BUSTING $10 MILLION:
Changing Culture

As a management consultant for more years than I care to remember, I can safely say that almost every one of my clients has wanted to break the $10 million revenue barrier. This applied to ongoing businesses as well as start-ups, from high-tech to low-tech and even service companies. Many have tried but few have succeeded. The basic reason for failure lies in the culture of the company, with blame usually laying squarely with the founder, the owner, the president or all three.

The inability to see ahead and plan accordingly is one glaring weakness. To make matters worse, there is reluctance from the top to change old habits and to add new people who have been where they want to go. In fact, at this level of maturity many founders and presidents are reluctant to hire people better than themselves. This shortsighted perspective prevents the highest level of management from seeing, as the saying goes, “outside the box.”

The result: The culture becomes so inbred that anyone trying to change or neutralize it eventually either gives up in frustration, accepts the fate or departs.

Success Is Relative!

It isn’t necessary to bust $10 million to be successful. I have encountered clients who are so successful they are embarrassed to show me their bank accounts. There have been occasions when I have challenged presidents, “Why not continue to operate at the present level, since you are taking more money home in a year than you could spend in a lifetime?”

Invariably, they claim a desire to grow and play a bigger part in the market, an answer rooted in ego rather than financial objectives.

G.P. Moore’s excellent book, Crossing the Chasm, though directed to taking products to a successful market, can also be used as a model for understanding company culture. Many small companies cannot get across the cultural chasm even when they do try to build bridges. Up to a certain level, the president can control all aspects of the business, including customer selection and pricing. Since he is operating in such a small niche, he has the assumption that he knows and understand the market. However, there are many obstacles that need to be overcome before the “busting $10 million” culture can be achieved. One of the most important is related to marketing.

From start-up, many small companies operate successfully with a very conservative approach to inventory-making sure they have a firm sales order in hand and buying only enough material to manufacture the product for that customer. It is the operating mode of the company that becomes the culture. There are few if any competitive pressures on delivery times. However, despite the low risk, this conservative mode is restrictive and can backfire when corporate growth is essential to stay competitive.

To increase revenue however, broader market segments must be engaged. Entering a more competitive market necessitates shorter, more competitive lead times that force faster deliveries with even shorter lead times for parts deliveries. In such cases an element of risk must be included by buying material on the come in anticipation of orders.

Competition also puts downward pressure on pricing. Traditional pricing formulas are no longer competitive and must be changed. Unfortunately, up to this point the accounting department is usually more concerned with cash and tax management than with accounting procedures and financial controls. Today companies must have a good understanding of costs as well as their inventory control systems. Marketing must drive this change.

The Marketing Mode

The biggest, most challenging obstacle for company leadership is the development of a level of trust among management staff members that enables them to be decision-makers. It is no longer sufficient for middle management to merely be a rubber stamp for the president or CEO. To effectively manage in today’s economy, they need authority along with their responsibilities.

But trust cannot be achieved without comfort. In other words, comfort breeds trust. It is difficult to develop comfort with little in the way of research, market savvy, cost controls, feedback, and the basic infrastructure to face the new challenge.

In any case, the move to a Marketing Mentality is a must. Some do it by learning as they go, slowly lowering their learning curve by trial and error. Others accelerate the process by adding talent and experience to facilitate the change more quickly. Unfortunately, the vast majority who are reluctant to make the switch fail to bust through the elusive $10 million plateau.

HANDS-ON MARKETING

Here we are again back at the bench with hands-on management. I have expressed a philosophy that a hands-on manager is a necessity for running a growing company. This does not mean you have to do everything yourself. You should still delegate, but you must know how to delegate and how to follow-up. This is especially true when dealing with marketing.

No doubt about it, marketing should be the driving force of a company. I’ve seen more successful presidents with marketing backgrounds than any other operating discipline. And since marketing is such a vital part of a company’s success, it requires a healthy dose of common sense. Marketing needs internal challenges from the management staff. I’ve seen too many companies where marketing personnel play God. The rest of the staff plays along with it because of the mystique and sense of importance that only marketing can create. This is because the Marketing department buffers the rest of the company from the customers and market. They are on both sides of the bridge. The proper use of the whole management team can provide the right checks and balances on Marketing that will help lead the whole company to success.

Market Trends

I don’t have to tell you that there are significant changes in the market that apply not only to the high-tech industry but to the traditional markets where companies produce products that are shipped to customers. Some of my hardware clients find it difficult to believe that their customers no longer are interested in a specific product as much as they are in a solution. More companies are customizing their products for customers who are looking for and buying solutions rather than standard off-the-shelf components. This means smaller runs and shorter lead times. Unprecedented effort is going into keeping inventories down while customers demand-and get-more support that ever before. This competition for service has been introduced from outside the product-specific marketplace from companies like Nordstrom and Southwest Airlines that have set new standards and higher expectations for customer service which all industries have to live up to.

In addition, global competition is increasing, not in the old sense of import pressures on the domestic markets, but in staking a position in the growing global economy. While servicing U.S. companies in the Orient from the USA is becoming less competitive, one of my clients started a factory in China, not so much for the low labor cost but just to be in that market.

Whether your business is domestic-based or international, it is hard to go it alone, especially if you have a growth mentality. That is why strategic partnerships and mergers, either for business, marketing or financial reasons, are the rage today. You can’t pick up a newspaper without reading about new business alliances, i.e.: Microsoft/Apple, but they are-and can be-very complex, both for customers and competitors.

During the late 60s and 70s, America’s reputation as the world leader in technology and competitiveness declined. It took nearly a whole decade, but we finally saw in the 90s a resurgence in US industrial leadership, primarily due to a major turnaround in US business practices that increased efficiency. It is a good news/bad news scenario. The good news is that U.S. industry is now lean and mean with smaller runs, customization and innovative technology in manufacturing such as the use of surface-mount components. The bad news is that with all the new technology, fewer people are needed to accomplish the job.

While “re-engineering” and “downsizing” have become hated buzzwords among America’s workforce, they have been the silver lining for business. Competitive manufacturing is making a return to the United States. I’ve seen a power supply company bring product back. I’ve seen a printer circuit board company prove that it is far more competitive in the States because of improved efficiencies and improved equipment. Japan’s quest to “increase market share” has gone aground because of the need for customized products, short runs, higher customer support and that very important requirement-getting product to market quicker than ever before.

I think history will show that companies that successfully reengineered themselves while reducing manpower, have now more people employed than before the cut backs. General Electric is one such example.

The bottom line of this important return of leadership by U.S. marketing and global business practices is the restoration of respect for customers, who have been reinstated as the king and queen of business. Companies that want to compete know where their bread is buttered and treat their customers accordingly.

Company Leadership

To succeed, you and the rest of key management must take charge and serve as champions of product, service and change as needed. If your company has any chance to grow and survive in the marketplace, it is extremely important for you to face any and all changes and to adjust to them swiftly.

Marketing’s Role

Marketing should direct a company, provide the financial maturity, support the vision and the mission, define the product, define production needs and support functions. Market research, market analysis, product planning and overall strategic planning are vital to a company’s growth. The planning and strategy aspects are essential in providing market penetration, product development, product or service differentiation and market diversification.

Marketing is responsible for defining a product and what’s needed to sell that product. Marketing is really the bridge between the company and the customer and is built on a foundation of a vision and a mission. Marketing is actually the ability to deal with the customer’s perceptions more than the perceptions of the products. It is better to be first in the mind of the marketplace. And marketing is what puts the idea out there.

Successful marketing also depends on priorities-resources, customer relationships, common sense and economics. The tendency is to sell a product immediately at a particular price and volume, without researching what the customer needs, without determining if your product is really going to solve his or her problem. To be successful, marketing must be organized with a high degree of planning, execution, development, pricing, promotion and distribution.

The Marketing department must be the champion of change. Its responsibility is to know the market image, how the product is perceived, who the competition is. It has to interface and support the customer because customer satisfaction is more important than ever. It also must increase the company’s value. The company is not in business solely to make a profit or put cash in the bank. It’s in business to increase the valuation of the company, whether it’s an owner who wants to sell out some day or a start-up that wants to go public.

Ultimately Marketing and Finance pull the wagon. They are the key elements behind every decision. As the company’s leaders, they must be thorough in their knowledge of the firm’s vision, cost information and competition. As the company matures they must be able to identify new market needs and be able to meet those needs with strong management and customer resources.

If a company is to continue to grow and succeed, marketing must become a part of that company’s mind set. There are several steps you must take:

· Establish a marketing plan,

· Set a vision and mission,

· Produce a set of goals,

· Make a market analysis,

· Know the pitfalls and plan how to overcome them.

It’s a Question Thing

Whether or not you are a master marketeer, there are always questions to ask your marketing staff. The answers will make an influence on the product and on the future of your company. Just because it sounds exciting and everybody feels it’s wonderful, you should always question the probability of success by asking:

· What’s the need?

· Is the timing right?

· Is it an insurance product or an education product?

· Can life go on without the product?

· Is the alternative to do nothing a better choice?

Marketing people have a tendency to offer percentage figures as proof of the wisdom of their position; but when you are dealing with growing a company, percentages alone do not really provide the information needed for strategic planning. If your people offer percentage figures, get them to define the kind of need, the timing and what the company is capable of doing. Sure there may be a market need, but are there alternative ways to meet the need? Does the customer really need it? Your marketing person should know what the customer’s position is. Before launching an expensive change, understand the structure of the market, the market size and potential, the priority of the need, availability of customer funds, and the customer’s product awareness.

Also ask:

· How much it is going to cost to produce?

· How long is it going to take to get to market?

· What is the product’s lifecycle?

· What is the market need?

· Do your internal resources match this?

And the ultimate question is always:

· How are you going to penetrate the market?

All these questions may seem overwhelming at first, and of course there are different ways to approach any given market whether it is new, existing or emerging (more on this in the chapter “Market Relativity.”). Marketing is after all a complicated subject. Even in this book I refer to marketing as:

· A person

· A function

· A culture

· An attitude

· That which drives a successful company.

However, as complex as marketing can be, its success is easy to measure. Marketing is successful when sales revenue increases.

SALESMAN OR CON-ARTIST

Salespeople Play on a Field of Schemes

There is an old joke: “How do you know when salespeople are lying?”

After a drum roll, the answer is: “Because their lips are moving.”

After the sales presentation at a staff meeting, when the sales manager has left, I have heard many frustrated voices complain, “Is he a salesperson, con-artist or what?” This is the perception that non-salespeople have in all fields and markets.

The non-marketing staff believes salespeople are too quick to support the customer position; that they will get a sale at any price. Often they would like to shoot the messenger because they don’t like the sales person’s input. Senior staff believes salespeople habitually over-commit the company-constantly giving away too much and trying to sell product “that we don’t have.” Because of these perceptions many times no one listens when the salesperson has something important to say. During my short stint as a salesman, I often found it tougher to sell inside the company after a customer had been sold on the outside.

Sales Mentality

Salespeople commonly believe that:

· They are the only vendor to get the entire competitor bid inputs.

· They won the contract, but not as the low bidder.

· t is up to the inside management to cap them before hand. because it is their job to push the company as far as possible to get an order.

· The system is holding them back.

· Reports slow them down from selling.

· The inside personnel do not respond to customer requests with urgency.

Sally Sales was guilty of most of these sins when she was first given the opportunity to take over the sales manager’s job. In the beginning she got into trouble by going too far in representing customers. When Fred reminded her who signed her paycheck, her retort was, “There would be no paycheck if there were no customers.”

Given her attitude it was a wonder that she lasted in the position, but her greatest strengths, a passion for the product and a caring attitude, were greatly appreciated by the staff. Their support eventually won over Fred Founder, although he would never acknowledge Sally as a better salesperson than he was.

Despite Sally’s strengths, which were important for the company’s growth, I winced whenever she spoke of customers as her friends. As good as she was; this was naive thinking. No customer is a friend! That is particularly true when you are dealing with real pros in purchasing. Skilled purchasing people can play with sales personnel like puppets, by making them believe they have the inside track among all the competitors. They are masters at creating the illusion of friendship with what I used to call the old Maxwell Smart trick.

A purchasing agent leaves the room with a wink and a nod that seems to say: “Look, I’m going to be out of the room. If you can read upside down, you ought to be able to get the confidential information I want you to have.”

This “friendly” gesture is meant to sell the sales person an illusion, that he or she is clever and respected by the buyer. While the salesperson might discover the specific competitive prices, he or she doesn’t know all the other terms and conditions that went with that price.

Because their attention is usually fixed exclusively on pricing, salespeople are not primed to understand the total value they are providing to a customer. This includes such intangibles as: volume, total commitment, shipping rates, payment terms, customer supplied information and guaranteed material and customer support.

It’s downright dangerous when Salespeople believe they work for the customer. It’s nice to support the customer, but they have to keep in mind that their paychecks come from the company.

No matter what they are told, the sales force thinks the company is holding back. The sales team believes that the company can do more in the way of better schedules and prices. Too often the Sales credo seems to be, “Get as much as you can from the system and let the system worry about itself.” Or, “If I go down to a lower number and the customer accepts it, then the system is going to make it happen.” Fortunately, in growth situations, that is often a reality. However, too often the sales force makes promises to customers they can’t keep. This is terrible, both for the company and salespeople. Once soured, a sales relationship can’t be turned around. If the factory gives the salesperson a promise that never comes true, the credibility with the customer is destroyed and salespeople know that. Salespeople want to own the customer and killing their credibility can be devastating to their future.

I’ve seen salespeople sell a product even when the product is not available. They love to tell customers they’ve got new things because that is what excites them. They tell the customer that they love them, that they offer the best solutions for them. I attribute this to the unique personality of salespeople. They have to be needed and loved.

Because of Management staff perceptions on the one side and Sales’ attitudes on the other, sales staffers often adopt an Us vs. Them mentality. You can hear them saying, “Selling inside the company is more difficult than selling to the customer.” This may be true, but salespeople must realize that not everybody inside the company is going to jump at everything they say. They forget that “the insiders” have other priorities, and that they must work harder to make themselves heard.

Problems can arise when salespeople believe their own B.S. Some salespeople believe that reports slow them down from selling. They also believe that the inside doesn’t respond to the customer’s request in enough detail. However, I’ve seen salespeople get quote requests and then give answers that leave out key points or ignore what the customer wants.

Most salespeople hate terms and conditions and price increases. They thrive on gross margins even though they don’t understand the profit structure. In a sales meeting they try to win a point with the customer by talking about their concern for the gross margin and product integrity. This is dangerous. They don’t like to tell a customer the company wants Net 30. They would rather tell him, “Yeah, we’ll give you six months to pay.” This should signal the customer to get ready for a kill.

And there is always the “good news/bad news” perceptions and reactions:

· Good news, we got the order; bad news, there is no margin.

· Good news, we got the competitive prices from the buyer; bad news, the prices are below our cost.

· Good news, we are the customer’s top choice; bad news, he didn’t win the order from his customer.

But the worst characteristic in salespeople is when they aren’t very good listeners. A joke about a salesperson’s chronically short attention span goes, “By the time you count to ten, they will have forgotten the first three numbers.”

I once called on our largest customer with one of our regional sales managers. It was very important to get insight into their purchasing plans for the year. My manager dominated the early part of the meeting with statements like: “You will be buying X units this year, and Y from us,” “You plan to stay with the present product for the next two years,” “You want to evaluate our new product” and on and on.

Finally, he asked a good question and while waiting for an answer actually paused to take a breath. Our customer’s purchasing manager, who had sat patiently through all this, didn’t miss a beat, and replied, “You have been doing all right until now, so why don’t you answer the question?”

If we had left then, we would have had no new insight for the year. Fortunately, I had a good rapport with the customer and I jokingly asked him to critique my manager’s inputs, and we got the true scope.

Another time we asked our salespeople to survey the customer base for a hot new product (at least we thought so). Our marketing people went to great lengths to define the product and all its features, and to provided the salespeople with excellent collateral material. The response from the salespeople was overwhelmingly favorable, so we were surprised when sales didn’t take off. Marketing did some checking and found most customers were asked the following, “If we provided a memory that was faster, smaller, lighter and cheaper, would you like it?” But no attempt was made to tout our features and advantages over competitive products. And the main question didn’t seem to get asked, “Would you pay for it and buy it from us?”

O.K., enough sales bashing. In my experience, salespeople are seldom appreciated. It’s time to acknowledge the positive traits salespeople can possess. Aggressive salespeople won’t take no for an answer. A good sales person will sit in a parking lot for two to three days to turn an order around, and that is commendable. Sally also got bad vibes from her peers when on occasion she went around the system to get Fred’s attention. I thought this was great-when she couldn’t get enough interest inside to pursue it, she wasn’t going to lose an opportunity that she passionately believed was good for the company.

I truly believe that salespeople have unique personalities and companies need them. In fact, few other disciplines in the management structure can switch over to sales. It’s not easy to sit in front of a customer while deliveries are late, quality is bad, and you don’t have the lowest price, and have the gall to ask, “Can I have the next order before I leave?” The good salespeople can do this. No one else in the organization can.

So let’s acknowledge that:

· Salespeople have necessary and unique personalities.

· Making them managers can destroy good salespeople.

· Salespeople hate terms and conditions.

· Once soured, they can’t be turned around in the same environment.

· They hate price increases.

· Don’t give them the lowest price if you want more than that.

· The president can be the best salesperson in the company, because he can make customer commitments happen.

· Good sales people believe, “It isn’t over until it’s over.”

I was part of the interview process when Fred hired Sally. In fact, I eliminated other candidates because Sally was the only one who said she wanted to make well over $100,000. Better yet, she was willing to gamble more on a commission than on a guaranteed draw.

Look what she put up with on a daily basis:

· Customers who continually grind at getting prices down.

· Customers who continually exercise her for proposals and more information but will never buy anything.

· Customers who out and out lie.

· Customers who are naive and lack expertise only to buy elsewhere after she has taken the time to educate and help them.

· Inside personnel who disbelieve and mistrust every input Sally gives them.

What to Expect from a Sales Personality.

To get the most from your sales staff, you have to look for the following characteristics:

1. People with a high level of passion. I can’t imagine a salesperson being very successful without passion. And that is something you must hire.

2. People highly motivated by performance-based rewards. If a salesperson is not competitive (and there’s no better competition than getting commissions), then you have a dangerous situation. Look for people who will work strictly for commissions, although this is a dying breed. If you find one, you’ve probably got a real winner.

3. People who will push until they get what they want. Many managers shut that off. I want people who push the organization, which by nature wants to take things easy. It’s extremely important to have personalities that will challenge the people and the system.

4. People who will go around the system. I’ve had salespeople that felt so strongly about something they would try to locate the president of the company, even on a Sunday. I like that. I don’t want anybody in the field-anybody who deals with the customer-to walk away from something they really believe in. They may not get their way, but at least upper management should hear about it.

5. Look for salespeople who want to make a lot of money. If they make a lot, so will you. Turn away those who would be content just making a “comfortable commission.”

Keep in mind that salespeople must be positive with the customer even when they are being constantly beaten up over their company’s poor performance and support. I have had good salespeople say they would rather sell a poor product with good company support then sell a good product with poor support.

So appreciate sales personnel and calibrate them to understand what percentage of the B.S. is real and not real. And, then find out what the real part is.

With all that in mind, take heed to these words of wisdom. Many small companies start out by calling their top sales person VP of Marketing. Then, three or four years later when the job requires far more than just selling, trouble rears its ugly head. The person has the marketing title but not the skill.

I have successfully taken engineers and put them into marketing and they have done great. I have taken a finance guy and put him in charge of operations and he was very effective. But it is very difficult to move non-sales people into positions where they are required to sell the company’s products or services. On the other hand making salespeople managers can destroy them.

MARKETEER OR PIED PIPER

The president could be the best salesperson in the company, or at least he thinks he is. He is the one person that can make a commitment and make it happen. He can guarantee the price and nobody disputes it. But he or she can also get in the way of change.

Many times while serving as a company director, I have had disagreements with the company president and marketing subordinates when they have tried to use the mystique of “the Market” as a shield to fend off questions about less than stellar performance.

The Excuses

Even when a company is already in deep trouble, they say, “Well, you just don’t understand our market.”

I respond, “Apparently you don’t understand your market either because you are losing money!”

Pied Piper Mindset: We’ll Sell Them!

I have used the term “pied piper” when criticizing marketing people whom I have known and worked with over the years. They ARE like pied pipers. They are great storytellers and they can get people all worked up and excited. And they can often lead them out right of town and into oblivion. As managers, we must make sure that doesn’t happen.

A marketing Pied Piper would have the entire company build to a forecast regardless of the inputs. The market could be shut down but Marketing believes that Manufacturing should keep building the products and “we’ll sell them.” This puts a lot of companies in trouble.

The pied piper marketer also believe gross margins will save the day. Even when forecasts are failing, he is happy because he is getting 50 percent gross margin across the board.

However, Management must look at it differently. The fact that they’re selling less than half their forecast and revenue means that at 50 percent, the contribution in total dollars will be nowhere near necessary to cover the expenses, let alone profit. This is the problem with Marketing’s attitude. They believe that the pricing formula guarantees profit.

Almost every company I have seen has told me that they have a pricing formula designed to guarantee a 20 percent pre-tax profit, but in fact all they were getting was between 2 and -1 percent. What does that mean? When you don’t get the sales you forecast and your product mix is diverse, each with its own set of margins and complexities, then it stands to reason that your profits are going to take a hit. It comes from the failure to see the big picture.

Marketing people become heroes in their own minds by being “master of the after-strategy.” They believe the company will die if it doesn’t get the contract. Or they will say, “We can’t afford to let our competition get it.”

On the other hand, you can expect a rash of excuses from the marketing folks when they don’t get the contract, despite the fact that you’ve given them everything they needed to close the deal.

You’ll hear excuses like: “Well that would have been a bad job for us anyway.” or “You know that job would have taken too much of our resources,” or “ The margin wasn’t good enough, so it’s better to lose the contract.”

Marketing tends to over commit the system. Many times this is because they believe the system is better than it is. “We can deliver that in three weeks,” they claim, although you know it normally takes 12. “If we could get a price and you give me twice the order, we’ll get the price reduced by 30 percent.”

Sales vs. Marketing

It is all about attitudes. What is the attitude of a marketing person? A sales person? Is it marketeer, pied piper, or what? Staff perceptions about sales and marketing can get downright confusing unless you and your company understand a couple of basic tenets.

1. Sales is really a subset of marketing. The problem is that most salespeople don’t understand the difference. As manager it is your job to ensure that the roles of Sales and Marketing are clearly defined.

2. Salesmen will deal in a field of schemes, and to a degree that’s important. But it is my belief that management must always deal with salespeople-and every other discipline in the company-with a degree of cynicism without being antagonistic.

The Outsider Solution

The first encounter a company president has with a marketing manager almost invariably ends in failure and sometimes disaster. Often he is not as savvy about marketing as he should be and does not realize its importance to the growth of his company. Consequently, he may be reluctant to bring in a marketing person on his own. However, this hesitation is usually wiped away by pressure from directors, investors, trade groups, roundtables or even his own staff, all echoing the words: “What this company needs is marketing” or the old cliché, “We need to change from a technology-driven company to a market-driven company.”

What Fred Founder, the president, does know is that growth is getting tougher, and a 40 percent growth rate at a $5 million revenue level is far more difficult to maintain than when the company is at the $1 million revenue level. Sally Sales, the sales manager, does a good job, but she fights forecasting future business for fear of being wrong. She provides little insight into where the company should be taking the product. Oh, she has inputs from customers a mile long, but never seems to know if it makes economic sense for the company to undertake a new direction. Engineering is frustrated because her aggressiveness and tenacity continue to interrupt its perception of what the product should be.

Of course, Ed Engineering hasn’t fared much better in product and market planning since the initial product entry. This starts to worry Fred because he realizes that, until they know what the follow-up product will be, growth will eventually subside and the company could end up in the tank. After to much time passes, Fred realizes the company needs more market insight and declares, “Okay, maybe marketing is the answer.”

This idea is strengthened as he realizes he personally is being pulled away from the customers, because of his added duties as president in a growth company. He is still not clear on what marketing is, but the echoes around him keep saying, “We need marketing,” and he finally comes to believe the time has come.

Unfortunately, Fred doesn’t know what lies ahead.

Fred has two ways to go, run the usual ad in the local newspaper, or hire a search firm. A newspaper ad costing under $500.00 looks the best to him, but he’ll only end up getting what he pays for. Despite the high costs of search firms, his better choice probably would be to retain one to search for such a key person.

Why?

The probability of hiring a marketing superstar from an ad in a local paper sits right up there with the odds of winning the lottery. Compare the quality of people generated by the ad to that from the professional firm. Not being experienced in hiring senior people, Fred will write an ad that will dig up all kinds of personnel, from maintenance and service people to office managers, and from leasing people to marketing support personnel. Like most newspaper ads that yield well over 100 resumes, 10 may look worthwhile enough to do a phone interview. Three or four will be worth bringing in. After interviewing the short list, Fred probably won’t be comfortable enough to hire any of them. Weeks have gone by and hours of Fred’s precious time have been expended and he is back at zero.

In reality, a real winner is a person who is not really looking for a job. If Fred were smart he would have hired the executive search firm. Search firms can get a lot further and deeper with candidates in initial interviews. They know how to ask much more relevant questions than the president might feel comfortable with. If this sounds like a commercial, so be it, but results speak for themselves.

Having a search firm would have saved Fred several phases, starting with help in defining the role of the person to be hired. He could explain what he believes he needs, and the search firm would take it from there. After playing this back for Fred’s approval, it is most likely then that every candidate brought to Fred would meet the qualifications. It would then be up to Fred to judge the best one based on chemistry and the ability of that person to adapt to Fred’s culture. Besides helping define the role, the search company also could help to define the compensation and work with him in the negotiations.

The marketing head is the key position Fred needs to fill. It will have the most significant impact on his continued success and growth, and the value of Fred’s “estate” -the company. Search firms conduct extensive reference checks, and can get answers to any questions Fred was reluctant to ask the candidates. They can also deal with issues that Fred may have been nervous or uncomfortable with. Fred hasn’t had experience in hiring a key senior manager and doesn’t know the pitfalls in identifying losers or non-superstars.

Fred needs a marketing superstar and to find one, he must avoid the following:

1. Don’t hire someone who is currently unemployed. Remember, we are looking for a superstar. The person has to be in demand. If laid off due to unfortunate circumstances, a person in demand would have no trouble walking into another position.

2. Don’t hire someone who has jumped from job to job too soon. Instability is a drawback in any position.

3. Don’t hire someone who has followed his or her boss from job to job. You will seldom find a leader among those who have followed all their careers. A superstar is a leader, not a follower.

4. Don’t hire someone who isn’t focused. Such people are generally responsive to any job and don’t make it clear what they are interested in. They don’t really know where they are going.

5. Don’t hire someone who made more money in two previous jobs, or someone who will take a significant pay cut. There may be some sound reason the candidate wants to join the company, but if you are paying less than what the candidate received in two previous jobs the mindset of your candidate is wrong. Someone who isn’t ambitious on their own behalf will probably not be ambitious on yours either. Anyone should be able to see that this is not a good fit.

6. Don’t hire someone who has done no research about your company before the interview. Why hire someone who is not interested enough in the company to find out something about it?

7. Don’t hire someone who has not been with a winner. Once a person has had a taste of being on the winning team, nothing else will do-he or she must get there again.

8. Don’t hire someone who doesn’t seem intelligent, who has no common sense. It is amazing how good a person sounds when he knows all about the specific job he has done. However, you need to make sure he can walk across the street without jeopardizing traffic.

9. Don’t hire someone who has failed to achieve success in his or her previous (or current) position. Do you really want to hire a CFO from a company going bankrupt? Or a Marketing manager who hasn’t successfully launched a new product in years?

10. Don’t hire someone who will accept any job available-barber to brain surgeon. This just demonstrates how dangerous that person is.

11. Don’t hire someone who was fading in his or her previous company. In the reference check, decode all the fancy titles, and find out if he or she were on a positive or negative trend.

12. Don’t hire someone who has worked in the industry for several years and has consistently earned far below the norm. This strongly indicates that the person has a problem you’d be crazy to inherit voluntarily.

Passion is one very important attribute Fred should look for. With Fred dominating the staff, it is unlikely that many of them, if any, have passion. Marketing and sales require personnel with passion, and the best place to start is at the top. So do hire someone who wants to make a lot of money. That is your chance to be rewarded also.

Bypassing the search firm, the most likely candidate will come from a referral or someone Fred knows in a vendor or customer company. Fred will be overwhelmed at the person’s polished image, steady flow of buzzwords that spiel out in all conversations, apparent knowledge of the product and market that create a misguided feeling of comfort for Fred.

The person may even be more of a sales type. If so, Fred hasn’t distinguished between sales and marketing.

The first person in will probably want a compensation agreement heavy on guaranteed income that Fred will innocently accept, and most likely regret later when the performance doesn’t meet his expectations.

If he or she comes from a bigger company environment (because that’s where marketing managers come from) that new marketing manager will most likely have a problem with fitting into the existing, smaller culture. A president like Fred, who supports the person all the way and is in awe of his or her style and chatter, will allow his new hire lots of freedom and authority. Ms./ Mr. Nix Fit will change things (even if they are working fine) and actually set the company back. Forecasts will sound so good that Fred will allow product to be built on the come, only to later sit idle in inventory and drag down Fred’s net worth. (If you don’t know about that yet, you need my inventory book)

All forecasts have great reasons for being missed, but nothing goes away, it’s only delayed. I can’t count the number of times, after being way below forecasts several months into the year, I have heard the marketing manager say, “I will take responsibility for the forecast.”

My response, “What the hell does that mean?”

Many Freds defend their marketing manager without realizing that in several months the individual could leave, most likely for a higher paying job, leaving Fred behind with a trail of missed forecasts, unneeded inventory and a great void in new product planning.

One sad note: after a bad marketing experience there is a lingering sensitivity not to do it again. I have seen this scenario played out time after time, and I try to prevent it by educating the Freds of this world as to what marketing really is. The need is not for Fred to be a marketeer, but to have a good comprehension of what marketing is. Then Fred’s skill and common sense will make the integration effective in his organization. Help and direction can also come from a board of directors or previous mentors. Education is the best pill for shortening that cycle. The old adage applies, “If you fall off the horse try to get back in the saddle as quickly as possible.”

Even when Fred finally decides the new person and program is not working, it is already too late. Unfortunately, given his lack of marketing experience, Fred has a hard time confronting this new breed of manger.

However, Fred can avoid the months of reorganization by asking one simple question, “Have Sales Increased?”

There are many dimensions to marketing, but the one real purpose is to increase sales. And this should be easy to measure.

I have found the most effective way to focus on this is to structure the new marketing manager’s compensation on the growth of sales.

When the right candidate says, “I want a compensation agreement heavy on guaranteed income,” Fred’s line will be, “We are going to do $5 million in revenue without you, so how about basing your compensation heavily on the additional sales?”

Stairway to Success

The Marketing/Sales management team should drive the selling effort. It is important to have salespeople you know are brazen, bold and willing to try to reach the president of a client company. You can’t just deal with the buyer alone. You’ll never get the proper insight for your marketing need.

Some handy tips are:

· Use titles to your advantage. If the sales person in Florida is responsible for the Florida region, call him or her the Vice President, Southeastern region.

· You have to believe your salespeople most of the time. You can’t shoot them because you don’t like their input.

· Don’t have too many layers between customers and top management.

· Keep your frustrations with the customer from your employees.

· Manufacturing reps are useless if they don’t get the support they need from you. They will make the most money for a company that gives them the best support.

· Use finder’s fees to your advantage.

· It can be better to have a bad product with good support than settle for bad support of a good product.

· You must have passion in the sales organization.

· Base rewards on performance.

Keep the following points in mind:

1. Never walk away willingly from a customer. Keeping a customer is important, since one unsatisfied customer can result in 10 bad referrals. You can take a bad customer and turn him into an opportunity, if you work hard enough at it. There are times when it seems impossible, but experts tell you it costs five times more to develop a new customer than to service an old one.

2. If you really want to or have to drop a customer, there are far better ways to end the relationship than by just walking away. First raise prices and explain to the customer how your costs have risen. On the other hand you can even offer to find him another supplier. I have done both and come away with good will from the customer and praise from the corporate headquarters for turning my division around.

3. Breaking into new markets is very difficult. You can’t develop credibility and confidence with new customers overnight. When it comes to marketing, companies exist to serve customers with goods and services they need and are willing and able to pay for. The trick is to match those needs with your resources and be able to serve it.

4. When dealing with customers and supporting your sales and marketing personnel, keep in mind that customers like to deal with a winner. They like a positive attitude. They want to deal with the best, a leader. A good strategy is to be conscious of the customer’s perceptions and deal with mystique. Never go with your hat in your hand.

Now, you should have a pretty good idea about how I feel about sales and marketing. I never professed to be a marketeer per se, but I do believe that my years of experience and product successes have given me a good understanding and working knowledge of marketing. I can quickly pick out the good marketing plans from the bad ones, and I can spot a good marketer from a pied piper in the blink of an eye.

MARKETING AIN’T MANAGEMENT

The most important difference between sales and marketing is profit consciousness. Sales personnel should try to get the order from a customer under any conditions possible. It is up to Marketing and the system to put the restraint and cap on sales so that the orders make strategic and profit sense.

Marketing, on the other hand, should have both Profit and Return on Investment (ROI) in mind at all times. However, marketing is not solely responsible for Profit and ROI-the general manager must also watch over them. In addition, Marketing must be concerned with serving the customer and ensuring a comfortable, easy path between the customer and the company.

Marketing personnel, while trying to please the customer, are often determined to create their own mystique within the company. Marketing personnel set themselves above everyone else by virtue of their influence with, and total access to, both the inside and outside world. Marketing personnel have knowledge of the products from both the technical and market viewpoints. These global overviews encourage arrogance which is OK, because in dealing with the outside world they must believe they know it all and know best how to solve everyone’s problems and needs.

But this high and mighty attitude must be corralled. It is essential for management to look out for the signs that the marketing mystique is getting out of hand.

In every marketing person, there are good and bad characteristics, which, depending on the person, can either have a positive or negative effect. I observed Mary Marketing for years and saw a continual improvement. She got better every day, strengthening the positive side of the balance sheet. She knew what it took to make a buck. However, there are other facets of running a company, such as product mix, scheduling resources and finance, that Mary had not encountered in her role as Marketer. As good as Mary became she still had the characteristics of a marketing person that needed to be understood and watched.

You could observe Mary Marketing for hours before realizing the make up of her personality included the following:

Master of the After Strategy.

This is one of Mary’s most powerful methods for creating her image. She is a master at fitting strategy to a result after the result occurs. For instance, she chases a major customer for months, soliciting everyone’s help to close but with no success. Shortly after losing the customer’s order, the customer goes bankrupt. Mary now claims, “She didn’t really want the order because she knew the customer was in trouble and it would be an unnecessary drain on the company.”

Believes her own BS.

Mary got so used to touting and selling the company that she started to believing everything she had said. This may be okay in selling the company image, but should never be allowed to work its way internally into decision-making.

Likes to sell product the company doesn’t have.

Mary is so intent on solving a customer’s problem and winning him over, she will pitch products and solutions that are neither available nor realistic.

Wants to be all things to all people.

It’s said that next to poor cash management, the second most listed reason for small companies failing is their effort “to be all things to all people.” Remember, the god-like attitude of Mary drives her to this mindset.

Hates to Lose.

This is a great attitude in selling and marketing (if obsession doesn’t drive them past the line of common sense). It takes time, some bent ears and pushed in noses for people like Mary to realize you can at times win by losing, by walking away from a bad deal for the company.

Gives services away.

Mary is always trying to please the customer and may offer services to close an order. Of course, it is also perceived inside the company she is giving too much away.

Ready to Give Up Something for Nothing.

It can be the unilateral pressure of getting an order, or the desire to please, but if you keep giving in to a customer and get nothing in return, the giving will never stop. Common sense says, “I’ll give you this but you must give me that.” When the customer asks for a gimme, Mary should say, “I’ll give you a lower price, but I want a larger commitment, or a better delivery schedule.”

Represents the Customer.

After all, someone must take the customer’s part, particularly when the staff starts vying for priorities. The danger can be when Mary goes too far and acts like she is the customer, and forgets the company always comes first.

Thrives on the Sacred Gross Margin and Forecasts.

Mary was so proud when she could report to anyone within earshot that she had bookings with high margins on small orders. She finally realized that in most cases although the margin percentage may be good, the total dollar margin covering all the expenses in place is more important.

One of the biggest weaknesses in Mary’s mindset was the refusal to give up on a forecast and make the necessary and timely adjustments.

I sat on the board of a company that recognized in the fourth month that the forecast was in jeopardy, but the marketing manager hedged on, believing in the Sacred Forecast up until the start of the 12th month. The year ended up a disaster. If the problem had been recognized earlier several actions could have been taken to improve the situation and lessen the blow?

It seems that no matter what Ed Engineering or Max Manufacturing told Mary about the time it takes to do things, Mary would violate their position and promise far better. Mary’s motto was “promise the impossible or lose the order.”

Fortunately (or unfortunately on many occasions) the company actually performs under those conditions, which encourages Mary to continue to set her own standards for performance.

Tends to Play Down Competition.

It seems the competition hardly exists, even though every customer order isn’t won. I have had situations of complete incompatibility and confusion presented by Mary and her kind.

Point of issue: Early on Mary had claimed that the market supported $100 million in sales with no competition in place. However, when she was only doing $6 million in the same market, the illogic of her previous claim drove the board crazy.

Over-commits on performance and schedules.

Mary will promise the customer whatever he wants: different packaging, daily reports, etc.

As Mary matured many of these characteristics became balanced, and because the staff constantly challenged her, the negative ones became manageable. The bad news was that had Mary been left to her ways, she could have driven the company and system far beyond its capability. The good news is, having passion and winning spirit, Mary could drive a company and system far beyond its capability.

The most important difference between sales and marketing is profit consciousness. Sales personnel should try to get the order from a customer under any conditions possible. It is up to Marketing and the system to put the restraint and cap on sales so that the orders make strategic and profit sense.

Marketing, on the other hand, should have both Profit and Return on Investment (ROI) in mind at all times. However, marketing is not solely responsible for Profit and ROI-the general manager must also watch over them. In addition, Marketing must be concerned with serving the customer and ensuring a comfortable, easy path between the customer and the company.

Marketing personnel, while trying to please the customer, are often determined to create their own mystique within the company. Marketing personnel set themselves above everyone else by virtue of their influence with, and total access to, both the inside and outside world. Marketing personnel have knowledge of the products from both the technical and market viewpoints. These global overviews encourage arrogance which is OK, because in dealing with the outside world they must believe they know it all and know best how to solve everyone’s problems and needs.

But this high and mighty attitude must be corralled. It is essential for management to look out for the signs that the marketing mystique is getting out of hand.

In every marketing person, there are good and bad characteristics, which, depending on the person, can either have a positive or negative effect. I observed Mary Marketing for years and saw a continual improvement. She got better every day, strengthening the positive side of the balance sheet. She knew what it took to make a buck. However, there are other facets of running a company, such as product mix, scheduling resources and finance, that Mary had not encountered in her role as Marketer. As good as Mary became she still had the characteristics of a marketing person that needed to be understood and watched.

You could observe Mary Marketing for hours before realizing the make up of her personality included the following:

Master of the After Strategy.

This is one of Mary’s most powerful methods for creating her image. She is a master at fitting strategy to a result after the result occurs. For instance, she chases a major customer for months, soliciting everyone’s help to close but with no success. Shortly after losing the customer’s order, the customer goes bankrupt. Mary now claims, “She didn’t really want the order because she knew the customer was in trouble and it would be an unnecessary drain on the company.”

Believes her own BS.

Mary got so used to touting and selling the company that she started to believing everything she had said. This may be okay in selling the company image, but should never be allowed to work its way internally into decision-making.

Likes to sell product the company doesn’t have.

Mary is so intent on solving a customer’s problem and winning him over, she will pitch products and solutions that are neither available nor realistic.

Wants to be all things to all people.

It’s said that next to poor cash management, the second most listed reason for small companies failing is their effort “to be all things to all people.” Remember, the god-like attitude of Mary drives her to this mindset.

Hates to Lose.

This is a great attitude in selling and marketing (if obsession doesn’t drive them past the line of common sense). It takes time, some bent ears and pushed in noses for people like Mary to realize you can at times win by losing, by walking away from a bad deal for the company.

Gives services away.

Mary is always trying to please the customer and may offer services to close an order. Of course, it is also perceived inside the company she is giving too much away.

Ready to Give Up Something for Nothing.

It can be the unilateral pressure of getting an order, or the desire to please, but if you keep giving in to a customer and get nothing in return, the giving will never stop. Common sense says, “I’ll give you this but you must give me that.” When the customer asks for a gimme, Mary should say, “I’ll give you a lower price, but I want a larger commitment, or a better delivery schedule.”

Represents the Customer.

After all, someone must take the customer’s part, particularly when the staff starts vying for priorities. The danger can be when Mary goes too far and acts like she is the customer, and forgets the company always comes first.

Thrives on the Sacred Gross Margin and Forecasts.

Mary was so proud when she could report to anyone within earshot that she had bookings with high margins on small orders. She finally realized that in most cases although the margin percentage may be good, the total dollar margin covering all the expenses in place is more important.

One of the biggest weaknesses in Mary’s mindset was the refusal to give up on a forecast and make the necessary and timely adjustments.

I sat on the board of a company that recognized in the fourth month that the forecast was in jeopardy, but the marketing manager hedged on, believing in the Sacred Forecast up until the start of the 12th month. The year ended up a disaster. If the problem had been recognized earlier several actions could have been taken to improve the situation and lessen the blow?

It seems that no matter what Ed Engineering or Max Manufacturing told Mary about the time it takes to do things, Mary would violate their position and promise far better. Mary’s motto was “promise the impossible or lose the order.”

Fortunately (or unfortunately on many occasions) the company actually performs under those conditions, which encourages Mary to continue to set her own standards for performance.

Tends to Play Down Competition.

It seems the competition hardly exists, even though every customer order isn’t won. I have had situations of complete incompatibility and confusion presented by Mary and her kind.

Point of issue: Early on Mary had claimed that the market supported $100 million in sales with no competition in place. However, when she was only doing $6 million in the same market, the illogic of her previous claim drove the board crazy.

Over-commits on performance and schedules.

Mary will promise the customer whatever he wants: different packaging, daily reports, etc.

As Mary matured many of these characteristics became balanced, and because the staff constantly challenged her, the negative ones became manageable. The bad news was that had Mary been left to her ways, she could have driven the company and system far beyond its capability. The good news is, having passion and winning spirit, Mary could drive a company and system far beyond its capability.

SALES AIN’T MARKETING

It is more common than not for a company to mistake sales for marketing. I have seen companies that call their head of sales a manager, director or VP of marketing. Although sales is really a subset of marketing, with a salesperson in the lead, we can expect that the “marketing” function in these companies will be one-dimensional-sales.

Because a new or small company has to focus on selling, the sales function is established long before the marketing function. In fact, the president usually starts out as the sales manager because he knows the product and the market niche he is trying to establish.

Sales is important, no doubt, but to continue growth and success the marketing dimension needs to be added.

Here again, the president may have a “gut” feel for marketing, but without education and experience in marketing, he certainly will not have the capability to perform all the functions of marketing manager.

Presidents with technical backgrounds will believe they are experts in marketing because they have a total understanding of the product and application. But the technology-driven company serves a very limited market. In my experience, most technical presidents run out of gas in the market when it comes to deciding on the next product, beyond the initial one that got the company running. For those companies success came largely because the customer took the product as delivered and built upon it. While a supplier may possess technical genius, it usually lacks knowledge about fulfilling customer needs, designing a whole product that takes care of the customer. In a market driven company, product quality is still number one, but additional things like training, system interface, manuals and service are as much a part of the product as the gadget itself.

Sales personnel will think they are great marketers because they get to know all the players and buzzwords in the markets they serve. Couple this with their inflated egos, and bam! In their own minds, they are marketers.

The one attribute that clearly reveals that sales people are not marketing-minded is their lack of planning discipline, a key attribute of effective marketing. The second is the short time-span mentality that is characteristic of salespeople. The desire for a quick “kill,” fast results and lack of patience in a person’s make-up will be the force that gravitates them to selling.

Patience is a virtue needed by good marketing personnel, but it doesn’t always exist. Then again there are also times when marketing patience gets in the way of good business — like when marketing refuses to give up on a forecast on a sales opportunity. If the marketing person is strong and overpowering, the long overdue adjustments that are needed will be fought until the last hour of the last day of the last month.

The desire to win and never-give-up can also be destructive to a company when resources are overcommitted and potential orders are chased relentlessly. I first learned that you could win by losing — by walking away from a bad deal — in a large corporation. I later learned this also applies to small companies.

Many of the in-house functions and responsibilities of marketing that go far beyond sales:

· Market Definition

· Matching Company Resources to Market Needs

· Product Planning

· Pricing

· Return on Investment

· Promotion

· Order Entry

· Revenue Forecasts

· Production Builds

· Research

· Market Analysis

· Product Distribution – Sales

· Strategic Planning

Outside the company, marketing is responsible for:

· Company Image (Position) in the Market

· Customer Satisfaction

· Interface

· Support

· Business

· Knowing the Competition

· Protecting the Customer Base

· Identifying Market Needs

· Penetrating the Market

Marketing has to drive the company when it comes to planning. It has to be the force that helps:

· Provide Financial Maturity

· Support the Company Vision and Mission

· Define Products Project Manufacturing Builds

· Define the Support Functions needed to play in the Market

Most of all Marketing needs to be the Champion of New Product and Change.

When he started the company, Fred Founder made the mistake of calling Sally Sales the VP of Marketing. He was quite high on Sally from the old company after spending many hours selling together in the field. Sally was a great salesperson, so Fred talked her into joining his new company and the title was part of the inducement. Even though sales is only one dimension of marketing, Sally was instrumental in helping the company grow.

When Fred realized that in order to move even higher he needed more than Sally could provide, he spent many hours agonizing over making a change. Naturally, Sally was against any change and her lack of marketing understanding kept her from comprehending the need to change. Unfortunately, the first attempt at solving the marketing problem failed because the individual was more of a pied piper than a manager.

After that debacle, Fred had to work hard to keep Sally in the company. Fortunately, Mary Marketing came along, and Sally related to her and came to believe she could actually learn from Mary. Sally finally realized the sales function was actually responsible for developing and winning the account, and that Marketing was responsible for ALL the other activities associated with identifying, developing and retaining customers.

To understand the difference between Marketing and Sales consider a company entering the market of high-speed Internet access. A salesperson will take the package and start calling on everyone within striking distance, including all the apartment complexes in the area. On the other hand, before making one call, a marketing person will study the demographics of homeowners to find a community of medium income households with PCs and look to see if the wiring is already in place.

MARKETING AND COMPANY MATURITY

A company reaches maturity when all decisions are driven by marketing and economic strategy. Getting to that point is easier said than done, especially when the least understood functions in a company are marketing and sales. Further confusion arises when non-sales or non-marketing personnel are thrown into marketing functions with little or no experience and training.

In many startups and growing small companies, the distinction between Sales and Marketing is so misunderstood that management starts by hiring a salesperson under the title of Marketing. The person running Sales is called director, manager or vice president of Marketing. In these cases, sales decisions will precede marketing ones until the company matures and Sales takes its rightful role as a sub-set of Marketing.

When should marketing develop in a company?

Right from the beginning.

The need for revenue always pressures selling activity and makes everyone think they are salespeople right from the start, however the Sales department should take its direction from Marketing.

Marketing plays a big part in establishing the vision and mission of the company. It will define the products and the markets and how to penetrate those markets. In other words, all the promotional activities that will create the desired awareness and proper perceptions among customers and competitors. In determining market positioning for both the company and its products the Marketing department researches where the greatest sales potential is located. Marketing then provides all the tools salespeople need to make fruitful contacts, and defines the company’s product line and figures out pricing so profits are assured.

It is important to clarify the two roles again:

· Marketing is responsible for defining the market and the products.

· Sales is responsible for customer accounts.

Companies can exist without marketing by remaining in their original market forever and having a good grasp of the needs and players in that market, including both customers and competitors. But the trick for successful growth is to service customers, adding enhancements, product differentiation, and new products and services to maintain a profitable position in the ever expanding and competitive markets.

Many new firms founded by technical personnel operate within a niche. They comprehend the market’s immediate needs and go for it. However, because of some early success, technical presidents perceive themselves as marketing experts. That perception is a long way from reality.

Yes, she may be the best sales closer in the company; or he may totally understand the immediate needs of customers, and offer vital solutions; and, as presidents, they can make their commitments happen. But when the initial product or entry idea has been exhausted and the start-up moves into a growth path, success can fade quickly, unless the company can extend and expand its market segment with new and improved products.

Recognizing the broader market need, matching that need with product resources and product definition, and doing it all in a timely manner to stay competitive requires a Marketing Mentality.

After his initial market entry, Fred Founder really struggled and was going nowhere until he added Mary Marketing to his management team. Pushing the company to win one-on-one competitive match-ups occurs mostly by building relationships with the customer. Fred did okay when there were just a few customers and competitors. However, new relationships are based on giving total satisfaction, serving the customer’s every whim and delivering the goods with features, timing and pricing.

Before Mary joined the company with her sophisticated understanding of marketing as a check and balance, the company was under a constant strain to honor the initial promises that Sally Sales made to the customers. Before she matured, Sally’s mode of operating was to constantly agree with the customers, and that put pressure on the system. It’s tough to ignore inputs from Sally (whether true or not) that included such statements as: “We are the high bidder,”or “If we don’t meet the customer desires, they will go somewhere else,” or “I have the inside lead, and I guarantee they will give us the order if you can do what I promised.” Sally’s badgering and blackmailing the system from top to bottom to get support for an order was usually after the fact. In fact she had already given commitments for features, schedule and price. Naturally, the staff labeled Sally’s salespeople as “con-artists.”

It is sad, but I have seen significant sales orders being received by the staff with less enthusiasm than they deserve, all because of the depressed state inside employees feel after having been repeatedly conned by their own sales people.

So where does Marketing get the Pied Piper rap? Without a Marketing Mentality, the job of selecting the first marketing manager for a company is a difficult experience. After finally recognizing the need for marketing and having the initial marketing person end up in failure, the president becomes soured on marketing altogether and delays the second entry into the market.

Here is the problem:

Before developing a marketing sense, most companies do very little planning, and the mode of operation is more reactive than proactive. The marketeer will be hired from a bigger company, which is okay since that experience is valuable to help the company grow. But there’s going to be chemistry mismatch. There will be a serious gap in the backgrounds, which usually never gets addressed, and puts a serious restriction on the change that is needed.

Problems are initially masked because the new marketeer sounds so good. With a stream of strategic rhetoric, knowledge of the market and product buzzwords pouring out in professional and eloquent style, management works up such frenzy it is willing to follow this guru-like person to hell if necessary. Even the president will ignore his gut feeling. His or her decision to select the marketer relied on the hopeful note that the sound of the flute and the music would take the company to the next plateau. Unfortunately, it is not long before the music fades and is replaced with the dull thud of reality. The poor chemistry and diverse cultural differences, initially sloughed off, will be the final bell that tolls the death of the fantasy.

This is not to say the first choice was a loser. He or she just was not the right fit for the company at that particular stage in its development.

“The Mature Company”

It takes a long evolution to get a company to the marketing-dominated phase. Technology driven companies may never change over to being completely marketing-driven, but they must become marketing-directed to reach maturity. Marketing should be the orchestrating force for a company or the bridge between the company and the customer. After all, isn’t the entire purpose of a company to service and supply customers with their needs?

The following example is selected from my book, The Laws of Management Physics:

Growth through the Changing Personalities

A company reaches maturity when decisions are based on financial or economic and marketing considerations. However, a high-tech product start-up company can take a considerable amount of time to reach this point. During the company’s growth, each operating discipline takes over control of the company for a period and dominates the company’s decision-making. Eventually growth slows until the next function takes over. These time periods can be shortened if management recognizes what lies ahead.

Phase One: The Entrepreneur

Usually, individuals who start companies are technical entrepreneurs. Their management skills are limited, if they have any at all. Too much energy is wasted on new experiences, such as dental plans and building leases. Whenever the entrepreneur learns a new management technique, it is like a new toy, and he tries to apply it to every situation.

This person often makes agreements, deals unilaterally and establishes precedents that will come back to haunt the company. The customers relate to the one man, and he must be everywhere and on top of everything. His great ego creates the illusion that he can do everything better himself. He no doubt believes that he will become a financial expert, and nobody can tell him anything.

His expectations of his staff also are generally unreasonable. With a limited staff, everyone is forced to wear several hats, and soon important matters start falling through the cracks. He judges his staff according to his own skills and abilities. His attitude is, “If I can write 1000 lines of code by Friday, why can’t everyone else?” The staff gets very little mentoring.

If you think about it, how can the techie president schooled in engineering bring management skills to a controller, a sales manager, or a production manager?

Phase Two: Engineering

Eventually sales reach the point where the company must build more than one of each product. That is when engineering has to direct the company. There is little or no documentation or complete designs, so manufacturing is directed from sketches, redlined drawings, and verbal instructions. Engineering ends up running the testing as well as performing the quality control functions. They make hourly decisions, with no checks and balances, and no one in the company does anything without asking engineering.

In this phase, proposals and manpower loading are done poorly, with no concern for yields or labor inefficiencies. Everything is programmed for success, and no contingencies are included.

The results? All vendor questions get directed to engineering, and they must handle heavy customer interface. Product designs are often finished in the customer facility.

Unfortunately, this situation can’t last for long if growth is to continue.

Phase Three: Sales

With product available and the organization growing, the company desperately needs to secure orders beyond the original customer contracts. Sales must “feed the dragon,” and it tends to do so with unilateral decisions on schedule commitments and continual pressure on the internal organization for lower pricing.

Sales pricing philosophy is based on large volume orders that often show up in small releases. The priority given to customers is based on the “loudest squeaks.” Since the sales department doesn’t know how to lose, it to be all things to all people.

This is a dangerous phase for the company; it can lose its focus and grab at everything.

Phase Four: Manufacturing

As growth progresses throughout the organization, revenue becomes key for both profit and working capital. Sensitivity to customer needs drops as manufacturing takes over. Too much is expected from Sales in getting orders and deliveries exactly as needed for manufacturing planning purposes.

Manufacturing tends to optimize revenue dollars, ignoring the prototype and small dollar items. This can hurt the company down the road.

Under the continual threat of “falling off the cliff” (reaching the end of the backlog), manufacturing makes all kinds of scheduling promises to get orders, but the company doesn’t have the material planning and production control skills to make it happen yet. Manufacturing tends to over-order material and to build unneeded inventory. The organization isn’t yet ready to implement cost saving measures or industrial engineering, which leaves things dangerously in the hands of the product design engineers.

Phase Five: Quality

With a growing volume of shipments and limited controls, the company finds itself on a fast track to disaster as customers find products suffering from poor quality. So a quality control department gets established, and before you know it, it is the major decision-maker, getting involved in just about all-shipping issues, becoming the customer interface and deciding the revenue schedule.

At first, the QA department is assigned to the manufacturing manager, who has a basic conflict of interest because he wants to ship anything that isn’t tied down.

Soon, the “I’ll stop the line if I’m not satisfied” attitude prevails, and “quality” gets overdone. Without quality engineering and corrective action skills Quality Control becomes a negative force. Fortunately, this is usually a short phase in the cycle.

Phase Six: Marketing

The marketing department evolves from internal technical people and generally starts with a heavy applications orientation. It includes poor listeners who talk down to customers. They have a “never lose an order” mentality, and sacrifice margins for volume. They believe that the solution to every problem requires a meeting with scores of people. The constant threat of a customer bailing out is used to win internal support. The customer becomes god, and all kinds of things are given as incentives, such as free samples and field service.

As commitments get bigger, orders start coming in under poorly written contracts. The importance of planning is finally recognized, but while the company isn’t doing this planning, the mistakes keep mushrooming and the impact on performance increases. So does the disillusionment of the senior managers.

Phase Seven: Finance

The organization starts to get heavily involved in financial decisions with little historical data, but everyone still expects precision. Engineering and manufacturing can’t wait for accounting to respond to their needs, so they start up their own accounting functions out of frustration. Products planned because of engineering’s ego fail to meet sales and return on investment (ROI) expectations.

For the first time, cash is recognized as blood, and the Finance department needs to make it last. It starts to make unilateral decisions, getting the other departments up in arms. The emphasis on numbers-not credibility-increases as concern for contingencies nose dives. Sensitivity to customer needs drops as the sudden pressure to make collections strains customer relationships.

A new Management Information System (MIS) system is pushed through, but since the organization is not ready for this, the costs, time expenditures and frustrations grow proportionally. The lack of timely financial information related to cost/price relationships puts the company at high risk.

At maturity, all decisions are based on marketing and finance intelligence. With detailed planning, mission statements, controls, information feedback and strategies in place, most decisions become inherent and can be made by all empowered employees. Fortunately, throughout the cycle improvements are taking place, and good leadership can force the company through these phases faster. In spite of all the hazards, many companies survive this process and eventually go on to great things.

GETTING YOUR FEET WET

“Companies Exist to Serve Customers
with Products and Services.”

This concept has to sink in before a company can expand its horizon beyond the comfort zone of the small company. Fred Founder started his company by finding a niche requirement that he was able to fill using his expertise and knowledge of the need and product that could fill that need. In essence, a market niche is always there because of the inability of customers or suppliers to fill the need.

Serving a unique need results in a single-source situation that gave Fred leverage to do as he chose while building his ego. Whenever this occurs, presidents like Fred stop listening and adopt the attitude that says, “Mr. Customer, I know better than than you do what your needs are.”

Because of his ego and a lack of marketing experience, Fred always pictured himself as the marketing guru. And why not? Since he was the one who closed most of the sales, or at least the key ones. Operating as a big fish in a small pond can be both comforting and financially rewarding. Fred had it great, dealing with many customers having small needs or a few big customers whom he knows well and will tolerate whatever performance they get. But the time came when Fred and his company needed to move beyond this pond and into new market environment made up of sharks-strangers and new requirements beyond Fred’s experience and comprehension.

I have no doubt that a wealth of people and companies would have wanted and needed Fred’s products or services enough to pay for it. But the trick is always to match that need with company resources and to be able to deliver a solution.

In the Big Market, customers like to deal with:

· Winners

· A Positive Attitude

· The Best

· The First

· Some Mystique

To reach this new market, Fred had to lean a new discipline called PLANNING. Hand in hand with PLANNING comes the other “ing” word MARKETING, and its key basic steps:

1.) Identify a Need in the Marketplace
2.) Match resources to the Need
3.) Find a way to penetrate the Market with Sales

I have found many presidents who, up to a point, are the best salesman in the company because they ARE the president, not because they have great skills in marketing and sales. By virtue of their lofty position, they can carry the image and leverage to a customer, they have intimate knowledge of the service or product and, most important, they can make a promise or commitment to a customer and then, with total control, make it happen. As the person in charge, he or she may make concessions in price and support that a professional marketer or sales person would not, but it is done under the umbrella of “I am the closer.”

I have seen many companies top out after initial successes. In fact, I believe this is a barrier that makes “Busting $10 Million” so difficult. The inability to change the company culture as needed is the foundation for this barrier. Presidents who are in the loop usually require all customer inquiries and their demands come to them, but ultimately they will have to give some authority to their sales personnel to be closers.

Many companies fail because their market is limited to the niche or solution they provide. The product is short lived, and the business opportunity cannot be sustained to build a business. They have myopia: they can’t see anything beyond their knowledge. I have often challenged start-up presidents by asking, “Is this a business or an opportunity?” When recognized as a limited opportunity it’s best to combine the idea with an on-going strategic partner who can recognize the value.

Marketing: the Bridge Between the Company and the Customer

Before Fred Founder learned the importance of marketing in the new marketplace, there was a long transition period during which he tried to achieve success by passing the sales baton to other personnel. It started with a sales person.

Sally Sales was hampered by a lack of pricing authority and schedule commitments. It was awkward for her to clear every major decision with Fred. She did a great job getting physically in front of a customer, but in spirit, the president always loomed over the transactions. Over time, growth forced Fred to tend to other matters, which gave Sally more leeway and authority.

Even then it was difficult for Sally. Her task, at least at first, was to sell product as close to the available product as possible. However, sales forecasts were hard to come by, and the company’s growth was hampered by the reluctance to believe any forecast, or to commit resources to new ventures, including inventory on the come.

Trust within the company was slow to develop and Sally alone didn’t have the depth to cope with Fred. This situation prevailed until Fred realized marketing was needed as the bridge between the company and the customer.

When Mary Marketing came on the scene, she convinced Fred that they needed to build a marketing foundation that included:

· Company Vision and Mission

· Resources

· Customer Relations

· Common Sense

· Economic Skills

Initially, Mary scared Fred and made him somewhat insecure because of her business sense. Fred had never worried about articulating a mission before. It was either in his head or he made it up as he went along. Certainly he never sat down to analyze his resources; he just spit out commitments and busted his tail to make it happen. Customer relationships were easy when the company was small. Fred solved every problem and the customers loved him. Fred believed it would always be that way and there was no need to work the issue. Mary believed that her previous success in marketing was based on common sense and discipline-gathering all the information and then making a timely decision with the resources available.

Fred was lucky to get Mary because more often than not, the first hire of a marketing manager ends up in a disaster. Without any marketing skills, Fred thought all marketing people he interviewed sounded good-as if he’d never heard of the Pied Piper. But Mary’s maturity and tenacity eventually made it work. In her mind, all good decisions were based on marketing and economic concerns that, when embedded in the culture of a company, made many decisions quick and inherently part of day to day operations.

Mary likes to tell a story of a classmate who grew up in Las Vegas. His father told him when he was 21 he would set him up in any business he wanted. When that day came, Mary’s classmate said he wanted to be a manufacturer and sell slot machines. And so it happened. The business got off to a great start but growth slowed down. The new entrepreneur decided to expand his horizon beyond Nevada. One day he went over the hill to the states surrounding Nevada. You can imagine how heart-broken he was to find out that very few people wanted to buy slot machines.

Fred Founder eventually learned that as long as customers find it cheaper to buy a service, a product or a transaction than to do it themselves, they will consider going outside. This had been the basis for starting his company and was the reason his customers bought from him. However, without someone looking ahead for new opportunities, growth ends and the company settles into a “status quo” way of life.

The Numbers Game

The need for good Marketing people does not absolve the President from all responsibility. Part of the knowledge base needed in individual situations comes from asking pertinent questions. Marketing people are notorious for predicting market penetration based on numbers. Just because a market is big, it doesn’t mean it is easy to penetrate.

One famous Pied Piper line is: “With a $4 billion dollar market, don’t you think I can get at least a quarter of a percent? That’s $10 million dollars!”

The proper response should be: “No!”

Then there should follow a series of hard questions:

· How are you going to do it?

· Who are the sales personalities?

· What is the nature and structure of the sales channel?

· Who specifically are the customers and what contact have you made with them?

Good market research should provide the answers and convince top management and investors of the market need. But comfort in believing the plan will come from providing a convincing story on how to penetrate the market.

Someone like Mary can answer those questions and more:

· Have you verified a market need?

· Can we match that need?

· What is the timing of the product to penetrate the market?

· How do you plan to penetrate that market?

This line of questioning often comes from a company’s board of directors and investors. Their biggest concern is whether or not the market can be penetrated. Penetration probability can come from:

· Established sales channels

· Good public relations

· Back-up for marketing studies

· Identification of early adopters

· Letters of intent from potential customers

· A well-defined promotion program.

As it turned out, one of Mary’s strengths was developing the sales channel, which led to continued successful growth, all because Mary truly believed the main objective of marketing is to increase sales.

Marketing ABCs

After Mary got Fred thinking about planning, she educated him on her ABCs of Marketing.

Most creative marketing personnel see the need for new products and new services on a daily basis, but it is important to focus on those that fit the company skills and resources. I have seen many plans fail, most often for two basic reasons: one, the inability to penetrate the market, and two, the idea as good as it is, can not generate a business.

The path to entering a market with a product or service requires a simple three-step process:

A. Identify a Market Need
B. Match the Need with Resources
C. Have the Ability to Penetrate the Market

The level of difficulty for each step increases by a magnitude of 10. While “Identifying the Market Need” is a 1.0, “Matching the Need with Resources” is a 10.0, and gaining the Ability to Penetrate the Market is a 100.0

One of the first things I look for in reviewing a business plan is whether or not the market plan offers an opportunity or a business. The question to ask is: “Is it a business or an opportunity?”

Often would-be entrepreneurs get mad if you tell them that many great ideas just aren’t robust enough to develop and drive a business. Their passion and dream may seem like gold to them, but to the experienced eye, the idea may lack substance to bring a solution or whole product to a market. If it’s a good opportunity and has merit to exploit, then a good option is to find a strategic partner who already has a strong position in the market or technology. The trick is to find a company whose technology or market need compliments the idea enough to welcome a partnership. If successful, the financial rewards can be lucrative, however for some this approach may lack the psychic rewards of doing it all and being number-one.

Even the most vital business dreams can fail because of the inability to understand how to penetrate the market. I chuckle when I see a plan that shows the new entry going from zero to 30 percent of an existing market in two years in. This assumes the established competition is going to sit idly by and watch the newcomer take over. How is it that otherwise competent managers can sit around a conference table strategizing for hours on how to grow market share without consider that the competition is having the exact same meetings?

The best way to prove the ability to penetrate a market is by having a well-defined sales channel. This can be strengthened with customer letters of intent, a thorough knowledge of the competition and how to deal with them.

On the other hand, evidence of a successful early penetration can be misleading. One example sticks in my mind from the time I sat on the capital equipment committee in a large company:

A start-up division that sold high-speed logic devices was asking for several million dollars to expand its foundry. It was extremely excited because sales had zoomed from nothing to $5 million in a relatively short time. But then someone asked, “Has anyone given you a second order yet?” It just took one “No” for the bubble to burst.

Apparently they had a very strong sampling phase and were far ahead of the market . Because of this, the committee believed their present supply source would be sufficient until the product gained solid acceptance.

Left to his own devices, Fred Founder seldom thought about market acceptance. He would get carried away whenever he got one order, believing that the future held many more such sales. When the market did not buy into his dream it led to inventory write-offs.

Mary Marketing brought needed discipline by developing mini-plans for new products that included a market analysis, a sales forecast and a support plan before anyone jumped into the fire with few burning coals.

Mary took the time to give classes in needs analysis, matching and penetration to the senior staff and to her own staff. This helped both sides and her own cause to get everyone’s cooperation to explore these steps

She also unwittingly created a great check and balance for her ideas from the educated staff, which can be a boon to any growing company.

IT’S ALL PERCEPTION

Just about every marketing book I have ever read points out “Marketing is all about perception.” When working with customers, do not get hung up on facts or logic alone, but make sure you learn their perceptions. It is important to find out how your customers perceive your company so you can deal with it.

In dealing against IBM for years, no matter how good we made our field maintenance capability, the customers still perceived that IBM’s field maintenance organization was Number One. It was frustrating to accept this, especially after being told horror stories about IBM performance glitches.

Although Mary Marketing was hired to help grow a company that was big in engineering development into a market-directed company, it took quite awhile for the idea to take root within the company. Mary had to pressure Fred Founder to hire an outside consulting firm to do a survey of its customers. Much to Fred’s dismay, the feedback was loud and clear: “Growco is a great, responsive and innovative engineering house, but I wouldn’t trust them with my manufacturing.” Fortunately Mary knew how to respond to this and eventually got the company message across. She recognized the difference between a “marketing position statement” and a “market position.”

The position statement defines how the company wants to be perceived by its customers in the marketplace. The position is how the customers actually perceive the company.

Fred wanted the company to be perceived as a “Start to Finish” company capable of taking a product from conception, through engineering design, through manufacturing and finally through customer support and even further into sales development. Based on the market position study, Mary realized she had to do more promotion to create and sustain the company’s market image. She had several choices: public relations, advertising and the Internet.

Mary first determined that all customer contacts, from face-to-face meetings between company representatives to the company literature, had to effectively present the company’s image and be world class. Her campaign started with the Rita Receptionist. Rita had been with the company for three years and had never had formal training in how to best deal with customer and vendor calls. It is ironic to think how many thousands of dollars go into training salespeople and customer support people, only to neglect the very first point of contact with the customer-the receptionist.

Mary sent Rita to a seminar at the local Phone Company, and then added her personal touch to the training. She took the time to explain the company’s vision, mission and values and topped this off with a detailed description of the customers and their key personnel. To be sure Rita got the message, Mary called in every chance she got to see how Rita answered the phone regardless of the time or day or her mood at the time.

The next step was to review the literature, most of which had been around for years. Mary realized it needed drastic changes. It was heavily technology orientated, and she wanted to direct the literature toward problem solving and customer service. The main change was to establish a theme that supported the position statement Fred wanted and the company vision and mission. The vision and mission were clear enough, so she redefined the position statement to support the vision and mission.

Mary then turned toward promotion choices and examined them in terms of economics and effectiveness.

Public Relations (PR)

Mary knew a local PR firm that, for a modest monthly retainer, would try to spread the word on Growco to all the publications they had contact with. She knew they could write great copy with her, however there was no assurance what percentage would be published, and even if so, where. Mary had once written a two-page (500 word) product release that ended up in some publications with fewer than 50 words. On the plus side, a good product review by a respected magazine can have more value than money could buy.

Mary’s take on PR was that you traded free space for uncontrolled copy, but interestingly enough such product hype was perceived by customers as unsolicited and true opinion.

Media/Trade Advertising

With multicolored ads and pages in magazines costing several thousand dollars, this alternative can be expensive. Coupled with the need to do it on a continuing basis, it takes a well thought out campaign to be effective. Fortunately, whatever copy is provided to the trade publication will be published in total because the space is paid for. To make Mary’s job tougher, Growco had several technologies that played to different market segments. Picking the correct publications for the campaign required extra effort. Besides the cost of the ad space, the ad itself had to be produced by an outside agency, since Growco did not have in-house capabilities.

Mary’s take on Media Advertising is that controlled copy is a plus, but that there are two negatives: the high cost and trade ads are limited persuaders because customers perceive them as self-serving.

Direct Mail

Mary believed that the company had good stories to tell the customer base, which made the direct mail approach make sense. Her main problem was the lack of a substantial database to direct the mailing. She found she could buy lists from different sources, including the publications that she determined were the ones being read by her customers. However, Mary knew that even something as simple as direct mail had right and wrong ways to do it; so she had her people attend seminars and talk to outside consultants. Everyone learned that a one-shot mailing is hit or miss, and the key to getting your customers’ attention is repetition, repetition and more repetition.

I truly believe that a company’s existing customer base is a great asset, and even though it is intangible, it should be on the balance sheet-counted as part of a company’s value, just like goodwill. However, you have to take care of the customers for the base to have any value.

Another major realization from Mary’s analysis of direct mail was that Growco wasn’t communicating very well with the existing customer base. Contacts with customers were sporadic and haphazard. Also Growco’s customer base included leaders in each of its marketing segments. The relationships were good, but there weren’t enough of them. So for her own direct mail approach Mary decided to put out an informational newsletter to existing customers on a regular basis to keep them informed of Growco’s continual growth and transition to a full-service company. For instance, to convince the large customers Growco could provide higher levels of manufacturing, the first newsletter featured a story about Growco’s achievement of ISO 9000 status.

A huge benefit from Mary’s newsletters was the formation of customer user groups. Almost the ultimate in communications, the user group provided direct and focused feedback from the customers to the company.

Mary’s take on direct mail: A good combination of modest cost and a targeted audience.

Radio/TV

Growco’s product offering was not very conducive to local selling or the expense of National TV Advertising, which by the nature of it, is a “shotgun” approach rather than targeted.

Her people came up with imaginative ideas for this media, but Mary shelved them until Growco could enter the consumer or commodity markets.

However, on a positive note, one radio ad placed by the human resources department was successful in finding employee candidates at a very low cost.

Mary’s take on Radio/TV advertising: Radio ads are suitable for low-cost local advertising, while national TV ads should be considered if and when Growco becomes a multi-million dollar consumer products company.

Trade Shows – National

Mary has mixed emotions about trade shows. The bigger they are and the higher the exposure, the higher the cost. Her past experience with national shows was bad. She found that the better locations, like Las Vegas, the better chances that attendees would be managers and decision-makers.

In her last employer ( a $10 million revenue level) $300,000 had been spent on just one trade show which attracted hundreds of thousands of visitors and exhibitors who felt compelled to be there or be perceived as a minor or non-player or worse yet, a player who was in trouble. Mary estimated that 100 qualified leads were gathered from the show-a decent number for a sales team to pursue but very expensive when you figure cost per lead.

Mary’s experience generated the following advice: “If you can’t deliver what you promise, existing and potential customers will seek out their solutions elsewhere, never to return.”

Mary believes that trade shows are expensive and time-consuming, but ideal for face-to-face contacts, for checking on competition and for keeping informed about the industry in general.

Regional “Table Top” Trade Shows

Regional shows can be far more cost-effective and, for just a few hundred dollars or even a couple thousand dollars in expenses, can yield far lower cost per lead. It’s not unusual for a small show to attract between 200 and 500 targeted and very interested customers.

Since Growco’s market was engineers, who rarely left their cocoons, the regional shows with their free parking and free lunches were great attractions.

Mary likes regional trade shows for their face-to-face contacts, low cost per lead and higher percentage of qualified leads.

Technical Articles and Presentations

Trade magazines and trade shows clamor for articles and presentations. Technology-based articles and conference presentations have far more impact on credibility with customers than paid ads.

Unfortunately, Mary ran into what is a typical problem in every company and every industry, the “I’m too busy” excuse. The only way to move this request up on the priority charts at Growco is through greater education about marketing at all levels of the company. Mary was at least able to get Growco’s president, Fred Founder, to offer compensation rewards for any article written.

Mary’s take on Articles and Presentation: A great low-cost method for building company image.

Seminars

Mary has tried at trade shows and conferences to have Growco provide seminars on how to utilize Growco’s product. This required real planning and effort, and it was hard to get the full participation of company personnel. Unless you have someone inside who will champion the idea-who believes in the seminar concept and can present them-they are not going to happen.

Mary feels strongly that seminars are extremely effective in image building to a limited but controlled audience.

Telemarketing

Having tons of people calling customers on the telephone is not too effective for an OEM supplier. Mary believes this method is better suited to companies that deal in commodities or services. At the same time, she knows that whether the leads are from trade shows, direct mail or advertising, follow up phone calls are essential. And she believes that, in most cases, marketing support people can do an effective job without tying up the sales force.

Mary’s take on utilizing the fax/phone system: Low-cost, very effective for corporate image building and letting customers know you care.

Focus Groups

One thing Mary does not believe in is focus groups, especially in the Original Equipment Manufacturers (OEM) market. A well-run focus group might help find customers for an existing product, but not for new products. Great inventions like fax machines and PCs could not have evolved from a focus group.

Internet

Without a doubt, the Internet is here and NOW. It can be an effective image builder and must be included in any marketing/sales plan. But it too must be implemented carefully and according to a well thought-out plan. And if you don’t have the internal expertise, get help from outside gurus.

Mary saw many companies fail with their web sites because they did not know how to focus their efforts on the internet-whether to get business or to aid with sales and image. She believes web site development is not simply a matter of concentrating-on-the-positive aspects of a company. First off, the creative input should not be left to the web designer (either inside or outside the company), rather it must come from engineering, marketing and management. Like any marketing venture the companyweb site should be approached from a focused perspective that has a definite purpose, defined audience and clear message.

As a practical matter the web pages must be designed to download quickly. Too many graphics will slow download times and the passage of information. Too much text too early in the site can also frustrate an audience. A well-designed site should provide important information with hyperlinks to useful extensions and, most importantly, it should incorporate e-commerce. The easier it is for a customer to get information and then to place an order, the better the chances for a sale. The mechanics of the site must provide the means for coming up high on browser and search engine selections. This can be a very creative exercise. If your site is defined by words that lump you in with hundreds or thousands of other alternatives, your customers may never get to you.

Mary has taken the Internet seriously and has convinced management of its importance and the needed investment: “It’s here to stay and must be utilized to build the image of the company.“

The Ultimate Test-Return on Investment

Mary knows that one common, very important consideration in choosing any marketing vehicle relates to the return on investment-comparing each vehicle on a cost-per- quality lead basis.

For instance, she compared a national trade show that cost $110,000 to a regional trade show with expenses totaling $2,500. The national show yielded 140 qualified leads, or $785/lead, while the regional event resulted in 58 qualified leads, or $43/lead. She also analyzed the last trade media ad (full page, four-color) that cost $4,000, and found that it generated 15 qualified leads for $266/lead.

Of course, cost/lead isn’t the only criteria for choosing a marketing strategy, but it’s a strong one. In planning the image-building campaign, first you have to decide what story you want to tell to each of your target markets, only then can you figure out the best way to tell it.

Mary learned that when a techie president talks of changing the company from a technology-driven one to a marketing-driven one, it is better to think of it in terms of a company that is technology-driven but is directed by marketing.

Fred Founder never heard of a Position Statement until Mary Marketing asked him one day, “How do you want the market to perceive you?” Fred had always believed the customers knew where he was, and would find him when they needed him.

“Of course,” Mary explained, “that was okay in your little niche, but you hired me to help make the company grow.” Mary told Fred one of her experiences to show Fred it all starts with a vision and is followed by a mission statement.

Early in her career, Mary worked for a growing company making parts for the plumbing industry. Her boss and owner had a clear vision. Ever since he was a kid following his father around fixing leaky sinks and toilets his vision was: “To be the best most innovative manufacturer of bathroom fixtures, and to be known around the world as King of the Crapper.”

A good goal but not necessarily the basis for a business plan. Mary helped him, and together they built the vision into a mission statement:

“To provide premium innovative bathroom fixtures, utilizing a new technology for flushing, to the leading construction companies in the International market.”

This was then used as a position statement for the company.

Mary knew Fred had his vision well thought-out in his head, but he had never committed it to paper. So, together they banged out a market positioning statement. They even ran it past the staff at an off-site staff meeting to get their support. This is what they came up with: “From Start to Finish, GROWCO is with you all the way. We know the concept is just the beginning, and we will help you find the solutions you need in design, engineering, manufacturing and service support. GROWCO your Full Service Solution.”

Afterwards, Fred felt good, but Mary cautioned him that this was only the first step toward having the market accept their position. Now the market perception, whatever it was, had to be changed to reflect the position statement.

In reality, your market position is always whatever is in the eyes of your customers. Avis was perceived as the Number 2 car rental company long before they capitalized on the perception and built it into their mission.

Early in her career Mary had learned that perception is the key to many sales, so it is very important to construct a perception that fits the direction you want the company to go. Fred’s early customers had a great perception of him and the company when he had the time to service all of them. So it would not be too great a stretch for them to see Growco as their ”Full Service Solution.”

Mary had to do a lot of research to match the growth potential to the marketing position statement. There is a big difference between staying with a market niche and wanting to be the leader. Formerly you attacked your competitors’ weaknesses, but being the leader requires aggressively going after the strengths of your competitors-something that is far more risky and expensive.

Mary found it best to give a tutorial on the many ways to promote the company. This is the direction Mary was leading Fred and the staff because some of the cultural changes required spending money for promotion and moving everyone into a marketing mindset. She needed the support of the group and wanted to continue to lead them.

In meetings, Mary presented her entire promotion position plan and got Fred’s approval. While on a roll, she also makes the pitch that marketing was everyone’s job in the company, and any contact with a customer should be first class. She eventually trained the receptionist, organized customer visits, got the shop cleaned up, redesigned all the sales collateral and started a newsletter that shaped the company image for customers.

She was pleasantly surprised by the support she got from engineering for their quick responses to proposal requests, to customer visits and trade shows and not talking down to customers.

Besides the mission statement, Mary also wanted to respond to the customers’ preferences for:

· Winners

· A Positive Attitude

· The Best

· The First

· The Leader

· Some Mystique

She couldn’t practically fit all this into her promotion program, but she did set out to present the best image she could.

She also knew she had to kill the bad image some customers had. She learned how to turn negatives into positives:

· One unhappy customer can poison many more.

· Winning back customers is far cheaper than developing new ones.

· Complaints give you valuable input on your company, system and market.

· No news from a customer is bad news for the company, because they are probably out shopping for alternatives.

The results were rewarding. Customers had always respected Growco’s technical competence, but they were leery about follow-up and manufacturing. Now customers consider the company a one-stop shop for all their needs. Mary’s campaign paid off inside the company as well as outside. Inside she had everyone believing that no matter how good you are, marketing is always about perception.

SANS MARKETING PLANS

“We are moving from an engineering company
to a marketing-driven company.”

I have lost track of the number of times I have heard this said by clients in planning and strategy meetings. They always say it as if it were the most natural transition in the world.

It ain’t.

Engineering background personnel start most technology driven companies. Techie’s usually recognize the need for a product or service in the market they are in. Since they understand the need in great depth, they can convince investors and associates to join them in a new venture. If they guessed right, they can build a successful enterprise based on their knowledge of the market and need. But as they grow, competition becomes fiercer, customer requirements expand and potential opportunities abound. The problem becomes, “What opportunity to select or what to do for an encore?”

In most cases, without supplementing the technologist with marketing savvy, the company stagnates and some even disappear into oblivion. Intelligent techie presidents recognize the shortcoming and start voicing the party line: “We need to move to a marketing company.” The trouble is, few know how to make this happen, and even fewer recognize the impact of what can happen without marketing plans.

Let’s look at what happens when marketing plans are weak or non-existent.

Development

In the development phase the product will be ill defined. The results are constant changes, incompletion, missed schedules and certain overruns in costs and budgets.

Product direction, when not controlled, can change every time a new customer input is received, creating numerous inefficiencies and delaying the product definition and product launch. Delayed schedules tie up personnel, not only hurting the product being worked on but also preventing other engineering activities from happening. Programs are often misguided by the inputs from a large customer who may not have the pulse of the market any better than the company doing the development.

The answer:

· Obtain marketing research to define the market need.

· Generate a marketing specification for engineering to use as the basis for the product design, then try to stick to it.

Production

Production suffers from the lack of a well-thought plan by:

· Over-building inventory.

· Inventory obsolescence from the continual changes in design

· Missed Cost Objectives from the push and pull caused by incomplete designs.

· Missed Schedules even with high costs of expediting.

· Quality problems.

· Test procedures are lacking and reworked assemblies become a nightmare.

The answer:

· Build production schedules from a completely released product with all the necessary documentation. This must result from a plan.

Quality and End of Life

How many product plans consider life in the field?

Seldom will you find a plan that plans the end of the life of a product. Considerations like spares, main-tenance and product support are often left out of the planning process.

Quality and The Customer

The lack of a marketing plan also impacts the customer: Customers will ultimately forget high prices and late delivery, but poor quality will irritate them as long as it exists.

Ironically, customer support never seems to end for a poorly conceived product. Supporting poor products goes on forever and the difficulty of fixing problems gets tougher as they age. Many “design fixes” even create other new problems.

One of the most serious impacts on a company’s efficiency is the dilution of management under a flood of poorly performing products and never-ending frantic calls from irate customers! Every time there is a hiccup from the customer, a meeting must be called causing countless, inefficient and wasted hours.

The Ultimate Consequence — RED INK

The final blow that hits the bottom line is the ultimate write-off of inventory (and in some cases, capitalized engineering development) that is left on the balance sheet because it outlasted the product. I can say, without a doubt, inventory write-offs are most severe for engineering driven companies. (If you don’t believe me, or understand how this works, read Will the Real Inventory Please Stand Up and Be Counted.)

It is incredible how many wasted products are built. In all the turmoil of change upon change, “cherry picking” (selecting the best or what works) becomes the norm. The result is a bunch of defective parts or units waiting for an inventory write-off.

The answer:

· Have a marketing plan with a product strategy and definition that is well thought-out and executed.

Marketing should define the product that Engineering develops.

One reason Mary Marketing joined the firm was because she was impressed with the attitude of engineering, the infrastructure and the controls. The documentation control system was the best she had seen in her career. Unfortunately, she wasn’t aware of the company’s history. One of its first product lines had very little in the way of specifications or performance criteria. She had her worst nightmare when a customer had field problems with Product One. The original design engineers were long gone. The company had a poor warranty program that further weakened her position with customers. There were even times when the source code couldn’t be found. It seemed like every customer complaint caused internal strife and stress that affected the relationships between marketing, engineering and manufacturing.

Product One became the “product from hell.” It took over a year for Mary to wash the problems out of the system. Management dilution throughout the organization was tough to measure, but it is believed it slowed down the new product release by close to one year.

BEST TO WORST

The time it takes a market to accept a product or service depends on the nature of the product being offered. More often than not a great idea will die long before the market embraces the product and makes it successful. Since the marketing of products varies with customer needs, it’s important to have a product launch plan that includes customer satisfaction by identifying the need and promoting a perception that the need will be met.

No doubt about it, promotion can help a product, but over the long haul the product must be perceived by a customer as a need. In the high-tech world, products are being generated on a daily basis. Retail store shelves continually expand and trade magazine ads proliferate constantly. Obviously all these products have operating characteristics that serve some function. Some products are continually replaced while others are doomed to collect dust and eventually be kicked out of the store. Highly promoted fads, such as the older hula hoop and the more recent Beanie Babies that took the country by storm, definitely benefit from promotion, but then quickly lose popularity.

At the top of the customer acceptance pyramid are products that improve performance and that provide cost savings. Near the bottom are products, like insurance policies, that do not excite the customer.

So Whatcha Gonna do?

Consider the range of what I consider best to worst that follows.

The Best

Performance Improvement

A good example of performance improvement is the RAM memory chip for PCs. Even non-computer literate users can appreciate the improvement in computer speed and expanded performance that comes from software applications provided by expanding memory. Performance improvement is also obtained by expanding the hard drive in computers. Gigabytes of disk drive storage capacity are now common, but a programmer of 30 years ago only dreamed of having that much memory available when she went to heaven. Application software today require tons of megabytes to run the program. The avalanche of PCs accelerated as cost performance was improved. Today they have better cost- performance than mainframes did 20 years ago.

Cost Improvement

Throughout the ages, capital equipment policies and committees supported approvals based on cost improvement. Improved productivity and higher Return on Investment (ROI) topped the list of reasons for improvement. If a product can reduce personnel needs or speed up machine time, the probability of success is greater.

Technology Step-up

In this country it is possible to sell 50,000 of any gadget or high-tech device because a segment of the market wants the latest and the greatest. It’s a matter of providing features that meet the need for ego gratification. Look at the growing success of satellite global positioning systems (GPS) that are being sold for automobiles. One of my client’s staff members was one of the first customers of the GPS device. It was expensive and cost a lot to install, but the recipient thought it was great. Except testing it right after the installation or to demonstrate its cool, he hasn’t used it since.

The Killer Application

Combining all of these good positions is the “Killer Application.” The Internet has brought new dynamic applications almost on a daily basis. However, you must have extreme marketing astuteness and luck to hit on a “Killer App.” You can wait for luck to be successful, but you can make it happen by being on top of the market.

These products are getting tougher to sell:

Alternatives Exist

Coming out with a new alternative to replace something is a tough sell. In fact the toughest (and most overlooked) alternative to sell against is “do nothing.” I was party to a well-produced, informative presentation for a new service to the Information Manager of a large multi-national corporation. When the lights came up, the Information Manager’s supervisor, who had the final level of approval, asked, “Will we die without this product?”

When the Information Manager gulped, paused and blurted out, “No”, the meeting was over and the sale was dead. The same certainly applies to the customer. It is always easier to stay with the status quo. Few people welcome change of any sort, so “doing nothing” is an easy path for the customer.

Education

Products that require educating the user may eventually make it to market, but the cycle of acceptance and robust sales levels can take forever. There have been many high-funded startups in California that have failed because it took too long. One company went through $75 million dollars with a pen computer, and died before the technology got accepted. When you spring a new idea on the customers, you have to plan on a heavy investment in time and money before success can be attained.

Insurance

The “Insurance” product solution can even take longer than education to reach projections and market acceptance. The need for insurance is always there, but customers are reluctant to pay for it. After a major disaster like the computer system crashing, then the need for a tape back-up system is recognized. I have been involved with tape back-up for more than 20 years; the first product I encountered was for an IBM Series 1 computer. Our solution was better and cost 25 percent of the IBM solution. The differential didn’t matter because few customers were buying tape back-up anyway. Twenty years later, one of my clients got into selling tape back-up for PC’s. The product, story and collateral were all great, but after a burst of sales for a couple years, sales tapered. I recently polled 10 individual PC users and not one had tape backup.

The Fad

The last on the list is a product that captures the imagination and fancy of customers. It’s clearly tough to predict a fad, and unless you are first, the fad will go away so fast you won’t have a chance to capitalize as the Number 2 entry.

Planning Essentials

Timing

Timing of a new product or solution in an emerging market is crucial. If a market pull can be created, chances of success are enhanced. Many companies building ”plug-compatible” products for computer manufacturers like IBM or DEC thrived for years in a market pull for their products.

Pull

Whatever solution the product or service offers, timing and success depend on establishing the customer’s perceived need for that product or service. With all new products, the launch must overcome customer/user ignorance.

In retail markets, the probability of success depends on the ability to generate market pull. Unfortunately, generating pull is costly and time-consuming. However, unless customers seek the product it will die Many retail products die because the funding isn’t sufficient to promote the product. With thousands of products to fit in hundreds of feet of shelves, a product must move or else, at the first sign of dust, it is yanked. The ultimate indignity is that many retail stores actually charge you to use their shelf space.

For suppliers of OEM products and services the greatest market pull comes from your reputation or market position. If a customer perceives you as the best, he or she will find you first, before your competitors.

Channels

Another shortcoming for launching new products is the lack of defined and available channels for the customer to buy them. Mary Marketing was so proud to be one of the early users of a Web page. The problem was, no one knew about it. It wasn’t until she incorporated the web address into all of the site’s literature and presentations (including trade shows) that her customers started looking for it.

The foundation for the success of any of this is the need for good marketing people to convince customers they have the need for the product or service, even when they don’t.

LESSONS FROM HISTORY:
THE BIG THREE

Markets are just like the weather in New England, if you don’t like it, wait; it will soon change. Today’s markets change so fast companies must go with the tide or be left stranded on the shore. Even if it appears you are in the number one position, complacency and arrogance will pull you down.

Long before the customer was King and Queen, a few suppliers dominated the markets. In fact, it seemed like three was the magic number in the major market segments.

As you can see, even the names with staying power are no longer dominating their markets. In fact, many on the list have expanded far beyond their original market.

· GMC went for electronics and financing.

· Time got into the entertainment business.

· Ford into military electronics and car rental.

· Philip Morris into food products.

· CBS into electrical equipment.

The shortsighted automakers in the 50’s never gave one thought to the possibility of foreign imports. Having foreign owners making automobiles on US soil and using US workers was unthinkable. Foreign competition and innovation impacted many of the stagnant brains in Detroit.

The exception to the three-peas-in-a-pod rule was in the computer industry where, because IBM was so dominant in the computer market, the major competitors were the so-called “seven dwarfs.” IBM was so strong it was tough not to buy from them. It was often said in the market that you couldn’t be fired by selecting IBM. Today, most of the seven-RCA, Xerox, GE, Honeywell, DEC and CDC-are long gone from the computer market. IBM’s plan was to reach $100 billion in sales by the year 1990. However, it’s only now in 2001 that they are approaching this level. Innovation by its competitors, both in technology and manufacturing, caught IBM by the throat, stymied its growth rate and caused it to suffer multi-billion dollar losses.

One major factor that killed IBM’s growth was the market’s move to “open” systems. During the days of yesteryear, computer suppliers were structured to provide entire computer systems along with all peripherals and software. Once a customer committed to a supplier he was in essence married to him. You had to go back to them for every change, expansion and enhancement you needed. When open systems came into the market, the customer could go to several compatible suppliers for the CPU, peripherals, enhancements and most important, software and application needs. Open systems spawned numerous companies because of their innovation and quickness in reaching the market.

The larger companies had an inertia that killed them, or as in IBM’s case, slowed them down, which allowed smaller companies to eat away at their dominance. The all-time classic scenario occurred when IBM went outside it’s organization to get the PC computer operating system and created a giant now known as Microsoft. Another force in today’s computer market, Intel, was given the contract for the basic processor.

Even IBM, as dominant in the market as it was, only reached less than one million users. Today Microsoft reaches millions more and dominates the microcomputer market, while battling competitors, the US Government and several state governments. The irony is that IBM helped to create the PC computer world, but by maintaining its philosophy of a closed system, it was not alert to the changing market and lost considerable revenue to the competition.

Arrogance and complacency should have no place at all in a company marketing strategy. The TV networks learned the hard way when a dramatic market shift hit the industry. In the early 1980’s, CBS, NBC and ABC reached more than 95 percent of US homes. Now that number at some periods has dwindled to below 50 percent. Such declines have occurred as a result of innovation, which new competitors take advantage of and which give audiences new choices. Most of all decline in market share can only be blamed on miscalculations by the studio chiefs-the failure to read the signs.

During this period of decline, several factors occurred:

· Increase in cable TV companies.

· Increase in national broadcast networks.

· Increase in national cable networks.

· Increase in the number of cable channels.

· Increase in cable subscriptions.

· Innovations in programming, like CNN.

· Decrease in rate of additional TV hours watched.

· Increase in movie rentals.

· Increase in movie attendance.

· Increase in Video Cassette Recorders.

· Satellite TV networks established.

· The Internet is introduced.

According to TV critics, programming quality has continued to decline along with audience share. It should cause you to wonder if much of this decline, although not foreseen, could have been avoided by better programming the product they were selling. Of all the critical issues discussed in the board rooms of the major networks during the past 15 years, did the quality of the product, or the quality of the packaging ever come up?

Whatever the reason, all the big three have lost significant market share, only some of which can be regained by merging with the competition.

HIGH-TECH COCKTAIL TALK

I have stopped counting the times I have participated in interesting, intense discussions about products, technology and starting companies over cocktails, beer and more recently, coffee. In fact, I take credit for coining the term “cocktail talk” (something my peers and friends will vouch for).

A friendly environment and camaraderie seem to bring out the creativity in all of us. Plans, promises and commitments to do something together evolve before the night is over. Some of the most exciting plans and killer applications develop in these sessions. But from the next morning on, nary a word is ever mentioned again about the actual “cocktail talk” follow up. The ideas just faded away. Why, there must be hundreds of innovative ideas swept off the floors of cocktail bars and coffee shops daily.

When technical personnel decide to go forward with their brilliant ideas, they often don’t seem to realize they only have part of the equation. They certainly know all the details of the design and how they play together, and they may even have a very good understanding of how the user will benefit. But they fail to understand what marketing is all about.

For an executive, the first mistake is to believe that because you think it is a great idea people will fight to get their hands on it. Even if a user thinks it is a great idea, it doesn’t guarantee he will pay for it. There are many other factors that come into play (especially that his best alternative is to do nothing), all of which have to do with marketing.

The key questions have to be asked:

· How to position the product?

· How to promote it?

· What to do with competitive factors?

· What is needed to support the product?

And these do not even address all the financial aspects or those related to manufacturing.

We have all heard about the fantastic success of innovative startups, but not as much is ballyhooed about the billions of dollars lost by investors in new-ideas-that-couldn’t-miss, but did.

In my recent work with companies trying to bust $10 million, I find that most firms fail because they lacked marketing know-how. Companies get off the ground and grow to as much as $10 million in sales from their first idea-the one gleaned from a niche not seen by management in their previous company or a real good technical idea that has an immediate window. However, the essence of sustaining growth is coming up with a second product, and unfortunately, following “Idea Number One” with “Idea Number Two” is much more elusive and hard to pull off without a thorough knowledge of what the market needs and is willing to pay for.

Another cardinal sin by techies is their lack of perspective and understanding of the capabilities of the potential user. I have sat in many strategy and board meetings that were full of passion and expectations because a new product or idea sounded like it would capture the market. My habit was to glance around the room and note:

· Donny Disc had 4 gigabytes in his home PC when most users were wrestling with kilobytes.

· Peter PC had a network of PCs at home (this well before Windows NT was introduced).

· Manny Mac had a scanning and desktop publishing capability that would put printer companies out of business.

I began to wonder if this was the group to judge whether or not typical home users or doctors or lawyers would buy the new product. I didn’t think so then and I don’t think so now.

I keep hearing about applications for small business, but when I have polled members of my Executive roundtable, the topic is foreign to the group. Once I heard about a voice recognition system required at least 133MHz processor and 128MB of RAM. In the whole room, I was the only one in the meeting who came close to having a computer with those specifications. At that time, few if any doctors, the targeted market, had this capability.

Another example is the video phone, predicted to be afuturistic essential of the 1960s, but where is it today? It took a while for the developers to realize that it wouldn’t be much good if no one on the other end had one too. Today even with the Internet and web cams, we are as close as we ever have been to the dream of seeing the person on the other end of the line, but still far from the market penetration of the telephone.

Wait, I gotta get it right!

A variation on this problem is the Techie’s desire for the perfect product. Why does it take 95 percent of the time to do the last 5 percent of the design? Given the chance, most engineers will continually try to improve the design unless it is taken away from them.

Ed Engineer will admit to this in his past, but today Ed has been converted to the marketing religion and perfect sense. He actually insists that Mary Marketing provide him and his engineering group with marketing specifications and requirements before he develops a technical spec to meet it, and before he actually starts the design.

Eureka, it works!

I have seen many start-ups misled by successful beta testing. Often the product is given to friends or sophisticated people who understand the product and make it work, so the test is not with the target market. Another issue involves the willingness of the customer to buy the product after testing it. I experienced a program with a client who was servicing Fortune 1000 company users. Everyone loved the software beta program, but nobody wanted to pay for it once they had it, even at a discounted price. When asked to return the product, everyone did. So the beta was a success, but the project flopped.

On give-aways the issue is always the same, “If the beta product is so wonderful, why isn’t the customer willing to pay for it?”

Just wait till this takes off!

I have been involved in many programs where everyone is excited, but one problem undermines the program. For instance, in the early days of video on demand, equipment manufacturers, cable providers and users loved it. But no one figured out who would pay and who would make the money. This delayed the program for over five years.

We know what the customer needs! But he doesn’t.

The saddest fate for a tech-driven company is to have a great idea, a great product and perfect market timing but to lack the resources and cash to make it happen. The yellow brick road is paved with shrink-wrapped products collecting dust in some storage unit somewhere.

I advise any start-up, particularly a techie, to study cash management and cash flow before starting their company and risking their estate and that of their friends and relatives.

Couple this with a short course in marketing and their chances of success increases tremendously.

THE WOULD-BE ENTREPRENEUR:
Marketing at its Pinnacle

(This chapter is excerpted from my book, The Laws of Management Physics, A Handbook for Hands-On Managers.)

If you are trying to build a business plan or shop the one you have around some people will tell you that the three most important things an investor looks for in an investment are market, market and market. Others will tell you they are team, team and team. I believe those three things are comfort, comfort and comfort.

Start with common sense. Ask yourself, “Why would I invest in this venture? Is there a market need? Does the product meet that need? Can the team penetrate the market and make money at this?”

The First Contact

Most of the investors you encounter will be strangers, so you have to work that much harder to convert your dream into a business plan. You must get into that investor’s comfort zone, and to do so, you must do the research and select investors who are comfortable with your market and the product you are presenting. Find the latest buzzwords that are of interest in the investment community, like biomedical, multimedia, or Internet. Avoid those that are dying, and be alert to the fact that customer service is the “in” approach. A new buzzword is the “Solutions Company.” For example, hardware products are slipping unless the company is service-minded and the product is part of a larger solution.

Keep in mind that investment companies receive hundreds of business plans a year, and can’t possibly give your plan all the attention you would like. The chances of them accepting or returning a cold phone call are slim to none, and the chances of getting a response to a plan sent in cold are just as low. To increase your chances of getting a response from an investor, obtain a referral that will give you credibility.

To help the investor reach a minimum comfort level, you will need to include these items in your plan:

The plan must have an exciting summary up front, sometimes referred to as the executive letter. This letter should cover the following points:

· Here is where I’m going.

· Here is how I will get there.

· Here is why you, Mr. Investor, should come along.

· And here are the rewards…

In order to earn the investor’s confidence your plans must also have credibility. Avoid the Guinness Record Syndrome, which will sink your plan before it even gets off the ground.

Don’t show a plan that:

· Anticipates spectacular growth while competitors stand still

· Plans for higher sales per employee than what the industry has ever experienced

· Shows profit margins never before experienced in the free world

· Expects costs so low they are lost in the noise

· Expects penetration into an existing market to grow to over 30 per cent without competitive response

· Shows “hockey stick” growth where 90 percent of revenue growth occurs in the last 10 percent of the plan period

· Proposes a product for which the best alternative is for the customer to do nothing

· Proposes to solve all the world’s problems.

· Don’t try to dazzle the investor; stay on firm ground.

Do:

· Make sure you’re entering an emerging market and not a mature or fading one.

· Avoid market statements that can’t be verified.

· Understand that sophisticated investors usually know much more about the market in question than you do, and they probably have more resources to rely on for verification as well.

· Make sure your dream has enough depth to develop into a business and isn’t just an opportunity that would be better off with a strategic partner.

Comfort! Comfort! Comfort!

There are three aspects of your presentation that will be particularly important in developing the investor’s comfort level:

· How well you deal with the market.

· How strong your team is.

· How carefully and realistically you’ve planned.

The Market

Getting your investor comfortable with the marketing plans requires that you do three things:

· Prove that the market and the need exist.

· Prove that your product meets that need.

· Prove that you can penetrate the market with your product.

If you can prove these things, the investor will be able to have confidence in your marketing plan.

The Team

It helps to have a team that has worked together for a while and shares your vision and enthusiasm. You must have people who believe in your dream as strongly as you do. The investor is looking for a team that is willing to commit to working 100 hours per week and will hock their houses and families to make this dream become reality. Also important: you should have proven winners on a team, people who have done it before, especially if they are known in the marketplace. The venture capitalists may even prefer a failed entrepreneur to a novice because they will assume he has learned from his failures.

The Plan

Don’t assume the reader knows as much as you do about the subject. Make sure the first paragraph captures all the most important information: the dream, the need, the solution, the reward, and the role of the investor. You have to capture the investors’ interest so they will read beyond the first paragraph, maintain that interest throughout the executive letter, and pass this plan along to his or her analyst.

Investors expect the arithmetic in the financial section to be correct, but they will discount it to some extent, mentally cutting the revenue in half, delaying the growth, or changing the growth rate. They want to make sure it will work under adverse conditions as well as ideal ones.

Extend the plan for a long enough period to show that the return on investment occurs in time. Provide a running line in the plan that shows the investor’s ROI. Finally, make sure there is an exit plan for investors (and for you!) or any valuation of the company is useless.

Be Fast on Your Feet and Other Tips

· Keep in mind that you are asking for a lot of money, so be prepared to explain in detail how you plan to spend it.

· Always be ready to state your own personal investment to date.

· Be ready to articulate your cash needs and explain how that cash will be used.

· Convince the investor that you too are in it to make money, or else he won’t believe that you will make money for him.

· Be a good storyteller, or have someone on you team who is.

· Believe that once an investor is willing to give you the time, they really want to believe in your dream and are asking you to convince them.

· Investors get excited about investing in product development, marketing, and needed inventory, but they don’t like to just cover rent and payroll.

· An investor may stay in a situation for as long as they don’t have to put more money in.

· Make sure your financial performance goals are high enough to make the investor comfortable.

· Usually you only get one shot at an investor, so make sure you ask for enough cash up front.

· Remember that the investor is looking for COMFORT, COMFORT, COMFORT! Comfort breeds trust and that is exactly what you need from investors.

Investor comfort comes from his or her perception of you, the entrepreneur. And as you should know by now, marketing is all about perception. Entrepreneurship requires the highest form of marketing. Even for supporters the entrepreneur’s dreams need to be defined, and for the uninformed investors formalized. Before any handshake, and well before any deposit in the bank, marketing plans need to be developed with all kinds of backup data to convince investors to sign their checks. And even after the initial funding, the entrepreneur must continue to sell to investors, employees and customers.

Start by understanding that your priorities and the investor’s priorities are very different. This business opportunity is very high on your priority list: it is your dream, and quite possibly your livelihood. On the other hand, to the investor, you are just one of hundreds of similar stories about the “perfect” investment. Keep trying to find the hurdles between you and the investor and knock them down. Close the priority gap.

When all is said and done, it will not be the written plan that will close the deal. It will be you and your team, with your excellent story and your convictions that will make the investor comfortable enough so his hand won’t be shaking and he can sign a check.

BECOMING A MARKETEER

All operating disciplines need plans and reports to function. Management can use them as checks and balances to make sure everyone is on the same page in the operation. Investors use them to determine how healthy a company is. However, out of all the reports and plans that are generated within a company some are more opaque than others. In high-tech companies, no one outside of engineering can challenge a product design. Engineering can hide behind guarded technology and a string of buzzwords to scare any non-­technical person from asking even the simplest of questions. On the other hand Marketing reports are the easiest to challenge.

Fortunately much of marketing relies on good common sense and the non-marketer who is a good listener and has a good memory can be a good check and balance on marketing plans and aspirations. A good memory is needed because marketing personnel do waffle in order to fit their latest whims. Since marketing personnel are Masters of the After Strategy, they have a great ability to fit the latest results to a logic that is generated after the fact. For instance, they can pitch and fight to get a product priority in the company, appearing to create an excellent basis for its need and importance to the company in the market. But once everyone has jumped on the band wagon, and the product fails in the marketplace, the story line changes. Then the tale from marketing is, “It’s good it bombed because it would have been a dilution to the core business, and we didn’t want to do it anyway.”

When a new product idea and plan are presented, there are several questions that need to be asked about the nature of the product.

1. Does the market have a need for the product?

This will relate to the amount of research done on the market and competition. A retailer like Wal-Mart decided without a doubt that small towns and cities would embrace a low-price/quality store in their area. It built a dynasty that serves small markets across America. If K-Mart or Target did a similar study, they would probably eventually learn that certain regional areas could only support one superstore.

I have seen many business plans predict the company can jump into an existing market and soon become a significant player by capturing a 30 to 40 percent market share. These grand plans generally ignore the competitors, as if the new player expects the existing participants to let him take a big chunk out of their market, all the while chanting “Go, Go, Go.”

Part of determining market need is sizing up the market. Knowing the market size and how a realistic penetration can be done will establish the basis for the size of investment necessary for the entry. I have seen startups that expect to raise significant funding, later realize the market isn’t big enough to support their vision. The success they envision will not support the return on investment expected by the investor.

Another failure common to new companies is the inability to recognize the difference between an opportunity and a business. Many product ideas in themselves are great, but they aren’t substantial enough to build a company.

If it is recognized early on that the idea can’t spawn and evolve a company, it’s better for the developer to strategically plan a partner from the beginning. A good partner can be a company already established in the business. The new product will complement their market thrust and increase the probability of success.

2. What is the nature of the product?

The answer to this question goes a long way in helping everyone understand the issues of time to market, revenue and profit. Certainly a product that has a market pull will reach fruition a lot faster than a product that requires educating customers. Products that provide an insurance factor, such as a tape backup, may never dent the market. I have had three experiences with companies with magnetic tape drives backing up files for computers. None of the three companies ever attained their expectations.

In one case, we had a $3,000 solution for an IBM Series 1 computer. IBM’s solution was $13,000, but after two years and almost unable to cover the technical support in place, we gave up. Unless a disaster occurs, a computer crash with lost files, or a security breach, few buy an insurance product.

An insurance product has to compete with a difficult alternative called “do nothing.” In fact, in evaluating any product, it’s always worth asking marketing the challenging question, “What happens if the customer does nothing?”

If the marketing person has no valid response to cover this eventuality, the product will probably die.

Products that require education generally require extensive marketing, promotion costs, innovative techniques and a long cycle. One product that seems to be taking forever is a device for helping incontinence. More than 20 million people suffer with the problem, so no doubt there is a need, but getting the message out has been very difficult. One reason that seemed to be limiting was the embarrassment of admitting to the problem. Apparently those who have the problem don’t have a high priority to seek other solutions. But awkward or expensive, they do have an existing alternative — diapers.

Contrast this with Viagra, the pill to overcome male impotence. Because of the overwhelming desire of millions of men to better their sex life, the market definitely had a tremendous pull. Only the small print explaining the side effects bordered on education.

3. What is the timing feasibility for market penetration of the product?

As noted earlier, too many plans on paper jump too fast based upon a market penetration report that is unrealistic. The distinction must be made between end­user acceptance and an Original Equipment Manufacturer (OEM) who will use the product as part of his product offering. User buying is instantaneous and, with awareness (education/ marketing), sales can jump significantly during the first introduction in a one-hour infomercial. But an acceptance cycle for an OEM buyer can be six to nine months or longer. First there is awareness, second is the qualification cycle, third is the product design stage and finally there is timing and need to buy.

Market Sizing

One of the most difficult things for a small company is to determine the size of the market for their products.

And what is the most common and by far the weakest excuse for avoiding research?

“We can’t afford it.”

In fact, these companies can’t afford not to do it! Without a thorough analysis of the market to determine, among other things, its demographics and size, its needs and challenges, they are severely limiting their intelligent planning and jeopardizing their chances for success.

The real reason is because market research seems to be a foreign subject.

Many small companies have a serious shortcoming in developing a Marketing Mentality. I have had clients who don’t even know how or where their product is used. In reviewing the product and market with new clients, I find they just don’t know how the customer uses their product. And they certainly don’t know who the customer’s customer base is!

I sat on the board of a power supply company for years and continually got blank answers whenever I asked, “How does the customer use your product?” It was a custom business, which baffled me. How can you give the best value and solution if you don’t know how the customers use the product? This limits your planning and forecasting the future. It also limits visibility and nasty surprises often occur because of the lack of customer knowledge.

There is no way to project the success of the customer’s needs, or worse, lessen the chance to see a cut-back or stoppage when it comes.

Far from being difficult to find out, it is one of the easiest pieces of marketing data you can obtain. In fact, in a partnership relationship, you can best keep your customer by knowing more about his product and his customer needs than he does.

Even with limited knowledge there is hope in sizing the market. Three methods yield meaningful results:

Macro Market

Analyze global market need and determine where your product fits by percentage. By hook or by crook, get some kind of market study on a global basis. For instance, while in the printed circuit board business, we knew every electronic device known to man had a printed circuit board in it. We also found out that the printed circuit boards represented six percent of the costs in computers and 11 percent of instrumentation, two of the markets we were serving. We obtained market data in dollars for each of these markets.

On this basis, we projected the percentage of the sales dollars being used to purchase printed circuit boards. This wasn’t very scientific since we had to make assumptions about margins that computer and instrument manufacturers were able to get. The results were more of a sanity check and proved quite useful in justifying capital equipment investment approvals.

Of course, a clever manager could take advantage of the numbers as I found out in a large multi-billion dollar company.

We had a not-so-clever GM overseeing printed circuit boards who kept insisting he could take the division from $10 million to $50 million on an annual basis. For the first two years he failed to deliver on his plans but tried to cloud the issue by changing his internal strategy from commercial to government, single-sided to multi-layer. He must have seen it coming because he quit on the Friday before the Monday he was to be fired.

I was sent in as the group’s troubleshooter-the expert simply because I had visited the GM a couple of times. His final strategy was to go after the multi-layer printed circuit boards in the government-driven sector. When I analyzed the statistics I found one thing true: it was a $3 billion market. One statement he had always pushed to justify his projection of $50 million was, “Don’t you think I could get 1.6% of the market?” Sure he could do the math, except the government’s market segment wasn’t $3 billion.

• First, 50 percent of the market was captive, served by some customers themselves, which took the number down to $1.5 billion.
• Second, 30 percent was international, reducing it to $1.05 billion.
• Third, 70 percent was commercial, deflating it to $315 million.
• Finally, the Government’s multi-layer segment was only 40 percent, taking the market to $126 million.

Before being faced with reality, the ex-GM had claimed he could take sales to 40 percent of the market. I can only assume he thought the embedded competition would stand by and let him do this. Ironically, in this multi-billion dollar corporation, it required sales at least $50 million to meet some of the hurdle requirements. When it became apparent this wasn’t about to be a $50 million division; the decision was made to divest it. Sadly, the division had lost several million dollars during the ex-GM’s reign.

Available Market

One way to determine the available market is to add up all the customer purchases. Of course, there is no way to know every sale, but certainly the larger ones to public companies are published. Again, this isn’t a scientific answer, but it gives insight to the future based on their growth rates. I was with a company doing $5 million in sales to Digital Equipment Corporation. We were able to predict our sales growth based on DEC’s sales growth and made projections on a fairly accurate basis. We could identify what the top five companies in our market had purchased and project the total based on DEC’s 75% market share.

Your customer’s purchasing departments are also a valuable source of information. For instance, I was able to get estimates of annual buy projections from some of them. They might tell you what percent of total purchases your particular component or system is, or what their annual purchases are. Thanks to her relationships with the purchasing agents, Mary was able to put together an annual estimated buy from the customers. Confirming this with the customer’s growth rates, Sally Sales was able to have a good feel for the market segment they served.

Micro Market

In general, you can get a good fix on your competitors and what their sales are. Adding your sales to theirs will give the total known market.

Mary Marketing once worked briefly with a company selling IBM compatible memories. The president wanted to grow to $50 million in sales, and was struggling to grow beyond $14 million in annual revenue. Mary was persistent and, after several meetings with the salespeople, got them to come up with good sales data on the competition. Lo and behold, when they added up all the suppliers, the total market was $35 million in annual sales. So obviously his $50 million dream was beyond reality. This forced him to redirect the company toward other products to take to the market.

Marketing people are notorious for predicting market penetration based on numbers. Just because a market is big, it doesn’t mean it is easy to penetrate.

Go back to the cliché: “With a multi-billion dollar market, don’t you think I can get a little old fraction of a percent?”

The response should be: “Prove it.”

Good market research will convince top management and investors of the market need. But comfort in believing the plan will come from providing a convincing strategy to penetrate the market.

If Fred Founder knows his Marketing ABCs he will be able to challenge any market plan with questions like:

• “Have you verified a market need?”
• “Can we match that need?”
• “What is the timing of the product to penetrate the market?”
• “How do you plan to penetrate that market?”

These methods are much easier to do if you are an OEM supplier, but they can also give useful information to end-user suppliers.

Unfortunately, if your sales channels get fragmented by reps, distributors and catalog sales, it does get more difficult to determine the size of your market. However, this only makes market sizing a bigger challenge and a more important study to make.

MARKET RELATIVITY

Although Mary Marketing won Fred Founder over to her marketing way of thinking, Fred was rigid in his belief that the customer base was one of his most valuable assets. He believed the list of customers was sacred. They had been there to get him started, and he believed in remaining loyal to them. And as an astute businessman, he knew that bringing new products to them held minimal risk with a quicker return than developing a new customer base.

He and Mary both agreed on the risk factor. After all, a large investment in time and money had already been made in the existing market. Also Fred and his staff had developed a knowledge base with known factors: customers, competitors, market needs and its idiosyncrasies.

Mary went further and prioritized marketing possibilities like this (with the best at the top):

· EP/EM: Taking Existing Products to Existing Markets.

· NP/EM: Taking New Products to Existing Markets.

· EP/NM: Taking Existing Products to New Markets.

· NP/NM: Taking New Products to New Markets.

Mary had seen many successful companies stumble and fall trying to jump to new markets with new products. Mary told Fred that if ever the company decided to do that, she would expect to hire technology and marketing personnel from the new market they wanted to jump to.

Mary Marketing is restless. She is supposed to have a business head, to understand ROI, be aware of cash flow and be a major thrust in making profit, but her excitement is also heavily slanted to new things. Even when the present products are well accepted and sales are good, she is anxious to push the company into new territories and markets. Encouraged by Sally Sales, Mary is always seeking the excitement of selling a new product or entering a segment of a foreign market. However, Sally is dangerous, because her head gets full of the ideas and dreams she hears from Ed Engineering and his troops over pizza and beer when she schmoozes with engineering. At all strategic meetings Sally seems to listen only to the blue-sky stories she hears. Since Sally isn’t concerned with, or even understands, bottom-line responsibility, her view is narrow-all she can see with new product ideas is making a fit with the customer and one-upping the competition.

I believe one of the most valuable assets a company has is its present customer base. I wonder why it isn’t valued and listed as an asset on the balance sheet or at least part of the goodwill often listed as “intellectual property.” Too often companies ignore the present customer base. There is a lack of communication with existing customers, even though the focus is on taking more products and solutions to these customers. Many companies believe in “no news is good news,” which can be very wrong. Just because a customer doesn’t call doesn’t mean he is satisfied. In fact, he may well be looking for new suppliers.

A number of marketing studies clearly point out that it takes a much greater investment in time, energy and dollars to develop new customers than to support existing customers. So the obvious question needs serious consideration: “Why not exploit the known customer base with ideas and products before straying in other directions?”

EP/EM

The Existing Product/Existing Market is the least risk area to play in. It’s clear where to find customers, and because it draws on the known customer base we can assign it a difficulty factor of 1. Extensive energy and study should be done to ensure this market doesn’t go away. It could prove to be the market with the highest margin to sell in. Mary and Sally should be directing their staffs to find ways to sell customers more, or they should create enhancements to increase the value to the customer and to his margin.

I am a great believer in newsletters that let customers know you are still around and scrambling to improve their competitive positions. It can be a modest cost, and if done regularly, it keeps you in your customer’s face on a regular basis.

One of my clients had been selling software licenses for years, but most sales were in reactive mode with one person taking orders by telephone. A change in marketing management and the pressure to increase revenue brought a new vitality to the company. The database, which numbered hundreds of customers over the years, was divided up between a telesales person and members of management. The goal was to contact all names on the list. The results were quite positive: sales increased and many customers were delighted to hear from the company after gaps of several months, and for a few even years.

On many days, dozens of customers were contacted. It would have taken months to identify and contact the same number of suspects and prospects if the job had been left to sales personnel alone.

In the OEM market, where it can take six to 18 months to develop a new customer, a company can starve waiting for the ultimate success. Present markets are known, understood and easy to contact. Why not concentrate on the existing base before straying off? The first priority of Marketing should be to find innovative ways to sell the existing product to the existing customer base.

NP/EM

The next move up with regard to risk is taking new product to the existing market, which has a difficulty factor of 5. Market expertise is hard to come by, so Mary should take advantage of her present market knowledge and position and grow from there. The major effort should be directed toward better understanding the existing customer’s needs and finding product and services to match those needs.

Understanding the existing market offers several advantages over trying to penetrate a new market with a new product. As with the EP/EM strategy, the same factors apply: the uniqueness and idiosyncrasies of a market and its customers, as well as being able to easily identify the market need. The existing customer relationships allow in-depth conversations about what else they need to improve their competitive position and bottom line. Marketing research can certainly be done more easily with the customer base than with strangers, and the inputs received have more credibility with the staff.

I was running a computer supply company and our portfolio included disc packs, magnetic tape-both reels and cartridges-and printer supplies, including paper, ribbon and cartridges. We had a saleswoman in Texas named Elaine, who constantly sold two to three times more than the other salespeople. She was so good we had to keep creating new product categories because she would take orders for buckets, brooms and even toilet paper.

She sold with her eyes. When sitting with a purchasing agent or buyer she would look around to see what else they were buying, other than the computer supplies. Her pitch was: “Why not just write one purchase order for all your bits and pieces and I will find them for you.” This made sense to the buyer and she combined other needs for non-computer supplies along with the printer paper and magnetic tapes. No wonder Elaine was our top salesperson.

EP/NM

Taking the existing product and services to a new market has a difficulty factor of 10. When deciding to exploit existing products, technology and services in new market segments, the first step is to gain knowledge of the new market, inside and out.

With their high regard for their staff and even higher self-images, Mary and Sally believe they can conquer any and all markets. Before they run off to conquer the world, I have to remind them of one of my sad experiences as former president of a leading computer memory systems manufacturer for OEM companies. We had an experienced and trained sales organization and top-notch engineering group. We decided to take on the IBM mainframe market with plug-compatible memory systems. It’s hard to believe today, but IBM was getting $1 million per megabyte of memory, and we believed we could beat the price and provide product performance above IBM. As it turned out, we were right in both cases. But unfortunately we did not understand the end-user market. Having played in the OEM market for years, we had no knowledge of dealing with the user. The product we supplied to our present customer base was narrowly defined and marketed by the customer. It required no application support and, most importantly, did not need any maintenance or customer service. Now we were faced with users who needed support for installations and follow-up on applications, and who certainly wouldn’t buy without a maintenance service.

The economic impact on selling stunned us. First, it cost far more to put salespeople in the field because of the higher need for support. Second, whereas our OEM sales force was selling several million dollars per year, per salesperson, we found $500,000 per salesperson in the end-user business would be tough. Our high-performing OEM salespeople had real trouble making the transition and only a few of them were able to cross over successfully.

I could go on and on about the continual changes in our marketing and the added cost to finally reach success. Suffice it to say, it took two years and several million dollars before we got it right. The message is clear: before entering a new market segment, you must add marketing and technical expertise to your existing operations. The only way to be successful in the EP/NM market is with with experienced and skilled people who can prevent disaster and speed up the ROI for the new venture.

NP/NM

Finally, there is the major jump to new product in a new market, which, in my opinion, has a difficulty factor of 100.

I have been around long enough to lose count of the number of companies that tried to make this jump, only to destroy themselves as they fell into a bottomless chasm, never to be heard from again. I do believe, however, that in most of the failures I observed it was ego that drove the dog sled off the cliff. This was particularly true of companies that had quick and relative ease in building success with one product in one market.

My first encounter was with Atari, the electronic game manufacturer. They introduced electronic games that took off like a rocket. My firm was supplying printed circuit boards, so most of our dealings were with purchasing and production control personnel. The company was extremely successful but arrogant. Management encouraged all personnel to supply new product and marketing ideas. In fact, the first half-hour of any meeting with an Atari person was all about the new ideas he had submitted. Atari management tried many of them. Now, Atari, as you know, has been history for a long time, while the home electronic game market has become a multi-billion dollar business. Although I can’t tell you if any of those ideas were the reasons for the company’s demise, I can’t help but wonder how successful Atari would have become if it had stuck to its original game concept.

Look at Amazon.com. Doing hundreds of millions in revenue with losses. Having made a brand name on the Internet selling books while handling only 4% of the publishing market, they are branching into selling other products.

Bringing a New Product to a New Market creates a double whammy-trying to understand the needs of a new market, while developing a new product before the needs are really known. The success in a market depends on having a whole product, at least in the eyes of the customer. So logically, how can you develop the whole if you don’t truly understand the market needs?

I don’t dispute that it may be necessary to conquer new markets to sustain growth, but again my advice is pure and simple. Gain the market knowledge before wandering off into new territory, and don’t hesitate to buy the knowledge in product and people rather than waiting for the existing team to develop it. For companies attempting to charter new ground in unfamiliar territory, the learning curve can last forever because there are no prior warnings or travel tips to make the journey smooth and easy.

THE PATH TO STAGNANT GROWTH

I have seen the following scenario repeated over and over by startups that run out of gas for lack of a Marketing Mentality:

Ed Engineer started his company because his employer was imbedded in technology and didn’t pursue the needs of the market. For Ed, a techie, to even think about marketing was a good start. He saw a niche, put a band of friends together and, with $150,000, jumped into it.

The lone competitor was losing interest so Ed had the market segment to himself. The company was well received from the start because Ed brought a new technology to the market segment. With the image of a technology leader, the company shined at trade shows and got the first calls from the market. Gross margins and profits were so big they were ludicrous. Growth in sales dollars in the early years exceeded 50% per year. The company was healthy and was more than able to finance itself and build cash reserve.

So what was the problem?

Ed thought too small; he lacked a Marketing Mentality and focused only on the now. And without a finance mentality, he never considered other uses of cash accumulation other than bank interest.

Then the inevitable happened:

The attractive market brought new competition led by Otto Opportunity, who brought to his new company his big-firm experience and big bucks. He had the advantage of coming into a market segment that Ed had first identified, developed and cultivated. His company set out to challenge Ed’s image with extensive advertising and PR. Otto’s company needed the PR because it was new and offered nothing newer than what Ed had delivered for years. Otto also had a fleet of multi-disciplined VPs to compete against Ed and staff’s technical-only mentality.

So what was the impact on Ed’s company now that real competition was in place?

· Ed got very little PR.

· Ed’s technology leadership was challenged.

· Ed’s sales were delayed when Otto’s company flooded the market with evaluation units.

· Ed’s pricing and margins were forced down.

· Ed’s initial competitor woke up and regained interest.

· Ed’s company no longer got the first call from customers.

· The customers found it easy to check three suppliers before making a decision.

And the end result was that Ed’s company growth not only slowed down but flattened out. And for him the elusive $10 million barrier still exists.

This scenario is repeated over and over for technology-driven startups. It is important to know that good times will not last forever. Competition will find you, even if only armed with nothing better than a marketing plan. So you must also start out with a vision and plan that takes you far beyond your initial dream.

SELLING VALUE

The most difficult task for a salesperson used to selling “boxes” is to learn how to sell “value” rather than time and material. Today’s customers place less importance on the tangible product itself than on solutions and services.

Back in the old days of the computer industry, product designs were often incomplete when sold. This caused real heartburn for the customers of Original Equipment Manufacturers (OEM) who suffered from long delays in integrating the product into their own. Even worse, poor quality and the expensive maintenance of the product drove customers nuts. Many were locked into closed systems that forced them to stay with one supplier. Differentiation in price alone could not get a customer to switch suppliers. Mary had to differentiate the cost of ownership among the suppliers. She tried to convince new customers that they should be concerned about possible lost market opportunities caused by delays in delivery, longer integration times and a Mean Time to Failure, which would have a heavy impact on field maintenance costs and the cost of spares.

When visiting an existing customer we used similar tactics. For example, we were supplying disk drives to a major customer, but competitors were continually snapping at our heels with faster, higher capacity and cheaper disk drives. We fought them off by convincing customers that switching over would increase their overall costs in training, documentation changes and write-offs of inventory spares.

Before cost of ownership and support services became the key to purchasing, quotations were based on reams of data that spewed out the cost of each resistor, nut and bolt, time to build and assemble right down to fractions of a second. During the manufacturing period, seconds and pennies were extremely important. The race to win the bid on cost forced us to reduce support cost estimates, as well as margin and profit percentages. Sadly, it also resulted in lower quality products. Mary remembers the days when the marketing of “boxes” on price alone and incomplete designs made her think of giving it all up to enter a convent.

With the evolution of microprocessors and PC’s, many competing products actually looked alike and probably cost about the same. I believe all CPU’s and motherboards for a time were made in the same factory in Taiwan and disbursed through many Taiwan companies to the US. This made differentiating your product on hardware alone very difficult and brought many companies to their knees trying to compete on cost. A purchasing agent’s call to “sharpen your pencils” shook many a management team. This is when I learned that you often win by losing, by walking away from a bad deal.

The evolution of microprocessors and miniaturization was also made difficult by the migration from computers housed in large monster cabinets to today’s microprocessor-based PCs that occupy less than a square foot of space. Once we could command higher prices based on the perception of bigness-Big was Better. However, today the larger desktops are priced much lower than portable PCs (notebooks, sub-notebooks, et al). Customers’ perceptions have shifted because the manufacturers have led us to believe that “smaller is just as good or better,” and so far the market continues to uphold that contention.

Maturity has found its way back into the market, and people like Mary Marketing welcomed the change and the challenge. Global competition and rapidly changing technology are forcing customers to seek help in partnering with suppliers to get the quickest and best solution to their needs. The computer industry has been saved by this new customer mentality of the 1990’s. With both desktops and portables pretty much becoming commodity-like products, customers are looking for more differentiation through customization, quicker time to market, and a truckload of vendor support to help with their product integration and market positioning. The “box” on its own isn’t as important now as its being a part of the solution.

We can see another aspect of the market shift-the move to services-in our everyday life: a three-year service contract for a tape recorder that will probably be obsolete in a year, and a couch with a five-year Scotch Guard protection to prevent stains even though you may have no pets or kids. Clearly the bucks aren’t just being made on the product, but from the changes, modifications and services that are offered.

Another shift in the market is has to do with what product is. The term Intellectual Property has crept into customer vocabulary to define anything a customers cannot touch or feel. Whether it is 24-hour customer support, on-demand documentation or a manufacturing processes that gets the product to market faster, suppliers now try to get as much value and money as they can from this invisible product.

Even more importantly, many companies have learned the value of outsourcing. Simply put, when a customer can buy a product cheaper than doing it in house, he will go outside to get it. When Mary found that Fred’s company had lots of technical expertise and core competencies, she realized that this dramatic trend towards service outsourcing gave them a leg up in the market with major companies who were willing to abandon in-house functions when outsourcing produced better results at lower costs and less time.

However to bring Fred’s company up to current market standards, she first had to convince the sales force, long conditioned to sell only price, to sell value. Her salespeople found it difficult to charge customers for intangibles. Mary taught them that instead of pushing the product on the customer, they should first find out what help the customer needed and then to charge them for this value. Since their company was capable of developing products quickly, she spent many sessions showing the sales force how a faster time-to-market yields greater sales and profits to the customer. She explained that the apparent high cost of their program would be more than offset by delivering a product faster than ever before. In the present market you are lucky if you can get six months out of a product. Getting the product to market so much sooner means that the Return on Investment would be attained before the market window closed and the product became obsolete.

Their first chance was a major development for a Fortune 500 company. The customer admitted it would take 15 months for the development, but Mary had her engineering people do it in five months. The ultimate value to the customer was far greater than the cost of material and the five months of time. Mary charged accordingly and got more than just a modest mark-up on time and material. The days of selling only the “box” were over, replaced by the new era of selling “value.”

It was clear to Mary and management, and had to be made clear to the entire company, that selling value would increase both revenue and profit. However it wasn’t easy to convince the people inside that value really was something worth selling. Her challenge was to break down their resistance to change while building their self-esteem. The sales staff felt more comfortable with hours and material costs, which were still needed for the foundation cost. She spent many hours convincing sales and management that the engineering staff was willing and able to provide numerous services and a wide array of solutions for their fast-moving customers.

Mary explained that many of their customers had a shortage of technical personnel and products with a shrinking life span. They had basically two choices: buy a company or product line or outsource product development. Mary’s company could help the customer from concept to production, and provide the early manufacturing to get the product to a volume status.

The list of what they were offering contained value rather than “product”:

· The concept

· The specification

· Product development

· Complete documentation

· Test definition and procedures

· Prototype assembly

· All certification from UL to FCC

· System integration

· Quick Time to Market

Mary then had to keep the engineers in tow, discouraging them from giving estimates to customers about job times and dollar amounts. It would be hard to get $50,000 for development jobs if an engineer told a customer, “I can knock that out in a couple of weeks.” Many customers believe they can buy an engineering design, ship it off to Asia and in a few weeks get a manufactured product ready to ship to the customer with no problems. Unfortunately for them, this approach often ends in failure because no one has taken the time to work out the early wrinkles in the manufacturing cycle.

Mary also realized that a similar education program was needed to convince everyone inside the company that they had great manufacturing services to offer. Most engineers believe that when their design is completed, it need only be thrown over the wall to manufacturing and they can move on. In Mary’s company, manufacturing was perceived as just “putting the thing together.” Engineering didn’t realize manufacturing was its customer and documentation was its product. Even as the engineering matured, good designs were a long way from delivery.

As the following list of services and skills illustrates, Mary got the customers to appreciate the contribution her manufacturing people could provide to turn the engineer’s drawings into commercial reality:

· Manufacturability

· Design verification

· Vendor identification

· Cost verification

· Engineering change orders

· Parts availability

· Fully released and tested drawings

· Regulatory testing

· Volume testing

· Large volume partners

· Transfer to a large volume assembly company

Finally, everyone inside was convinced there was far more than the “box” to sell, although Mary often had to return to the sales department to change the mindset of selling on price alone. Mainly this involved seeking what the company could bring to the customer. This meant getting the sales people to become listeners so they could hear and spot what help the customer needed. This is a never-ending task since they want to revert back to their comfort zone-price. Mary gave them lots of technical support by having the engineers and customers meet often right from the early stages. She tried hard to get the engineers to ask the customer such subtle questions as: “Why are you even talking to us?” and “Don’t you have this capability in house?”

Mary knew that if the customer needed help, the opportunity to sell value was increased significantly. It took time to identify the customers who had a need that could be matched by Mary and the company, but once this was done, it was easier to sell the concept of value to the customer than it had been to sell the concept to her own people. She soon found that customers looking for high growth rates in emerging markets were the best prospects for a sale.

As the above example shows, another form of value is closely tied to differentiation. In the early days of his company, Fred Founder was able to differentiate his company from others because he was the only one with the capability and product. As his company grew and entered a wider market, the competition expanded and stiffened. That is when differentiation becomes even more important. In the new, broader market, many companies slow down and die because they can’t replicate the uniqueness and success of their first product. Price alone does not make enough of a difference, especially with customers who have become more savvy. In a competitive marketplace, it is too easy for prices to be matched or beaten instantly.

In a value driven market, companies differentiate themselves from their competitors by bundling products and services, by adding customer service or offering something unique that their customers would be willing to pay for. Here’s an example of how two engineering service companies use a variety of approaches to differentiate from their competition:

1. Offer product development at half its cost. Take a royalty and the risk that the customer will successfully sell the product.

2. Offer early manufacturing as well as product development to get the product to high volume as quickly as possible.

Both of these approaches create value for the customer by giving more than a product design. They provide the resources to get the product to market sooner. Fred chose the second path, and with Mary’s direction, created differentiation by offering the early manufacturing as well as the engineering design. Mary also provided direction by insisting that selling value depends on relationships with customers. She drilled the sales staff on the importance of face-to-face customer meetings that served to differentiate their company and to help their product stand out in the marketplace.

It is worth retelling two tried and true sales stories wherein value provides availability and skill:

A shopper looking for good rib steak enters a market and is shocked when the owner tells her it costs $15.50 a pound.

Seeing her puzzled look, the shopkeeper asks her, “What seems to be wrong?”

“Well”, she says, “Tony’s Market across the street sells it for $12.00 a pound.”

“Well”, he says, “Why don’t you buy it from Tony?”

She is quick to reply, “Because he is out of it right now.”

“Well” he says, “When I am out of it, I sell it for $10 a pound.”

A doctor is shopping around to get his car engine fixed before starting on a long vacation trip. It had been sputtering and jerking for days. He had gotten quotes from $250 to $400. It wasn’t so much the cost, but all said it would take couple days to make the repairs. In desperation, he entered a shop ready to close for the long holiday weekend. The mechanic looked under the hood and after a minute or so, he said he could fix it.

The doctor asked excitedly, “Before you close?”

“Yes, but it will cost $500.”

“Okay,” said the doctor, “but please get started.” The doctor left the area to seek out the men’s room and to find a coffee machine. He called his wife at home to tell her he would be late for dinner because he was ready to sit and watch for hours. When he returned to the garage area, the car was purring and sounded better than ever. The mechanic showed him what he had done using a hairpin to fix the problem.

“How can you, in good conscience, charge me $500?” said the doctor.

The mechanic shot right back, “You are paying for all of my experience and hard work in learning how to fix it, and for the ability to give you the value you need and deserve.”

The Internet is killing many tried and proven methods of doing business by attacking the weaknesses of established customers who couldn’t change or respond quickly. Amazon.com reduced the significant costs of book distribution that Barnes and Noble had in place. Dell Computer started selling computers online successfully because they had no large direct sales channel like IBM to feed. The advent of on-line and catalog sales have dramatically altered the sales commission structure.

During the 1999 Christmas season, e-commerce grew substantially, and many customers were disappointed by late deliveries and the difficulty in trying to make returns. I can’t help but wonder if people think that it would have been better to have gone to a local retailer to pay extra in order to get the product immediately after a look-see and touch and to have fewer hassles and frustrations?

What will people do in the future?

Encyclopedia Britannica dominated a market, but over the course of a decade lost their leadership and saw a market segment destroyed. It started with a cheap CD ROM offered by Microsoft® as part of a PC software package. Encyclopedia Britannica not only lost sales of $2,000.00 per order but now offers their encyclopedia free on the Internet. It wasn’t the cheap version that did them in, but the PC. When parents realized that they could buy their children a PCfor the price of an encyclopedia, they jumped on it.

By focusing on the changing market needs and championing differentiation, Marketing can play a large role in continuing the growth and success of a company. However, when it comes to fueling the engine that drives the company machine, differentiation certainly plays a significant role, although it is not the top priority for the marketing department.

What is Job One?

Increasing sales!

SELLING THE POSITIVES

Fred Founder is always pleasantly surprised when Mary and Sally bring home a winner from what Fred considered a lost situation. It’s like he throws them a punch line, and they turn that into a sound and winning strategy. For instance, in recent activities, Growco won four contracts against strong competition. After assessing all the inputs, he voices his concerns or worries and throws out the cue:

Fred worries: “But we’re such a small company!”

Sally replies: “We’ll pitch the ‘personal’ touch.”

A small company can stress the personal touch against a much bigger competitor. Being able to put all your top management in a room with the key customer personnel can give the customer a level of comfort not usually available from a large-tiered company. The customer, facing all the key decision-makers in your small company, can overcome the idea that he or she is facing the often illusive “they” encountered in big companies. Beating on a regional sales manager, when necessary in a big company, can be diluted by the time it reaches the top, if the complaint or request ever gets there. Being able to pick up the phone or send an e-mail memo to a top manager in a small company can get instant response.

Fred worries about the limitations in the design: “It has fewer features?”

Mary: “We designed for cost and simplicity”.

Fewer features can weaken a competitive situation, therefore all the bells and whistles of the competitor must be exposed. If the total capability of a software program is never utilized, all the features may not be needed. In many cases, the less complex approach can be more user-friendly, and your product can be pitched as having been directed to meet their needs. Sally’s favorite retort in this situation is, “And all the extra sizzle isn’t really needed.”

Fred worries about the bottom line: “There’s no more ‘give’ on our side!”

Mary: We sell a complete package.

It may be difficult to overcome a competitor’s lower price, or costly features that time will not allow to be added. In this situation modest features such as dressing up the manual or jazzing up the packaging “at no extra cost” might be a dealmaker. I have seen an order turned around by a supplier offering to package the product in a form that was conveniently used by the customer to ship direct to their distributors.

Fred worries they can’t afford to add any new features: “How can we look special without substantial investment?”

Mary: “We will be their fall-back alternative.”

Sally: “We talked about adding the packaging at no extra cost.”

In today’s market, specifications and features aren’t the only criteria for selection. More often than not Mary has had more success offering the customer a weak product with strong product support than with a good product and poor support.

In Mary’s mind small companies do not have to have it all. Buyers wouldn’t even be talking to Growco if they didn’t want them to be a part of it. The key is to search for a positive sales pitch that can give buyers a degree of comfort when defending their supplier selection decision to their bosses.

Buyers can take the seemingly safe route by going with a “big” supplier, but that solution can be painful now. There was a time when it was said that purchasing personnel wouldn’t be fired by going with an IBM image and size company. Fortunately, purchasing people today face a real risk of termination if they do NOT consider a company other than IBM.

Mary Marketing and Sally Sales, old pros that they are, have been doing all this for years. They know that much of marketing is based on perception. In dealing with customers, “What you see is what you get” must be influenced by “What you perceive is what you buy.” The ability to “sell what you have” is the mark of a strong marketing and sales function. Competing on a features-only basis and a one-to-one measure can lead to many defeats against a stronger or bigger competitor.

No matter what your competitive position in the market, you can always find positive attributes to pitch and sell. The trick is to get the customer to perceive there are other factors that you can bring to their needs.

Fred Founder is always pleasantly surprised when Mary and Sally bring home a winner from what Fred considered a lost situation. It’s like he throws them a punch line, and they turn that into a sound and winning strategy. For instance, in recent activities, Growco won four contracts against strong competition. After assessing all the inputs, he voices his concerns or worries and throws out the cue:

Fred worries: “But we’re such a small company!”

Sally replies: “We’ll pitch the ‘personal’ touch.”

A small company can stress the personal touch against a much bigger competitor. Being able to put all your top management in a room with the key customer personnel can give the customer a level of comfort not usually available from a large-tiered company. The customer, facing all the key decision-makers in your small company, can overcome the idea that he or she is facing the often illusive “they” encountered in big companies. Beating on a regional sales manager, when necessary in a big company, can be diluted by the time it reaches the top, if the complaint or request ever gets there. Being able to pick up the phone or send an e-mail memo to a top manager in a small company can get instant response.

Fred worries about the limitations in the design: “It has fewer features?”

Mary: “We designed for cost and simplicity”.

Fewer features can weaken a competitive situation, therefore all the bells and whistles of the competitor must be exposed. If the total capability of a software program is never utilized, all the features may not be needed. In many cases, the less complex approach can be more user-friendly, and your product can be pitched as having been directed to meet their needs. Sally’s favorite retort in this situation is, “And all the extra sizzle isn’t really needed.”

Fred worries about the bottom line: “There’s no more ‘give’ on our side!”

Mary: We sell a complete package.

It may be difficult to overcome a competitor’s lower price, or costly features that time will not allow to be added. In this situation modest features such as dressing up the manual or jazzing up the packaging “at no extra cost” might be a dealmaker. I have seen an order turned around by a supplier offering to package the product in a form that was conveniently used by the customer to ship direct to their distributors.

Fred worries they can’t afford to add any new features: “How can we look special without substantial investment?”

Mary: “We will be their fall-back alternative.”

Sally: “We talked about adding the packaging at no extra cost.”

In today’s market, specifications and features aren’t the only criteria for selection. More often than not Mary has had more success offering the customer a weak product with strong product support than with a good product and poor support.

In Mary’s mind small companies do not have to have it all. Buyers wouldn’t even be talking to Growco if they didn’t want them to be a part of it. The key is to search for a positive sales pitch that can give buyers a degree of comfort when defending their supplier selection decision to their bosses.

Buyers can take the seemingly safe route by going with a “big” supplier, but that solution can be painful now. There was a time when it was said that purchasing personnel wouldn’t be fired by going with an IBM image and size company. Fortunately, purchasing people today face a real risk of termination if they do NOT consider a company other than IBM.

Mary Marketing and Sally Sales, old pros that they are, have been doing all this for years. They know that much of marketing is based on perception. In dealing with customers, “What you see is what you get” must be influenced by “What you perceive is what you buy.” The ability to “sell what you have” is the mark of a strong marketing and sales function. Competing on a features-only basis and a one-to-one measure can lead to many defeats against a stronger or bigger competitor.

No matter what your competitive position in the market, you can always find positive attributes to pitch and sell. The trick is to get the customer to perceive there are other factors that you can bring to their needs.

YOU AND YOUR CUSTOMER:
INNOVATE OR DIE

Turning a negative into a positive, or after a disaster with a customer there is only one place to go-up.

A turnaround is called for when a company is in bad operating condition and usually deep into a negative cash flow. During one period in my career, I had several turnaround assignments and actually got good at it. My two most important do’s and don’ts are:

· Do change the culture (and top people) as fast as you can

· Look for negative customer situations to improve and build up.

The Culture Shift

Many times in professional sports when one of my favorite stars is traded away from a team in trouble I have learned that maybe management knew what they were doing, and I shouldn’t be upset. After all, if they weren’t winning with the guy, how much worse could it get?

I believe that the people who got you into deep trouble are very unlikely to get you out of it. Whether it’s a bad marriage or a bad company, it takes just as long to get out of it as it took to get into it because the same people are involved. Many bad marriages can’t be repaired because neither side wants to work that hard to straighten it out. The same is true of a bad company. Sometimes a trauma, like a sick child, might expedite the turn around situation in a marriage. In a similar way firing the staff responsible for the mess is the quickest way to save the company.

Turning negatives to positives.

I became a major part of the near-term strategy to success when I was put into a printed circuit division of a multi-billion dollar corporation. To protect the names, let’s call it Trouble, Inc. Deliveries were very poor and quality was marginal at best. To make matters worse, management personnel ignored calls for help from the customers, because they were afraid it was another complaint. I was in Sam Seller’s office when a call came in from a very irate Fortune 1000 customer. Their potential sales were $2 million dollars a year. This wasn’t too shabby for a company running around $10 million per year. Sam didn’t want to pick up the call so I grabbed it, and introduced myself as the new general manager. That was about all I got out of my mouth. The guy on the other end bitched, screamed and threw in a few curses insulting my heritage.

This wasn’t the first irate customer call, and I had started timing them. This customer broke the record, going a fraction over 42 minutes. Sam watched closely to observe my reaction to all this. But he was surprised when the call was over and my reaction was, “What a great call!” He couldn’t understand my conclusion until I explained it.

“Sam,” I said, “this is a great opportunity because the guy loves us and more important, needs us.” He was stunned and thought that maybe the pressure was affecting my brain. I went on, “If he wanted us to go away, he could have done that in 10 seconds.”

As it turned out, I was correct; after several visits back and forth and performance improvements, they became the $2 million customer we had hoped for.

Challenge Creates Opportunities.

The reason companies exist is to service customers. In head-to-head competition, it helps to find some needs or services that go beyond the customer ‘s bid package, a strategy that provides a chance to pull away from the pack. Sure, you can say it is a challenge to beat the price and delivery, but this advantage could be wiped out in a push and pull negotiation with an astute buyer.

When computer customers were just buying “the box” (a complete hardware system), it was tough to overcome competitors that had the best delivery, price and performance matching criteria. In fact, the better features and performance of the “box” were the main tactics to pitch. The best approach we could offer was to dwell on the cost of ownership. It wasn’t just the original cost, but the maintenance cost, the cost of enhancements and spares and the ongoing support. At times it worked, but most purchasing personnel were attached to the price of the “box.”

But now we have evolved to a new customer mentality. A great performing “box” no longer enthralls customers. Instead, customers today want solutions. To them, the “box” now is just part of the solution. They are looking for solutions to improve their competitive situation, their bottom line and their ability to speed up time to market. Fortunately, this paradigm shift allows creative, agile companies a chance to excel by finding a challenge and performing to meet it.

I came across a company that took service to the ultimate and at last glance passed the $40 million revenue level in less than five years. Company Services, Inc. supplies drill bits to printed circuit board (PCB) manufacturers. Part of the process for making printed circuit boards was drilling holes, millions of them each year. The holes required great precision and drill bits were made of carbon or steel. It wasn’t unusual for a good size PCB company to accumulate several hundred thousand dollars in new and used drill bits in inventory. Most companies re-sharpened the bits, and because of a lack of expertise in measuring equipment, they were never quite sure how many times they could re-sharpen a bit. This often created poor quality.

In addition, the PCB business was notorious for poor service; most companies thrived on past due performance. It seemed every so often printed circuit board manufacturers would lose the process recipe and forget how to make quality boards. Poor quality control of bits was also part of the problem.

Company Services, Inc. set out to provide excellent service and took upon itself a unique challenge. They realized their drill bits were probably no better than the competition so they chose a different path to excellence. They provided the re-sharpening expertise to the PCB manufacturers, and were willing to take over the responsibility for the used bit inventory.

Taking over the inventory control of drill bits provided a tremendous service to PCB manufacturers. It reduced their inventory, extended the life of drill bits, improved cash flow and provided inventory control of a major segment of their business. Although Company Services, Inc. was selling new bits and re-sharpened bits as a product line, by extending the life of a drill bit for their customers, they were, in fact, competing with themselves. They became supplier, repairer and financier. And to top it off, they provided great turn-around time for new and re-sharpened bits by setting up service facilities closer to the customers around the world. Company Services, Inc. found a very successful formula-creativity and originality in an industry that seldom has process or technology changes.

When the customer needs help

Fred Founder built a very successful company by doing a good job satisfying customers. Long before quality programs like TQM and ISO9000 became prominent, he believed that exceeding a customer’s expectations was the way to go. He had a very simple, balanced approach to the customer. When asked what major criteria he believed as his Customer’s Creed, he would reply:

1. Quality is meeting a customer’s needs and exceeding expectations-within reason.

2. When problems face me, I assume I am wrong and I work hard to prove it. When I can’t, I know I was right!

3. If a problem develops with a customer, it’s not he has a problem, but WE have a problem.

4. Either allow a customer to specify the components in the system or to specify system specifications, but he can’t have both!

5. When trouble rears its ugly head, start immediately to build a file.

6. If you ship a customer a product he can’t use, you both lose; so take it back even if it met specs, and solve the “WE Problem.”

7. It’s always your price, my terms; your terms, my price.

DEALING WITH MR. BIG

The first thing the management of a small company must understand about dealing with a big customer is that there is a huge difference in their respective cultures. And if it is a first-time experience, there is no way for Mr. Small, the supplier, to know what lies ahead.

Paula President had been steadily growing her company, Smallco, struggling to overcome and absorb the modest cultural change. Paula’s plan was to make positive step functions in revenue growth by seeking the big customers in her market.

Paula had come close with some opportunities only to be turned down. She didn’t know that Mr. Big believed the risk was too high to deal with a small company. Billy Buyer, the decision-maker in this case, would be held personally liable if he gambled on a small company and it fell flat on its face. It was far safer for him to choose another big company supplier, knowing he could always get problems resolved, even if he had to go to their top management.

There is also a matter of economics with Paula’s company. Big customers find it hard to believe that Paula can double the annual revenue without pain to her company and them. Many big companies do not want to be in a position where they dominate the resources of a small company. They don’t want the pressure of being so important that it could influence the small company’s decision-making. They are also don’t want to be responsible for any adverse impact on the small company’s destiny, not to mention a legal suit.

The fact that the small supplier has the best solution, including technology and delivery date, doesn’t always influence the buying decision.

Mr. Big will likely ask:

“Is it possible to get all the extra people in place in time to meet the initial build-up and ultimate shipping rate?”

“Will Smallco have the financial resources to fund the added resources?”

And most important, “If Paula is the driving force and the program stumbles, then whom can Mr. Big turn to for help and resolution?”

And worse yet, “What if something happens to Paula?”

Paula and her Smallco staff are in for other surprises. Even though Paula has been building infrastructure and adding new people resources along the way, she will find she is light years behind how big companies operate. First off, several people will hit her like an avalanche, all wanting immediate information. She will have to learn the difference between data and information. What she and her engineers had passed on to their new big client as information is really only data. Suddenly Paula’s people will be asked to generate reports they had never even heard of. Mr. Big’s employees, will call and talk to anyone in the company to get the information they want, which they will invariably need immediately. Both verbal and documented reports will be needed on an overwhelming basis, keeping email files filled, the telephone ringing and faxes and copiers running constantly. Paula will find herself and staff being out numbered in all meetings and feel that she and her team need to circle the wagons.

Paula and her staff will only get it right when they finally understand that raw data, the figures that show that product X meets its specifications, has nothing to do with information. When it comes to selling to Mr. Big, nothing is obvious. Data needs explanation and processing and analysis. What does the data show? How does it apply in Mr. Big’s situation? Information provides answers to questions that Mr. Big needs to make full use of the product.

Then, to make matters worse, no matter how hard everyone tries, Mr. Big will settle for nothing less than a program manager to deal with. And guess what? Paula’s other duties will suffer. She will come to realize that being a program manager will mean being on line 24 hours a day/seven days a week. Her E-mail will be filled up daily. Her family will come to know the names of Mr. Big’s team as well as they know their relatives. And it will get worse when the product is ready to ship. Mr. Big will impose all kinds of qualification tests previously unknown to her. Engineers and test technicians will overwhelm Paula like the Slime Creatures from Outer Space.

So is it worth it?

Paula will find that even with suppressed margins, the size of the revenue will provide margin and profit far beyond the past levels. This will help keep her sane, but she must be careful not to lose her head in using the extra margin (and the added capital now available) for building unneeded resources or chasing an ill-founded dream.

Here are some handy tips on how to avoid the pitfalls (and there are many) that can help land the big customer order while preventing small company oblivion during the contract. or even more importantly, after Mr. Big goes away.

Get an attorney involved.

Most partners are optimistic when approaching a new relationship. Both sides believe it will be successful, or why even consider doing it? That is noble, but also naïve. Conditions change, business environments change, and most importantly, the players on both sides change. With new players the original intent of the agreement gets lost, particularly if there is stress created by problems with performance on either side.

A lawyer is great for adding the what ifs, like: What if the customer doesn’t pay on time?

I was with a company doing $5 million in revenue, and we got an order for $5 million to ship over one year. With the rapid build-up, the account receivables grew to $1 million, but the customer was extremely slow in paying That created a tremendous stress for our firm, the supplier. Sure you can shut them off if they don’t pay. But would you?

Two more examples-of many problems-that can develop:

1. What if the customer doesn’t release the commitment schedule in a timely fashion?

2. Do you buy inventory on the come to meet the forecasted schedule?

An attorney will be more likely to bring up “what if” on an unemotional, objective basis. If the “what ifs” can be defined, likely solutions will be added to the agreement. Minutes from meetings should be documented and signed (or acknowledged) by both sides as the negotiations progress.

As good as they can be for oversight, lawyers need limits too. It is amazing how well-intended agreements can become confusing and masked in the never-ending paragraphs of a legal document. Once you have worked out the what ifs with your attorney and settled all the issues with your customer, you both should sign a Letter of Intent, before turning the attorneys loose on the contract. The original letter of intent, can on occasion, be a strong point in a legal dispute.

Be sure cash flow is covered throughout the entire program.

Initially Paula was ecstatic when her company received $200,000 up front. She did not realize this would fall far short of her needs. The cost of goods (COG) for $400,000 a month revenue was 65 percent ( $240,000). In the initial build-up, with changes, stops and starts, it was necessary to have two months of shipments in process at the cost level. At that point, Mr. Big was into Smallco for $500,000, which meant that Smallco was funding Mr. Big’s growth and a new product.

The choice: always fight for enough cash to cover the peak during the entire program, or walk away from it.

Avoid penalties for scheduled performance.

You may find that the terms and conditions in all contracts by Mr. Big contain penalty clauses, particularly for late deliveries. In reality, there are just too many unknowns to guarantee performance.

The answer? If possible, reject such penalties. Define the contract to the nth degree to help prevent a stumble, or preferably ask for an incentive if you beat schedule or performance. Often asking for an incentive gets the penalty requirement dropped.

Avoid giving up the jewels if you stumble.

Again, Mr. Big will have well thought-out clauses to cover any hiccup or stumble you make. The penalty might include taking over the technology or the manufacturing. This is unfair, but many small companies give in because of the big potential rewards for taking the contract.

The answer? Try to get it rejected, or at least define the conditions in detail to minimize the need for it to happen.

Smallco’s president should prepare to play program manager.

Mr. Big will push to have a program manager-someone who has the power to make things happen and will be in constant touch. That person will most likely be the No. 1 person in the small company. The contacts will be relentless and the time demand all-consuming. In this situation Paula will still have to cover all the normal duties in running the company for an extended period. Paula can appoint someone, but Mr. Big will always get back to her, the president, if a commitment is needed.

Make sure you have a champion on the inside.

Even though you were selected, there are people at Mr. Big who wanted it to go a different way. And they won’t give up. They will look for every opportunity to criticize you and keep pushing their alternative. If the decision was to forego doing it inside but to go outside, the battle will never end. Also, no news is not necessarily good news. Silence from the customer doesn’t mean you are doing a good job. The adversarial wheels keep turning against you.

The answer: Stay close to the champion who picked you. Be alert that turnover in big companies is high, so try to cultivate others to keep you informed.

Keep attention focused on your company. Offering a price reduction periodically can help. At least communicate with Mr. Big. Give them updates, perhaps in newsletter fashion, of how the company is doing. Do not be shy in letting Mr. Big’s top management know all the good you are doing for them.

Get the customer to write the contract.

This can help if there is a dispute and the wording is not clear. In a dispute, an arbitrator or judge will feel that if Mr. Big had the chance to better define his intent and didn’t do it clearly, then Smallco is in the right. It gives a better chance for the judge to favor small David over big Goliath.

From a realistic viewpoint, it saves significant lawyer fees for writing the contract. These fees are better spent having your lawyer look for ways to modify the contract to protect you. And who knows, Mr. Big may have worded some things in your favor that you might not have tried for.

Force a single communication channel.

Someone should be appointed to corral all the inquiries and information from Mr. Big. If there are multi-channels of communications, the organization will be swamped and everyone will be driven into the ground.

Mr. Big’s people may balk at first about going through one channel, but will eventually recognize it is more efficient in getting them answers and priorities. Most importantly, it keeps track of all the communications between the companies, and will prevent surprises that someone without authority agreed to under pressure.

E-mail makes it difficult because it is so easy for parallel communications. The person responsible should get copies of all e-mail going in either direction.

Keep a close eye on Mr. Big’s marketing position.

Staying on top of Mr. Big’s success will help Paula make decisions that depend on the contract continuing. Because the order from Mr. Big dominates Smallco, the future of Mr. Big becomes more important to the destiny of Smallco. A good gauge of Big’s future is market positioning. Any hiccups by Mr. Big or new competitive pressure will snake its way back to Smallco and have a heavy adverse impact.

Know Mr. Big’s product.

This follows closely after staying close to Mr. Big’s market. If technology changes or new competitors join the market field, you must be prepared for all contingencies. You must anticipate surprises even before they reach Mr. Big. The total situation probably is far more important to you since it represents a larger part(a third or more) of your firm’s revenue and profit. For Mr. Big it could be less than 5 percent.

On the plus side, the better you understand Mr. Big’s needs the better chance you have to offer product improvements. This would go a long way towards extending the relationship. Try to develop a partnership mentality. After all, Mr. Big came to you for help. Working closely also allows you to monitor Mr. Big’s position in the marketplace.

Have strong cancellation charges.

It is very likely when Mr. Big decides to terminate the contract it will be before the designated time stipulated in the original plan. The big company’s hopes and intentions were honest, but the market is so dynamic it dictates fast, often unwanted changes.

The aftermath of programs that end abruptly can be devastating to a small company. Falling from such a high cliff will result in excess people standing around, materials seemingly coming out of the walls and financial commitments that need to be satisfied. I have seen many small companies negatively impacted by writing off inventory left over from programs long gone. This is another good reason to have a good lawyer up front, to help minimize the negative impact on your small company when the termination ax falls.

On the positive side, if the product does require continual support and maintenance, you could be in position to help Mr. Big support the installed base.

Avoid customer-supplied material.

Being forced to use customer-supplied material can be a real determinant for you to perform to the contract. In fact, if there is a requirement for Mr. Big to supply only one part or component, all attempts at penalties for performance should be flatly rejected.

Here is a recent example of a client trying to ship material at a customer’s extremely ambitious schedule:

The customer’s supply of one plastic part was late, and when it did arrive initial quality problems existed. Smallco suffered from this inefficiency. Manufacturing output was irregular, deliveries were delayed and cash flow became a real problem. All because of one part. To pour salt on the wound, Mr. Big forced them to tight margins, and was a very poor payer. Paula could only wonder why she took the job at all, and how much better off they would have been without it.

Protect the golden goose.

With all the added margin and profit flowing in from the big contract, companies like Smallco tend to put all of their eggs into the big basket and abandon their core competencies.

I once worked with a small company, Maintenance, Inc, experts in testing, debugging and repairing memory for computer companies and their users. It won a development contract from a large computer company for designing and building a new test system. However, it became so consumed in the new program it neglected its bread and butter business. As Mr. Big’s price pressures mounted it reduced the level of its testing business to stay competitive.

Bam! Maintenance, Inc.’s manufacturing business was canceled, it found it very difficult to reconstruct its lost business, and the company soon drifted away.

With new big contracts, try to find a way to isolate them from the core business. It will certainly lessen the impact when it ends.

Support Mr. Big when he decides to do it himself.

When Mr. Big decides to take over the manufacturing, accept the decision. Instead of fighting it, give it your full cooperation. You can’t stop it so be overly cooperative and supportive.

With a healthy attitude, Mr. Big will plan an orderly transition, and you may find that some part of the need will go on for an extended period. Mr. Big will probably pay for technical and transition support. There is always a chance Mr. Big will continue to maintain a back-up source with you at a modest level.

Build a file of relevant documents.

Don’t trust you memory about past discussions. Record all comments. Anything can be the key to winning a disagreement. Keep in mind that Mr. Big can muster all kinds of resources to win a dispute. To avoid misinterpretation when trouble occurs, make sure all responses are documented and document all agreements along the way.

Grab the opportunity.

Don’t turn down big opportunities. Grasp them while you can, but be prepared to maximize the opportunity without leaving a crater when it ends. Use it to position yourself for the future and to help build the foundation for your true vision and mission.

Finally!

Treat the arrangement like a honeymoon-enjoy it while you can, but know it will end.

NEGOTIATING

Not everyone is a born negotiator. Here are some basic ways to create the proper mindset for entering into a sales negotiation.

Use the Good Guy/Bad Guy Approach.

Negotiating can be a stressful event and all issues must be put on the table, even if they irritate the other side. Having a good guy to balance the bad guy can be quite effective in getting an agreement.

If more than one person is participating from your side you can play roles. Someone like Mary Marketing can play the “bad guy,” by presenting everything the company wants and challenging everything the customer wants. On the other hand, the customer needs someone to understand his or her reactions and feelings about the entire negotiation, and Sally Sales can be the “good guy” working the customer issues, but avoiding confrontations or asking for sticky points that might irritate the customer.

The worst thing to do is to send the top decision-maker to open up a negotiation. With Fred Founder on hand, there can be no recourse to change agreements reached in negotiation sessions and, more importantly, it lessens the chances to go off and think about it. Number-one is needed in case agreements are made emotionally or too hastily under pressure.

The board of directors can also play the bad guy role. The negotiator can agree to things to keep the activity rolling along with a caveat that she must still get board approval.

Don’t give a lower price without getting something for it.

Pricing pressure from the buyer to gets lower prices upon request will encourage Bill Buyer to keep pressing on to get even lower prices. In fact, if the buyer barks and gets a response, why should he stop trying to get even lower prices? The buyer cliché, “You’ll have to sharpen your pencil,” should not be met simply with lower prices. If it seems reasonable to give a lower price, something should be asked for in return. This can be in the form of a greater commitment, such as larger quantities, higher shipping rates or better payment terms. Keep in mind the buyer is trying to use all the competitors against each other in order to drive the price down. In fact, buyers like Bill who take multiple proposals may drop the lowest bidder from consideration but will use the low numbers to get what he wants from the other bidders.

Let the other side define the language first.

It’s not a bad idea to get the other side to spell out just what it is they want. Once you understand their position, you can be more flexible and try to match your needs to theirs. It helps to have them define many points so that if there is a dispute later and your point seems logical, you might win because their wording is considered unclear. The issue would be, “if you wanted that interpretation why wasn’t the wording clearly defined?”

When negotiating never be the first one to name a price; it can only lock you into a poor position. Their counter offer will only go in the wrong direction.

Your price, my terms or your terms, my price.

More often than not, there will be a downward pressure on pricing, but be wary about giving up all the terms in the contract. Get one or the other: price or terms. If the pressure from the customer is absolutely to get the best price, then he should be willing to make concessions for you on all other issues. For instance, Ed Engineer was pressed for a low price by a client who wanted a development contract for an engineering product. Normally the client owns the design rights when he pays for the development. In this case, Ed agreed to the low price, but in return he got paid up front and got to keep the intellectual rights to the product.

After giving up on two consecutive issues, step back and review your starting position.

Take a break after a long discussion in which you believe you have conceded the issue. In long and hard negotiations with many issues to resolve, giving in on them one at a time may seem like taking reasonable incremental steps toward a worthwhile goal , but if you were to sum them up from your starting position, you would be amazed at all you have given up for very little in return.

Don’t negotiate with yourself.

I have found that some people who are really excited with the potential deal can start negotiating with themselves. After presenting an offer and getting no response, they offer an even better one before the customer has had a chance to respond. I have even seen a salesperson offer a better deal after the customer just cleared his throat. It always pays to be a good listener and observer of body language. Wait it out, watch and listen. Silence on your end can be your best tool.

If two sides want to deal, they should lock themselves up until they reach an agreement.

There are times when both sides really want to work together to reach an agreement. If it’s possible for the two primary decision-makers to meet (provided they honestly want to make a deal) then they should get together without the army of supporters.

Fred Founder has done this many times: First, in two columns, he and the client list what each wants that are clearly “deal breakers”-issues that must get resolved without compromise. Fred then suggests that just the two of them lock themselves up until they come out in agreement. It usually works.

Reach a signed agreement of intent before giving it to a lawyer.

Keep the lawyers from defining your business intentions. This prevents the deal from breaking down and everyone going away angry and frustrated. Fred has learned the hard way that after reaching a friendly agreement with a client, the lawyers can screw up the contract so badly that some customers go away mad. Fred first tries hard to get the intent of the agreement resolved with his customer. Then, when possible, he and the customer explain their intentions to the both side’s lawyers in the same meeting. Whenever problems in the contract arise and the lawyers from opposite sides disagree, Fred always asks his client to go back to the original agreement of intent.

Unfortunately a large percentage of agreements do sour, so do engage lawyers. Many people define agreements based only on success. This is far too general and optimistic. Stuff always happens. The lawyers will be very good at defining the “what ifs.” “What if the program fails?” “What if you don’t do your commitment on time?”

Win/Win Situations.

Markets are moving towards situation where both sides win. The challenge to see who can come out on top is being replaced by how a deal can be structured where both sides can win. Today, I see more and more customer/supplier alliances that result in success.

Approach negotiations as a collaboration rather than as how to screw the other side?

I believe Confucius may have said it first, “A good contract is where both sides walk away from the negotiations smiling.”

PRICING IS AN ART

Fixed formula pricing is swayed by market conditions and changing product mixes that strain all formulas. It’s great to build pricing formulas; but in today’s market with smaller runs, more customization and increasing competition, the formulas become more of a guideline for pricing than a rule. I have seen situations where marketing personnel swear they have bid everything based on the formula to yield 20 percent bottom-line profit. Seldom are these kinds of margins in the results, and bottom lines too close to zero can occur if the environment is different from that used in the formula.

Pricing has to be based on several elements, including:

· Fixed and support costs

· Direct costs

· Profit objectives

· The sales channel

· Product mix

· Market competition prices (very important)

· Gut feelings.

When the goal is to sell the value of the product and service and to gain higher prices than the competitors, pricing based on costs alone may lessen the chance for higher prices and margins.

Back in the dark ages only two channels existed: OEM and end-user. Either you sold products to Original Equipment Manufacturers to be incorporated in their equipment or you sold to the user. Because of the higher marketing costs and customer support, end-user prices had to be higher than OEM pricing. There was far less risk in selling to the OEM.

Today there are numerous sales channels:

· End-user

· Reseller

· Distributor

· Corporate America

· Mail order

· Bundling Partner

· The Internet and E-Commerce

On the Internet there are even bold activities that give away the product-shareware software and even PCs-or services-data storage or information retrieval- for free. Of course, suppliers are hoping for advertising dollars or follow up transactions and service income. But before any pricing exercise, it is extremely important to understand the cost of building the product or service, and all supporting costs should be covered before quoting the price to the customer. To support this, the product mix and utilization of resources must be understood, since they will strongly effect profitable pricing.

In small companies and startups, it’s possible early on to build to order, but as the company grows and competition increases, the risks become higher. Initially profit is measured by the “goesinnas” (payments) exceeding the “goesoutas” (expenses and cost of the product.) However, to be competitive, features and product lead-time deliveries need to be added on the come. This means providing reserves for inventory and bad debt write-off-the willingness to take higher risks.

Marketing needs to be cognizant of all of these changes and to price products and services accordingly. Be wary of just using formulas for pricing. Be extremely aware of the necessary internal costs that support the market in which you are selling.

Pricing Your Company Out of Business*

Moving from being an OEM supplier to selling commodity products can be dangerous and risky. Not only are the market requirements far different, but the additional infrastructure can be extensive and costly.

When customers buy your product wholesale to incorporate into theirs, you are spared such heavy costs as:

· Market Research

· Training

· Advertising and promotion

· Customer service and perhaps field maintenance

· Volatile pricing

When your product becomes a commodity and you face more competition, price reductions can be devastating.* Continual pressure from competitors will always push the price of a product down. However, of all the possible strategies for dealing with these competitive pressures, lowering prices is one of the most dangerous. While the competition in the market ultimately sets prices, you must completely understand pricing structures to ensure that the sales levels, the prices and the profit margins will cover all the supporting costs.

Definitions and Terminology

To begin with, we must understand the cost factors and elements that go into pricing formulas.

Direct Costs include all the labor and materials devoted to manufacturing the product. They do not include manufacturing support and general operating expenses. This is sometimes referred to as the Cost Of Goods Sold, or COGS.

Operating Expenses are all the costs associated with running the company; however, this does not include direct manufacturing costs. Operating expenses do include manufacturing overhead, sales and marketing, engineering, and general and administrative expenses. When “labor in place” (the core manufacturing personnel) is included this is sometimes referred to as the “nut.”

Sales Dollars are defined as the total income from sales. This can be expressed as the number of units sold times the price per unit.

In this exercise, the Gross Margin will be defined as the percentage of sales dollars left over after taking care of direct costs. The gross margin must cover both operating expenses and profit. The gross margin percentage is calculated by dividing the gross margin dollars by the total sales dollars.

The Break-Even Point is the price at which sales dollars cover all expenses but yield no profit.

The Profit Margin is the percentage of sales yielded as profit.

Determining Price — The Basics

The ideal pricing formula allows sales dollars to cover direct costs, operating expenses and the profit target. The basic sales equation must be:

Sales Dollars = Direct Costs + Operating Expenses + Profit

To make this equation useful for pricing, it must be restated as:

Sales Dollars (% of sales) = Direct Costs (% of sales) + Operating Expenses (% of sales) + Profit (% of sales)

When it comes time to set a price, you find yourself in a “chicken or egg” situation. You must decide what is to be determined first, the sales level or the operating expenses. Here, we will start by covering planned operating expenses.

For this example, assume that there are $60,000 in operating expenses either planned or in place. If our goal is a 10% profit margin, the sales dollars must cover:

Operating expenses = $60,000
Profit = (10% of sales dollars)
Direct Costs = ?
Sales Dollars = ?

Direct costs can be developed as a percentage of sales dollars. In our example, Manufacturing determines the direct costs per unit and Marketing determines the market price:

Direct Costs = $6,000 per unit
Market Price = $10,000 per unit

To find the gross margin, we figure the percentage of our direct costs in relation to the market price (per unit Sales Dollars):

$6,000 out of $10,000 or 60% of the sales price.

This leaves a 40% gross margin to cover operating expenses and profit.

The company must now be able to sell enough units so that 40% of the total sales dollars covers both costs and profit.

How many units are required?

If our profit margin is to be 10% of sales dollars, 30% of sales dollars are left to cover operating expenses (40% GM-10%PM = 30%OE). Since we know that the $60,000 operating expenses must now constitute 30% of the sales dollars, we can now calculate the total sales dollars required.

30% of Sales Dollars  = $60,000
or 0.3 x Sales Dollars = $60,000

This simple calculation shows what the total sales dollars must be:

Sales Dollars = $60,000 / 0.3 or $200,000

Now working backwards, we arrive at the following:

Direct Costs = 60% of Sales Dollars
or 0.6 x $200,000 = $120,000
Operating Expenses = 30% of Sales Dollars
or 0.3 x $200,000 = $60,000
Profit = 10% of Sales Dollars
or 0.1 x $200,000 = $20,000

Since Marketing has determined that the market price is $10,000 per unit, simple division shows that the company must sell a minimum of 20 units to reach the desired goal. When this is accomplished, sales dollars will cover direct costs, operating expenses, and profit; and everybody will live happily ever after!

Determining Prices — The Catch

Covering the gross margin is only part of the task. Unless you are bringing in sufficient real dollars, you are still not where you need to be.

Continuing with our example, if the sales department is able to sell the product at a gross margin of 50% instead of 40%, but sells fewer units, the real dollars will still not add up.

For 20 units, total sales would reach $140,000. With a 50% gross margin the actual dollars will equal $70,000, of which $60,000 must cover operating expenses. This leaves $10,000, or 7% of sales, to go to profit-well below the profit target.

However, there is an even more dangerous problem. Remember that competition forces prices down!

In our example, let’s say that sales wants a price cut of $2,500 per unit in order to be competitive. They claim that the market requires a price of $7,500. This would constitute a 25% price cut-not that uncommon in some market segments today.

Because operating expenses and direct costs remain the same, this price drop would decrease the total sales dollars for 20 units to $150,000, yielding not a profit, but a loss of $30,000, as shown below.

Sales Dollars – Operating Exp. – Direct Costs = Net Profit (Loss)
$150,000 – $60,000 – $120,000 = ($30,000)

If the 10% profit is required, then the shortfall is even greater. Sure the profit target is important, but in tough times, survival is more important until adjustments can be made and a recovery is possible. During periods of intense competition, you must be aware of the break-even point and maintain this last threshold until other adjustments can be made.

Since the operating expenses must be covered in real sales dollars, the smaller the gross margin, the more sales will be required. When direct costs ($6,000) are 80% of the market price ($7,500), the gross margin of 20% must cover the operating expenses and profit target. Just to meet the operating expenses ($60,000) sales would have to be $300,000, or double the original sales target. And there is still no profit!

This shows the tremendous impact of a 25% price reduction. If we just want to break even, we must sell 40 units at the new price. If we want to hit the10% profit, we must sell 80 units at the new price.

From a practical viewpoint, however, matters are much worse, because it is unlikely that the costs in place to support the manufacture of 20 units will be sufficient to support the manufacture of 40, much less 80! Therefore, operating expenses would increase, requiring even more units to be sold in order to cover it.

This is the danger of selling a commodity product in a highly competitive market. It becomes necessary to seek out other, more stable markets, or to find ways to add value and outstanding customer service in order to maintain a price advantage over the competition. The almost casual request from sales for a “competitive price change” has taken many a company with healthy sales and profit to disaster.

Don’t get on this toboggan!

REPLICATION IS NOT EASY
WITH HUMANS

Any good industrial engineer realizes that every new function takes time to learn. For the rest of us it is important to recognize that in high growth mode all planning must be sensitive to loading functions that involve new assignments and learning. Calculating loading in manufacturing is more easily measured, because the repetitive tasks can be timed and used as the criteria for planning. However, spreadsheets are dangerous for planning high growth rates. It takes a fraction of a second to put a formula in a cell, and then one step to replicate the numbers at some proportional rate to the revenue. It just doesn’t happen that easily with people.

Back in the days when GrowCo was heavily involved in high labor content, we went from under 100 direct labors to over 3000 in a few short years. There was a tendency to expect instant efficiency and people performing to “optimal standards” almost immediately. We got bit on this for a while but soon realized that it takes time to become efficient. Add this to a high turnover and we learned quickly that a big gap existed between our expectations and reality.

We did an analysis of plants in Hong Kong, Singapore and Taiwan, each chartered to grow to 500 direct labor employees as quickly as possible. Even though our average assembly operations were on an 85 percent learning curve (it took 85 percent of the previous operation time to double output), in the first year of operation of these start ups, we only had an efficiency of 33 percent. In effect, we produced 33 percent of the product we had hoped for.

The problem: continually adding new personnel to get to the 500 levels, was constantly dragging down the average efficiency. Of greater impact was the need to keep replacing the majority of people we had hired. The turnover was substantial and new replacements, who always start at the top of the curve, pulled the average efficiency down. What made matters worse was that many of the tasks for the indirect labor and support people (managers, accountants, clerks, etc.) were not repetitive, and the pressure of growth did not allow for training such people.

Once our manufacturing people got the hang of planning direct labor, we finally overcame the phenomena. But it took time.

It is a mistake to treat experience and knowledge with a learning-curve mentality. You can’t plan knowledge and experience. They can’t be converted into a learning curve. When people leave, they take their knowledge and experience with them. The new guy, no matter how intelligent, cannot bring in what you have lost.

One of Mary Marketing’s shortcomings was her naiveté when it came to growth and in her belief that people skills could be replicated by multiplication. Mary isn’t alone. Many founders and company leaders don’t seem to understand replication either.

Mary was selling for a printed circuit board company and, thanks mostly to Ed Engineering, the head of engineering, the company was on a great growth path. As the company grew, Mary was able to compound the success by adding new and larger customers to the backlog. For a while Ed was able to keep up with it. Then one day production seemed to break in half, and the output dropped dramatically even with all the same resources and number of people.

Mary told me her biggest surprise was that this happened despite Ed’s promotion to head of operations, responsible for engineering and manufacturing.

“That’s it!” I said.

“What’s it?” she said. “Ed was our superstar. I thought he would straighten those clowns out in manufacturing.”

“You cannot replicate superstars like some product,” I said.

Ed Engineering had been responsible for defining the process for each order. He would release $1.2 million in potential revenue a month. When he got promoted, he replaced himself with an engineer who had to strain to do $400,000 a month. Without the product released to the floor, manufacturing couldn’t produce the line of product to be sold. Even when Ed realized he had lower output and kept adding personnel, he had to add two rookies who took time to come up to reasonable levels. To make matters worse, the quality of the engineering output went down during the learning period. The result: past due deliveries stretched out and some customers even went away.

Unfortunately, this problem occurs in many business plans where increased output is covered by just duplicating personnel on paper. While you may come close calculating direct labor, it is very unlikely that such figures will be reliable in the support and management roles or in the service industry.

Founders lose sight of the course also. A founder may be seller, designer, strategist and chief bottle-washer in building the company, but he or she can’t solve every problem just by doubling the number of people. It is more difficult for a founder to understand this concept when she is very good at all she does.

It is the responsibility of senior management to recognize the difficulty of replicating itself on an one to one basis. Marketing people get in trouble by supporting forecasts for doubling sales by only doubling people on an instantaneous basis. Expecting sales to double by adding people or regions will get you in trouble. It takes time to develop a good sales team. Even if you find good people, there is always a certain time period needed for them to learn the company, the customer base and the products.

Today we have to deal more carefully with the human assets than we do with the financial or more tangible assets. Manpower planning should be an important part of any growth plan. The skills, experience and unique work habits of the stars on board must be understood. The trick then is to determine which of those elements must be replicated for success, and then how to plan to make it happen.

IT’S THE FIRST DRINK THAT KILLS YOU

In today’s world, with great emphasis on shortening product and service time to market, engineering performance is more critical than ever. In an industrial company, Marketing can go nowhere without Engineering. While Marketing can direct engineering in a mature company, it still depends heavily on engineering’s ability to perform. There is often a big mismatch between the departments when it comes to passion, urgency and customer sensitivity.

Here are some examples taken from my book Will The Real Inventory Please Stand Up and Be Counted that show the havoc engineering’s bad performance can bring on the financial health of a company:

In the normal course of business the engineering department plays a crucial role in controlling and optimizing the inventory. It all starts with a good design. The more complete and tested the design, the less likely changes will be necessary. Finalizing a design before creating a Bill of Material and going all out on production minimizes the possibility of filling inventory with parts and components that will go unused and have to be written off at year-end.

Setting Engineering Limits

I have seldom heard the words effectivity date coming from an engineer. The effectivity date of a component or part is the date by which the part or component can be used in manufacturing of the product. Mature companies establish formal guidelines defining the effectivity date in a way that ensures manufacturing will be prepared to make the change in its process.

Too often an engineer sitting in front of his PC, completely oblivious to the outside world, unilaterally sets the effectivity date. For engineers the date of change is immediate and does not allow input from manufacturing, purchasing, sales or accounting. When such changes are made new parts and components are substituted for the old ones in inventory, and the resulting scramble to make the change is usually very costly. As purchasing rushes to find the new parts before the sales department complains about delays, they inevitably incur expediting charges that send accounting through the roof.

Sure! At times there may be a defective or non-performing component that needs immediate replacement. Engineering is responsible for making changes to the product when dictated by performance quality, cost improvement or safety. However, there are shelves full of parts and components all over the world which are still usable and could have been phased out after depletion, except for that one design change.

Engineering must realize that manufacturing is its customer!

Don’t get me wrong; engineering departments play an extremely important role in any manufacturing company. The engineering perspective provides crucial input to the Material Review Board (MRB) by helping make quick decisions on the disposition of products and components. However, it does no one any good when engineering unilaterally makes decisions that delay getting designs into production and create pigeonholes that are classified “components to be disposed of” and “components for assemblies.”

Effectivity dates should be set by multi-departmental consensus, which always takes into account the existing stock of usable parts. Otherwise you will end up stockpiling enough obsolete parts to sink your company’s profit margin faster than the Titanic.

It is also engineering’s job — and rightly so — to select and qualify parts. But is should stop there. Engineering should never be left to negotiate prices and availability with vendors and suppliers. Vendors love to have engineers make a first buy before purchasing gets a chance to negotiate a fair price. And when engineers do buy, they buy too many parts, parts that have a high probability of being replaced in the near term. Parts like these live in limbo, like the unbaptized innocents. They are counted as part of the inventory time and time again, but are never moved out or used.

An interesting inventory report to run in a heavy engineering company is one in which all components are noted, and parts “not used on a Bill of Material (BOM) are listed. If a component or part does not exist on a BOM, it will never be used by manufacturing to build products.

In my experience, engineers are notorious for taking material out of inventory without recording the transaction or even without telling anyone in charge. I have known engineers who would climb over walls or squeeze into cages like mountain climbers or amateur magicians, just to get that part they happened to need right now.

Every delay in delivery reduces revenue.

A more subtle impact on inventory and finances is the delayed development program. The often-used cliché is true: it takes engineering 95% of the time to do the last 5% of the design. In order for a product release and launch plan to be successful, several related activities in sales, marketing, finance and manufacturing have to be planned and acted upon parallel to the engineering design effort. These are all keyed to the release date specified by engineering and any delay creates havoc in all areas, with a large negative impact on a company’s cash flow.

In order to meet schedules, manufacturing has to take a risk and commit to material purchases, which make material available, as it will be needed in the manufacturing process. The longer a design takes, the more likely parts will be changed or substituted, creating a pool of unneeded parts that will sit in inventory, and (no surprise now) eventually be written off.

Attitude

Team members who are only concentrating on their piece of the pie do not have the perspective to recognize the impact that delays have at the beginning of a program. Most programs build to a crescendo – the date of product release – and any delay in meeting that date is not only costly to the company financially, but hurts the company’s image in the marketplace.

What appears to be a modest slip in scheduling and milestone commitments at the beginning of a program can have a devastating effect on long-term outcome. Windows of opportunity for new product introductions are often fragile, so a manager must be sensitive enough to catch them when they open and address them with the priority and level of commitment they require. I have too often heard the unabashed excuse; “We will only be a month late…”

A one-month slip is like that first drink on a first date, it has tremendous impact on the big picture.

Tell me why I shouldn’t worry

Once, when I was a division manager, we had a purchase order from a Fortune 10 company. We would not have been considered eligible if we had not been a division of a multi-billion dollar corporation. Believe me, I got it from both sides. The customer wanted its deadlines met; the company wanted its reputation preserved. My staff was in complete disarray because of the pressure we all felt and its inexperience in dealing with companies of this magnitude.

I received a visit from the customer’s representative, who wanted to make sure that we had the right attitude and were giving a high priority to its purchase orders and needs. After everyone was seated, the first thing he wanted to know was: “Why shouldn’t I worry about you meeting the schedules for the first article and the subsequent production buildup?”

Surprising even myself, I remained very calm (I realized later I was able to remain calm because I was so underpaid I had very little to lose) and gave him my well thought-out answer.

“First, if we miss the dates, every day we are late will cause cost overruns, hurting our bottom line and cash availability. Also, if we miss dates, we tie up personnel resources that we need for other projects, hurting our chances for future success. Thirdly, if we fail, all hell will break loose at corporate headquarters. Finally, if we miss our revenue and profit forecasts it will affect our bonuses, and maybe even my job. So I assure you that I will be watching the program personally and as soon as I see a problem that could cause us to miss a major milestone, I will force my staff to find alternatives to make very sure our final schedule commitments are met.”

The man glared at me for what seemed a lifetime, and I was certain that he had interpreted my remarks in the worst possible way. However, when he finally replied, he told me he was very impressed with all my reasons. But it was my last one that had really hit home. He then made it clear that his people also were part of the team, and that if they could be part of any alternatives, I should call them.

What happened? We got the order, and although we hit several bumps in the road, in the spirit of cooperation we smoothed them out and performed to everyone’s satisfaction.

Timing and a sense of urgency are vital to new product introduction

I have worked with this idea in mind over the years, and I try to get it across to everyone I work with:

Missed schedules create extra costs and delay revenue streams. As a result, they delay profit and, most importantly, risk losing the customer and the product’s market window. Because keeping schedule commitments is so important, the management team must always have viable alternatives ready to implement on short notice, which will enable them to stay on schedule. It is like dominos; one bad program will knock down all the others.

Corporate confusion.

The way many companies tolerate missed commitments has always frustrated me. Unfortunately, big company environments are often more tolerant of such slippage than smaller companies can afford to be.

I once worked in a $400 million electronics component group in a multi-billion dollar company. Sales were centralized at the group level for all divisions. The sales department started off the budgeting process for the coming year by presenting its sales forecasts to the various divisions in September. Division budgets were due in October, but the divisions got squeezed between the sales forecasts on one side and the corporate revenue and ROI targets on the other, making it very difficult for the divisions to make ends meet. Not having direct control of sales forced the divisions to fit their plans for operating expenses between two walls, a sales forecast and corporate requirements. It was not just a squeeze in planning – corporate requirements restricted the manufacturing divisions and kept them from trying to do great things with their business.

They were caught between inflexible corporate goals for performances that were not compatible with revenue the centralized sales group could deliver.

Usually by the end of October, Group Sales would issue a revised forecast downward by as much as 17%. Of course, group level management would then hammer the divisions to reduce their budgeted expenses across the board, with some arbitrary percentage required to meet the consolidated corporate profit goal. The new sales forecast for the Electronics Group dropped over $60 million in sales and $5 million in profit. As you can imagine, this created severe morale problems since Group Sales was always let off the hook.

I saw division managers break down in tears when told to cut their budgets again and again, after having wrestled with them for weeks trying to get the first pass accepted.

The big company attitude toward the operating divisions, which had less control over the process, was “It’s their jobs to do what we tell them. We pay them enough to respond to the directions we give.”

You would think that management at the group level would have told Sales to find alternatives that would enable them to stick to their original commitment. Even if it required investments above the original budget, the overall results might still be improved upon, and with far less pain and risk.

From the very beginning, focus must be on setting goals and making commitments that will stick.

And then stick to them!

Anatomy of a Disaster: The Slippery Slope

Even short delays at the beginning of a program can hurt company programs and goals.

Table 1 shows the monthly projected revenue for a new product, NuPro, during the first year. In this case, the revenue equals the per unit price of $25,000 times the number of units. The revenue starts out slowly, and after a slight dip in months 3 and 4, picks up steam in the second half of the year. The total revenue forecast for the first year is 166 units, or $4,150,000.

Table 1: Original Revenue Projection for NuPro

Year 1
Month

Units Shipped

Percentage of Total

Revenue
in Dollars

by Month

Cumulative

by Month

Cumulative

1
2
3
4
5
6
7
8
9
10
11
12

2
4
1
1
4
6
8
12
18
26
36
48

2
6
7
8
12
18
26
38
56
82
118
166

0.01
0.02
0.01
0.01
0.02
0.04
0.05
0.07
0.11
0.16
0.22
0.29

0.01
0.03
0.04
0.05
0.07
0.11
0.16
0.23
0.34
0.39
0.71
1.00

50,000
100,000
25,000
25,000
100,000
150,000
200,000
300,000
450,000
650,000
900,000
1,200,000

Total

166

4,150,000

Table 2 shows a cash flow projection based on the monthly revenue forecast through the first year. The cash flow (column 9) turns positive in the eighth month, and the cumulative cash flow (column 10) reaches the break-even point in the twelfth month. Development expenses (column 2) drop each quarter as the product moves into production so technical resources can be available for other projects, which translates into future revenue, possibly even in the same fiscal year. Cash is required to cover inventory (column 3) starting in the first month as the bills for material needed for the first month’s shipment come due. Finally, manufacturing must anticipate the time when they need to take over and sustain product support, so there are sustaining engineering expenses (column 4) beginning in the first month of shipments.

Table 2: Original Cash Flow Projections for NuPro
(thousands of dollars)

Year 1
Month

Cash Out

Cash In

Net Cash

Devel.
Month

Inven.
Month

Sust.
Month

Total
Month.

Total
Cum.

Total
Month

Total
Cum.

Net
Month

Net
Cum.

1
2
3
4
5
6
7
8
9
10
11
12

30
30
30
20
20
20
10
10
10
5
5
5

20
40
10
10
40
60
80
120
180
260
360
480

10
10
10
10
10
10
10
10
10
10
10
10

60
80
50
40
70
90
100
140
200
275
375
495

60
140
190
230
300
390
490
630
830
1105
1480
1975

0
0
50
100
25
25
100
150
200
300
450
650

0
0
50
150
175
200
300
450
650
950
1400
2050

-60
-80
0
60
-45
-65
0
10
0
25
75
155

-60
-140
-140
-80
-125
-190
-190
-180
-180
-155
-80
75

Table 3 shows the gross margin contribution from the sale of NuPro. These figures justified the investment. With a Cost of Goods at 40% of revenue, the contribution after one year will be $2,490,000 (Revenue – COGS = Gross Margin). The company funding the program was willing to make the investment and take the risk because of the significant potential for an additional gross margin.

Table 3: Gross Margin Contribution (60%) from Sales

Year 1
Month

Units
by Month

Gross Margin
by Month

1
2
3
4
5
6
7
8
9
10
11
12

2
4
1
1
4
6
8
12
18
26
36
48

30,000
60,000
15,000
15,000
60,000
90,000
120,000
180,000
270,000
390,000
540,000
720,000

Total

166

2,490,000

The Slip: That First Drink

After signing a personal guarantee with the bank loan, Walt Whimple, a company president, should have been religious on cash management and meeting commitments. He had to work hard on having engineering join the club, which wasn’t easy for him. Sam Action, VP of Sales and Marketing, tried hard to get the message across but didn’t always have Walt’s support.

The Announcement

At a progress meeting, Ed Loosely, VP of engineering, casually announces that there will be a slight slip in the schedule and NuPro will not be released on schedule.

Sam Action raises a fuss when he hears this because the marketing window will be missed. Sam has been fighting for years to get management to commit to the product and is fearful that with a slip in schedule the competition will move out ahead and kill their market impact.

Paul Wimple, president, says, “Come on, Sam. This is the same old dialogue, and a little slip can be overcome by the team.”

Sam is about to bring up other examples of programs that have been hurt by the company by being late, but he figures he had better stick to the issue at hand. Besides, his neck is already out pretty far, over his last revisions to the sales forecasts. He also has payments on that BMW to keep up.

“Well, how long?” he asks.

“Only one to two months,” Ed Loosely replies.

Now Mike Response, VP of manufacturing, starts complaining that he has been spending money according to the original budget, and now he has inventory coming in, and this is going to make him look bad.

At that point, Paul, who cannot stand division in the ranks, jumps in and says, “Let’s go with Ed’s schedule. It really shouldn’t hurt that much, being only one or two months late.” Paul is even thinking to himself that he might not even mention it to the board, since it’s such an insignificant change.

Fred Numbers, VP of Finance, comforts Paul further by saying; “I could find ways to cover the potential impact on cash and profit.” He has a golf date with Paul for Friday afternoon.

The Reaction

Sam does not give up easily. Back in his office he begins to consider the impact on the original schedule. He calls up his friend in accounting, Andy Ledger, to do an analysis for him. The next day Andy comes back with some results that don’t surprise Sam, but sure will be news to Paul. The changes to the original schedule are shown in Tables 4, 5, and 6, which compare the first-year numbers of the slipped schedule with the original projections.

Table 4: Effect of a One-Month Slip on Revenue

Year One
Month

Units Shipped Monthly

Monthly Revenue

Original

Slipped

Original

Slipped

1
2
3
4
5
6
7
8
9
10
11
12

2
4
1
1
4
6
8
12
18
26
36
48

0
2
4
1
1
4
6
8
12
18
26
36

50,000
100,000
25,000
25,000
100,000
150,000
200,000
300,000
450,000
650,000
900,000
1,200,000

50,000
100,000
25,000
25,000
100,000
150,000
200,000
300,000
450,000
650,000
900,000

Total

166

118

4,150,000

2,950,000

Table 4: The units shipped the first year drop from 166 to 118. This 48-unit drop lowers the revenue projections from $4,150,000 to $2,950,000. A revenue reduction of $1,200,000!

Table 5: Effect on Cash Flow — One-Month Slip

Year One
Month

Cash Out

Cash In

Net Cash

Development

Total

Monthly

Cumulative

Orig.

Slip

Orig.

Slip

Orig.

Slip

Orig.

Slip

1
2
3
4
5
6
7
8
9
10
11
12

30
30
30
20
20
20
10
10
10
5
5
5

30
30
30
30
20
20
20
10
10
10
5
5

60
80
50
40
70
90
100
140
200
275
375
395

60
80
50
50
70
90
110
140
300
280
375
495

0
0
50
100
25
25
100
150
200
300
450
650

0
0
0
50
100
25
25
100
150
200
300
450

-60
-140
-140
-80
-125
-190
-190
-180
-180
-155
-8
75

-60
-140
-190
-190
-160
-225
-310
-350
-400
-480
-555
-600

Total

195

220

1975

2000

2050

1400

Table 5: The net cash for the year drops $675,000, from a positive $75,000 to a negative $600,000. Most of the impact comes from the fall-off in the last month’s shipments, which represents 29% of the shipments for the year.

Table 6: Gross Margin — One-Month Slip

Year One
Month

Units Shipped

Gross Margin Contribution

Original

Slipped

Original

Slipped

1
2
3
4
5
6
7
8
9
10
11
12

2
4
1
1
4
6
8
12
18
26
36
48

0
2
4
1
1
4
6
8
12
18
26
36

30,000
60,000
15,000
15,000
60,000
90,000
120,000
180,000
270,000
390,000
540,000
720,000

0
30,000
60,000
15,000
15,000
60,000
90,000
120,000
180,000
270,000
390,000
540,000

Total

166

118

2,490,000

1,770,000

Table 6: Finally, Sam and Andy’s analysis reveal that the gross margin would drop from $2,490,000 to $1,770,000. Nearly three-quarters of a million dollars ($740,000)!

One Lump or Two?

Out of curiosity, Sam asks Andy to carry the analysis further and to look at a two-month slip. After all, when has Ed ever made even revised deadlines?

Tables 7, 8, and 9 show the impact of a two-month slip, which would extend the initial start-up schedule two months.

Table 7: Revenue — Two-Month Slip

Year One
Month

Units Shipped Monthly

Monthly Revenue

Original

1 Month
Slip

2 Month
Slip

Original

1 Month
Slip

2 Month
Slip

1
2
3
4
5
6
7
8
9
10
11
12

2
4
1
1
4
6
8
12
18
26
36
48

0
2
4
1
1
4
6
8
12
18
26
36

0
0
2
4
1
1
4
6
8
12
18
26

50,000
100,000
25,000
25,000
100,000
150,000
200,000
300,000
450,000
650,000
900,000
1,200,000

0
50,000
100,000
25,000
25,000
100,000
150,000
200,000
300,000
450,000
650,000
900,000

0
0
0,000
100,000
25,000
25,000
100,000
150,000
200,000
300,000
450,000
650,000

Total

166

118

82

4,150,000

2,950,000

2,050,000

Table 7: In the first year of a two-month slip, shipments drop by 84 units, from 166 to 82, and revenue drops by $2,100,000 from $4,150,000 to $2,050,000.

Table 8: Cash Flow — Two-Month Slip

Year
One
Month

Cash Out

Cash In

Net Cash

Development

Total

Monthly

Cumulative

Orig.

One
Mo.

Two
Mo.

Orig.

One
Mo.

Two
Mo.

Orig.

One
Mo.

Two
Mo.

Orig.

One
Mo.

Two
Mo.

1
2
3
4
5
6
7
8
9
10
11
12

30
30
30
20
20
20
10
10
10
5
5
5

30
30
30
30
20
20
20
10
10
10
5
5

30
30
30
30
30
20
20
20
10
10
10
5

60
80
50
40
790
90
100
140
200
275
375
395

60
80
50
50
70
90
110
140
200
280
375
495

60
80
50
50
80
90
110
150
200
280
380
495

0
0
50
100
25
25
100
150
200
300
450
6500

0
0
0
55
100
25
25
100
150
200
300
450

0
0
0
0
50
100
25
25
100
150
200
300

-60
-140
-140
-80
-125
-190
-190
-180
-180
-155
-80
75

-60
-140
-190
-190
-160
-225
-310
-350
-400
-480
-550
-600

-60
-140
-190
-240
-270
-260
-345
-470
-570
-700
-880
-1075

Total

195

220

245

1975

2000

2025

2050

1400

950

Table 8: Net cash for the year drops $1,150,000 from a positive $75,000 to a whopping negative ($1,075,000).

Table 9: Gross Margin — Two-Month Slip

Year One
Month

Units Shipped

Gross Margin Contirbution

Original

1 Mo. Slip

2 Mo. Slip

Original

1 Month Slip

2 Month Slip

1
2
3
4
5
6
7
8
9
10
11
12

2
4
1
1
4
6
8
12
1`8
26
36
48

0
2
4
1
1
4
6
8
12
18
26
36

9
0
2
4
1
1
4
6
8
12
18
26

30,000
60,000
15,000
15,000
50,000
90,000
120,000
180,000
270,000
390,000
540,000
720,000

0
30,000
60,000
15,000
15,000
60,000
90,000
120,000
180,000
270,000
390,000
540,000

0
0
30,000
60,000
15,000
15,000
60,000
90,000
120,000
180,000
279,000
390,000

Total

166

118

82

2,490,000

1,770,000

1,230,000

Table 9: The drop in gross margin tells the story in very dramatic terms – a decline of $1,260,000, from $2,490,000 to $1,230,000.

In the case of a two-month slip, the first-year projections for units, revenue and gross margin would drop more than half, and the net cash would go from a small positive number to a negative $1 million!

These substantial losses happen because the main revenue gains would have come at the end. In this case, the last two months represent 51% of the original revenue. In the new revenue forecast, the same period would only be 49% of the original projections, way down from the plan that was used to convince the board to make the investment in the first place.

The impact on profit will be substantial because of costs already in place. The projections assume that development engineering stays with the program until it is complete, while sustaining engineering stays poised to take over and inventory build-up follows the original plan. Sam knows that his sales department can’t accelerate sales orders because the whole program relies on NuPro being available for immediate delivery.

The Review

Based on the analysis both Andy and Sam realize that the two-month slip will kill the current year profits. Sam knows Paul will have a fit if he has to tell this to the board. Andy is so concerned that he asks Sam if he can take these results to his boss, Fred Numbers. Of course Sam agrees, because this is exactly what he wants.

After Fred reviews the analysis, he gets Paul to call an immediate staff meeting so he can present the results. After everyone is seated, Fred gets their attention by hitting them right across the face with the proverbial flounder. Showing them the numbers from Andy’s analysis, he summarizes the difficulties as follows:

“Revenue Down: This kills any growth plans we had for the year.”

“Gross Margin Down: This falls so low that it will force a staff reduction.”

“Profit Down: Kiss your bonus good-bye, and feel for Paul when he has to tell the Board.”

“Increased manufacturing and engineering expenses: Expenses will exceed budget and require actions that may end up hurting the company even more by draining people and resources away from other projects.”

“Development: New program development will be delayed, hurting future company performance. And worse yet, what about that initial public stock offer the board had planned to do at the end of the year?”

“Delayed indefinitely.”

“Why? Negative cash flow. Cash will fall far short of plan, which could force a private equity offering at give-away prices, diluting the value of the stock for the present shareholders.”

“All of this because engineering is going to be only one to two months late!”

Of course, Ed Loosley from engineering is the first to respond, “I don’t see why revenue schedules have to slip once the product is released, and anyway, why can’t such a cracker-jack organization as Sam’s make up the revenue in the following months?”

Paul nods in support, and calls on Sam to define actions and programs that will enable the company to catch-up once the product is available.

Sam is annoyed at Paul for not coming down on Ed hard enough. Instead of answering the question directly, he voices his frustration:

“First off, Ed, why did you wait so long to tell us the program would slip? You are the one who encouraged us to put costs and resources in place because you were so confident you could make the schedules, which were, by the way, your estimated dates, not mine. We’ve all busted our butts trying to make this thing a go based on your timetable. We are too far into this now. Any delay will give our competitors a big jump on us, and the majority of sales depend upon people not only having the NuPro in their hands, but into the customer’s hands without delay. How can we sell something we can’t deliver?

“And, it’s not just about sales. Look at the figures. With all the other pieces in place we can’t easily redirect them to overcome the problem you created. Your slip will cause a tremendous negative impact on the year, the year we were to shine both in the market and to the investment community. And I wouldn’t bet on just a one or two-month slip so expect it to get worse. It will be difficult to shift our employees and energy to overcome the slip unless we can help Ed find a way to recover his part before it is too late.”

At this point, Sam begins to pick up support from the rest of the staff, and Paul swings toward the consensus. Soon Ed is asked to come back in 24 hours with alternative plans for avoiding the schedule slip. The staff will then evaluate costs and risks as a group, and look at ways to help engineering meet their original commitment.

Graph 1

Graph 2

So what was the problem?

Ed’s technical mind needed to see the problem graphically. The big gap between shipments (Graph 1) made an impression on him, but the cash flow curves (Graph 2) heading in opposite directions cemented his support.

In a situation like this, you can be sure that whatever extra things the engineering department may need to do to make schedule commitments will be far more cost-effective in the long run than running the risk of losing all that revenue, profit and cash at the back end.

Growth requires intensity and a firm commitment to meeting goals, no matter how impossible they may seem. Certainly management cannot permit casual schedule changes. Letting engineering off, the way Paul tried to do, would have violated the principles that encourage rapid growth and set off a chain reaction of devastating losses and problems that would most likely have ruined the company.

Remember, it’s the first drink that kills you!

GOOD COLLECTIONS ALWAYS START WITH
A WELL-DEFINED PURCHASE ORDER

I have recommended to presidents that they take on the task of trying to collect overdue bills. I have done it myself with some interesting and rewarding results. First, seldom has a customer who did not want to pay his bill deliberately stiffed me. There are many times that the invoice, although mailed on the shipping date, won’t get paid because the customer believes the product has not been fully delivered. I often found that although the basic product had been shipped, bits and pieces, such as software, user manuals, cables and labels, were either missing or wrong. Another problem many companies are slow to learn is that the invoice and purchase order must be matched.

I had a client who would automatically add a restocking charge to invoices for returned power supplies that were tested and had no problem. Although the charge was nominal at $25 and a small part of the overall invoice, the customer was not paying any of the bills, and the total receivables added up to several hundred thousand dollars. This put my client in a severe cash problem. I was empowered to visit this Fortune 500 Company to resolve the issue.

I sat down with the accounts payable supervisor. The invoices from us and the purchase orders from them did not match, and therefore their system would not authorize the invoice to be paid. I saw the problem with the unauthorized charges, and eliminated them with a stroke of a pen. The customer cut a check before I left the building and I returned a hero.

I finally got Fred Founder to call some customer’s with overdue payments. In his dealing with customer’s payable personnel, he learned about problems that originated in his system, like poorly written internal orders, poor engineering release systems and problems at final quality checks. When the problems were corrected, invoices were paid and the accounts receivable aging improved considerably.

One major problem I still see in my travels is related to acceptance, or under what conditions a product is acceptable. It sounds simple, but I have seen equipment sit for days at a customer before they believe its okay and they start the payment cycle. Products shipped can meet the client specs, but there are times where no criteria exists for product acceptance test results. Without specifying the nature of tests it is difficult to prove that the product meets the specifications if the customer puts it in their equipment and tries to break it. Acceptance testing should be called out in detail and be compatible with the test equipment both at the vendor and customer sites. It does not have to be overly elaborate. Something simple can work well, like connecting the product to this equipment, entering test criteria and watching to see if a green light goes on to indicate that it has passed the test.

When I got involved in one turn-around situation, it took me awhile to learn what the “P” report was. It turned out to be the number of days the customer took to accept the system after shipping and installation. When I joined the group, this was averaging 25 days. Although we expected to get paid 30 days after invoicing and shipping, the customer did not start the payment period until the day of acceptance. Once the cause was understood, we improved all aspects of the process and reduced the average days to five.

Holding accounting personnel responsible for poor collections is unfair. If the whole product isn’t delivered and people aren’t paying their bill, the system isn’t working. More than likely the product acceptance was not well defined in the purchase order.

Too many purchase orders describe the product in depth, but not the criteria for properly testing it for acceptance. It is always worth the time and effort to have a well-defined sales order that includes the criteria for acceptance. This will surely aid the collection process and provide the cash input on a timely and projected basis.

RETURN ON ACTIVITY:
QUALIFYING CUSTOMERS

I have often heard it said that time is the only essential factor in marketing decisions. While it is true that time is precious, human assets must be used with as much care as capital assets.

It is natural for a marketing department to want to be all things to all people and to never lose. However, a new salesperson or a manufacturer’s rep can flood the system with weak and useless leads. If every opportunity heard about is fed into the system, it can strangle and stagnate the normal business process. As the keeper of the input gate, Marketing must intelligently guard against this, to keep in mind the best use of the company’s human resources, and always remember what might happen if those resources were ineffectively used. The Return On Activity (ROA) criteria must be conscientiously considered before getting everyone turned on to a new prospect. What is the activity, either financial or physical, that will be needed to cover the time, energy and costs to analyze an opportunity?

More often than not, small companies fail when they try to grow by looking for customers in an emerging market because of a lack of focus. Trying to be all things to all people can be a death wish.

One common trait for successful companies is the ability to qualify good opportunities and good customers. Almost all companies I have worked with end up with at least one customer from hell. It is often an order that was badly defined and a terrible customer attitude that results in never-ending problems. Good ROA study should include standards for qualifying a customer up front, and include credit rating, the need for product, and cultural fit. Energy put into qualifying customers and jobs can provide a good return on activity, and be a large contributor for a profitable business.

The efficiency of market potentiality studies can also be improved considerably by having a clear mission statement and criteria for defining the opportunity before it is submitted for scrutiny. Regular sales meetings and constant input from the field can make the ROA factor acceptable. Any good marketing person should be able to recognize what is good for the company and determine the best utilization of all its resources.

PRODUCT MIX

Do not assume that managers responsible for profit understand profit, or the things that make a company profitable. It is not unusual for managers not to understand concepts like Return on Investment (ROI) or Return on Assets Employed (ROAE). I remember sitting in a meeting with 40 division managers, and I would bet that at least half of them didn’t understand the presentation on ROI. None of them, however, was about to display their ignorance in front of their peers by asking the obvious questions. After all, everybody assumes that general managers just know these things.

Unfortunately, most companies take few, if any, steps to provide the formal training for general managers that would ensure that they understand such concepts. The assumption is that they either got it in college or learned it on their way up the corporate ladder. This problem is aggravated in high growth situations, where people are promoted even before they’ve had a chance to learn their previous job. Ironically, it is a very short time before they’re treated like they’ve been there forever and know everything.

At the other end of the advancement spectrum is the slower-paced environment where the knowledgeable and competent employee, who’s been around forever, is passed over for a promotion in favor of the outside hire. Usually this happens only because the current employee’s faults are known. The saying is true: Familiarity breeds contempt. However, looks can be deceiving. In an interview the outside hire only displays his or her best side. What is often overlooked is that the outside hire will not bring to the job instantaneous understanding of the existing corporate culture and the subtleties of the product and product mix that the current employee has.

One of the subtlest aspects of profit responsibility is the understanding and optimizing of the product mix. All the training in the world will not necessarily make a manager sensitive to the impact of product mix on profitability.

For years it has amazed me how many pricing formulas are put together that supposedly guarantee a 20% pretax profit but later yield only 2% or even a loss. Forcing that manager to find the lost 18% usually results in a very educational experience for him or her. Of course, the danger is that most pricing formulas are put together without allowing for such “little glitches” as bad debt, inventory obsolescence, or, most importantly, changes in the product mix.

In larger companies, managers tend to base pricing formulas, projected manufacturing overhead (PMO), and general and administrative (G&A) rates on a theory or a single approach, regardless of the nature and idiosyncrasies of the product and the mix. Many business plans are also put together without a detailed breakdown of the product mix. In fact, even when the mix is forecasted, the results rarely come out as forecasted.

When a company builds only one product or manufacturing sticks to a build plan for the whole year, product costs are fairly simple to understand and budget. Early in the year the management plan is neat and tidy, but it assumes that the product mix and the volume sold will follow the forecast, which, after subtracting the direct costs, divides the remainder neatly on a percentage basis to pay for supporting costs and quality. These costs per unit are then added to the direct costs to be used in the pricing formula.

Now this all works out fine when the output is constant and predictable. For example, X-CO expects to do $10 million in sales, with 50% of the price going to direct costs, 40% to supporting costs and 10% to profit. To determine the appropriate price, all they have to do is identify their direct costs and add the appropriate percentages for supporting costs and profit. If they sell $10 million, $5 million pays direct costs, $4 million pays supporting costs, and they make $1 million in profit. Very neat and tidy, but most companies are lucky to have a month clearly defined, let alone a year!

Unfortunately, the mix of products sold and the sales level (even of only one item) tend to change as the year goes on. More likely, X-CO will one day find that they only sell $9 million. Once they subtract out half ($4.5 million) for direct costs and the $4 million they will still have to spend in supporting costs, they will find only $500,000 left for profit. A slip in sales of $2 million would completely wipe out all profits. (See Table 1.)

Table 1: Pricing Based on the Sales Forecast and Slipping Sales

Forecast

$1 Million Slip

$2 Million Slip

$10,000,000

$9,000,000

$8,000,000

10,000

9,000

8,000

$1,000

$1,000

$1,000

$5,000,000

$4,500,000

$4,000,000

$500

$500

$500

$4,000,000

$4,000,000

$4,000,000

$400

$444

$500

$1,000

$1,000

$1,000

$900

$944

$1,000

$100

$56

$0

$1,000,000

$500,000

$0

Table 2: Pricing Based on Sales Forecast Using Standard Unit Costs

Forecast

Actual

$10,000,000

$9,000,000

10,000

9,000

$1,000

$1,000

$4,000,000

$3,600,000

$43,000

$40,000

$1,000,000

$900,000

$15,000

$45,000

$1,000,000

$900,000

$6,000,000

$5,543,000

$700,000

$700,000

$1,500,000

$1,500,000

$800,000

$800,000

$0

$100,000

$3,000,000

$3,100,000

$1,000,000

$357,000

The primary reason for establishing standard costs is to provide management with a handle on how the business is going from day to day without making it wait for delayed accounting reports. Of course, a company must establish product and overhead costs to determine pricing and ensure profitability. However, they must also recognize that the basis on which the pricing is established changes over time. Rate reevaluation rarely keeps pace with these changes; more often management is forced to rely on instinct and judgment.

In a volatile product environment, someone who has an overall feel for the products and the impact of changes in the product mix must be on the lookout for fluctuations. I even remember one process engineer in a company that manufactured printed circuit boards who could walk by the copper tanks and spot a problem by the different shades of blue in the bath. This kind of specific expertise develops more readily in a single-product environment. While operating a job shop, I tracked the added value realized from shipments (billings) on a daily basis. (I defined Added Value as Total Sales – Material Costs.) I had a good handle on the direct costs of each product, and I knew the margin required to break even and to turn a profit. Finally, I kept my eye on the new orders to ensure that the pricing covered, and would continue to cover, the added value and profit.

Gross margin percentage isn’t enough!

I’ve seen many companies whose management was not sensitive to the impact of product mix on the bottom line. Managers often brag about the high gross margin percentage they are receiving for their products. However, gross margin must cover all the supporting costs currently in place before anyone realizes a profit. A plan to cover $1.6 million in supporting costs from a 40% gross margin assumes a minimum (or break-even level) of $4 million in sales. Six months into the year, the GM is proud because he’s now getting a gross margin of 48%. Unfortunately sales are running at a projected annual rate of $3 million. Unless the support structure is changed to reduce costs, the gross margin of $1,440,000 will not cover the supporting costs and the company will lose $160,000.

Adding products increases costs!

It might be reasonable to expect that average product costs would go down as a company adds products because indirect costs are spread over more products, but this isn’t the case. Unfortunately, efficiency and yield tend to decrease as new items go into production.

Component manufacturing provides a good example. With only one product, the process can be optimized, and any deviation from the norm quickly recognized and corrected. In another company I worked in, I was responsible for the manufacture of memory components. When we were a one-product shop, we were able to improve efficiencies and attain an average cost of $2 per thousand. When we added a second component with only slight specification differences, the overall average cost rose to $2.20 per thousand. A third similar component drove the cost to $2.50 per thousand. It was not that the added components were more difficult to manufacture; in fact, the yield from component three was better than that for component one. The problem was that with each added component, efficiency decreased and scheduling requirements kept us from staying with each product long enough to maximize the yields. In addition, the support staff’s attention was spread over the three components, so they couldn’t give each one the same focused attention they had before.

The impact on efficiency that adding products to the mix has is easy to demonstrate. I’ve often felt that someone who took the time could probably develop a formula that could predict this effect with reasonable accuracy. However, absent such a brain, keeping an eagle eye open to the changes in the wind is the best solution.

Since different products have different yields and efficiencies, the most important step is to make sure that prices get adjusted as each product is added. It is difficult to allocate the indirect costs with precision, so a good gut feel or instinctive understanding of the situation is required to set prices appropriately.

When I worked in a systems manufacturing environment it was possible to achieve 100% yield by repairing the systems that aren’t functioning, but here again, specialization becomes important. With only one product, everyone knew the product well enough that there were no drawings or written specifications. None were needed. Assemblers could often detect and repair defects with minimal impact on time and schedules. However, as more systems were added, rejected systems had to be set aside to be repaired later on by more skilled personnel. This always added a cost to the system and increased the indirect product cost.

In that environment it was even more difficult to meet the testing schedules, and often any problem system was merely set aside. This cherry picking only delayed the inevitable. Often the picked-over systems were very difficult to fix, and the cost for repairs was far above that allocated in the estimate. In fact, the real product costs weren’t known until it came time to close out a work order.

Some companies mask problems by not closing out work orders in a timely fashion, letting that inventory build up instead, and then when this inventory is written off, it is generally as a lump sum that still isn’t recognized as a cost of the product line that caused the leftovers. This approach gives false data about product cost and margins.

Here is the problem for High Growth companies: As new products water-down company specialization, average costs will go up. Further, the redundancy of having specialists working on various products isn’t cost effective and is particularly expensive with a continually changing product mix.

Is a firm mix the answer?

In my experience a changing product mix in the computer/electronics industry is a way of life. I used to wonder how American manufacturing managers would fare with a manufacturing schedule that was firm and consistent. I got at least part of an answer shortly after a company I was working for merged with a large Japanese computer company.

We were accustomed to weekly, even daily meetings to redo the manufacturing schedule, and it was a constant struggle to get salespeople to at least stick to the schedule for the month. After the merger, new manufacturing rules forced us to commit to and to purchase to a schedule that was absolutely fixed for at least six months out. After that, we were only allowed a minimal flexibility of a 5% change for months seven through nine. It didn’t matter, even as partners, that we couldn’t sustain the sales rate. Every Friday, those systems landed on the dock like clockwork, and most of them just went into our warehouse.

I’ve never had the luxury of giving this kind of commitment to manufacturing managers working for me in other companies. If I had, they would have thought they’d died and gone to heaven. However, in the normal world product mix should, to some extent, be sensitive to what the company can sell.

Is the manager managing for product mix?

If a company is experiencing any kind of growth, the product mix is changing, so it becomes vital that a manager be able to gauge the costs and resources needed for a given mix. One company I worked with was very aggressive in the electronic components and systems markets. After several acquisitions went sour, we began to look for what those failures had in common.

What we had done was give the previous owner several million dollars and then move him aside. Then we put in one of our rising management stars with our big-company management style. Not only did we end up losing the previous owner’s drive and enthusiasm, we also ended up losing his know-how and experience with that particular mix and set of resources.

One such gentleman in particular really understood that to win the war you must sometimes give up a battle or two, and he had a real knack for knowing when to stop chasing an opportunity and walk away. He knew what products were best to take. In a way no accounting system could duplicate, he knew when to compromise the margins, and most importantly, when not to compromise the margins. If his instinct told him it wouldn’t be the best thing for the company, he was also quite capable of saying “no” to an aggressive sales staff, even on those rare occasions when they actually made some sense. In contrast, our accounting system was not particularly sensitive to changes in product mix.

How about just focusing on the big money maker?

Companies that don’t understand product mix sometimes take jobs with lower margins, believing that existing customers (the backlog) already cover fixed costs. They reason that the incremental costs of the added business will be comfortably covered by the lower margin with room to spare for profit. However, this does not plan for the possibility that the existing customers, with their higher margins, may not be customers forever. In this case, the added work, even with its higher revenue, often can’t cover all the costs in place. Management may have considered this a calculated risk but many times they forget that the good times end, leaving potential disaster in its wake.

A similar situation arises when one customer provides a significant percentage of the business, and the company doesn’t plan for the possibility that it might lose that business. Limiting customers to 25% of the business is not the answer. Some companies using this rule try to reduce the amount of business they get from that customer, rather than increasing business from other customers. It makes more sense to treat the situation like a honeymoon-enjoy it while you can, and plan ahead for the days after it ends.

One $3-to-$5 million OEM manufacturer with great technical expertise wanted to do end-user sales in the worst way. Because of its impressive technical expertise, it was able to convince one giant company to place substantial orders for three new products. Instantly, the manufacturer was looking at more than $20 million a year in OEM sales.

Needless-to-say, the manufacturer jumped at this once-in-a-lifetime opportunity, and with great cooperation between the two companies, the manufacturer geared up very rapidly to meet the new demand. All this required heavy involvement from the manufacturer’s president, but otherwise added little to support costs. The pricing was fair, and the margins were better than from any other order. The terms were so good that the order absorbed a lot of overhead and made the manufacturer more competitive with its other products as well. Unfortunately, the owner chose to spend all these newfound resources developing an end-user side to the business. With a new $500,000 advertising budget, several new vice presidents, and all kinds of additional costs in place, disaster struck-all large company orders were canceled.

Even with reasonable termination costs, the company’s resources were soon depleted trying to sustain the end-user business. To make matters worse, that side of the business never really did take off, and supporting costs were much higher than on the OEM side (See Table 3). Too late, the owner tried to restructure back into a $3 million OEM business, but he couldn’t pull it off and went into bankruptcy. If you are not careful with your increased expenditures, if (or when) the project ends, the Supporting Costs put in place in the flush years will run your company dry.

Table 3: The Impact of Losing a Large Customer

With Mr. Big

Without Mr. Big

Know thy resources!

In another case, a printed circuit board manufacturer got one-third of its business from a single customer. This customer was able to manufacture the same product, but used the company to cover peak needs by purchasing only the inner layers of a multi-layer board from them. Sales to the customer had been stable over a couple of years and were covered by a well-defined contract that provided for better margins than the base business.

There were a number of distinct advantages to building this product. Manufacturing and quality control had fewer problems because the yields were so high.The firm schedule allowed Manufacturing to optimize the yield and reduce scrap. There were no depreciation expenses because the customer provided and installed state-of-the-art equipment in the company’s shop and related expenses were included in the contract rate. Support costs, especially indirect labor, were virtually non-existent. Manufacturing’s material and production controls didn’t vary from week to week, so one clerk could manage them. Sales needed very little customer contact. Engineering’s major tasks ended with the initial release to manufacturing. Finance needed to produce one invoice per week to bill one third of the revenue.

The party ended when someone else bought the manufacturer. One zealous purchasing agent saw a chance for glory when he noticed that the contract could be canceled if the supplier changed owners. After reassessing the situation, the customer decided it could save money by bringing the job back in-house. While disappointed, the new management was enthusiastic and believed the market was strong enough to pick up the lost business in a relatively short period of time.

The company did well in finding and filling in the lost business, but the real problem was that its entire cost structure had been disrupted. The special product had cost very little in overhead and G&A, but in the pricing formula the product still carried one third of the company’s costs in these areas. Now, with one third fewer sales, the remaining sales had to carry nearly 150% of its former overhead and G&A burden. Rather than reducing costs, management attempted to increase sales quickly, but profit and cash continued to decline.

Why?

Sales and Accounting both needed additional staff to boost sales and to keep the billings timely. Also the less efficient products had higher direct labor costs. Engineering ended up paying heavy overtime to get several new products on line in a hurry. Scrap levels increased, and more quality control people were needed. Finally, the company had to add capital equipment because the additional production used more of the mainstream process equipment. Finally, the new rate structure killed the competitive pricing in a situation where the pricing had been under pressure all along. Ultimately, mounting losses and negative cash flow forced the new owners to virtually give the company away to get out from under the debt obligation.

Better due diligence might have revealed that the company could lose the contract, but often due diligence doesn’t deal with the subtleties of product mix. Perhaps because management didn’t totally understand the phenomenon to begin with.

It is essential that a company isolate the requirements and rewards of a major company program, not only to prepare for the time when the program will end but also to avoid contaminating the base product line. Normally such a product should be physically separate from other products. Keep all direct costs and resource requirements flexible and avoid committing to fixed costs, such as a long-range building lease, in support of the product. These actions will help minimize the impact of losing such a customer and avoid masking the true cost of the company’s other products. Management must also use the rewards that customer generates carefully and not fund other programs sloppily or on a whim. (See Table 4.)

Table 4: Matching Cost Structure to Product Mix

With Customer A

Without Customer A

$10,000,000

$10,000,000

$3,333,000

$0

$6,667,000

$10,000,000

$1,666,500

0

$4,666,900

$7,000,000

$6,333,400

$7,000,000

$3,666,600

$3,000,000

$999,000

$0

$1,999,800

$3,330,000

$3,000,000

$3,300,000

$666,600

-$300,000

Be wary of a short-term focus.

Many companies get in trouble by making only short-term plans and assuming that market conditions won’t change over the long-term. Product lines run out of gas and companies that don’t plan ahead will eventually get stuck. Even when the problem is obvious, sometimes management just doesn’t want to face it.

However, a management sensitive and mature enough to look ahead will often have the time to take the actions and make the adjustments necessary to continue with a different product line. It’s difficult to look for catastrophe in the midst of success, but all good things are finite, and a company must plan for that contingency or face the consequences.

One company was able to command a 65% margin and built sales to $10 million over several years. When the market for its product started shrinking, it recognized the problem early on, and began to lower margins to continue growing. It introduced new products at a rate designed to maintain the sales level. Unfortunately, its new products had trouble commanding a 40% margin, much less a 65% margin.

In response the company began to do some sound long-range planning. It developed proforma financial forecasts, and although the arithmetic was hard to swallow, the conclusions were very clear. Over the short term, $10 million in sales with a 65% margin provided $6.5 million to cover overhead, G&A and a before-tax profit of $1 million. Over the long term, however, the profile was very different. $10 million in sales at a projected 40% margin only left $4.0 million to cover support costs and profit. Even giving up the profit, no change in the cost base would still leave it with losses of $1.5 million if no action were taken.

To put this in perspective, total payroll, including fringes, was about $3 million, and since payroll is generally the most significant expense, most of the $1.5 million reduction (the minimum required just to break-even) had to come in staffing cuts. Overall, to provide $1 million in profit, would require reducing support costs by $2.5 million out of the $5.5 million they originally had to work with.

That level of changes obviously required thorough restructuring, and the company’s management rose to the situation by moving more into distribution rather than basic manufacturing. By holding on to some of the high-margin product, it was able to keep margins above the 40% rate for a while, which bought time to make the necessary changes. It was only because the company’s good leaders were alert to the situation that they were able to make the transition in time. (See Table 5.)

Table 5: Business Direction Change

High Margin

Low Margin

Difference

$10,000,000

$10,000,000

$3,500,000

$6,000,000

$6,500,000

$4,000,000

-$2,500,000

$5,500,000

$3,000,000

-$2,500,000

$1,000,000

$1,000,000

$0

Don’t lose sight of the mainstream.

Resources spent on unrelated activities are wasted, even if those activities are profitable. One group leader in a large company had a very small but profitable division (approximately 2% of his business) with a product line completely foreign to his main group products. I tried to explain to him that any energy spent on marketing and managing that division would be better spent on the main product lines, which were under heavy competitive pressure. He rationalized that so long as the division produced profit, he should leave it alone.

In fact it was diluting his resources. Selling the division at a fair price would have produced eight to 10 years’ worth of instant profit, which could then have been used to help the main product lines. However, that didn’t matter to this group leader, because he was unwilling to give up his conversation piece.

Don’t starve the golden goose!

While it’s important for the champions in a company to make new things happen, too many champions can take needed focus off the real moneymakers. Sometimes in their excitement the champions forget where they’re getting the cash to support their new projects. If management makes the new things too high a priority, everyone will turn their backs on the golden goose, which then dies from neglect.

Profit isn’t always the deciding factor.

The big companies’ ability to tolerate losing product lines has always been disconcerting to me. Even when the product was losing money, politics could still prevented a change. For example, one company I was in tolerated a foreign operation with mounting losses for far too long because at a recent shareholders’ meeting the corporate office had bragged about our entry into the foreign electronics market. In another company, upper management refused to discontinue a large division with constant losses because the loss in corporate fees would have required them to downsize at the group headquarters.

A product’s gross margin can be misleading.

Profit and Loss (P&L) reports for individual product lines are a must. Without them management can make bad decisions and miss good opportunities. The product line P&L attempts to define the net contribution of a product line by comparing the direct and support costs to the sales dollars. A product may have a very high gross margin, but by the time all the other costs are added in, it may not yield as much profit as other products.

A company with $5 million in annual sales established a policy that all new products had to have a gross margin of 50%. The mainstream product was operating at a gross margin of 52%, which met the requirement and justified its existence. This major development product was budgeted to cost $500,000 for the year, with an additional $150,000 set aside to promote potential new products. From a product line P&L perspective, any new product would lose $650,000 that year, but the company did not break down the numbers in any other way. The rest of the engineering budget for the year totaled $350,000, or 7% of sales.

A unique opportunity arose to introduce a new product in a short time, with very little engineering support. Since the product was to be purchased from another company, margins would be tight, and start at 45% tops. The product planning committee rejected the deal on the first pass, but the controller forced a product line analysis that clearly indicated the new product would yield a higher profit contribution than the mainstream product. Because it was a completed design, it would not require engineering support in addition to that needed to sustain the existing product line.

Simply subtracting the 7% of the engineering budget spent on the mainstream product from their 52% margin, the contribution from the mainstream looked very similar to that from the new product. From then on, the other costs of manufacturing, administration, etc., were higher on a proportional basis for the existing product than for the new product. The net result was that the new product would produce a higher percentage profit at the bottom line than the existing products, even though the existing products seemed to have a higher gross margin. (See Table 6.)

Table 6: Product Line Profit and Loss (P&L)

Product Line P&L

Main- stream

Development

Nupro

Total

$5,000,000

0

$1,000,000

$6,000,000

$2,400,000

0

$550,000

$2,950,000

$2,600,000

0

$450,000

$3,050,000

52%

0

45%

51%

$500,000

$500,000

$150,000

$150,000

$350,000

$70,000

$420,000

$500,000

$50,000

$550,000

$850,000

$650,000

$120,000

$1,620,000

$1,750,000

-$650,000

$330,000

$1,430,000

35%

33%

24%

$800,000

$100,000

$100,000

$1,000,000

$4,050,000

$750,000

$770,000

$5,570,000

$950,000

-$750,000

$230,000

$430,000

19%

23%

7%

The Bucket Theory

In operating a job shop or a professional service company, it’s important to think of the backlog of orders as filling up existing buckets or needs. Essentially, you are selling hours, and since there are so many hours already in place, you must cover them as soon as you can. First concentrate on filling up this month’s bucket then put effort on covering the next month’s buckets one by one. The trick is to get the buckets filled as far out as possible.

Once the hours in place are covered, and assuming they are sold at a price sufficient to cover the fixed costs and provide profit, then as a manager your next task is to get more effective hours in your buckets to take full advantage of the margin contribution. In a job shop, once the fixed costs for the period have been covered, working people overtime, even at additional cost, is a small price to pay for the significant extra output and the incremental margin added with no penalty.

Even for a professional service, mix is important. It is not enough to sell the equivalent in total hours. If, for example, more hours of junior personnel (as opposed to senior personnel) are sold than before, the support costs in place may not be covered by the lower-priced hours. (See Table 7.)

Table 7: Product Mix — Consulting, Inc.

Budget

Actual

$244,500

$183,500

1,500

750

$192,000

$96,000

750

1,250

$52,500

$87,500

2250

2000

$60,000

$45,000

$15,000

$135,000

$108,000

$27,000

$195,000

$195,000

$102

$56

2250

$128

$70

$244,500

$183,500

$195,000

$195,000

$49,500

-$11,500

Profit does not come from paper and pencil exercises but is very dependent on the mix and timing of all the products sold. The subtle concept of product mix and its effects on your business can make or break YOUR bottom line!

FORECASTING OR DREAMING

Fred Founder had never seen a sales forecast before Mary Marketing came on the scene. His forecasting was done in his head and included only his probability of getting a reorder from his present customer base and what he had to do to get it. Fred had a very conservative and successful approach to risks. He would not order material until he had a firm, documented commitment from a customer. He had found this to be important when he had gotten his first loan from a bank. Since he had a relatively new company and little track record, the banks were cautious about lending him money.

One of the important issues related to the loan was the amount of backlog. What was his backlog of orders that had to be filled? Since he was a 100 percent owner and had no outside investors or debtors, he let the accounting be loose at times. He knew he could always catch up and straighten things out at year-end when he gave all the records to his accounting firm.

He had to clean up his act for the bank because they wanted accurate records to base the loan on. This included his balance sheet and P & L statement, monthly reports on accounts receivable (A/R) and accounts payable (A/P). The bank wanted to see how much money he owed to vendors (A/P) and how much he might collect from customers (A/R).

In other words, was he debt worthy?

It wasn’t enough just to provide total dollars; the aging became important. When were the collections and payments due? The bank put the final touches on the task by asking for a cash flow projection. Fred had not done anything like this before. His cash management strategy was collecting more than he had to pay out.

Fred learned that the banks were not about to lend him money unless he could prove to them that he could pay it back. And, most banks want more than one source of revenue from which to pay it back. That is why, even with a great positive cash flow projection, they also wanted Fred’s personal guarantee, pledging his home and first-born child.

Coupled with all the financial records, including cash flow, Fred still had to convince the bank the risk was low. This is why he had to provide revenue and new order forecasts, supported by the backlog and other sales and marketing rhetoric. Verbal commitments were out. The backlog had to be for firm commitments. To be entered into the backlog a sales order required a customer purchase order number and a delivery schedule. Firm orders now eliminated letters of intent where the customer had made an agreement to purchase product over time. Even orders with a bonafide purchase order number but with no scheduled dates were passé.

Mary got the forecasting started by forecasting new orders by month, by units, by customer and by dollars. It soon became apparent that for planning the business, shipping dates were far more important than the dates that orders were received. The backlog delivery dates were very important. They were over-layered to give Manufacturing, Accounting, Sales and Marketing the revenue forecasts they needed.

For a period, there were credibility problems stemming from the fact that everyone who provided input to the forecast had a different feeling and definition of probability. For instance:

One sales person giving a 70% probability meant a 70% chance to get it all.

Another sales person with a 70% probability meant a 100% chance to get 70% of the business from the customer.

There were also the dreamers predicting 100% probability because of their gut feel.

100% isn’t possible until the order is booked and has a P.O. number and schedule. Eventually, Fred and Mary agreed to a consistent measure for probability that ran from 10% for suspects (someone who might have an interest) to 90%, based on having some of the following:

· Customer with an interest.

· Customer with a budget.

· Customer who knows the product.

· Customer who asks for a proposal.

· Having met more than one person at the customer.

· A proposal has been made.

· A proposal that has been accepted.

· A successful negotiation.

· Waiting for the phone call to confirm the order.

Fred and Mary assigned probability numbers to each level. Even as it worked its way up the ladder, Fred learned and Mary conceded, “The longer something takes to happen, the less chance it has of happening.”

Because of this, Mary initiated a Report of Outstanding Proposals. It listed all proposals in the works, and included pertinent information such as customer products and dollars. Most importantly, however, it had a column for the latest probability and the number of weeks since the proposal had been submitted. This report gave Fred very good view of what was going on and, after he determined some calibration based on the customers and aging, it became even more useful.

Fred learned quickly that with the lending institutions, it isn’t likely you will get what you hear. For instance, in searching for the loan, everyone started with “you can borrow 80% of your accounts receivable.” For a small growing company it is great to have 80% of the cash available the day you invoice the customer.

Unfortunately, in the early days, Fred had a European distributor, sold to NASA, and had two large customers who dominated his customer profile. The banks voided foreign sales and sales to the government, and limited what he could borrow against customers beyond 25% of his accounts receivable. The bank also made any receivable over 90 days ineligible for the borrowing back. At best he was able to borrow 60% of all the receivables.

Based on his experience with the bank, Fred realized he had to take risks on sale’s forecasts to attain the growth he wanted. To be competitive with delivery times, Fred was forced to buy inventory on the come, before the purchase order was received. If a purchase order says six weeks, but the material delivery takes 10, he had a problem. The company also needed to change the mix of customers and to be more careful to qualify them in terms of credit. From an accounting viewpoint they had to enforce the payment terms and conditions.

Thanks to Mary Marketing and Al Accounting, Fred was able to grow by using good sales forecasts and good cash management. Most importantly, the forecasting gave him a degree of comfort in living with the personal guarantee and having his house and family at risk on a daily basis. One thing is for sure, with all that is at stake, be it pressure from internal planning, your bank or shareholders, once the forecast has been made it is necessary to perform to it.

MARKETING REPORTS

There are several reports and forecasts (metrics) that a marketing department can turn out that will benefit the company in terms of visibility, assessing check points and influencing or initiating an action. Of course any report must be responsive to the type of business and information needed by management. The following wish list can be tailored to fit your business profile:

Bookings and Revenue Forecasts

The planning force that drives the company starts with the report on the Bookings (new orders) in dollars. Once the bookings have been established, management can evolve planning for product, inventory, operations expenses, manpower, resources, profit and cash flow.

Since the Bookings forecast only describes the potential revenue, it is important to know how it will be spread out in time and turned into shipment dates. This is where the Revenue Forecast comes in.

Product mix can be very significant in structuring the overall costs. Dollars alone won’t give the necessary detail. In a product company it is necessary to forecast units, and in a service company, hours.

Actual Bookings and Revenue Reports

It’s only natural to follow the forecast with reports on the actual performance as compared to the forecasts. This measure of performance is needed to determine whether to go forward with the plan or to make adjustments. Graphs are quite useful- actual and forecast results can be shown on the same graphs.

Book to Bill Ratios

This is even a more impressive graphical measure of performance of a company’s visibility. A graph of the ratio of bookings, divided by revenue on a monthly basis, will indicate if the company is growing (when greater than one) or going down (when less than one).

Industries such as the semiconductor industry do this on a per market basis. It even helps economists in the prediction of the national economic health.

Backlog (of orders in house)

This is a measure of a company’s health. It is a record of orders on hand that have yet to be delivered. Of course, a big backlog gives management comfort. However, once again timing (the backlog aging) is important. Large backlogs with deliveries way out in the future are not as comforting as smaller backlogs with near-term delivery requirements.

Because an order put into backlog can be distorted by including promises to buy or even written Letters of Intent, it is important to define what qualifies as an order. An agreement to buy a quantity of units or number of hours over a period of time can vanish long before the period is over. Certainly verbal orders should never be considered backlog. An order should be defined as an order from a customer with a bonafide purchase order number and a scheduled delivery date.

Proposal Report

While new activities help keep the perpetual business machine busy in-house, it helps even more to know how long a proposal has been outstanding (submitted to management or a client) and how much credibility to give it. Confucius says, “The longer something takes to happen, the less chance of it happening.” This report should include proposed sales dollars, a measurement of the degree of probability, as well as aging-time to product completion and revenue.

Accounting Reports

Reports related to customers and performance can be generated by the finance department. These include:

· Accounts Receivable (AR): shows which customers are good or bad payers.

· Past Due Report: shows the level of past due delivery orders in dollars.

· Product Line Profit & Loss: indicates the running account of the gross margin of product produced and serves indirectly as a measure of the marketing bid process.

· Profit Report: Marketing should always be cognizant of how the company bottom line is performing.

And, of course, there are reports beneficial to marketing:

· Dollars per Sales Lead

This can be a measure of the investment in the promotion of a program. It will compare the number of leads related to the dollars involved in advertising, trade shows, direct mail or whatever promotion vehicle is being used.

Individual performance measures are needed, including:

· Sales Dollars per salesperson per customer visits

This comparison of the actual sales and visits to the customer allows management to see how well the sales staff is performing and helps to eliminate unproductive or bogus customer visits.

· Phone calls per sales person

· Sales dollars per region

· Sales dollars per product

· Sales and Marketing Operating expenses against the budget.

Of course these checks and progress reports can drive Sales/Marketing management crazy. Whenever sales personnel resent providing reports, they say, “Do you want reports or sales dollars?”

The answer is easy, “Both!”

Keep in mind marketing drives the company and the more feedback and information available the less risk involved in going ahead with the plan.

MARKETING IN THE NEW MILLENNIUM

The first time I was made aware of the phenomenon that was to take place in the 1990’s was late in 1988 at a business conference. I wish I could remember the keynote speaker’s name, because his comments have stuck with me for over a decade. It is even more impressive that what he said was dead on.

The bold projections I heard from this unnamed marketing guru were:

The 1990s will be driven by the customer with

· Open systems

· Faster Time to Market Requirements

· Customized Product

· Smaller Runs

· Demands for Higher Quality

· Global Competition

· More Customer Supplied Support and Solutions

· Strategic Partnerships

· And, most importantly, The Customer Will Be King.

If you look around, you can see that this has happened, and I believe it has been for everyone’s benefit, customers and suppliers alike-not just for high technology suppliers but in all segments of the market.

Until 1990, particularly in the computer industry, suppliers were kings. They operated within closed systems in which customers were heavily influenced by their suppliers’ guarded technology. The Japanese were eating our lunch with a strategy of market share that worked for a while but has turned out to be one-dimensional and now seems passé. They had based their entire strategy on gaining market share by building quality products at low cost. They did it first with toys, then electronics and then cars. But the end of the 1980s building a quality product at low cost was not enough. Suddenly the market was looking for products that could be customized. The market share philosophy, great so long as you wanted what they were selling, was inflexible and the Japanese industry could not keep up with the change.

However, American industry, having had to meet the challenge set by the Japanese industry had been forced to adapt, to reexamine strategies and change, and so were in a better position to meet the market’s desire for customizable products when it arose. Today customers are happier. U.S. productivity has risen to the top worldwide again, and U.S. companies and the economy are thriving. There is no turning back.

I believe the leaders in various industries will most successfully service their markets by being agile and open-minded to change. As we go forward, there will be lots of changes, and the old ways will become non-competitive.

Second, I see as being of utmost importance:

· The open-minded company will be receptive to trends and see the need for change.

· The agile company will be quick to change and fulfill the customer needs as the relationship continues.

Telecommunications have Limits

No doubt, more and more commerce is being done on the Internet and several products can match a market need by fax, telephone or E-mail. But when it comes to developing major accounts or strategic partners, nothing beats the old face to face meeting with a customer. Unfortunately, more salespeople are being chained to their desks by keyboards and wires. Because much can be done by telecommunications, good, intense customer-sensitive salespeople will become a dying breed.

Establishing a strong relationship depends on comfort and comfort leads to trust, meeting and getting to know the customer is essential to building that trust. Getting to know all of the customer’s key players enhances your chances of getting to know a customer and qualify with him.

Some managers try to justify their telecommunication decision with the rationale that avoiding face-to-face meetings at customer sites means lower cost-per-sales dollars. However, telecommunication media serve as filters that hinder the development of that warm and trusting relationship. They are also single channel modes of communication in which the person at the other end (in this case the customer) controls all the information coming to you. This single channel restricts input and limits your ability to accurately interpret the information you receive.

It is difficult to sell value over cold digital communications channels. It is also hard to overcome a price that may be higher than the competition. Sally Sales says, “How can you develop relationships with engineering, marketing and customer management if you never meet them?” This is especially true when it is imperative to get to other key personnel in the customer company. You may be blocked by the lack of personal contact or limited to the existing channels. There is no way to see and interpret body language over the phone or via fax or email, and when dealing with a low-level purchasing person or an engineer, it is difficult to get the complete and real story because too often the discussions are limited to price and delivery issues.

Mary Marketing says that with fax and e-mail too often people misinterpret silence from the other end by believing that no news is good news and that the customer must be happy. On the contrary, no input could just as easily mean the customer is unhappy and looking for options. It is easier for the customer not to call and face an unhappy situation by confronting a bad supplier. That is why it is so important to physically show up and make sure you are getting the correct input (and from more than just one person). Also, by showing up at the customer site, you are seen as a supplier who really cares about that customer. In my opinion, the best booking forecasts are done by sales and marketing people who know the customer face to face and not as someone on the other end of an email or phone.

It is very difficult to develop a partnership with a customer without building a relationship, and building a relationship depends on face-to-face meetings. So when you are not selling a catalog item or commodity, don’t ignore the importance of customer visits and face-to-face meetings. The value you have to offer may not be appreciated by the lower level people you are dealing with, and it is extremely difficult to get to the right people unless you visit the customer. Sally and Mary both agree that selling value beyond the box requires as many as five physical contacts with the customer before closing the order.

Timing can be so important in a relationship. Sally can identify numerous orders she received because she just happened to be there at the right time. Of course, Sally doesn’t tell you she creates her own luck. It isn’t unusual for her to get an appointment by telling her customers that she is going to be in their area and would like to stop by. Of course, Sally will tell this to a hard-to-reach customer before a visit even though she hasn’t made any firm travel plans.

There is one successful tactic I know Sally has used that telecommunications can’t help. Sally will sit in a lobby or parking lot for endless hours for a chance to see those elusive customers, the ones who won’t answer her calls, faxes or e-mails.

A great example was after Sally read in a trade journal that a big competitor got a major development from a big computer manufacturer for their future mainframe memory. Sally tried to meet with Mr. Big Computer, but he saw no need for another supplier and kept turning Sally down. Undaunted, Sally flew back, and over the course of three days in lobby and parking lot meetings, she was given a half-hour meeting. With approval from Paula and Ed, Sally promised a similar development at no cost with a promise to deliver in half the time promised by the competitor. Ed and his engineering team came through, and Sally and her team were awarded a production order worth more than $60 million in sales over three years.

E-mail and the Internet are great tools, and should be used to aid the customer relationship and complement face-to-face visits. But they must not be the only basis for customer communications.

Remember, a firm handshake is far better than any electronic connection.

A Final Word on the New Technology

Today with the Internet and e-commerce upon us, I have no doubt that business-to-business marketing will dramatically change the way we sell and market our products and services. Choice boards, exchanges and intermediators will become a big part of the marketing vocabulary for companies big and small. But the real purpose of marketing-obtaining greater sales and profits-will not change. Internet and dot-com companies may get by for a time operating with substantial losses while trying to build revenue and customer databases. However, when it comes to marketing as the foundation for building revenue with profit, I believe the experiences and ideas I have presented in this book will prevail.

WHAT THEN IS MARKETING ALL ABOUT?

When a dynamic company president wants to step on the throttle and accelerate growth or bring about change, the major hindrance is often the gap between him and the staff. The biggest obstacle to overcome is inertia. A president who is keyed up to change direction leads the charge with his very personal call for self-improvement. Getting the staff to grasp the new vision is difficult, but getting them to change the way they do things for the new culture is even more difficult. In response to your plea for ideas, you may get nothing more than exasperating blanks stares, puzzled looks or furrowed brows that indicate they believe they won’t get out of their anytime soon. Just as bad is the automatic negative input on the why and how a presidential suggestion can’t be done.

At these times everyone should remember what their role in the company is-that the staff is paid to define how it can be done, and it is the President’s call as to whether or not it is worth the time, resources and risk.

I offer the following analogy:

The President is pulling a wooden wagon with wobbly wheels up a long steep hill. The wagon is loaded with sand and pebbles, and the load is uncovered so that sand and pebbles are spilling out in all directions through the slatted sides. There is no road and the path is pocked with holes and rocks that cause the wagon to buck and roll from side to side, forcing the president to follow a zigzag route up the hill. For every move upward on the scarred terrain, there is half a move backward. The struggle is almost unbearable, but the obsession of his vision drives him on. His vision is to build a concrete monument with the company name on it at the top of the hill for everyone to see.

If the staff would share his vision the task could be made easier. Sally Sales would run ahead and put up a sign to let everyone know the wagon was coming, Andy Accounting would separate the load and put a cover on top to keep it from blowing away, Max Manufacturing would repair all the leaks and strengthen the latch on the back gate, and Ed Engineering would find a way to put a motor on the front to ease the pull. It might still take days to reach the goal at the top, but at least the President wouldn’t kill himself and he could be spending his time planning on how to best utilize the monument after it was completed.

But in today’s highly competitive market a shared vision in only half the battle. Someone may beat them to it. How great it would be if they could also rethink how they do things, and with open-minded discussion come up with a better idea. This is where Mary Marketing starts to shine with her thinking and planning mentality.

She is quick to grasp the need for getting there first and also optimizing the resources. Her thinking goes way beyond the so-called box. Her response to the situation above is, “Let’s hire a helicopter and lift the load and all of us to the top of the hill and accomplish the task in less than an hour.”

Changing the culture in today’s business environment is a necessity, but after sharing the vision, new and better ways must be found to pull away from the pack. This is where the marketing takes over.

Appendix B
Laws and Lies of Inventory Management

· Law 22: “The longer something takes to happen, the less chance it has of actually happening!”
This certainly applies to inventory because the longer parts or components sit in inventory, the chance lessens for them to be used.