Book Order Form | Table of Contents | Preface | Part 1 | Part 2 | Part 3 | Part 4 | Part 5
Appendix A | Appendix B

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?”

    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:

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

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

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

    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.

    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

    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):

    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?”

    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.

    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.

    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.

    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?

    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:

    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.

    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.

    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.

    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:

    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.

    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.

    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.

    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.

    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.

    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.

    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.

    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.

    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.

    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.

    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.

    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.

    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:

    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.

    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.

    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.

    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.

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