An Initiative for Next Year?

As we come to the close of the year, I want to talk some about something you should consider for next year:  Inorganic Growth.  That's right, buying a business to add to the one you have.  Most small business owners that I have met do not really think this is an option for them.  I have posted this Fall about buying a business instead of starting one and about using an SBA loan to fund your business.  In fact, if you look through my postings I think you will find ample ways of buying another Business.

The question is why buy instead of build?  Well, the answer is that you are not buying instead of building.  You are building and using buying as one mechanism.  This does not discount all types of ways of growing your business.  Buying one has a single advantage:  Time.  Imagine you run a $1M Revenue company and are growing at 10% per year.  It will take you about 7 years to become a $2M Revenue company.  But you might be able to buy a competitor Business and make that change overnight. 

So, what is special about being bigger.  You will hear it called "Scale".  What this means is that there are parts of two $1M business that are duplicated or asked to do multiple things.  When the two businesses come together you can eliminate the duplication (this is called "Synergy").  People can focus on wearing fewer hats in a larger company so that they become more efficient at what they do.

This works in lots of ways.  Let's suppose both companies had websites and that they used both Search Engine Optimization (SEO) and Search Engine Marketing (aka Pay Per Click or PPC) to drive traffic into the business.  By buying a competitor, you can eliminate one company that was competing in the Search and have better search results through SEO.  You also can allocate more money to the one company and have more PPC traffic as well.

There are challenges with this approach and we will cover them as well.  But you should consider Inorganic Growth as part of what you plan to do.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

 

 

Annual Plans: Putting them to Work

When I last posted about Annual Plans we were talking about Key Performance Indicators (KPIs) and Key Results Indicators (KRIs).  I want to talk this week about making this plan a living document that works for you and your business.  Going through the exercise can help, but nowhere near as much as using it on an ongoing basis to judge your performance.

When we talk about the Indicators, we are talking about things to measure in your business.  The next step is to put these measurements in place with what is often called stop and go gauges.  In this case 2 levels are assigned to the performance of each metric.  There is a lower point between the Red (bad) and the Yellow (Danger).  The higher point is between Yellow (Danger) and Green (Good).  There are some binary metrics, but most of the time the 3 color levels are a more likely measurement.

So, let me use an simple example.  We are going to measure the number of Sales appointment per month and use a number of 90 a month as our Green Goal.  If we get 75 per month, we will call that gauge Yellow.  Anything below 75 is Red.  This is a typical KPI and might be found in many companies.  The next part is to match the KPI with the monthly revenue total.  Green in the Sales Call number should strongly correlate with Green in the Revenue KPI.  There might be some delay (depending upon your Sales Cycle), but that is the mission of this style of measurement.  Create a set of KPIs that generate the KRIs that you want in your business.  Then measure both and make sure that it happens.

There are a couple of problems to diagnose with this setup.  The first is whether your business can meet the KPIs that you have established.  If you can't then there needs to be another plan - something different put in place.  If the KPIs do not lead to the KRIs that you want, then either you have the wrong KPIs, the levels are off, or the correlation is not as strong as thought.

All of these errors are likely to occur, especially the first time you use this strategy to build a business.  In many ways, it is similar to the first time you do anything.  You learn, adapt and grow.  Over time you will build excellent measures and predictors of performance.  And when you do, your business will move into a phase where you can grow in a controlled manner.

Have a great day!
 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

 

Sonoma County: News and Notes

 

This week I get to my review of Enphase.  This is long delayed due to other business activities for me as well as the Thanksgiving Holiday.

The company reported $77M of revenue and a non-GaaP loss of $0.01 a share.  This is a significant gain over past quarters and was based around a nearly 3.5% gain in Gross Margin.  This has been a troubling metric for the company as it is still in the low 20% range.  The response of the stock has been almost explosively positive with today the stock being $2.90.  The stock was hovering below $1 a share not too long ago.

There are three things that I would like to say about this very positive result for the company. 

First, I want readers to note the ongoing R&D spend that the company has.  This number is about 10% of Revenue.  Nowhere near the numbers that I decry in Calix's results, but the company needs to continue to invest in cost reduction activity.  There is a balancing act in the R&D plan between reducing cost and opening markets.  As the CEO notes throughout the call, there is a 7-10% annual price reduction in the market.  R&D must keep lowering costs or Enphase will fall back below 20% Gross Margins.  At the same time, the company needs to expand Sales.  Right now the projection for Q4 is flat again.  Without Sales Growth, the company will need to manage itself very tightly.

Second, this was the first time we got to hear the new CEO (Badri Kothandaraman) on the call. I know that many will regard these results as his success.  The thing is that as he points out this result started when the IQ6 started shipping.  The plan to get to today was before his tenure as CEO.  Essentially, we now see the outcome of Paul Nahi's plan.  The next couple of years will tell us all about Badri as a CEO.  In particular, he talked about caution on pricing.  This will limit upside Sales at least in the near term.  So, you will want to monitor the control of Operating Expenses and Gross Margins over the next several quarters.

Finally, we will have a shifting competitive landscape over the next few quarters.  Beyond the Sunviva ruling, there will be competitive response to the products announced on the call for 2019.  Because Enphase is ASIC based, it takes a longer development cycle to build new products (you have to design and prove your silicon AND design and prove your circuit boards).  It also means that non-ASIC based solutions can be available with less time from the start of development.  There is also this notion of pushing into India and Africa.  I think India is a more likely place, as the Chinese have little to no influence there.  However, caution needs to be applied to Africa.  Many if not most countries in Africa are in bed with the Chinese.  It will be interesting if a company like Huawei, which is already huge in these markets becomes a factor.

Those notes aside, this was a very positive quarter.  Have a great day!
 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

 

Annual Plans:  KRIs and KPIs

Last week, I posted about initiatives.  This week I want to talk about measurements.  There are two kinds of measurements used in Plans. 

The first type of measurements are called Key Results Indicators (KRIs).  They measure the results of business activity.  An example of a KRI is Revenue.  Revenue is a result of Sales, which is a primary business activity of every for profit company.  It also is a very important number to the Income Statement and every company should be planning for and setting measurements for Revenue.  I know this seems very basic, but we need to include the impact of any Initiatives in these measurements.  When will the initiative become important?  Will I see benefit from the Initiative in this metric or other ones?

The second type of measurements are called Key Performance Indicators (KPIs).  These measure day to day work that should be driving results to some KRI.  An example of a KPI for Revenue might be the number of Sales Calls that are made.  If you want to drive higher Revenue, then one way to do it is to call on more prospects.  There should be some correlation between these numbers, but the Sales Calls will happen before the Revenue increase.  Depending on your Sales Cycle (the time between first contact and deal closing), you might have a good predictor of future Revenue.

And from that basic approach you can see the idea here.  KRIs are all about what happened in the past.  KPIs are all about what is going to happen in the future.  The goal of planning is to choose the right KPIs for your business and set the goals for them to meet or exceed your KRIs goals.  As you can imagine, this is an imperfect science and the first time you will likely get it wrong.  But it is the exercise of that connection in your business from your activity to your outcome that is important. 

Let me give you an example of a not KPI from my past and how it related to a KRI.  When we bought the former Reltec group in Dallas, their Product Manager showed us a chart.  This chart showed housing starts in some specific geographies to revenue from the company.  He could show a connection between the Revenue the group got with the housing starts from 6 months earlier.  The good news is that this connection was easy to track.  The problem was that the group had no control over it.  And that is what we want out of KPIs.  A level of control by our own actions.  So while this was a valuable tool, it was not a KPI in a business process way.

A better example would be a cost reduction plan that I worked on at AFC.  We stack ranked the products by volume and then took the top 10 to evaluate what could be cut out of the design or out of the manufacturing.  We set a dollar amount that we needed to save through this process and measured it quarterly.  Each group that had responsibility with the top 10 had a goal to deliver on.  That allowed us to track at a lower level how each team was doing.

So, that is a little about measurements and how they can be created to drive business results.

Have a great day! 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

 

Sonoma County: News and Notes

Well, its earnings season and I am starting my posts with Calix.  I want more time with the 10-Q from Enphase but what I have to say about Calix is unequivocal.  Since reporting, the stock is up considerably.  This is due to the 4Q guidance, but what I have to say I think eclipses that.

Let's talk numbers first.  Revenue was $128M of which $106M was product.  The company with that lost $0.35 per share.  The guidance for Q4 was Revenue of between $140M - $145M and a loss of $0.10 - $0.15 per share.  The company lauded this set of results and predictions as substantially on track with their plan and how things should be.

I completely disagree.  If you look at the numbers, the Product Revenue was down year over year on a quarterly basis.  From my time in the industry, I know Q3 is a big quarter.  That represents a huge problem for me.  Secondarily, they have been increasing revenue year over year with services.  In this case, they are losing $6M on the services at Gross Margin.  This compares to essentially breakeven last year.  This means to get the business associated with these services that Calix had to give its customers a $6M discount.  Now, to complete this thought we need to come back to the R&D expenses.  Right now, if you ask Calix I am sure they would say they are spending about 25% of Revenue on R&D.  The reality is that this R&D has to do with product and not services.  That means that really that is more like 30%.  That is an extraordinarily high number for a company that is flat this year for Product Sales.  Add into that that they had to give a discount, you get real problems.  If you are building such great and valuable products with all of that R&D, why did you have to give your customers a discount?

Now the stock has done well post-announcement.  I see a completely different story than the one the company tried to sell.  The analysts were all over the service margin issue, but I don't believe that anybody tied it up in a bow for you like this.

My view is quite simple.  This is the third or fourth major growth initiative from Calix that has gone essentially nowhere.  That is a problem from not recognizing that strategic situation and dealing with it correctly.  To me that starts at the top and the Board of Directors should do something about it.  Yes, I think it is time for Carl Russo to go.  Look the company is substantial and not going away anytime soon.  But they clearly need a new path forward as the last several have not worked.  That is why you need a change of leadership.  They have turned over just about every other position in the leadership.  And yet the problem remains.  Now it is up to the Board to act.

Have a great day!
 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

 

Annual Plans: Initiatives

Last week, I posted about Budgets.  When you are done with your Budget, you might be unhappy with the bottom line results of it.  So, the question is "What do we do now?"  The answer is Change.  It could be some new product or service.  It could be a cost saving initiative.  The question is where to start and how to create these kinds of initiatives.

If you recall, a few (fire interrupted) weeks ago we talked about a SWOT.  That should help get the juices flowing.  Look at the Strengths and Opportunities and see if there is something that can be capitalized on by a new initiative.  Alternately, you can look at shoring up your Weaknesses and protecting from Threats.  A SWOT evaluation can be really effective when combined with a look at your Target Market and Ideal Customer.  Is there anything here that helps align the initiative from where you want your best customers are going to come from. 

The second thing you can do is look into your Financial Statements.  Is the bottom line enhanced better with a cost initiative or a revenue initiative.  I have some clients that have extraordinarily lean organizations. For them, it is much better to go after revenue.  They have cut costs to the bone, and it gets harder to cut over time.  Others might find that it is better to lower costs in a substantial way.  There are companies that provide standards for how companies look financially.  You can line up your finances against those standards and see where there is variance.  That makes a great way of comparing your company against comparable firms and seeing how you stand.

The final source is what is going on in the general market.  Internet and Information Technology is dramatically changing the way business is done.  How up to date is your firm?  What are the local and regional economic trends?  What are your local competitors doing?  Are there older businesses that might exit the market?  Have you heard about new market entrants?  What is your local business journal writing about?  All of these provide fertile grounds for thinking about something new.

The best thing is to have a moderate list of things that you can do and narrow it down to a smaller list of things you will do.  Depending on the size of the business and the size of the initiatives, there should be no more than 3 top level initiatives and for most small businesses 1 is probably a good number.  Better to do it really well than to half do many things.

Have a great day!
 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!