Diversification

Diversification is introducing variety into a company’s portfolio of investments or in the variety of goods and services offered or the spreading out of investments to reduce risks. It allows a company to increase profitability through greater sales volume from new products and new markets.

The Limitations of Interdependence

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InterdependenceWhat do you think? Will Joe stay or leave?

And, more importantly, what would you do?

Joe had worked in the operations side of his uncles’ technology company for ten years before he told them that he wanted to run his own business.

Good for Joe. That conversation led to the creation of an installation company that was actually separate from the base business, and Joe had his opportunity to be a President. Since they financed the startup, Joe’s uncles owned the new installation business. Within a few years, Joe became a minority shareholder. Today with ten more years now under his belt, Joe and his uncles have equal shares.

Whether you handle computers, telephones, furniture, sun rooms or sound systems, growing an installation business has its challenges. It’s labor-intensive with lots of moving parts, conflicting schedules, union versus non-union jobs, tight budgets, high expectations and too little control over what’s promised.

Installers are dependent on salespeople to make reasonable commitments. In a highly competitive environment, that becomes almost impossible. To get the account or the project, a sales person can feel forced to agree to just about any demand. This pressure is tough enough to handle when the installers are in a department within the core business. Installers in a separate business are dependent on promises made by salespeople in someone else’s company.

So Joe and his uncles negotiated a deal to help the companies be interdependent. The core technology company would get discount pricing and give Joe’s business right of first refusal on their installations. For a few years, the majority of Joe’s installation projects came from the family’s technology business. However, he wanted to grow his business faster and learn how to work with a broad range of customers. Joe can’t hire, train or supervise the sales people in the technology company, but he can develop his own sales department. Today, less than 20% of Joe’s business comes from his uncles’ technology company. Hmm…They are his partners. That could be awkward.

Who gets to decide which companies Joe’s salespeople can approach? What about companies that directly compete with the family-owned technology company? How many other customers can be extended the right-of-first-refusal discount before its value is diluted? Have the installers lost the influence they once had with the technology company salespeople? If the promises made by the family-owned technology business become unacceptable, could Joe charge them more money? Could Joe ever buy his uncles’ shares and become the majority owner? If the family-owned technology company continued to be his largest customer, could Joe change his pricing? If independence is Joe’s primary life goal, could he focus “his” installation company on completely different products or customers than the family-owned technology business?

What do you think? Will Joe stay or leave?

And, more importantly, what would you do?

As an Entrepreneur, Have You Lost Your Authentic Swing?

Businessman ThinkingI love the 2000 movie The Legend of Bagger Vance.

Remember it? Directed by Robert Redford, the movie was based on Steven Pressfield’s 1995 book with the same name. The actors include luminaries Jack Lemmon, Will Smith, Charlize Theron and Matt Damon. This was Lemmon’s final movie which makes it even more important to many people.

In 1931 (during the depths of the Great Depression), the City of Savannah, GA sponsors an exhibition golf tournament with great golfers Bobby Jones, Walter Hagan and the town’s golf prodigy and hero, Rannulph Junuh.

As he caddies, wise Bagger Vance (played by Will Smith) provides sage advice to help Junuh recapture his “authentic swing.” They talked very little about the fairway, sand traps or greens. They talked about post-traumatic stress, the meaning of life, guilt, regret, a broken heart, giving up, accepting responsibility and hiding. You know…light conversation (lol).

As many golfers of today can tell you, finding one’s authentic swing in golf is not just a matter of repetition. Golf is a mental game as much as it is a physical one. When a golfer’s muscles are tight from being angry at work, his/her slice or hook returns on the golf course. When a golfer’s optimism or confidence is compromised, the short game on the green becomes another nightmare. An executive’s capacity to make great strategic decisions is another version of one’s authentic swing.

Presidents of privately held mid-sized companies often don’t have time to play golf or have another similar outlet that offers feedback on whether the president is still centered. It is impossible to maintain your authentic swing when you aren’t centered. Often the all-important feedback comes in the form of poor business results. The president’s loss of his/her authentic swing is taken out on the business.

Sometimes executives just keep showing up when he/she knows he/she is “just not right with the world”. Continuing to show up is important, but just going through the motions can solidify bad decisions (a hook or a slice). Finding what keeps you centered is worth the effort. An executive coach could be your Bagger Vance.

CEOs Learn Important Lessons from Serving on Other Company Boards as Minority Shareholders

Serving on the board as a minority shareholder of another business provides unique learning opportunities for CEOs. It’s a particularly good idea for CEOs of privately held companies that are approaching the $50Mil/yr mark because that is such an important inflection point on the journey to $1 Bil. (see David Thomson’s 2006 book BLUEPRINT TO A BILLION.)

As a minority shareholder, you can witness another CEO being defensive as you and other board members ask important questions about the readiness of executive team members to take the company to the next level. You can see what happens if/when the performance metrics that serve smaller businesses haven’t been replaced by more relevant ratios. As a board member, you can see how indecision on the part of the CEO stalls growth more often than market dynamics or the availability of money. You can learn that nothing invites the exodus of top talent faster than previously successful executives who have become risk adverse. And you can witness the damage done when leadership refuses to address a chronic recurring problem.

New Department, Subsidiary or Separate Entity?

Although experienced attorneys can provide guidance based on laws, regulations and taxes, it is not always obvious when a growing business should establish a separate entity, a subsidiary or just a new department.  Ask yourself some relevant questions before you consult attorneys.

How different is the nature of the work being done?

We have helped a few dozen technology sector clients address the dramatic differences between their system integrators, staff augmentation unit, trainers, application engineers, tech support services and data base managers. The diversity of schedules, priorities, education, etc involved is enormous.  Most companies do not officially establish separate companies, but separate offices for such distinct business units are usually involved. Strong account management makes it work.

Will the “unit” provide products/services only to the existing company?    

Our expansion into executive search is illustrative. We know our clients’ strategic plans, cultures, and the composition of their executive teams. Several clients asked us to help them find, screen, and select executives for their teams. We continued to recommend industry-specific search firms and also reached out to people in our data base to look for possible candidates. We didn’t have to make the same kind of promises other search firms make. We weren’t expected to do as much.  If our additional outreach resulted in a great candidate, the client would compensate us for time and access.  As more and more executives were hired as a result of our network, we would consider hiring a search professional and establishing a department. A separate company probably wouldn’t be indicated if/until the search service would be offered to non-client companies.

Should the “unit” involve a different combination of leadership or ownership?

If only serving existing clients doesn’t move fast enough for an ambitious department head, decisions about that service unit would change. Should it become a separate entity?  The regulations, approach to compensation, and culture impacting strategy consulting and executive search firms are dramatically different. Can you imagine having only one commission driven service department head on an executive team?  Before you let that happen, you consider a separate entity, equity, pricing, and win/win coordination between the entities.

Do the laws, regulations, and potential conflict of interest cue separation at the onset?

CPA firms must be very careful when it comes to their auditing services.  Of course, they shouldn’t audit their own work. Financing is similar.  Of course any private investment activity would be separate from strategy consulting.

 

Aldonna R. Ambler, CMC, CSP has earned the right to be called THE GROWTH STRATEGIST®. She has won over 2 dozen national and statewide “entrepreneur of the year” awards for the resilient growth of her international businesses across 4 recessions.  Her midsized BtoB clients get on…and then stay on…the published lists of the fastest growing privately held companies. She owns and operates a suite of companies that help privately held midsized companies achieving accelerated growth with sustained profitability® through opportunity & resource analysis, 4 approaches to strategic planning, executive advisory services, growth financing, and targeted search.  2012 is Ambler’s 8th year hosting a weekly peer-to-peer-to-peer syndicated on line talk show that features interviews with CEOs/Presidents of midsized companies (typically between $20 and 200 Mil/yr) sharing success tips about the growth strategy-of-the-week. An archive of over 300 interviews is available at www.GrowthStrategistShow.com. She can be reached toll free at 1-888-Aldonna or at Aldonna@AMBLER.com.

A Technique to Screen Business Investment Opportunities

Lots of very bright people get burned by the assumption that every business owner who has learned how to make decisions about his/her own company can objectively evaluate the potential of someone else’s business.

If you are regular reader of this blog or one of the 200,000+ business executives who view weekly broadcasts of The Growth Strategist® peer to peer talk show, you are familiar with our tagline ACHIEVING ACCELERATED GROWTH WITH SUSTAINED PROFITABILITY® and you may also already know that the secret to success lies in reversing the phrase.  Know what drives your profitability, do what is needed to sustain it, then growth strategies (like acquisitions, new products, or geographic expansion through franchising are relevant)…then you can step on the gas to accelerate.

OK. So what if you used that tagline as a technique to screen potential investments in other peoples’ companies? It takes some practice, but it does help.

Can you tell what REALLY drives the profitability of a business?  The answer is fairly evident for some companies.  Innovation comes to mind for APPLE®.  But it’s not so clear with other companies.  What has driven the profitability of H&R Block® all of these years?  Being able to train people quickly? Flexible staffing?  An understanding of taxes?  Simplification?  See, the answer is not always so obvious. That is the first question when you consider investing outside your core business.

In my recent interview with Eric Shepocaro, the CEO of TelX, it became clear that their focus on how large clients can benefit from leveraging TelX’s technical advances has driven their profitability.  It is not just about creating new technologies, building new data centers, or going to the cloud for the sake of going to the cloud.

Once you have your arms around what drives profitability, analyzing what is involved with sustaining that factor is critical.  What could interfere with APPLE®’s innovation? What could slow down H&R Block’s ability to simplify and replicate? What could distract TelX from its focus on customers’ leveraging their technology?  The profitability of businesses that are based on helping companies comply with laws, regulations, rules, and quotas can be compromised by the slippage in ethics during recessions.  Profitability won’t be sustained if the government or justice system can’t follow through on enforcement.  You would clearly need to dig deeper before investing in a business built around compliance.

If you become convinced that the answers to the first two screening questions (criteria) are sound, then you can decide if the proposed growth strategies serve those answers well enough (are congruent). 

 

Aldonna R. Ambler, CMC, CSP has earned the right to be called THE GROWTH STRATEGIST®. She has won over 2 dozen national and statewide “entrepreneur of the year” awards for the resilient growth of her international businesses across 4 recessions.  Her midsized BtoB clients get on…and then stay on…the published lists of the fastest growing privately held companies. She owns and operates a suite of companies that help privately held midsized companies achieving accelerated growth with sustained profitability® through opportunity & resource analysis, 4 approaches to strategic planning, executive advisory services, growth financing, and targeted search.  2012 is Ambler’s 8th year hosting a weekly peer-to-peer-to-peer syndicated on line talk show that features interviews with CEOs/Presidents of midsized companies (typically between $20 and 200 Mil/yr) sharing success tips about the growth strategy-of-the-week. An archive of over 300 interviews is available at www.GrowthStrategistShow.com. She can be reached toll free at 1-888-Aldonna or at Aldonna@AMBLER.com.

Stop Waiting for Teleseminars – Learn from Your Peers While on the Treadmill

Here’s a suggestion for busy Presidents/CEOs of midsized businesses (especially $20 – $200 Mil/yr) who

  • feel that your time is STILL your scarcest resource
  • recognize the need to feed your mind, learn, stretch, grow
  • find relevant teleseminars but then can’t participate because they run at the same time you are involved in important meetings
  • know you need to exercise but are going to the gym less often
  • have been tempted to attend an Inc. Conference on Growth…

Why not download free online radio shows onto your iPod to take to the gym? Take shows featuring interviews with your peers on the Inc. 500 list of the fastest growing privately held companies who are sharing success tips about the growth strategy-of-the-week. 

Most of you, the readers of my blog and Twitter tweets, know that I have been hosting a peer-to-peer-to-peer online radio show The Growth Strategist™ for 5 years now. We rotate through various geographic locations, industries, and growth strategies.  One week, my show might feature an interview with the President of a Singapore-based retail company that has grown through franchising. The next show may be with the CEO of a Kansas City-based manufacturer sharing success tips about how they’ve grown through acquisitions.

Many of the guests on my show are on the Inc. 500 (or at least the Inc. 5000) list of the fastest growing privately held companies. They are bright, ambitious, somewhat intense, fabulous leaders….just like you. The show is #2 in its category and attracts over 180,000 listeners.

I have LOVED hosting the show.  How can the discussion of growth strategies between people who actually live the journey EVER be boring?!

I open each show with some tips on the growth strategy-of-the-week gleaned from my 30+ years of experience as a growth strategist helping midsized companies earn and keep their spot on the Inc. 500 while increasing their profitability. Many of you know that I have also won over two dozen national and statewide “entrepreneur of the year” awards for the resilient growth across 3 recessions of my own midsized businesses. So I share examples from my own journey as well.

It’s been 5 years so my website, www.TheGrowthStrategist.com, and the station’s website (www.business.voiceamerica.com) now have over 200 downloadable shows (podcasts if you prefer) available for you to download onto your mp3 players and take to the gym.  Our research shows that most listeners do that or they listen to the show between 11:00 pm and 1:00 am as they do their last round of email “after the spouse and the kids have gone to sleep for the night”. The only reason you would break from an important meeting to listen to the live broadcasts each Tuesday at 11:00 am EST would be if you wanted to ask a question.  Most listeners send emails with questions to me and my guests following the shows. It’s NOT like traditional radio broadcasts where listening at the exact time of the live broadcast represents your only opportunity.

Why wait for teleseminars when you can download 5, 6, …sometimes as many as 10… timely peer level radio shows focused on a growth strategy you are using or have been considering, including

  • specialization
  • diversification
  • acquisitions and mergers
  • franchising and licensing
  • new products/new markets
  • joint ventures and strategic alliances
  • equity deals and IPOs
  • several others….

I did a series of shows earlier this year about ‘HOW TO CHANGE YOUR BUSINESS MODEL” and another on “THE CHANGING IMPACT OF REAL ESTATE ON STRATEGIC GROWTH DECISIONS”.

You can suggest topics, offer to be a guest, or recommend someone else you think might be an interesting guest.  The toll free number is 1-888-Aldonna and the email is Aldonna@AMBLER.com.

Diversify Yes, Chaos No

On Tuesday, April 28, 2009, Jason Caldwell of WENCOR, was my guest on my weekly online radio show, The Growth Strategist™ and provided some great advice about how to diversify without creating chaos.  A well known distributor within the aeronautics industry, WENCOR has been expanding internationally, gotten into manufacturing, and acquired a few businesses.

Many distributors lose their shirts when they try to become manufacturers. WENCOR has been successful because they maintain their identity as a distributor. They got into manufacturing to improve their control over the quality and cost of some key products. Their customers still count on them to provide the right products at the right price. Whether WENCOR is the manufacturer is relevant to WENCOR but not their customers.

Being fiscally conservative has also helped WENCOR succeed through diversification.  Their employees are encouraged to look for opportunities, but when they bring ideas to be considered, they must present well thought through business proposals.

Like other companies that successfully grow through diversification, WENCOR uses a check list/criteria for its acquisitions that includes “cultural fit.”  Interesting tidbit: 8 years after the acquisition of DIXIE Aeronautics, Jason Caldwell is the President of DIXIE and still serves as the EVP Sales for the parent company, WENCOR.

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