GAP-FREE,’’ RAPID-RESPONSE PLANNING PROCESS THAT AVOIDS THE TRADITIONAL PROBLEMS OF THE SMALL BUSINESS Undertake ongoing gap-free planning with rapid communication of changes to all concerned. The buck rises and stops with the CEO. All planning units should receive the direct involvement and commitment of line management. Major decision-making and recommendations should not be delegated to staff subordinates. As a small company grows, there is a tendency for functional, departmental, or divisional managers to delegate the ‘‘grubby’’ parts of their planning work. This often happens with managerial overload or when there is a lack of conviction that the planning is more than just an academic exercise. For a definitive evaluation of the strength of your own business planning, consider and rate your planning practice against the following eight deficiencies. 1. Little or No Documenting of Strategies and Plans. All small-business planning should begin with documentation of your current mission, objectives, and strategy profile. Some small-business entrepreneurs have enjoyed an initial measure of success without a formal strategic plan or even anything in print. Others have even contended that they do not strategize, they just put an ‘‘exciting offering’’ out there and run with it. Many dot-coms and e-coms failed because they were using a ‘‘shorthand’’ description of a ‘‘new’’ business model and missed some of the essentials, particularly the profit dimension.

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Your strategy always exists, whether expressed or implied. In the worst case, the implied strategy is likely to be interpreted differently by associates. The danger rises as the business adds personnel and tries to communicate missions, goals, and strategies to them without some formalizing and documentation. It is imperative that everyone march to the same drummer. And bankers will not advance loans to a business without a minimum level of written justification and critical numbers. On the other hand, you want to avoid an academic paperwork monster that your people will not read. A few pages preceding the operating budget may suffice for starters as long as it is pithy, action-oriented, and realistic. But it should cover all essential strategies, and be developed and committed to by all decision makers charged with its implementation. 2. Once-A-Year Planning Chore without Interim Updating. The business plan of record often is not being kept up to date with every significant change. More than ever before, today’s competition and the speed of the Internet require a dynamic plan. You no longer can confine planning to an annual ritual. You must keep it ongoing and flexible to face unforeseen challenges. However, do not be too quick to destroy or replace strategies that are working strongly. Continuity of marketing strategy is one of your key strengths. To facilitate participation and speed the updating, establish a computermounted plan. Some have called this your ‘‘digital cockpit.’’ Passport-protect it for access and inputs only by those who need to know. Keep a brief up-to-date summary of all essential action steps, responsibilities, and time schedules on your internal computer system. 3. Thin Planning Participation and Undue Delegation by the Implementers. It is rare when the founding entrepreneur can keep fully attuned to all dimensions of a growing business in a dynamic market. One of his or her worst enemies is creeping managerial overload. As a staff grows, the CEO often is tempted to delegate planning responsibility and even accountability. Plan decisions are not a staff function; they need key-management participation and sign-off. The CEO must be the lead strategic planner, working closely with senior line associates. This group reaches consensus on the corporate mission and objectives, and the merging and blending of all unit plans into a cohesive and consolidated position. 4. Late Communication and ‘‘Spotty’’ Presentation. You can not afford to assume or take for granted that your people are staying well informed on plan changes. Always be prompt about documenting and communicating your updated strategies and plans on a need-to-know basis. Its format and documentation should be kept as brief as possible, yet must guard against ‘‘gaps.’’ Use your ‘‘digital cockpit’’ to advantage. Your aim is a well-informed team who are sharing the same marching orders. 5. Significant Gaps, Broad Generalizations and Fuzzy Action Steps. As in the Grandmother’s Calendar failure, planning often fails to identify and prepare for all of the critical people skills and physical and financial resources needed to carry

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out the firm’s mission and objectives. Goals, strategies, and numbers are not always well matched with operating plans. Focus your plan content on competitive problems and their solutions, and on new opportunities to apply your core strengths. Keep the ‘‘blue sky’’ and wishful aims out of your plans. Specify action steps, timing, benchmarks, and the individual accountable for each program or function. 6. Overly Optimistic Financial Assumptions. Cover all functions and activities with your financial planning. Do not underestimate costs or overestimate cash flow. This is sound advice to both new start-ups and ongoing small businesses with new projects and programs. Flawed numbers in an unsatisfactory business plan are not a cause of failure; they are a result. They stem from missing or misdirecting functions needed to produce sales and operate productively. Over-optimism in new entrepreneurial situations may be due to:





Over enthusiasm and a rush to get going with a bright new idea and a skeleton plan that slights critical details A primarily sales-oriented leader who lacks senior associates with the other requisite managerial skills Inexperience with the competitive requirements for success specific to a particular industry An unexpectedly howling initial success that far exceeds the entrepreneur’s starting expectations for the venture.

7. No Regularized Contingency Planning. Contingency plans for unanticipated competitive exposures and risk-management issues may be lacking. A growing concern is failure to anticipate the impact of the Internet and state-ofthe-art information technology. For many businesses and industries, the Internet has collapsed the time available to take advantage of windows of opportunity and meet fast-rising competitive threats. Businesses tend to rely too much on past results in planning, not enough on the future. Moreover, we tend to think about the future in terms of a single scenario and probabilities, when there may be so many new ones facing us. We need to reach outside the box to play ‘‘what if’’ as we think ahead to be ready for the unexpected. 8. Faulty or Neglected Performance Analysis and Feedback. Last but not least, this is one of the most commonly neglected planning deficiencies. Day-today operating pressures and work overload lead to slighting routine performance audits. Regularly undertake competitive situation analyses, track performance, and review alternatives for meeting competitive contingencies. Rolling cash flow projections are a significant tool in such reviews. Most importantly, get to really know your people and keep in regular and frequent personal contact. Schedule regular reviews with those responsible for each major plan element and each business segment. Include your outside partners

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in this. Set up the information screening and warning systems you will find in Key Nine. The planning and leadership trick is to keep line management fully committed. Highlight the essence of your plan—the main direction, the roadmap, and the game plan. Cover the essential supporting detail with referenced files that can be accessed by those who need to use it. Consider how a metals producer really talked net with its plan presentations. Concise Documentation of a Business Plan for Each Product/Market Segment Some years ago a producer of nonferrous metal alloys established a summary format to simplify the business plans and strategy profiles in each of its 14 product/market segments. Each segment’s summary was a stand-alone record of its unique segment planning, and outlined the support it needed from any company functions it shared with other segments, that is, common product lines, R&D projects, manufacturing, and specialized services.2 Figure 6-1 shows the two-page format for one of the producer’s 14 market segments. Each segment plan was supported by backup reference information where applicable. The brevity and focus were most helpful roadmaps for the company’s product managers, sales personnel, R&D planners, and operations managers. The model, with topical variations, also should be applicable for the small, single-niche manufacturer. Essentials of Small Business Enterprise Plans and Their Varying Content and Emphasis Excellent business plans vary widely in content, planning processes, sequential steps, and form in use. A plan’s particular content and character depends on the type of business, the style of the CEO, the degree of dedication to comprehensive planning, and the size and complexity of the business. In the firm’s early stages, ‘‘Keep It Simple’’ is always good advice for a start-up or small, established company with a single product/market scope. Avoid planning complexity, but communicate clearly and succinctly all appropriate elements that fit your particular audience and purpose. A Sequential Planning Process for Avoiding ‘‘Gaps’’ and Responding Rapidly to New Problems and Opportunities The dynamics and sequential flow of a comprehensive ongoing planning process are outlined in Figure 6-2. This ‘‘first-things-first’’ approach separates the process into four major phases:

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Source: J. Thomas Cannon, Business Strategy and Policy (New York: Harcourt, Brace, & World, 1968), pp. 410–411.

FIGURE 6-1. Planning Profile of Nonferrous Metals Producer

1. 2. 3. 4.

Update the documentation of your Current Strategy Profile. Conduct a Competitive Situation Analysis at least quarterly. Keep your Enterprise Profit Plan updated. Employ a Continuing Feedback Process.

Each annual-planning cycle should begin with a review and refinement of your mission statement and your basic objectives and strategies. Invite challenges to these starting points as you and your planning team move through each functional

FIGURE 6-1. continued

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Suggested Content of a Comprehensive Business Plan












Your company’s mission and objectives What your business is all about; your products and services, and why they promise superior benefits to users An outline of your physical facilities and resources What is growing about your market, and its competitive makeup Your own management, leadership, and control expertise The credentials of your key associates, and how your business is organized The customer and market-orientation of your employees, associates, and partners The core strengths essential for your success and their validity for the future If a going business, your profit record, and present and future financial needs If a start-up, a financial pro forma, your capital requirements, and your specific plans for the foregoing If a troubled company, your plans and a timetable for a successful turnaround

area to determine whether the marketing goals are achievable. This becomes a chicken-and-egg and give-and-take process. It is modified or expanded as associates contribute new inputs and insights about your marketplace, competition, and internal core strengths and resources. Then, do not limit updates to an annual or even quarterly cycle. The tone of your plan should convey your confidence and enthusiasm for the enterprise, and your conviction that you have a viable business and a solid profit plan. If you are submitting it to a banker, venture capitalist, or other funding and investing sources, you probably will want your Enterprise Plan document and your presentation of it to touch upon all of the content suggestions in the above sidebar. You can be more selective if you are using it to attract strong participants to join you. Concentrate the internal version of your plan (your operating blueprint) mainly on objectives, strategies, operational and development programs, assignments of responsibility, target benchmarks, schedules, timetables, financials, and information technology. A recommended organization of plan sections is shown in Phase Three of Figure 6-2. Always count on new issues to arise between the start and end of your plan year that require new strategic deliberations and decisions. Such requirements may need addressing within any of the four planning phases. They may involve:




Significant performance problems or challenges to your basic mission and objectives Problems or exciting new options for individual market-positioning or operational strategies Front-line tactical changes or innovations along your value chain.

FIGURE 6-2. Phases and Steps in the Small Enterprise’s Planning Process

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A well-designed planning process with clear responsibility assignments will facilitate rapid decisions by the CEO and management at any time. Today’s computer capabilities enable instant updating and communication in the greatest depth and range of information needed for all concerned. Enter all substantive changes and refinements in your digital cockpit ASAP with an instant alert system to notify all concerned parties. Depending on the complexity and segmentation of the company’s business, either note source references to the preparer or use layered databases on the computer. Start with a brief strategy summary, then click down through one or more layers of essential backup files that are most commonly needed by the user. UPDATE YOUR COMPETITIVE SITUATION ANALYSIS AT LEAST QUARTERLY AND WHENEVER SIGNIFICANT ISSUES, PROBLEMS, AND NEW OPTIONS ARISE Formal quarterly reviews have several advantages. They force your organization to keep more closely in touch with your customers’ viewpoint. Are your features and benefits continuing to meet their needs and expectations? Is your pricing still worth the value they are realizing from you? Phases B and C of the competitive situation analysis in Figure 6-2 can give you lead time to uncover problems developing with your supply chain and other customer service functions. Charge every key associate with the responsibility to bring serious crises or opportunities to top management’s attention quickly between the regularly scheduled reviews. A thorough competitive situation analysis could have helped a new small business whose patenting issue was reviewed earlier. A Competitive Situation Analysis for a Racing Bike Accessory in Search of a Market Recall that the owner of the specialty racing bike product reported in Key One wanted to build and market an innovative product he had developed for his serious avocation, mountain biking. His target markets were professional racers and off-road, recreational riders. He designed and built samples of his new idea, and obtained a patent. He employed moonlighters to undertake market research. When they confirmed the interest in his innovation, he began searching for outsourcing to do the engineering design and purchasing. Through this effort he was fortunate to attract a business executive, also a serious bike rider, to invest in the venture in exchange for a significant ownership share, with the inventor retaining a buy-back right. Into his second year with the venture, the entrepreneur became convinced that he should proceed further and began introducing his product at trade shows. With these market exposures he became confident that he had a market interest among professional racers, and identified several redesign features. He signed on professional riders as sponsors, and offered cash prizes to winners of professional races around the United States.

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By early in his third year, he was ready to place his first ads in trade and biking publications and sell through mail order houses and distributors. He priced the product at the top price for its category, and sold just a few hundred units that year to middlemen. However, he was enthusiastically projecting much higher annual sales for the next year. Heading into his fourth year, the inventor still hoped that he might have a winner, but was developing serious reservations. His competitive situation analysis revealed that he faced a number of significant open issues. One risk was an open question of mechanical reliability. The product was still relatively untested under field conditions, with highly critical demands and expectations from the racing segment. Would the product’s mechanics meet grueling mountain-racing conditions? A second issue was inconclusive proof of sufficient demand. He still had only limited quantitative market research behind his belief in both the amount and intensity of the demand for his product among biking aficionados. The inventor had found ready interest and endorsements among top racers and was favorably received by other racing participants. Nevertheless, this lone pricey accessory faced tough competition for prospects’ attention and dollars in a highly competitive climate of continuing innovations. It was the highest-priced part for its application. Would it make riders’ performance that much more effective or comfortable for the price? Did the serious racers constitute a large enough market? Third was unproven distributor support. The item was only one highly specialized new component of many for two small sub-segments of the growing recreational biking application. What incentive would distributors need to push it? So far, he was getting insufficient repeat orders from his initial distributors, in some cases, none. Could they be expected to undertake significant sales or promotional effort for it? Or, would their interest wane in a one-product specialty that got ‘‘lost’’ in an inventory of thousands of line items for both pro and amateur bikers? Also, would distributors be interested in performing any required repairs? The fourth issue was a lack of consumer marketing experience. The inventor was comfortable about his patent position, and had years of successful experience in running a low-tech manufacturing business profitably. He also had an interested financial partner. However, he was in new territory in consumer marketing, and just beginning to learn about the requirements for distributor support. The situation analysis process had succeeded in giving him a better perspective concerning the hurdles his venture faced. He had raised a large agenda of issues to surmount as he approached his development of his profit plan for the next year. He could not find satisfactory solutions to these problems and withdrew from the market. REVIEW YOUR MISSION AND OBJECTIVES FOR CONSISTENCY WITH THE SITUATION ANALYSIS The small business strategies that form the central thrust of the book flow from, and must stay closely coupled with, the mission and objectives of the venture as it grows. This is no longer just a once-a-year process. Rather, you

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should maintain a list of ‘‘what if?’’ issues and contingency plans, plus optional strategies for timely competitive commitment. Five recommendations and cautions concerning the direction-setting objectives are germane. Keep Strategies Tightly Linked with Mission and Objectives The mission and objectives must be in synch with the core strengths of the company, and with the realities of its competitive marketplace. Setting the objectives is always a chicken-and-egg process involving ongoing iterations and tests between objectives and workable strategies. Consumers’ needs and significant competitive actions change, and entirely new opportunities or threats can emerge unexpectedly. Avoid Fuzzy and Disparate Objectives Among Managers Among the mismatches and dangers to guard against is that not all in management positions may share the same view of what destination the firm should be targeting and how they should be proceeding to get there. A small investment service was having great difficulty reaching its financial and business development goals. Ultimately, the senior partner realized that his key partners and managers were performing mainly toward their own expectations that were not fully in concert. The solution came only after hammering out a common mission and set of objectives representing compromises by all parties and a firm commitment to pursue the same basic direction. This problem can also occur in a manufacturing business where significant authority has been delegated, particularly to decentralized profit centers. It is essential to clarify the company’s broad service to the market in terms of the users’ basic benefits. Most importantly, do not fail to communicate the agreedupon mission to all who need to know. Set Challenging and Effort-Stretching Goals Make your objectives stretch the capabilities of your management and operating people. Communicate the specifics of how you expect the process to operate. Consider the following approaches:






Supplement quantitative goals with narrative objectives related to basic directions, skill levels, and capabilities for key functions. Precede goal setting with a challenge to key managers to inventory their successes and resources, and define fitting opportunities outside the present business concept. In each functional area, set tough but achievable goal levels that challenge past efforts and results.

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Encourage brainstorming with no taboos on exploratory assumptions. Do not prune away the imagination until all fertile ideas have sprouted. Then trim back to objectives compatible with your desired profit targets and the available resources.

Set Objectives with Measurable Performance Requirements Many early dot.coms and e-coms failed because their plans left profits to chance, where they had no broad proof of market demand and no reliable performance measures, only expectations. Establish readily confirmable measurements and keep ‘‘blue-sky’’ hopes out of the sales equation. Then make reasonable increases in goals to spur extra effort as long as you can match them with the ability to perform. Insist Upon Highly Ethical Business Policies and Practices Kim B. Clark, Dean of the Harvard Business School, until he became President of BYU–Idaho in 2005, asserted that the responsibility of every CEO should be to:








Stress the importance of integrity, always aligning actions with conscience Instill ethical principles in the organization Demonstrate high ethical standards and achieve excellence Embody the larger purpose of the enterprise in society Exercise skill and responsibility in employing financial resources Inspire trust and confidence in colleagues and create an environment where they thrive Be honest in relationships with investors and other external customers and constituents

Ethics has been in the school’s MBA curriculum since its founding in 1907, and a requirement in the first-year course since 1988. Clark’s challenges and the school’s program are outlined in more detail in Key Seven on ‘‘People Power’’ as an integral part of a CEO’s control over ethics issues, and a model for every entrepreneur. Three situations illustrate some of the critical issues of the five preceding planning guidelines. They address the disciplining requirement, the importance of outstandingly clear directives, and the need for involvement of all parties in achieving the goals. Summer Earnings Goals Enforced Well Beyond the Operators’ Intentions My parents’ aim for my tiny summer pop-stand business with my younger brother was for us to spend industrious summer vacation time earning spending

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money for the next elementary school year. We always began to lose enthusiasm after the 4th of July, when we had earned enough to buy fireworks! Thankfully on hindsight, our parents pressed us to continue the project for several full summers. A neighbor who owned the local Coca Cola bottling franchise lent us the stand and moved it onto our front lawn each year. We bought sodas of many flavors at 80 cents per case of 24 and sold the drinks for 5 cents each, a 50 percent profit over cost, less what we consumed on hot days. We bought Snickers and Milky Ways, put them in mom’s icebox to freeze, and ate a number of them ourselves! We were operating on the wrong measure and timing—making sure we met our fireworks goal, then wanting to quit. But our parents always seemed to keep us working at our broader summer-long objective. It was an early lesson we did not appreciate until much later. A Clearly Articulated, Market-Oriented Mission That Has Been On Target for Forty Years OCLC, the Online Computer Library Center of Dublin, Ohio, is a not-forprofit membership organization serving the library world on an international scale. Its prime orientation is to the needs of its library members, a target that has kept OCLC in the forefront of cost- and time-saving technologies for library and information applications.3 Initiated and sponsored by a consortium of Ohio University and research libraries, OCLC was established in 1966 and developed by a brilliant scholar, librarian, and researcher, Frederick G. Kilgour. The original concept was Kilgour’s inspiration. He had had an outstanding career as librarian at Yale, and was the man whom President Roosevelt had commissioned to assemble the first comprehensive U.S. library of the world’s technology to aid America’s World War II industrial planning programs. The consortium’s first project was to seek labor cost savings from the pooled production of an online database to eliminate the need for the printed library card catalog. OCLC would mount each member library’s bibliographic data on one huge, shared online database connected through a dedicated telecommunications network to every member. This first application brought significant savings in library staffing almost immediately upon becoming operative. OCLC’s service was responsible for the eventual disappearance of the old, manual card catalog from all but the smallest libraries. A single, giant computer system in Dublin holds one shared data file for each book, magazine, or other information piece owned by its members. Each member library is assigned its own holding symbol to the one ‘‘electronic card file’’ in Dublin for each item in its collection. This eliminates the duplication of any publication by all OCLC members. In other words, the OCLC file needs to contain only one record for Agatha Christie’s ‘‘Mousetrap’’ in order to be accessed locally by all of the member libraries whose holding symbol means that they own that book!

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Kilgour’s successors over the years, notably Rowland C. W. Brown, have expanded OCLC’s offerings to include the highly efficient interlibrary loan services (ILL), full-text online storage and delivery, electronic publishing, and a growing range of online search services through both OCLC’s proprietary network and the Internet. In 1988 OCLC acquired the Forest Press, publisher of the Dewey Decimal System. By 2002 its membership included almost 41,000 libraries in 82 countries. OCLC’s annual operations have never been in the red since its founding. And the revenues of this nonprofit membership organization have grown every year to fund advanced online services. Throughout its history, OCLC’s guiding mission statement has held true from the outset, emphasizing its market-oriented and user-based mission: The purpose or purposes for which this Corporation is formed are to establish, maintain and operate a computerized library network and to promote the evolution of library use, of libraries themselves, and of librarianship, and to provide processes and products for the benefit of library users and libraries, including such objectives as increasing availability of library resources to individual library patrons and reducing rate-of-rise of library per-unit costs, all for the fundamental purpose of furthering ease of access to and use of the ever-expanding body of worldwide scientific, literary and educational knowledge and information.

A New Commissioner’s Mission Change and Challenge for Revitalizing the Popularity of the U.S. Ladies Professional Golf Tour Ty Votaw joined the Ladies Professional Golf Association as its legal counsel in 1991. In 1999, he was tapped as its Commissioner with the challenge of strengthening the LPGA brand standing. The mission and goals he designed for the next five years were innovative and impressive. And they were working admirably well.4 Votaw quickly started setting a new direction. He changed the strategies of the previous commissioner by ‘‘moving to fewer tournaments played on better courses with higher-quality fields and richer prize purses.’’ He started working more closely with Tim Finchem, the men’s U.S. PGA Commissioner, and also was instrumental in cultivating new international interest and involvement. Votaw’s stated business goals, many of which had been reached over the next five years, were major challenges calling for commitments by all of the LPGA players: TV viewership up 10 percent every year for the next five years; Tournament attendance up 15 percent every year for the next five; Top 90 players must play every event once every four years; and funding of research to determine the perception of LGPA players among the public.’’5

One of his highlights was the ‘‘LPGA Fans First’’ marketing strategy. It included Votaw’s Five Points of Celebrity that he said all players had an obligation to follow.

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Performance: If you play better, you will be more marketable. Relevance: Touch lives through defined personal values. Appearance: Great athletes have physical or personal appeal. Passion: Great athletes play as if they love their game. Approachability: None of the other four matter if you lack this.

Not long before his retirement as Chairman of General Electric, Jack Welch reversed one of his basic and widely known objectives to the surprise of many interested in industry. Throughout his tenure as chairman he had urged his company and division heads to be satisfied with nothing less than position number one or two in their respective industries. He made this a condition of the survival of their unit in GE. While he was speaking at a seminar of outside business and military executives, one of the attendees challenged that position as being too restrictive in terms of growth opportunities. The attendee argued convincingly that it left too little room for expansion of market share. If a business was continually first or second in the defined scope of its industry, was it not severely restricted in new, growing market opportunities within that unit’s defined scope? Subsequently Welch renounced his number one or two requirement and urged more related diversification objectives. This, indeed, opened division executives’ sights to begin coming up with related revenue and profit producing opportunities, including revenues and profits from services, previously included in the original purchase package. MAKE FORECASTS OF SALES, COSTS, AND CAPITAL ADDITIONS THE BASE POINT FOR A REALISTIC MARKETING AND SERVICE PLAN Key Five introduced the concept of the customer-generating cycle. You should establish a planning structure and discipline tailored closely to that cycle of market-positioning strategies. Your reviews of your mission and objectives, current strategy profile, and competitive situation analysis are the inputs for your sales, cost, and investment forecasts for the new plan period. But do not just take the easy route of laying on comfortable growth percentages to the previous year. Make your planning base point the development of scenarios for projections of unit sales and related costs in each of your niche markets. Setting the Cornerstone of the Profit Plan with Sharp Sales and Cost Forecasts of Each Product/Market Segment Stan Vecchi, the granite quarry operator, whose pricing and distribution strategies were briefed earlier in Keys Two and Three, was experiencing growing annual sales with his rock quarrying venture. He had started producing profits during his second year. He felt that his next year’s profit could be significantly

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higher with more working capital and modernizing of quarrying and fabricating equipment. He sought his consultant’s advice in preparing to obtain bank loans for expansion. The two believed they should have a more accurate and definitive sales forecast for starters. The answer was to construct scenarios, and sales and cost forecasts for Vecchi’s four different revenue sources. The first cut of the coming year’s sales assumptions and forecasts is shown in Table 6-1. The estimated unit sales in tons, revenues, and costs were needed for Stan’s first comprehensive cash flow forecast and business plan. Vecchi’s two largest segments were yard wholesalers in seven states and direct sales to contractors. He forecasted tonnages and sales growth only for existing accounts. The past year’s volume for yard sales was raised 15 percent based on Stan’s knowledge of his dealers’ future plans and the building activity in their areas. The overall estimate was considered to be conservative, since Stan would be continuing to seek additional accounts of both major types and wider geographic distribution. Quarry drop-in sales volumes were forecast at the rate of the previous 12 months. Stone needed for the masonry business was estimated at their average long-time level of activity. They expected new jobs to keep coming mainly by word-of-mouth attributed to the father and son’s reputation for high-quality and on-time performance. The combined schedule was the foundation for completing a cash flow projection with the first year to be spread by months. No attempt would be made to be overly precise in varying the forecasts from month to month beyond using last year’s seasonal history. There was an obvious slowdown in the winter months, when working the quarry was most difficult and there was less construction activity in the area. With the completion of the sales forecasts, Stan and the consultant were ready to proceed with the other elements of his marketing and operational planning. Vecchi’s exercise demonstrates an approach that bases operating and financial plans on a specific and definitive scenario of all of a small company’s sources of unit sales, revenues, and costs. It should be the numbers foundation for every business plan. The first time requires a lot of grubby work. But each successive exercise becomes easier, and the process helps sharpen understanding of the forecasting base for a realistic profit plan. Stan’s routine of careful forecasting was just one of many practices he continued to follow that contributed to his fourfold increase in profitable revenues in just 10 years. In the face of fast-growing quarrying competition, he was able to maintain prices at a higher price based on his stone quality and service. He hired a salaried inside salesman and a full-time sales rep on a draw plus commissions to call regularly on his wholesale yard dealers. His profits enabled him to buy 450 acres of land, including the 50 acres he had been leasing originally. This eliminated the previous royalty payments to the former owner with lower net financing costs and increasing equity. Several years later he expanded with the acquisition of another significant quarry in a neighboring state, which gave him a different type of granite in good demand. Stan also upgraded the personnel of his stone masonry division that he

TABLE 6-1.

Sales Assumptions for Vecchi Marketing Plan Annual Sales ($000) Annual Tons Shipped

Total Tons, Next Year

4655

Tons Shipped to Yards: Company A Company B Four Smaller Yards

1000 880 1100

Tons Shipped to Jobs: Contract C Contract D

800 500

Tons Sold at Quarry:

350

Tons for Masonry Jobs: 2 jobs at $4,000 2 jobs at $8,000 1 job at $12,000 1 job at $20,000

Total 459.2

2980 80 95 90–95

262.6 80.0 83.6 99.0

140 104

164.0 112.0 52.0

350

90

31.5

25

45

1.1

1300

4 7 5 9

Stone Inventory Production and Direct Labor Cost: Begining Inventory Ending Inventory Tons shipped to yards Tons shipped to jobs Tons sold at quarry Tons for masonry business Total tons sold Total tons mined and cut

$/Ton

Annual Cost ($000) 200 320

2980 1300 350 25 4655 4535

149.0 145.1

Note: Labor output per man per day ¼ 10 tons Labor cost per ton @ $40 per hour, $320 per day/10 tons ¼ $32 per ton

Additional Costs and Expenses Included in Cash Flow Projections Royalty payments to property owner @ $7.50 to $5.00 per ton Sales commissions and other marketing expense General and administrative expense Taxes, Federal and State Loan and Lease repayments for excavator and pickup truck Capital purchases Start-up costs Owner’s withdrawals

151.2 31.6 6.0 7.2 50.0 42.0 0.0 0.0 14.4

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and his father had been running profitably for some time. As of 2006, he had added a financial administrator and three well-qualified quarry supervisors. CALCULATE ALTERNATIVE ASSUMPTIONS RAPIDLY WITH A COMPUTERIZED PLANNING PROCESS Financial evaluations are required frequently for quickly appraising new strategic options and issues, such as ‘‘fleeting’’ windows of opportunity and serious competitive problems that arise unexpectedly. One rapid-response procedure combines in a computer program the three basic pro forma financial reports for evaluating a prospective new venture: the operating statement, the balance sheet, and its connecting link, the cash flow and application statement. The third form integrates and updates the changing numbers and account balances with the other two and their impact on your cash position. This consolidating tool is referred to as a Summary Financial Preview, an SFP for short. The instantaneous changes in the assumptions and the plan’s financial characteristics

Major Components and Selected Interconnections of an SFP Profit & Loss Statement 1. P&L Pro Forma shows three items affecting cash flow: depreciation, NPAT, and a reduction planned for the receivables level. Post these numbers to the Sources section of the Cash Flow and Application Statement, and adjust the Balance Sheet as shown below. 2. Pro Forma Plan calls for application of the extra cash for an equipment purchase, debt reduction, an inventory increase, and a remainder left from the planned sources. Post these changes in the Balance Sheet as shown. Cash Flow & Application Statement Sources of Cash Flow: $173,000 Balance Sheet Changes: Depreciation Net Profit after Tax Reduce Receivables

31,000 131,000 11,000

Reduce Net Fixed Assets Add to Surplus Account Add to Receivables Account

31,000 þ131,000 þ11,000

Add to Equipment Account Reduce Long-term Debt Increase Inventory Account Increase Cash Account

þ47,000 40,000 þ29,000 þ57,000

Applications of Cash: $173,000 Equipment Purchase Debt Reduction Inventory Increase Cash Retained

47,000 40,000 29,000 57,000

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enable you to test a wide range of refinements rapidly. The abbreviated example in the side bar illustrates the inter-linking. Expedient Application of the SFP to New Alternatives You met Buckeye International, a successful custom molder of plastic parts for the automotive, appliance, and children’s product industries in Key Five. The company was considering the addition of a variety of proprietary plastic lines. The CEO wanted to reduce his company’s hefty dependence on the major automakers by establishing proprietary products under Buckeye’s own brands. The loss of even one huge auto account could severely impact the company’s bottom line. One of numerous options evaluated was entry into top-of-the-line, high-styled indoor and casual outdoor plastic furniture. A venture study team affirmed the compatibility of Buckeye’s current engineering and production processes, conducted market research, and visited the furniture trade shows at High Point, North Carolina. The CEO commissioned furniture drawings by an experienced designer in the home furnishings field. For this project, General Housewares, Inc., was brought in as a marketing partner because of their experience in the product category. A preliminary business plan was developed to evaluate the venture’s feasibility. The new line would utilize existing facilities of the multi-plant molder, and draw heavily on the company’s engineering, operating, and staff support talents in its plastic molding units. Along with definitions of customer benefits and market requirements, the study team developed cash flow projections, cost/ pricing exercises, and breakeven analyses using the following set of assumptions defined by the CEO:






Use existing plant facilities Include overheads and cost of sales for pricing Parent will provide capital at 12 percent interest Seek a return on investment (ROI) of at least 25 percent discounted cash flow Justify ultimate annual revenue of $5 million

Buckeye’s vice president of finance was a dedicated user of the SFP, and supported the Buckeye furniture team’s application of it to five case evaluations. The first four were unsatisfactory because they did not satisfy the ROI target. The fifth case used more aggressive assumptions and came closer. Table 6-2 presents its resulting SFP, which incorporated three key assumptions that the SFP traces.


Initial start-up funds of $43,000 for marketing and design expense would be committed in the start-up year. As production requirements became clearer, another $186,000 of loans would be needed to move into operations.

TABLE 6-2.

Summary Financial Preview—Modern Furniture Project (Case Five) ($000) Start Up

Year One

Year Two

Year Three

Year Four

Year Five

43 0 43 5 48 0 48

380 251 43 86 136 18 68 27 96 0 96

1263 808 70 385 248 25 112 58 54 0 54

2600 1612 7 891 364 45 482 75 406 56 350

3371 2023 2023 1246 404 52 790 48 742 371 371

43

277

381

— — — — 43

43 — — 48 186

— 33 10 84 254

386 54 — 47 23 115 147

504 350 — 57 41 56 —

521 371 — 53 49 48 —

43 — — — — — — 43

277 48 100 50 31 48 — —

381 96 40 65 70 110 — —

385 — 30 88 100 167 — —

503 — 90 40 51 96 226 —

521 — 60 30 44 91 296 —

43

79

259

527

674

809

43 — —

— 31 48

— 101 158

— 202 325

— 253 421

— 297 512

Fixed Assets: Tooling Fixtures and Equipment Less Deprec. and Amortization Net Fixed Assets

— — — —

100 50 0 150

140 115 43 212

170 203 113 260

260 243 210 293

320 273 312 281

TOTAL ASSETS

43

229

471

787

967

Profit and Loss Statement Revenues Less Cost of Sales Less Depreciation and Amortization Gross Margin Less Marketing and Design Expense Less Gen. and Admin. Expense Operating Profit Less Interest on Debt Net Profit Before Tax Less Federal and State Taxes Net Profit After Tax Cash Flow and Application Statement Sources of Cash Flow: Net Profit After Tax Start-Up Expense Depreciation—Tooling Depreciation—Equipment Accounts Payable Increase Loans to Program Applications of Cash: Net Loss Tooling Equipment Inventory Increase Receivables Increase Debt Retired Cash Retained Balance Sheet ASSETS Current Assets: Cash Inventories Accounts Receivable

1090* (continued )

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TABLE 6-2.

continued ($000)

DEBT and EQUITY Total Liabilities: Accounts Payable Other Current Liabilities Long-Term Debt Total Net Worth: Paid-in Capital Surplus TOTAL DEBT and EQUITY

Start Up

Year One

Year Two

Year Three

Year Four

Year Five

43

277

614

876

706

458

—

48

132

247

303

351

43

229 48

482 144

629 90

403 261

107 632

48 229

144 470

90 786

261 967

632 1090*

43

* Differences due to rounding.







Initial furniture inventories over years two and three would require more loans. The sales scenario called for $254,000 and $147,000 in the two years. The cash flow and application section records the dollar flow from the P&L plus borrowings and expected use of the cash, with these items posted to the balance sheet. Case Five projected the start of strong profit in year four. Loans would peak in the third year at an estimated $629,000, then decline to a balance of $107,000 by the end of year five with ROI nearing 25 percent yearly average discounted cash flow.

Judgmental Evaluation and Determination of the Project’s Requirements for Success Concurrently with the SFP projections, market research and other judgmental evaluations were continued. The team comprehensively defined the project’s ‘‘Requirements for Success,’’ which is shown in Table 6-3. Management concluded that the high risks were too great for first, establishing high-style plastic furniture demand, and second, achieving the target ROI. The General Housewares representative on the team concurred. The project was terminated. Ultimately, after pursuing about a half-dozen other proprietary plastics product options, Buckeye’s CEO and senior management concluded that ‘‘the grass was indeed not greener on the other side!’’ They felt that their best strategic course for the foreseeable future was to continue to be diligent about protecting and further growing their profitable positions as custom molders to the auto and appliance industries. The SFP tests had played a significant part in their conclusion.

TABLE 6-3. Requirements for Success of Buckeye Furniture Venture Emphasis of Venture Partners Major Success Factors

Performance Requirements

1. Market-Oriented Business Concept and Focus of All Partners

2. Prolific Design Strength and Innovation

3. Continuing ‘‘Windows’’ to the Markets

BI, Inc.

GH, Inc.

Marketer

a. Clearly defined target markets b. Strong growth prospects c. Compatible and innovative partners d. Modest domestic and foreign competition e. Favorable initial market research f. Realistic entry objectives and ROI potential

***

***

**

a. Innovative design concepts and forms b. Achieve design firsts and awards c. Design transferability —Indoor and outdoor applications —High to medium price points —Households and contract markets d. Avoid decline to commodity status

*

*

**

a. Monitor U.S. and foreign market trends b. Follow life styles and living environments —Mobility of the young —How express individuality —Dwelling constraints and preferences —Barriers and objections to plastics

**

Designer

Achievability of Success Factors? Quite Iffy Mature market with ‘‘Me-Too’’ history Price importrant Demand unclear

***

Fairly Low No partners tested in these markets Will face significant trial and error odds

*

**

*

High BI and GH strong Mktg. partner is active internationally

(continued )

TABLE 6-3.

continued Emphasis of Venture Partners

Major Success Factors

Performance Requirements

BI, Inc.

GH, Inc.

Marketer

4. Strong Sales and Marketing and Achievable Channels Representation

a. Continuing access to essential channels b. Competitive pricing, sales, and marketing c. Growing market-share potential

***

***

*

5. Compatible and Flexible Manufacturing Operations

a. Efficient fit for Buckeye b. High-volume processes and technologies c. Prototyping capabilities at low cost d. Superior economies of scale

***

6. State-of-the-Art Technology

a. Best resins and related components b. State-of-the-art plastics fabrication c. Continuing technology forecasts

***

7. Requisite Financial Resources and ROI

a. Favorable return on investment b. P&L-oriented focus—all partners c. Entry capital available to commit

***

Designer

Achievability of Success Factors? High Three strong mktg. partners

High Very high marks with automotive manufacturers *

**

High BI tracks S-O-T-A plastics regularly Poor Risk Assumptions at high expectation

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KEY SIX: PROFIT PLANNING PROJECTS 1. Establish a Regular Procedure for Your Competitive Situation Analysis. Using your current strategy definition as the reference point, update your understanding of your competitive differentials. Concentrate particularly on your three or four most significant competitive leaders. Reinforce this work with pertinent conclusions from the worksheets of Tables A-3, 1-2, 3-5, and 5-1. 2. Define a Standard Process and Format for Your Business Plan, and Assign Planning Responsibilities. Rate your present approach against the planning problems noted earlier in this chapter, then, develop the planning process, content, and organization that best fit your business.

KEY SEVEN

People Power through Teaming and Empowerment Select, Train, Organize, Manage, Motivate, and Develop Employees Who Complement Your Leadership Style

A game like this makes you trust all those corny-sounding cliches. On paper you may not look as talented or as fast or as strong as your opponent, but if you get guys to buy into a system and fight to the bitter end, you can accomplish incredible things. —Mike Vrabel

The New England Patriots linebacker Mike Vrabel was commenting on one of the most outstanding sports teaming examples since the U.S. hockey team’s win over Russia at Lake Placid in 1980. He made these remarks following the Pats’ astounding, surprise victory over the St. Louis Rams in the NFL’s Superbowl in January 2002. Vrabel probably would have used a similar encore when the Pats repeated in 2004 and again in 2005, and the Boston Red Sox pulled off their first World Series victory since 1918.1 The main managerial challenge for the small-business executive or start-up entrepreneur is to provide leadership that develops people power through strong teaming and empowerment. The leader must build an organization of highly motivated, marketplace-oriented, and infotech-compatible people. This must include employees, outside partners, and advisory associates. The managerial and leadership styles that can do all this profitably are legion. CHALLENGE YOUR OWN MANAGERIAL AND LEADERSHIP STYLE Begin reassessing your leadership and team-building requirement by dissecting and challenging your own philosophy of managing. And do not think you are out of date using traditional, time-proven management styles. Consider the following profile.

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Bob Carlson, Whose Traditional Small Business Models Thrive and Grow Profitably A West Coast entrepreneur has built a successful track record starting and running technology-based enterprises in a variety of niche markets. Bob’s business-to-business companies provide OEMs (original equipment manufacturers) with components for end products ranging from outdoor cooking grills to medical devices. At this reporting, he is still going strong, with combined annual revenues in the high eight figures. His businesses have continued to return comfortable and growing after-tax profits to him and his shareholder associates. Over the years, the total start-up investment from this founder and his partners was barely $100,000! Profits generated from the successful ventures have enabled him to finance his growth and shrug off a few losing ventures without going outside for venture capital. He and his associates have had great fun and gratification for five decades of entrepreneuring. Often their success was due to patient development of new solutions for the existing application problems that other businesses could not solve. Bob has continuously avoided the management fads, instead opting for his own pragmatic, tough-minded style. In a recent candid discussion of his no-frills managerial philosophies, Carlson revealed significant lessons for the small-business entrepreneur. A number of his common sense managerial and leadership approaches do not sound the way some new texts and pundits would put the requirements for small business success:













Start in an industry where your experience and background can be helpful, don’t dwell on what you can do. Rather, dwell on what that market needs. Don’t waste time on a career plan, or a long-range plan, or position guides, ‘‘they’re a waste.’’ Seek a marketable idea, explore and reject or develop it and get it running. Then go on to the next idea. Don’t force a new venture, no matter how novel or brilliant the idea may seem to its conceiver. To explore it, go to prospective customers to learn their applications and requirements. Accelerate this discovery process by going to where customers conveniently cluster for you—to their trade shows and conventions. It is considerably less expensive than engaging a market research firm, and you are more assured of getting a first-hand feel for the consumer’s needs. Pick your associates for their intelligence, know how, and evidence that they are achievers. Then shepherd them through their learning phase if it is in a new niche that is unfamiliar to them. Don’t degrade them with negatives as they develop, and do not force them to do the impossible. In your financial support of new and established ventures, be chintzy, not a spendthrift. Also, with an outstanding proposition, seek partnering support from a key customer.

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Don’t shy away from an attractive market where ten others have failed. If you have the relevant expertise, recognize and understand the user’s needs, and conclude that it makes sense if done right, then go for it. If you have false or failing ventures (Sanders had only two over the years) do not hide behind a bankruptcy. Pay your suppliers and customers; do not ever leave them in the lurch or holding the bag. Don’t stay with anything you won’t have fun doing!

Small-business entrepreneuring succeeds or fails through countless differing managerial styles and philosophies. Management is a highly personalized phenomenon that can work in many ways. There probably will never be an end to managerial and leadership experimentation. However, many of the traditional, tried and true managerial philosophies, such as that of Bob Carlson, will survive. Jim Collins One of the most widely heralded contemporary styles is revealed in the findings of Jim Collins and his team. Collins’ work is reported in Good To Great, selling more than three million copies through 2005. His study-set was large corporations, but the implications and lessons are universal. They also apply to the smallest enterprises that aspire to be great. Be inspired and challenged by his opening sentence, ‘‘Good is the enemy of great.’’ Consider just a few of his insights, and then read the book.2







The best leadership is self-effacing, quiet, reserved, shy, a blend of personal humility and professional will. First who—then what. Get the right people on the bus, the wrong people off, the right people in the right seats. Then decide where to go. Confront the brutal facts. Maintain unwavering faith that you can and will prevail, but with the discipline to confront the brutal facts of your current reality. Transcend the curse of incompetence. Your core business, no matter how long pursued, must be the best in the world. If not, replace (refresh) it with the three rings: what you are deeply passionate about; what you can be the best in the world at; and what drives your economic engine.

Read about business executives who have performed outstandingly as CEOs or line managers. Get inspiration from those who began in a barn, old chicken coop or basement, the likes of Michael Dell, Bill Gates, and the founders of Hewlett-Packard. Scan the press or visit with successful leaders in different walks of life to discover style features that you might add to or subtract from your own. Here are a few more samples of diverse approaches that have worked.

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Ronald Reagan Surround yourself with the best people you can find, then delegate, and do not interfere. This worked well throughout his life, with very few exceptions. One example was his approach with Iran Contra where hindsight says he should have added ‘‘but don’t quit watching and listening!’’ Perhaps his greatest asset was his inspirational and motivational power with people. John Burgoyne: A British Revolutionary General’s ‘‘Enlightened’’ Concept of Leadership in War In 1777, British General John Burgoyne is best remembered for leading a force of British, Canadians, Germans, and American Indians in an unsuccessful invasion from Canada against the American ‘‘rebels.’’ After taking over Fort Ticonderoga, he was defeated decisively at Saratoga by the American force under General Gates. Some years earlier, prior to assisting Portugal in its war with Spain in 1762, Burgoyne was known by his men as Gentleman Johnny, noted for giving outstanding leadership instructions to his junior officers in Burgoyne’s Light Horse. Even though he was defeated at Saratoga by factors other than leadership, his approach had been successful throughout his prior career. It was a style of generating rapport, respect, trust, and guidance that still can be most effective in the right situations. ‘‘Telling his junior officers that they should regard his instructions as the advice of a friend rather than as commands, he urged them to mingle and occasionally joke with the men in the ranks. In a total reversal of common practice, he suggested that the enforcement of discipline by flogging could be minimized if officers treated enlisted men as ‘thinking beings’ rather than spaniels ‘trained by the stick,’ and to avoid cursing them for mistakes. He urged his officers to read books about their profession, ‘write English with swiftness and accuracy,’ study mathematics, learn French (in which the best treatises on tactics were written), practice drawing, and get the hang of measuring distances by eye. And in what must have raised eyebrows in every regiment in the army, he advised them to learn the work of their grooms—‘‘to accouter and bridle a horse themselves until they are thoroughly acquainted with the use of each strap and buckle.’’3 Colin Powell Oren Harari, writing in Modern Maturity, listed Powell’s seven laws of power. For a fuller insight into his career of successful leadership, read his biography.4 Abraham Lincoln: Political Genius in Managing His Confrontational Cabinet Secretaries5 Our sixteenth president was a long shot to win, ranked fifth behind four contenders. From the start of his presidency, he began to show the political

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Colin Powell’s Seven Laws of Power 1. 2. 3. 4. 5. 6. 7.

Dare to be the skunk To get the real dirt, head for the trenches Share the power Know when to ignore your advisors Develop selective amnesia Come up for air Declare victory and quit

acumen that later caused many to regard him as the greatest world leader of the nineteenth century. He assembled a team of rivals to head his cabinets. At the outset, several secretaries hated each other and none admired or had confidence in him. He had planned the confrontational mix to assure stimulation of as many viewpoints and challenges of an issue as possible before reaching his own conclusion and decision. In small groups, Lincoln evoked universal appeal as a story teller and humorist, and also was a great listener. He never signed off on individual proposals of his cabinet members unless he was convinced that the American public or Congress was well prepared to accept the wisdom of his proposition. When convinced of his position he did not need consensus. But he also moved diplomatically, finding praise and ingenious ways to soften the ire of his antagonists. Most of the time he managed to restore or keep harmony among his key associates. His emphasis on inviting intellectual competition can play well in business management and leadership. Another Set of Style Definitions Table 7-1 outlines five more divergent types of leadership and management techniques of successful CEOs featuring strategy, human assets, expertise, box, or change. Study these definitions and the preceding leadership summaries. Judge how closely any combinations of such traits could match and complement your own skills, emphasis, and preferences. If you are not completely comfortable with your own approach, try mixing and matching desirable elements, and consider challenges to your own modus operandi. You may prefer a model expressed as tersely as Jack Braitmayer’s. Whichever concept and approach you prefer, make no change if it already works quite well. Use it consistently as your ‘‘people model.’’ Hire, train, and develop managers who can work effectively with your style, and who will be strong and forthright in voicing and debating their contrary convictions with you. Again, always seek key people with a marketplace orientation and an affinity for the advancing infotech tools.

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Leadership Techniques of CEOs

Style

Description

Preferred Personnel Style

The Strategy Approach

Create, test, design and implement long-range strategy. Focus on allocation of resources and optimal direction

CEO values employees to whom they can delegate day-to-day operations; and who have finely-tuned analytical planning skills.

The Human-Assets Approach

Closely manage the growth and development of individuals. Delegate strategy formulation to the business units.

CEO values long-term employees with ‘‘company-way’’ behavior, as opposed to so-called mavericks.

The Expertise Approach

Select and disseminate an area of expertise that will be a source of competitive advantage.

CEO hires people trained in the expertise, and also those who have flexible minds, lack biases, and demonstrate willingness to be immersed in the expertise.

The Box Approach

CEO creates, communicates, and monitors an explicit set of controlsfinancial, cultural, or both-that ensures uniform, predictable behaviors and experiences for customers and employees.

CEO favors seniority in the organization, promoting people with long experience, and rarely hiring top executives from outside.

The Change Approach

CEO creates an environment of continual re-invention, even if it produces anxiety and confusion, and can lead to strategic mistakes and temporary financial slippages.

CEO wants aggressive and independent people who view their jobs not as entitlements, but advancement opportunities to ‘‘seize’’ the day.

Source: Farkas and Wetlaufer, ‘‘The Way Chief Executive Officers Lead,’’ Harvard Business Review, May/ June 1996.

FIGHT DILIGENTLY TO REDUCE MANAGERIAL WORKLOAD FROM ITS OUTSET A pervasive contributor to the failure of a start-up or early-stage small business is the plague of managerial overload. Most of the time it calls for aggressive action to restructure your work routine so you can focus your time and attention on your principal managerial requirements. Two sets of changes promise the greatest relief from suffocating workloads. Both require working smarter. The simpler one is to clear your desk and your calendar by assigning more productive administrative tasks to others. The other is the much trickier process of delegating, empowering, and teaming. This, of course, not only helps the workload but also develops stronger associates.

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Re-organizing the ‘‘In-the-Office’’ Administrative Tasks Reginald Olmstead had been running a small, urban renovation business in a metropolitan area for about five years, and was a superior on-the-job manager. Through word-of-mouth he had the good fortune of an abundance of ready work. He was a positive motivator, and a sleeves-rolled-up boss who was happiest when working alongside his employees and associates. He was an excellent judge and trainer of people and had a fine sense of which employees made the best job bosses. All this resulted in very low workforce turnover. With business continuing to grow and thrive year-round, Reg found himself more and more over-burdened with the general office details of a one-man management show that was reducing his time supervising and working jobs at his clients’ locations. He sought consulting advice on how to accomplish better balance and work smarter. His initial concern was an expressed guilt and resentment that the office demands took so much time away from working at his projects. He had three competent lead renovators, and excellent relationships with specialists and subcontractors skilled in wall painting and decorating, plumbing installations, kitchen countertops, and unusual design approaches. However, he had a chaotic approach to the office side. Reg retained a consultant to address his ‘‘office nightmare,’’ with a number of areas crying for attention. The consultant first persuaded Reg that his CEO responsibility required him to perform inside management work ‘‘free from guilt,’’ but he could only hope to spend more client time with higher office productivity. So the first reorganizing steps were a wall display board that unified prospect, job, and subcontractor scheduling, and finding a temporary computer programmer to set up reliable accounting and finance records, reports and routines. Programs were initiated to utilize job cost and price history for bid development. And a search located a new

Reg Olmstead’s ‘‘Wish-Not’’ List of Office Nightmares









Sloppy scheduling of prospects, bids, accepted jobs, and subcontractors: scraps and piles of paper contained requests for job bids not yet acted on; bids developed from prospect visits, but not worked up; new jobs ahead; and subcontractor arrangements. He kept no master schedule for all this Flawed accounting records: limited help from his accountant; a self-installed QuickBooks Pro system with inconsistencies and gaps; no tailored chart of accounts Cash flow status: uncertain cash position, no cash flow projection or balance sheet Job cost and profit analyses: not taking advantage of the records of jobs, manpower required, and materials used; largely intuitive bid development

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accountant. The office operating improvements rapidly began to free him for more time on client work. They also assured his faster response to his bread and butter—outstanding bid requests. Slowing Diversification and Spreading Management Responsibility to Reduce Overload Dennis Smith is the founder and sole owner of Hospitality Properties, which operates six related business segments. He began with one small enterprise while still in college and grew through acquisitions. By the early 2000s his properties included:






the Marina restaurant of 150 seats with a 25-mile boating range on a fun river a boat marina with 80 seasonal slips a 25-room motel owned for 15 years in a nearby town, plus three rental houses a catering service for local businesses and weddings a tavern of 40 seats, and a deli of 48 inside and 48 patio seats (owned for two-and-one-half years on a state highway through a busy shopping center)

Dennis was always looking for additional enterprises, and had begun negotiating on two related acquisitions, a banquet service and a restaurant. At the same time, he was beginning to feel spread too thin to maintain adequate direction of all segments. He was also concerned about profitability of his food service units. Dennis had never designated a second in command. Nor had he delegated significant responsibilities and accountability to lead supervisors for any of the enterprise’s segments. He reviewed his current situation with a consultant, and the two men concluded that he should step back and take a more detached look at the varying managerial demands and his personal workloads for each business. The consultant proposed that Dennis rank each business for growth and profitability, comparing performance data, investment and ROI, numbers of employees, supervisory requirements, managerial potential of his key supervisory people, and his personal ‘‘fun-to-manage’’ preferences. The summary think piece for this evaluation is illustrated in Figure 7-1. It focused his review on three key dimensions of the six businesses: each current situation and its future growth and profit potential; the talents of his people and the supervision requirement; and where he expected to have the most fun with his direct involvement. Due to Dennis’s intimate familiarity with all of his businesses, the wheel approach quickly gave him the perspective he needed. The most important of his initial reorganizing actions were the following: 1. He put negotiations for the two possible acquisitions on indefinite hold. 2. He empowered his most senior associate with responsibility for all food and beverage operations.

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FIGURE 7-1. Diversification and Empowerment Planning Wheel

3. He obtained a point-of-sale register for the restaurant, which immediately sped up waitresses’ services and increased the accuracy of billing his patrons. The computer system enabled much more efficient management of all of the company’s acquisitions and inventorying of food and beverage. 4. He initiated an analysis of the tavern and deli segments, which he later divested. Dennis told the consultant, ‘‘That Wheel technique really made my day! Many thanks for the simplified tool. It helped me re-establish perspective on where I should be heading and spending my time. I have ranked the Marina restaurant, #1; then marina slips, #2; motel and house rentals, #3; and catering, #4.’’ He was most pleased with the initial empowerment step he had taken. It relieved his workload appreciably and set a foundation for his continuing growth and profitability. A Contemporary Guide for Outstanding Work Habits and Managing A regular, periodic feature of Investors Business Daily, ‘‘IBD’s Ten Secrets To Success,’’ explores basic managerial guidelines. This important daily publication

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IBD’s Ten Secrets to Success 1. How You Think Is Everything: Always be positive. Think success, not failure. Beware of a negative environment. 2. Decide Upon Your True Dreams and Goals: Write down your specific goals and develop a plan to reach them. 3. Take Action: Goals are nothing without action. Do not be afraid to get started now. Just do it. 4. Never Stop Learning: Go back to school or read books. Get training and acquire skills. 5. Be Persistent and Work Hard : Success is a marathon, not a sprint. Never give up. 6. Learn to Analyze Details: Get all the facts, all the input. Learn from your mistakes. 7. Focus Your Time and Money : Do not let other people or things distract you. 8. Do Not Be Afraid to Innovate; Be Different : Following the herd is a sure way to mediocrity. 9. Deal and Communicate with People Effectively : No person is an island. Learn to understand and motivate others. 10. Be Honest and Dependable; Take Responsibility : Otherwise, Numbers 1–9 will not matter.

for the investment and financial community and industry leaders has run this stimulating column on the elusive art of managing for several years. IBD presents one or another of the Secrets periodically, accompanied by a relevant article on that subject.6 Every IBD presentation treats some new aspect of managing. Topics covered include sage advice from the pioneers of industry, or timely dissertations on progressive practices that work. Reading time is five minutes or so. Thinking time that is stimulated by the features can be longer as you apply the pragmatic lesson to your own managerial style or your business processes.

MAINTAIN FRONT-LINE SUPERVISION FOR PRODUCTIVITY IMPROVEMENT AND COST CONTROL Operating problems often have their roots in faulty supervision. It may be assuming that bright, congenial workers don’t need a straw boss and costs can be cut. Another frequent flaw is to mismatch the supervisor and his supervisory style with the production process and crew. Or, the boss may be distracted by too much success with his long suit, selling.

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Profitable Decentralization of Job Control to Cope with Business Growth A contractor who owned Suburban Modular Home Builders, sold and assembled high-quality, custom-designed homes from modules fabricated in factories. This was a relatively small, specialized, and high-priced niche market, not in competition with the much larger, lower-priced, and much more standardized manufactured homes industry. Suburban’s module supplier, a major midwestern manufacturer, constructed modules cubed as large as 65 by 13 by 14 feet to the unique specifications of each buyer. This was the largest module size that could be transported to the site on a flatbed trailer over the U.S. interstate highway system. Kitchen and bathroom installations, piping, and electrical wiring were built into the modules at a highly productive, controlled-climate factory. Before shipment, independent inspectors at the plant always signed off on adherence to stringent production standards and building codes of the ultimate state destination. Suburban did all of the site planning, clearing, foundations, and utility lines and feeds preparatory to receiving the modules. The factory crew delivered, stacked, fitted them together, and roofed them over on the site in a day or two. The contractor’s crew and local subcontractors then completed all plumbing, heating, and utilities connections to the local outside service lines. Then they finished the carpentry, painting, and decorating, and completed the punch lists. Suburban was erecting from five to eight custom-designed, single- and multistory homes per year ranging in size from 2,500 to 10,000 square feet. The number of modules would vary from three or four to as many as eight or ten per home. One large job had sixteen custom-designed modules. Many sales ran into high six figures, with 80 percent of the selling price going to the modular manufacturer. Following a factory down payment when the order was placed, the manufacturer received his balance on delivery of the modules to the site. With only 20 percent of the sell price to work with, the risk of profitability was clearly on the contractor’s shoulders. The owner, a superb salesman, personally did all selling and custom design liaison with the buyers. He prepared all bids, negotiated with the factory, and ran the site-preparation and construction operations. He rarely lost a sale. Initially, with only one or two projects going at once, the owner functioned quite effectively as the local boss of each site. Eventually, with his sales successes, six or eight separate projects were in bid or being completed simultaneously. To keep costs down, he kept supervising all jobs himself without resorting to individual site foremen. Cost overruns and quality control often were problems. It soon became apparent that he should make a lead carpenter the responsible job supervisor at each location. As his growth continued, he had an opportunity to merge with another contractor. The new partner was a seasoned builder, superb at costing and pricing custom bids, and the entire financial and operational control

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functions. He was not interested in selling, but was an outstanding production manager. The business continued to thrive and grow profitably with clearlydelegated and assigned local control. A Mis-Match of Production Crew and Supervisor An entrepreneur was confronted with significant losses with one of his investments. VanityWare Products was a small fabricator of a line of high-quality, molded plastic, marbleized countertops for bathroom vanities and kitchen counters. Their principal applications were in single-family residences, new apartments, hotel complexes, and commercial buildings. The previous owner had commissioned installation of the production setup to an independent factory system specialist.7 Soon after acquiring VanityWare, the new owner brought in a new general manager who had been a highly successful sales executive with a major paper company. In a very short time, he established a large order base from the commercial and apartment house markets. Sales clearly were no problem. However, losses continued because of a high rate of rejections and missed order delivery dates. Production output was substantially below the plant’s rated capacity. The productivity claims of the factory-systems vendor were not being achieved. After sustained losses and no satisfactory guidance from the designer, the owner sought outside technical and plant engineering help without success. He then turned to a consultant for guidance. After visiting the original system provider, the consultant could not attribute the problems to technology, raw materials, or the production layout. He considered the main issues to reside with supervision of the work crew, plant scheduling, and overall management. Managerial improvements were made in the production flow, scheduling of longer same-product runs, tighter monitoring of order processing and shipment scheduling, and production-control procedures. The plant supervisor was a relative of the general manager. His previous experience had been mainly in social work, and he was not comfortable with the rough-and-tumble day-to-day requirements of the production operation or types of workers. The supervisor’s style and temperament did not fit the ‘‘tough’’ direction required to keep the line moving. He was counseled to use a more authoritative approach to leading the production crew. The company’s performance did not improve fast enough to stop the bleeding, and the business was sold to a company with the requisite experience. They changed management and supervision and soon started turning the business around. Front-line supervisors of the right type are essential for meeting costs and assuring quality of the finished product whenever management cannot devote significant face-to-face time and attention to the operation. Neglecting on-the-job supervision is penny-wise. Price its cost into your bids.

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USE ORGANIZATION STRUCTURE FOR DIRECTION, DISCIPLINE, AND FUNCTIONAL EXCELLENCE One of Jim Collins’ prime measures of success was ‘‘the culture of discipline. If you could accomplish disciplined people, disciplined thought, and disciplined action, you would not need an organizational hierarchy, bureaucracy, or excessive controls.’’8 You might avoid internal politics, selfish motivations, functional silos, and rejection of not-invented-here ideas. Collins’ concept of a culture of discipline is not the autocrat, but rather, the self-discipline instilled in all players. This is also an admirable goal for the small business, but not easily achieved, and certainly not by the start-up just out of the chute. As a small business grows to double-digit personnel and beyond, a well-conceived organization structure becomes a must as long as it does not erect high walls or functional silos, or become an inflexible strait jacket. If positive teaming among levels and functions prevail, it can provide key disciplines and other advantages beyond reduction of managerial overload:










Clearer definition and performance of all players’ roles and responsibilities Minimal or negligible duplication of effort Maximum manageable span of control and fewer managerial layers leading to:
cost savings from fewer managers and supervisors
faster and more accurate communication of critical information
stretching the seasoning and capabilities of managers
closer top-level understanding of what is happening on the front line Sharper tracking of trends among consumers, competitors, and technology More diverse points for identifying innovative opportunities Increased power of deeper functional specialization Clean separation of decentralized line operations and profit centers

Most of these points speak for themselves. One that deserves elaboration is the potential power of specialization that can be a particular advantage in sales, marketing, and application planning. Look for opportunities to specialize these functions when your offerings can be applied competitively to varying requirements of different markets and you can afford to field two or more sales representatives. Specialized selling, marketing, and customer services for discrete customer categories or classes of business deepen your sales and service expertise. Salesmen and application specialists with niche assignments understand your customers’ problems better. They can talk their language, think through the applications more deeply from the users’ perspective, and discover new benefits waiting to be built into your offerings. A specialization program undertaken by IBM some years ago demonstrates application specialization power at its highest level. IBM’s giant scale cannot be

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applied in depth to the small-business situation. However, the small company can adopt this powerful principle when growing from one market category into multiple applications. In the early 1960s, IBM had a Data Processing Division of 25,000 employees with sole responsibility for marketing computer systems and peripherals throughout the United States. This division performed all sales, marketing, application systems planning, customer service, and sales administration functions. It operated domestically through a hierarchy of regions, down to districts, then to 105 branches assigned mainly on a geographic basis. Within the branches, individual sales territories were also geographic assignments, except in some of the larger markets where some of a branch’s territories were specialized by industry niches. The DPD management decided they should take more powerful advantage of their overwhelming critical mass by specializing the field organization along niche industry lines. The strategy was implemented fully in the 20 largest metropolitan market areas that contained 70 percent of IBM’s domestic sales revenue and potential. Each major area encompassed a 50-mile radius from the city center. This was the furthest distance that IBM management wanted a salesman, customer service person, or systems engineer to have to travel in order to respond quickly to customers’ calls for help. Branches in the remainder of the country that covered the other 30 percent of sales were left largely geographic, but specialized industry territories were retained where the cluster in a branch was large enough to support an industry territory. The 20 geographic branches in the New York City metropolitan area, for example, were reorganized into industry-specialized branches. Branch personnel and assignments were regrouped separately for banking, insurance, retailing, education, government, manufacturing, petroleum processing, and other industry groupings. The division headquarters in White Plains, New York, established 15 industry-marketing departments to provide staff support and niche planning to their counterpart industries in the field. Admitting the uniqueness of IBM’s immense scale of operations, power gained from niching can be harnessed by the small business. It does not require field organizational units, such as branches or districts. A small company can specialize by the individual sales person. This enables deeper focus and communication on the unique needs of a homogeneous set of customers. The initial focus may be largely concentrated on one niche, with additional niching introduced as the company grows. Whatever scale is applied, the discipline helps avoid the contrary approach of ‘‘trying to be all things to all people.’’ TEAM AND EMPOWER TO SPREAD WORKLOAD AND FOSTER MULTI-FUNCTIONAL COOPERATION The nomenclature of empowerment is much, much newer than the actual practice. Decentralization of authority and responsibility date back to the earliest

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establishment of departments and divisions designed to alleviate spans of control, establish profit centers, and accelerate the development of senior executives. Over the past several decades, heightened attention has been given to these ‘‘new’’ organizational concepts. There has been much criticism that they have gone too far. Using epowerment in its broadest sense, operational employees are given the authority to make and carry out significant decisions without approval or interference by higher management. Among the aims of these organizational approaches are to:






Develop future senior managers by delegating responsibility and accountability for revenue and profit-center results Obtain sharper specialization and concentration in managing product lines, discrete services, market segments, or key functions Foster brainstorming and innovation ‘‘out-of-the-box’’ with fresh leadership closer to the front lines of the business Provide expanded career paths to retain the allegiances of valued associates Disperse and alleviate a growing top management and communications burden, but only if the foregoing empowerments work

Selective Application of Teaming and Empowerment Concepts The AES Corporation is a major global electricity and technology company based in Arlington, Virginia. The company and its subsidiaries generate and distribute electricity through operating organizations in 27 countries. AES represents an illuminating example of taking a pioneering, but cautious, phased approach with empowerment. Although they are one of the largest power utilities, their experience is valid for the small firm, because they have learned how to apply it selectively to units of all sizes, including quite small operating entities.9 AES’s empowerment concept has worked best where they have created a climate of shared values and principles, particularly those of fairness, integrity, social responsibility, and fun. The fun derives from being ‘‘fully engaged with total decision responsibility and accountability daily.’’ The highlights in the sidebar are key to their successful application of the strategy. For effective empowerment, it is critical to hire the right people, those with no fear of ambiguity or decision making, and to keep communicating broadly throughout the organization. In AES, the aim is to ‘‘reinvent capitalism at all levels around a sense of mission and contribution to society.’’ The role of the CEO and leaders is to be:





Advisors Chief guardians of the empowerment principles Chief accountability officers Chief encouragers

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Characteristics of AES’s Empowerment System











Fewer organizational layers, no hierarchy, and little staff in selected areas Combined operations and maintenance teams No human resources department Only one of each type of specialist—two could be a disaster Job rotation to develop generalists Try to reinvent the wheel Compensation based half on technical factors, and half on cultural values Free and frequent information flow with few secrets Limited or no approval processes O.K. to make and ‘‘own up to’’ mistakes

Empowerment should be applicable to businesses of almost any size, except that on AES’s scale it is not likely to be appropriate for the very smallest and youngest enterprises. As with most newly popularized managerial fashions or fads, teaming and empowerment frequently has been overdone. Criticisms of its application include: ‘‘You can’t replace strong, singular authority with group or committee action.’’ ‘‘It’s highly risky to cut loose from the experienced judgment of the senior executives.’’ ‘‘Exposure to immature or faulty judgments can be costly.’’ ‘‘We’re losing the ‘big picture’ of our industry.’’ Major requirements for success of the decentralizing ventures should include those shown in the sidebar. Make Empowerment Work with Strong Risk/Reward Incentives, Enlightened Supervision, and Even-Handed Management Control One of the sharpest motivators of people power is accomplished with risk/ reward incentives. The delegation of responsibility and accountability creates Teaming and Empowering Guidelines








Start modestly by picking the most likely venue with great care and caution. Choose participants astutely, and monitor them vigilantly in the early stages of the decentralization. Carefully construct the scope and decision-making ground rules for the team’s authority at the outset. Maintain strong, continuing communication among all participants and their mentors on a broad ‘‘need to know’’ scale. Establish internal computer networking of the team to foster communication, exchange decision alternatives, and finalize approval of actions. Conduct both scheduled and surprise progress reviews with senior managers. Take great care to avoid negative responses to any but the most potentially disastrous propositions.

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more centers of motivational opportunities in the firm for the leaders and team players. The involved employees are converted into more powerful result producers. However, risk/reward will not carry the load alone. The CEO must cover all operating and staff functions with strong supervisory direction and control, and exert similar attention and intensity with independent contractors and outside consultants. Many forces and factors compete aggressively for the time and attention of the entrepreneur or small business leader who is confronted with limited resources and managerial overload. Numerous factors can critically threaten performance of the supervisory function. The authority to control begins as a given, and as an accepted part of the role of the CEO, senior manager, or lead entrepreneur. It comes as a part of the boss’s territorial imperative. However, the executive who does not delegate misses the added control power that the management role provides. Elements of control are implicitly or explicitly coupled with leadership and direction at each organizational level. The negative implications of the control responsibility are the smallest part of the game. The positive elements of managerial control begin with a wellarticulated purpose of the company that is clear to all concerned. It extends into and through every clearly delineated strategy and every function and requirement of the enterprise. Consider what each element shown in Table 7-2 contributes to positive control in your own company. Are any of your programs and policies counter-productive to control by their absence, or by the fuzziness of their execution? What are your strongest control practices? What aspects fall through the cracks most often and why? What problems of managing could you alleviate by changes in your approach to any of the elements? What are the strongest and most effective features of your own control style?

Factors Inhibiting Effective Supervision and direction







When the top person is an outstanding sales producer and that is his or her main, if not all-consuming, interest to the neglect of other responsibilities When supervisors’ experience, expertise, and leadership personality do not match their supervisory work units When the firm staffs up with inexperienced people, and suffers high labor turnover When the leader does not feel he or she can afford the cash outlay for full-time job supervision, and assumes all projects can be managed adequately When the direct and overhead costs built into bid prices make the gross margin too thin to cover likely contingencies When the CEO fails to get timely financial, accounting, cash flow status reports, and departmental or project performance measures against plan

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TABLE 7-2.

199

Critical Elements of a Sound Managerial and Control Plan

Rate your performance in each factor as S ¼ strong; W ¼ weak; or N ¼ not practiced —Clear Missions, Objectives and Goals: Communicate need-to-know fully, so that everyone understands what the company is aiming to accomplish. —Outstanding People: Hire and train the best, and make clear assignments with no ambivalence or misunderstanding about what performance is expected. —Inspiring Leadership, Direction, and Supervision: Motivate strongly to spur great accomplishments in an atmosphere of challenge and mutual respect. —A Well-Understood Business Plan: Provide specific knowledge of the action game plan and each function’s role and goals in it. —First-Hand Contacts (Regular and Impromptu): Charge all managers to keep attuned to front-line progress, identify problems early, and encourage employee’s feedback. —Timely Measurement and Analysis: Quickly identify areas of under-performance against plan; stay alert for productivity and cost-savings opportunities. —Clear Risk/Reward Policies: Encourage individual excellence and initiative, and clarify the rewards for outstanding achievements and penalties of poor performance. —Strong Allegiances and Belonging: Emphasize personal development programs and empowerment assignments; create new career opportunities. —Ongoing Customer Contact: Keep tracking customers’ needs, not settling for what management thinks they want; clarify how each function can contribute to customer satisfaction; stay alert for mismatching of offerings and users’ needs. —Impeccable Ethical Behavior: Assure fully responsible and superior business ethics in all policies, practices, and performance of your employees and partners.

Take a moment to rate yourself and your firm’s managerial style as strong or weak against the ten elements in the table. Everyone can contribute to a sound managerial, leadership, and control culture in your company. Then develop a plan of action to make your company the very best place for your key people to work. Begin with an assessment of your current practices and performance with business ethics issues. Establish and Maintain an Impeccable Standard of Business Ethics Throughout Your Company A highly ethical and responsible senior executive once said ‘‘The horrendous plights of the Enrons and World.coms can’t happen if your legal staff and outside legal counsel are doing their jobs continuously.’’ Wrong! This is not just a lawyer issue. It should be an essential responsibility and requirement of every function both inside the firm and with your partners and other outside associates. And the buck goes all the way up to the CEO and the board of directors. Properly and continuously monitored, a business ethics program becomes one of the most important preventive and control elements of Table 7-2.

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The 1947/1948 MBA candidates at the Harvard Business School grappled in depth with the price-fixing scandals of the day and other much larger ethics issues. The subject had been in the curriculum since the school’s founding in 1907, but some graduates through the years still didn’t get the word. HBS’s current required course is ‘‘Leadership and Corporate Accountability.’’10 It’s aim is to prepare business leaders to play a crucial role in society that:





Delivers strong financial results for investors Superior goods and services for customers Attractive work environments for employees Innovative ideas for the future

At the same time, future business leaders are challenged to:




Observe the laws of the countries in which they operate Respect society’s ethical standards Contribute to the communities of which they are a part

The school’s present interdisciplinary course uses cases in economics, law, psychology, and organizational behavior. Students must grapple with the legal, ethical, and economic responsibilities of corporate leadership, the elements of organizational accountability, and the interfaces between personal values and responsible leadership. The cases confront students with:




Choices or dilemmas in dealing with the company’s core constituents: investors, customers, suppliers, and the public Issues of organizational design and government, for example, incentives, planning systems, and performance measures Personal choices or dilemmas, such as when individual values collide with those of a boss or a company

An increasing number of large and small companies have begun to require formal annual reviews and sign-offs on business ethics. They certify their decision makers, managerial and supervisory personnel, or even all employees. Often the subject is an essential element of the company’s training and personnel development activities. CHALLENGE YOUR HR LEADER TO SPEARHEAD STATE-OF-THE-ART STAFFING, TRAINING, AND PERSONNEL DEVELOPMENT Unlike physical assets, you risk losing your human assets as they leave at the end of each day. —21st Century Infotech CEO

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Fundamental forces have been counter-influences on the loyalty of key employees to their corporations. They include downsizing in the 1990s with the hope for higher productivity; increasing uncertainties about the adequacy and even survival of corporate retirement plans; almost universal loss of lifetime corporate ‘‘entitlement rights’’; executive recruiters chipping away at key talent; desire of yuppies to do their own thing; and exciting new opportunities in infotech. Tackling and beating such contrary forces is a formidable assignment. One beginning approach is to assure that all of your employees and associates understand and are challenged by the requirements for success in your company and industry. Offer this as a positive challenge in which each of them can participate to enhance their career opportunities with you. Consider the enlightened programs undertaken by a long-established company. Training a Workforce in the Dynamics and Economics of Its Company and Industry Outokumpu American Brass, of Buffalo, New York, is a 100-year-old copper and brass rolling mill, and a subsidiary of a Finnish mining and metals conglomerate. In the 1990s sales were declining and the plant was experiencing disturbing labor unrest. One of management’s best remedies was the inauguration of a crash course in the economic and financial basics of the brass industry.11 The Cornell University School of Industrial and Labor Relations was commissioned to run the program, bringing in their own and outside experts to cover a broad array of pertinent background subjects. Over several years the periodic classes began to give the employees a full understanding of the external forces that would make or break the company. Many employees had not even known where their diverse line of products went after leaving the plant. The program has been highly successful in clarifying the markets and requirements for success in their industry, raising the productivity of the workforce significantly, and re-establishing sales growth and profitability. As of early 2001 the company was still holding quarterly sessions with all employees to discuss and obtain their suggestions on the entire range of company issues, including plant operations, market conditions, and investments in new equipment. The executives of Outokumpu achieved an early stage of teaming, empowerment, and productivity improvement with their industry education programs and their ongoing forums for encouraging managerial suggestions. Like AES, they did not excessively decentralize empowerment. The smaller business should consider the Outokumpu program a constructive way to move into empowerment. Begin in phases with competent presenters, starting with concentration on your customers’ applications, your benefits for them, and your competitors’ strengths and weaknesses. Clearly, CEO’s in businesses of all sizes must work harder and more imaginatively at a broad range of ways to motivate employees, and build and maintain loyalty and allegiance. Begin with attractive risk/reward incentives for individual and team initiatives.

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Options for Development of People Power and Allegiances Company-Wide Programs Your firm’s requirements for success12 Your market-positioning objectives and strategies Evaluations of new infotech applications Communications practices and the firm’s ‘ Digital Cockpit’’ Special Group-Based Seminars and Retreats Your customer and key-account partnering SWOT exercises and productivity planning sessions Empowerment team projects Individualized Self-Development Programs and Assignments Specialized skill projects Career development planning and mentoring Job rotation plans and exploratory field assignments Partnering assignments with major customers Management Development and Succession Planning Annual business ethics reviews and course certification of employees Individual development programs and mentoring Rotational department or market-segment assignments Managerial succession planning Out-company programs and courses Related Diversifications for Added Career Opportunities Brainstorming sessions for growth and diversification opportunities Major-customer partnering for new applications and benefits Strategic alliances and joint ventures

Work hard to help your associates develop and enhance their managerial, technical, or functional capabilities. Hone your own managerial style, leadership, motivating, and performance-control talents. Explore internal development programs versus bringing in professionals and outside services to help cope with growth. Establish on-the-job training and development activities that enhance your employees’ contributions and increase their loyalties to stay with you. Cherry pick programs from the options in the sidebar, and do all you can to assure

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that your highly valued people are enthusiastic about coming back to work with you the next day. KEY SEVEN: PROFIT PLANNING PROJECTS 1. Re-Assess Your Managerial Style in Relation to Your Firm’s Performance. Play your own devil’s advocate. Get objective advice from others whose executive judgment you value highly. Cherry pick alternative styles. Purge unworkable managerial traits and habits. But do not change what works well for you. Identify any changes you wish to make, and set your plan in motion. 2. Consider Teaming and Empowering Approaches. Identify your three best options in terms of the readiness of people for the key roles. Plan to begin with the one having the most favorable odds for success, and not the one with the greatest magnitude. 3. Outline Measures for Strengthening the Allegiances of Your Key People. Brainstorm with your senior associates on their own and their subordinates’ styles, and the priorities for getting underway. Invite their comments on your own style. Outline a training and development agenda from the many alternatives in the above sidebar.

KEY EIGHT

Leveraged Development, Production, and Outsourcing Upgrade Operations with Development Partnering, Productivity Innovations, and Outsourcing to Gain State-of-the-Art and Shorten Time-to-Market

You’re a born salesman at heart and I’m impressed with how you always put your customer first. But, do not neglect the significant strategic roles your internal operating functions must play. Large firms do not have monopolies on this. The gutsy small entrepreneur can make many astute operating moves as well. Let me elaborate . . .

The above advice to a small-company CEO parallels the conviction of Michael Hammer, consultant and founder of Hammer and Company, a management education firm based in Cambridge, Massachusettes. In a recent article, Hammer presented a convincing argument for the strategic importance of significant operational changes. He pointed out that much of industry concentrates on the more glamorous and exciting marketing side of strategy. Senior management tends to overlook significant opportunities to make sweeping changes in the workhorse internal functions that pay the rent.1 Hammer’s concept is not just operational improvements or excellence in operational performance. He is advocating that you identify major changes in how traditional front-line operations in your company can be performed more productively. Hammer makes much the same challenge Porter did years ago with his introduction of the value chain—all of the functions from raw materials progressing through design, manufacturing, sale, order fulfillment, and continuing customer services. Recall Porter’s conclusion noted in the Introduction that ‘‘The operating level is the front line for your strategic success. It is where many of your most important strategic decisions are planned and executed.’’

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OPERATIONAL DESIGN, OUTSOURCING, PRICING, AND RECRUITING STRATEGIES IN SUPPORT OF A BRILLIANT SALES MODEL As previously noted, an excellent example of the small company’s operational challenge and opportunity is the strategic mix Michael Dell marshaled to complement his direct sale model.2


Component selection by the customer took the guesswork out of Michael Dell’s determination of what personal computer components to offer, and eliminated his risk of manufacturing unwanted products. Customizing to the specific desires of each prospect eliminated Dell’s early product development costs and simplified manufacturing to a highly efficient assembly and order fulfillment operation.




Significant economies from outsourcing and JIT shipping created a meaningful pricing advantage. From the outset the company bought and assembled state-of-the-art components from others, particularly microprocessors from Intel and operating software from Microsoft. Dell was leveraging his available resources by relying on other suppliers for research and development, and he purchased components only against orders in house. This enabled him to keep his components up with the fast-moving state-of-theart, and avoid obsolete inventories.




Low price was Dell’s profit keystone. It resulted from the direct selling, customizing, and outsourcing. His total PC operating expense is still reputed to be at least five percent or more below most competitors. The company’s ‘‘reverse cash conversion’’ phenomenon drove financial strategy, and continues to be a major contributor to Dell’s profitability. His purchase of stateof-the-art components still cuts R&D costs to the bone. The just-in-time replacement policy requires very minimal parts and components inventory with low risk of technical obsolescence. Dell’s revenue collections, which begin shortly after the customer places the order, almost eliminate the company’s payables balance. The senior vice president of finance, James M. Schneider, explained the results the finance strategy has produced:3 We are driving the financial management of this company so that we can continue to grow without needing new capital. We start by being connected directly to the customer. Then we work with our vendors to create a system ( JIT) where we try to have no inventory. We take an order, take parts from the inventory of a vendor making a PC (just seven days of components and work in progress, no finished goods), ship the PC to our customer, and collect as fast as we can. We think of our system as a reverse cash conversion cycle.




Timely hiring of professionals was an early Dell operational strategy. Michael brought in outstanding executives and other professional management

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Dell Computer Company’s Cash Flow Advantage CCC ¼ DSO þ DSI  DPO (Cash Conversion Cycle) DSO ¼ Days sales outstanding plus DSI ¼ Days supplies in inventory minus DPO ¼ Days payables outstanding. ‘‘In the last quarter of 1998, we achieved 40 DSO þ 7 DSI  56 DPO ¼ 9 days negative CCC’’

as the young business kept growing beyond his early hands-on-everything entrepreneurial stage. His first move was in 1986, when he brought in Lee Walker as president. It is doubtful that the introductory question of luck ever occurred to him. Michael Dell had experienced the typical growing pains and problems of the small entrepreneur in his early years. He was forced to scramble deftly to survive a major business crisis in his tenth year, and again wisely brought in senior professional management. Dell’s profit model still serves the company well as they continue to grow. However, it is only one of many possible strategic operational models. No single school solution or consultant’s favorite operational strategy fits all types of ventures. Along with obtaining funding, permits, and any necessary proprietary protection, the CEO should finalize market-positioning strategies and determine the operational functions required for developing and implementing them. Each entrepreneur puts together his or her own organization and modus operandi based on experience, expertise, preferred style of operating, and competitive situation. The resulting value chain becomes the common denominator. Although there are almost as many opportunities as there are functions in any value chain, this key concentrates on the most central operational aspects. COLLABORATE AND PARTNER WITH CUSTOMERS, CHANNELS, AND SUPPLIERS TO DEVELOP SUPERIOR OFFERINGS YOUR CUSTOMERS NEED AND WILL PREFER The operating functions most concerned with product and benefits planning include sales management inputs, market and product research, design, development, and engineering. The beginning point should be the expressed or observed needs of a consumer, with their validity and magnitude of demand verified by market research. The next step should then be a market-tested design that builds superior benefits into almost every physical feature by skillfully blending cost, price, quality, and value. The design and development work should include cost-cutting simplifications and shortcuts for the production process, maintenance-reducing designs, and

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improvements for the customers’ operations or use. It also should consider current or leading edge state-of-the-art, particularly when you are pursuing Porter’s differentiation strategies. Benefits and physical characteristics are chicken-and-egg in product planning. They should spring from sensitivity and responsiveness to consumers’ needs in their application, key-customer partnering, and innovative thinking and brainstorming outside the box for new options. Then the formative product-design stage must proceed through a substantial amount of trial and error, grubby re-design work, and market testing before full commitment to competition. A positive example of how marketing and infotech capabilities can be teamed with the company’s product development and manufacturing functions is the case of a privately-held women’s apparel manufacturer. Initiating Product-Line Planning with a Continuing Online Feed of Consumer Preferences. Zara, a subsidiary of a Spanish textile manufacturing company, Inditex Group, has been revolutionizing the international fashion industry with a profound impact on product design, production, selling, and inventory planning for the supply chain. It gives its 400 retailers and their consumers in 25 countries more new styles rapidly with infotech than do many of its competitors. Under the imaginative leadership of its CEO, Jose Maria Castellano, Zara has harnessed the Web to speed up the industry’s fashion cycle from its traditional four times yearly style changes to virtually nonstop introductions of new fashions. From the time it receives market trends from the field, the parent company’s producer network can execute the new styles in less than fifteen days.4 The principles Zara follows can be readily scaled down to smaller firms in style- and fad-sensitive businesses. ‘‘Each store is electronically linked to the company’s headquarters in northwest Spain. Store managers monitor how merchandise is selling, and transmit the information, along with customer requests, to headquarters. This gives the designers real-time information for the fabric, cut, and price points of a new garment. Zara produces 60 percent of all fabrics used, and cuts and colors them at a company-owned state-of-the-art factory store. Store inputs help determine how many garments to make and which stores will receive the finished product. Then the fabric is sent to local shops to be assembled before being sent around the world.’’ Zara’s spectacular impact on the trendy fashion business demonstrates one of the principal benefits of the infotech-enhanced world that is available to the large and small enterprise alike. As of late 2005, the company was continuing to add new stores internationally, including the United States where it has seventeen in major cities. Its parent, Inditex Group, is continuing to invest additional sums in its fashion-changing logistics functions. Zara has demonstrated convincingly how the walls and barriers to intra-company communication and the ‘‘notinvented here’’ phobia can be eliminated between the externally faced functions of a business and its internal operational functions. As Thomas Friedman has proven dramatically, most Infotech communications applications are scalable by any company large or small.

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Partnering in Product Design with Key Customers Patricia Seybold has described how sellers are using a collaborative approach with a customer’s design team jointly working through the client’s product development cycle. This can require a series of iterative exchanges between the team and the supplier as they jointly work out specifications and fit the purchase item into the user’s application.5 The seller’s objective for initiating the scenario is deeper understanding of buyers’ requirements. Instead of solely considering the finished product for sale, Seybold advocates developing an in-depth appreciation of the entire application within which it fits. Often, this broader context reveals, not only product improvements and better sale/purchasing routines, but also related product sale possibilities. Seybold describes how large companies have made the scenario approach work successfully, but the same principle can be scaled down for the smaller company. She sets forth several basic steps for a scenario in which the buyer and seller have a quid pro quo opportunity and each has proprietary technology or a unique expertise to swap and contribute to the collaboration. 1. 2. 3. 4. 5. 6.

Select a target customer set. Select a goal that the customer needs to fulfill. Envision a particular situation for the customer. Determine a start and an end point for the discussion. Map out as many variations of each scenario as you can think of. Consider the customers’ buying activities and information needed at every step. 7. Think through how you can use your marketing, distribution, and service channels, sales force, web site, and call center to streamline the customer scenario. AVOID DEVELOPING PRODUCTS WITH FLAWED TECHNOLOGIES OR ‘‘ME-TOO’’ DISADVANTAGES Be careful not to dissipate your product development resources and time with inherently impossible technical solutions or ‘‘me-too’’ offerings that cannot match user value with costs and required price level. A Product-Engineering Process that Failed to Discover Insurmountable Design Limitations. Before the days of the Internet, an entrepreneur obtained the rights to produce a miniaturized version of a continuous-loop audio tape recording system and cassette. A major feature of his product concept was low-cost communicating. His design for the cassette was small enough to be mailed at the lowest first-class postal rate. The venture presented the ‘‘razor and blade’’ opportunity for repeat business, with a potential profit mainly from selling the tiny cassettes.

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He obtained tentative promises of financial backing from senior executives of two major concerns with high-volume applications for communicating with their field marketing organizations. Both organizations required frequent communications to the field with steady streams of information on new products, changes in prices and terms, product pitches with features and benefits of their offerings, and particulars of the latest intra-company sales contests. Negotiations with the original investors were developing slowly, and the entrepreneur grew impatient to diversify. He had begun tracking the rapidly growing personal computer markets, and envisioned much broader growth applications and markets for digital recording than his original analog voice idea would command. He did not anticipate the speed and pervasiveness of adoption of the World Wide Web. He hired a senior-level salesman with experience in computer peripherals and PCs. The two men started developing considerable interest and sales leads through publicity, ads in trade publications, demo presentations at trade shows, and special promotions to several potential niche markets. They succeeded in generating many trial orders to determine the feasibility of the digital recording approach for a wide range of applications. The digital version’s prospects began to appear so promising that the inventor quit pursuing the original audio approach. A deluge of trial orders for diverse digital applications was attributed to the low postal rate for mailing the tiny cassette. The entrepreneur obtained additional venture funding from another source, and tried to move the exploratory interests into production-volume sales. However, both the customers and the entrepreneur’s lab professionals discovered a significant technical problem that they could not master. They could never be assured of total fidelity in recording computer bits because they could not completely eliminate distortion of the tape by the pulling action of the tiny continuous drive. This was not a problem with the original audio applications, but was a go–no go situation with digital, where not a single binary bit could be lost. The entrepreneur and his investors gave up on the venture, and sold the business to another party at a substantial discount from the original investment. Unfortunately, the new buyer was unsuccessful in developing digital application interest or solving the technical problem. Within a short time, he also abandoned the venture. A most attractive-sounding concept could not be moved beyond the product design and engineering stages into digital because it could not be made technically feasible. A Costly Technology in Search of a ‘‘Me-Too’’ Niche in a Highly Competitive Market A thermal, non-impact printer venture was in early development. An inventor presented the project to a potential buyer, a small firm successfully operating in a different industry. Its design was based on patents that, hopefully, would be upgraded and extended with new semiconductor technology. The key was a new

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print head component for strip-chart recorders, digital plotters, graphic display devices, and personal computer printers. The first application would be a PC printer incorporating the chip invention with other purchased components. The prospective investor agreed to a modest initial capital outlay for continued development, with final agreement dependent on market research findings. The heart of the venture was an attempt at ‘‘revolutionary’’ semiconductor chip fabrication. Subsequent market research indicated that the assembled printer would be little more than ‘‘re-inventing the wheel,’’ with all of the proposed applications likely to be highly cost-competitive. Moreover, the new company would be vulnerable to the Intels and other giants of the industry, with their rapidly changing technology. Neither the investor nor his associates had semiconductor experience, and could not begin to match the leaders’ R&D and investing potential. An entrepreneur with a promising new printer and a ‘‘winning’’ marketing approach would risk far less by buying proven state-of-the-art chips and assembling them with other purchased parts. The seed-money spigot was turned off and the project did not fly. SEEK SIGNIFICANT PRODUCTIVITY IMPROVEMENTS, RELIABLE QUALITY CONTROLS, AND INNOVATIVE PROCESSES IN PRODUCTION OPERATIONS AND THE SUPPLY CHAIN Develop and produce to meet your promised benefits. Investigate more economical sources of raw materials, parts, and components. Make certain your new product is doable in production quantities. Use and streamline supply chain operations that deliver on time and are cost effective. Provide ongoing customer services to keep your offerings working to consumers’ expectations. An assembler of parts into a variety of electronic components for sale to OEMs was looking for ways to reduce the costly buildup of shelf inventories awaiting orders for shipment. His practice was what he called a ‘‘push’’ process of building shelf reserves based on prior sales experience and promoting their sale. However, he was experiencing changes in seasonal demand for some items and trending declines in others. He began detailed examination of daily and weekly order flows of each type of component, coupled with more frequent discussion with his OEMs on their needs. This led to establishing a ‘‘minimum’’ but safe reserve level for each line item and reducing the buildup of the aggregate inventories. He more closely monitored all incoming order increases or decreases for each item and made changes in the standing build order accordingly. He, in effect, had converted his production operation from a ‘‘push’’ mode toward a finely tuned ‘‘pull’’ mode based on demand and the most current market trends in customers’ orders. Many years ago Don Mitchell, who later became president of the Sylvania Electric Corporation, was given an assignment by a dairy products chain to find

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ways to reduce their cost of milk delivery to the retailers carrying their brands. He thoroughly researched their bottling and packaging processes and costs, and then rode for a few days alongside their driver/salesmen as they made their deliveries. Going in and out of stores, the solution hit him between the eyes. He proposed, and the client accepted, changing from glass to paper milk cartons. At a great savings in time per call, the deliveryman could carry twice as many units into the store because of the reduced weight, and the processing of returned bottles was eliminated! Mitchell had literally ‘‘gone out of the bottle and into the box.’’ In the simplest terms, you distribute or place your production operations where your market is and where your customer prefers to buy and have access to the timeliest service. A case in point is a company that produced custom-designed products in a niche of the construction industry. Locating Near Key Customers to Give the Best Services and Prices Harold Harris founded Modular Construction, Inc., a small business that fabricated wood building products in Kansas. MCI produced and sold custom building components for a range of construction applications. Within a few years his principal account became Pizza Hut, which had its founding headquarters in Wichita, Kansas. During Pizza Hut’s early years of booming growth, he fabricated the rafter framing for their uniquely designed huts. Harold provided them with a highly efficient and cost-effective line of components that he produced in a small plant near Wichita. He delivered the assembled frames ready for installation to Pizza Hut’s designated area collection locations for their transfer to new store sites. Harold’s production methods were highly effective, and his quality control and JIT delivery services were impeccable. Pizza Hut wanted to produce for a broader geographic area and preferred Harold above other suppliers. So they proposed that he establish additional assembly operations in the Southwest. The decision for Harold was a ‘‘no-brainer.’’ He set up satellite operations with low overheads to produce for these new locations. His growth and profits benefited handsomely as Pizza Hut continued to expand. Quality Controls that Assure Conformance to Specifications, Flawless Offerings, and Reliable Order Fulfillment A small start-up, Antiques Re-Visited, developed a line of oil paints and stains reproducing antique colors for internal decoration of woodwork, furniture, and furnishings. The founders were antiques aficionados who devoted considerable research effort to assembling their line of colors. Their brochure’s color chips were faithful recreations of antique styling, and were presented invitingly. When first applied to surfaces, the paints looked superior.

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From the earliest sales deliveries, problems began and customer complaints started arriving. Several popular colors, particularly a Colonial Williamsburg red, would not dry successfully. It was unclear whether the failure had occurred in production or should have been detected and remedied in the design and engineering stage. However, in their haste to get to market, the founders had failed to conduct sufficient testing and aging. After laborious efforts, the entrepreneurs could not solve the problem and closed down their business. Entrepreneurs in Pursuit of an Innovative and Less Costly Product Source Ronald Stamp, a former fish wholesaler, and Paul Benson, owner of a springwater business, merged to pursue a venture of melting icebergs as a new source for bottled water. They formed Iceberg Corporation of America and were lent $400,000 interest-free by the Atlantic Canada Opportunities Agency, whose mission was providing seed money to new ventures to improve Newfoundland’s 15 percent unemployment rate. The partners invested in a floating factory fitted with a crane and grapple to take a half-ton bite at a time out of icebergs. The ice chunk was crushed on shipboard, heated, put through a filtration system, and stored in tanks. The water was filtered again and bottled at a new plant at St. John’s, Newfoundland, that was funded through a private placement. Some marketing headway had been made as of late 2000. They were packing 100,000 gallons of Borealis brand every month, and trucked water to New Brunswick where Borealis beer was made. They also shipped to Brampton, Ontario, where it was used to produce Borealis vodka. The venture was pushing ahead toward viability, but still in the red and faced with significant hurdles, not the least of which were:





The forces of nature, thunderstorms, high winds, and winter hurting the harvest Distance of the plant operation from large consuming markets High price ($4.75/six pack of 12 oz. water) versus lower-cost competition from established brands Inability to get import licenses from the U.S. Food & Drug Administration

It is an intriguing idea, but as with most creative business ideas, icebergs may be free, but they are a long way from the customers and subject to uncontrollable production disruptions. However, the entrepreneurs still felt they had a revolutionary water-sourcing strategy with a possible payoff worth the risk ultimately.6 For fiscal 2001, Iceberg’s revenues included iceberg water, 50 percent, bottled spring water, 30 percent, and vodka and beer, 13 percent, all under the Borealis

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brand name. The company had thirty employees as of mid-2005 and its bottom line was in the black. So far, Iceberg’s innovative, out-of-the-box production method was working well.

EXPLORE THE TWO BASIC OUTSOURCING OPTIONS: AS A PURCHASER OF PARTS AND COMPONENTS, OR A LOW-COST, STATE-OF-THE-ART SUPPLIER The generic function of outsourcing has been around from almost the beginning of commerce, and certainly before it was labeled as such. It was being used profitably long before the most recent concerns in the press, political camps, and industry about our country’s regrettable loss of so many jobs to foreign suppliers and service organizations. Many companies in many industries have taken advantage of outsourcing for lower product cost and pricing, or to gain state-of-the-art advances from more economical sources, or to accomplish both objectives. Key Two noted the serious current problem of competing for OEMs’ business against the China price. ‘‘America’s service sector, which involves about 85 percent of the U.S. workforce has become increasingly vulnerable to the cheap labor pools of the developing nations.’’7 The Organization for Economic Cooperation and Development in Brussels has estimated that 20 percent of the developed world’s employment could be ‘‘potentially affected’’ by global outsourcing. In a recent set of reports, the McKinsey Global Institute estimated lower exposure of around 10 percent and viewed the move, not as a crisis, but a slower, evolutionary change that is inevitable. They saw the basic exposure as limited mainly to job functions that do not require customer contact, local knowledge, or complex interactions with the rest of a business. They concluded that ‘‘many business processes are difficult to separate into discrete chunks, and often the tasks are too small to make a move worthwhile.’’ McKinsey also cited a limited number of suitable cheap workers available in developing countries due to poor language skills and second-rate education systems.8

Strategic Outsourcing from the Purchaser’s Perspective As Dell proved in the early 1980s, selective and careful outsourcing has many potential benefits for the small company that is buying. Among the most important pluses are farming out non-core functions to others having greater expertise and critical mass; reducing capital and working capital costs; avoiding one’s own facilities and equipment investment; getting quick access to the best and most advanced technology available, and, therefore, collapsing the time it takes to enter new markets or offer stronger products. Green Mountain Technologies, introduced to you in Key One, took this approach when they sub-contracted their manufacture of their third system, the

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Earth Tub, to an area fabricator. All of the system elements and components of their two initial waste processing lines had been outsourced from the start of their enterprise. Outsourcing the Earth Tub production to a reliable supplier reduced their capital requirements and freed up their time to focus on core activities. The small firm leverages its tight resources by buying from suppliers with a better scale of operations, unmatchable R&D, and lower overhead burdens for the outsourced items. These advantages are enhanced with JIT purchasing to keep inventory levels low, and realizing savings through pooled shipping. Quinn and Hilmer published a classic statement of the buyer’s outsourcing strategy in 1995. It is recommended study for any small business when considering this option.9 ‘‘Strategic outsourcing strategy for the company choosing to buy products or services from outsourcers combines two approaches. One, you should concentrate on core competencies that will achieve definable prominence and provide unique value for the customer. Two, strategically outsource other activities, including many that are integral to the process but do not have a critical strategic need or special capabilities. This strategy leverages benefits for the purchaser of outsourced products and services in four ways: 1. Maximizes returns doing what you know best. 2. Sets up barriers to competition to preserve market share. 3. Fully utilizes suppliers’ investments, innovations, and professional capabilities that are probably too expensive for the purchaser to duplicate internally. 4. With situations of changing marketplaces and technology, it decreases risks, enables shorter cycle times, lowers investments, and creates quicker and better responsiveness to customers’ needs.’’

Exploring the Issues Involved in Outsource Purchasing Global outsourcing to gain cost advantages can help more entrepreneurs convert innovative ideas into profitable businesses for jobs that can be digitized and do not need face-to-face interaction. An insight into the issues that must be faced is illustrated for a young west coast couple planning a start-up recently to develop a line of children’s pajamas. They knew that each product needed to be priced below $50, but calculated that U.S. production would require a prohibitive price of $120. They chose to set up a ‘‘virtual’’ company that would have no manufacturing, storefront or warehouse. Their plan was to refine patterns and pick fabrics, communicate via e-mail and phone, and transmit images and design specs to a producer in a developing country. They would market in the U.S. via the Internet and boutique retailers, and hire a freight management company in California to receive shipments, check quality, and send finished products directly to customers.

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The entrepreneurs researched prospective sources through Google and a Las Vegas trade show. They knew that their screening and selection process had to surmount many hurdles, including:








Language and time zone differences Culture differences Complex import regulations Shipping fees Workmanship Random problems, for example, Asian flu if they used marabou feathers Anxiety about unwittingly engaging a ‘‘brutal’’ sweatshop

They also were aware that big cost savings could only be realized over time with large manufacturing orders; and that small jobs probably were not justifiable. They narrowed their search down to six prospective outsourcers to whom they sent designs, and then prepared for a meticulous screening process.10 Strategic Outsourcing from the Seller’s Perspective The other side of the coin is making a profit by operating your business as a provider of the outsourcing services. An important opportunity for the small firm is to identify an application of a larger company that the latter consider secondary. Sell them on letting you produce for them to free up their resources and concentrate attention to their main core strengths. Many OEMs serve the automotive manufacturers with secondary parts and components, as Buckeye International did. Some years ago an entrepreneur developed a profitable niche with the big three to produce an ignition assembly for their combustion engines. This was tiny volume for them that they welcomed delegating to an outsourcer, but it created significant revenue for the entrepreneur. His finished assemblies normally were shipped to their plants by air in JIT amounts. Selling outsourcing services traditionally has been considered by many to be the province only of larger companies that are able to take advantage of economies of scale because of their relative size. Contrarily, small, independent subcontractors have been essential factors in automotive and other manufacturing industries for many decades. Three management consultants have challenged the large-only view with their alternative position that scale in manufacturing companies is not an issue of ‘‘all or nothing.’’11 The authors cautioned that the pursuit of lower cost is ‘‘not a unitary, static business’’ and proposed a ‘‘Three U Framework’’ for reinventing scale.




First, Understand—map your value chain Second, Unbundle—break it apart, and Third, Unleash—take advantage of any real economies of scale within subelements of the chain.

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In the third stage, you should recognize two dimensions as scaling possibilities, horizontal and vertical. Your horizontal dimension may include two or more product lines, only one of which can gain lower cost or superior differentiation of benefits. Vertically, you may have individual value-added functions to exploit, such as collaboration in product design through your extraordinary design skills or proprietary software and processes. Or, you might take advantage of sophisticated maintenance processes you have developed for your own operations, and sell them to customers at a profit for preventive maintenance programs and corrective trouble-shooting calls. Developing Specialty Services and Products for Profitable OEM Account Growth Over many years, the plastics fabricating industry has been a dependable provider of injection-molded and extruded plastic parts and components to an increasing number of OEM customers. New value-added features and offerings can exploit strong, niche positions in such industries as automotive, appliance, information systems, and medical instrumentation. As noted in Key Five, Buckeye International was an early practitioner of this outsourcing on the sell side. The strategy assures repeat business from the high quality of the finished part and from regularly delivering the orders with a JIT strategy that appreciably reduces customers’ inventory carrying costs. This is critical for the larger-volume accounts, particularly automakers. OEM suppliers pride themselves on never being responsible for shipment delays that shut down an assembly line. Part of the risk exposure is due to a plastic fabricator’s production snags, but more often it results from the customer’s underestimating his order stream and delivery promises. In recent years, many plastics molders had evolved from quantity production of single-piece parts to the addition of value-added services and features built into the parts they were shipping. Long before the strategy was called outsourcing, OEM suppliers had started producing simple insert moldings, custom sub-assemblies of two or more molded items, and chroming of molded and extruded plastic trim. Numerous new items have kept coming. Sales and profit increases have not been the only motivating factors. The molders could no longer rely mainly on ‘‘shoot-and-ship’’ injected molded pieces. These parts had become ‘‘me-too’’ commodities, increasingly price-sensitive and competitive. The majors wanted to extend their outsourcing further by eliminating sub-assembly steps that were not the mainstream success requirements of their business. Among the most promising newer value-added options in the auto market are four categories of products and services:


Insert molding of electrical components, such as connectors and terminals, medical records on a memory chip, motors and circuit boards, and military dog tags

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Auto modules, including instrument panels, cockpit modules, and floor consoles, installation of lenses and electrical components in interior lighting receptacles, headliner systems and visors Decorating of cell phones, heating system assemblies, and automatic gear shift units with lamps for lighting the gear-shift positions Specialization in mold making, including their expertise in multi-cavity molds for other plastics processors KEY EIGHT: PROFIT PLANNING PROJECTS

1. Consider Collaborative Partnering Projects for Your Product Development and Design Functions. Screen your consumer and competitive profiling for collaborative benefits, development enhancements, and innovations to pursue jointly with key accounts. Include options for outsourcing from suppliers that would give you more competitive offerings and benefits through advances in your firm’s state-of-the-art. Research Friedman’s citations of numerous outsourcing strategies beyond exporting digitized applications, that is, his numerous examples of collaborative ventures in product planning, purchasing, and production that can enable the small business to leverage its financial and human resources to keep abreast or in the forefront of the state of the art.12 2. Explore Productivity, Quality Control, Process Innovation, and Outsourcing Strategies. Set up brainstorming sessions along your entire value chain to identify simpler and more cost-effective production and order fulfillment procedures. Consider whether any of your resulting developments represent outsourcing opportunities from either purchasing or generating revenues by selling your expertise and processes to others.

KEY NINE

Problem Solving and ‘‘Do-Your-Own’’ Turnarounds Install Early Warning Checkups, Isolate the Internal Causes, and Perform In-House Turnarounds to Maintain Control It’s quite clear—the market is against small business. I’m stymied at every turn. —Frustrated entrepreneur

The speaker, formerly an engineer in a mid-western OEM manufacturing company, had left to exercise his dream of being his own boss. He founded a business offering a variety of products for home decorations to consumers in his small community and outlying areas. It was unrelated to his previous employment. Some offerings were purchased products, and others combined outside components with parts he engineered that took advantage of his prior experience. The start-up’s product mix was in good taste and the combination items presented superior quality. He was losing his nest egg, and was certain that the marketplace was against him, as with most ‘‘little guys.’’ He was operating from a detailed business plan that covered goals, products, and operations, but was short on market profiling and a profit plan. However, he was keeping accurate and timely financial and accounting records. The entrepreneur’s basic business concept turned out to be flawed. The majority of lines were infrequently purchased, non-repeat items, and discretionary spending choices for his target consumers. A number bordered on ‘‘me-too’s,’’ without individuality to offset competitive pricing. Also, the geographic scope of the largest market he felt he could economically cover was much too thinly populated to achieve breakeven levels, which he had not previously calculated. The owner put together an attractive printed furnishings and gift catalog directed to selected mailing lists for local and more distant markets, but it failed to generate sufficient added sales. He sold the business at a loss, still convinced that ‘‘anti-small-business’’ forces in the market had defeated him. He had failed to get to the root causes of his problem—slow moving lines, very limited repeat items,

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poorly defined prospects, too few customers in his region, unfocused marketing, high inventory, production overheads, and an owner’s monthly draw. He had failed to model and test his venture with a sound, all-encompassing profit plan before launch. In marked contrast, another small business CEO was confronted with a similar losing performance record, but with a positive and fighting frame of mind. Small Business CEO to Consultant: ‘‘My sales are down and my profits are gone? And I’m not sure who’s been eating my lunch. How do I go about getting this all sorted out and turned around?’’ Consultant: ‘‘Ask yourself some tough Business 101 questions about your customers, competition, retailers’ needs, and requirements for success. Your action plans will begin to be obvious! I’ll help you start the critique.’’

This frantic plea was from a small manufacturer of specialty hand power tools sold through retailers to the do-it-yourself markets. It should be the beginning point of rejuvenation for many of the small business failures the U.S. economy experiences every year. In this case, the consultant found a receptive audience. He helped the CEO start developing answers to the following lines of questions: 













With my declining sales, how much has my customer base shrunk this year? The past three years? What percentage of my accounts were consistent buyers the past twelve months? Two years ago? What has been my retailer turnover? Have I kept a record of accounts lost? To whom? Why? What inputs from my sales reps? What have I learned directly from my retailers about what I’m not giving them? How often have I visited them? What is my new-prospect batting average? How many new accounts have I won recently? And failed to win? Did I get candid reasons for the wins and losses? Who are my main competitors? What items, features, and benefits are they offering that my customers don’t get from me? How does their marketing and selling differ from mine? Their account service? In what ways? How well do I understand my end-consumers’ applications and major needs? Have I profiled them? Have I done any direct consumer research on benefits? Are any of my lines tired or obsolete? Am I selling loss leaders? When did I last come out with new products, or significant upgrades? If yes, what percentage of current revenues are they contributing? What new products or features do I have in development right now? When will they be ready? Which of the above issues have contributed most to my declining profits? What are my most urgent priority problems and have I traced all of them back to their internal causes inside my shop?

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What are my critical requirements for success? What strong solutions do I need, and how can I develop an action plan within a profit plan that addresses all of them?

This entrepreneur had tasted success earlier, but had drifted into a hefty dayto-day overload. He plunged into an objective self-critique that helped him get underway with a new focus on his marketplace and delegation of more responsibilities to key associates. He was well on the road to a recovery of his previous profitability.

LEARN FROM THE MOST FREQUENT PROBLEMS SMALL BUSINESSES FACE There are almost as many favorite lists of recurring problems as there are consultants and other experts. In addition to severe managerial overload, the short list includes the sidebar’ nine broad deficiencies listed below. All are critical and any one can be enough to sink the business. None go away easily. 1. a flawed market concept and business model that lacks a profit plan; 2. inferior or undifferentiated user benefits in product or services provided; 3. faulty pricing, inattention to breakeven levels, and insufficient cash flow; 4. unfocused prospecting and marketing, plus weak sales closing approaches; 5. outmoded channels and supply chains, and undependable customer services; 6. ineffective management, control, and motivational leadership; 7. fear of critical numbers and inexperience with accounting and finance; 8. disregard for early warning symptoms of lurking problems; and 9. failure to differentiate between problems and their internal causes. The last four include key causes of the first five. One of the more subtle dangers is to assign external factors as excuses for the real causes. Do not ever fail to trace the symptoms and problems back to internal managerial deficiencies. The buck should not stop until it gets inside the company. Charge your key people to stay alert for all early signs of looming problems. And always count on intensified competitive threats from both small competitors and giants of industry.

SET UP THREE GROUPS OF EARLY WARNING SYSTEMS AND PROCESSES Is not the beauty of the small business the fact that you can wrap your arms around the entire operation? And with great satisfaction at being your own boss! Certainly, but with a perpetually under-staffed roster, it does take some

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extra-vigilant effort. You must focus on and stay fully attuned to your customers, competitors, marketplace environment, and internal operations. ‘‘Prepare an Information Monitoring and Control Plan for Me’’ Harold Melloy, whose cash flow projections you reviewed in Key Two, was riding two years of success at a 30 percent growth rate in his revenues and consistent net profit after only his fourth full year of operations! He queried his consultant, ‘‘I’m getting busier and busier trying to keep on top of things. What information should I be routinely collecting and evaluating to maintain my performance? And, how do I streamline my tracking? Give me your suggestions assuming I am a sheer neophyte at managing (which he was not). I’ll ignore your thoughts if they look too academic or unwieldy.’’ The consultant recommended that Harold formalize the twelve categories of critical information shown in the sidebar. He should set up regular administrative procedures for collection and have them kept available for his access and review at any time. A number could be maintained in QuickBooks. The items varied in how often each should be reviewed in depth, and time intervals were set for each category:

           

Information Tracking Plan for Melloy & Son Construction Applications offered, customers’ main needs, process requirements, changes Sales backlog, bids outstanding, and bids to be developed Sales productivity by type, monthly billings trend, repeat business, jobs lost Personnel record files, performance ratings, supervisory potential, training plans Individual work assignments—performance, billings, hours, and percent billed Actual direct cost summaries of each type of service performed Market research, prospect categories and lists, monthly Dodge Reports Files on key competitors: their lines, prices, policies, introductions, benefits, trends His trade association bulletins, studies, and special services available Promotion pieces, publicity, and case-experience articles, results and costs of each Cash position and rolling cash flow projections for the next twelve months Financial reports, including P&L, balance sheet, and cash flow and application

Most items in this information base are common for any small business. Before growth starts really cluttering an unmanageable information stream, set up an early-warning procedure that can become a time saving routine for you. Assign functional responsibilities to your associates, and hold regular periodic

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reviews of your competitive situation and contingency plans. Computerize the critical information flow to leave time and attention for monitoring the nonquantifiable information and catching up with the unexpected happenings. Build into your computer system an early warning process with an ‘‘alert’’ feature that can reach all pertinent people instantly. Set up three crucial warning screens for financial performance, marketplace trouble signs, and internal management and operations intelligence. Screen each area to determine what looks healthy or unhealthy today, and what you might anticipate tomorrow and later.

Warning Screening #1: Financial Trouble Signs from Your Computerized Files Are your revenues and market share slipping? Are you short of cash, losing money, suffering increasing losses? Are you facing an increasing cost of debt and finding that your available credit lines are eroding? Set up a warning file that monitors performance against plan for the kinds of information shown in Table 9-1. Add other tracking factors unique to your business. Getting to the crux of these kinds of questions requires sifting through an increasing deluge of so-called, ‘‘un-smart’’ numbers to focus on those that are most meaningful and critical. Unfortunately, each new version of QuickBooks Pro and the like enables your staff to spit out more and more fancy charts and tables. A notebook full of tables, graphs, and pie charts can grow to a three- to five-inch stack of reports if undisciplined. It is essential to trim down to the

TABLE 9-1.

Warnings from Your Financial Performance Numbers

—Negative Cash Flow: Number of weeks until completely out of cash? How long until it turns positive? How long before sustainable? —Slow Accounts Receivables: Increasing aging? Bad debts rising? —Overdue Accounts Payables: Growing in number of vendors? In amounts? —Declining Current Ratio: Below own past and industry standards? Quick ratio deteriorating? —Growing Loan Balances and Credit Lines: Number of weeks and dollars before reach credit limits and loan defaults? Interest costs, penalties, and terms rising? Lenders cutting back on open credit? Independent credit ratings downgraded? —Slipping Gross Margins: Below industry and own historic levels? And declining? Fixed overheads growing and excessive? —Missing Breakeven Levels: Not reaching pre-determined unit and dollar breakeven levels? —Profits Declining: Trend worsening? Into the red some months? ROI below target? —Debt-to-Equity Ratio Rising: Bankers and other lenders raising concerns? Reduced borrowing power?

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simplest possible ‘‘critical-numbers’’ structure to help you determine what is really going well or badly, and to eliminate or minimize the surprises. For this sector, tie into your process the comparative financial studies of RMA—The Risk Management Association (formerly Robert Morris Associates). RMA publishes a reference valued highly by banks and corporate financial managers. It provides historical data for several hundred industries. The study for each industry reports about 40 performance characteristics sub-divided by the reporting companies’ revenue size. An abbreviated example of the report for retail gift stores is shown in Appendix E. Warning Screening #2: Threatening Competitive Changes in Your Marketplace At IBM, the salesman, branch manager, district and regional managers had one thing in common—their fear of losing a customer or prospect. The consequence was an immediate (next day) day-and-night effort combing through all facets of the account experience, culminating in the final precipitating event leading up to the defection. This was a meeting with the top executives, almost always including, first, Thomas J. Watson, Sr., and later his son, Tom, Jr. There was one saving grace: if the salesman and his or her boss could demonstrate that they had called upon all of IBM’s relevant resources to keep the account. If not, one or both probably would be moved to another assignment—by the next day or so! The main catch was that the losers frequently did not have time between the loss and the post-mortem hearing to do a proper job of ferreting out the whole story. Pay close attention to your customer base and the other factors in Table 9-2. Analyze all customer losses thoroughly. Build the marketplace surveillance agenda into your overall early warning approach. Warning Screening #3: Internal People Problems and Declining Operating Productivity Which of these alerts are familiar to you? What attention and remedial action do they suggest? What other internal warning signs come to mind? ___ ___ ___ ___ ___ ___

Key employees defecting? High employee turnover? Morale and Esprit slipping? Lessened market awareness? Managers losing decisiveness? Over-dependence on meetings?

___ ___ ___ ___ ___ ___

Order fulfillment late and faulty? Physical plant deteriorating? Information glut, late reports? Development pipeline empty? Innovative programs lacking? Other symptoms or problems?

A new small business requires a risk-taking entrepreneur to survive and work through the early stages of growth. Move aggressively and confidently, but track

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Warnings from Your Customers and Marketplace

—Shifting Markets: Users undergoing changes in their basic needs? Higher percentage of your sales mix in fading uses? No projects planned for the new consumer needs? —Dangerous Customer Concentration: More vulnerable to loss of top accounts? Increasing sales percentage to top 3 to 5 accounts? —Losing More New Bidding Opportunities and Sales: Lost sale tracking and post-mortems showing increasing inroads by competitors? —More Unprofitable Customers: Increasing customer order mixes too costly to fulfill? —Increasing Number of Product ‘‘Loss Leaders’’: Losing money on higher portion of offerings? Some products becoming commodity items, more vulnerable to price competition? —Middlemen Defecting: Key distributors and dealers taking on competitive lines and discontinuing yours? Competitors using new, more cost-effective types of middlemen? —Tired Product Lines: No new product additions, features, or benefits in past year? Too few relative to competition in past three years? In past five years? —A Failing New-Product Development Program: Limited or no new projects in progress? No new options agenda for the future? —Competitors’ Infotech-Based Supply Chains: Slower order fulfillment? Cost and pricing disadvantage? Benefits value/price diluted by price-driven B2B usage by industry? —Deficient Competitive Strategies and Programs: Offerings of competitors increasingly stronger? In user benefits offered? In prices and terms? In new products? In more productive and advanced technologies? In customer services and supply-chain management? Little company initiative or efforts to compare market-positioning strengths and weaknesses? Entry into unrelated conglomerations distracting management and dissipating or confusing a strong brand image?

the foregoing questions and those suggested in Table 9-3. Your operating problems often tell you when it is time to bring in professionals to reinforce and complement your own entrepreneurial talents and drive. By doing this on a timely schedule, you are girding up to move ahead with aggressive growth and profit programs that must be linked together.

DIG DEEPLY TO DISCOVER THE INTERNAL CAUSES TO YOUR PROBLEMS Assume that all problems must be traced to their causal roots inside the company. Your tracing must not stop with blaming the external competitive environment. With a bit of sweat and objectivity, such roots often are traced to inexperience, erroneous judgments, wrong aims or motives, sloppy planning and evaluation, weak supervision, wishful thinking and pink glasses, or a rush to conclusions by people inside the organization, beginning with the CEO.

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TABLE 9-3.

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Warnings from Your Internal Business Operations

—Lackadaisical Sales Operations: Call reporting by sales personnel and reps slow and uninformative? Sales productivity per call down? Reduced key-account sales efforts? Fall-off in sales prospecting? Lower rate of new-account conversions? —Delinquent Orders and Shipping: Deteriorating period-to-period performance trends? In shipment on-time record? In on-time customer services performed? Rising out-of-stock and back orders in dollars and percent of orders? In accounts lost from shipment delays and mistakes? —Production Goofs and Higher Inventory Levels: Higher rates of production rejects? Increasing product returns? Plant repair and maintenance costs up? Factory and warehouse space squeezed? Slower inventory turnover? —Slipping Workforce Morale and Loss of Esprit: Growing overtime and sick leave? Lackluster attitude on the shop floor? Higher turnover? More employees leaving to join competitors? Exit interview findings less favorable? Higher rejections by favored job applicants? —Less Effective Supervision: Missing more project deadlines and target dates? Sloppy planning? Ballooning of meetings and conferences, with less decisive outcomes? Noticeable pessimism and lack of excitement? More defections and firings? —Reduced CEO and Senior-Manager Productivity: Daily crises dominating? Working around the clock? Delegating reluctantly? In-basket and desk clutter increasing? Information gluts and voids? Losing sleep nights? Increasing competitive and internal-operations ’surprises’? Scarce visits to the field? Limited or no senior key-account responsibility assignments? —Customer Orientation and Market Drive Lacking: Limited and irregular contact with marketplace issues by internal functions? Senior management not stressing market orientation?

It is essential to trace every hurdle and setback to the causes you or your people have created by either action or inaction. The importance of differentiating root causes from problems and symptoms is critical in every field of endeavor. A seasoned consultant has estimated that the vast majority are internally caused! Search behind every problem and its symptoms to define its internal causes. Skirting the Causes of an Antarctic Failure and Disaster Go back into the history of the great polar explorers at the start of the twentieth century. Captain Robert Falcon Scott in 1911 set out to become the first to reach the South Pole for the glory of Britain, only to lose a close race to the Norwegian, Roald Amundson.1 Scott took four men with him, closely following an earlier route that had been used by Sir Ernest Shackleton in a failing effort in 1908. Scott’s 1911 attempt was bogged down by a ‘‘bewildering array of modes of transportation—ponies, such as Shackleton had already proved to be useless; motor sledges that did not work; and dogs that no one in his party knew how to drive effectively.2 According to diaries recovered with their bodies a year later, the Scott team, all of whom perished in a blizzard, knew they had lost the race when they came

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across Amundson’s path. They had been covering 10 to 13 miles daily, facing starvation and other hardships. This contrasted with Amundson’s 15 to 20 miles per day using skiis, a team of fifty-two superbly conditioned and trained dogs, and skilled drivers. Among the recovered diaries, Scott had written a message to his expedition’s treasurer in England praising the courage of his team, but also writing his assessment of the reasons for their failure. He cited ‘‘failed pony transport, weather, snow, frightfully rough ice, a shortage of fuel in our depots for which I cannot account, and the illness of his brave companion, Titus Oates.’’ A tragic story with severe problems, yes, but none directly targeted on the internal management and leadership causes of the failed expedition. Timely and decisive problem solving and identification of their causes in business is one of the most critical managerial arts. In the practice of this art, it is essential to assume that there is no such thing as an external cause of a seemingly insurmountable business problem. Even the extreme external origins of the problems faced by Behlin discussed in Part A might have been ameliorated, if not prevented from damaging them. Management had not considered the possibility that the Federal government would cancel the grain storage subsidies, drastically reducing their market for storage buildings. They had not covered such risks with sound contingency plans. Loose problem definition occurs much too often when determining problems, their causes, and what to do about them. This happens when:    



Symptoms are mistaken for problems Problems and causes are confused with each other The analysis stops with the identification of external ‘‘culprits’’ beyond the company’s ability to control Tracking from problems to causes does not get back deeply enough to the decision points where individuals could have either avoided the cause or taken action to modify its impact Responsibility for taking the needed remedial action is not clearly assigned

The Problem/Cause/Solution Track A common industry practice is the use of SWOT exercises to ferret out problems and their causes. Lead a brainstorming session with associates in different functions related to an unsatisfactory situation. Push for the group’s insights and consensus by joint definition of the company’s related Strengths, Weaknesses, Opportunities and Threats. Pull the SWOT findings together into the best alternative solutions. A somewhat more-structured path toward clarifying the root causes of a threatening situation is represented schematically in Figure 9-1. This sequential analytical process can help classify and clarify the ‘‘apples, oranges, and bananas’’ of the initial evidence gathering. Your task is to move through A and B to

PROBLEM SOLVING AND ‘‘DO-YOUR-OWN’’ TURNAROUNDS

FIGURE 9-1.

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The Problem/Cause/Solution Track

identify C, the internal causes that must be corrected by you and your associates through one or a combination of your actions, D, E, and F, to get to workable solutions, G. One of the ways to accomplish this iterative and judgmental process is to start placing and re-positioning your evidence in one or another of the seven boxes. Refine the exercise until you have reached a convincing logic and action plan.3 Getting stuck at Stage A risks confusing symptoms with causes. It does not take you far enough toward understanding which actions of your people, and which policies, practices, and strategies, should be changed or re-directed. Such symptoms as unsatisfactory financial data, and disappointing physical performance (missed shipments, user complaints and dissatisfaction, and product malfunctions) beg the action question. Even definition of generalized problems with your people—poor morale, inordinate turnover, key employee defections is not constructive.

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The search for external causes, Stage B, must be undertaken, because it tends to define the direction, magnitude, and damage of the problem. However, it also helps leave the buck with a fall guy or a soured situation outside the company. It rarely gets specific enough about the internal managerial actions that were the end causes. For example, a random, generalized list of external causes might include:         

Our customers’ needs changed. Material costs rose. Suppliers let us down. Distributors lost interest. Competitors gained market share. Chinese imports stole our markets. The dollar devalued. New technology killed us. The national union struck.

Stage C is the essential conversion to make in your problem solving. It helps define and position the possible corrective or innovative solutions and actions among the key managers who are performing D, E, and F. Where and when might someone in the organization have anticipated or foreseen a troublesome internal or external situation? Why was not the warning met with action or relayed to appropriate management along with corrective suggestions? This level of analysis carries all the way to specific steps you and your key associates must take, as suggested by some of the generic internal causes to consider. The purpose of the exercise is not to discipline but rather to identify who should be charged with, and has the resources for, taking the necessary remedial steps. Such steps might include actions to correct the deficiencies related to D, E, and F of Figure 9-1.

         

 

Stage D—Functional Performance Deficiencies: Fuzzy definition of users’ needs and applications Inadequate screening of competitive environment Failure to market test conclusively Sloppy product test and engineering Faulty estimating and pricing Obsolete technology Weak order scheduling and production control Inattention to user feedback and servicing needs Thin field technical and service support Recruiting breakdowns and failures Stage E—Management Practices Deficiencies: Marketing myopia Weak marketing research

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Unclear corporate purpose and strategic directions Failure to communicate sound purpose and goals Expedient, intuitive choice of markets and strategies Impatience, trying to move too rapidly with too much Frequent change of organization and personnel Unclear career paths and work alternatives Lack of definitive policies for risk/reward/penalty Limited incentives for risk-taking No planned management development programs Inconsistent performance measurement against goals Stage F—Individual Management Style Weaknesses: Uninspiring and non-motivating leadership Immersion in details; poor details Undue stressing of favorite functions and people Obsession with volume over profit ‘‘Not-invented-here’’ syndrome Disruptive and confusing signal changing Mistrust of written plans and procedures Turf-building and political infighting Ineptitude at training and coaching subordinates Failure to groom successors Creative fatigue from being a ‘‘workaholic’’ UNDERTAKE AGGRESSIVE ‘‘DO-YOUR-OWN’’ TURNAROUNDS TO AVOID LOSING CONTROL

Take prompt internal actions on threatening problems to avoid losing control of your business. Perhaps nothing can be more agonizing or despairing for a small-business CEO than to stand by helplessly while an outside turnaround expert comes in, sits in your chair, and takes control of a failing business. It is usually the painful end of a grand dream of independence when your controlling investors or the corporate raider resort to bringing in the outside expert, the workout team from the bank, or the takeout specialist. Even a severe performance decline, however, does not have to spell the end if early-warning procedures and a sharp definition of the problems and their internal causes have been in time. Self-turnarounds can and have been accomplished under the most dire circumstances. Doggedly Successful Pursuit of Their Own Turnaround The founder and CEO of Quaker Construction Services had plunged ahead with diversification of his own construction business without focusing on the potential dangers ahead. He learned the hard way what he should have avoided,

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almost seeing his business fail. However, he had the good fortune to bring in a person who spearheaded the saving of the firm. Complementing each other’s expertise, the two proceeded to engineer a solid turnaround by applying some bitter medicine to the founder’s previous pattern of over-diversification, loose management, and lack of financial control.4 Quaker was founded in the late 1970s by Drexel Wright to specialize in remodeling buildings. As his business grew, he took on other craftsmen, then added warehousing and retailing of building products. By the mid-1980s he had reached sales of $1 million annually and expanded his workforce to 32 employees. However, with this growth he was confronted with serious financial difficulties. Over time, profits disappeared and his debts skyrocketed. Trying to regain positive cash flow, he began stretching out accounts payables until they grew to 120 days overdue. Creditors began threatening liens on the business, and he had far too much overhead. He stopped making tax deposits and the IRS became his largest creditor. His financial statements were poorly prepared and inaccurate, and his checking account was unbalanced and frequently overdrawn. Wright had had no training in management and possessed no financial or administrative skills. Moreover, he had not brought in anyone to compensate for his weaknesses. At a friend’s suggestion, he hired Beth Bloom, who had been assistant to the president of a large construction firm. Wright immediately assigned her to the administrative functions, while he concentrated on sales and operations. Bloom swung quickly into action, beginning to apply classic turnaround measures, starting with control of the cash and purchasing accounts. She and Wright soon terminated seven employees, and switched to a new accountant, who moved swiftly to design a useful control system within a few months. Bloom cut out such frills as extra copying machines, sought free information from previous business associates, and talked to an excellent bankruptcy lawyer, to local university business faculty, and to SCORE volunteers in their area. The IRS refused to negotiate the delinquent tax deposits and threatened seizure of Quaker in early 1986. The firm’s lawyer advised Chapter 7, but Wright and Bloom opted to go Chapter 11. They took this step in August 1986 with assets of $325,000 and liabilities of $446,000, owed to fifty creditors. Since Quaker was a sole proprietor, both business and personal assets were at risk. The two, both having been divorced, had fallen in love early on, and in 1987 decided to marry. They entered the next stage of fighting through Chapter 11 with their new marriage weathering many disagreements. They had to purchase all supplies C.O.D. and started collecting past due receivables more aggressively. They stopped retailing building products that enabled them to eliminate their $100,000 inventory. They withdrew completely from new construction work, concentrating on remodeling, Wright’s major area of expertise. They lost some old customers and annual sales dropped to $500,000. They cancelled car phones from all trucks, and let twelve more employees go.

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Cash flow began to improve, but still was not sufficient to start paying back old debts. They obtained court approval to sell some of Wright’s personal assets, including the cattle from his farm, his farm equipment, company vehicles, and some rental properties. They rented out most of the farmland, and considered, but were able to avoid, selling their home. Through these combined efforts, the Wrights were able to achieve modest net income of $21,000 in 1987, and $66,000 in 1988, with a profit margin of 13 percent. Bloom never missed a bank payment or had an overdraft. In 1989 they succeeded in consolidating into one lower-cost bank loan of $150,000, secured by real estate and business assets. This move finally enabled them to prepare a reorganization plan, which the court approved. Their offer was first, to pay all back tax liabilities; second, many of their secured creditors in full; and third, twenty cents on the dollar to the unsecured creditors. All bought in. The couple then established a ‘‘C’’ corporation and after three more years had gained a healthy business momentum and a rewarding marriage and family life. By 1992, they had paid their bank loan down to $30,000, negotiated a lower interest rate for it, and sold most of their developed land. They anticipated eliminating the loan entirely and paying off all remaining creditors within two or three years. Beth Bloom had complemented Drexel Wright’s sales ability and craftsmanship with her own administrative savvy, knowledge of construction, and tough-mindedness to lead an impressive turnaround against heavy odds. Wright had been fortunate to bring in an associate who was skilled in administration and finance, and had experience in the construction industry. Together, the two went through a painful period of doing their own successful turnaround, and achieved most gratifying results. A Seasoned Expert’s Formula for Doing Your Own Turnaround An outstanding turnaround expert, Charles ‘‘Red’’ Scott, has been employing a highly effective nine-step remedy for sick companies over a number of years. His program is based on building and leading an enthusiastic, cohesive team comprised of key people who know that company and its industry intimately. Scott’s company, Intermark, Inc., of La Jolla, California, is a mini-conglomerate that he has assembled from small companies on the verge of failing.5 Starting with rescue of his first company to protect his own substantial investment, Scott’s approach has jelled into the nine basic steps shown in Table 9-4. He has proven with a number of subsequent rescues that any CEO who is able to apply the high degree of objectivity and fortitude required to make drastic changes can duplicate his approach. Scott’s program can be applied in three distinct phases, but is not for the faint-hearted. It is far better than the alternatives for any CEO who detects his crash symptoms early enough.

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TABLE 9-4.

‘‘Do-Your-Own’’ Turnarounds

Phase A: Apply First Aid and Cost Control Fast  Step 1: Take control of cash. Tightly monitor cash flow and application. Stretch payables. Press for

receivables. Meet all taxes due.  Step 2: Listen for positive ideas. Get insights and information fast from employees and concerned

outsiders—customers, suppliers, professional services.  Step 3: Stop the hemorrhaging. Focus on fixing, selling, or liquidating the losers first. Keep no

sacred cows, just the cash cows. Phase B: Prescribe and Fund Healing Measures  Step 4. Clarify the pluses and core strengths. Support and build your lead people, best products and

services, teams and departments.  Step 5. Develop a plan that conserves cash and emphasizes values. Implement boldly and manage

toughly.  Step 6. Raise new cash from receivables, inventories, successful non-core properties and sales and

leasebacks. Phase C: Inspire and Lead an Aggressive Recovery  Step 7. Improve attitudes. Communicate plan to build enthusiastic and cohesive team. Push to

increase productivity.  Step 8. Enhance credibility. Start with small programs that are easiest to achieve.  Step 9. Achieve a profit, but first spend on refresher training, mending plant, re-enthusing marketing,

investment spending to develop superior new products. Source: John Banaszewski, ‘‘Nine Steps to Save Troubled Companies’’, Inc., February 1981, Volume 3, pp. 43–44.

Don’t wait until forced to step aside and let others take charge and threaten, if not wipe out, your ownership and investment. Periodically, run through a ‘‘what if?’’ game plan. You will often be surprised what you learn about more profitable re-directions before you have no choices. You can apply some of Scott’s steps yourself; others need competent associates, possibly new to the company. However, remember that remedies seldom involve days or a few months. Rather, they frequently can take years from crisis to turnaround, as with Quaker. Swallow your ego, and heed those warnings earlier. Better still, there are a number of positive actions you can take to prevent any serious trouble from looming. 1. Make a regular practice of in-depth evaluations of other small businesses’ failures in your industry, or in your type of operations. 2. Study the reasons why and how the successful small businesses and startups did so, and how to apply such lessons to your own enterprise. 3. Maximize the strengths and effectiveness of your own leadership drives and problem-solving style; don’t try to copy managerial styles that do not fit. 4. Employ professionals and outside services to cope with your organization’s overloads and skill gaps.

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5. Always keep your own and your associates’ eyes focused on your customers and how to avoid problems in serving and keeping them. 6. Maintain close personal involvement with all of your key associates, your operations via the front line, and the outside services on whom you depend. 7. Assume you are a candidate for a merger or buyout, and undertake your own self-conducted due-diligence exercise periodically before you need it. KEY NINE: PROFIT PLANNING PROJECTS 1. Develop an Outline Agenda for An Early Warning System. Set up processes that will track all critical aspects of your operations and competition. 2. Perform a Problem/Cause/Solution Analysis of One of Your Toughest Current Problem Situations. Ask a trusted mentor or associate to critique your approach and results. 3. Outline and Rehearse a Mock ‘‘Do-Your-Own’’ Turnaround Plan. Focus on how to meet the one or two most serious dangers or ‘‘what ifs?’’ in your contingency plans.

KEY TEN

Linking Growth Strategies with Profit Plans Seek Related Diversifications and ‘‘Out-of-the-Box’’ Innovations, and Set Tightly Linked and Effort-Stretching Growth and Profit Plans

Innovation doesn’t come easy. It has to be dragged, kicking and screaming, into existence. Often coaxed out of a blank piece of paper. And innovation just for the sake of innovation doesn’t make the cut. Innovation is revolutionary, relevant product designs and industry-leading developments that help every golfer be a better golfer. Innovation is miles of data to get yards of results. It’s taking you and everything about your game into account. Long before our gears ever get turning. Even going so far as to design our own alloy because the one mother nature came up with will no longer do. So why continue to push the boundaries of golf science? Because, like you, we’re golfers, and simply settling for the status quo won’t put more circles on your scorecard. —Advertisement, Calloway Golf Company1

Profitable results require locking together the twin strategic forces of Growth Initiatives and Profit Disciplines. These two forces often can be counterproductive for companies of any size. Optimizing them successfully requires focusing all available human, physical, intellectual-property, and financial resources on what you know best. Objectives must be consistent with present talent, or reinforced by timely employment of missing people skills. Management must clarify the requirements for success with each strategic segment of the firm, and establish realistic benchmarks, completion dates, and measurements of progress. Most importantly, if small businesses are to go from Jim Collins’ Good To Great, they must include astute profit planning.

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REVISITING THE HIERARCHY OF STRATEGIC OBJECTIVES AND STRATEGIES FOR THE SMALL BUSINESS AND THE START-UP Recall that the Introduction of this book presented a fundamental strategy hierarchy at five descending levels: 1. Drucker’s main strategic purpose: create a customer 2. Porter’s main positioning preferences: occupy a profitable and growing industry, and develop a winning competitive advantage 3. Porter’s two strategic objectives: cost leadership and differentiation 4. This book’s ten key directional strategies for market positioning and management and operations 5. Porter’s many strategic options on the front line of your value chain In the first nine keys many success and failure cases and strategies have been presented for one or another of these levels. This tenth key returns the book’s focus full circle to the two linked aims of growth and profit. Except for the usual primacy of first determining product or service, market size and prospects, user benefits, and commensurate pricing, the keys range among the five hierarchical levels in no particular sequence. Moreover, there is no single, sacrosanct definition of strategy. It comes in a limitless range of shapes, sizes, and relative importance. Perhaps the closest to a useful guide for small business CEOs is to proceed from the firm’s objectives directly to the relatively few basic strategic decisions that will set the main directional courses the company has elected to pursue. Then, flesh out this framework to fit your competitive situation. The main directions work for you when outstanding subordinate strategies and tactics are marshaled to implement them. The Growth/Profit Plan of this key can provide the overriding discipline. In structuring the plan, the small business leader’s strategizing can benefit from a collection of characteristics and hardearned lessons gleaned from working companies and start-ups of many sizes and types. Table 10-1 summarizes this experience with guidelines for an effective strategic and profit planning process. The Managerial Challenge of Balancing Growth Forces with Cost and Profit Constraints Harnessing the two potentially counter-directional forces for success needs an adroit balancing of initiatives, disciplines, strategic choices, managing, and motivation. The result depends considerably on how you perform the managerial swing forces and deterrents, such as those shown in the side bar.

TABLE 10-1.

Significant Characteristics of Small Business Strategy

A: hierarchy of strategic decisions First, Main Strategic Purposes of the Enterprise Create a customer and innovate. (a) Second, Your Basic Strategic Objectives (b) Occupy a profitable and growing industry. Choose one where your user benefits can win. Third, Strategy’s Prime Alternatives (b) Cost leadership—low cost producer Differentiation—superior user benefits Focus—combination of cost and differentiation strategies in subsets of selected segments Fourth, Key Strategic Functional Directions (c) The two sets of ‘‘external’’ and ‘‘internal’’ keys and the core strengths and strategic drivers that power them Fifth, Strategies and Tactics in Operations (b) Strategies at the value-chain levels, and the tactics required for implementing them B: timing of strategic commitment Operative Status of the Company’s Strategies Your strategies become operative only when responsibilities and resource allocations of people, facilities, and funding are assigned. Market-Commitment Timing Distinctions Commitment strategies—operating decisions that govern competing in the market now versus Development strategies—current assigned and funded projects in R&D, engineering, outsourcing negotiations, diversifications and other options to make ready for their future marketplace commitments to competition Infotech Strategy in this Book Mainly advocates infotech state-of-the-art to serve as a major profit facilitator, not an end goal. Execute a phased program only employing applications proven for small business. Exception, market an innovation developed internally as a profit center. C: strategic decision-making cycle One, Current company position against plan Always document current plans and progress. (a) Peter Drucker, The Practice of Management (b) Michael Porter, Competitive Advantage (c) The approach of this book

Two, Competitive Situation Analysis Key trends with customers and competition Broad industry and economic factors Three, Identification of New Opportunities Strategic and tactical operations options Requirements for success with key options Four, Mission and Objectives Confirmation and revisions Five, Strategic Plans Market-positioning, managerial and operational strategies, core strengths and strategic drivers Financial and infotech strategies Six, Departmental Operating Plans Marketing, Operations, Financial and Infotech Seven, the Enterprise Business and Profit Plan Consolidation and optimization of the departmental plans, supported by the financial and infotech strategies and constraints D: strategy realities in practice Strategies at Two Levels in this Book One, the basic directional courses the company has decided to pursue; and two, strategies for implementation at the value-chain level. Need for Documentation and Communication Every organization has a strategy, expressed or implied; if the latter, it can be misunderstood. Up-to-date communicating on a needto-know basis is a must for consistent results. Ongoing Strategic Review and Updating Strategic planning is no once-a-year activity; competition and infotech’s shrinking windows of opportunity require ongoing evaluation. A Line Responsibility Making strategic decisions is line managers’ responsibility to develop and execute, not an assignment to be delegated to staff. Decision Content More Critical Than Process Effective strategic decision-making requires a combination of the planning process and content development and innovation, placing more emphasis on the substance than the process.

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Main Ingredients of the Entrepreneurial Balancing Act Growth Initiatives

Profit Disciplines

Occupy growing niche markets Set a bold mission and objectives Stress a pervasive marketing mentality Pursue industry-leadership strategies: —Differentiation of benefits and/or —Low-cost market dominance Promote innovation and brainstorming Lead and motivate enthusiastically

Leverage resources with outsourcing Partner with strong associates Screen new plans with due diligence Employ key professionals and specialists Delegate, team, and empower Deliver prompt, superior services Insist on operational productivity Seek economies of scale

Profitability Swing Forces Negative Swing Dictatorial Not discriminating Left to swim alone Do just because it exists Deep-seated flaws Left to chance Growth at any cost

Positive Swing Leadership style Marketing mindset Empowerment Infotech state-ofthe-art ‘‘Natural’’ strategies Career Opportunities Profit Plan for growth

Broadening people power Market view in the forefront Trusting, even-handed control Profitable for your application Strong inherent, built-in pluses Personal development plans Perform due diligence testing

PURSUE INNOVATION AND ‘‘OUT-OF-THE-BOX’’ BRAINSTORMING TO CREATE SUPERIOR BENEFITS, SOLVE PROBLEMS AND IDENTIFY RELATED DIVERSIFICATIONS You have already met a number of successful start-up entrepreneurs in the previous keys. More are to come in this tenth key starting with a street busker who has gone on to keep achieving unbelievable innovative successes. How Brilliant Creation and Astute Strategies Turned a Street Busker into a Billionionaire Cirque du Soleil is not your grand parallel of today’s Ringling Brothers, Big Apple Circus, or Circus Smircus. It is highly sophisticated entertainment that ‘‘speaks in a universal language.’’ Soleil is a reinvention of the circus on a much loftier plane that has been called a circus maximus and a new form of the arts. Each new show always has a different theme, with ever-changing combinations

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of spectacular dancing, pantomimes, trapeze artists, jugglers, floor acrobats and contortionists, fantastic costuming and staging with colorful settings, spotlighting, and innovative theme music. It is a most original, unusual, and spectacular show of high quality entertainment from the creative mind of Guy Laliberte. Born in Quebec City in 1960, he became a busker on the streets of Montreal as an early teen playing the accordion for tips. Following high school, he hitchhiked across Europe, met jugglers and stilt walkers, and learned the art of fire breathing. Back in Montreal, he organized parties and street festivals out of a youth hostel, and later obtained $1 million of backing from the Quebec government to stage a street show for Canada’s 450th anniversary celebration.2 In 1987 Laliberte produced an act for an art festival in Los Angeles, then performances in Santa Monica and San Diego. By 1990, major engagements began developing with great success in Las Vegas, then in Montreal, Paris, Spain, and other major locations. The latest show underway abroad is at a Japanese Disney World project. By mid-2005 he had ten different shows worldwide (6 of them traveling) with three more in preparation. Four different shows in Las Vegas alone were playing to 9,000 people a night. Ticket sales in those locations exceeded $1 million nightly. A gigantic fifth show set to the music of the Beatles opened at the Mirage with a $100 million theater in mid-2006.3 What are some of the strategies of this entrepreneuring way out of the box by Guy Laliberte? 1. He began with a particular talent and flair and stayed in an entertainment medium he knew best, doggedly promoting his abilities in the formative stages. 2. He persuasively convinces backers to partner with him. The Las Vegas hotel owners and other partners provide the theaters and pay the costs of preparing the housing and facilities for each show. Laliberte manages the show’s creative and production costs. Overall expenses and profits are split 50-50 on opening. Guy maintains 100 percent control over all creative aspects. 3. He introduces innovative shows, never copies of past productions. Every new show has fresh, spectacular, class acts, and novelty filled with surprises and wonder at the performers’ skills. He always introduces strikingly different productions at a high level of innovation and quality entertainment. He promotes by word of mouth and periodic showing of Cirque’s entire series of hits on BRAVO cable TV. 4. He depends upon never-ending sources of the world’s top talent—acrobats and trapeze artists, novel entertainment teams, and individual stars who seek him, or are being discovered by his twenty talent scouts scouring the world. He signs the cream of the crop, binding them to three-year contracts for the shows’ moves from location to location. 5. He is masterful at working the critical financial numbers. He partners with casino giants who foot the costs of the facilities, and charges high

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admission prices because of the quality and demand. Our tickets were ordered well in advance and Cirque possessed the advance payments for three months before our show date in Montreal. Our seats were the next to last row in the huge tent, but fine viewing nevertheless. Attendees first pass through a small tent to have tickets taken, with the tent filled with programs, snacks, novelties and mementos of show characters for sale— tempting impulse purchases. Special tickets at very high prices are available for those who also want to meet the entertainers in a separate tent prior to the main event. Guy Laliberte is a strong contender for outstanding startup entrepreneur of this generation.

The Role of Imagination and Perspective in Problem Solving The late Dr. Richard Hayes, while director of systems engineering for NASA’s Apollo moon landing project, was struggling with the problem of removing 600 pounds from LEM, the lunar landing module. The objective of the weight reduction was to enable enough additional fuel to be carried for an added 15 seconds of safety margin for the reascent to the space capsule.4 In the finest problem-solving fashion, he combed through all components and operating procedures of the lunar module, but the alternatives fell short of his objectives. Dick related that his solution finally came to him one day while riding the New York City subway. As he stood in the aisle hanging onto the strap, he found his answer. His solution was to remove the astronauts’ chairs from LEM; they were unnecessary for the short journey to the moon and back to the spaceship! Dr. Hayes later was chief scientist at Xerox. He regularly began his innovative thinking about problem solving and new opportunities with the premise ‘‘the world has no gaps.’’ He admonished us to ask ourselves:









What kind of business are we in? Who is the competition? What is the technical situation now? What was it 3 to 5 years ago? Who were the leaders then? What are the leaders doing now? What are we doing to get there? How fast must we move?

Do not hesitate to act quickly when an unexpected problem arises. It might be a new opportunity surfacing at the same time. Many small business success stories have been initiated, not after exhaustive market research and analysis, but by sensing an opportunity presented by a new set of circumstances.

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Converting a Natural Disaster into a Thriving Enterprise It took a tornado in the mid-1990s to launch Deborah Edlhuber’s career as a budding entrepreneur. In the aftermath of the tornado that wiped out the woods on her family’s farm near Waukesha, Wisconsin, an abundance of wildflowers of many varieties began springing up again. Deb and her husband started taking photos and marveling at what nature had restored to their property. They wanted to start a wholesaling business, Prairie Frontier, in 1995. They began propagating many wildflowers and prairie grasses and selling them to garden centers in southeastern Wisconsin. Deb grew more and more frustrated that she was only functioning as a wholesaler and had virtually no contact with her consumers. She bought her first PC in 1996, subscribed to America Online, and began teaching herself about the potentials of the web, with the help of her son. She next bought a scanner and they started building their own Web site in the spring of 1997, putting the address on the seed packages. When web queries started to come to her, stimulated by her fabulous photos of wildflowers and prairie grasses, she joined LinkExchange, a business that swapped banner ads, and her web traffic catapulted. Prairie Frontier began receiving $50 to $100 orders directly from consumers. Since that time she has placed ads in Time, Newsweek, U.S. News and World Reports, Entrepreneur, Home Business Computing, Inc.Technologies, Business Week, and the Wall Street Journal. She currently is using links to thirteen other web sites. An August 2005 visit to Deb’s site reveals her tremendous expansion of products and services over the years. These additions include games, wildflowerthemed puzzles, and slide shows, such as how to create a prairie. She initiated discussion forums that she visits frequently to contribute and receive ideas. Another popular diversification has been the addition of free musical greeting cards for e-mailing. She downloaded music from several public domain sites, and put her company’s name on the card.5 The unanticipated opportunity of a Prairie Village is a kind of dream many budding entrepreneurs would hope to discover and develop. When considering new directions for growth, consider related businesses first. Think long and hard before conglomerating except for ‘‘once-in-a-lifetime’’ opportunities that are attractive enough to be worth the risk. The Velcro story described in Key One is a case in point. But do not be too hurried about rejecting a new idea. Do not dismiss seemingly far out propositions until they have been thoroughly aired and tested. Then, make yourself and your fellow advocates and proponents meet the scrutiny of penetrating and convincing evaluations. Remember that deciding when not to diversify is often as critical as planning to do so, as a successful small business owner concluded after exploring some interesting new options for his unique business.

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Prioritizing New-Business Options Raymond Bates is one of no more than a dozen master horologists in the United States, who has been called a preeminent ‘‘steward of time.’’ Horology is the science of time measurement. Ray, ‘‘The British Clockmaker,’’ has a thriving and highly preferred service business in Northern New England. He concentrates on repair and restoration of antique clocks, watches, sundials, and other high-quality timepieces. Over the years, he has renovated many antiques created by three centuries of clockmakers, including numerous museum timepiece treasures. Ray was born and raised in Scotland where he apprenticed for five years with the R. L. Christie clock making company, learning the traditional craft under the tutelage of European masters. Concurrently, he earned a mechanical engineering degree at the University of Edinburgh, and also achieved the Master Clockmaker status from The British Horological Institute, London, in 1952. Following service in the RAF and his own new business in London, he moved to the United States in 1957. Ray’s first U.S. employment was working for a watchmaker in Keene, New Hampshire, and then teaching English ‘‘with a Scottish accent’’ along with parttime clock repair. By 1964 he had become convinced of the potential for antique clockwork in America, gained American citizenship, and established his own full-time service in Newfane, Vermont. Ray’s craftsmanship is impeccable. He has developed a lucrative and loyal client base and a reputation that commands and warrants high repair and renovation charges. He regularly has six-to-twelve month backlogs for finishing jobs. Ray operates his own machine shop of precision metalworking equipment for reproducing virtually all of an antique clock’s tiny precision pieces. It is not uncommon for a client to wait (sort of) willingly a year or more for delivery of a finished restoration of a rare and valuable timepiece. It is well worth the wait. For about 40 years Ray’s reputation and business have grown into wide recognition throughout the United States and Canada, marketed by word-of-mouth, regional advertising spots on public radio, and periodic promotional mailings to a select list of satisfied clients. Ray and his wife, Beverly, have great expertise in photography. In the late 1990s, she had retired from college teaching, and they were considering diversifying into new product lines related to their respective creative skills. They were also exploring construction of a retail store in a part of the house and barn that housed Ray’s operations. The store, tentatively called ‘‘Bates Crossing,’’ would display a variety of timepieces he had accumulated over the years. Beverly would run the store and develop crafts for sale (calendars, notepads, scenic pictures, etc.) that she had been expertly creating by applying her photographic capabilities. Ray, although keeping fully booked with his renovation services, was interested in diversifying. He had been exploring the development and manufacture

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of faithful reproductions of antique clock faces and other timepieces. They would have no clockwork, rather be marketed as purely decorative items. This had already progressed into a few handsome prototypes an engineering shop had executed for him. These expenditures, plus issues concerning the retail store idea prompted the couple to seek guidance from a consultant to help evaluate and focus their diversification aims. One of the first steps was to brainstorm numerous options related to Ray’s expertise and Beverly’s interest in photography. The initial brainstorming generated a diverse array of product types and market segments, as outlined in Table 10-2. The vertical axis shows six categories of ‘‘Time’’ products and horology lore, including A and B, Ray’s successful renovation services and his periodic promotion of antiques for resale. Categories C through G were potential diversification options. All of the product and service options were matrixed against four preliminary groupings of market segments. Ray, Beverly, and the consultant brainstormed the matrix, and then condensed and prioritized them into the conclusions and next action steps summarized in the sidebar. The demands of executing Ray’s favorite Option C required a thorough and exacting price-setting process. Ray had developed several prototypes and had master models produced in brass that he and their consultant proceeded to cost and price. This type of early-stage exercise is a must for a new entrepreneur who doesn’t have the seasoning, judgment, and market experience of a Ray Bates. Confronting the first-time, start-up enthusiast with simulating all of the grubby steps is essential for a sound and realistic go–no go decision. A thorough quantifying process forces early objectivity on the risks and requirements of an exciting new idea. The breakeven analyses for timepiece reproductions suggested risky sales levels at the estimated costs and requisite pricing spreads. Ray suspended this diversification aim, at least for the near term. His main considerations were:



Unconvincing findings about the viability of a quality decorative reproductions market that is a highly discretionary purchase, and The strong and growing backlog of profitable repair and renovation work confronting Ray in-house.

After reviewing all of Bates’ matrix options it was an easy call that Option A should continue to be the core of the company’s expertise and sales momentum for the near term. The second option, promotional mailing, had resulted in sale of almost all items offered. This underscored the market’s high level of trust and confidence in the value-based benefits Ray was offering to collectors of antique timepieces. Ray and Beverly decided to keep refurbishing their own inventory of valued antiques by continuing to attend auctions to find additional resalable items. For the short run, the evaluation of new options helped refocus the company’s attention on preserving the cash generating capabilities of the established renovation and repair service. However, the matrix approach provided the Bateses

TABLE 10-2.

The British Clockmaker’s Diversification Planning Matrix MARKET SEGMENTS and PRODUCT IDEAS 1. Collectors a. Individuals b. Institutions (Clocks and Range of Antiques)

PRODUCT CATEGORIES A—antique restorations and repairs

B—antiques for resale C—reproductions for collectors and decorators

2. Decoration a. Professionals b. End Users

3. Education and Recreation a. Children and Parents b. Grandparents c. ‘‘Learners’’

British Clockmaker’s Clients and Prospects —Long-time client list —Word of mouth —Public radio listeners 1. Owned by Bates 2. On Consignment 3. Bought for Spec

1. Owned by Bates 2. On Consignment 3. Bought for Spec Clock faces, Moon faces, Sun dials, Miniatures, Old Paintings

Same as Decoration Items for a, c and d outlets

D—home accessories and novelties

Calendars, Note Pads, Place Mats and Coasters, Xmas Tree Ornaments

E—toys and games

Jig Saw Puzzles, Rubik’s Cube take-off, How-To for Children

F—educational booklets

How Things Work, Oiling Techniques, How to Buy Antiques

G—other ideas

4. Other Markets a. Bates Crossing (Store) b. Cabinet Makers c. Retail Antique Corners d. Mail Order Catalogs-Gifts

Bates machining of clock parts—Geotron

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British Clockmaker Options: Second Stage Review A—Timepiece Restorations: Keep first priority on the basic renovation and repair services. B—Antiques for Resale: Keep attending antique auctions and household goods sales for opportunistic purchases. Evaluate the results of the recent mailing of a sales brochure to Ray’s client list that offered twenty-five antique items in his current inventory. C—Timepiece Reproductions: Prepare definitive cost and pricing estimates, and breakeven unit sales analyses of the reproduction prototypes already commissioned and received. Suspend any more prototype commissions until evaluation completed. D—Bates Crossing: Postpone the retail store option indefinitely based on initial construction cost estimates, and concern about lack of local market density. E to G—Other Options: Put on hold the home accessories, toys and games, and educational booklets, but keep them in a ‘‘future agenda’’ status.

with a stable of prioritized shelf options for future consideration on a carefully phased timetable. One of their sons joined the business to serve an apprenticeship in the renovation work, and he turned out to be a fast learner. This promised to free up some of Ray’s time for future attention to the options. Also, Beverly later continued the evaluation of a retail store and gallery. The diversification exercise demonstrated the importance of keeping focused on:




Where a company’s core strengths best fit the alternative niches; A targeted market-positioning strategy that emphasizes the most profitable directions; and The need to avoid temptations to spread human, physical, and financial assets too thinly over too many diverse markets.

This in no sense precludes looking for greener pastures. Keep motivating your key associates to move out of the box with brainstorming. Your market-positioning planning process should always endeavor to push the envelope toward improving your competitive advantage. As the company grows and evolves into multiple business niches or segments and an increasing workforce, some amplification of the planning cycle is needed. Revisit your market-positioning and operational options periodically to keep your key people looking outside the box. Consider the possibilities for profitable growth across the entire range of your value chain. Perhaps the most important opportunity common to all of these random aspects is the people dimension. Mounting superior people power focused on sharp marketing, unswerving customer orientation, and impeccable customer services may be the best generator of profitable growth. And begin your relateddiversification journey within the four broad, generic classes of product/market options. Unless you are contemplating a complete break into some entirely

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Selected Areas for Strategic Options Along the Value Chain Technological innovations Cost leadership Differentiation of offerings Partnering and joint venturing Design simplification Pricing Core-skills concentration Infotech applications

Speed and timing strategies Geographic expansion Distribution selectivity Targeted prospecting Product cost reduction Outsourcing Selective empowerment ‘‘Guerrilla marketing’’

different endeavor, your main choices for profitable growth are most likely to fall within the first three of these categories. Evaluate market-positioning options that employ new technology and benefits enhancements. All except NP/NM inject important new dimensions into your present strategic plans and programs. All three clearly can provide a boost of excitement, energy, growth opportunities, and big challenges for you and your associates. Do not give up easily on initiating strategic and operating innovations with your present lines and markets, either before, or as you pursue the other courses. EP/EM is not just about converting ‘‘me-too’s’’ into ‘‘me-to-pluses.’’ You almost always will have additional sets of alternatives to apply to the existing lines and customer categories you know best. EP/NM: Look in this direction when you value your core strengths highest for your existing products and their related technologies and production processes. Brainstorm on how you can bridge over to new applications with your present know how. Flexlite, seeking new types of specialty lighting applications, was on this path. NP/EM: When your highest order of strengths is your knowledge and expertise in your current market, its applications, and customers’ businesses, you may prefer to concentrate your growth planning on identifying new types of

Four Basic Classes of Product/Market Options EP/EM: Established Products for Established Markets

NP/EM: New Products for Established Markets

EP/NM: Established Products for New Markets

NP/NM: New Products for New Markets

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products and services. You have met Antenna Audio, Iceberg, GMT, and U.S. Sports Camps who pursued this course. NP/NM: This ‘‘all other’’ category calls for non-related diversification into entirely new offerings, businesses, and markets. This is the riskiest of the four options, and takes the least advantage of your present experience and expertise. Its success is highly dependent on your managerial acumen and the imagination you and your associates can exercise. It normally requires new human, physical, and financial resources to carry you through the longer development and gestation period of the entirely new proposition, and on to the development of brand new market demand and a favorable brand standing. Or, of course, you may come upon the entirely new, new thing. We have caught a bit of the excitement of several innovative start-ups and lone inventors—Velcro, AnthroTronix, Lonnie Johnson, and Dontech.

Maintain Contingency Plans and Strategic Shelf Inventories of New Products, Policies, and Programs to Meet Competitive Threats Management should always include in its on-going planning process two ‘‘what if?’’ elements: competitive contingency options and plans, and an active agenda of growth/profit options. Contingency plans should be drawn from the continuing reviews of your competitive situation analyses. Key people should also meet regularly to brainstorm on potential threats and alternative reactions to them. The accelerating pace of change made possible by the Internet and infotech gives today’s companies less time to react to competitive initiatives, emerging new opportunities, or threatened loss of major accounts. It is prudent to maintain a ‘‘shelf inventory’’ of tactical or strategic options, such as ready-to-market product and service enhancements, alternative pricing policies, and fresh marketing and promotion approaches. Periodically offering the new helps to keep your customers with you.

Separate Your New Venture Responsibilities from Your Mainstream Line Functions Development strategies provide the growth/profit encore. In the earliest stages of a new enterprise you must begin determining and executing the developmentstrategy decisions to ensure longer-term competitiveness and profitable growth. Otherwise, you may have only a comfortable-sounding ‘‘futures’’ agenda without substance that could be too late. Be careful to differentiate between commitment and development strategies. Follow through decisively to launch qualifying priority options. Empower your most ardent believer to implement. Start new ventures outside of your present structure. Then, monitor closely for performance against objectives.

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EMPLOY INFOTECH SELECTIVELY AND RESOURCEFULLY AS A PRIMARY CORE STRENGTH Some readers may be surprised that infotech developments as primary and strategic core strengths and main thrusts of a business began sometime earlier than the World Wide Web, or the Internet, or Netscape. Lessons are to be learned from earlier applications that pre-dated the wave of successful and failing IPO’s of the late 1990s and early 2000s. A short list where infotech was already the main act includes the following landmark initiatives and building blocks:














DARPANET (Defense Advanced Research Projects Administration): The forerunner of Netscape was initiated in the 1960s by the U.S. Department of Defense to facilitate defense planning. It linked a group of corporations, government agencies, and university research centers in the first significant information networking approach. Bolt, Beranek and Newman, now Genuity, was a driving force in the net’s development. American Sabre Airlines Reservation System: This first online, real-time air passenger flight booking system, was jointly developed by IBM and American Airlines in the early 1960s. Blair Smith and Cecil Webb spearheaded IBM’s participation in developing the infosystem for this groundbreaking effort. Online Corporate Knowledge Databases: Following the pioneering work on the Sabre System, Webb developed a comprehensive online proprietary database in the mid-1960s. It cataloged IBM’s application expertise by type of business and industry. Webb christened his project an attack on ‘‘IBM’s shoemaker’s-children syndrome.’’ This directory encompassed and classified every one of IBM’s 10,000þ domestic sales, systems, and systems service persons according to their hands-on understanding of applications by industry and sub-industry. The database became a powerful, instant reference source throughout the company’s worldwide sales, marketing, and product development organizations. Online Stock-Quotation Computer Systems: Beginning in the 1960s, Reuters, Ultronic, Bunker Ramo, and others established real-time online reporting of current stock quotations and commodity prices. The information was delivered to desk monitoring screens of investment companies’ trading desks and research departments, to the investment departments of banks and insurance companies, and to stock and commodity exchanges. Individual investors could also subscribe to a twenty-minute delay of the stock prices and market data flow. Timesharing: One of the earliest widespread communications-based capabilities allowed computer users to access computer capacity from remote locations. Much of this early work was at GE, and a major participant was the late Michael Dertouzas, a brilliant computer expert who later headed the information labs and programs at MIT. Dertouzas authored one of the first

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definitive articles on the concept and future of ‘‘The Information Superhighway,’’ and the book, The Unfinished Revolution: Human-Centered Computers and What They Can Do for Us. OCLC (Online Computer Library Center): OCLC, described in Key Six, was established in the late 1960s by a consortium of Ohio University and Research Libraries to reduce the libraries’ card cataloging costs and improve access to the world’s information. Development of the system was led by Frederick Kilgour. This not-for-profit membership organization went on to develop the Interlibrary Loan Service, and many other related services for libraries and their patrons. In the 1980s, Rowland Brown led their expansion of services into online delivery of full text. Intel’s Production Processes: In 1986, Intel digitized its product development process for the production of CAD/CAM software systems, giving the company a two-year lead in the design and development of computer chips.6 Wal-Mart’s Supply Chain Systems: Wal-Mart digitized its logistics flow with sophisticated communications and technical systems for real-time sales and ordering. This enabled significantly improved delivery of the right products at the right time to the right stores, cost cutting, integration of operations with suppliers, and the capture of comprehensive customer information.

These pioneering applications are representative of many services that were initiated for broad, industry-wide information warehousing, sharing, and exchange prior to the Internet. The infotech core strengths of DARPANET, OCLC, the stock quotation services, and American Airlines’ Sabre became the prime profit producers for their developers. Another essential infotech-based venture that contributes much more than operational productivity enhancement to an enterprise is the application of infotech to cattle breeding and dairy farming. Maintaining a Massive Historical Database at the Heart of Its Member Service Offerings The Holstein-Friesian Association of America was established in 1852; its name was changed to Holstein Association USA, Inc., in 1994. Ninety percent of U.S. dairy farmers use Holstein cattle. This organization offers many services to its members. Its mission is to develop the breed through ‘‘unexcelled production practices, greater income over feed costs, unequaled generic merit, and adaptability to a wide range of environmental conditions.’’ The heart of the member support is the comprehensive database of characteristics on more than 19 million Holsteins.7 The basic Holstein computer file contains accumulated listings, lineage and descendant chains, and productivity data for the living and dead cows of the membership. Every six months an updated historical directory is published for the benefit of its members in making their breeding decisions. The process of keeping current data requires 30 plus classifiers in the field, responsible for keeping tabs on about 600,000 cows each. Every classifier calls

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on assigned dairies on a regular schedule, getting milk production updates on several hundred cows per week, spending two to five minutes on data collection per cow. Their assigned herds vary from 50 to as many as 2,000 head per farm. The aim of the data collection is to accumulate information to help dairy owners plan the future breeding for their herds. This requires tracking the performance pedigrees of Holstein bulls’ progeny. The information system helps identify the physical characteristics contributing to the animals’ longevity and milk production. Seventeen traits are recorded, including such factors as body depth, rump angle, udder depth, and rear leg formation. HA’s inventory taking process had been computerized since the late 1960s, and currently each classifier has an efficient handheld data collection device. Every night the day’s information is uploaded to the headquarters computer system, and data on the herds to be surveyed the next day is downloaded. This information system is the primary core strength essential to maintaining the huge base of member support and the association’s numerous programs.8 Since the advent of the Internet, many infotech-enhancing functions of the value chain and the supply chain have been proposed or marketed as the primary strategy, or a major profit enhancer. Many have been large in scale and not readily suitable for the very small enterprise. Exceptions to the purely online approaches of an Amazon.com and a growing list of smaller ventures are the bricks and clicks models. Many of these use infotech as a supplement to stretch geographic scope and expand the line of offerings or supplement the order fulfillment process. Some such cases were briefed in Keys Three and Four. The small entrepreneur is cautioned not to plunge into elaborate infotech just to be state-of-the-art if it will seriously reduce or eliminate bottom-line profits. Wait until it fits your application and can be a realistic core strength, or is proven to produce profits from a growing scale of operations. Where an infotech venture does fit, move aggressively before a competitor beats you to it, and support its development to the hilt! AVOID BUSINESS VENTURES WITH HUGE, INHERENT ‘‘NATURAL-STRATEGY’’ HURDLES Natural strategies are those major decisions that are based on fundamental characteristics and requirements for success of a venture. Such characteristics may favor the venture’s core strengths, and be major reasons for undertaking it. Or they may be conditions that could pose future insurmountable obstacles beyond the entrepreneur’s control. Often the negative characteristics are hidden or not easily anticipated prior to the project’s implementation. An example from Key Eight is the failure of the miniature cassette being promoted for low-cost mailing, because its principal technology of a continuous-loop design could not guarantee digital fidelity, which was not discovered in the early stage of development. Both the positive and negative characteristics of natural strategies are like water seeking its level. Hindsight always discovers them eventually, particularly

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for the failed venture. It is never too early to try to identify all such factors that are essential for success. The potential flaws come in many variations beyond unsatisfactory design and operational technology. They may include:









Fundamental misconceptions about consumers’ critical needs Poor judgment about the relative importance of price versus benefits The fleeting fad versus fashion continuity Exposure to technological creativity and obsolescence Untested consumer shopping preferences, ie., early online marketing Drastic strategic changes by major competitors Underestimating the influence of union loyalties and perquisites Vulnerability to changes in governmental and regulatory statutes, for example, Behlen’s loss, cited in Part A, when grain storage subsidies to farmers were cancelled

Bucking Natural Strategic Obstacles that Were Potential Deterrents from the Outset Key One reviewed the innovative successes of Dortech with automated cargo handling systems for airlines. However, one of its ventures illustrates a problem with the natural strategies of a new concept. In the mid-1960s, the Port Authority of New York and New Jersey (PONYA) offered Dortech a lease option of fifteen choice acres of airport land adjacent to a key runway at JFK Airport. The first purpose was to develop and promote an automated air cargo terminal, which Dortech would then run as a consolidated service to be shared by multiple small ‘‘member’’ airlines. PONYA’s second objective was to eliminate its financing of cargo facilities for airlines to help fund building of the Twin Towers. The Dortech project would preserve costly and scarce airplane ramp parking space, and give member airlines substantial cost benefits from a shared, automated warehouse. The airlines would retain their own customer identity with separate sales and marketing activities. Common warehouse and ramp service people would be hired by the new business to be called CATS (Consolidated Aircargo Terminal System.) At the outset, management recognized that working out the personnel and union complications would be a tough call. PONYA gave Dortech 60 days to persuade some representative airlines to tender letters of intent to seriously consider participation. Dortech brought in a consultant to serve virtually full time as the CATS project manager. He made sales calls and proposals to a number of airlines and soon obtained letters from six participants. The six represented a compatable mix of medium- and smaller-sized domestics and internationals with well-staggered flight schedules to minimize aircraft ramp congestion. The Dortech team began developing specific plans for warehousing, ramp layout, handling processes, pricing and policies to fit the particular characteristics of the six interested airlines.

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Efforts continued for some time without success in reaching final accord among all participants. Then, at PONYA’s suggestion, Dortech formed a joint venture with a major refueling and baggage handling service, Allied Maintenance Corporation, that was well established at the New York area airports. This linked Dortech’s strong systems and engineering capability with a proven airline service organization that hopefully would be capable of convincing the airline participants it could manage the union operating personnel effectively. The venture partners tried to commit the airlines to join in breaking ground but were never successful in overcoming all of the objections and concerns of every airline. Each one had invested significant time to make the venture workable. In the end, a major cause of the project’s failure was the cargo handlers’ potential loss of airline privileges, particularly free air trips, once they would sever their airline employment to become CATS employees. More importantly, every combination of potential airline mix had at least three different unions representing their respective cargo crews. Staff reductions were inherent in the concept, and no airline was ready to bite this bullet with its own union. The airlines, PONYA, and the venture partners stayed with the project for so long because of powerful potential benefits for all parties. However, there was always a significant ‘‘natural’’ strategic hurdle that could doom the project—union noncompatibility. Innovative technology and success in selling a beneficial concept were domineering drivers that still could not save the venture from the union conflicts. However, the venture partners always considered the potential gains well worth the risk.9 A Diversification with High-Risk Requirements Beyond the Firm’s Basic Expertise The Tomlinson Oil Company was a small mid-western oil and gas exploration and development company with a successful track record in finding oil. The principal owner was also one of nine partners in a sub-marginal-sized, southwestern oil refinery having lucrative jet fuel contracts with the U.S. Air Force. When an opportunity came to buy out the other partners, Tomlinson convinced his board to support the acquisition. The company moved quickly to sell high-yield bonds to finance a substantial increase in the refinery’s capacity from 5,000 to 20,000 barrels per day, and to fund a costly overhauling of the refining process. This was required in order to convert the plentiful local reserves of sour crude into the sweet crude demanded for the jet fuel. Soon after its completion, two serious setbacks occurred that had not been given serious enough weight in the board’s decision to take over the refinery.


OPEC drastically reduced the price of crude oil delivered to Texas, and Saudi Arabian refineries were able to land sweet crude at the Texas gulf ports at a lower price than the new refinery could match.

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President Reagan eliminated the small-refinery bias that had been a significant tax break for the marginal refineries (normal minimum refining capacity was 250,000 barrels per day).

The combination of these two factors sent the company into the red, and it was taken over by a corporate raider. Unfortunately, Tomlinson Oil had strayed too far afield from its proven expertise and success as a petroleum finder and developer, and had failed to factor in the two major dangers beyond its control. LINK GROWTH AND PROFIT OBJECTIVES AND STRATEGIES TIGHTLY INTO A COMPLETE PROFIT PLAN The critical task of growth/profit planning is particularly crucial in three differing situations: when planning to launch a start-up; when considering either additions or eliminations of significant segments of a small business at any time; and when performing regularly scheduled annual plan reviews and revisions. In other words, always. While the deliberations vary for the three, all require a mix of penetrating consumer- and competitive situation analyses, critical-numbers development, judgmental evaluations, meticulous screening, high expectations, objectivity, and guts. Improving the Odds for a Successful Start-Up Profit Plan The intended audience governs the contents and level of detail needed. Alternative forms range from a comprehensive document for bank lending departments to the simplest possible approach that establishes strong conviction for proceeding. In order to establish strong confidence for launching, the new entrepreneur should have clearly in mind the following issues that have been explored in the ten keys. Documentation in at least an expanded outline form is advisable to facilitate presenting your plans to trusted advisors for challenge and suggestions. Minimum Requirements for the Successful Launch of a Start-Up Ideally, the entirely new venture should have dotted the I’s on all of the foregoing elements, but the absolute minimum should include strong conviction and satisfactory evidence of meeting the five prime issues for the litmus test presented in the Part B chapter:




Viability: positive indications of superior benefits and strong market demand; Permits and Compliances: all identified and obtained; Funding: enough to reach estimated positive cash flow at realistic pricing levels;

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Key Profit Plan Issues for the Go–No Go Decision Marketable products and services, all with superior benefits? Growing consumer demand for your price/value combination? A market size that affords a profitable critical mass? A realistic mission and objectives? Advantages over major competitors and their offerings? Targeted marketing strategies? Customers’ preferred distribution channels? Supply chain matching customers’ requirements? Responsive customer services and policies? Market-oriented personnel and compatible managerial style? Required facilities and operating locations? Competent outside support services? Reachable breakeven target? Positive and conservative cash flow projections? Adequate current financial resources and future funding sources? Combination of the venture’s critical numbers into a complete and workable profit plan?





Operating Confidence: understand the early managing requirements; and Entrepreneurially Ready: not ‘‘burning bridges,’’ and expect to have fun.

As noted in earlier keys, the start-up entrepreneur is advised to ‘‘double the early cost estimates and halve the revenues. It is also prudent to establish an early accountant relationship to have up-to-date performance data and help with fiscal discipline. Many issues also require a competent lawyer. Given the normally high optimism and confidence of the neophyte entrepreneur, a mentor is highly advisable. Get a sounding board—a trusted and objective ‘‘mentor-type’’ friend, associate, or advisor for counseling as the venture moves toward and into launch with its successes, hurdles, fits, and starts. Beyond these cautions, refer to Appendix E for a more complete coverage of the five litmus test questions and issues. A Profit Planning Process for the Ongoing Small Business There is no secret to profit planning, although it becomes more complex with growth and diversification. The plan must assure that every function in your value chain is concentrating on improving your competitive advantage. The plans for any introduction of new strategies or diversifications should be tested comprehensively to determine that they have good odds for achieving their intended gross margins and contributions to profit. A well-structured profit planning process will help you respond rapidly to fast-developing new options, narrowing

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TABLE 10-3. Profit Planning Dynamics for an Ongoing Small Business Stage A: UpdateYour Competitive Situation Analysis Review and update worksheets and plans for your— 1. Current Strategy Profile 2. Current Enterprise Plan 3. Latest Situation Analysis 4. Latest SFP (summary financial preview) Determine progress with all funded development projects in progress. Review your ‘‘wish list’’ of future options. Group all realistic options into Case Combinations.

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Stage B: Prioritize Prospective Case Combinations Flesh out each surviving Case Combination to include— 1. Business scope and emphasis 2. Mission and objectives 3. Corporate strategies 4. Operations and HR Plan 5. Financial Plan and policies 6. Information technology requirements Reject all but best Case priorities.

?

Stage C: Evaluate Options’ Financials & Success Requirements Run definitive financials for each surviving Case, including— 1. Rolling 3-year cash flow and breakeven test (see Key Two) 2. Summary Financial Preview (see Table 6-2) 3. Requirements for Success exercise (see Table 6-3) 4. Due Diligence Tests (see Key Ten) Determine surviving New Case or Cases.

?

Stage D: Develop Profit Forecast for Your Total Enterprise Plan Consolidate surviving old Plans and new Case or Cases into a single Total Enterprise SFP. Evaluate against overall Corporate mission, growth and profit objectives, including target ROI.

time spans for meeting windows of opportunity, and serious new competitive challenges. For reliable growth/profit balancing, you should bring together several approaches and processes, all of which have already been presented in the preceding keys. Together, these constitute an integrated four-stage approach for the established firm, as shown in Table 10-3. The table clarifies and expands the process beyond that outlined earlier for the start-up, because of the established firm’s operating experience and greater knowledge of the marketplace. To keep ahead of the pack, the CEO must factor this collective savvy into his or her company’s planning. If the process looks formidable, it is not. You have already reviewed virtually everything in the table’s outline, with the exception of the specific screening routines in Stage C that are presented later.

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Stage A—Competitive Situation Analysis. In reviewing the four exercises shown in the table, review the status of all funded development projects that may be underway. Check your ‘‘wish-list’’ agenda of interesting future options. Also, give particular attention to all significant competitive vulnerabilities. Stage B—A Prioritized Agenda of Contemplated Plan Changes. Build into your future plans your competition-induced priorities, and seek innovative strategies and programs to gain or enhance market leadership, and improve your core strengths. Stage C—Alternative Rolling Cash Flows, SFPs, and Screens. Apply this stage’s first exercise—cash flow projections and breakeven calculations—to all surviving cases from Stage B before undertaking the other exercises. Then continue with the survivors one exercise at a time. Stage D—A Combined Profit Forecast for the Total Enterprise Plan. If consolidation falls short of your total profitability targets, consider any investment spending risks that could justify such a shortfall. Then start eliminating the lowest priority changes. For an early but ongoing small business with a single product/market segment, the process is not difficult to apply informally with minimum documentation. If Table 10-3 looks too intimidating for the early-stage entrepreneur, then he or she might step back toward, but not necessarily all the way to, Jack Braitmeyer’s concise advice to first create; second, make; third, sell, and fourth, count beans. As your venture advances into multiple business segments, you will find it especially helpful to use the SFP approach for rapid calculation of profitability.

Opportunity Cost Analyses of Alternative Strategic Segments For the firm already in business, the economic concept of opportunity cost is always a consideration when facing new alternatives. This issue copes with the scarcity of human and other resources that always forces tradeoffs in choosing one new alternative over others or established programs. The opportunity cost of a strategic decision is the value of the best alternative decision foregone in order to make the current decision.

It can be either more costly or a savings. The need for opportunity cost analysis enters into any stage of small business profit planning because the CEO must always be prepared to make funding and spending choices. It may occur at any pre-start time and between or during regularly scheduled planning dates. The company might be facing a short window of opportunity for weighing alternative start-up options, or adding an exciting new venture to a going concern, or biting

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the bullet with a losing strategy or segment to contain losses, or discontinuing a fading cash cow to apply the resources more profitably elsewhere. Both quantitative and judgmental factors must be considered. For example, the cost and returns of continuing to operate a cash cow must be weighed against what the best alternative strategy would cost and yield by comparison. Measurement of quantitative differences in relative values should include the salvage value of physical resources to be abandoned, human and other operating costs no longer needed, and gross margins no longer earned by the cash cow. These would be matched against the investment, costs, and earnings potential of the best new program. The judgmental dimension would concern such issues as the relative impacts of the two alternatives on present customer patronage, the potential for new customers attracted to the company, and the relative managerial and operational requirements and distractions. An opportunity cost issue faced the Ultronic Corporation, an innovator and early leader in providing online stock quotation information to the investment community. Ultronic was serving investment trading houses, major banks, and large institutional investors with leased terminals that accessed an online feed of stock quotations and transactions. Reuters was providing the data stream live from the world’s major stock exchanges. As competitors began offering terminals and data feeds, Ultronic developed more sophisticated terminal systems and data streams for their clienteles. Anticipating the return of their leased, first-generation terminals, they engaged a consultant to study the continuing prospects for marketing those earlier terminals and information feeds to other categories of investors. Three new markets were targeted for evaluation: smaller brokerage houses and institutional investors who had not yet gone online, ‘‘affluent’’ individual investors, and a second level of commodity traders, including manufacturers interested in active hedging of the raw materials they were converting into their finished products. Market research established that none of these markets appeared promising. Main reasons were the costs of new online data feeds for the commodities segment and the fast-growing obsolescence of Ultronics’ firstgeneration terminals, starting to be referred to as ‘‘clunkers.’’ The opportunity cost analysis favored several new, forward-looking projects in Ultronic’s main business, and the old terminals were retired as sunk costs. Ultronic management avoided a psychological temptation that often gets in the way of keeping a failing business or business segment after its profit potential is gone. A recent article in The McKinsey Quarterly recorded the thinking of three professors at the Australian Graduate School of Management at the University of New South Wales on the subject of sunk costs as a failure trap.10 When evaluating a failing endeavor, executives should avoid four psychological traps:





Confirmation bias—emphasizing only supporting data The sunk cost fallacy—too costly to walk away Escalation of commitment—throw more money at the problem Anchoring and adjustment—revise worth upward to justify more spending.

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It is most often wiser to admit that plans don’t always work, so free up your resources to embrace new market opportunities. A Standard Operating Procedure for Making Due Diligence Screening and Testing of New Strategic Options You are ahead of the game if you have been maintaining minimum documentation of the reference items noted in Stage A of Table 10-3. For Stage B, the segment managers engage in current-plan challenges and recommendations. The CEO, as chief strategist, both initiates strategies and plan changes, and makes or coordinates the ultimate decisions. With growth of the business, the CEO charges each functional line executive to resolve inter-functional issues with their counterparts to the fullest extent possible. The need for some compromise is almost always necessary to assure compatibility of all inter-related strategies and tactics. There is also the ever-present competition for the company’s operating and financial resources that are always in short supply. The senior managers participate in setting the priorities for final selection of the plan changes to be made. A company producing telecommunications and data warehousing systems, applications, and software employed a new-project screening procedure that progressed from the proposer to a study task force. A corporate screening group was composed of finance, marketing, operations, and operations research heads. The project sponsor submitted an idea with product specifications and implementation costs and requirements to the task force members for initial evaluation in their respective departments. The four heads then met to review the proposal, seek added inputs from the proposer, and vote on its disposition. The voting sheet is reproduced in Figure 10-1. The simplistic appearing format always stimulated in-depth probing and challenges. A majority of three favorable votes was required to keep the project alive for further study and refinement. Adoption of the proposal required all four favorable conclusions. The significant number of ideas and propositions always in play made this an effective screening approach. A profitable and growing small business with three consumer market divisions was actively pursuing related product/market diversifications into new entries and prospective mergers, acquisitions, or partnerships. To assure in-depth market research and consideration of the most promising diversification options, the exploration teams developed a two-tiered screening summary shown in Table 10-4. The evaluation section had five basic factors, all of which needed to be favorable to proceed. The following sub-factors guided the conclusions about each major requirement. A. Primary demand for class of product is strong and growing. 1. Current demand for application based strongly on users’ needs 2. Company’s offering compatible with application

FIGURE 10-1.

Project Screening Task Force Voting Sheet

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TABLE 10-4.

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New Venture Screening Procedure—Control Sheet

Project Number:

Project Title and Description:

Sponsoring Unit or Division: Program Sponsor:

Project Objectives: (both quantitative and narrative)

Date Submitted: Relationships to Present Business: Date Final Decision Needed: SUMMARY OF NEW CAPITAL REQUIRED:

STATUS OF EVALUATION & REVIEW (Major Factors per Attached Summaries) A—Primary demand for class of product is strong and growing. B—Competitive conditions are favorable. C—Substantial market share is achievable. D—Cost/volume/price/profitability & ROI estimates are favorable. E—Business is suitable for us to enter.

Included in Sponsor’s Curent Plan? YES NO

Incomplete Unfavorable Favorable Strong Go

CONCURRENCES: Division Project Committee General manager _____________________ Marketing _____________________ Engineering _____________________ Production _____________________ Purchasing _____________________ Controller _____________________

Corporate Management: Planning _____________________ Finance _____________________ Controller _____________________ Legal _____________________ President _____________________ Board of Directors _______________

3. Growing demand; number, and intensity of users expanding 4. Demand exceeding GNP and company’s growth target 5. Market longevity expected for both application and product B. Competitive conditions are favorable. 1. Company’s offering has significant value-added potential 2. Has demonstrable user benefits that should be superior 3. No dominant competitor; future enhancement feasible 4. Competition does not have adequate over-capacity 5. High entry cost and long lead times for new competition C. Substantial market share is achievable. 1. Can mount effective marketing, sales, and service actions 2. Can get comprehensive distribution in key markets 3. Can maintain low-cost manufacturing capabilities

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4. Can lead in product development and engineering 5. Can put a total program together rapidly 6. Can maintain significant proprietary protection D. Cost/volume/price/profitability and ROI estimates are favorable. 1. Product development, engineering, and production advantages 2. Low breakeven levels; improvements with volume 3. Competitive pricing with attractive cost/price spreads 4. Strong profit rate, improvable with unit growth 5. Realistic capital and cash flow requirements 6. Expected longevity enough to amortize investment 7. ROI projections exceed company’s minimum target E. Business is suitable for us to enter. 1. New offering consistent with company’s present business 2. Focuses on most desirable segments of market 3. Strong match with company’s human strengths 4. Offers sound enhancement and diversification possibilities 5. Can meet all requirements for success 6. Company’s resources available and ready for action 7. Product ranks highest of all alternatives under consideration The types of quantitative exercises shown in Table 10-3 supported the overall ratings and conclusions. Diligent pursuit down through all five factors assured a team’s comprehensive investigations. During the first year, only a handful of options were pursued fully, resulting in one acquisition. The ten keys have given you many options for profitable entrepreneuring in a free-market society. They have included both successful and unsuccessful approaches, beginning with generating innovative consumer benefits, then moving through a multitude of objectives and strategy options, on to meticulous construction and testing of your profit plan. But the path will never be reduced to a standard formula for small business. Your individuality, curiosity about the consumer’s mind, determination, and venturesome enthusiasm will be critical factors for your success. In addition, in lieu of one universal school solution, consider one more set of broad guides as you evaluate your start-up plans or your current, ongoing business venture. APPLY TEN PREFERRED GUIDELINES IN DEVELOPING YOUR SMALL-BUSINESS PROFIT MODEL 1. Make the selection, management, and development of the right people and partners your main focus. Assure their marketplace orientation and infotech savvy. 2. Concentrate on the things you do best. Do not abandon outstanding expertise and market position. Do not stray from your preferred market niches.

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3. Be wary of conglomerating. To accelerate profits, diversify from and build on your core strengths before trying to grow your business in completely uncharted waters. 4. Before over-committing to a new type of venture, search diligently for any ‘‘natural strategic hurdles’’ that could be lurking to defeat you in the long run. 5. Explore third-party alliances, including partnering, joint ventures, mergers, and acquisitions to leverage your resources and gain expertise more rapidly. 6. Encourage brainstorming and innovative thinking for new ways to increase profit growth and strengthen valued employees’ career opportunities and loyalties. 7. Upgrade your company’s information infrastructure for greater productivity wherever you have strong assurance of its productivity and cost effectiveness. And, don’t delay harnessing affordable and profitable new infotech to improve competitive advantage. 8. Establish and apply tough, definitive new-venture screening and prioritizing criteria to improve the odds for profitable strategic decision-making. 9. Interlock long-term growth and profit goals for every new major strategic initiative; never focus on growth alone. Consider all of the operating costs, capital requirements, and human capabilities needed in order to determine the business risk. 10. Keep ethical! KEY TEN: PROFIT PLANNING PROJECT With the conclusion of this tenth key, you are urged to perform only one more chapter project. If you are presently involved in an ongoing small business enterprise, rate your management style, strategic planning, and operations against the foregoing ten guidelines. If you are a start-up entrepreneur, also check out your readiness against the Litmus Test detailed in Appendix F. Then continue innovating, tightening your profit plan, and pursuing competitive advantage, market leadership, and profit enthusiastically and confidently!

APPENDIX A

Small Business in the United States

The most comprehensive quantitative information sources about U.S. enterprise are the U.S. Census Bureau, publisher of the Statistical Abstract of the United States, the U.S. Small Business Administration, and the reports of the U.S. Internal Revenue Service. Other significant sources include Entrepreneur and Inc. magazines, Dun & Bradstreet, and the U.S. Chamber of Commerce. The 2004– 2005 edition of the Statistical Abstract contains detailed summaries of enterprises at both the firm and establishment levels for the whole of the United States and by types of industries. The firm level is the legal entity used by the U.S. Internal Revenue Service for tax reporting. The IRS uses the terms firm, business, company, and enterprise interchangeably. The 2004–2005 Statistical Abstract reported a total of 13.0 million active firms submitting returns to the IRS in 1980, 20.1 in 1990, and 25.6 in 2001, the last reported year.1 These totals included three broad categories, which are sub-classified in the Abstract by types of industries:

No. of Tax Returns (000)

Corporations Partnerships Nonfarm Proprietorships

1980

1990

2001

2,711 1,380 8,932

3,717 1,554 14,783

5,136 2,132 18,338

At the establishment level, the Economic Census collects data to classify the structural and functioning characteristics of the economy, but the Census coverage does not correlate with the IRS reports. The Census defines an establishment as a single business location where business is conducted or where services or industrial operations are performed. A single enterprise may either have only

APPENDIX A

264

one establishment location, or several, or many more. Also, the reporting establishments exclude those entities that account for most government employees, railroad employees, and self-employed persons. However, the establishment headcounts do provide helpful insights on the relative importance of small business to the U.S. economy. In 1990, the Abstract reported 6.2 million U.S. establishments, and in 2001, 7.1 million.2 Although the IRS and Census do not specifically define what businesses are considered to be small, the establishments with fewer than 20 employees are by far the largest percentage.

Business Establishments Number (000) 1990

2001

Under 20 employees 20 to 99 employees Totals under 100

5,354 684 6,038

Over 99 employees All establishments

138 6,176

Percent 1990

2001

6,083 836 6,919

87 11

86 12

176 7,095

2 100

2 100

The U.S. Small Business Administration has defined small businesses by using size standards for most of the industries coded by NAICS, the North American Industrial Classification System (formerly the SIC System.) Among these small size ceilings are:      

500 employees for most manufacturing and mining industries 100 employees for all wholesale trade industries $6 million for most retail and service industries $28.5 million for most general and heavy construction industries $12 million for all special trade contractors $0.75 million for most agricultural industries

About one-fourth of all NAICS industries have a size standard that is different from these levels. They vary from $0.75 million to $28.5 million based on average annual revenues and from 100 to 1500 employees based on number of employees.3 The published Census reports contain employee size distributions for many individual industries.4 Drawing upon these standards, SBA statistical studies indicate that there were almost 23 million small businesses in the United States in 2002, including 550,100 start-ups. They provide about 75 percent of net new jobs, and hire a large proportion of younger, older, and part-time employees.5 Among other key characteristics cited by the SBA, small firms:

SMALL BUSINESS IN THE UNITED STATES    

265

Represent over 99 percent of all employers; Employ 50 percent of the private workforce; Provide 42 percent of private U.S. sales; and Account for 39 percent of jobs in high tech sectors.

No definitive measure has been identified of the percentage of each year’s start-ups that are initiated by neophyte first timers, versus established businesses setting up separate new ventures, or individuals coming out of corporations with varying levels of business expertise and seasoning. An educated guess is 40 to 50 percent first timers and 25 to 20 percent each in the other two categories. A basic small business issue is the survival rate for start-ups and active small businesses, and what can be done to lengthen it. Only a general indication for the total economy is available. In 2003, 37,182 firms of all sizes filed bankruptcy petitions or had them pending. This included Chapters 11 and 7 for individual and business reorganizations.6 For some time it was thought that after ten years only one out of ten start-ups would still be operating. More recent Census Bureau analyses have shown that about half survive more than four years, but one-third of the closures were still successful although discontinued for other reasons. Managerial upgrading, better financing alternatives, and well-developed exit plans continue to improve the survival rate of small businesses. However, much more progress is still essential in view of their vital importance to the U.S. economy.

APPENDIX B

Intellectual Property Protection

PATENTS A patentable property must be different from anything known by the public. A granted patent identifies you as the inventor of a process or developer of a machine or other physical product. It does not protect a business name. Two kinds of patents are granted: design patent—how it works; utility patent—what it does or how it is made. Basic Patent Grant A U.S.-only property right to the owner for a term of 20 years from the date application is filed or from an earlier related patent filing. Patents are granted based on supportable claims made in the patent application. Public filing of an application enables other parties to dispute the claims and/or their descriptive terms. Two Filing Levels for Individuals and Small Companies One, a non-provisional application that covers three independent, and up to seventeen dependent claims. Two, a provisional application for a lesser initial fee that is evaluated for feasibility before any claims are written. Patent Infringement Claims First, assorted claims must be properly construed to determine their meaning and scope. This step of claim construction is within the province of the court.

INTELLECTUAL PROPERTY PROTECTION

267

Second, there must be a determination as to whether the construed claims encompass the accused product. Estimated Patent Cost for a Grant of Minimum Complexity Filing fee: $75 for provisional; $375 for non-provisional (higher for more than 20 claims) Issue fee: $650, due when patent is to be issued Formal drawings: $75 to $200 per drawing Maintenance fees: to keep patent’s exclusivity intact for its full term, due in 3½ years, $445; in 7½ years, $1025; in 11½ years, $1575. Added Patent Office fees: for time extension during prosecution of up to six months—one month, $55; two, $205; three, $465; four, $725; five, $985. Estimated Total Cost for an Individual or a Small Company Non-provisional Patent: $7,000 to $10,000 plus drawings cost (this assumes an up-to-20-claim filing fee for minimum complexity and at the national average for attorney fees) Provisional Patent: $4,000 to $6,000 plus drawing cost. TRADE SECRETS In most states, a trade secret may consist of any formula, pattern, physical device, idea, process, or compilation of information that both provides the owner of the information with a competitive advantage in the marketplace, and is treated in a way that can reasonably be expected to prevent the public or competitors from learning about it, absent improper acquisition or theft. Trade secrecy is basically a do-it-yourself form of protection. You don’t register with the government to secure your trade secret. You simply keep the information confidential. Once it is made available to the public your protection ends. Copyright A copyright protects the author of original works of authorship. It protects the form of expression rather than the subject matter of the writing.

   

Protected Works Literary: Musical and its words; Dramatic: with accompanying music, pantomimes, and choreographic; Pictorial: graphic and sculptural; Motion pictures and other audio/video;

APPENDIX B

268  

Sound recordings; Architectural works.

Works Not Protected  





Not fixed in tangible form of expression—not notated or recorded, improvisational speeches or unwritten or unrecorded performances; Titles, names, short phrases, slogans; familiar systems or designs; mere variations of typographical ornamentation, lettering or coloring; mere listings of ingredients or contents; Ideas, procedures, methods, systems, processes, concepts, principles, discoveries, devices, as distinguished from a description, explanation, or illustration; Work consisting entirely of information that is common property and containing no original authorship (e.g., standard calendars, height and weight charts, type measures, or lists and tables from public sources)

Length of Copyright Protection Copyright Term Extension Act set by U.S. Congress, 1998, and upheld by Supreme Court on January 15, 2003:   

Twenty-year extension for all existing copyrights Life of creator plus 70 years for individual works For copyrights held by corporations, 95 years from publication, or 120 years from creation, whichever is shorter.

Securing a Copyright No publication, registration or action in the Copyright Office is required. Copyright is secured automatically when work is created or fixed in a copy or phonorecord for the first time. Issue of a Copyright notice is no longer required. TRADEMARKS A trademark protects a word, name, symbol, or device to identify its source and distinguish it from the goods of others. It prevents others from using it, but not from making or selling the same goods. With a trademark you can keep a formula secret, but with a patent you must divulge the formula. Trademarks are registered with the U.S. Office of Patents and Trademarks. They have no expiration date or time limitations. However, you must use them to keep your right and protection. A non-distinctive trademark that describes a type of product rather than a specific brand will not protect you.

INTELLECTUAL PROPERTY PROTECTION

269

Four Major Types of Trademarks ‘‘Trademark’’ for goods ‘‘Service Mark’’ for services ‘‘Certification Mark,’’ for example, quality standards—Good Housekeeping Seal of Approval ‘‘Collective Mark’’ used in commerce by members of cooperatives, associations, unions, or other collectives.

SOURCES    

IP Watchdog.com, December 2003: see Patent Law, Copyright Law, Trademark Law, and Trade Secrets Basics FAQ Lance Frazer. ‘‘A Small Biz Guide to Trademarks, Patents & Copyrights,’’ E- Merging Business, Fall–Winter 2000, page 112. United States Patent and Trademark Office U.S. Copyright Office

APPENDIX C

Entrepreneur Magazine’s Annual Software Guide

Every year Entrepreneur magazine publishes a ‘‘Complete Guide to Software,’’ a comprehensive summary of applications available to the small business. The May 2006 issue, ‘‘The Next Generation,’’ edited by Lianne Cassavoy (pp. 72–81), lists almost 200 programs in the following categories: Applications for Small to Midsize Businesses Accounting/Financial/Tax Office Applications Preparation Office Suites Business Plan PIM/Synchronization Contact/CRM Presentation CD/DVD Authoring Project Management Communications Security Connectivity/Networking Tablet PC Software Database Web Software (five types) Desktop Publishing/Graphic Utilities Design/Image Editing The editors make downloadable versions of the entire collection available on their Web site. The size, functional coverage, and diversity of Entrepreneur’s overall collection makes a major statement on the advancing state-of-the-art of information technology and productivity for the small business.

APPENDIX D

Alternatives for a Manufacturers’ Agency Agreement

The terms below are unlikely to be required in total by any particular business situation. Moreover, no suggested element is sacrosanct; all depend on their need in the specific business application. The purpose of this appendix is to present a comprehensive set of possible agency scenarios and terms from which the company can cherry pick to suit its specific requirements. It is a composite of terms and conditions drawn from a variety of agency agreements and case situations where an agent strategy was used. In rare instances, the parties rely on oral agreements and handshakes only. But this is not advised. Also, see a competent lawyer in every instance for content and wording that precisely fit your situation. Independent Contractor: 1. Agency is not a legal agent of the company for any purpose. 2. Agent does not represent self for anything except as a selling agent. 3. This agency is personal, and the agent shall not sell, assign, convey, or otherwise transfer his/her rights hereunder. Products and Services: 1. Assignments of offerings will be made exclusively or non-exclusively to agent. 2. Agent is responsible for soliciting sales only, not approval of orders, for the following products and/or services of the company— 3. Agent will offer only the company’s approved prices, terms, and conditions unless company grants permission in advance of agent’s contact with customer or prospect. 4. Agent will have no invoicing or collection responsibility. 5. Company will provide any required special training and preparation needed by agent, and agent agrees to participate in all such sessions and programs.

272

APPENDIX D

Commissions: 1. Commission rates will be paid on all sales in accordance with the company’s latest published listings. 2. Commission payments will be made to agent on the following schedule— 3. Commissions on returned sales will be charged against agent’ commission account, except—

1. 2. 3. 4.

Territory: The specific geography to be covered is— The industry or industries will be confined to— The following key accounts will be the agent’s responsibility— Exclusions within the above are—

Agency Responsibilities: 1. Agent will only solicit sales, not accept orders and will forward all orders to company for acceptance, order fulfillment, and invoicing. 2. Agent is not empowered to initiate or negotiate special deals unless company issues a written agreement in advance. 3. Agent will assist in installation and training of customer as follows— 4. Agent will maintain an office for customer contact at agent’s expense as required. Office will need the following facilities and capabilities— 5. All sales reps and others in the agency whose duties involve customer contact will/will not require approval by the company. Competition: 1. Agent is not permitted to sell offerings of company’s competitors. 2. Agent is/is not allowed to offer non-competitive lines, except— 3. Following termination at any time, the agent agrees not to compete with the Company for a period of ______ full years in any endeavor that involves the Company’s types of products and services. Sales Promotion: 1. Company will provide agent with historical and current information on all assigned accounts in territory. 2. Company will provide sales prospecting lists to agent. 3. Company will provide all needed advertising, promotion, manuals, demonstration scenarios, recorded sales, training, and maintenance media, brochures, and other sales aids. 4. Agent will represent company at all specified trade shows, conferences, and industry association meetings, excepting— Disclosure and Confidentiality: 1. During the life of this agreement, agent will not use, publish, or disclose any secret or confidential information to any third party except as required to sell and service the customer.

ALTERNATIVES FOR A MANUFACTURERS’ AGENCY AGREEMENT

273

2. Following the agreement’s termination, this obligation of the agent will continue for ________ full years, or less if the company and agent agree. Arbitration: 1. Any dispute stemming from this agreement shall be settled by arbitration under the rules of the American Arbitration Association. 2. Agent and company will share costs equally. 3. All arbitration rulings will be final. Initiation and Termination: This agency agreement shall commence on _______, and terminate on _______, unless earlier terminated by the company for just cause or by the mutual agreement of the company and agent. ******* All of the foregoing is a starting agenda for development of an appropriate agreement. None of the suggestions should be proposed or put in force unless a competent lawyer has approved every line and word.

APPENDIX E

RMA Annual Statement Studies

RMA—The Risk Management Association, an organization of U.S. bank loan and credit officers, was founded in 1914. It has grown to more than 3,000 commercial banks and thrift institutions, which account for around 80 percent of the commercial and institutional lending in the 50 states, and a number of foreign markets. RMA’s mission is to facilitate the flow and interchange of credit information. It offers a variety of services, conferences, and publications dedicated to improving the principles and practices of commercial lending, loan administration, and related services. RMA’s publication, Annual Statement Studies, contains comprehensive summaries from confidential statements submitted by U.S. companies in every industry and sub-industry defined in the SIC (Standard Industry Classification), and its successor, the NAICS (North American Industry Classification System), both defined by the U.S. Department of Commerce.1 This appendix contains an abbreviated RMA report example for retail gift stores that illustrates the wealth of information and financial analyses available to all businesses across industries. Each report presents averaged summary data in two sections: financial values and performance ratios.





Financial Account Summaries from the Balance Sheets and P&Ls. Comparisons are made for total dollar values for the latest year by asset size and sales revenue groupings. Three-year trends are also calculated for total assets and revenues. Performance Percentage Ratios. Each industry report contains fourteen of the most prevalent comparative measures for a company’s risk management. The ratios cover three-year trends for both total assets and total revenues, and latest year averages broken into asset size and revenue size groupings. The publication defines all of the accounts and ratios used in the summaries.

RMA ANNUAL STATEMENT STUDIES

275

In the Ratios section, three sets of values are computed for each of the fourteen ratios, an upper quartile value, a median value, and a lower quartile value. The three measures are derived from division of the aggregate ratios for an industry into four groups of equal size. This analytical technique eliminates unusual distortions between the strongest and weakest values. Table E-1 shows only the median, but RMA’s Annual Studies report all three quartile results. Individuals and companies can become RMA members, subscribe to the Studies, and access any individual industry reports online. However, most member financial institutions have them. Small business CEOs should enlist the help of their banker and accountant in regular comparison of their competitive performance with the RMA Statement Studies.

TABLE E-1. Financial Data and Ratios for Retail Gift Stores (SIC# 5947) Comparative Historical Data

Current Sales ($Mill.)-Last 6 Months of Year 3

276

Year 1 179

Year 2 171

Year 3 170

Number of Statements

0–1 70

1–3 52

3–5 17

5–10 12

10–25 10

25 plus 8

% 10.2 6.8 54.4 0.8 72.2 19.0 2.5 6.3 100.0

% 10.8 6.0 53.6 1.4 71.9 19.5 3.1 6.5 100.0

% 11.9 5.8 55.0 1.2 73.9 19.2 2.7 5.2 100.0

ASSETS Cash and Equivalents Trade Receivables(Net) Inventory All Other Current Total Current Fixed Assets(Net) Intangibles(Net) All Other Non-Current Total Fixed

% 13.7 5.1 58.1 1.1 78.0 15.0 2.0 5.0 100.0

% 12.2 5.0 59.8 1.1 78.1 17.1 1.4 3.4 100.0

% 7.0 2.6 54.4 1.2 65.2 24.1 3.0 7.7 100.0

% 10.8 15.4 39.1 1.1 66.1 25.4 0.2 8.2 100.0

% 11.4 7.1 39.1 1.2 58.7 32.4 1.1 7.8 100.0

%

14.4 4.4 18.3 1.0 8.7 46.8 19.3 0.5 2.1 31.3 100.0

11.4 4.7 16.3 1.5 8.9 42.8 21.6 0.1 1.5 34.0 100.0

10.4 4.1 18.4 6.0 8.6 42.1 19.6 0.2 3.3 34.9 100.0

LIABILITIES Notes Payable-Short Term Current Maturity-L/T/D Trade Payables Income Taxes All Other Current Total Current Long Term Debt Deferred Taxes All Other Non-Current Net Worth Total Liabilities and Net Worth

11.1 4.5 15.9 0.3 9.3 41.1 22.7 0.0 3.9 32.2 100.0

9.6 3.7 23.6 0.4 8.4 45.6 17.1 0.1 2.7 34.5 100.0

14.2 3.8 14.1 0.4 7.5 39.9 16.5 0.1 6.5 36.9 100.0

10.0 6.5 22.2 0.9 5.8 45.4 15.6 0.0 1.8 37.1 100.0

11.0 3.1 14.9 0.4 9.3 38.7 25.9 1.0 0.5 33.9 100.0

100.0 45.6 41.2 4.4 1.2 3.2

100.0 45.1 41.5 4.6 1.1 3.6

100.0 45.4 40.1 5.4 1.7 3.7

INCOME DATA Net Sales Gross Profit Operating Expenses Operating Profit All Other Expenses (Net) Profit Before Taxes

100.0 46.4 39.8 6.6 2.2 4.3

100.0 45.4 41.1 4.2 1.2 3.0

100.0 50.0 47.0 3.0 0.4 2.6

100.0 38.6 36.2 2.3 1.1 1.2

100.0 43.1 37.4 5.7 1.6 4.1 (continued)

TABLE E-1.

continued

Comparative Historical Data

Current Sales Range-Last 6 Months

277

87/88 179

88/89 171

89/90 170

% 1.6 0.3

% 1.8 0.3

% 1.8 0.3

190.8 2.5

234.5 2.4

245.5 2.3

8.3 9.9

9.2 8.5

8.8 7.7

2.9 1.8

2.7 2.1

0.6 2.2

Number of Statements MEDIAN RATIOS* Current Quick

0–1 70

1–3 52

3–5 17

5–10 12

10–25 10

% 2.1 0.3

% 1.6 0.3

% 1.6 0.3

% 1.7 0.4

% 1.6 0.4

496.5 1.8

425.3 2.4

155.1 2.0

102.7 3.4

102.3 2.6

Cost of Sales/Payables Sales/Working Capital

9.6 5.4

7.2 8.6

10.2 8.1

9.4 12.1

12.4 12.2

2.7 2.6

EBIT/Interest NPþ Deprec.&Amort/LTD

2.7 1.2

2.7 1.2

2.4 1.1

2.2

0.6 2.0

0.5 1.9

Fixed/Worth Debt/Worth

0.3 2.2

0.5 1.9

0.8 1.4

0.6 1.6

0.9 2.0

18.7 7.0

26.7 7.3

20.0 6.6

% NPBT/Tangible Net Worth % NPBT/Total Assets

23.3 7.2

25.2 6.6

14.6 5.6

10.7 4.8

4.2

17.2 2.6

13.0 2.4

17.1 2.3

Sales/Net Fixed Assets Sales/Total Assets

24.6 2.2

17.9 2.6

12.8 2.3

17.4 3.0

9.9 2.3

2.1 4.4

1.8 4.7

1.8 4.8

1.9 6.5

1.8 4.3

2.0 3.7

3.5

2.8

Sales/Receivables Cost of Sales/Inventory

%Depr/Dep,Amort/Sales %Officers’ Comp/Sales

25 plus 8 %

Source: Summarized from ‘‘RMA Annual Statement Studies,’’ RMA—The Risk Management Association, Philadelphia, PA * These ratios are the median values. The complete Statement Studies Reports divide and rank all ratios into four quartiles and calculate an upper quartile value for the average of quartiles one and two, a median value for the second and third quartiles, and a lower quartile value for quartiles three and four. This eliminates unusual distortions between the strongest and weakest values.

APPENDIX F

The Start-Up’s Initial Operating Requirements

A fine line is difficult to draw between the basic strategic content and emphasis of start-ups and ongoing small businesses. The book’s coverage should make it clear that both are concerned with the same basic market positioning, managerial, and operational strategies and their results. A number of lessons applicable to both are illustrated with start-up cases. The differences include issues of relative experience levels, and the availability of funding and resources for operations. Moreover, most start-ups occur in the U.S. economy under three different sets of circumstances.   

One, the neophyte start-up entrepreneurs; Two, the entrepreneurs with prior corporate experience striving to be on their own; Three, the leaders of new ventures for established businesses that have been set up to operate separately from the parent organization.

All three types have the objective of initiating a new venture that may be an already-proven model in an established market, or an existing type of business formed to establish a more competitive concept, approach, and set of benefits. Or, it may be a new, new thing in virgin territory requiring the development of primary demand for an entirely new market use. The most important and essential ingredient that all three have in common is a comprehensive profit plan. A recommended approach to this number one priority is presented in Key Ten. Principal differences among the three types lie in the experience of the leader, problems with the planning for launch, and the initial unfamiliar operating demands placed on the neophyte. The beginner is the main concern of this appendix that clarifies and elaborates on the issues of the five litmus test questions outlined in the introduction to Part B. Table F-1 provides a checklist that can take the newcomer a long way toward readiness for an exciting new venture.

TABLE F-1.

Five Litmus Test Questions for Start-Ups Operating Plan? Are all of my initial start up associates in place? —Have I thought through my own managerial style and what my leadership, control, motivational, and innovative practices should emphasize? Am I prepared to cope with the notorious ‘‘managerial overload’’ that creeps up and tries to smother all entrepreneurs in the launch stage and beyond? —Have I inventoried all of the specialized expertise that I should have in place to complement my own capabilities at the outset of my venture’s launch? For Accounting? Production and/or Service Offerings? Engineering? Legal? Information Technology? Marketing? Selling backup? Can I delay any of these until sales momentum begins? Or engage outside services as needed? —Have I planned for competent inside or outside expertise in Human Resources requirements, including recruiting, state and Federal payroll taxes and witholding, and unemployment taxes; Americans with Disabilities Act, Fair Labor Standards Act? National Labor Relations Act? —Am I prepared to implement all of my decisions for my market positioning strategies, including outside partners? —Have I identified and set up all of the critical numbers performance measures for monitoring my launch? —Have I had the experience of ‘‘meeting a payroll’’? If not, do I fully understand all of its requirements and demands?

one, viability —Does my venture appear marketable for the long term? —Has my market research proved a strong and growing demand for my offering? Identified a significant niche of prospects to pursue? —Am I offering competitively superior user benefits worth the value to the consumer and profitable for me? —Have I proved it will sell? By actually making test sales? —Has my market research defined all that I must do to assure success and profitable long-term repeat business? two, compliances & permits —Do I have, or can I meet all restrictions for all operating locations and processes that I will need? —Can I meet all environmental restrictions for my venture? OSHA requirements? Consumer Product Safety? three, funding and financial sources —Have I refined my objectives and Operating Plan for offerings, personnel, functions, processes, facilities, and legal form of organization? —Have I developed pricing, breakeven analyses, and cash flow projections for the principal operating scenarios? And their accompanying preliminary P&L, Balance Sheet, and ROI projections? —Have I explored financial leveraging options, such as lease/buy? Outsourcing? Procedural simplifications? Engagement of outside services initially? —Have I raised sufficient capital and borrowing power to cover start up costs and working capital for the near term? Have I lined up future funding sources, including investors?

five, readiness to entrepreneur —Review the tests of the Entrepreneur’s motivations and readiness for a new venture as presented in Tables B-1 and B-2 of Part B. Or, at the very least, use Jack Braitmayer’s four requirements! Then begin the fun!

four, operating ‘‘nuts & bolts’’ —Have I determined the managerial and other personnel I need for executing my

279

Notes

INTRODUCTION 1. Peter Drucker, The Practice of Management (New York: Harper & Row, 1954). 2. Michael Porter, Competitive Strategy: Techniques for Analyzing Industries and Competition (New York: Free Press, 1980); and Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985). 3. Norm Brodsky, ‘‘The Three Criteria for a Successful New Business,’’ Inc., April 1996, p. 21. 4. Porter, Competitive Advantage, pp. 11–16. 5. Ibid., p. 47. 6. Thomas L. Friedman, The Lexus and the Olive Tree: Understanding Globalization (New York: Farrar, Straus, and Giroux, 2000); and The World Is Flat (New York: Farrar, Straus, and Giroux, 2005).

PART A: CONSUMERS AND COMPETITORS— YOUR STRATEGIC FOUNDATION 1. Theodore Levitt, ‘‘Marketing Myopia,’’ Harvard Business Review, July/August 1960, p. 45. 2. Ad in Golf World, February 13, 2004, pp. 11–15. 3. Scott Shaw, ‘‘The Wrong Move,’’ Inc., August 1995, p. 21. 4. U.S. Census Bureau, as compiled on Web site for Abbott Wool’s Market Segment Resource Locator, www.awool.com, accessed August 29, 2005. 5. Ibid. 6. Kim T. Gordon, ‘‘Three Rules for Niche Marketing,’’ March 4, 2002, in ‘‘Solutions for Growing Businesses,’’ Entrepreneur.com. 7. David H. Bangs, Jr., The Marketing Planning Guide, 4th ed. (Chicago: Upstart Publishing Company, 1995). 8. Ibid. 9. Paul Nunes and Frank Cespedes, ‘‘The Customer Has Escaped,’’ Harvard Business Review, December 2003, p. 96.

282

NOTES

10. Ibid. 11. John McDonald, Strategy in Poker, Business & War (New York: W.W. Norton, 1950), p. 1. 12. Susan Greco, ‘‘The Decade-Long Overnight Success,’’ Inc., December 1994, p. 73. 13. Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: The Free Press, 1985), pp. 4–11. 14. Joseph Weber, Business Week, September 18, 2000, p. EB60.

KEY ONE: END-USER BENEFITS FOR GROWING NICHE MARKETS 1. Peg Meier, ‘‘Puzzle It Out,’’ Naples Daily News, Naples, FL, March 27, 1996; Elms Catalogs, 2001 through 2005/2006; and Elms Web site through May 2006. 2. Gloria Green and Jeffrey Williams, ‘‘Thinking Like the Customer,’’ in Mastering Your Small Business Marketing (Chicago: Upstart Publishing Company, 1996), p. 4. 3. Susan Diesenhouse and Julie Shaver, ‘‘How They Do It,’’ New York Times, January 1, 1994, p. 41, and visits to the Flexlite, Inc., Web site through 2005. 4. Missy Sullivan, ‘‘The War of the Words,’’ Forbes, November 13, 2000, p. 288; and visits to the Antenna Audio Web site, www.archimuse.com/mw2004, accessed October 4, 2005. 5. www.gmt. 6. William J. Broad, ‘‘Rocket Science Served Up Soggy,’’ New York Times, July 31, 2001, p. D7; Kellie Schroeder, ‘‘Eureka! Today’s Inventors Bring Winning Ideas to Market,’’ BJ’s Journal, May 2000, p. 1; and periodic reviews of Johnson’s Web site, web.mit.edu/invent/cow, accessed October 4, 2005. 7. Nicole Ridgway, ‘‘Robo Therapy,’’ Forbes, May 14, 2001, p. 216; and monitoring of the AnthroTronix Web site, www.anthrotronix.com, accessed October 4, 2005. 8. Mary Bellis, ‘‘Microscopic View of Velcro,’’ Inventors Newsletter, 2004, http:// www.ideafinder.com. 9. Geanne Rosenberg, ‘‘Eureka! Your Invention Works: Now What?’’ Investors Business Daily, April 9, 1997, p. A1. 10. Phil Patton, ‘‘Humming Off Key For Two Decades,’’ New York Times, July 29, 1999, p. E1.

KEY TWO: PRICING THAT PLEASES TWO MASTERS 1. Ted C. Fishman, ‘‘The Chinese Century,’’ New York Times Magazine, July 4, 2004, p. 24. 2. Friedman, The World Is Flat. 3. Charles W. Goodyear, ‘‘Letter to the Editor,’’ Darien Times, February 10, 2005, p. 4A. 4. Danny Hakim and James Brooke, ‘‘Toyota Develops Hybrids With an Eye on the Future,’’ New York Times, August 4, 2005, p. C3. 5. Melanie Warner, ‘‘Goodies in Small Packages,’’ New York Times, May 30, 2005, p. C3. 6. Barry Farber, ‘‘The Price Is Right,’’ Entrepreneur, May 2005, p. 86.

KEY THREE: INFOTECH-STRENGTHENED CHANNELS AND SUPPLY CHAINS 1. Julia Moskin, ‘‘For Trader Joe’s, a New York Taste Test,’’ New York Times, March 8, 2006, p. D1.

NOTES

283

2. Ibid. 3. Leigh Buchanan, ‘‘A Room with an SKU,’’ Inc. Technology #4, 1999, p. 77. Also see the company’s Web site entries, www.ihtech.com, accessed August 22, 2005. 4. Seth Shafer, Hoover’s Online, February 7, 2004; and Covisint Online, February 2004. 5. Ibid. 6. ‘‘The 21st Century Supply Channel,’’ Harvard Business Review, October 2004, p. 98. 7. Friedman, The World Is Flat. 8. ‘‘GE’s Polymerland Division,’’ Fast Company, May 2000, p. 354. 9. Liane Cassavoy, ‘‘The Next Generation,’’ Entrepreneur, May 2006, p. 72. 10. Leigh Buchanan, ‘‘Pitching Camp,’’ Inc. Technology #4, 1999, p. 74. Also see the company’s Web site entries, www.ussportscamps.cm, accessed August 22, 2005. 11. ‘‘Supply Chain Challenges: Building Relationships,’’ Harvard Business Review, July 2003, p. 64. 12. Ibid., p. 67. 13. Steve Lohr, ‘‘IBM Sought a China Partnership, Not Just A Sale,’’ New York Times, December 13, 2004, p. C1. 14. Leigh Buchanan, ‘‘Law and Order-Taking,’’ Inc. Technology #4, 1999, p. 106. Also see the company’s Web site entries, www.depo.com, accessed August 22, 2005. 15. Jan Zach, ‘‘On the Rack,’’ Forbes, March 5, 2001, p. 152.

KEY FOUR: A TARGETED AND FRUGAL SALES AND MARKETING MIX 1. Michael Dell, Direct from Dell, Harper Business, 1999. 2. Ibid., p. 21. 3. Ibid., p. 88. 4. Jay Conrad Levinson, Guerrilla Marketing: Secrets for Making Big Profits from Your Small Business, 3rd edition (New York: Houghton Mifflin, 1998). 5. Jay Conrad Levinson, Rick Frishman, and Jill Lublin, Guerrilla Publicity (Avon, MA: Adams Media Corporation, 2000), p. xiii. 6. Ibid., p. 78. 7. Ibid., p. 71. 8. Melanie Wells, ‘‘Cult Brands,’’ Forbes, April 16, 2001, p. 198. 9. ‘‘EEEE Gads!,’’ People, May 29, 2000, p. 155, and Web site, www.oddball shoe.com, accessed October 12, 2005. 10. Gary Rivlin, ‘‘Does the Kid Stay in the Picture?,’’ New York Times, February 22, 2005, p. E1. 11. Leigh Buchanan, ‘‘Show Me the Monet,’’ Inc. Technology #4, 1999, p. 78. 12. Friedman, The World Is Flat.

KEY FIVE: CUSTOMER SERVICES THAT GENERATE REPEAT BUSINESS 1. ‘‘Anchors Away: Aslanis Seafoods Reels In the Business,’’ BJ’s Journal, Spring 1997, p. 11.

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2. Norbert Johnson, Small Business Consultant, Brattleboro, VT. 3. Jerry Bowles, ‘‘Delivering the Promise of the Internet Economy,’’ a special advertising report by Cass Information Systems, Fortune, September 11, 2000, ad p. 10. 4. Rick Whiting, ‘‘In Their Orbit,’’ Information Week, August 4, 2003, p. 32. 5. Laurie Sullivan,‘‘DHL’s RFID Plans,’’ Information Week, June 13, 2005, p. 34. 6. Marcia Stepanek, in eBiz, Business Week, September 18, 2000, p. EB86. 7. ‘‘Partnering w/KPMG,’’ New York Times, August 8, 1999. 8. Glen Allmendinger and Ralph Lombreglia, ‘‘Four Strategies for the Age of Smart Services,’’ Harvard Business Review, October 2005, p. 131.

PART B: PROFIT-PRODUCING MANAGERIAL AND OPERATIONAL STRATEGIES 1. Michael Copeland, ‘‘The World According to Clark,’’ Business 2.0, May 2005, p. 88. 2. Michael Lewis, The New New Thing: A Silicon Valley Story (New York: W.W. Norton, 2000). 3. ‘‘Common Body of Knowledge Required by Professional Management Consultants,’’ Association of Consulting Management Engineers, New York, September 1957.

KEY SIX: DYNAMIC, ‘‘NO-GAPS’’ BUSINESS PLANNING 1. Louise Lee, ‘‘Picture This! Firm Failing from Too Much Success,’’ Wall Street Journal, March 17, 1995, p. B16, and the author’s experience as a customer. 2. J. Thomas Cannon, Business Strategy and Policy (New York: Harcourt, Brace & World, 1968), p. 141. 3. J. Thomas Cannon, No Miracles for Hire: How to Get Real Value from Your Consultant (New York: American Management Association, 1990), p. 63. 4. Ron Sirak, ‘‘Stepping Down, Moving On,’’ Golf World, January 14, 2005, p. 18. 5. Ibid.

KEY SEVEN: PEOPLE POWER THROUGH TEAMING AND EMPOWERMENT 1. Michael Silver, ‘‘Pat Answer,’’ Sports Illustrated, February 11, 2002, p. 38. 2. Jim Collins, Good To Great: Why Some Companies Make the Leap . . . and Others Don’t (New York: HarperBusiness, 2001), p. 1. 3. Richard M. Ketchum, Saratoga—Turning Point of America’s Revolutionary War (New York: Henry Holt, 1997), p. 75. 4. Oren Harari, ‘‘Behind Open Doors: Colin Powell’s Seven Laws of Power,’’ Modern Maturity, Washington, D.C., January/February 2002, p. 48; and Colin L. Powell with Joseph E. Persico, My American Journey (New York: Random House, 1995). 5. Doris Kearns Goodwin, Team of Rivals: The Political Genius of Abraham Lincoln (New York: Simon & Schuster, 2005). 6. ‘‘Ten Secrets to Success,’’ Investors Business Daily, Los Angeles, CA 90066, special periodic feature.

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7. Cannon, No Miracles for Hire, p. 77. 8. See Collins, Good To Great, p. 120. 9. Suzy Wetlaufer, ‘‘Organizing for Empowerment: An Interview with AES’s Roger Sant and Dennis Bakke,’’ Harvard Business Review, January–February 1999, p. 111, and 2005 visits to their Web site. 10. Release: Harvard Business School. 11. Weld Royal, ‘‘A Factory’s Crash Course in Economics Pays Off,’’ New York Times, April 25, 2001, p. C4. 12. See Ibid., and the Buckeye Requirements for Success model in Key Six, Table 6-3.

KEY EIGHT: LEVERAGED DEVELOPMENT, PRODUCTION, AND OUTSOURCING 1. Michael Hammer, ‘‘Deep Change: How Operational Innovation Can Transform Your Company,’’ Harvard Business Review, April 2004, p. 84. 2. Michael Dell, Direct from Dell, Harper Business, 1999. 3. See Adrian Slywotzky, ‘‘How Digital Is Your Company?,’’ Fast Company, February/March 1999, p. 102. 4. William Echikson,‘‘The Mark of Zara,’’ Business Week, May 29, 2000, p. 98; Miguel Helft, ‘‘Fashion Fast Forward,’’ Business 2.0, May 2002, p. 61; and Jane Folpe, ‘‘Zara Has a Made-to-Order Plan for Success,’’ Fortune, September 4, 2000, p. 80. 5. Patricia B. Seybold, ‘‘Get Inside the Lives of Your Customers,’’ Harvard Business Review, May 2001, p. 81. 6. Nathan Vardi, ‘‘It’s the Tap of the Iceberg,’’ Forbes, September 4, 2000, p. 114. 7. Eduardo Porter, ‘‘True or False: Outsourcing Is a Crisis,’’ New York Times, June 10, 2005, section 3, p. 4. 8. James Brian Quinn and Frederick G. Hilmer, McKinsey Quarterly, issue No. 1, 1995, p. 48). 9. Ibid. 10. Matt Richtel, ‘‘Outsourced All the Way,’’ New York Times, June 21, 2005, p. C1. 11. Alex Kandybin, Martin Kihn, and Cesare R. Mainardi, ‘‘Reinventing Scale: How to Escape the Size Trap,’’ in Content/Strategy and Competition (New York: Booz Allen & Hamilton, 1998), p. 63. 12. Friedman, The World Is Flat.

KEY NINE: PROBLEM SOLVING AND ‘‘DO-YOUR-OWN’’ TURNAROUNDS 1. Caroline Alexander, The Endurance (New York: Alfred A. Knopf, 1999); and Fergus Fleming, Off the Map: Tales of Endurance and Exploration (New York: Atlantic Monthly Press, 2005). 2. Ibid. 3. Cannon, No Miracles for Hire, pp. 194–204. 4. Beth Bloom Wright with Martha E. Menglesdorf, ‘‘To Bankruptcy,’’ Inc., September 1993, p 86.

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5. John Banaszewski, ‘‘Nine Steps to Save Troubled Companies’’ Inc., February 1981, volume 3, pp. 43–44.

KEY TEN: LINKING GROWTH STRATEGIES WITH PROFIT PLANS 1. Golf World, November 26, 2004, p. 3 2. Matthew Miller, ‘‘The Acrobat,’’ Forbes, March 15, 2004, p. 101. 3. Interview with Guy Laliberte on ‘‘Sixty Minutes,’’ CBS TV, August 7, 2005. 4. Cannon, No Miracles for Hire, p. 203. 5. Leigh Buchanan, ‘‘Seed Money,’’ Inc. Technology #4, 1999, p. 72, and visits to the Prairie Frontier Web site, www.prairiefrontier.com, accessed August 29, 2005. 6. Adrian Slywotzky, ‘‘How Digital Is Your Company?’’ Fast Company, February/ March 1999, p. 99. 7. Based on Holstein’s Web site, www.holsteinusa.com, accessed August 29, 2005, and previous interviews at HA. 8. Damian V. Rinaldi, ‘‘Putting the Mainframe Out to Pasture,’’ Client/Server Computing, November 1944 and 1996, p. 36; Paul Quinn, ‘‘Dairy Files Are Updated in the Field,’’ IDSystems, p. 36; and 1996 interviews at HA. 9. Cannon, No Miracles for Hire, p. 210. 10. Paul S. Brown, ‘‘The Failure Trap,’’ New York Times, May 13, 2006, p. B5.

APPENDIX A: SMALL BUSINESS IN THE UNITED STATES 1. Exhibit 716, Statistical Abstract of the United States: 2004–2005, U.S. Census Bureau, p. 483. 2. Ibid., Exhibit 730, p. 492. 3. See Web site for U.S. Small Business Administration, under section on Frequently Asked Questions; data were operative standards reported as of July 2005. 4. Exhibit 731, Statistical Abstract: 2004–2005, p. 493. 5. Small Business Administration Web site (http://www.sba.gov/) July 24, 2005. 6. Exhibit 739, Statistical Abstract: 2004–2005, p. 498.

APPENDIX E: RMA ANNUAL STATEMENT STUDIES 1. RMA Annual Statement Studies, RMA—The Risk Management Association, Philadelphia, PA.

Annotated Bibliography

BOOKS Adams, Scott, Dogbert’s Top Secret Management Handbook, HarperCollins Publishers, New York, 1996. Humorous cartoon-supported lessons from the office scene on how not to manage effectively. Bangs, David H., Jr., The Market Planning Guide, 4th ed., Upstart Publishing, Chicago, 1995. A comprehensive discussion and set of basic A to Z worksheets for all aspects of the marketing plan. Blanchard, Ken, John P. Carlos, and Alan Randolph, Empowerment Takes More Than a Minute, Berrett-Koehler Publishers, San Francisco, 2002. How to make empowerment work in a firm of any size; dramatized with an easy-to-read story that follows a seasoned executive through the process of creating an empowered culture. Bloch, Arthur, Murphy’s Law: And Other Reasons Why Things Go Wrong!, Price, Stern, Sloan Publishers, Los Angeles, 1979. One-liners and throw-out phrases in this socalled Book of Miracles that relies on humor to convey Murphy’s principle that whatever can go wrong will! One of the enduring ‘‘tongue-in-cheek’’ resources that can enliven the impact of the small-business executive’s training of neophyte managers and supervisors. Cannon, J. Thomas, No Miracles for Hire: How to Get Real Value from Your Consultant, American Management Association, New York, 1990. Pithy questions and issues the CEO should consider before selecting and committing to consultants. Case briefs, principles, and options aim at assuring the most relevant and cost-effective client results. Also by the same author, Business Strategy and Policy, Harcourt, Brace & World, New York, 1968. One of the earliest structural definitions of business strategy principles, basic options, and case-type examples; chosen for the Core Collection of the Harvard Business School Library. Christensen, Clayton, and Michael Raynor, The Innovator’s Solution: Creating and Sustaining Successful Growth, Harvard Business School Press, Boston 2003. Called a survival manual for corporate managers, explores how innovators can and have been successful in taking on the major competitors with disruptive, new strategic models.

288

ANNOTATED BIBLIOGRAPHY

Collins, Jim, Good To Great: Why Some Companies Make the Leap . . . and Others Don’t, HarperBusiness (an imprint of HarperCollins Publishers), New York, 2001. Called the defining management study of the nineties and leading the business book bestselling list for several years, it is a ‘‘must-read’’ for the entrepreneur. Although based on a five-year team study of large companies and the practices behind their long-term successes, it applies to how small business leaders can and must make the transition from entrepreneuring to team-based professional management practices. Covey, Stephen R., The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change, Simon & Schuster, New York, 1989. For the small-business executive who feels an urgent need for a major overhaul of his or her style of life, leading, and managing. Dell, Michael, Direct from Dell: Strategies that Revolutionized an Industry, Harper Business, New York, 1999. A ‘‘must-read’’ chronicle of brilliant and resourceful strategies and operations, from planning the Dell start-up to overcoming its early obstacles to survival. Drucker, Peter F., The Practice of Management, Harper & Row, New York, 1954. The first of many publications with Drucker’s penetrating insights on the primary issues and principles of successful management. Examined chronologically, his many writings demonstrate his continuing thinking ahead of the pack on the art of management. The Entrepreneur’s FastTrac II Handbook, 1997 and later editions, Entrepreneurial Education Foundation, Denver, CO, 1997. This and related handbooks support the publisher’s comprehensive seminar course replete with worksheets for planning both the new and the ongoing venture. Friedman, Thomas L., The World Is Flat, Farrar, Strauss & Giroux, New York, 2005. Using many anecdotes and case briefs, Friedman documents the prime influential role our advancing information technology is continuing to play in the irreversible changes in global communication and shifts in the world’s economic centers. His insights and future expectations range from the level of individual business practices, to enhanced competition and economic development among industries and countries, and on to the world’s galloping political and idealistic issues and conflicts. Goodwin, Doris Kearns, Team of Rivals: The Political Genius of Abraham Lincoln, Simon & Schuster, 2005. Our sixteenth president successfully teamed and strongly led competing secretaries of state in his cabinet to assure the best possible deliberation of all critical issues facing the country. His managerial genius at mending fences with those at odds with his final decisions is an applicable lesson for leaders in companies and other organizations of all types and sizes. Harrison, Jared F., Management By Obstruction: or How to Save Your Organization from Needless Efficiency, Prentice-Hall, Englewoods Cliff, NJ, 1974. This comprehensive compendium of humorous characteristics and innuendos about managerial abuses and misdirections parallels much of Parkinson, Peter, Murphy, Dogbert, and more. Use it to lighten up your ‘‘how to manage’’ curriculum with your training of supervisors. Levinson, Jay Conrad, Guerrilla Marketing: Secrets for Making Big Profits from Your Small Business, Houghton Mifflin, New York, 1998. One of many writings filled with ingenious ideas for adapting the best marketing practices from the major corporations, then figuring how to execute them at low, low cost. Also, review Levinson, Jay Conrad, Rick Frishman, and Jill Lublin, Guerrilla Publicity, Adams Media Corporation, Avon, MA, 2000. More on options for cost-effective marketing.

ANNOTATED BIBLIOGRAPHY

289

McDonald, John, Strategy in Poker, Business & War, W.W. Norton, New York, 1950. Four generic conditions that characterize the uncertain forces at play in competition. Morison, Samuel Eliot, Victory in the Pacific, Little, Brown, New York, 1960. One of more than a dozen books on World War II by the prolific historian, documenter, and analyst of the many strategic lessons from the military campaigns of World War II. Parkinson, C. Northcote, Parkinson’s Law: And Other Studies in Administration, Houghton Mifflin, Boston, 1957. A satirical attack on bureaucracy at all organizational levels; particularly acclaimed for his thesis, ‘‘Work expands to fill the time available for its completion.’’ Peter, Dr. Laurence J., and Raymond Hull, The Peter Principle: Why Things Always Go Wrong, William Morrow, New York, 1969. Humorous, tongue-in-cheek, with great wisdom and insight on why things go so wrong in all types of organizations, and creativity in solving such problems. Porter, Michael E., Competitive Strategy: Techniques for Analyzing Industries and Competition, Free Press, New York, 1980; and Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, New York, 1985. The two books should be in every serious strategist’s reference library for their in-depth presentation of business’ strategic requirements and options. Drawn from Porter’s teaching and case research at the Harvard Business School, and his worldwide consulting, the books range from the concepts of strategy to the critical characteristics of competition, and the many strategic and tactical options along the front line of the company’s entire value chain. Roethlisberger, Fritz J., Management and Morale, Harvard University Press, Cambridge, MA, 1946. The author teamed with Elton Mayo and other HBS professors in the landmark 1930s experiment at the Hawthorne Works of Western Electric. This research clarified for the first time the prime importance of human relationships in improving the productivity of teams in the workplace. ‘‘Address every individual’s hopes, aspirations, teaming dynamics, and roles in the company’s total mission first. Then secondarily, attend to lighting, workplace comfort, and other operating conditions.’’ Salas, Rodolfo, Prioritize ’til It Hurts: Discovering and Unleashing Your Best Opportunities, University Press, Chagrin Falls, OH, 2003. Salas details his consulting practice that focuses on helping executives establish market leadership through organizational focus, precisely reasoned research, thought and logic, and meticulous attention to execution. Shim, Jae K., Joel G. Siegel, and Abraham J. Simon, The Vest-Pocket MBA, Prentice-Hall, Englewood Cliffs, NJ, 1986. A quick reference source by three professors of accounting, finance, and information systems. At the ‘‘Business 101’’ level, it treats the elements and issues for accounting tools and guidelines, financial and economic measures, and quantitative methods and computer applications. Stern, Carl W., and George Stalk, Jr., eds., Perspectives on Strategy from the Boston Consulting Group, John Wiley & Sons, New York, 1998. This rich reference source is a compendium of papers by Bruce Henderson, the founder of BCG, and several dozen other management, planning, and consulting practitioners. The papers are a goldmine of the strategic planning and decision-making tools developed and tested over many years. Subjects include the experience curve and industry life cycles, market segmentation and value creation, economies of scale, performance measurement, profit centers that decentralize organizations, and effecting change to meet future challenges.

290

ANNOTATED BIBLIOGRAPHY

PERIODICALS Barron’s, weekly, Dow Jones, New York. Mainly comprehensive reporting on the investment market and the economy. Each issue also contains one or more fresh articles on selected industries and companies in the news—competitive standings, expected impact of new technology and other strategic developments. Business 2.0, monthly except Jan/Feb, subsidiary of Time, New York. This pioneer of the early World Wide Web and Internet days has gone through ownership and editorialemphasis changes. It continues as a broad-ranging reporter of major happenings and trends in the information industry, with emphasis on the principal participants in the changing infotech world. Business Ethics, quarterly, Business Ethics, 2845 Harriet Avenue, Suite 207, Minneapolis, MN 55408. Publishes scholarly articles pertinent to the international business community. Can be accessed electronically. Business Week, McGraw-Hill, New York. The definitive tracking of information and developments in all business aspects, See the periodic section on ‘‘EBiz’’ and their online information sites. Entrepreneur, monthly, Entrepreneur, Irvine, CA. A regular must-read. A premier source for small businesses and start-ups with many enlightening reports and specific company briefings in each issue on new and effective small-business practices. Quite strong on practical tips on selling and marketing. Also, each May issue contains an updated classified directory of infotech software for the small business. Fast Company, monthly, Mansueto Ventures, New York. Editorial emphasis on today’s information dimensions, with articles in every issue on how leaders are changing their infotech strategies; of equal importance, case reports demonstrating how the CEO and entrepreneur can avoid missteps, and benefit from lessons learned by others the hard way. Forbes, biweekly, Forbes, New York. Aimed at investor readership, each issue contains one or more briefs on specific companies’ successful or unsuccessful approaches. Fortune, biweekly, subsidiary of Time, New York. A major publication about and for industry. Editorial emphasis on innovative strategies and business approaches stressing the larger companies. Always yields insights scalable to the smaller firm. Harvard Business Review, monthly, Harvard Business School, Boston. A must for the serious business strategist. Every issue reports on investigations of innovative strategic practices and concepts with particular focus on the industry leaders, but often downsizable to the smaller business. Inc., Mansueto Ventures, New York. Another must-read for the small entrepreneur. Always contains case briefs and practical lessons for small-business management, with frequent emphasis on infotech applications. Information Week, CMP Media, Manhasset, NY. Sent free to information technology specialists. Also, keeps the nontechnical small-business leader up-to-date on the fast moving application changes and innovations that he or she must continue to track. Investor’s Business Daily, except Sunday, Los Angeles, CA. Known best for its timeproven ‘‘CANSLIM’’ method of stock selection. Each issue reports on a number of small- and medium-sized companies, new to the investor spotlight, that have relevant success stories and strategic lessons. Every week a special feature, ‘‘IBD’s Ten

ANNOTATED BIBLIOGRAPHY

291

Secrets to Success,’’ presents one of their ten leadership principles and its application helpful to any organization leader. Scientific American, monthly, Scientific American, New York. High-caliber, wide ranging editorial emphasis with some articles relevant to a company’s or industry’s technological and economic environment. Technology Review, monthly, Technology Review, Cambridge, MA. MIT’s ‘‘Magazine of Innovation’’ publication broadly covers issues and developments in virtually all aspects of technology, including product planning and development, engineering, production and quality control, and information technology. The small business CEO should scan it regularly to avoid competitive surprises and discover leapfrogging opportunities, then get with his or her technical advisors. Wall Street Journal, daily except Sunday, Dow Jones, New York. A bible of investment market information, economic and business developments, emerging industry and company situations, and pithy editorials on the wide range of business-related issues. Wired, monthly, The Conde Nast Publications, San Francisco, CA. Scan this rapidly growing, wide-ranging publication for occasional features in each issue that can stimulate your company’s brainstorming and ‘‘out-of-the-box’’ explorations.

BUSINESS AND GOVERNMENT REFERENCE SOURCES U.S. Small Business Administration (SBA), Washington, DC, www.sba.gov. The voice, conscience, and proponent of America’s small businesses. Key resources locally available throughout the United States include:  SCORE (Service Corps of Retired Executives); 13,000 volunteers in more than 750 U.S. locations for counseling start-ups and small businesses  SBDC (Small Business Development Centers)  SBA publications on all aspects of start-ups and small business management subjects, including financing alternatives and approaches (many available at field locations)  Export Assistance Centers, www.sba.gov/oit/export/useac/html. Offices in sixteen states supported by SBA, the Department of Commerce, and the Export-Import Bank. The trade associations and publications that serve your industry, including its suppliers and customers, and/or ethnic market niches. Make use of their publications (content and statistics); membership lists; annual conferences and shows; special seminars; and specialized software programs. Seek the perspectives of their executives and officers on your markets’ needs and trends Local and State Organizations:  Banks and other lending institutions  Local Better Business Bureaus  Chambers of Commerce  Special programs for women in business  Economic and business development departments, state, regional, and local  State and regional offices of SCORE and SBDC  State-level regulatory and educational units of the U.S. Government departments and agencies cited below (check your telephone and Yellow Page listings) American Management Association, New York, NY, www.amanet.org. Management development and executive training through seminar courses and broad offerings of

292

ANNOTATED BIBLIOGRAPHY

publications on the full range of managerial functions and issues; courses tailored for size and type of company and for separate groupings from seasoned to minimally experienced workshop participants. Council of Better Business Bureaus, Arlington, VA, www.bbb.org. See their Better Business Bureau Online, dedicated to maintaining the reliability and privacy of online operations—protecting consumer-safe shopping, policing identity fraud, resolving disputes, investigating negative business practice complaints, assuring product-recall alerts, and reviewing advertising claims. Dun & Bradstreet, D&B Company, Short Hills, NJ, www.smallbusiness.dnb.com. Its Small Business Solutions division provides business credit reports, finds new customers, and offers risk-management solutions, with insights on over 100 million businesses worldwide. Internal Revenue Service, Washington, DC, www.irs.gov. Reports the number of tax returns submitted broken into three broad categories: corporations, partnerships, and nonfarm proprietorships; other data summaries available on request. NAICS (North American Industry Classification System) Association: a unit of the Office of Management and Budget, Washington, DC, www.census/naics. Successor to SIC (Standard Industrial Classification codes), assigns industry codes and company profiles for 14 million U.S. businesses. Prepares summary reports by NAICS industry title that conceal individual company identities; reports show number of establishments broken down by sub-industry, geography, and employee size categories. National Association of Small Business Investment Companies (NASBIC), Washington, DC, www.nasbic.org. A national trade association for privately organized and operated venture capital firms. Under license by the SBA, they make credit available to small independent businesses. National Association of Women Business Owners, McLean, VA, www.nawbo.org. Represents the 10.6 million U.S. women business owners through networking, sharing resources, and providing a single voice for women in the U.S. economy. National Venture Capital Association, Arlington, VA, www.nvca.org. A leading trade organization in the venture capital community for information, networking, advocacy, professional development, and industry statistics. Occupational Safety & Health Administration (OSHA), a unit of the U.S. Department of Labor, Washington, DC, www.osha.gov. Responsible for workplace regulations; through OSHA field units, perform on-site inspection for conformance of all establishments with eight employees or more. Robert Morris Associates, RMA Annual Statement Studies, Philadelphia, PA, www.mahq. org/rma. Renamed Risk Management Association. Comprehensive statistical comparisons of U.S. companies’ annual financial performance lumped into industry groupings based on the Department of Commerce’s NAICS codes. Data are presented by number of employees and revenue size categories for P&Ls, balance sheet items, and financial ratios. U.S. Chamber of Commerce, Washington, DC, www.uschamber.com. Three million businesses worldwide, 96 percent with fewer than 100 employees, and their local chambers. Represents and promotes the interests, business development, growth, and legal rights of its members and affiliates. U.S. Citizenship and Immigration Services, www.uscis.gov. A bureau of the U.S. Department of Homeland Security; includes responsibility for the qualifications and

ANNOTATED BIBLIOGRAPHY

293

requirements for temporary employment visas in the United States, and controls visa compliance. U.S. Copyright Office, a major service unit of the U.S. Library of Congress, Washington, DC, www.copyright.gov. It is the office of public record for copyright registration and for deposit of copyright material. U.S. Department of Agriculture, Washington, DC, www.usda.gov. Laws and regulations governing food preparation (e.g., clean kitchen requirements) and marketing, and information on food safety; department’s Rural Development Service issues guidelines and regulations concerning development and use of rural business sites. Start-up financial assistance is available through the department’s state offices. U.S. Department of Commerce, Washington, DC, www.commerce/gov. The most wideranging array of government services for the small business and the start-up: mission is to ‘‘foster, promote, and develop the foreign and domestic commerce of the United States.’’ The entrepreneur should become familiar with all aspects of the department that touch upon his or her endeavor. A few of the most relevant areas relate to:  Commerce: the U.S. Census Bureau, www.census.gov. Publishes the annual Statistical Abstract of the United States, which contains information on many aspects and characteristics of America’s economy. The neophyte planner should begin familiarization with the massive government data banks available by reviewing the Abstract’s contents.  Quantitative reports on U.S. industries and their geographic distribution: Among the most useful of these for the small business start-up planner are County and City Data Book, County Business Patterns.  Intellectual property: the U.S. Patent and Trademark Office, www.uspto.gov.  Technology: Scitech Resources—a catalog of government science and technology Web sites; and NIST’s biweekly newsletter, Tech Beat, on recent research results  Telecommunications: National Telecommunications and Information Administration, Washington, DC. Includes responsibility for the radio frequency spectrum. U.S. Department of Justice, Washington, D.C., working in conjunction with the SBA for compliance with the Americans with Disabilities Act. U.S. Food and Drug Administration, Rockville, MD, www.fda.gov. Responsible for the regulation of food, drugs, medical devices, biologics, animal feed and drugs, cosmetics, and radiation-emitting products. U.S. Government Printing Office, Superintendent of Documents, Washington, DC, www.gpo.gov. Serves the three branches of the U.S. government through its store in Washington and its Online Bookstore. The CEO of the GPO is the Superintendent of Documents and the Public Printer of the United States. U.S. Postal Service (USPS), Washington, DC, www.usps.com. Start with your shipping questions by contacting your local postmaster. World Almanac and Book of Facts, 2006, annual, World Almanac Education Group, 512 Seventh Avenue, New York, NY 10018. Check each year’s update section on computers, telecommunication, and the Internet. Peruse the table of contents about other basic information relevant to your own industry.

Index

(Case briefs and examples are in italics)

ACME (Association of Consulting Management Engineers), the enterprise manager’s functions, 150 AES Corporation, selective application of empowerment, 196 AIDA (Attention, Interest, Desire, Action) ingredients of Blademaster sales pitch, 108 Amazon.com, Jeff Bezos, early adapter of a leading infotech-based business, 85 Antenna Audio, competing against the audio tours leader with superior benefits, 42 AnthroTronix, Corinna Lathan and Jack M. Vice, learning toys for disadvantaged children, 49 Antiques Re-Visited, failure to solve a paint drying problem, 211 ArtSource, online art gallery for corporate and institutional clients, 123 Aslanis, Gus, outstanding customer services that grew a major seafood start up, 127 Astraltune versus Sony Walkman, alternatives for protecting intellectual properties, 54

Atkinson-Baker Court Reporter, Inc., a geographic and functional scope expansion, 97 Austin Grill, failure to profile prospects for a new Mexican restaurant, 16 Bean, L. L., early mailing promotions to affluent hunters and outdoorsmen, 104 Behlin Corporation, restoring a grain storage business devastated by external causes, 27 Belkin Corporation, marketing the benefits of USB cable on the package, 35–36 Benefits of offerings for the user: avoiding products in search of a market, 3; competitive benefits evaluation worksheet, 52; converting product features into superior benefits, 35–36; partnering with key accounts on their needs, 40; product design partnering with key customers, 208; Ted Levitt’s Marketing Myopia—‘‘What business are we in?’’ 11 The British Clockmaker, Ray Bates, related diversification planning, 241 Buckeye International, customer service scenarios, 131; modern plastic furniture

296

INDEX

Buckeye International (continued) venture, 176; outsource provider of value-added components for auto manufacturers, 216 Business missions, objectives and strategies: cycle of strategic decision-making, 2–3; definitions of strategy, 236; devil’s advocates, getting your own employees to challenge current strategies, 39; external focus of market-positioning strategies, 8; five requirements for missions and objectives, 168; internal focus of managerial and operational strategies, 8; ‘‘natural’’ strategy hurdles, 249; Peter Drucker, purpose of a business to create a customer, 1; strategy hierarchy for small business, 3–4, 235–36; three traditional aims for a new venture, 6; Porter’s value chain, the front-line decision point for many strategies and tactics, 6–7 Children’s pajama maker, exploring offshore outsourcing production, 214 Circuit-Connections, Adam Bristol, sharply focused niching by electrical contractor, 1, 33 Cirque du Soleil, outstanding success from an entertainment avocation, 237 Classic-car buff seeking funding without a plan or experience, 143 Cody-Kramer Import, licensing to expand geographically, 98 Competition: five powerful competitive forces, 27; four unruly competitive characteristics, 26; Porter’s Competitive Strategy and Competitive Advantage, 4; profiling and evaluating major competitors, 28 Consumers: addressing the consumer’s critical perceptions of the seller, 39; ethnic markets, 16; Kipling’s six journeymen, 13; lifestyle niching, 15; psychographics and generational consumer characteristics, 15; quantitative

market and competitive factors and forecasts, 24; thinking like your consumer with eight penetrating questions, 38; timing of shopping, 24; ultimate consumer buying model, 23; value poaching and channel surfing by shoppers, 21; why ultimate and business-to-business consumers buy, 19–20 Covisint, failed business-to-business hub that had threatened small auto sub-contractors, 88 Customer services aims and strategies: company wide customer service strategy and training programs, 137; creating ‘‘smart-service’’ strategies that convert functions into revenue producers, 136; customer generating cycle as driver of repeat sales, 137; departmental goals, 126; developing customer service scenarios as guides, 130; Norbert Johnson’s ten commandments, 128; two scenarios needed with outside partners and reps, 132; weaknesses and competitive evaluation, 129 Customer services functions: collaborative shipping logistics, 133; customer-to-customer interactions online, 135; infotech-based home office services, 134; online databases for company technicians, customers and suppliers, 134; online problem-solving software, 135; online scheduling of service calls, 135; remote diagnostics for product performance and maintenance, 136 Dell Inc.: early online supply-chain linkages, 89; marketing, 101; Michael Dell’s early growth and profit strategies, 2; operational and outsourcing strategies, 205, 213 Distribution and supply chain middlemen: B2B (business-to-business) hubs, 89; competitiveness worksheet for distribution channels and supply chains, 99; discount clubs, distributors, and highway

INDEX

shopping centers, 81; ‘‘seamless’’ partnering with distributors and other independent associates, 94; West Lebanon, New Hampshire, shopping strip, 81 Distribution channel and supply chain strategies, 90; distribution expansion by geography and product scope, 95; distribution selectivity strategies, 81, 83; schematic of traditional and new channel alternatives and infotech options, 79; small business aims, 74; strategic alliances, 98; supply chains, largest initial infotech application area, 75 Dortech CATS, consolidated air cargo service, inability to resolve labor conflicts, 250 Dortech, Inc., Frank B. ( Jake) Carder, innovative technical expertise for new growth market, 50 Elms Puzzles, Betsy Stuart, taking on the quality jigsaw puzzle leader with superb new benefits, 36 Entrepreneur magazine’s small business infotech software database, 93 Establishments, number of small businesses, ix, 1 Ethics in business, xii, 169; Harvard Business School’s program, 199 Financial tools and techniques: breakeven analysis, 61; cash flow projections (CFP), 65; due diligence scenarios, 257; rolling cash flow, 66; summary financial preview (SFP), 175 Flexlite, USA, converting a ‘‘me-too’’ lighting product into a ‘‘me-too-plus’’ business, 41 Goldcorp, Inc., seeking new, low-cost gold mining approaches online, 30 Grafton Volunteer Fire Company, listening carefully to your customer’s application requirements, 38 Grandmother’s Calendar, Harvey Harris’s fatal planning omissions for growing new venture, 2, 156

297

Green Mountain Technology, Michael Bryan-Brown, core expertise used to innovate with composting systems, 43; outsourcing of production, 213; use of manufacturers reps, 110 Hand power tool manufacturer, trying to recover from declining revenues and profits, 219 Harriman, Inc., George Albright, profitable simplification of product and pricing options, 69 Hayes, Dr. Richard, thinking out of the box with the LEM module, 239 Heating fuel and systems distributor, solving a lingering customer service problem, 127 Hewlett-Packard, customer-oriented online problem solving for customers, 135 Holstein Association USA, Inc., infotech as the prime strategic thrust, 248 Home decorations dealer, failure to define and locate in a viable market, 218 Hospitality Properties, Dennis Smith, solving a severe managerial overload problem, 189 IBM, industry marketing specialization, 194; branch-level critiques of sales losses by IBM president, 223; sold 81 percent of PC business to Lenovo, China, 96; World Trade’s expansion strategies, 95 Iceberg Corporation of America, exploiting a new source for bottled water, 212 Ideal Toy Corporation, adversely impacting retailers’ profits with TV advertising, 112 InfoCom Associates, identifying and prioritizing prospect types, 105 Infotech and the Internet: ‘‘digital cockpit’’ with need-to-know access, 9; early infotech promises, 31; infotech and bricks and clicks sales options, 121;

298

INDEX

Infotech and the Internet: (continued) infotech-enhanced channels alternatives, 79; online databases for customers, suppliers, and company technicians, 86; selected pioneering infotech applications, 247; self-test of small business infotech readiness, 92; suggested phasing of infotech additions, 92; supply chains—largest initial infotech application areas, 75; the wide-reaching implications of Thomas Friedman’s The World Is Flat, 7 Innovation in business: Calloway Golf Company’s innovative mission, 234; innovating ‘‘out of the box,’’ 48, 237 Intellectual property protection: choice between maintaining lead time and legal protection, 53; four classes of protection—patents, copyrights, trademarks, and trade secrets, 53; loss of inventor’s unpatented Astraltune rights to Sony’s patented Walkman, 54; loss of a mountain bike attachment’s patenting costs because of unfavorable market performance, 54 Johnson Research & Development, Lonnie Johnson, producing innovative toys outside main career, 49 Levinson, Jay Conrad, leading proponent of ‘‘Guerrilla marketing,’’ 113 Levitz Furniture, early discounter that hurt traditional retailers, 78 Litmus test of start-up readiness: fitness checklist for start-up entrepreneurs, 146; five initial issues, xii; issues revisited, 8; minimum requirements for a start-up launch, 252–253; questions and case examples, 143; start-up motivations, 145 Livingston & Haven Industrial, early adopter of supply-chain infotech services for customers, 86 LMN Paper, traditional strategies for distribution channels and customer services, 86; 133

LPGA (Ladies Professional Golf Association) marketing strategies, 171 Managerial functions and concepts: ACME’s eleven managerial elements, 151; the CEO’s managerial work of the 21st century, 152; changing leadership requirements progressing through the small business’s early growth stages, 147, 148; Investors Business Daily’s feature, ‘‘Ten Secrets to Success,’’ 191; Jim Collins’ insights from ‘‘Good To Great,’’ 184; leadership techniques of CEOs, 187; a managerial mainline of strategic decision areas and issues, 153; random motivations for doing your own thing, 145 Managerial styles of leaders: Abraham Lincoln’s political genius in managing contrary cabinet secretaries, 185; Bob Carlson’s tough-minded entrepreneurial style, 2, 183; Colin Powell’s seven laws of power, 185; Jack Braitmayer’s four keys, 141; Jim Clark, Netscape founder, on entrepreneurship, 142; John Burgoyne, enlightened leadership in war, 185; Ronald Reagan—surround yourself with the best people, 185 Marcus, Donna, planning a new commercial cleaning service, 65 Marketing and sales: competitive marketing mix evaluations, 125; cult brands, 118; developing your range of infotech marketing mix options, 120; doing your own marketing research online, 30; ‘‘guerrilla marketing’’ and promotion, 113; the importance of wordof-mouth sales momentum, 12, 35, 115; key account managers, 112; manufacturer’s agents, 110; the marketing mix, 101; publicity and low-cost promotion options, 119; sales closing expertise and AIDA (attention, interest, desire, action), 108; specialization of sales job, 194; support of channel and supply-chain partners, 111; targeted

INDEX

sales prospecting, 104; trade shows, 106 MCI, Inc., Harold Harris, serving Pizza Hut with regional manufacturing facilities, 211 Melloy & Son Construction, rolling cash flow to plan diversifications, 66–68; sales prospecting, 105; information tracking plan, 221; three groups of early warning problem screens, 212 Metal alloys producer: strategy profiles for 14 discrete markets, 161 Metal fabrication shop, Rich Walmsley, reluctance to obtain marketplace feedback, 18; flawed costing that penalized competitive price setting, 58 ‘‘Me-too-plus’’ businesses: alternative paths to ‘‘me-too-pluses,’’ 40; cash cows, 40; upgrading from commodity status ‘‘me-too’s’’ to superior user benefits, 40 Miniature digital cassette start up, undiscovered and unresolved technical flaws, 208 Mitchell, Don, reducing milk delivery cost by switching from glass to paper cartons, 210 Mrs. Tucker’s, failure of regional food brand to achieve national distribution, 96 NetFlix, superb application of infotech to a DVD distribution service, 123 Niches: the importance of niche-market strategies, 42; non-niche account strategy, 45; profiling and prioritizing customers by niche, 44; shelf inventories of niche offerings, 48 OCLC (Online Computer Library Center) long-lasting corporate mission statement, 170 Odd Ball Shoes, a bricks and clicks channels strategy for rare product specifications, 123–124 1-800-FLOWERS, an online success from the outset of the Internet, 122

299

Order fulfillment, push-pull alternatives to reduce production and inventory costs, 210 Outdoor Sports Accessories, Fred Hindley, failure to determine breakeven sales levels, 1, 62 Outokumpo American Brass, crash course in business economics for employees, 201 Outsourcing: Dell’s operational and outsourcing strategies, 205, 213; purchaser’s perspective, 214; seller’s perspective, 215; two basic options— buyer and seller, 213 Pan Data, issues of re-inventing vs. buying technical components for new venture, 209 Pea Pod, a selective bricks and clicks service for home food ordering and delivery, 122 People Power: clear risk/reward incentives for growth and profit, 197; compatibility of supervisors with the type of personnel the work requires, 183; critical elements of a sound managerial and control plan, 199; the critical need for market-oriented and infotech-savvy talent, 182; front-line supervision for productivity improvement and cost control, 191; New England Patriots’ winning teamwork, 182; the roles of discipline and functional excellence in team performance, 194; separating management of new ventures from mainstream, 246; state-of-the-art staffing, training, and personnel development, 200; teaming and empowerment to spread workload, 195 Pet Kennel, tabling a new venture because of compliance and permit hurdles, 143 Phoenix Roofing, Perry Phoenix, profiting from word-of-mouth promotion, 115 Planning: the business plan’s three purposes, 156; the competitive situation

300

INDEX

Planning: (continued) analysis, 166; the Internet’s compacting of windows of opportunity and the change from annual to dynamic planning, 3, 158; contingency planning and a shelf inventory of strategic and tactical options ready for the unknown, 246; eight common planning problems, 158; evaluating mission and objectives against the marketplace, 167; forecasts as the plan’s cornerstone, 172; planning steps for the small enterprise, 165; the SFP (summary financial preview) to facilitate rapid quantification, 175 Polymerland Division, General Electric, installing online supply chain functions, 91 Prairie Frontier, Deborah Edelhuber’s start-up initiated following a natural disaster, 2, 240 Pricing: alternative pricing strategies, 70; B/E chart, 64; breakeven analysis, 61; cash flow projections, 65; China price, 61; consistency with other options, 69; cost elements, 58; gas pricing determinants, circa 2005, 71; pricing ladder, 60 Problem solving: Charles ‘‘Red’’ Scott’s nine turnaround steps to profit, 231; most frequent small-business problems, 220; probing the Problem/Cause/Solution Track, 226; small-business winners and losers, ix; three groups of early warning systems, 220 Product development: partnering with key customers, 208; product/market diversification options (Four-Box Choices), 244 Profit planning: due diligence screening and testing, 257; dynamics for ongoing small businesses, 253; opportunity cost analysis of strategic alternatives, 255; ten preferred profit-model guidelines, 260; tightly linking growth and profit objectives and strategies, 234. See also Profit planning projects at end of each chapter

Progressive Corp, early adopter of infotech for insurance claims adjustments, 135 Push/Pull: a production and inventory buildup strategy, 210 Quaker Construction, Drexel Wright and Beth Bloom’s ‘‘do-your-own’’ turnaround by reduction of the services scope, and stringent cost control, 2, 229 Racing mountain bikes—the cost of patenting an ‘‘iffy’’ new attachment, 54; negative competitive situation analysis, 166 Requirements for small business success, Buckeye furniture project, 178 Resort Suites of Scottsdale, promotional emphasis on user benefits, 11 Retirement retreat, unsatisfactory planning of capital requirements, 143 RMA (Risk Management Association), formerly Robert Morris Associates, comparative financial studies of historical data for several hundred industries using the NAICS standard industry classifications, formerly SIC codes, 223 Rural general store, plunging in and failing without ‘‘nuts and bolts’’ capabilities, 144 Scott, Robert Falcon, faulty pre-trip preparation for disaster of Antarctic expedition, 225 Sony Walkman vs. Astraltune, an issue of lack of patent protection, 54 Suburban Modular Homes, meeting the project supervision requirement, 192 Summer Pop Stand, parents’ use of their children’s venture objective to keep them persevering, 169 Supply chain, infotech state-of-the-art advancements, 89. See Distribution channels and supply chains; Customer services Tomlinson Oil, acquisition failure from insurmountable natural strategic threats, 251

INDEX

Trader Joe’s, exclusive retailing of unique specialty lines, 84

301

Ultronic Corporation, resolving a strategic choice with the opportunity cost test, 256 Urban renovation service, Reginald Olmstead, sloppy office administrative approach, 188 U S. Sports Camps, expansion of administrative and marketing functions, 93

Vecchi Stone Reserves, a diversification based on prior core strengths: distribution channels, 75; pricing, 57; sales forecasts as point of departure for business plan, 172 Velcro, George deMestral, the ‘‘out-ofthe-box’’ discoverer on an outing with his dog, 51 Volvo, consequences of poor supplychain coordination and communication, 95

Vanity Ware, identifying the root supervisory and procedural causes of unprofitability, 193

Zara, Jose Maria Castellano, revolutionizing the fashion industry’s product introduction cycle, 207

About the Author TOM CANNON is a marketing and strategic planning consultant, specializing in start-ups and small businesses. Throughout his career, he has audited client’s competitive environments, developed business plans, and conducted seminars, retreats, and problem-solving workshops for small to large companies in many industries. Over the last few years, his main client work has been as a consultant with the Service Corps of Retired Executives. He is the author of Marketing: Text and Cases, Business Strategy and Policy, and of No Miracles for Hire.