Thursday, January 28, 2016
Managing Risks in Small to Mid-sized Firms
I’d like to pick up where I left off in my last post concerning risk management. In that piece, the context was set in larger firms, although the core issues apply regardless of firm size. Let’s put a little more specificity on this issue for smaller firms. How should these smaller companies manage and mitigate the risks to which they are exposed?
Recall our earlier discussion on identification and evaluation of risks. Small and mid-sized firms also need to do this and focus on the relevant risks (those of higher expected impact) to their businesses.
First, they’ve got to identify the risks that warrant their attention. From where do they source their inputs? How tightly do they manage inventory? What contractual obligations do they have with their customers? Are their workers highly skilled and thus difficult to replace on short notice? These can then be mapped into a table exemplified by the above. And the list may be quite long, but let’s go through the following fictionalized case.
Consider a maker of consumer products that require three types of inputs, two of which are widely available at the desired quality level. The third, however, is sourced from the lone supplier in the area. What happens to their business if that supplier can no longer deliver? The company needs to evaluate the risk level (low, medium, or high) and the potential risk impact (which in this case is very high). The company needs to develop mitigation plans now or prepare a plan in case of non-delivery. Clearly planning now is preferred.
If they know of alternative suppliers outside the area then they may only need to contact two or three of them and arrange a cost-effective substitute input. Or they can develop a plan for a dual supplier relationship with contract terms that include delivering a multiple of the requirement within a specified period of time. This will affect their margins in the short term but likely will be manageable and allow them to deliver to their customers. Keeping tabs on their supply chain, having relationships with possible alternative suppliers and having a game plan (e.g., shipping alternatives) for obtaining the input will be critical should a negative event occur. Also, opening supplier discussions may facilitate their firm’s expansion into new markets. This is not just risk management activity – arguably it is also business development activity. The value created from implementing this plan is very high.
When a negative event occurs that impacts the firm’s ability to deliver to their customers, timely and effective communication is key for managing the situation. A point person accountable for contacting customers should be nominated and that person carries out all direct communication to clients. That same person also vets any other communications and message platforms to be distributed (press releases, blog posts, website updates, the lot). The same message needs to be delivered to all recipients to eliminate confusion. The last thing the company wants to hear is that customers that have spoken with each other after the direct communications have been delivered and now some are calling to complain.
If a firm has highly skilled and experienced staff this may prove to be difficult and potentially a liability. There are ways to hedge this risk (cross-training, detailed and up-to-date procedures, key-man insurance) but not all are cost effective, especially for smaller firms. Of course, we’ve all heard the excuse that documentation prevents progress and costs too much. Well, no documentation may well have led to some period of better bottom lines. But, when that key person contracts a serious case of the flu, the operation may grind to a halt. Customers not receiving their orders timely may opt to find an alternative supplier. And if your operational stall is lengthy, those lost customers will not necessarily choose to be exposed to your company’s delivery risk to them! Documentation and training to facilitate better handling of negative events, as well as vacation time for your staff, is an investment that will pay continuing dividends. This is not limited to risk events, but can be used to demonstrate a competitive advantage to prospects. A tight ship presents fewer risks for any potential customer.
Oh yes, we live and work in southern California, so we have at least two risks that are given by our location: earthquakes and fires. And actually, when we experience the latter, the next time (perhaps years down the road) we are blessed with rain, the problems of land movement and flooding are relevant. All of these events have different probabilities and several are unlikely. Yet the implications of not planning for how to adapt may be the difference between surviving and going out of business.
In passing we point out that there is no industry link to these risks – whether you produce some type of consumer product, are in the supply chain of another producer, or provide services for the community in which you operate – all firms are exposed to these events and their consequences.
An example comes to mind. A friend and small business owner sources tissues from global tissue banks. He then processes these samples to produce inputs used in medical research laboratories around the world. His operation is quite small and critically dependent on freezers to preserve the tissue samples he uses as inputs.
The first time he showed me around his business, I asked whether he had a back-up power generator. A bit to my surprise his response was no. He had asked the landlord about it some years ago but the issue dropped off the radar. So his business, located in a relatively rural location but clearly exposed to both earthquakes and fires, was at risk if there was a power disruption. The cost of a back-up diesel generator with sufficient capacity for keeping his freezer units operating was about $4,000 when I checked. And diesel is a much safer fuel than gasoline and the technology itself is more than proven.
One last point. While head of risk and compliance at a major investment firm in London, I heard the story of a much larger sister organization in California that had acquired a back-up generator. Then when the parent’s risk team visited to confirm their risk management was up to scratch, one visiting person asked to see the back-up generator and found it had not been connected! The key takeaway is that regardless of your risk plan, companies should test and perform disaster scenario planning on at least a yearly basis depending on the type of company.
When you deal with risk issues, the questions one asks typically are not industry-specific but rather are almost generic. What are the supply chain issues? What are the downstream issues? Does the firm have a business continuity plan? Does the firm have a calling tree? Does the firm conduct unannounced tests of both the calling tree and business continuity plan? If so, what have been the results of the most recent tests? Who are the key staff and are any at risk of leaving?
Answers to these questions likely will expose gaps that need to be assessed for impact and, if appropriate, steps taken to fill the gaps. The PRASE Methodology that C-Level Partners employs in working with clients is a natural for moving a business from the current higher-risk operational state to the desired lower risk state with known and understood remaining risks to be managed going forward.
All companies want to know the cost. Our rule of thumb is that that a firm should be spending about 2% of its budget on risk management. This includes insurance premia (with these policies you are offloading the risk, but you have to take care to understand what coverage you have [recall those Farmers’ ads!]), staff and management time to create and maintain documentation, monitoring firm activities, etc. So a company with a budget of $50 million should be spending about $1 million on risk management – relevant, but not huge. And a company has to ask the flip side of that question: What would it cost if something went bump in the night and your operations went down? Can you recover? Will your customers remain loyal or would they shift to a competitor and never return. All these questions can be addressed in a risk audit.
If you have a different view, please let me know as I’m always interested in others’ views. And if you would like a copy of our risk checklist feel free to contact me at firstname.lastname@example.org or on (949) 445-1080 x301. I look forward to hearing from you and discussing how we can help improve your business and enhance value creation.
Thursday, January 21, 2016
There are many things that make a successful company: great leadership, exemplary people, a solid culture, and a much targeted market. Yet, people sometimes overlook the impact of building a successful ecosystem of partners who can help a company with new applications, products, features, and channels to the market.
So we decided to look at one of the masters of building such an ecosystem: Apple. We all know how successful Apple has been with the iPhone and the iPad and creating new product categories and platforms that leverage mobile computing. Mobile accessory vendors have been quick to leverage Apple's product platform from the very beginning. In building lifetime value of a customer, these accessories can derive large profit margins for everyone in the value chain. Just how big is the market?
ABI Research expects global revenues for mobile accessories to be $81.5B in 2015. Future Market Insights believes global mobile accessories market revenue will reach $121.7B in 2025.
For the sake of discussion, we can look at mobile phone accessories as part of larger wearables and mobile accessories market. In fact, if you use mobile phones as controllers, they start to tap into the concept of the Internet of Things (IoT) and other related and adjacent markets in smart homes, entertainment, and security.
Let’s look at mobile phone accessories. Future Market Insights subdivided this market into more than 6 categories as shown below and included their 2014 market share.
While this list is pretty straightforward, strangely, I believe it is missing one important category - hardware enabled input and output devices that take advantage of the iPhone platform as a controlling device. This is a distinct advantage of the iOS market. Unlike Android devices, whose styles, hardware, form factors, buttons, switches vary by competitor, the iPhone platform and ecosystem is standardized to allow a clear path to hardware development of the iPhone mobile computing platform. They offer developer programs like MFi and the External Accessories Framework (EA) to support communication and support of third party hardware device to an iOS device through Apple Lightening, 30-pin connector and wirelessly using Bluetooth.
In the presentation by VisionMobile, these ecosystems have given birth not only to red and blue oceans, but black oceans, ecosystem driven-markets that are so powerful and strong, you can't beat them, and you can only join them or compete with them with another black ocean ecosystem (e.g. Android vs. iOS).
A simplified input-output model for hardware development looks something like this:
|Source: Vince Ferraro|
In the imaging, test and measurement, and audio markets, companies are leveraging Apple's ecosystem in some exciting and new ways, often creating new product categories or products that are substitutes to existing products that were created on platforms and devices in the pre-smart, mobile phone world.
Here are some examples of such products.
Ollo Clip 4-in-1 Lens System
Zeiss Optics Exolens System
Sony QX30 Smartphone Attachable Lens with 18MP and 30X optical zoom
Echo Labs Revolve - a San Diego startup that is developing an innovative microscope that use mobile phones and tablets for image viewing, image capture, analysis and printing.
HyperCam - under development, the HyperCam makes use of a technology called hyperspectral imaging, which involves scanning 17 wavelengths of visible and invisible near-infrared light from across the electromagnetic spectrum to capture unseen details.
Infinite Peripheral’s LineaPro 6 Accessories Bar Code Scanner - turns your iPhone into a bar code scanner
eora 3D - the world’s first high-precision 3D scanner that is entirely powered by a modern smartphone. It lets you capture everyday physical objects and surfaces and turns them into high-quality 3D models, all on your phone, making it extremely affordable.
Sensing & Measurement
Lapka for iPhone - a range of environmental sensors that plug into the iPhone
Scanadu SCOUT - which is developing a personal medical Tricorder
Range Smart Cooking Thermometer - hardware and app to receive remote temperature alerts to iOS devices anywhere. You can also save and share recipe graphs, and set both USDA- and gourmet-recommended presets, so you know your dinner will be done just how you like it.
There are also brainwave measurement using devices like Emotiv's EPOC / EPOC+. Another popular one is by Muse.
A list of other medical-device accessories for the iPhone can be found here.
Audio & Music
Alesis IOMIX 4-Channel Audio Interface/Mixer for iPadfour-channel mixing and recording on your iPad. The iO MIX provides all of the necessary connections, as well as compact four-channel mixer for making the most of every performance. With its compact design, iO Mix is the perfect portable studio.
Focusrite iTrack Professional Dock for recording on iPad. iTrack Dock is a comprehensive, studio-quality iPad recording interface that acts as the hub of your iPad recording studio. It features dual legendary Focusrite microphone preamps, along with two line inputs and an instrument DI with plenty of extra headroom, stereo monitor outputs with 105dB dynamic range plus independently controlled headphone outputs, and a USB port for class compliant MIDI instruments and controllers.
DigiTech IPB10 Guitar Floor Multi-Effects Pedal - a programmable Pedal board which sets a new standard for guitar signal processing. By harnessing the power of the iPad, it combines the simplicity of a pedal board with the flexibility of multi-effects. The iPB-10 unleashes the ability to create and control guitar effects like never before. The iPB-10 allows you to create your ultimate pedal board, all on your iPad. Design a pedal board by simply dragging and dropping up to 10 different pedals, in any order, to each pedal board.
IK Multimedia iRig 2, an interface adapter for iPhone, iPod touch, iPad, Mac and Android. They have an entire line of mics, mixers, effects, and recording attachments for smartphones and tablets.
Where do you go from here?
There are many other examples and opportunities are limited only by the capabilities and functionality of the iOS platform.
The key point is that a company, such as Apple, looks at their product as a platform upon which others can build and profit from. In addition, other companies can exploit that ecosystem to build their business.
There are a many hardware opportunities for innovative companies that can do one of two things to leverage the capabilities of Apple platform.
1) Replace existing products by harnessing the power of the Apple ecosystem. Create disruptive products that challenge and change prevailing value propositions and pricing of these products in the market. Leverage existing value chains to drive market share and expand the market.
2) Create new products and solutions that were too costly or unattainable, until the iPhone ecosystem was developed. Develop the market with new price/performance curves and blue ocean ideas that bring radically new capabilities and functionality that might have been confined to a higher priced niche.
While this blog focuses on Apple, other companies may glean ideas on how they can transform their products and services by leveraging the power of an ecosystem. Sometimes, it is just a matter of building a stronger business development function. Other times, it may be reviewing and expanding on the product set which will make the product or platform more robust. Perhaps setting up a new product or business advisory panel can help with those ideas.
What are your thoughts on this topic? Let’s continue the dialog. And if you would like to discuss building an ecosystem, feel free to contact me at email@example.com or tweet me @vincelferraro and check out our other insightful blogs and resources.
Friday, January 15, 2016
We have all heard of the perfect storm, an event where a rare combination of circumstances will aggravate a situation drastically. For a business to perform optimally it must create the “perfect calm.” However, just as the perfect storm is a rare occurrence so is the perfect calm.
Successful businesses must have vision, goals, strategy, strategic objectives, tactics, action plans, execution, and follow up. These components must be both clearly articulated and effectively communicated to align the organization. If a business is not performing all of these activities effectively, even a small storm will create problems. If all of these activities are being effectively performed and there is no external storm a perfect calm is created. Everything goes according to plan. As I said, perfect calms are as rare as perfect storms.
Businesses will always have to deal with problems or challenges. Issues may be internal or originate externally such as from competition. How management responds to these constraints differentiates winners from losers. Fundamentally, a business must have the right culture and processes in place to seek the truth when solving problems. It must have the will and methodology to identify the true issues and deal with them no matter how uncomfortable. In other words, management can deny that the wind is blowing or just hope that it stops blowing, or it can adjust the sails and take advantage of it.
However, sometimes problems are not so apparent.
The following example illustrates how difficult it is to find the root cause and develop solutions.
Consider Specialty Gadgets, a middle market company that manufactures and sells gadgets to small businesses to enhance office productivity. The company’s revenue growth has recently declined, leading to thinner margins. Management has indicated the reduction in revenues is attributable to a competitor offering a similar product at a lower price. The issue before the executive team is how to reduce prices while maintaining market share and margins.
The first step in reversing the declining growth is properly identifying the problem. Let’s assume that in this case a consultant was hired to bring forward an objective perspective, broad business experience, and the appropriate tools and methods. The consultant determines it is true that (1) growth is down, and (2) a competitor has reduced its price. However, deeper analysis showed it was more complicated than that.
Digging into the sales numbers revealed that one sales territory has actually increased revenue growth in spite of the competition Upon further investigation, it was determined that this specific sales team discovered the competitor’s product was less expensive but also inferior. They created a product comparison brochure and trained the sales representatives on how to sell the difference in benefits and value. Specialty Gadget’s higher quality product results in lower overall operating costs over time. This was well received by local small businesses.
One might now assume that the problem is a lack of a centralized competitor analysis and training program that works with all sales teams to best position Specialty Gadgets against its competition. This was true but there is an even more fundamental problem. A corporate scorecard that enables managers to drill down on key metrics did not exist. With this information, management would have been in a better position to ask different questions and not assume the root cause of the growth reduction was the competitor’s price actions.
At this point, we have determined that the root cause of the declining growth was a lack of clear metrics and a scorecard that was available to the executives and the functional leaders. Had a scorecard been in effect, management would have caught the declining revenue growth in a timely manner and created specific sales training to combat the competition across the company. The obvious question is: why there was no scorecard?
It turns out that the Founder/CEO is a brilliant man but not a “quant.” He has a feel for the business having been in his position for a long time, and makes decisions based on his observations. He thinks spreadsheets are a waste of time. The CEO is an engineer by trade and spends most of his time working with the product team improving the gadgets. He rarely gets out to the field to visit with customers and sales teams.
The CEO is well liked and he sets the informal culture. The company’s family-like culture was an advantage when the company was small and everyone was in one building and had access to the CEO. However, as the company grew and opened offices across the country, sharing information, and understanding the vision were more difficult to achieve. Therefore, the reduction in sales growth was rooted in the misalignment of the culture, originally set by the Founder/CEO that no longer fit the more mature company.
Obviously, this is a difficult problem to solve. The Founder/CEO has three options as follows: (1) lead a change that keeps the best of the family-like culture but instills more discipline and control in analysis and decision making, (2) hire a CEO to make the necessary changes and limit his work to product development, or (3) keep running things the way they are and hope for the best. We at C-Level Partners do not believe that hope is a good strategy for any company.
Implementing either of the first two actions is much more difficult than the original decision to reduce prices and take out cost to maintain margins. However, had the original diagnosis been acted on it is likely business results would have worsened. Lower revenues per unit offset by cost reductions would likely have resulted in lower product and/or service quality. In this case, a resulting reduction in growth would be much more difficult to turn around.
Furthermore, if the current processes and culture of the company did not change, additional problems would arise as the business continues to grow. Eventually, results could deteriorate to the point where replacing the CEO outright will be required to save the company.
Although the story above is fictional, I believe it is realistic. Too often, companies see a problem and they assume they understand its root cause. They then take action only to find that the problem recurs or results actually get worse. I believe this is due primarily to the following:
1. The executives are too close to the business and can’t see clearly through their biases
2. The business does not have the right decision-support tools and processes to effectively monitor and analyze the key metrics driving performance, including a dashboard to provide early warning signs of problems
3. The executive team believes anything less than decisive action is bureaucracy (“analysis paralysis”)
4. Accountability for results is unclear or shared among different groups
5. Cultural orthodoxy prevents the organization from considering and implementing new ways of approaching the business
In this fictionalized example, the problem was a combination of several of these five items.
In many cases, business problems aren’t adequately addressed because management is overly confident. In fact, sometimes managers are unwilling to look in the mirror and admit what they don’t know, or ask for help.
The moral of the story is that sustainable business performance starts and ends with executive humility. Whether you are responsible for your own work or that of an entire company, success depends on staying open minded. Successful executives are not afraid to seek help or look at new ways to conduct business. As Andy Grove, former Chairman and CEO or Intel has said, “Only the paranoid survive.”
Having the right culture and processes that ensure problems are accurately described, and the root cause identified may not create the “perfect calm” but it is a critical first step to sustained success. The perfect calm may akin to perfection - not a bad goal to pursue.
We are interested in hearing about your experiences in solving problems. Is the fictitious example described above realistic in your experience? How do you go about making sure you solve the right problem? Feel free to contact me at firstname.lastname@example.org to discuss.
Thursday, January 7, 2016
I was at a very interesting meeting hosted by Brett Olinger and Susan Howington, founder, Power Connections on Dec. 16, 2015. There were about a dozen high level executives around the table with titles ranging from VP to COO to CMO to CEO. Susan got us together to talk about business issues and she asked a relatively simple question: What makes a company great? And the subordinate theme of what kind of company would you want to work for or build?
As a tech executive and one involved in the entrepreneurial eco-system in southern California, I would have imagined that I would hear about things such as the latest and greatest technology that captures people’s hearts and minds. Or maybe I was hoping to hear about the great opportunities for career advancement or companies doing social good.
I did not hear of specific industries, technologies, functions, unique characteristics of the leaders or anything that you might glean from an employee survey. Remember the ones commenting have been and are successful executives. After listening intently – and contributing as well- I captured their thoughts into three areas: Culture, Leadership, and Customer Focus. And I have to admit that is probably the order of importance because to me, culture is a platform upon which to build and enact leadership and a customer philosophy. As you read the following, just ask yourself about the companies for which you worked. What made them good? Why did you like coming to work? What drove your passion? What made these companies great for you?
Culture was the number one item. Culture was a necessary but not sufficient condition for making a company great. Think about Tony Hsieh of Zappos. He has instilled a clear culture in that company that focuses on the customer. Do what is right for the customer. Certainly his vision and bent is the customer. But without a cultural underpinning, Zappos would not be as successful as it has been.
Culture is also unique to a company. It is hard to duplicate and is normally set by the CEO. Think about other companies that are successful and have a truly unique culture. Think about Disney and the culture about Imagineering. Think about Intel and the culture of innovation. Think about 3M and their culture that they encourage people to invest their time on new ideas. Without a culture of innovation and support for innovators, many companies may not achieve success.
We discussed other components of culture as well. Those components included telling it like it is……. but respectfully and constructively. (As an aside, I can certainly relate to this coming from Brooklyn, NY and have seen direct cultures like New York and oblique cultures like I have seen in the Mid-west.) Another element was pushing employees to the next level, i.e. making them believe they can succeed and giving them opportunities to succeed. In the process of encouraging people, the culture must also accept failure (fast failure is preferred) and must set up a reward system for those that are successful.
Culture is also critical as the underpinning of being customer focused. Think about a company that is just focused on the bottom line versus a company that is trying to help a customer and wanting them to be happy. Think about your experience with Zappos. Or if you have web service or webhosting from 1and1, think about the great customer service you have received from them. Was it easy to talk with the company and its reps? When they talked with you did you believe that you were the only person in the world on their mind or did you feel that you were imposing by asking them a question? We heard a story this morning about how Steve Wynn chose people to work for him. Applicants were told to go to another part of the building and when they got there, Steve was sitting behind a desk, rose to greet the applicant and wanted to see their reaction. If they were friendly and responsive, they were hired. True? I am not sure but it makes a good story.
We all know that leadership is critical. Leadership starts with the CEO and filters down to people in the organization. The leader sets the culture. When I was head of marketing at US Cellular, our founding CEO, Don Nelson, was a great leader. He selected an eclectic group of people, set the objectives and measured results meticulously and religiously. But what distinguished him was his willingness to listen to his people, set and change vision and set a clear direction for the company.
The result, during my tenure was that the company grew fourfold in revenue in only five years.
Think back to the CEOs and possibly mentors you have had in your career. What has distinguished them? This morning, the executives around the table believed that not only did the CEO establish and set the culture for the company, in essence being the chief culture officer, but also set a clear and compelling vision for the company. As the Cheshire Cat said, “if you don’t know where you are going, any road will get you there.” Leaders know where they are going.
Coupled with the vision is the ability to articulate the clarity and alignment of the messages across the entire company, and in my humble opinion, do it in a personal way. As companies grow, become more complex, and are geographically disbursed, having a common vision and alignment of messages are critical to ensure everyone is marching in the same direction. In this case organizations become both effective in generating profits (the end game for most) and efficient in doing so.
The group believed that a great company has a servant-leader. A servant-leader focuses primarily on the growth and well-being of people and the communities to which they belong. By focusing on people first, it empowers employees to be successful. It also has a mentoring quality enabling employees to trust the leader such that when these employees are pushed to success by the leader, they trust that their best interests, and in turn the company’s, are aligned. To be a true servant leader, two other elements must ring true. The leader must be authentic and must be transparent. There should be no hidden motive or ego at play.
As a businessman and marketing executive, I have written extensively and talked about customer focus. The customer, the one who buys your company’s products and services, must be foremost in your mind. Companies who are customer focused truly understand the behavioral drivers of the customer and why they buy your products and services.
The executives at our meeting believed that great companies connect with the customer. These connections may come from a better user interface, or the way they train their front line people to interact with customers. We bandied about the concept of Customer Experience Officer because customers, who are not happy, not satisfied, become disloyal. And, all of us recognized that retention of customers is critical to a company’s success. Further if you connect with the customer and relate to the customer, if a company makes a mistake there are positive “chits” that have accrued over time and forgiveness by the customer of any faux pas is normally granted.
Note that customer focus relies on a specific culture. Again, think back to Zappos or think about any experience you have had at a retail store or an online store. Systems are critical to help achieve customer focus but in reality it is the people, those front line sales people and customer support people that guarantee that the customer is important. Most of us go to Starbucks to get coffee. Think about your experience. They ask your name and if you visit the same store more than a few times, the baristas and others will get to know you. How do you feel? Pretty loyal I would assume.
Starbucks, Zappos, US Cellular and other companies have realized something very critical. The people who interact with the customers ARE the brand. Leadership sets the vision and a customer centric culture is established. Yet customer focus is executed by the people. All of us agreed that great companies are those that have this passion for the customer, exercised by supporting a customer first philosophy on the front line.
Going back to the original question of What makes a company great, it comes down to three areas: culture, leadership, and customer focus. All three are interrelated. In short, great companies balance the needs of customers, employees, and owners. What companies would you want to work for? What makes a company great in your mind? My partners and I will be glad to talk with you about your business issues and help you set a course so your company can be "great" as well.
For more thoughts and ideas, feel free to contact me at email@example.com or visit us at www.clevelpartners.net. I will also guarantee that if you write or call me, I will pick up the phone and talk with you. Why? Because we, too, love our customers and we have implemented a culture in our company of helping and sharing.