David Frescoln knows all about acquisitions.
The CEO of Ann Arbor-based Flint Group has shepherded the company through a string of acquisitions during the last 14 years, leading it from $450 million in sales then to $2.6 billion today as the second-largest ink manufacturer in the world.
Frescoln, Flint’s long-time president who took the CEO post in January 2005, faced his biggest challenge with last year’s merger with XSYS Print Solutions.
It was the final piece of a global expansion plan that began in 1992 when he took over as president of Flint Ink Corp. Frescoln saw an acquisition-based strategy as the best way to grow, because the printing industry is a mature one with excess capacity.
“When you have that combination of factors, it’s difficult to grow organically because that is difficult to do profitably,” Frescoln says.
So Flint started acquiring companies, first in the United States and later in Asia, that fit with the company’s product mix of inks, specialty printing materials and equipment. Flint ultimately merged with Stuttgart, Germany-based XSYS, a marriage that united two ink heavyweights with different market exposures and services. That proved to be Frescoln’s biggest challenge yet.
“Whenever you combine entities, you have opportunities to reduce costs in manufacturing, administration and sales, so you can become a more cost-effective competitor in the marketplace,” Frescoln says.
But the XSYS deal was different. For once, Flint Ink was not the controlling entity.
“This was a merger transaction,” Frescoln says. “We are literally creating a new company.”
As a result of the merger, Flint Ink became Flint Group, but there’s more to mergers than just creating a new name. Frescoln’s challenge was to merge different cultures and find the value in the newly created multinational corporation.
The power of listening
Merging cultures is always difficult, but Frescoln’s challenge was complicated by the fact that XSYS was a 10-month-old product of a 2004 merger between BASF Printing Systems and ANI Printing Inks.
“We have all these different cultures, and they all have their strong points,” Frescoln says. “We want to keep those strong points.”
First, Frescoln had to learn what employees expected of the merger and what they had experienced in their former companies.
“You have to sit down with the people involved in the enterprise and listen to them,” Frescoln says.
Much of the integration is taking place in Europe, and Frescoln is traveling to meet with employees throughout the organization.
“Internally, we have to convince our people that this is an exciting new venture that will be highly successful and there is a better future for them in this new organization than any of them had in their respective companies before,” Frescoln says.
These conversations must happen face-to-face.
“You have to get out there with people in their environment whether our employees or customers and you have to deal with them on their turf,” Frescoln says. “You can’t do it by remote control.”
Frescoln notes that mergers often fail when team members can’t voice their ideas.
“You have to let everyone say their piece,” he says. “The key is making sure everyone has a chance to get in their two cents, and after discussions are over, they feel like they’ve been heard and the solution is something that is best for the company.”
Hearing all sides of the story is especially important during a convergence of several company cultures.
“Depending what business people come from, they have different views on how things are and should be,” he says. “So we get these people together at meetings and come to terms with a method of operation that will suit all cultures.”
One such example is the integration of the separate companies’ pigment businesses. One of the appealing parts of the merger was the ability to vertically integrate pigment production so the new Flint Group could make enough of its own pigment to supply its U.S. and international operations.
The merger introduced differing opinions on whether Flint Group should continue to purchase pigment from outside vendors to create competition or rely on its vertically integrated operations to supply it.
“On one hand, you have the theory that the more vertically integrated you are, the more opportunity you have to capture profit within the enterprise,” Frescoln says. “You have to strike a balance between just blindly supplying all pigment internally and using the market to make sure your internal supply is, in fact, cost-competitive. You need to combine those two imperatives in an effective fashion.”
Frescoln says Flint Group reached a middle ground, and the discussions and follow-up with employees ensured that the team would execute the ultimate plan rather than expend energy working against it.
“The key is to make sure everyone participates in the dialogue,” Frescoln says.
A series of quarterly meetings with employees at all levels of the organization shed light on Flint Group’s merger progress and plans. Frescoln announced financial results, integration plans and the company vision, but only after listening to his team.
“You have to listen first before you start talking,” he says.
Through these conversations, Frescoln determined that Flint Group would operate best by centralizing operations such as procurement, and decentralizing HR and marketing functions.
“Procurement is one of those areas where everyone thinks they can get a better deal than the other guy,” he says. “It’s like when you buy a car and you’re excited to tell your neighbor, and he says, ‘I could have gotten a better deal.’”
But procurement is one area where consolidation can help relieve Frescoln’s greatest fear: the rising cost of raw materials. Economies of scale will work toward Flint Group’s advantage in this department.
Leadership changes molded a more centralized operation than employees from the former Flint Ink knew. Previously, HR and marketing were highly centralized, something that changed under the new corporation because human resource issues such as benefits and compensation can vary greatly from one part of the world to the next.
“No one can be an expert on HR practices all over the world,” Frescoln says.
The same goes for marketing. Branding and advertising messages easily get lost in translation. Subtleties such as colors and taglines must be treated with sensitivity.
“A color you use on an advertisement might be popular in one country, but it doesn’t work in another,” Frescoln says. “A tagline that is effective in the U.S. may be offensive in another country. No one can be such an expert on varying cultures to manage all that centrally.”
Finding the value
Part of the value of a merger is meshing complementary products and services or adding geographical coverage. But to fully maximize the value of a merger, you also have to eliminate redundancies.
“There were a lot of cutbacks of necessity, which happens when you put together two businesses of this size,” Frescoln says.
Flint Group’s U.S. headquarters is an example. It staffs one-third fewer employees than it did before the merger because the combined entity’s new headquarters is in Luxembourg. The merger also led to changes in how the company sets up its factories. Each factory now produces a single product line as opposed to making a little of everything, allowing it to focus on being as efficient as possible in one area.
Because Flint Group supplies a larger customer base now and enjoys better buying power on resources, volume is up and costs are down. Fewer resources including human capital fuel each plant.
Still, Flint Group preserved the majority of its sales forces because XSYS and Flint Ink covered different market segments, and their geography didn’t overlap. This diversity is what made the deal so attractive.
“We were strong where they were weak, and they were strong where we were weak,” Frescoln says.
XSYS brought business in Europe and experience in the publications sector. Flint Ink, a $1.5 billion entity before the merger, had penetrated markets such as Latin America, Australia, New Zealand, India and China. Its calling card is a full-range of services, from packaging to magazine and newspaper printing to catalogs.
The merger is still a work in progress, but the dirty work of deciding how the company will function as an entity is mostly done. Frescoln says Flint Group is already seeing returns on the year-old marriage. Business in North America has increased over last year, and the organization continues to work through integration efforts Europe.
Despite change, Frescoln says Flint Group has held on to its corporate identification.
“I really believe that people do business with us because we make it easier,” he says. “That [message] was there when I started, frankly, and it’s still here.”
Also still vital is Flint Group’s growth-though-acquisition plan.
“The big win for Flint Group is we had a strategy we started developing in 1992 to become a global company, and to have balancing shares of the business all over the world, and 14 years later, we’ve come pretty close to achieving that.
“We’ve done what we said we were going to do.”
HOW TO REACH: Flint Group, www.flintgrp.com or (734) 622-6000
“When we started in e-commerce, the total industry revenues were 5 (percent) to 10 percent of what they are today,” says Michael Rubin, president and CEO of the King of Prussia-based company. “The big challenge was establishing (a business) in a new industry.”
Six years ago, when Rubin launched GSI from the e-commerce division of his company, Global Sports Inc., the industry was young and its inherent challenges steep: Start-up capital for technology was costly, many retailers weren’t hip to online sales and competition was stiff. But this didn’t prevent Rubin from acting on his intuition.
“We saw a gigantic business opportunity, and we wanted to build a significant infrastructure that could handle that,” Rubin says.
To fund the venture, GSI raised nearly $200 million in capital from three primary investors, and Rubin allocated funds toward infrastructure, fulfillment and cost centers, and intellectual capital people. In fact, he hired a few hundred employees before GSI earned its first dollar. The company lost money for the first four years, but Rubin was confident that GSI’s sales pitch would win over big-time retailers and that he would recoup this loss.
The key to winning over high-profile retailers was to sell GSI’s e-commerce solution, and Rubin knew his vision was different.
“It wasn’t that (retailers) lacked the capital (to start their own e-commerce divisions), it’s that they lacked the experience,” Rubin says. “We timed the market perfectly with a great offering e-commerce was needed, and we solved the problems that CEOs were having in 1999.”
GSI’s offering consisted of a neatly wrapped e-commerce package. As GSI’s partners, big-name retailers no longer had to worry about staffing an e-commerce division or building internal systems to support online sales. Large retailers’ assets are branding and products; GSI’s strengths as a soup-to-nuts e-commerce provider are its technology platform, fulfillment and customer service capabilities.
“Our sales pitch today is the same as it was when we started the company,” Rubin says. “E-commerce is really big, but it will never be more than 10 percent of our partners’ businesses, and for that reason, by building a superior platform and leveraging (our technology) across all of our partners, we can give them each better e-commerce capabilities.”
Building on the vision
Rubin initially grew the company by taking this proposition to retailers he knew in the sports industry.
“The great thing about sports was that it gave us experience in many different product categories: apparel, footwear, licensed products, hard goods,” Rubin says.
But Rubin knew GSI needed to expand its partner universe beyond sports, which represents only 3 percent to 4 percent of total e-commerce. So he translated this sports background into a selling point when he pitched GSI’s solution to retailers outside the sports industry in 2001 and 2002.
“It was harder to convince some of the partners in new product categories to work with us than it was to get the sporting goods partners to work with us,” Rubin says. “But partners are our best assets in getting new partners.”
Rubin plays a key role in building relationships and selling GSI to new retailers, among them Estee Lauder and Palm, two of GSI’s first clients outside the athletic arena. The retailers GSI was going after were larger than its existing sports partners, but Rubin broke down doors with a simple, honest pitch and proof of satisfaction from existing clients.
“The pitch is that our partners will do more business and make more money because we have more capabilities,” Rubin says.
He shows CEOs that to launch a successful e-commerce division, a company must build out an organizational team and invest dollars in management and technology. Though retailers were interested in e-commerce capabilities and online exposure, many did not want to build the infrastructure or hire more staff. At the same time, Rubin recognized that GSI needed big-name retailers to continue to grow.
“We knew the big-brand retailers would be successful online, not upstart Internet companies,” he says.
He also focused on providing infrastructure for established retailers rather than trying to sell their products under the GSI name.
Rubin’s strategy proved correct. The overall growth of e-commerce has ushered new partners to its door, and its portfolio includes 50 partners such as Polo, Timberland, kate spade, RadioShack and Dick’s Sporting Goods.
Growing beyond the basics
GSI continues to play outside the sports field, adding new categories each year. Today, it services retailers in apparel, health and beauty, sporting goods, consumer electronics, entertainment, jewelry and luxury goods, and home.
To continue growing, Rubin has stepped up the company’s service offerings to meet the more sophisticated e-commerce demands of its partners.
“It’s not that we reinvented ourselves,” Rubin says. “But we offer more value today than we originally did.”
GSI has added multichannel initiatives, customized products, online personalization and international services. And if GSI can’t build it, it partners with others to provide customers with everything from new technology and best-of-breed software to e-commerce customization tools.
“Customization and personalization is a theme we’ve been pushing for a few years,” Rubin says. “We talk to our partners about how they can integrate that into their businesses.”
While Rubin says partners sometimes approach GSI with ways online shoppers can personalize products, GSI’s business management teams are assigned to clients, and together, they brainstorm customization concepts. Rubin figures this will continue to drive growth.
“If we continue with our existing business model, over the next couple of years, the growth for us is enormous,” Rubin says. “We’ve added 10 new partners a year, and I think we will continue to add five to 10 more a year. And we do more for our existing partners.”
GSI builds the relationship side of its business by offering robust services that allow retailers to give their customers the same personal service online as they expect in physical stores.
“(Our clients) want a business partnership and experience,” Rubin says. “We go to our partners and say, ‘Look, not only can we give you great infrastructure, we can help you grow your business.’”
And the partners are buying it. GSI is consistently beating the industry growth average each year and is projecting net revenue of $432 million for fiscal 2005.
Rubin measures success by how much of the e-commerce pie GSI consumes, and its portion is a low-single digit of total U.S. e-commerce sales.
“Our growth mirrors, at a minimum, what the growth of e-commerce has been,” Rubin says.
GSI’s compounded annual growth rate on revenue from 2000 to 2004 was 67 percent.
Growth for both is partners and for GSI is what Rubin’s vision is all about, and he has targeted about 1,000 companies as potential partners.
“We look for the big, established brands that have a lot of meaning in the marketplace,” he says.
The larger the retailer, the more e-commerce business it will do dollarwise and the more that will feed GSI& #x2019;s piggy bank and reputation. That’s useful because GSI doesn’t market its services; it relies on referrals and interest from retailers who hear about it from other big brands.
Rubin doesn’t expect this demand, or the e-commerce boom, to slow down. Estimating that overall e-commerce represents about 5 percent of total retail, he figures this number will double.
“Lots of things will drive that,” he says, pointing to broadband Internet availability, consumers’ increasing comfort with navigating the Internet and growing trust with online shopping.
What’s more, improved e-commerce services will elevate retailers’ and consumers’ expectations for how they conduct business online.
“Being online is a mandatory thing for companies today,” Rubin says. “It is not an option consumers demand it. Retail consumer brands need to be there, and that is an important opportunity for us.”
How to reach: www.gsicommerce.com or (610) 491-7000
Born: New York City
Education: New York Maritime College, bachelor’s degree in nuclear science; Pennsylvania State University, master’s degree in nuclear engineering; Rensselaer Polytechnic Institute, master’s degree in management
First job: I worked downtown as a messenger at an advertising agency. Out of college, I was a nuclear engineer.
What is the most important business lesson you have learned?
Business is all about people it’s about the people you select in management and the people you employ and how you attract them, motivate them, keep them, and reward them. We are a people business, and that is the name of the game.
Who do you admire most in business and why?
I admire the people who are not just entrepreneurial, but people who can do it and do it again. One of the most interesting people of late is Steve Jobs, who started Apple from nothing and Pixar from nothing and now he has resurrected Apple again. I think to have the energy and creativity to reinvent a business is admirable.
What has been your greatest business challenge?
It’s a lot easier to manage when things are going well. When you face the legislative challenges we had a couple of years ago or when we lost a big client 10 years ago, you learn to manage in adversity. That is a different skill.
Describe your leadership style.
I probably work the most hours still. I’m a hands-on guy who gets involved, but I try to lead by example. My strength is in my vision and strategy, and how I treat people. I try to stay out of operational details, but to be knowledgeable of them. I don’t ask anyone to do anything that I wouldn’t do.
“Detroit is one of the pizza capitals of the U.S.,” says Steve Jackson, president of Hungry Howie’s Pizza.
Pizza destinations such as New York City or Chicago can grapple over which serves up the best slice, but Detroit is the founding city of three major chains. A good 10 years before Hungry Howie’s time, there was Little Caesar’s, famous for its “pizza-pizza” two-for-one promotion, and Domino’s, which once promised dinner on the table in “30 minutes or less.”
Many entrepreneurs would consider Taylor, where founder Jim Hearn planted his first Hungry Howie’s store, a no-fly zone. Why set up shop in a neighborhood with two competitive cooks already in the kitchen?
“We cut our teeth in a very competitive market,” says Jackson, who started his career at Hungry Howie’s delivering pizzas for Hearn. “But the environment taught us a lesson over the past 32 years on how to compete in any market.
“Each company throughout our industry picks their niche and direction and tries to be competitive with that,” he says, describing the pressure to find an original way to concoct America’s favorite take-out food.
A crowded market forced Hungry Howie’s to get creative, and it fulfilled consumers’ appetites for a different kind of crunch with its trademarked flavored crusts. The crusts are Hungry Howie’s calling card and provide the differentiation the company needs to stand out, but they are only one part of its growth.
The homegrown business has multiplied into 526 national franchises with systemwide sales of $243 million in 2004. Jackson says strong systems, grassroots management and trusting franchisee relationships help maintain Hungry Howie’s standing as the ninth largest pizza franchise operation in the country.
Systems for consistency
Before Hungry Howie’s started feeding 17 states and Canada, the pizzeria was operated by a fraternity of close friends and family members who opened the first 10 stores within 25 miles of each other. Systems and metrics weren’t etched in stone how to prep toppings, prepare the dough, season the crusts and market the brand were all open to interpretation.
“We were as mom-and-pop as you could get,” Jackson says. “I jokingly say we had a cigar box to put our money in and our barometer for profitability was our checkbook. If there was money left at the end of the month, then we did OK.”
When entrepreneurs showed an interest in investing in a franchise, Jackson realized Hungry Howie’s quality promise would suffer without systems to guide new franchisees through the process of delivering its signature pie.
“When we made the decision to franchise the business in 1981, we had to transfer the knowledge we had, which was grassroots and street-smart, to other people so they could execute the business,” Jackson says.
In the meantime, there was plenty of competition, and Hungry Howie’s could not risk quality while trying to establish its brand.
“We had to start systemizing anything and everything,” Jackson says. “This started with pizza ovens and progressed to ingredients, marketing manuals and eventually, franchisee training.”
First, Jackson and his original team started testing ways to improve baking and preparation efficiency by experimenting with new technology.
“The early 1980s was the onslaught of the conveyor pizza oven,” Jackson says, noting that Hungry Howie’s was open to the concept despite industry skepticism.
The conveyor oven allowed Hungry Howie’s to load pizzas in one end on a rolling belt and catch them at the other end when they were piping hot and ready to deliver. This way, Jackson could rest assured that ovens were adjusted to the same time and temperature for each store.
Next, he considered ingredients. Whole green peppers, blocks of cheese and pepperoni logs all required cutting, grating and slicing, and that takes time.
“We had to convert ingredients to usable product at the store level,” Jackson says. “There was a large opportunity for human error.”
But prepared ingredients cost more, requiring that franchisees trust that the systems developed at corporate headquarters are in the best interest of the organization.
“If you buy cheese in a block and go to the manufacturer and say, ‘We need you to cut this up a certain way,’ that costs more money,” Jackson says.
Gaining buy-in for that process at the store level can be difficult when you must convince owners that doling out extra dollars will pay off in efficiency and labor savings.
“When you go to franchisees and tell them that, they say, ‘We don’t want to pay that.’ (Corporate) has to prove why they will save labor costs and have better consistency.”
Proving each new system to franchisees was a constant struggle and still is.
“It’s always hard to teach an old dog new tricks,” Jackson says. “We started with our base of people, and often they would tell us, ‘We don’t do it that way.’ Then we went through a process of education the ‘show me and prove it to me that it will work.’”
Field consultants have always played a critical role in communicating new ideas and systems from corporate headquarters to franchisees.
Each consultant visits several stores, learning their strong points and weak points. Listening and observing is a large part of the field consultant’s job.
“Our field people look at execution at the store level, whether how they assemble a product or how they transfer a raw product to a usable product at the store level,” Jackson says. “We get feedback from the field first before making any decisions.”
Frequent field consultant visits filter communication from the corporate office to each store, reaffirming Hungry Howie’s open-door management philosophy. Franchisees are always invited to offer their ideas.
Communication is also facilitated by a Web site that outlines processes, answers questions and highlights new products. Hungry Howie’s weekly e-newsletter helps corporate constantly state its case. Annual meetings and training sessions ensure that franchisees are up-to-date on the latest processes and products.
And the communication has to go both ways.
Franchisees’ ideas become part of Hungry Howie’s secret sauce. For example, flavored crust Hungry Howie’s No. 1 branding tool was invented at the franchise level when one of the first store owners sprinkled sesame seeds on his crusts to make his pizzas look different from those of a competitor.
“The consumers in that market accepted it,” Jackson says.
Soon, another franchisee picked up the idea, and eventually, all 50 stores started selling flavored crusts. Soon, there were eight options for consumers.
“Throughout the years we added crusts, with three new crusts in the last 12 months,” Jackson says, demonstrating that systems and recipes constantly evolve and franchisees play a significant role in writing the menu.
They also have a say when an idea doesn’t taste right.
When Hungry Howie’s introduced thin-crust pizza during the Atkins diet craze, the cracker-crisp texture won over many pizza lovers who were hesitant to sink their teeth into the original crusts, Jackson says. But when the company experimented with low-fat cheeses, it didn’t get such palatable results.
“The bottom line is the pizza doesn’t taste good when you start (using low-fat products),” Jackson says. “We tested it in certain markets, and people gravitated back to the real thing.”
The best interests of franchisees are the core of such corporate decisions, Jackson says.
“What better vocal input can you have than from the people who are dealing in the business each day?” he says.
Jackson says franchisees respect the members of management because of their experience working at the store level. Buy-in becomes less of a struggle when franchisees know this.
“We are not sitting in an ivory tower making decisions,” he says. “As of today, this company is not run by a Harvard MBA. The vice presidents and directors in this company grew up in the business, and most have been with us for 10 to 20 years. By doing so, everyone, including myself, can look at a franchisee and say, ‘We need to do this for this reason.’”
Pizza Today estimates the pizza franchise business is a $30-billion industry. Competitors nickel and dime their way to the top, waging coupon wars to capture consumers.
“If we went to a drawer in your kitchen, it wouldn’t lack coupons they are in your mailbox every day,” Jackson says. “Eighty percent of our orders are generated by a coupon. That is the nature of this business, and almost to a flaw.”
Jackson knows Hungry Howie’s must choose its battle cheap, fast or best.
“You can’t be all three,” he says.
Slashing prices usually means sacrificing quality ingredients, and fast delivery can be dangerous to the driver. Being the best will probably cost customers more money, so they must think the pizza is worth paying the difference.
“We made a decision a long time ago to never compromise our products for any reason,” Jackson says.
This means relying on a management strategy of niche products the flavored crusts and a calzone-sub hybrid for example and a minimal coupon offering.
Jackson won’t resort to deep discounts, which dig companies into a deficit and cause either profit margin or product quality to suffer.
“You can identify this philosophy with any business,” he says. “Look at auto. Most recently, they offered consumers employee pricing. Where do you go from there? How do you get people to take the full price down the road?”
More important for Jackson, how do you ask franchisees to slash prices if you know it will hurt their bottom lines? He simply won’t do it.
“We try to be as competitive as we can, and when we make a marketing decision [for discounts], we have to be careful that our franchisees can still make money,” says Jackson. “We’ve watched our competition struggle with franchisee relations because of that.”
Trust is a critical element. If franchisees think corporate is profiteering at their expense, the close relationship will fall apart, and open communication goes with it. Jackson and others at the corporate office are careful about who they pick to be a franchisee, because ultimately, they have to trust the franchisee as much as the franchisee trusts them.
“Our management style is like a sports team,” Jackson says. “I might be the coach who can recruit the players and hold the team meetings and train them, but it’s up to them to execute it. It’s up to us to watch that they play fair and execute properly.
“Just having those good people in all aspects of our business and training them properly helps us reach our goals.”
Strength in stores
By focusing on systems, communication and trust, Hungry Howie’s has come a long way since its humble beginnings. The company has more than 500 stores, but you won’t find Hungry Howie’s everywhere Jackson isn’t interested in pushing a thumbtack in every state on the map.
Rather, regional growth based on existing franchises will strengthen the brand.
“We’ve always maintained conservative, manageable growth,” Jackson says. “You read about chains that grow too quickly and there were many that were taking off and you thought they were the next best thing. Then they fell by the wayside, and some left the marketplace for good.
“Many times that is attributed to growth that took place too fast.”
Hungry Howie’s expansion will depend on distribution and existing locations. How easy is it to ship products to the location? If the franchise is close to other Hungry Howie’s stores, distribution is far more cost-effective.
Jackson shares success stories about franchisees like a proud father. The way he sees it, every time a franchisee opens a store, he welcomes another inspired member to his family.
“We’ve kept a family touch to the business,” he says, “and we will continue to do that as long as we can.
“Making a transition from mom-and-pop to a corporation is long and grueling. Thirty years later, we are still doing it so we can always be on the cutting edge.”
How to reach: www.hungryhowies.com or (248) 414-3300
Of course, we should consider our growth and investment goals all year, but January 1 is still a fine time to start a healthy planning habit. Begin by arranging a meeting with your banker, who can guide you toward realistic ways to fulfill your resolutions.
Smart Business spoke with Craig Johnson, president and CEO of Franklin Bank, about planning for the year ahead.
What should business owners review before planning for the following year?
It’s important to evaluate what your lending needs were during the past year and what you anticipate they will be in the coming year. You should prepare a projection and meet with your lender early in the planning process even if you are not ready to process a formal loan application.
You’ll want to discuss capital needs, equipment needs and fixed asset purchases. Your banker will need this type of information to help you secure loans for these investments.
Why is it important for banks to understand your needs in advance?
Banks ebb and flow. For example, there might be times when a bank may be more aggressive with financing working capital than real estate.
If you sit down with a loan officer, prepare a summary of your last year and project your borrowing needs, you can get a feel for how the bank can finance your growth strategies. Also, the lender will want to get a feel for the positive and negative events that occurred in your company and the economy.
What happens if you wait too long to plan properly?
Say a company grew 10 percent, but it didn’t properly plan its working capital needs. As a result, the company had to approach the bank for a stopgap measure bumping up credit at the time of line renewal or stretching trade payables. Generally speaking, a lot of small businesses should be able to project their next 12 months to avoid these last-minute fixes.
When a business owner makes such emergency requests, is he or she viewed as a risk by the bank?
The risk is that the bank could say no to the request. The same holds true with capital expenditures, whether for real estate or equipment. You want to talk with the bank early in the year and let them know the avenue you are paving. That way, come July, if you find a building and need to request a loan, you are more likely to secure capital than if you do not have dialogue with the banker in advance.
Also, the banker might not advise purchasing a new building, depending on the company’s financial picture. The banker might tell you, ‘Based on your growth, you should conserve cash.’ When you talk with the bank in advance, you know whether it will support your growth strategies, and you can also obtain valuable planning advice.
What exactly should a business owner prepare for an annual meeting with a lender?
You’ll want to be prepared with a summary of your last year, including revenues; what went well and what didn’t go well; new projects on the horizon; new clients; and any new products that will require additional financing.
Will you expand your current facility or buy a new building? Will you relocate or add another building in a different location?
On the other hand, consider whether you will contract your expenses in the coming year. What will you do in terms of excess space at existing buildings? Can you sell your equipment? How will you reduce your expenses?
What other banking considerations should business owners discuss during a planning meeting?
You should look at your existing banking relationships your nonFDIC-insured investments. Are they meeting your needs? Are you maximizing your returns?
Think of cost and convenience. Would you be better served with different products and services? Your banker can provide suggestions on ways to ensure you invest wisely. Also, if you haven’t already enrolled in Internet banking, you should consider the security it provides and the time, money and storage space these services can save you.
Craig Johnson is president and CEO of Franklin Bank in Southfield, Mich. Reach him at (248) 386-9860.
Greg Provenzano’s first experience in Corporate America left him with a sour aftertaste. Fresh out of high school, he took a job at a snack food company in Detroit, where he diligently worked his way up to middle management.
Then he hit a ceiling.
It wasn’t long before Provenzano, now president and one of four founders of ACN Inc., learned that his ladder was too short to reach the executive deck.
“I realized there were only a select few who were making substantial income and living a decent life,” Provenzano says.
This first impression of corporate structure turned him off of pursuing a career in a top-down, pyramid-shaped business structure.
It also sparked the idea for ACN. Provenzano and fellow founders Robert Stevanovski, and Anthony Cupisz and Michael Cupisz opted for a business-unusual approach to selling services — a network model usually associated with catalog kitsch. Now, ACN Inc., based in Farmington, is the world’s largest direct-selling company. It achieved annual revenue in excess of $500 million by offering everyday services such as telecommunications, energy and Internet access.
“We are just the opposite of a corporate structure,” Provenzano says.
But being different isn’t always easy, especially when the founding partners must still play in the corporate sandbox. If ACN was going to capitalize on the home-based business boom and tap into sales opportunities in emerging technology markets, it needed a strong infrastructure to support a network of independent representatives.
It also needed the right people — not necessarily the usual corporate suspects — to drive the company’s success.
Creating the business model
Direct marketing tactics are generally reserved for tangibles — make-up, cookware, baskets, candles and other items sold at home parties. The founders had deep knowledge of this selling structure after a combined 85 years in the industry working for other companies, but Provenzano knew that focusing on services such as telecommunications and energy would differentiate ACN from product-focused network sales organizations and give it a competitive advantage.
“People are accustomed to network marketing being associated with pills, potions and the like,” Provenzano says, addressing skepticism that a model like this would work outside the catalog world. “Because we are a service company, we attract a different type of person — someone who is professional and never saw themselves selling products.”
Telecommunications services also appealed to the founders because of the industry’s growth potential; communications is already estimated to be a $1-trillion-dollar industry. Also, such services do not require storage or shipping — two areas in which the founders lacked extensive experience.
“You can’t have a garage (full of) of telecommunications services,” Provenzano says. “Our representatives don’t have to worry about inventory, and there is no delivery or transaction of money. That attracted us to this industry.”
He and the founders were also looking for freedom to succeed, both for them and their employees.
“We had all come from a string of companies where management changed and the culture changed,” Provenzano says. “We didn’t want to risk putting our lives in the hands of other people that didn’t consider our interests or the general interests of the other representatives.”
After all, not all direct marketing structures provide just desserts for representatives at all levels, Provenzano says. From the beginning, he and the founders knew that ACN’s marketing model must fuel growth but also had to feed base-level employees.
“If the opportunity isn’t great for the newest person coming into the business, then it isn’t a great opportunity for anyone but the original founders,” Provenzano says. “And anyone who joins ACN today truly has more of an opportunity to do phenomenally well than when we started 13 years ago.”
Provenzano attributes this success to the telecommunication industry’s growth and the fact that representatives are selling services rather than products. And because ACN representatives sell services that consumers already purchase, customers are more comfortable with the pitch. This means representatives are more likely to bring in business and, therefore, earn a comfortable income while helping to expand ACN’s network.
It all starts with a different kind of selling technique than conventional corporations present.
“Traditional forms of customer acquisition are antiquated,” Provenzano says. “You can no longer spend hundreds of thousands of dollars acquiring a customer and hope they stay in your network long enough for you to make a profit.”
Customer acquisition costs can be next to nothing because the network-based sales model does not rely on traditional marketing methods to attract customers. Instead, ACN depends on its representatives to reach out to prospects, and cutting out acquisition costs means the company can provide services for less than its competitors do.
“Because of the ease of acquisition, we have been able to produce hundreds of millions of dollars in revenue for ourselves and still provide tremendous savings for customers and opportunities for representatives,” Provenzano says.
A strong infrastructure was a critical step for expansion, and Provenzano says that building the skeleton of the marketing machine was a daunting task for four marketing gurus with entrepreneurial spirit but no start-up experience.
“Thinking about the early days of negotiating office leases and setting up computer systems, we didn’t know any of that,” Provenzano says.
At first, the founders tried to build the business and recruit network representatives themselves.
“That was taxing and cumbersome,” Provenzano says.
Once the business grew bigger than four professionals could manage on their own, they knew they needed executive assistance.
“We have always understood our limitations and thus, we have never tried to be something we are not,” Provenzano says. “We’ve never had a problem with trying to attract people who are better than us in certain areas where we lacked. Because of that, the right kind of people can sense that we are not control freaks. We will always relinquish responsibilities to competent people.”
Provenzano says this mentality helped reeled in talent so that operations and sales functions could develop in tandem.
“It was our responsibility to say, ‘We need help.’ You have to ask the right people the right questions to get the right answers,” he says.
People drive the network selling vehicle — more representatives translate into more revenue. But the founders aren’t interested in collecting glossy resumes decorated with high-profile recommendations.
“I don’t trust resumes,” Provenzano says, questioning the validity of paperwork that can be botched or bloated with half-truths. “Just like we are great at network marketing, we are also great at networking in general. That means not just taking a look at someone’s resume but actually networking through references and really digging deep.”
And unlike most employers, Provenzano isn’t looking for skills that applicants learn in college. What ACN seeks in its network representatives are people with passion and a desire to change their lives. To these individuals, ACN provides hope and opportunity.
“I’ve always felt I had a chance to win, but I’m not so sure very many people feel that way anymore,” Provenzano says. “People take the traditional career path and find out it is not as profitable or (is) more demanding than they would like it to be.”
If the right environment isn’t provided for representatives to reap rewards for their hard work, the whole network breaks down.
“This is no longer a W-2 world, this is a 1099 world, in my opinion,” Provenzano says.
ACN’s network representatives are independent but still connected to a central nervous system that feeds them with training, encouragement and a structure in which to thrive.
Everyone rises together.
“There is a saying that it is lonely on top,” Provenzano says. “I learned that it doesn’t need to be lonely on the top. You should have a network of people you can interact with and trust.”
At its core, ACN is essentially a marketing firm for its network of representatives. It must focus on the next big thing while always fine-tuning its current services. It must evolve with advancing technology and tap into emerging industries. ACN’s sales and penetration into new market segments depend on it, especially if it is to reach its $1 billion revenue goal in the next few years.
“Our 13-year track record has taught us that you must always be ahead of the game to be successful,” says fellow founder and Chairman Robert Stevanovski. “You must have future thinking and know precisely the right time to act, whether it’s a new product line such as a (Voice over Internet Protocol) with video phone or a change in our business plan.”
The VoIP market is expected to grow into a $9 billion industry by 2008, and the spread of deregulation in the gas and energy markets opens up pockets where companies such as ACN can step in to sell services.
“When you have a marketing engine as we do, you can be pretty light on your feet,” Provenzano says, adding that marketing services as opposed to products makes the company even more nimble.
Meanwhile, Provenzano says ACN, with representatives in 18 countries on three continents, will continue to expand internationally. In turn, the company will translate services it offers to overseas markets to the United States. For example, Provenzano sees potential to build a strong cellular phone business here after ACN’s mobile services proved successful in Europe.
Gradually, Provenzano and the founders are building a corporate structure that looks much more like a solid, square block than a pyramid. The sign of true growth, Provenzano says, is when independent, hard-working people stand at the top along with ACN’s founders.
“There is a big difference between success and significance,” Provenzano says. “People who are significant look beyond their own personal success.”
How to reach: ACN Inc., www.acninc.com, (248) 699-4000
Education: Bachelor’s degree in business administration, Dowling College, Long Island, N.Y.; MBA, J.L. Kellogg Graduate School of Management at Northwestern University, Chicago; Business Development Program, University of Pennsylvania’s Wharton Graduate School of Management
First Job: Xerox
Whom do you admire most in business and why?
I try to take good things from different leaders and get unique qualities they have and build that into my thinking.
What is the most important business lesson you’ve learned?
You can get anything in this life you want as long as you help other people get what they want. The most important resource by a factor of 10 is your people.
What has been your toughest business challenge?
Getting the momentum rolling on the turnaround, and radical change was the way I approached it, and I started at the top.
Describe your leadership style.
I believe in building an entire company from the customer end and focusing on people.
McDermott on choosing role models:
As a young person starting out, I didn’t go to work at Xerox to be a salesperson. I went to work for Xerox to be David Kearns (former chairman and CEO). You have to have big dreams to make big dreams come true. You have to choose your role models wisely, and I was choosing mine early.
First job: U.S. Air Force fighter pilot
Whom do you admire most in business and why?
Rob Cawthorn was my boss for 10 years at Rhone Poulenc Rorer. He was the best at combining strategy with operational excellence. I also had the pleasure of working with Dr. Jonas Salk, who best recognized the power of combining great scientific vision with the human element.
What is the most important business lesson you've learned?
It all starts and ends with the quality and integrity of the people with whom you work. Describe your leadership style. Lead, follow or move aside. And do it with absolute integrity.
Education: University of Cincinnati, metallurgy and materials science
First job: Labor on the shop floor in a hometown foundry
Whom do you admire most in business and why?
A couple of mentors in my early years exemplified a good manager; they were performance-focused but they were great at motivating their teams. They weren’t autocratic types.
I’ve always had great respect for Bill Davidson, CEO of Guardian Industries, and now I have an opportunity to work with him.
What is the most important business lesson you’ve learned?
Surround yourself with good people.
What has been your toughest business challenge?
I joined Federal Mogul a year after we acquired an Indiana-based company that turned out to be a disappointment. There was mistrust between employees and managers, the business was fragmented, and just about all the metrics had been disappointing.
There were substantial changes required during that transition.
Describe your management style.
I hire the best people I can find, particularly strong ones who can cover my weaknesses. Then, I establish key objectives and leave them alone to do their jobs.
First job: Second lieutenant in the U.S. Air Force
Education: U.S. Air Force Academy; MBA, University of California at Los Angeles
What is the most important business lesson you’ve learned?
People are the most important decisions you will make; choose them carefully.
What has been your toughest business challenge?
Putting together two large companies AmeriSource Health and Bergen Brunswig to create AmerisourceBergen. We had to integrate two different cultures, and many people said we wouldn't pull it off. That was a little less than four years ago, and it was a huge undertaking during a time when many people didn't think a huge consolidation would work.
Describe your management style.
Pretty informal and collaborative. We take our jobs here seriously, but not ourselves. I allow people room to execute their jobs, telling them what needs to be done and allowing them to do it. That is sometimes painful because they might approach challenges differently than I would, and they might complete them more successfully.