Monday, July 22, 2013

Five Steps to Building an Organization That Achieves Goals

One of the most satisfying experiences I have had is building a workforce that is focused on achieving and exceeding organizational goals. I have found that taking five steps can have significant impact on this process. The six steps are:

·      Design the organization and workforce structure around the goals of the organization. This is more easily accomplished if you are starting a new business and more difficult for older and more established businesses. As I have mentioned in past posts, it is helpful to envision an organization successfully meeting its goals and think about the structure and employees driving that organization. Those goals can be making a certain level of profit, reaching a certain market segment, being a market leader, providing a certain level of service and so on. Many businesses may have all of the above and more as stated goals.  With these goals in mind it is important then to look at the organization’s functional components, finance, sales & marketing, production, distribution, research and development and make certain their goals are aligned with the organizations goals. For example, having an organizational goal of meeting customers specialized needs will have difficulty if the production arm of the organization is focused on cost control. Here, the production goal might be restated to find the most efficient method of fulfilling customer’s needs. Sales and marketing in this instance would need to focus on working with customers to find solutions that efficiently meet their needs. This allows the organization to strive to meet the customers’ specialized needs while providing efficiently designed customer solutions to the production department.  This will almost always require open communication channels between the organization’s functional components.
·      Clearly articulate goals. Beginning with the hiring process, keep the organization’s goals in mind. If the organization is structured properly, then the workforce positions in each of the functional components will support the overall organizational goals. In the previous example, marketing secretaries will understand the kinds of services being offered and know how to direct traffic to the right marketing individual. Production personnel will constantly be on the look out for more efficient methods to produce quality outcomes.  Accountants will focus on tracking costs and providing information to improve the organization’s ability to provide the best service competitively while generating acceptable profit levels.
·      Design training around organizational goals. Training new employees and retraining long term employees will have to be focused on meeting organizational goals. Here customer focus is very important. If employees can see how they fit in to a process that successfully addresses a customer’s needs then employees are more likely to be engaged reaching organizational goals. I have been involved in an organization that was large and well established but operated on internal departmental goals that built resentment and reduced cooperation between departments. By changing the organization’s focus to the customer we improved interdepartmental communication, efficiency, customer satisfaction and profits.
·      Design pay and bonus structures around organizational goals. Pay and incentive programs should be designed to achieve organizational goals. Using the previous example, if production personnel were rewarded on low cost per item produced and sales and marketing were rewarded for market share improvement and the overall organizational goals were to meet customer’s specialized needs, there would likely be friction between departments and dissatisfied customers. On the other hand, if both departments were rewarded for achieving market share growth and improved profitability then the organization and the customer are more likely to be successful.
·      Be careful about adding new jobs and new functions. Every new job or organizational function should be evaluated on its ability to help the organization achieve its goals. Executives and department managers can be very persuasive when requesting additional resources. It is important to use organizational goals as the metric to determine the need for the additional resources.

In addition to the above steps, when developing programs to engage personnel and build relationships with customers it is important to keep organizational goals in mind. It will be hard for employees or customers to see how lavish parties promote efficiency. On the other hand, well thought out social events can build relationships that foster good customer relations and employee morale and focus.

The process described above is fairly simple but requires daily focus. I have found that when orchestrated properly, it results in an organization that routinely exceeds expectations,  has customers that are satisfied and a workforce that is self directed and motivated.

Thursday, July 11, 2013

10 Considerations for Pricing a Product or Service

When introducing a new product or service to the market a key, and often critical, consideration is the price for this offering. I have seen folks simply take the cost of production and use a percent mark up as a pricing model. This is the simplest model and it provides a good example for the need to consider other pricing model options.

Here are 10 things to consider before setting a price for your product or service:

·      Mark up Based on Cost Vs Retail. In the opening paragraph I gave the example of a model being used that marked up a product by a percent over the cost. The cost used here is generally direct cost or labor and materials. If someone wants a 30% of the asking price to be the mark up, then using 30% of cost won’t provide the desired outcome. Simply put, it is the wrong math. If something costs $1 to make and it is marked up by 30% for a selling price of $1.30 then the profit of based on the asking price is 23.07%. To arrive at a 30% mark up based on the selling price it is necessary to divide the cost by the complement of desired percent of the selling price (this recognizes that the cost is 70% of the desired selling price).  In this case $1 divided by the complement of the desired percentage of the selling price(100%-30%) or 70%. Thus $1/.7 = $1.43. Here the mark up is $.43 and is equal to 30% of the selling price. I know this seems simple but I can tell you that it is a common mistake that is made by a lot of business pricing strategists.
·      Competition. It may not matter what you want to charge if your product has competition from similar offerings in the market place with similar capabilities. The price offered by the competition will have a significant influence on the price you will be able to charge unless you can find a way to differentiate your company or the product from the competition. Offering financing, volume pricing or other supporting programs such as training or superior support services can accomplish this. If differentiation is not an option then a review of the manufacturing and marketing processes may allow a reduction in the cost structure that, in turn, allows a greater profit per product sold even in a competitive environment.
·      Alternative Options. One of the major drawbacks of focusing on the cost of producing a product is the lack of focus on the alternatives that may be available to the customer. This can work for or against a pricing strategist. For example, in one company we developed a process for providing a service to deliver printed circulars in the newspaper and through the mail for considerably less than could be provided by any competitor offering the same service. One thought was to price the service with a small markup above our direct costs. This would certainly have drawn a lot of customers to our service but would have overlooked the possibility of pricing just below the competition or possibly above the competition and maximizing our profits. In the end we priced slightly below the competition, maximized our profits and won the majority of the customers in the market.
·      Budget. In every pricing situation the customers’ budget has to be a major consideration. If, for example, the typical customer spends 2% of their budget on products or services that you offer and your products requires most or all of the 2% you will be forcing potential customers to evaluate the potential expenditure very carefully. Many times to justify a large budget allocation will require more marketing and support expenses on your part in order to clearly demonstrate the value of your offering. The question here is whether this approach will provide more profits or a larger market share (more profits) than competing with a lower price.
·      Knowledge. In the early stages of a product life cycle the consumer may not be aware of alternatives to your product or service and may allow the ability to charge a premium price. As you know premium pricing and high profits will attract competition and competitors will work hard to educate consumers on alternatives to your offerings. To the extent you can hold on to the “knowledge differential” through patents or other protections such as capital requirements, you will be able to enjoy premium pricing. Be prepared to have a strategy when this advantage is lost. Some companies will schedule new product launches at the point where their patents expire.
·      Cost to Produce. As mentioned earlier, a clear understanding of the costs involved in producing and delivering your product or service plays an important role in pricing. Understanding the costs well enough to find alternatives to production or distribution costs can have a significant impact. Back in the days of phone modems, transferring data resulted in huge long distance telephone bills which was a key cost component driving our pricing. One option I found was to work with Western Union and use their satellites to disseminate information around the country. This was done by using a local phone connection to Western Union and a small monthly charge for the use of the satellite. In another situation I found that I could use strategic allies in other markets to rep my firm’s products and services thereby avoiding costs for expanding to other markets. This reduction in cost allowed us to attract customers that wouldn’t have been interested in the higher pricing that would have been necessary with the higher cost structures.
·      Cost to Market. Marketing costs can easily represent fifty percent of a product’s cost. Finding the most efficient means to distribute and promote the product or service can provide a real competitive advantage in pricing. Grass roots marketing through local community groups have provided some firms a way of introducing products to key individuals that become fans and product promoters.
·      Funding for Operations. One of the drawbacks to pricing a product based on its direct costs of labor and materials is the inability to properly consider the cost of ongoing administrative, manufacturing and support operations. Here the lack of understanding costs can result in charging a price for a product that does not cover the associated increase in administrative costs, repair and maintenance or capital expenditures. One solution is to include an overhead cost factor into the direct cost calculations for each product.
·      Market Positioning. It is important to remember that the price can suggest value to the consumer. Priced too low a product can be viewed as poor quality and of limited value. High pricing can support the image of a high quality product for discerning customers if all of the other marketing components are aligned properly.
·      Availability. An important consideration in pricing is the availability of the product or service and the ability to find substitutes. If there are markets that do not have easy access to products then a premium pricing strategy can be employed. Retailers routinely have higher mark ups in rural areas where competition and product variety is limited.

Product pricing can be critical to a product and ultimately a company’s ability to survive and succeed. Approaching pricing as a minor marketing tool can be dangerous. It is almost never a mistake to take the time to consider all of the factors affecting a product’s pricing strategy.

Thursday, July 4, 2013

Six Steps to Developing Low Cost New Businesses

Starting a new business doesn’t necessarily mean that large amounts of money need to be raised. Even businesses with the potential of capturing a new market of substantial size may not require a substantial investment. This may be good news for individuals with a great idea coupled with expertise and know how.

I have seen individuals lose control of their ideas and their vision of a successful company by seeking out investors to support the company in its early stages. This can be avoided by building the business though alliances and involving individuals that can benefit if the business is a success.

Steps in sitting up a low cost venture should include:
·      Identify potential prospects that would benefit from the product or service to be offered. These prospects can be interviewed to see if your offering is going to fill a market need. They may be enlisted to further refine the offering.
·      Once the product or service is validated, find a strategic ally that is willing to work with you by adding your product to their offerings or by allowing you or include their products to your offerings. This automatically creates market credibility. The more successful your ally, the better your credibility.
·      Maintain control of your business. This can be difficult and dangerous especially if working with a very aggressive business ally. One way of providing control is making sure that business transactions and cash flows are conducted through your company. That is, customers pay you and you pay your business ally.
·      Avoid large administrative and workforce expenditures. To process payments, payroll, business expenses, insurance and billing use an accounting service. There will be a fee for these services but there is no organizational expense and the cost of the service is directly related to the level of activity.
·      Find a university business school that is looking for internships for their students. These students can provide a workforce at a low cost and can be the beginning of permanent staffing and a future management team.
·      Plan an investment strategy that allows you to seek out investors when you have the best negotiating position.

At the Houston Chronicle we sought out new publications that could be distributed in our newspaper. The publication would help the Chronicle reach a broader spectrum of the community. The publication would benefit by having the credibility of being distributed in the Chronicle (they were able to command a higher advertising rate) without the cost of an internal distribution organization. Paper City, which is now in several major cities started with an alliance with the Houston Chronicle. It began as a very small operation and has grown significantly by strategically developing and controlling business alliances.

In a venture currently taking shape, a group of physicians felt that there was a need for a consulting service that provided healthcare guidance to underdeveloped nations. These doctors visited with several countries and were well received. One country invited the doctors to visit and make a presentation on the development of a major hospital.

The doctors explained the opportunity to a major architectural/engineering firm that had a great deal of experience building hospitals internationally and invited them to be a strategic ally.

The architectural firm accepted the alliance and accompanied the doctors to visit the country’s health ministry and make the presentation. The presentation went very well and the doctor’s group is now being considered for consulting services on 5 hospitals as well as other health ministry programs.

To develop a staff to gather information, the doctors have identified a university with a healthcare MBA program that is looking for opportunities for their students. The work for the students will be meaningful and cogent to their career objectives. The company will receive bright, capable individuals working on programs to solve health care challenges for the health ministry of a developing nation.

Cash flows for this new healthcare consulting company will come from regular payments from the contracting government and paid directly to the doctor’s consulting firm. The consulting firm, based on services requested, will pay all payments to business allies.

In this case the consulting company will have significant expenditures only when there is a significant revenue stream. Organizational expenses are held to a minimum and tightly controlled.

Finally, the health care consulting company is developing a long-term strategy to attract investors when they have a strong on-going business.