Until the credit and financial crisis struck, Ted Bernstein was primarily focused on the successful niche that his insurance company served in the market.
“We were guilty of not looking at the macro picture of our industry and where change was going to affect us,” says Bernstein, the president and director of Life Insurance Concepts Inc.
As the supply of capital began to shrink and many people stopped spending money on life insurance premiums, demand for the company’s niche ebbed. What do you do when the product that you are selling no longer fits with what your customers need?
You start from scratch.
Through a process of “creative destruction,” Bernstein discovered the opportunity to transition the company online to reengineer its product and service offerings for future growth.
Smart Business spoke with Bernstein about how business leaders can use creative destruction to help them innovate.
What is creative destruction?
A typical example of creative destruction is the PC, because it essentially destroyed the main frame and gave way to an entire new business model that improved upon what was killed off. It is the idea of product progress, and it is a staple theory in support of capitalism, constantly serving the economy in positive ways. From an individual company’s perspective, it represents the idea of looking at established product lines and service offerings with the goal of improving the status quo. I think it is essential for growth in normal business times and essential during a sustained crisis such as the great recession we are now experiencing.
What made this process so difficult and challenging?
It’s easy to destroy for some and for some it’s easy to be creative. Being creatively destructive is a real challenge. In a period like we’re coming out of right now, it may be why some companies just flat out couldn’t make it — they could not recover or evolve through the destructive period — and why so many incredible companies grow up out of these destructive times.
One aspect of creating differentiation around us was that the product certainly had to be better. The other was you had to have a reason that you are going to buy from us, because maybe you’ve been buying from people who have been serving you well until we’ve come along. So we felt that we had to offer value to you that maybe you weren’t getting from others.
It’s really been a two-pronged thing that we had to differentiate ourselves with the product and then our ability to engage them to make them feel that they should use us.
How does destruction lead to innovation?
I don’t think you can go through creative destruction without getting as wide angle of a view as you can of your industry, which is not easy to do when you are an insider and you know your way around. You think you pretty much know how your industry works, and it’s pretty difficult to put yourself back in that position to almost be looking at it as if you know nothing. We did that. I would say everybody should force that view and that type of lens on themselves. They will see their industry and their business in a way they may not have looked at since they came into their business however many years ago.
I reconnected with the leaders from all aspects of our industry. I began having conversations with executives of insurance companies. I began having conversations with the professional associations, the organizations that monitor trends in our industry. We ran focus groups here at the consumer level and also focused on technology to see how technology was changing our industry. I kept pulling back the lens further and further and further so we could get as much of a macro, big-picture view as possible.
How can a successful company use this process to spark new ideas?
If every couple of years management puts itself through some type of crisis management exercise and you just imagine the worst — imagine your biggest supplier cut you off for no reason, or you could no longer acquire bank financing or whatever was most important to you, like capital was to us. If you could imagine that it was lost and lost quickly, how would you react? I think that’s an incredible exercise not just for the CEO or owner — it’s the team. You might find out who in your organization is better in your organization than you ever realized. Or you might find out some things about your organization that you maybe don’t want to find out but it’s important to find out.
How to reach: Life Insurance Concepts Inc., (561) 988-8984 or www.lifeinsuranceconcepts.com
Deborah Fine is pretty good at shaking things up.
Three years ago, when she joined Direct Brands, the largest distributor of physical multimedia products such as books, movies and DVDs was in desperate need of transforming its business model to better compete in an increasingly changing marketplace.
Fine’s problem was pretty straightforward: Many of the company’s holdings had strong brand recognition, such as Rhapsody, The Literary Guild, Columbia House, QPB and The Book Of The Month Club, but those and other brands had lost their luster. And with the shine went some of the corporate revenue.
Aiming to provide more for the customer and recapture brand loyalty, Fine introduced a largely fresh marketing team and implemented new Web and social media strategies. She also took a new look at traditional, proven methods.
“We realized pretty quickly that between the database of scale and owning the ability to power a direct consumer channel, inherent in those lie two very, very large opportunities for growth,” Fine says.
Smart Business sat down with the former president of iVillage to discuss what it took to turn Direct Brands into a digital age company.
Q: On day one, what challenges did you walk into this job and face?
I walked into the success of a model that was largely unchallenged for decades, so there was nothing wrong with this model for a very long time. A mere three years ago, this was a billion-dollar business. The challenge is that the landscape changed so quickly. This is a company that saw throughout its legacy Red Box, Amazon and the changes at Barnes & Noble. It saw radical change around it, and frankly, it didn’t respond with the speed that the company now thinks and executes with.
Q: Did you find there was an urge to leverage your existing resources to expand outside the company’s core competencies?
Yes and no. We identified our growth strategy on several fronts. The first job was to go back to our roots and execute against core, direct marketing tools and best practices to increase loyalty retention — all the things that belied our heritage.
The second was to take the 24 businesses we own — those in physical form as well as their digital companion sites — and bring related business into the fray. For example, if we have amongst our audience several hundred thousand members of The Good Cook, (we have) a reasonable opportunity to monetize that audience and sell them the related casserole dish, spices and kitchen gadgetry.
The third (job) was recognizing the turnkey legacy value and expertise needed to power that model — with best-in-class distribution and customer service components — enabling us to enable others.
Q: You’ve been in industries where disruptive innovation is necessary. How are you bringing disruptive innovation to this organization?
Most disruptive about what we’re doing is exposing the company to new ways of running a business, as well as bringing in new disciplines. Titles such as ‘head of business development’ and ‘chief transformation officer’ were not titles that existed before. So I think I say it sort of in jest, but not really — the biggest change was showing up and bringing in a CEO to transform the entire management team. I changed 80 percent of the management team in my first year. Talent is the silver bullet, and there are very few business practices that are silver bullets.
Q: How are you balancing traditional channels with the new channels for doing this business?
It’s really a hybrid. When I arrived at the company from working as president of one of the largest online sites for women at NBC with iVillage, the perception was that I was going to show up with the world’s largest shredder and literally shred every piece of paper, every catalog and every piece of collateral material that we used to run our business. But no business today, regardless of genre, is able to throw the baby out with the bathwater.
So for us, I subscribe to test, learn, repeat; test, learn, repeat. And that’s what we are doing. Social media is a great example. There’s no way I’m going to walk away from 60 million pieces of direct mail, 500 million e-mails and 27 million cartons that can be marketed in, on and around in favor of a new discipline that may or may not work for us. But common sense says that because our demo is there, because our customer is connecting online, because our customer is active in social media, we have to be there.
Q: So how does this look in practice?
We’re certainly not abandoning our traditional tools, tactics and strategies, but based on demography, it’s the fastest growing segment. It’s requisite for us to be there, and I think it’s a combination of analytical tools, research, training, learning and business processes.
As a example, we had a situation where we had a consumer registering a complaint and posting it. Actually, we had two situations happening at the same time because of that: We had customer service react almost immediately, people who are monitoring those pages, but then we also had our loyal fans, de facto brand ambassadors, come to our defense.
You can go on the site and read their posts: “I’ve been a member for 20 years, 30 years, 40 years, you know. I‘ve never had this problem with the company. The service has always been a hallmark.”
So re-engineering the company is as much about new systems and processes as it is about changing the psyche.
How to reach: Direct Brands, www.directbrands.com
Interviewed by Dustin S. Klein / Story by Jessica Hanna
Every business owner has, or at least has heard of, a business plan. It summarizes the operational and financial objectives of your business and gives a high-level overview of the operations of your company. Business plans are not only useful for planning purposes, but are oftentimes necessary to obtain financing and attract investors.
But what about a business model? This distant cousin of the business plan is rarely written or talked about, but it’s what separates a Starbucks from an ordinary coffee shop. It describes your business and how it will generate revenues. It assesses the marketplace’s needs, risks and costs and is the basic framework your company will follow to become profitable.
Smart Business learned more from Matt Marchbanks and Paul Orsborn of Comerica Bank about the main components that your business model should contain.
What is the first thing a business model should contain?
Marchbanks: The first item to include is a description of the products and services your business will offer and why customers should purchase them. What makes your business unique and differentiates your products or service offerings? How will they fulfill the needs of customers? You must consider in your business model how you will transform your product or service into something attractive to consumers and how it will be made available to them. In essence, you should describe what will make your business successful.
Should necessary expenses be included in a business model?
Orsborn: Yes, the next crucial item to consider is how much your fixed expenditures will be. First, think about the core operating costs of the business. This includes everything from rent and employees to equipment and office supplies like computers. Also take into consideration the cost of any fees you may encounter when starting your business, like licenses, agreements and legal, accounting and insurance fees. You should also determine how much your product will cost to produce. Will you need a factory or supplier to produce it? Will you need to pay for shipping or transportation across the country? If you’re going to offer a service, think about what upstart costs you will incur.
How should revenues be factored in?
Marchbanks: The next step is determining how you will make money to offset the cost of your expenses and, in the end, be profitable. Who will your potential customers be? Look at the demographic you will be targeting and identify your target customer. Next, start to think about how you will develop customer relationships and how you will sell your product or service. You will need to develop a marketing and distribution strategy. Entrepreneurs should learn about trends and new breakthroughs and research their competitors. It’s also a good idea to talk to people outside of your industry. You never know what valuable information you can gain from an outside perspective.
Should a detailed financial plan be developed?
Orsborn: Yes, your detailed financial plan should include the initial investment needed to get your business up and running, like facilities and equipment, and also working capital to begin and sustain operations. It should also include an itemized list of expenses and revenue projections and keep track of profit, return on investment and cash flow. Also remember to keep continually thinking about your business model after you start your business, especially when it’s time to branch out. If your business goals change, it’s time to revise your business model.
Matt Marchbanks and Paul Orsborn are senior vice presidents for Comerica’s Texas Business Banking Division. Comerica Bank is the commercial banking subsidiary of Comerica Incorporated (NYSE: CMA), the largest U.S. banking company headquartered in Texas, and strategically aligned by three business segments: The Business Bank, The Retail Bank, and Wealth & Institutional Management. Comerica focuses on relationships, and helping people and businesses be successful. In addition to Dallas, Houston and Austin, Texas, Comerica Bank locations can be found in Arizona, California, Florida and Michigan, with select businesses operating in several other states, as well as in Canada and Mexico. Comerica reported total assets of $53.7 billion at Dec. 31, 2010. To receive e-mail alerts of breaking Comerica news, go to www.comerica.com/newsalerts.
Al Bell saw the future for Moochie & Co,. and it looked quite promising. It was 2008 and the pet supply retailer was about to close a transaction with a private equity firm that would have made available significant growth capital.
And then suddenly, the opportunity was gone.
“Due to the stock market and economic conditions, they walked away,” says Bell, the 102-employee company’s CEO. “They put us in a difficult situation with our lender.”
At the time, Bell was part-owner of the business. He owned 35 percent, a partner owned 35 percent and seven other investors owned the remaining 30 percent. Bell knew his business had growth potential, so he made a bold move to basically go it alone. He felt it was the best path to realize the potential he saw.
“I’m a strong believer in the company and our niche in retail and the growth of the pet industry,” Bell says. “That led me to essentially acquire full ownership of the company, renegotiate our store leases and really focus on cutting expenses.”
Expense reduction was critical. Bell wanted to take things back to square one and be a whole lot more careful about how money was being spent.
“Instead of accepting the historical expense model as a given, we built our expense structure from the ground up and really challenged and explored every expense,” Bell says. “We also asked the entire organization to accept the challenge and bring forward their best ideas, and we acted upon the better ones.”
When looking at expenses, you need to separate fixed costs from variable costs.
“We looked at every variable expense and we said, ‘Is there a way to control that?’” Bell says. “In our case, we’re looking at the percentage of revenue spent on a given expense at a particular store. So if utilities were excessive at a given store, you went in and tried to discover why that was and if there were opportunities to reduce it.”
You also need to get your employees involved to make any initiative effective.
“I very clearly set out specific objectives for the company, one of which was expense reduction,” Bell says. “It was a detailed review of the full-year profit and loss statement on a unit-by-unit basis and then a line-by-line basis. You begin to decide what are truly variable expenses that can be attacked as compared to fixed expenses that you have to accept.”
Bell did not hold back when explaining the importance of this investigation into expenses.
“One of the rallying cries I shared with the group is, ‘You may have bigger jobs at some point in your life, but you’ll never have a more important job than you have right now. We’re talking about the survival and potential success of a small company of which you are an integral part,’” Bell says. “I believe the team really embraced the opportunity to play a vital role.”
The result of Bell’s effort was a new business model that everyone at Moochie & Co. strongly believed in.
“We started with very modest revenue increase expectations and then examined every expense line carefully,” Bell says. “As the leader of the business, it fell to me to make the difficult decisions.”
The tough choice was two stores in Detroit had unacceptable occupancy costs and needed to be closed. But that proved to be only a bump in the road as the company soon was in a position to begin growing again as the economy began to recover.
The company had gone from 10 stores to eight, but it now has 12 stores and 20 Mini-Moochies at pet boarding resorts and veterinary clinics.
“Our major expenses have been brought down to affordable levels, and we have a culture within the company of challenging every expense and trying to reduce every dollar spent,” Bell says.
How to reach: Moochie & Co., (877) 666-2443 or www.moochieandco.com
Find your leaders
Al Bell wanted to reduce expenses at Moochie & Co., so he needed to find out who was ready to march with him on his quest.
“I’ve always believed in management that you need to articulate the goals, share as much information as is reasonably possible and then listen and be receptive to suggestions,” says Bell, CEO at the pet supply retailer. “It is a process that allows you to really learn who is with you and who is not.”
When you are open about a plan and forthcoming with details, you’ll be able to see who is buying in to the plan and who isn’t interested.
“Be brief, be clear and be consistent,” Bell says of your communication strategy. “You ask a lot of questions and give encouraging responses when people contribute.”
When you’re having a meeting, give people a clear sense about what it’s going to be about.
“We actually prepared and promoted the meeting for two months prior and gave people topics and an agenda and really tried to set the tone that it was going to be participatory and not a monologue,” Bell says.
When Patrick J. Pitrone took over as president of USA Insulation Franchise Corp. seven years ago, he had to overcome the hurdle of being the founder’s son.
He made sure he did every aspect of the insulation business himself so that he never asked someone to do something that he didn’t know how to do or wasn’t willing to do himself. As a result, he earned the respect of the company’s 135 employees.
Four years ago, he started turning the organization toward growth by transforming it into a franchisor. There weren’t any insulation franchise businesses, so the field was wide open.
Smart Business spoke with Pitrone about how he led the business into this new endeavor.
How did you start franchising your business?
It did take some hard knocks and learning initially. We knew our business very well, but we didn’t know the franchise business — how to take our model and carbon copy it across the country. We learned a lot about ourselves, and we found out that we’ve learned a lot about our business, but we never took the time to put it all down and hand it over to somebody. We had to go back to the drawing board and bring some consultants on board to frame out a system to put in place and put everything out on the table and give them a launch process and how we can help them operate.
The key to that area was bringing people on board who knew the franchise business and could mold it with the existing insulation process and be able to craft a system that can make people successful in this business.
How did you select consultants to help you?
We had some referrals of people who had done this before. There’s nobody in the insulation franchising business, so that was out the window, so we had to look for people who had similar service businesses or folks we met at the International Franchise Association’s annual meeting. It was bringing people on board who knew franchise businesses and molding it with ours.
In choosing a consultant, we made a mistake. Initially, we hired someone who was a fair amount of money, and you don’t know what you don’t know starting out, and we thought we had the right company there.
What tips would you give for hiring a consultant?
Spend time with them to get a sense of the people they were. [Ask] questions to get to where you felt comfortable with them.
I wanted to find out initially how they took companies from ground zero up to 10,000 feet or so. I wanted to find out not only if they did but what they did to bring companies that have been doing one particular thing in one location for X amount of time, and how did they build that business? How did they take a company and build their manuals, build their jump systems for new locations, how did they build the marketing and legal pieces? … Initially we didn’t know what questions to ask, so we had to make a couple of mistakes in the beginning — they were costly mistakes, but they helped us choose that next consultant, the one that has really gotten us to where we are now. So knowing what questions to ask initially was a pretty big thing, and we had to learn the hard way of asking the wrong ones first and learning the second time the right ones to ask.
What are some good questions to ask?
One question that I have asked before is, ‘Give me a reason why I would hire you and a reason why I wouldn’t.’ They’re sort of behavioral-based questions. Give me examples of times and things you’ve done. The closed questions won’t get as many answers.
The best questions are to ask the folks they’ve worked with and the referrals. I’ve actually been a referral now for this consultant, and people talk to me for a half hour at a time. They wanted to do their due diligence. … Those questions can be — the expectations that were set, did they meet your expectations, was the price that you paid the right amount of money for the services you got, or what are the biggest weaknesses that they’ve had in the first six months of getting started? Presentations are presentations. You can have consultants come and go through the front door, but unless you talk to the folks they work with, it’s difficult to get a sense of what they’re all about.
What have you learned from this process?
It takes longer than you think, and it takes more work than you think and you don’t always see progress when you want to see it. But it’s funny, the longer you do it, the more people from the outside looking in give you some perspective on how far you’ve come. It’s been [more than] three years now and we have 17 locations and that’s more than I thought I’d have right now. It’s interesting to see the growth of our company. It’s fun.
How to reach: USA Insulation Franchise Corp., (866) 602-4107 or www.usainsulation.net
Philip Rielly and Eric Hill co-founded a small private company and they run it like a small private company. Every decision they make, they ask themselves, “Is this big-corporate stupid?”
“Large bureaucratic businesses often make decisions that are far removed from where the decision should be made,” says Hill, vice president and co-founder of BioRx LLC, a national provider and distributor of specialty pharmaceuticals. “We internally say that those practices are ‘big-corporate stupid.’ We don’t have to make a big corporate decision; we have to make a small business decision.”
Making those decisions aren’t always easy, but Rielly and Hill work well together.
“You have to be respectful of each other’s leadership,” says Rielly, who serves as president of the $55 million company.
Smart Business spoke with Rielly and Hill about how they have managed growth of a small company.
Manage cash flow
Hill: One of the primary challenges is access to capital and finding the right corporate structure environment and partners to get the business started from a funding standpoint. We have to make sure we manage within our capital structure and don’t allow the growth to exceed our ability to fund it. You have to absolutely know what it’s going to cost to enter a certain market. Is it a new product, a new sales rep or employee, a different product line? There’s no one-size-fits all, but the commonality amongst all those things are: Do I know within some reasonable degree of certainty what that’s going to cost me and what my timeline is to recoup it, and do I have currently, on hand today, the ability to fund it?
Rielly: Just like any business, we have typical growing pains, and just trying to stay ahead of the line of credit has been the biggest challenge. It’s day-to-day collecting your cash on time, it’s managing and watching your inventory and being very precise about when you hire and when you expand. Don’t underestimate the importance of having a good banking relationship and don’t underestimate the importance of managing your cash flow because it’s obviously critical.
Find what customers need
Rielly: Now, more than ever, you need to focus on your customers, and now, more than ever, you need to show them how much you appreciate their business.
Hill: When we viewed this market, I’m not sure that we viewed it as a market where we had to be revolutionary in the way of product services and delivery. Rather, we viewed the market as having a deficiency in terms of high-quality customer service that can be delivered quickly with decisions made at a field level. If you’re just going to enter a market and just do what everybody else has done, it may work — the market may accept you just because of shear effort in the marketplace. But if you can go into the market delivering a service that’s needed but not being provided or even
used to be provided, your acceptance and uptake and revenue growth is going to be a lot higher than if you just go out and try to plow with the same model.
Rielly: When you do find the right people, you have to really empower them to make decisions that impact their job and impact the business. You have to empower people to do their job and let them go. Let them fail from time to time and let them make mistakes and let them learn from their mistakes. As an organization, you will be better five years from now, because they’re actually growing a lot faster because they’ve been kicked down and brought back up.
Hill: It also helps to think about how you can adjust your managing style. Be the manager that you would have always wanted to have. Meaning, when you weren’t a manager but thought, ‘If I was ever a boss, I would do this.’ Well, do those sorts of things because it probably has some merit.
Build strong infrastructure
Hill: Make sure that you have an infrastructure in place to anticipate the growth. Try to hire maybe not way in front of your growth curve but in line with your growth curve. You have to set expectations that you’re going to manage for a year or two out, not just for today. You have to be thinking … in advance in terms of policy setting, staffing, structural procedures that you have to manage on a day-to-day basis and preaching that mantra to the organization that what we do today not only has to work today but has to be productive two years from now.
How to reach: BioRx LLC, (866) 442-4679 or www.biorx.net
Wal-Mart and Apple operate in different industry segments with different business models, and yet the same management principles drive their long-term success. What is it they are doing that you need to do in your business?
Wal-Mart and Apple have absolute clarity about their core management philosophies, and they do not violate them. Core management philosophies define a company’s business approach and its fundamental choices. The combination of these choices creates a company’s unique position or business model in the marketplace. The strict adherence to these core philosophies often creates an unassailable advantage.
Wal-Mart ranked No. 1 on the Fortune 500 list in 2010 and reported profits of $14.3 billion. It has the money and resources to carry any merchandise it desires in its stores. Why is it, then, that you are not likely to find a $2,000 suit or dress in a Wal-Mart store? If you did, as a customer, what would go through your mind?
Wal-Mart’s core management philosophies include operational efficiency, lower prices and higher volume. Wal-Mart does not feature high-end merchandise in its stores. It would confuse its customers, employees and suppliers. The customer of a $2,000 dress has a very different set of expectations than that of a customer of a $30 dress. Selling a $2,000 dress requires a markedly different selling process than selling a $30 dress. Wal-Mart knows its business model and strictly adheres to it.
How well articulated are your core management philosophies? Is there ambiguity about your business model? Core philosophies are part of the DNA of your company. If there is confusion about the DNA, the company will not do well. Core philosophies affect everything the company does from its vision, goals and strategy to its capabilities, processes, roles and responsibilities, culture, performance measurement, and execution. Therefore, it is critical for you to identify your core management philosophies.
Business experts and consumers regard Apple as a highly innovative company. Many other companies also claim to be innovative, but Apple innovates in a special manner. It follows a core philosophy that permeates every single product it puts out in the marketplace. Apple constantly breaks new ground to make its products intuitive and easy to use. That is Apple’s No. 1 mantra, and it sets Apple’s products apart in the marketplace. Go out and search — you are unlikely to find an Apple product that is not easy to use.
Core philosophies are at a higher level than strategies. Strategies may change but core philosophies remain the same regardless of internal or external conditions. To identify its core philosophies, your company should consider if there are any unchangeable, non-negotiable aspects that define its business approach. Some questions for you to ask include: Does your company limit itself to certain industry verticals, market segments, account sizes, specific customer needs and specific product/service attributes?
Look around and identify successful businesses, whether they are Fortune 500 companies or the local bakery store. If you examine these successful businesses closely, you will find they all have a set of core management philosophies that they do not violate. It defines their business. It is their DNA.
It does not matter what core management philosophies you choose. Every answer is right. What is important is to have a clear answer that removes all ambiguity. You may select operational efficiency and low prices like Wal-Mart or you may choose superior products and premium pricing like Apple. Know what you are choosing and make sure all your stakeholders — employees, customers, suppliers, investors, board and management — understand those choices. It may very well be the difference between success and failure.
Ravi Kathuria is the president of Cohegic Corp., a management consulting and executive coaching firm. He is the author of the highly acclaimed book, “Coherent Strategy and Execution: An Eye-opening Parable about Transforming Leadership and Management Perspectives.”