Wow, what an inspirational day.

Gen Y has received a lot of criticism from those in my generation. “They expect it all, have a poor work ethic, if they can’t see immediate advancement opportunities they move on” – and the list goes on.

But then every once in a while you meet someone, see something or are told of something that changes that stereotype. With 4 kids aged from 29 – 13, it has happened to me a lot, but Friday was one of those special days. I had the pleasure of being at the Annual Lunch of the Penrith BEC (Business Enterprise Centre) – always a fun day and great to catch up with business colleagues and friends. When they announced the guest speaker was a ‘young entrepreneur’, I must admit there were a few raised eyebrows among the business ‘boomers’.

But what a surprise. Not yet 30, Jack Delosa has over 6 years experience running his own successful businesses (and one not so successful, but that’s another story). His latest venture, “The Entourage” looks at addressing the problem of ageing business ownership in Australia and the apparent lack of interest from ‘his generation’ in family succession. He sees both the threat and the opportunity and through The Entourage he aims to inspire and develop entrepreneurs to start, build and exit high growth ventures so that we can develop the social entrepreneurs of tomorrow, and effect real change for good.

Sound all too altruistic? Well think about this. The vast majority of Australian businesses are owned by Baby Boomers who will be looking to exit over the next 10 years. Opportunity for those want to acquire a business? Threat for those looking to exit?. Jack shared his thoughts on the risks facing business owners and what to do to minimise that risk. Like all good advice, it looks pretty obvious and simple. I’ll share it with you here.

So what were Jack’s Risk Factors facing business owners looking to get out?

Key person risk – the businesses reliance on one individual.

Management risk – the business has an inexperienced management team or board.

Lack of systems – poor automation, no documented policies and procedures.

Costly and/or time consuming revenue generation – lack of leverage and scalability.

Documents & Reporting – key contracts missing, poor reporting.

Financial risk – inconsistent cash flow, low profit margin.

All of the above risks will have a negative impact on your ability to dispose of a business for it’s full potential (average sale price of Australian businesses is 1.5 times earnings). But all of the above can be addressed with proper planning use of mentors, seeking outside advice and developing advisory boards.

On the ‘flip side’, Jack spoke of the Growth Factors that he looks to instil in a business and that will add value to your asset:

Scalability – you business needs to be easily scalable. Think systems and processes.

Good contracts – long term, high value clients = security of revenue.

Management – the business runs under management, not an individual and doesn’t require specialist skills. Think McDonald’s – a ‘restaurant’ run by 16 year olds.

Database – Make sure you have client details and a good relationship with them. A marketing friend of mine once said “he who has the biggest database wins”. Don’t think Microsoft invested into Facebook for it’s social network (valuing it at around $15bn when it was losing over $1m/mth) – Microsoft bought a database for advertising.

Leveraged Approach – key relationships that deliver consistent business.

Financials – the opposite of the Risk Factor.

Brand – its a barrier to competition.

So all of this from a “Gen Y’er”. Not bad eh? It is said inside every old man there is a young one wondering what happened – I don’t think this will be true of Jack Delosa.

In my last two posts, I shared the thoughts of Frank Gavrilos of AC Labels on why he has been successful with his business. This post concludes a most interesting and useful insight.

“Face the facts – just do the math!” I read an interesting article recently that suggested many managers manager like ostriches – with their head in the sand. In business, the figures are the “canary in the mine”. Don’t ignore them, Look for trends, good or bad, that will help identify problems and opportunities.

“Work ON the business, not IN it” I regularly hear from my clients that they are too busy “working” to worry about planning. I believe that in small business you need to be spending at least 2 hours a week working ON your business – ie planning for the future, identifying areas for improvement, developing staff etc. Frank made an interesting comment on this that I think defines his principal really well for medium sized businesses “Management need to work on what’s important, staff on what’s urgent”

“Don’t change the goal, change the process!” Now this is an interesting concept. If you have been working on your business and monitoring you figures, it is likely the goals in you plan will remain reasonably consistent. If there are problems reaching these goals (and they are SMART), perhaps the way of reaching them is the problem.

“Don’t reduce headcount, re-engineer their work!” as tempting as it may be to reduce headcount in times of economic downturn, if you have good staff now is the time to try and protect and retain them. Find productive and useful work for them and it will be a win/win situation, especially as business picks up.

“Match skills and tools with your plan” The best plan in the world, be it a football team’s game plan or a business plan needs to be supported by resources. If your plan calls for a strong export push and you lack experience and skills in this area, you need to gear up.

I was really impressed with Frank’s pragmatic approach to business management and hope you find his thoughts useful. While I have taken the liberty to expand on his thoughts a little, the basic concepts remain true and I think are well worth consideration by any business owner or manager.
Cheers
Wayne

In my last post, I shared with you what Frank Gavrilos, MD of AC Labels believed had been some of the reasons for the success of his business. I promised to follow up with his list of what he would look to improve within his business.

Firstly, Frank mentioned the need for tougher organisational assessment. I see the need to this all too often. It can be as basic as management being too busy to focus making sure they have the right person in the right job, to positions being created to support non-performing staff. Functional ogranisational structure will provide the best long term benefits to both the business and staff. If someone is not capable of performing their role in the business, management have a duty to identify this and assist the staff member gain the necessary skills through training or personal development. If this is not possible, the tougher decision of replacing the person may be the required option.

Next, Frank mentioned education at all levels in financial discipline. This ties into the point raised last week with respect to “ruthless cash management”. I recently witnessed where, despite a manager believing he had strong financial practices in place, the lack of attention to financial detail at a supervisor level was having a major impact on profitability of his construction business.

Better leveraging of technology was the next improvement on Frank’s list. When considering this, look for opportunities to improvement production, customer service, supply chain management and any other area of the business where competitive advantage or improved productivity can be achieved through better use of technology.

And lastly, more frequent and improved communication was mentioned. I have found that businesses that deliver clear and appropriate messages on what needs to be done, why it needs to be done and prioritises actions enjoy greater levels of success and staff commitment.

I have discussed Frank’s ideas with a number of business owners over the past week. While a lot of them have applied similar techniques, few had in place such a succinct list that allowed them to share them with their management team.

Until next week
Wayne

Face it: Most companies can’t compete on price. And the good news is they don’t have to.
This is a very interesting article – all credit to The Wall Street Journal…

By now, we’re all aware of the slash-your-prices scenario many companies take as a given these days: Your customers demand more and have online access to product comparisons from multiple sellers; you face global competition from rivals that have labor-cost advantages; and the financial crisis has accelerated the commoditization of more and more markets.

The solution? Cut your prices to gain volume and scale.

That definitely works for a few companies. But the reality is a very few—think Wal-Mart or Costco or Southwest Airlines. In fact, the very success of these business models makes it difficult for their competitors to duplicate—think Kmart or Sears, or any number of bankrupt budget airlines.

This article is for everybody else: those who choose not to compete on the basis of cost and low price. This article is for companies that can and should compete on the basis of performance, for which their customers willingly pay higher prices.

Questions to Ask Yourself
1. Does your company continuously focus on improving its products and services in ways that are important to customers and that allow you to raise prices and increase profits?
2. Do you communicate regularly with customers to find out how you can improve your offerings, and to make sure they’re aware of any unique value you provide?
3. Do your salespeople speak to the right decision makers and others who care about these value benefits in the customer’s organization?
4. Does your company involve every department in discussions about product development and pricing strategy in order to maximize efficiency, quality and profits?
5. Does your company consider pricing when it’s still developing a new service or product instead of when the product or service is introduced to the market?
If you answered no to any of these questions, your company is probably not doing enough to maximize profits in line with products and services that customers want and are willing to pay more for. And if you lack a repeatable process for doing these things internally at your company, it is unlikely that you will effectively identify and communicate value externally with your customers: Like so many other important things in business, pricing and leadership begin at home.

By competing on performance instead of price, you shift the battle to where your company’s strengths lie—in the ability to deliver unique benefits. So-called performance pricers are adept at three core activities: identifying where they can do a superior job of meeting customers’ needs and preferences; shaping their products and their business to dominate these segments; and managing cost and price in those areas to maximize profits.

If you can find these performance segments, manage them cost-effectively, and communicate to the customer the extra value being delivered, then as long as your offering is superior to the competition or other alternatives, you will be able to boost both prices and profits.

For an idea of how to become a master of performance pricing, let’s consider a global chemical company we studied.

For years the company had a pretty typical sales rule: It would take any order at any acceptable price. That sounds familiar, no doubt. But by 2003, it had recognized this wouldn’t generate acceptable shareholder returns or growth.

So the company switched to performance pricing, using a continuing four-step process that any company can duplicate: Identify value opportunities, choose which ones to prioritize, align their value and price, and constantly communicate to customers the value being provided. Here’s a look at each of their four steps.

Identify Value Opportunities
The leaders of the company started out by repeatedly asking in meetings across functions: What can we do to help our customers succeed or be happier? Every product, service and benefit the company delivered to its customers was examined to better understand all of the ways in which it had some impact on the customer, and how the offering could be improved.

Take a simple example: The company sells rubber stoppers to packagers of pharmaceuticals that use the stoppers to cap containers of injectable drugs. The company had long viewed the stoppers as a commodity. They’re easy to make, perform a simple function and cost very little. But looking at them afresh, from the customers’ perspective, it recognized that the stoppers could deliver multiple benefits to customers, and that these benefits could be quantified and ranked in terms of the value they produced for the customer.

The stoppers’ low price was only the first benefit. Their design could be tweaked to improve customers’ packaging-line speeds, lowering their operating costs. And because the customers used the stoppers to seal vials with different contents, making stoppers in different colors was recognized as a way to help hospitals and doctors reduce errors by making each vial more recognizable, and thus lower their insurance costs.
Set Priorities
After detailing the benefits, the company had to decide which products to develop further and how to invest its resources accordingly.

To be considered for performance pricing, an offering had to meet two basic tests. First, it had to have either a strong competitive position in its market or a highly ranked benefit to the customer (benefits were ranked, from low to high, in three groups: offering low acquisition price, helping reduce operating costs, and improving sales by enhancing quality). And second, the product had to be manufacturable at a cost that yielded attractive profit margins.

Thus, any product whose main benefit was its low sale price was likely to be rejected. But so were premium products if their costs were high and their projected total market too small. For example, the company had done well with a certain dental-filling product, but the total potential market was extremely limited and the investment costs would have included long, expensive testing of the product on people.

The stoppers, by comparison, looked promising. They offered highly valued benefits to customers, and could be produced at low cost.
Align Price and Value
The next step was to set higher prices in line with what the customer was willing to pay.

The key here is being able to document and quantify the precise nature of the benefits that your products offer, and to figure out what their tangible value is to the customer, in terms of acquisition cost, operating cost and added value to the end user. Once the supporting data are in hand, then you sit down with the customer to discuss what the new price should be.

In the case of the rubber stoppers, the company used the data to successfully argue to a customer that two products, while nearly identical in appearance, should be priced very differently because of the different ways they were used. One stopper sealed vials of a vaccine for chickens that the customer sold for less than $5 a vial; the other sealed vials of an anticancer medication that sold for more than $1,000.

While the stoppers looked alike, the higher-value application had tighter tolerances and came with significantly more technical assistance, service responsiveness and quality-control data, due to the difference in the costs and risks associated with the two stoppers. Indeed, failure of the seals on a few of the anticancer vials would have far greater impact on the customer’s bottom line than a few ruined vials of the chicken vaccine. And, while both kinds of stoppers helped production—in terms of high packaging-line run efficiency and low scrap rates—higher efficiency for the anticancer vials, resulting from the technical assistance and tighter tolerances, translated into increased profits for the customer.

Thus the chemical company proposed a significantly higher price for the anticancer-vial stopper, and presented reams of data from the tracking system to support its argument. The customer later came back with figures of its own that painted a lesser impact than the company had suggested. But the customer’s figures were in the ball park, the chemical company said. The two companies agreed on a new price for the anticancer stoppers that was a multiple of the price for the chicken-vaccine stoppers, and both parties felt like winners.
Get Cooperation
Such a system relies on a lot of help from the customer, and getting that cooperation takes work. The chemical company had to display a thorough understanding of all the issues the packager faced to win its case for the differently priced stoppers. After such increases are won, continuing efforts to communicate why higher prices are justified can bring other benefits as well.

By adopting performance pricing throughout the firm, over the next five years, the chemical company’s profits grew 10% annually in a market growing less than 2% a year.

The approach also provided a strategy that allowed the company to weather the recession better than competitors: In 2009, industry volume declined more than 20%, compared with 14% for the company. But, despite lower volume, the company’s return on sales increased by more than 40% due to its ability to identify value opportunities, prioritize requirements, align value and price, and communicate value to cost-conscious customers.

Frank V. Cespedes is a senior lecturer at Harvard Business School. Elliot B. Ross is chief executive of MFL Group, a Beachwood, Ohio, consulting firm that assists clients on growth strategies and pricing. Benson P. Shapiro is the Malcolm P. McNair professor of marketing emeritus at Harvard Business School. They can be reached at reports@wsj.com.

Last year I was fortunate to attend a function sponsored by The Federal Government’s Enterprise Connect Programme and The CEO Institute. One of the speakers was the host, Frank Gavrilos, MD of AC Labels.

Like many small business owners, Frank has a background in corporate management and “jumped of the cliff” a number of years back when he took over AC Labels. Frank spoke how he has successfully built on a foundation the founding owners had laid, and what has worked for him. Not surprisingly, sound business principals were at the root of his management style. Frank saw the following as the key issues focused on in building AC Labels:

1. Grow the Pie
Frank wasn’t talking about simply growing market share, but about looking at what other markets he could address. This meant a change of culture within his sales force, but one that now means he is building his business outside the original confines.
2. Rationalise the Business Plan
- Like any successful business owner, I am sure Frank has a clear vision and strategy for the business. He has this documented in a business plan but he stressed the need to remain focussed on core competencies and to create networks and alliances that will help turn the business plan into a reality. And another insightful comment was to “resist commodity pressure” – focus on your “value add” and stay true to your business plan. Lastly, to turn your business plan into actions through a solid “business team” and share your plan with them.
3. Ruthless Cash-management”
Frank spoke highly of his Financial Manager and his “affair” with his balance sheet. This is one of the best pieces of advice any business owner could take on board. Unfortunately I have seen too many profitable businesses go under due to poor cash management.
4. Focus on execution, not strategy
Now I am sure Frank didn’t mean here to forget point 2, but to not get carried away with “navel gazing”. To succeed, the business strategy must be executed and deliver real and immediate benefits to the business. In Frank’s situation, this meant has meant, among other things, a focus on customer service, print quality.

Frank went on to talk about things he would have done differently and what he sees as the most pressing issues in the current market environment – I’ll share these in the next post.