“We believe the strategic implications of a ‘flat world’ should be understood by the technology and business leaders of all companies, large and small,” says Joe Brouillette, vice president of business development at Avvantica Consulting. “The business world is flat; there are virtually no barriers any more.”
Smart Business talked to Brouillette about how doing business on a global stage has changed over the last decade.
Has the United States missed this phenomenon?
The United States did not miss the ‘flat world’ phenomenon because it was not a one-time event, but rather an evolution of events that have reshaped the playing field, globally.
The U.S. business community has been distracted by many significant events over the last five or six years the Y2K technology threat at the end of the 1990s, the U.S. response to the 9/11 tragedy, global terrorism and the financial chaos brought on by the collapse of Enron and WorldCom, to name just a few.
For the business community in general, the silver lining out of these dark clouds was an internal focus on how, why and where they conducted business. The need for more controls, security, speed and flexibility collided with the demands for efficiency, lower delivered cost and higher quality, all in an effort to maintain competitive differentiation in a rapidly commoditizing world.
The same technological innovations and excessive quantities of network capacity (bandwidth) that were created for an e-commerce marketplace that never truly met expectations enabled access to very low-cost information-processing and transmission capability.
What are the major factors that contribute to the world becoming flat?
There are three critical factors that should really matter to business/technology leaders.
First, today’s software platforms allow work that contains knowledge components to be broken down to its most elemental parts, managed, transformed and communicated instantly, and then reassembled to its desired form in seconds, thus delivering value at speed. It’s somewhat analogous to the period in the early 20th century when the concepts of scientific management and time-and-motion studies were being developed and applied to the industrial workplace. This time, the work that is being managed is knowledge work, not industrial or manufacturing work.
Second, the availability of relatively cheap bandwidth and network connectivity allows information to be moved virtually around the globe for a minimal cost.
And third is the availability of vast new labor markets in areas such as India, Russia, Eastern Europe and China.
Why does this matter?
Over time all businesses compete on cost and the primary implications of a ‘flat world’ is cost optimization/minimization. In other words, over time work will always be performed in the most cost-effective location.
As the enablers of a ‘flat world’ continue to evolve, organizations must understand what it means to them.
For instance, outsourcing and offshoring have become commonplace in certain manufacturing and services segments. In a ‘flat world,’ companies must now be concerned that many components considered knowledge work can be outsourced or taken off shore. Customer call centers are typical of function being outsourced, and in the ‘flat world’ there are virtually limitless possibilities for all processes.
So what do you do to prepare for a ‘flat world’?
From a business perspective, we believe that leadership should understand in detail those areas of their company that are truly differentiated from the competition and form the basis of their competitive advantage. Processes that are not differentiating and are of a support nature may be very attractive candidates to the opportunities of the ‘flat world.’
For technology executives, we recommend that they help the organization to define and implement a robust architecture for both technology infrastructure and business applications. This will allow them to take advantage of a ‘flat world’ in ways that make sense for their specific situations.
JOE BROUILLETTE is vice president of business development at Avvantica Consulting. Reach him at (214) 379-7928 or jbrouillette@AvvanticaConsulting.com.
Hire people with broad experience.
I like to see people that have broader experiences in lots of different areas, people who have crossed over from one functional area to another in their career. They have a well-rounded view of management and management style when they join the team at the senior leadership level.
Sometimes if people have experience in one particular area, they become narrow or their focus is too specific. Every department requires some technical expertise and experience. The higher you go in management, the more generalist your approach needs to be. You may be an expert in the subject material, or you may not, but you have to rely on other people to accomplish certain things.
Hire open people, not defensive ones.
I like to see people who are also collaborative with their staffs, people who are very visible in the work areas, who communicate clearly and always make sure that the team they’re working with is fully informed about what is happening, what the latest bit of information is, the direction of the company or the direction of their department.
You can tell when somebody might be defensive they’re being very careful about how they answer particular questions. Look for someone who is very open and honest and easily communicating what their strengths and weaknesses might be. Look for examples of when they’ve displayed leadership.
Look for if someone is continuously pointing out the things they’ve accomplished or whether they point out the things their team has accomplished, whether they give credit to other people to things they have achieved in their career.
Be adaptable to continue growing.
There’s always external forces that are beyond your control. A good organization is able to detect when that is going to affect or potentially affect their company, department or work unit, and quickly analyze the situation and start making some adjustment so the event is either not as serious or it can be avoided.
Internally, if departments or individuals create barriers to communication, that tends to stifle the communication of the overall goal or objective. People do not look at the overall corporate objectives and evaluate how they can help achieve those goals through their own efforts or work unit. That becomes a problem.
Stress highly that all the departments work together and communicate together on projects they’re trying to accomplish, even though the departments may not be directly involved. At least they’re aware of it. That involves them more in the potential solution.
To keep employees engaged, communicate with them.
Look at the overall organization to see whether or not the team members and the leaders are engaged. Are they actively working together as a team regardless of if they’re in one department or another, regardless of what their title or their position is, regardless of what their responsibilities are? If everyone is engaged, active, focused on making the company successful, you have a much better chance.
The key is to select senior leaders, and leaders look for team members, who are open and willing to communicate to each other freely and not let titles or status in the organization keep you from communicating. Allow a free flow of information throughout the organization so people feel connected to what the goals and objectives of the company are as well as feel as though they have a way of contributing to the achievement of the goal.
Clarity is extremely important. As CEOs, we tend to overcommunicate on certain things. That leads to a message that might be confusing to some people.
It’s important to be as clear and concise as you possibly can be when you’re stating an objective or a goal or you’re developing or communicating strategy to others.
The key is to not rely solely on your direct reports to communicate the message to the rest of the team but to be available to discuss the strategy or the goals of the company with all of the team members. Make sure that, No. 1, they are getting clear, concise, accurate reporting of the goals and objectives of the company but also to open a dialogue in case they have ideas that may be helpful in shaping the future of the company.
When making decisions, include anyone affected by them. It helps if everybody is moving in the same direction. Managers sometimes make the mistake that they always know the right answer.
It’s important that ideas and strategies be discussed and that everyone be open to critiquing the objectives and the strategies because you never know when someone’s going to have a better idea. They may have a better approach. They may realize that there’s something that was overlooked in the development of the strategy, or the objective needs to be taken into consideration.
The communication from the management to individual team members and then from the team members to the management is crucial.
Work collaboratively to focus each day.
You need to set priorities. You need to focus on three to six things to accomplish each day.
Make sure that the overall objectives of the company are clear and concise, and continue referencing those. Make sure the things you’re setting as priorities and things that you’re spending your time on are, in fact, the things that are most important in achieving the success you’re trying to find.
CEOs tend to isolate themselves not because they do it deliberately, but there are a lot of demands on our time and our ability to accomplish things. One has to be an expert in time management, one has to have a support team of senior leadership and other staff support that will make sure priorities are established, things are not overlooked and we’re focused on the correct priorities at the time.
It’s a cooperative effort to make sure we all are looking out for each other.
Feel out the situation before making quick decisions.
Listen with an open mind. Don’t prejudge a situation when you’re new to a situation, a company or a department.
Communicate with all of the people involved, whether they be the team members inside the department, or they be the suppliers or the customers. Learn as much as you can about how they view the company or the position, and then assess what direction or what leadership needs to be given in order to be successful.
How to reach: Kitty Hawk Inc., www.kittyhawkcompanies.com
Clampitt, chairman and CEO of Clampitt Paper Co. opened a resource center for creative professionals and their clients. The center allows the company to expand its presence and reach new customers by helping them meet their professional goals.
By implementing smart ideas like this one and leading by example, the company continues to grow, posting $137 million in revenue last year.
Smart Business spoke with Clampitt about how he leads his 288 employees and grows Clampitt Paper Co.
Engage with employees. Don’t be afraid to roll up your sleeves and get involved. Engage with your people and set the right example.
I treat people like I want to be treated. That’s a good rule of thumb to live by.
The worst thing you can do is not engage. There are a lot of leaders that are disengaged from their employees. In any industry, in order to be successful, you’re going to have to be involved with your people because without people, you can’t run a successful organization. If everyone knows that you’re committed and 24/7 thinking about their best interest, then you can be successful.
Trust your instincts. There are so many components to making decisions, but a lot of times you know you have a gut feel. If you’re actively involved in your business, you have a nose for what’s right and what’s wrong versus distancing yourself from the actual business. So some of these things you can make on the fly because you know instinctively they’re correct.
Have direction. I set my goals. I ask my entire management team to say how they’re going to implement these goals and when they’re going to do it, and we review these goals on a quarterly basis.
They’re trusting that we’re steering the ship on the proper course. We have a sales meeting, and in the closing, I go through what I believe the goals and missions of the company are, and not just for the next 12 months but for the next 60 months, so these people have an idea of where we’re going.
At the end of the day, people want to know there is a sense of direction and they want to know that people at the top, there are concrete thoughts behind decisions that they make and why we come up with decisions to go in this direction.
Develop a strong brand. A brand is a commitment made and a promise kept. I’m big on the brand. Our service platform has to be top-notch.
If we’re working at one level and we’re taking care of business all the way down the chain, we’re solving problems consistently and we’re telling people the paper is going to be there on time every time. You keep that promise. That’s what keeps people coming back to you.
It’s going to keep the business growing.
Squash problems when they begin. If you see an issue brewing, you need to address it right then, and that’s a big problem, no matter what company you’re in. This is every CEO’s challenge, especially ones that are more people-oriented.
You want to give everybody every chance, but when you realize there’s issues and you realize you’ve gone through the fostering deal, but still it’s not working quite right, you need to do something about it then. If you keep a problem in the organization, other people notice it and it begins to affect their work.
Retain management. The other thing that will inhibit growth is if you begin to change your management team regularly. There’s a great chapter from the book “Good to Great.”
The flywheel theory is you get up there every day and you get everybody pushing the flywheel a certain direction, and that’s how a company develops momentum, and momentum leads to growth. You’re only pushing it just a little bit, but after awhile, it begins to develop speed. If your president changes or your VP of sales changes, then all of a sudden, everybody doesn’t quite know what their marching orders are. The flywheel stops.
The new guy comes in, and he wants to throw it another direction. About the time that thing starts going the other direction, they change that guy. You develop no momentum because people are going one direction one time, one direction another time, so at the end of the day, it’s very difficult to grow because you haven’t developed any momentum.
Develop your skills. You’ve got to always be challenging yourself a bit. I’m involved in a group, and it’s a network of CEOs. These guys are in a noncompeting business, and the whole idea is that you share your problems, your issues with these guys that are in similar roles in different companies.
I go to them and I say, ‘I don’t understand capital markets,’ and they help me with that.
These guys are much stronger than I am, say, operationally, so they’ll ask very tough operational questions, and I’ve got to get my act together.
The other question that begs to be asked is, ‘What the heck do I really want to do long-long term?’ These guys challenge me to do that. Every CEO needs some kind of outside network. A lot of them have boards, but we don’t have a board here, and these guys challenge me to be thinking outside the box and challenge my thoughts.
Seek advice from others. By the time you’ve gotten to that role, you have certain things already in place, but don’t be afraid to seek advice from an outside source. That doesn’t mean you have to act on it, but seek the advice. If you’re engaged in your business fully, you’ll have a nose for your business, and you need to have that.
[Ret. Gen. H. Norman] Schwarzkopf said two things got him through. He says take charge and do the right thing. You already know, internally, what the right thing is most of the time because you wouldn’t be CEO of that company if you didn’t, and doing the right thing also involves the integrity issue of CEOs.
It seems like there’s been a lack of that, but you know in your heart what’s right.
How to reach: Clampitt Paper Co., www.clampitt.com
Many companies saw SOX as imposing the same compliance burden on them as was imposed on the companies that had been fraudulent or negligent and didn’t look past the short-term pain to see the longer-term opportunity.
“Meeting the requirements of SOX during the first two years proved to be the resource drain that many companies feared. Significant resources were consumed documenting and testing internal controls,” says Allen Harris, president of Compliance Technologies, the software and technology solutions business of Avvantica Consulting LLC. “Companies are now looking for ways to leverage that investment.”
Smart Business spoke to Harris about the ways companies can leverage their investments in SOX compliance to derive additional organizational value while simultaneously driving down the total cost of compliance (TCC).
How can a company leverage its investment in SOX?
The idea here is that, when you’re doing the work necessary to comply with SOX, you should gain a holistic view of the financial controls across the organization. This holistic view, or road map, often exposes areas where you can significantly improve operations. If you are going to spend the money to comply with SOX, you might as well get value in other areas, as well.
For example, sometimes when you test a control for an organization you find out that the control fails the test; not because of the control itself but because existing polices aren’t being enforced. In other cases, companies are able to identify controls that are unnecessarily complex and should be simplified. When you can see the controls laid out for the entire organization, you see everything come together in a view that you don’t readily see unless you go through the kind of rigorous documentation and testing of controls that is necessary for SOX compliance.
There are also cases where a control is manual that should be automated. One of the things that auditors hate the most is a manual control because it’s subject to human error. It’s preferable to have an automated control that you can test once and you know will always work the same way. If it’s a manual system, then you are relying on people to run it. You look at your manual controls and try to figure out which ones you can automate.
Finally, many companies lack a standard approach for similar controls.
It’s more efficient and effective to develop a standard approach so that everyone operates a particular type of control the same way, as opposed to unnecessary variations in different divisions or locations.
How can a company reduce its TCC?
An effective SOX technology platform provides a compliance road map for identifying opportunities for improved operations. Forward-thinking companies are moving beyond just SOX compliance to bring operations under better control while also reducing their TCC.
We first recommend that companies invest in a high-quality, effective SOX technology platform with a robust executive dashboard to manage the ongoing SOX process and to reduce their TCC. It’s very difficult to reduce your TCC without an effective technology platform, since you don’t have ready access to the necessary information.
Once the SOX technology platform is in place, the focus shifts to identifying appropriate key performance indicators, which might include total number of controls; percent of controls that fail testing; and the cycle time to collect evidence, complete tests and address controls remediation.
Next, companies should focus on optimizing the total number of controls defined for existing processes. Many companies have defined too many controls over areas that have limited materiality while not defining a sufficient number of strategic controls.
Finally, companies should focus on redesigning or re-engineering the underlying control processes in order to implement improved operational control.
How can a company take advantage of a compliance road map?
You want to move from non-standard controls for a given process to standardized controls to reduce the cost of controls documentation, maintenance and testing. And you want to migrate away from performing ‘back office’ processes on a local basis by moving to regional or national processing centers. For smaller organizations, centralization often provides a side benefit of helping a company address control issues such as segregation of duties.
A company can leverage the road map provided by an effective SOX compliance technology solution to identify significant areas for operational improvement and to attain process improvement and cost optimization. It can be used to transform the business by making SOX compliance an integral part of ongoing operations and by implementing identified operational improvements.
ALLEN HARRIS is president of Compliance Technologies, the software and technology solutions business of Avvantica Consulting LLC. Reach him at (214) 379-7924 or AHarris@AvvanticaConsulting.com.
Birthplace: Hornell, N.Y.
Education: Bachelor’s degree, English, Hope College, Holland, Mich., 1970
What’s the biggest business challenge you’ve faced?
When I came to ShowBiz and Chuck E. Cheese. I knew the risk was high, but I thought if we could buy ourselves some time to get things turned around, we could get it done.
What is the most important business lesson you’ve learned?
Believe in your people and earn their trust.
What is your work philosophy?
To make sure that my priorities are clear and that I remain extremely focused.
What’s the best work advice you’ve ever been given?
Keep it simple. Make sure you are focused on the right things.
Frank on failure: I’m a big believer in business that if you don’t have some failures along the way, you aren’t doing enough. I think sometimes in business, people get all caught up in making the right decisions.
I think it’s equally important that you have a company or culture where failure is not only tolerated but accepted, accepted in the sense that if the thought process was right, if the strategy and tactics are well-thought-through, if the execution of what you’re doing is done in a quality way, and it doesn’t work, I’m OK with that.
Then you need to step back and say, ‘Where did we miss? What in our thought process or strategy was wrong?’
Moreover, Merck’s action increased concerns among other manufacturers over the possibility of lawsuits based on the safety of their products. Therefore, it is in product manufacturers’ best interests in general to prepare for lawsuits aimed at them.
Smart Business spoke to Kirk D. Willis, a partner at Godwin Pappas Langley Ronquillo, LLP, to determine what drug manufacturers and other companies can do to prepare for lawsuits regarding the safety of their products, and how they can respond to safety challenges and legislative changes that will increase regulators’ authority over specific industries.
How can manufacturers prepare for product liability litigation?
There are several ways, and the methods differ from manufacturer to manufacturer.
One suggestion is to retain qualified counsel to advise them how to lessen the possibility of product liability lawsuits. Counsel would have the capacity and experience to respond rapidly should lawsuits be filed. Choosing the right counsel keeps the corporate missions of manufacturers who have faced or are facing product liability matters.
Another is for a manufacturer to insure itself properly. Product manufacturers are advised to carry as much insurance as they deem advisable, taking into account deductibles and co-insurance.
A third is for a company to implement diverse pro-active managing, marketing and technological strategies aimed at ensuring product safety and addressing safety issues.
Another is to work with trade organizations to find out what they are doing to deal with product liability issues, and track regulatory and legislative changes to be prepared for possible changes that may be necessary to deal with potential lawsuits.
What strategies can product manufacturers employ to defend against product liability lawsuits should they be filed?
The available strategies should be carried out with an attorney’s assistance. The strategies might include filing actions in state courts to have cases transferred to a single judge in each state for coordinated proceedings, and filing motions to transfer to a single federal judge and consolidate for the purposes of all federal cases of similar nature alleging personal injury and /or economic loss relating to the purchase or use of a product named in a lawsuit.
Are there strategies that product manufacturers can develop to protect themselves in product liability litigation?
As in the case of preparation, different strategies apply to different cases. Again, manufacturers should follow the advice of their counsel. The strategies might include: procedurally challenging all frivolous lawsuits, fighting attempts to certify as ‘class action’ plaintiffs seeking medical monitoring, seeking attempts to dismiss claims based on the statutes of limitations, fighting discovery orders that involve products that are never used by consumers, challenging certifications in cases where it appears proposed plaintiffs have not suffered, attempting to recuse judges who might have used products involved in lawsuits, trying to move as many cases as possible to federal courts, and deleting the “proximate” from cause.
How is “proximate” cause relevant to product liability lawsuits?
The legal principle of proximate cause lies at the heart of product liability litigation. It simply means that there must be some reasonable connection between using a product and the “insult” that the plaintiff has allegedly suffered. In other words, for a manufacturer to be liable for a plaintiff’s injuries, the use of the product in question must be the proximate cause of plaintiff’s injuries.
Is deleting the “proximate” from the cause anything over which manufacturers have any control?
This takes us back to preparation. Merck took Vioxx off the market because the company recognized that consumers were being affected adversely. In fact, about 20 million users took Vioxx between 1999 and 2004. But a clinical trial showed increased cardiovascular risk in the patients using Vioxx beginning after 18 months of continuous use. The company acted immediately and appropriately to voluntarily withdraw Vioxx from the market, even though the FDA had approved it for treatment of pain and inflammation associated with osteoarthritis, menstruation and rheumatoid arthritis and sales were generating $2.5 billion per year at the time the drug was withdrawn.
There is a lesson to be learned. If a manufacturer learns that its product is creating adverse effects on consumers, the best approach may be to withdraw it from the market. Doing so may invite a flurry of product liability lawsuits, but that is sometimes inevitable.
In the long run, deleting the “proximate” from the cause may work in the manufacturer’s best interests, especially if it is well prepared to deal with litigation, as we discussed earlier.
KIRK D. WILLIS is a partner and chair of the Personal Injury Trial Law section for Godwin Pappas Langley Ronquillo, LLP in its Dallas office. Reach him at (214) 939-4400 or firstname.lastname@example.org.
Internal Revenue Code (IRC) Section 409A establishes rules governing corporate deferred-compensation plans, including traditional elective deferral plans, equity-based compensation arrangements such as stock appreciation rights and restricted stock, supplemental executive retirement benefits, and individual employment and severance agreements. Failure to comply with the new rules carries significant tax implications for covered employees.
In light of the new rules and their tax-related implications, many corporate decision-makers are reviewing their deferred-compensation plans and policies, says Scott Mayfield, tax partner in Whitley Penn LLP, a regional accounting and consulting firm with offices in Dallas and Fort Worth.
Smart Business spoke with Mayfield to discover how corporate managers can evaluate their deferred-compensation plans to ensure 409A compliance.
How does Section 409A affect deferred-compensation agreements?
IRC Section 409A was enacted as part of the 2004 Jobs Act. The Treasury Department has enforcement jurisdiction of the law that covers all deferred-compensation agreements, including individual agreements such as executive contracts that contain a deferred-compensation clause.
Beginning in 2005, all deferred-compensation agreements that provide for future payment of current compensation must comply with tax rules relative to 409A. If the agreements are not in compliance, the individual receiving the compensation is liable for penalties. Non-compliance eliminates the deferral benefit and changes deferred income to current income, subjecting the income to a 20 percent excise tax on the amount deferred, along with an IRS underpayment penalty plus one point.
Penalties are imposed for each year beyond 2005. For example, if the deferred income is not to be paid until 2007, a noncomplying agreement would subject the individual to taxes and penalties for 2006.
State and local noncompliance penalties may be applied if those entities follow the federal legislation regarding deferred compensation.
How can managers ensure their deferred compensation agreements comply with Section 409A?
Most big companies will have already complied, but it’s still important to review every arrangement for each individual who has a legal binding right to compensation paid in a subsequent tax year.
How can managers evaluate agreements?
Each contract must be in compliance in the areas of distribution of benefits, acceleration of benefits and election of benefits.
Under Section 409A, a deferral election must be made before the beginning of the tax year or, for first-time participants, within 30 days after they become eligible to participate in the plan. If the deferred compensation is performance based for services of a period of 12 months or more, the election must be made within six months of the time the services begin.
Also, the time schedule of benefits cannot be accelerated except if specified by the IRS. Compensation cannot be distributed earlier than separation of service, disability, death, unforeseeable emergency and a date irrevocably determined at the time of at the deferral election. Compensation may be generally deferred only if the deferred election is made prior to the year during which the compensation is earned.
However, companies may continue to offer short-term deferred-compensation plans, as these still qualify for compliance under Section 409A so long as the compensation is paid within 2.5 months after the current tax year.
How should reviews be carried out?
Managers of human resources departments in larger companies will be familiar with Section 409A and its noncompliance consequences, and larger companies may have internal controls for reviewing deferred-compensation agreements. Companies that do not have in-house human resource specialists should start with the tax advisers and their attorneys.
How do managers bring plans into compliance?
If agreements are not in compliance, they may not be terminated. They must be renegotiated. Tax advisers and attorneys should review renegotiated agreements.
How are companies changing their compensation policies as a result of the new rules?
As a result of the new rules established in Section 409A of the 2004 Jobs Act, many companies are replacing deferred-compensation plans with other programs such as qualified retirement plans such as 401(k)s, vacation pay, sick leave, disability and death benefits, incentive stock offerings and medical Health Savings Accounts (HSAs).
The cost of administering deferred-compensation agreements under Section 409A rules is driving this change. Overall, the new rules are encouraging companies to rethink their compensation policies to include diverse benefits packages.
SCOTT MAYFIELD is a tax partner in the Fort Worth, Texas, office of Whitley Penn LLP. Reach him at (817) 258-9173 or email@example.com
As a member of the board of directors, Thomas D. Karol was already familiar with Elk Corp. before he became its chairman and CEO in 2001.
Karol was intrigued by the company’s mix of businesses and by the challenge of making Elk into something better.
“What attracted me to it was that my kind of modus operandi is to try to find what companies do well and exploit or optimize the potential based on the strength of the company,” Karol says. “Elk, I felt, had better potential, and we just needed to figure out what kind of sustainable advantages we had and how to commercialize and exploit those.”
Elk manufactures laminated, architectural asphalt shingles for steep-slope roofing, a product line that was performing well and driving most of the company’s growth. But it also had a puzzling array of other businesses that were performing weakly or losing money.
Those other businesses had evolved from the company’s founders five petroleum engineers from Midland who were natural-born inventors and tinkerers. They would often tackle challenges presented by customers and colleagues, and when they came up with a solution, they’d form a subsidiary around it.
“To a great extent, that’s one of the strengths of our company,” Karol says. “We have an innovative bent.”
The founders had also bought some businesses that didn’t fit in very well with Elk’s strongest performing business its roofing products and none of the subsidiaries made much money.
“They had been in a lot of other businesses, but they had never really, really made a lot of money or done anything else that had been a standout,” Karol says. “So I said, ‘Let’s look at what we do in this business.’... We made the decision that we really were a building products company, and anything that was not in some way adding to or was tangential to that business, we didn’t need.”
Despite his energy and drive, Karol former president, CEO and owner of L.D. Brinkman Corp., a carpeting manufacturer and flooring distributor that he sold in 2001 was not in a hurry. His first order of businesses was to examine those tangential businesses and make them healthier, positioning them for sale in the process.
“To a certain extent, you want to sell something when it’s all dressed up in a wedding dress, having dieted and exercised and with a tan,” Karol says. “We said, ‘Let’s see if we can make these better businesses, to see if someone else will want to own them.’”
The two businesses Karol decided to sell were Cybershield and Ortloff Engineers Ltd. Neither fit in with Elk’s core building products Cybershield made plastic shielding used in the cell phone industry and Ortloff handled matters related to the natural gas industry.
Karol’s theory proved correct; growth did, in fact, come after a severe pruning. In fiscal 2005, when Elk sold off those two tangential businesses, Elk’s revenue bounced up to $761.7 million for the fiscal year ending June 30, up from $574 million for 2004.
“When I came in, the earnings were 41 cents for the year and the stock price $14,” Karol says. “This year, our earnings should be in the $2.25 to $2.40 range, and the stock price is $37. To be honest with you, I think that’s been OK. We can do better.”
Karol and the board of directors also intend to sell Chromium, which supplies chrome-plated finishes for abrasive environments such as locomotives. So far, though, they have found no buyers.
“When we exit a business, we want to make sure it’s a good deal for everybody, that we get a fair price and that the employees have a good opportunity and that the buyer is getting a fair opportunity to succeed as well,” says Karol. “We have not found that opportunity for Chromium yet.”
In the meantime, Karol has made that subsidiary profitable by paring it down to one manufacturing plant in Cleveland and improving its manufacturing operation, lowering the sale price significantly. He says the company will keep Chromium for now, and he even sees opportunities to turn it into something more if it doesn’t sell. He sees applications in manufacturing and other fields that use fast-moving machinery, as plating can help prevent costly wear-and-tear.
“There is a whole industry that uses very high impact ceramics or very hardened steel,” Karol says. “We said, ‘We can use our hard chrome plating technology to improve wear on machinery in manufacturing.’ That’s a growth opportunity we see down the road.”
Losing fat, adding muscle
As the company is shedding the extra weight, it’s also adding muscle to its product lines. Since its concentration is in building materials, Karol has worked to buy out other manufacturers that create products that fit.
“We’ve invested in four business platforms that all use, in some manner, similar technology or processes, have similar distribution channels and all complement our brand position as a quality leader in building products,” Karol says.
Because the company is a leader in high-quality architectural shingles for roofs with a steep pitch, it made sense buy out a low-slope roofing company. Elk also sought out other complementary building materials, buying a composite lumber business and a composite railing business.
Karol is particularly bullish on the composite lumber business, which creates products made from a blend of plastic and wood fiber. The blend creates a longer-lasting deck and other wood for exterior use.
“The composite technology is really what I think is the next big thing because you can extrude in a continuous fashion, not a batch process, various profiles or shapes of materials that have enhanced features, including that you can put color in it, you can make it more moisture-resistant, and give it strength,” Karol says. “We are believers that the composite technology will be the next big engineered wood breakthrough.”
The company’s third product line revolves around specialty fabrics used as backing on carpet tiles, the facing for gypsum board and underlayments for flooring. VersaShield, a fire and moisture-barrier fabric, is part of that product line.
The fourth product line is what the company calls VersaShield Building Solutions that go underneath the exterior building products it makes.
Of all four lines, roofing is still the strongest performer, accounting for 90 percent of the company’s sales, but other lines are making strides.
“We make good money in each area,” Karol says. “Composites has been losing money, but we feel we are within one or two quarters of profitability there.”
Investing in the company
Elk has invested in two things that Karol says will continue to lead it into more profitable pastures: a new manufacturing plant in Lenexa, Kansas, that provides greater efficiencies, and a research and development laboratory in Ennis, Texas, which has undergone two expansions in the past five years.
“True innovation is how you succeed best in business, in my opinion,” Karol says. “Our job is to give better products that the consumer gets more value out of. We are big believers in true innovation, either that we can lower the cost to the consumer or give them more features for less cost.”
Growth will come as the company continues to expand its product lines through inventions.
“We’re developing various products in each of our business platforms that we think are very cool products that will provide more value and better performance,” Karol says. “We prioritize and work on certain things at a faster pace than others.”
Karol wouldn’t say what, exactly, the company plans to introduce, but says there are plans for siding and trim created from the composite materials business, and it will introduce a solar product this year to go on top of roofing materials and allow homeowners to capture solar energy.
Elk is making a move to promote itself beyond the builders and developers who know its products, Karol says. With help from a new advertising agency, Elk is making a push to become a brand that consumers recognize and request.
With its new tagline, “Confidence Built-In” and a slogan, “For confidence and peace of mind, ask for Elk,” the firm wants to make its brands known among consumers, who are building homes and making improvements at record rates.
Elk has concentrated its advertising in magazines sold commonly in home improvement stores, and Elk products have been featured on several national home and garden shows, including ABC’s Extreme Home Makeover. What Karol wants for his company is the same kind of name recognition that Kohler has gained for its faucets and Pella has for its windows and doors.
“The basic premise is we want people to have enough awareness of our brand that they would consider us,” Karol says. “If you are going to think about putting a roof on, or a deck or siding, we want you to think, ‘I know Elk. That’s a good company, and I will consider them in our choices.’ That’s all we want to do with our brand.
“Then we want to let the channels work to our advantage. They will then talk to their contractors or go to Lowe’s or Home Depot and hopefully, they’ll say, ‘Do you have any Elk?’”
Karol says the exposure is working since the advertising campaign began, Elk’s Web site traffic is up, as are inquiries from contractors.
As Karol sees it, growth takes time, and he hopes to build on the net income of $46.9 million on sales of $761.7 million posted for fiscal 2005.
“The basic philosophy we have is that we are money managers, if you will,” Karol says. “The investors want us to employ the money in things where we have a competitive advantage. They don’t want us in things that we aren’t good at.”
How to reach: Elk Corp., www.elkcorp.com
Hubbert was ridiculed for his observations, both inside and outside the oil industry. He was also right. A recent depletion analysis predicts that world production will peak between 2003 and 2008. Retired Princeton professor Kenneth Deffeyes, using production data collected in 2005, concluded that the all-time peak of world production was reached on Dec. 16, 2005.
“That time frame has not yet been validated,” says John Barnes, chairman and CEO of B&R Energy in Dallas. “However, production from fields in Russia, the North Sea and half of the OPEC nations has already peaked and, it seems, more and more analysts are accepting that fact.”
Smart Business spoke with Barnes about how the peak in oil production will affect everyone in the world and what is being done about it.
Who will be impacted most by the decline in oil production?
The decline in production will have a huge impact on every company in the world that uses energy.
Construction companies will feel it the most, as will those in the construction industry - especially ones that build shopping centers or have to ship products a long way. Heating and cooling costs will skyrocket, and it won’t be an anomaly.
Any company that has to transport goods or people 45 minutes to an hour will feel it at the gas pump. The decline will have an impact on everything, but especially transportation costs.
How fast will production at the fields decline?
According to the Association for the Study of Peak Oil & Gas-USA, production at the Cantarell oil field in Mexico City, the second-largest in the world, may deplete faster than expected, from its current 2 million barrels a day to 1.43 million barrels a day by 2008, and possibly to as little as 550,000.
Petroleum Intelligence Weekly reported that Kuwaiti oil reserves are really at 24 billion barrels as opposed to the previously reported 99 billion barrels.
Samotlor, the largest Russia oil field, has declined from a peak of close to 2 million barrels per day to less than 500,000.
Indonesia, a member of OPEC is now an oil importer.
It has been more than 10 years since the world found as much oil per year as it consumed. As a result, oil prices have gone through the roof. By 2030, demand is expected to be at 120 million barrels a day, while production of conventional oil is expected to drop to 60 million barrels a day.
That shortfall is going to have an impact on everyone. A lot of industries face some serious challenges to how they do business. How it will all play out, no one knows.
Who uses the most energy?
The United States, with 7 percent of the world’s population, consumes nearly 25 percent of the world’s oil and gas. At the same time, the U.S. also provides one-third of the world’s gross national product. While we consume oil disproportionately to our population, we use it more efficiently per dollar of GDP than the rest of the world. Every dollar of GDP requires an input of energy. More advanced economies require less energy per dollar of GDP than less advanced economies.
Energy is required to maintain a more advanced society, and we don’t want to reduce the country’s economy or standard of living. Yet, at the same time, there is a limit on how much oil and gas we can consume.
What are some alternative sources of energy?
Alternative sources have limitations.
The trucking industry is looking at ethanol and bio diesel. But availability, economics and production costs exceed the energy it produces or replaces. We cannot continue to deploy a negative energy resource.
Other alternatives may include nuclear power, solar and wind generation, gasification of and gasoline from coal, LNG, Canadian oil sands, hydrogen and ethanol. But these, at best (other than nuclear), are able to supply only a small percent of the world’s total energy requirements.
The current situation requires some careful soul searching and prompt action.
We need to find and produce more conventional domestic oil with newer technologies and enhanced recovery methods.
We need to exploit all the opportunities we can control: Gulf Coast, West Coast and ANWR field prospects and unconventional sources.
We need to continue to develop alternative solutions.
And we need to focus on critical world issues such as refining capacity, increased world demand, overstated worldwide reserves and peak oil realities.
JOHN BARNES is chairman and CEO of B&R Energy. Reach him at (972) 934-3800 or firstname.lastname@example.org.
There are several significant trends in executive education today, but perhaps the biggest trend is the move toward customization of programs to meet the needs of a particular group of executives, says Hasan Pirkul, dean of the School of Management and Caruth Professor of Management Information Systems at the University of Texas at Dallas.
“There’s been a push for customizing MBA programs to fit very specific needs,” he says. “Companies are often willing to pay for their employees to participate in executive education programs, and they fully expect to gain value from those programs. Customizing programs to meet specific business or industry needs helps to ensure a return on the company’s and the employee’s investment.”
Smart Business spoke with Dean Pirkul about the latest trends in executive education and why investing in it is good for employees and employers alike.
What is executive education?
Executive education is basically furthering the education of mid-level managers who want to come back to school, maybe after several years or more of working, and make up for the deficiencies in their knowledge and prepare themselves for upper-level management jobs.
How can a business benefit by supporting its employees’ executive education?
Most of the time, a company is paying for the executive’s education because it’s not just providing value to the individual, but it is providing value to the company. For example, we have recently signed an agreement with a company where they send us multiple students throughout the year and we not only provide them with the basic curriculum, but they work on solving actual problems associated with their business or company. In this case, the company gets back a significant return on their investment, because issues the company faces are studied as projects in the classroom, and the students are able to go back and provide solutions to the real problems the company faces.
What are the current trends in executive education?
There is more flexibility in executive education programs, because executives are very busy people. Also, many schools are now emphasizing globalization issues in their programs, as that’s becoming increasingly important to large corporations. Other growing areas include governance, ethics and leadership training. While these are subjects that have always been covered in executive education programs, they are receiving a renewed emphasis due to current events and changes in the business world.
But perhaps the biggest trend is the move toward customization: developing programs to meet very specific needs of a particular group of executives. This can range from programs geared toward project managers to physician and health care executives to global leaders, and can include a mix of both campus and distance learning opportunities to meet the needs of business executives all over the world.
How should a corporate leader make use of these trends?
The key is to find an executive MBA program or courses that fit the needs of the individual, as well as the corporation. There are many differences among programs. For example, we emphasize a couple of things that aren’t typically emphasized by other programs, such as executive coaching. We also emphasize customization to meet each executive’s individual needs. When students come to us, we work with them to determine their strengths, weaknesses and professional goals so we can customize the program as much as possible to help them achieve their goals.
There’s a lot of competition with executive education programs. Corporate leaders and business executives can take advantage of this competition to seek the program that offers the right curriculum and best value in terms of results.
Why should a business executive pay attention to executive education trends?
I’m a firm believer in life-long learning, and the business world is changing very rapidly. If you’re not reading, learning and improving yourself and your understanding of the business climate, you’re going to fall behind.
With the move toward customization and tailoring executive education programs to meet specific industry needs, there’s now more opportunity than ever to derive a direct benefit from this type of education. There’s tremendous value for both the executive and the company.
HASAN PIRKUL is the dean of the School of Management and Caruth Professor of Management Information Systems at the University of Texas at Dallas. Reach him at (972) 883-6813 or email@example.com.