Carpet made from discarded fishing nets? It may sound far-fetched, but not to John Wells, president and CEO of Interface Americas, a wholly owned subsidiary of Interface Inc., the world’s largest manufacturer of modular carpet tile.
The company recently launched an eco-friendly collection made exclusively from recycled Philippine fishing nets, thanks to a newfound penchant for risk-taking, innovation and social responsibility.
“We see innovation as a way to lower our manufacturing costs, give customers the products they want and reduce our environmental impact,” Wells says. “It’s a way of doing business — not a stand-alone initiative.”
If you think carpet manufacturers and environmentalists make strange bedfellows, you’d be right. The carpet industry has garnered criticism for its environmental footprint based on widespread use of petroleum and fossil fuels in manufacturing and the fact that some 5 billion pounds of carpet and padding end up in U.S. landfills every year.
Interface’s epiphany and massive mid-course correction started in the mid-1990s when its late founder, Ray C. Anderson, acknowledged the industry’s errant ways and vowed to eliminate any negative impact on the environment from its operations by 2020.
In Interface’s case, viewing the carpet manufacturing process through a green lens has led to an expansion of ideas, profits, cost savings and new markets.
“In many respects, innovation has become a survival strategy for us because we’re not a low-price, commodity player,” Wells says. “It’s led to reductions in operating costs and greater value for our customers, which is critical when you make a high quality product.”
For instance, using renewable materials instead of petroleum-based ingredients reduces energy usage by 30 percent and greenhouse gas emissions by 60 percent when compared to the production of nylon carpet. And since eco-friendliness is now a priority for about 65 percent of carpet shoppers, Interface Americas has been able to expand its reach by introducing sustainable product lines.
Wells, whose U.S., Canada and Latin America operations account for $575 million of Interface’s $932 million in annual revenues, has been instrumental in directing the company’s mid-course correction and fulfilling Anderson’s promise.
Here’s how the industry veteran reinvented Interface Americas by focusing on footprint reduction, innovation and cultural change.
Build an innovation framework
A company’s culture has a profound impact on business innovation. The key to success? Deliberately shaping the environment to inspire creativity and invite risk-taking across the enterprise.
“Culture is critical to innovation, and it exists whether you do anything to influence it or not,” Wells says. “Executives have to lead the way by being intentional in their actions as part of a comprehensive and orchestrated effort to foster creativity.”
Wells and the Interface executive team studied the philosophies of author and researcher Marcus Buckingham and extensive research from the Gallup organization before deciding that a strengths-based culture would provide the ideal framework to encourage innovation.
In a nutshell, the strengths-based concept promotes the idea that people get the best results by recognizing and maximizing their strengths while downplaying their weaknesses or perceived deficiencies.
“We all have inborn talents,” Wells says. “Our managers are charged with drawing those out as part of our strengths-based development program. It helps our people maximize their talents and from what we’ve seen, it’s driving results.”
Furthermore, strengths-based hiring debunks the idea that creativity is limited to engineers. Workers are hired for their strengths, placed into roles that leverage their talents and assigned to teams based on an inventory of their personal assets. As a result, all employees — from managers to shipping clerks — across the Interface enterprise are involved in the quest for new and better ways to manufacture and distribute carpet.
“The journey toward change starts with a vision and a mission statement; ours is ‘Mission Zero,’” Wells says. “It creates engagement by giving our workers a sense of purpose. They honestly believe that they can change the world.”
For instance, one engineer became so enthralled with the idea of recycling Philippine fishing nets that he developed the Net Effect concept, engaged conservationist groups in the pilot and helped develop the new product line.
Finally, the Interface executive team invited cultural change by developing “Play to Win” training, which teaches employees to view sustainability as a challenge, not a threat, and encourages them to change their thinking and behavior to foster individual and collective success.
“We changed our culture by changing what people do every day,” Wells says. “Our employees don’t see themselves as manufacturing carpet; they see themselves as making a difference, and that’s weaving innovation into our DNA.”
Champions of organizational innovation must demonstrate enthusiasm for risk-taking and foster a penalty-free environment. But too many mistakes may give executives cold feet, especially when they have to please fashion-conscious customers such as architects and designers who live on the cutting edge of trends.
Wells developed a three-pronged strategy that encourages risk-taking by creating safeguards that take the sting out of failure.
“You tend to have more failures when you develop products or ideas in silos,” he says. “We give people a common goal and utilize blended or cross-functional teams to keep people from competing against each other or having to grapple with divergent interests when developing new products or green manufacturing processes.”
Next, he installed a mass customization production system in Interface Americas’ U.S. plants. That way, the company can offer customers a wide array of products and fill orders on demand, eliminating the pitfalls of inaccurate sales forecasting, overstocking or purchasing delays.
“We only expect a 20 percent take-up rate on new products,” Wells says. “But that’s OK, because we have the ability to manufacture product on demand so we don’t maintain large inventories. Ultimately, our production system lets us introduce more products because it gives us a fairly low investment on the front end.”
Finally, by narrowing the supply chain and creating more products from the same raw materials, he reduced the cost of beta testing. Having fewer feeder inputs hastens the product development process, lowers raw materials costs and makes it easy to fulfill specific customer requests.
“We’ve taken steps to facilitate risk-taking, but you really need to take a long view and test, test and retest before you launch a new product,” Wells says. “Otherwise, it’s easy to slip back into old habits when you fail.”
A cultural shift is a work in progress, and to keep up the momentum, it’s a smart idea to utilize collaborative tools. Interface’s latest effort involves the sharing and development of ideas with diverse, global teams through the use of a social collaboration tool called Jive.
“We’re using an open architecture system to connect people in various capacities all around the globe,” Wells says. “It’s fascinating to see the energy it creates and the speed and execution of ideas as we discuss specific customer problems.”
Wells initiated the collaboration process by posing questions to a small group of participants through the tool. He slowly broadened the talent circle, organizing staffers into project teams and assigning them specific problems as discussions took on a life of their own.
“Online collaboration accelerates the innovation process because you can socialize ideas quickly, gauge feasibility and decide where to invest,” Wells says. “We’re able to solicit feedback from engineers, R&D, product development and sales people all over the world, which eliminates silos, hastens decision-making and reduces the risk of developing new products.”
Since the launch of “Mission Zero,” Interface Americas’ employees have developed the world’s first carbon neutral carpet, selling more than 204 million square yards, and retiring more than 2.9 million metric tons of verified emission reduction credits through 2012.
The company has reduced both the face weight and backing weight of its carpet tile products, decreased the amount of raw materials to produce a square yard of carpet by 10 percent and invented a glueless carpet tile installation system. In addition, seven of nine Interface factories now operate on renewable electricity while the plant in LaGrange is powered by methane gas harvested from a local landfill.
“Our mantra is to innovate and achieve our business goals but to do that through a lens of sustainability,” Wells says. “We’ve done it by changing our culture, using our talent to drive innovation and literally doing more while taking a whole lot less from the environment.” ●
How to reach: Interface Americas (800) 336-0225 or www.interfaceglobal.com
Build an innovation framework to re-invent your culture.
Farm innovation through online collaboration.
The Wells File
Name: John Wells
Title: President and CEO
Company: Interface Americas
Birthplace: Wells was born in Dalton, Ga., which is often called the carpet manufacturing capital of the U.S. Mills within a 65-mile radius of Dalton control more than 80 percent of the U.S. carpet market — which supplies 45 percent of the world’s carpet.
Education: He received a bachelor’s degree in industrial management from the Georgia Institute of Technology; he also completed the executive education program at UNC, Chapel Hill.
What was your first job and what did you learn from it?
I did accounting and engineering work for a carpet manufacturer as part of a co-op program during college. They offered me a full-time position in R&D and product development after graduation, but I soon realized that I wasn’t wired to be an engineer. I moved into sales and was hired by Interface in 1994 as vice president of sales.
What was the best business advice you ever received?
I was fortunate to work for a number of great managers early in my career. Those who developed their people to their greatest potential tended to be the most successful, so I make a habit of following their lead and their advice.
Who do you admire most in business and why?
That would be Ray C. Anderson, the founder of Interface Inc. He was a beacon in the industry who had the courage to stand up and say we’re doing this all wrong. He launched the greening of the carpet manufacturing industry.
What is your definition of business success?
For me, it’s the ability to combine financial success with a noble purpose. When a company meets its fiduciary and social responsibilities, then I believe it has achieved success.
The inability to adapt to changing market conditions and client needs is a recipe for failure. So when a tsunami of mergers and regulatory reforms hit the banking industry in 2008, Max Martin had two choices: scale-up or give up.
“One day our clients were happy and the next thing, they were giving us an ultimatum,” says Martin, CEO and chairman of ARGO Data Resource Corp., a niche developer of banking software. “They wanted products that could scale from 1,000 to 5,000 branches overnight and reduce the processing time for basic banking transactions by 66 percent.”
After more than two decades at ARGO’s helm, Martin wasn’t about to walk away from a fight, even with major competitors like Oracle and SAP nipping at his heels. Plus, in spite of the recession, his research suggested that ARGO had an opportunity to substantially grow and even diversify by marketing its cutting-edge search and match technology to the health care industry.
Martin set a goal to meet the burgeoning needs of the top 100 U.S. banks and increase ARGO’s revenues from $40 million to $100 million within five years. To ensure the achievement of his bold plan, the algorithm-minded entrepreneur launched a series of deliberate and sequential steps to propel the company from laggard to leader. More importantly, he placed his trust in science instead of chance.
Upgrade your staff
Martin realized that he needed a stronger management team to become a $100 million company. Above all, customers want leadership, and they want a team of leaders that understands industry trends and has the horsepower to improve their organization. Moreover, ARGO’s managers would need to recruit and mentor a larger staff and master greater responsibilities as the organization grew.
“We weren’t a high performing organization; we were making too many mistakes,” he says. “I felt like I had the right content, but I couldn’t scale the organization with my current management team. I needed them to grow.”
Under the circumstances, many CEOs would clean house or hire an executive trainer, but the inquisitive Martin wasn’t about to pass up a personal development opportunity.
He studied the science behind human performance by analyzing the work of scholarly experts such as K. Anders Ericsson, Neil Charness, Paul Feltovich and Robert Hoffman who authored “The Cambridge Handbook of Expertise and Expert Performance.”
Next, he created a 162-page development program, and to ensure his team’s progress, he taught them critical competencies like decision-making, planning, strategic thinking and thought leadership.
“Human performance isn’t subjective; there’s a science behind it,” Martin says. “I needed to become an expert so I could tell our people how we were going to become a high performing organization. Plus, I needed to lead by example, so I became a pupil as well as a teacher.”
At the same time, Martin created a strategy to take the company from 230 to 513 employees. He initiated a new hiring process, taught his managers how to interview, and specifically defined the requirements and profiles for new hires by reviewing actual performance data and the attributes of the company’s top performers.
“We were letting the candidate’s resume drive the interview,” Martin says. “Plus, we weren’t getting rid of people who didn’t work out. So I reversed the process. Now, managers have to prove why someone should stay instead of go when they hit 90 days.”
Martin’s efforts paid off as 75 percent of the executives who took his class are still with the company and the retention rate for new hires has reached his goal of 95 percent. While he’s satisfied with his decisions and the results, his attitude has changed.
“I’ve raised my expectations,” he says. “Going forward, I’m going to be less tolerant and I won’t give someone the benefit of the doubt. People need to prove why they should be here.”
Create transformative changes
Entering the health care market and developing products in adjunct banking areas such as fraud, cash inventory and staff forecasting requires a penchant for innovation and hefty capital investments.
Although ARGO’s product managers had the authority to make investments, Martin questioned whether the funds were actually improving customer satisfaction or producing cutting edge technology.
“Our criterion for measuring our return was too soft,” Martin says. “Our product managers needed a deeper understanding of our customers’ problems and they needed to link our investments to quantifiable outcomes to ensure that our capital investments were creating value for our clients.”
To improve the return, Martin introduced new cost benefit analysis procedures for capital investments and forced managers to justify every dollar they spent.
For instance, duplicate patient records were creating headaches for health care CIOs, as a database search returned the incorrect file 4 to 12 percent of the time. Most importantly, patients suffer and some have died as a result of the inaccurate matching system.
While major competitors studied the problem and promised to temper the error ratio, Martin’s team set a higher goal and won contracts by building a product that reduced the error ratio from 12 percent to between 0.05 percent and 1 percent.
“Our technology changes tended to be incremental rather than transformative until we started linking our investments to quantifiable goals and customer outcomes,” Martin says. “These processes have become our measurement criteria for product development and innovation capital-spend decisions.”
Since the primary supplier of patient-matching software was IBM, ARGO had to substantially leapfrog industry players to be successful in the health care industry.
Martin’s plan was to leverage ARGO’s superior matching technology while minimizing the firm’s lack of health care expertise by hiring credible industry leaders and consultants to put the company on a path to success.
“We leveraged our matching technology and used it as a stronghold,” Martin says. “Then, we accelerated the credibility-building process by asking renowned heads of key medical school biostatistics departments to serve as consultants.”
Martin further enhanced the firm’s standing with health care executives by using a reliable third party to oversee and benchmark its technical results. Finally, he strengthened the firm’s technical capabilities by adding 14 professionals to its analytical sciences group. Collectively, the new hires have five doctorates and nine master’s degrees in math and related fields.
“The search-and-match process is vastly complex, you could study the methodologies for years and not come up with a winning algorithm,” Martin says. “We needed additional brainpower to improve patient identification accuracy to a level that would surpass our major competitors and pass muster with executives in the health care industry.”
Protect your culture
Although Martin welcomed many of the changes that accompany growth, he feared that an infusion of new talent might inadvertently redefine ARGO’s culture, perhaps destroying its core values and customer identity.
“We’ve always embraced diversity and acknowledged our mistakes,” he says. “I was afraid that outsiders would inject their biases into our hiring process or brush a problem under the rug because that’s what they’re used to.”
Rather than running the risk of allowing ARGO’s culture to deteriorate, he took steps to reinforce the desirable elements of the firm’s culture and restate its priorities by creating the acronym CRP3, which stands for customer driven, revenue expansion, people, process and product. CRP3 became an explicit part of new employee orientation and the guidepost for his manager’s daily decisions.
“When you go through major change, you don’t want to lose the things that made you great in the first place,” Martin says. “CEOs have to orchestrate the change process because culture is too vital to the long-term health of the company to leave it to chance.”
As a result of his efforts, ARGO succeeded in becoming a high performing organization and achieved revenues of $102 million for fiscal year 2013. Martin doesn’t take credit for his firm’s success; he attributes its achievements to science.
“Leadership has been studied and there’s a science behind it,” Martin says. “You’ll be a lot more successful if your definition of leadership is based on science instead of unfounded beliefs.” ●
- Upgrade your talent pool.
- Leapfrog competitors.
- Protect your culture as you go through change.
The Martin File
Name: Max Martin
Title: CEO and chairman
Company: ARGO Data Resource Corp.
Birthplace: I was born on a corn and soybean farm in Greenville, Ill.
Education: Bachelor’s degree in math and economics from Southern Illinois University.
What was your first job and what did you learn?
I was a mathematician for a geological services company that specialized in offshore oil exploration. I had no idea that you could use math to discover oil out in the middle of the ocean until I took that job. The irony is I’m still using math to solve problems for clients today. Most people don’t realize that math is the power behind modern technology.
Who do you admire most in business and why?
I worked for Ross Perot at EDS for 10 years. He had a way of making complicated things very simple and he was a master of execution, which is why I still admire him today.
What is your definition of business success?
I think a business is successful when it makes significant contributions and ascends to a leadership role. For example, ARGO performs 70 percent of the financial teller transactions for the top 25 largest banks in the U.S. so in that respect, we’re successful.
What was the best business advice you ever received?
The world is full of people who make promises they don’t keep. That’s why the best advice I ever learned was from Ben Franklin who said, “Well done is better than well said.”
How to contact: ARGO Data Resource Corp., (972) 866-3300 or www.argodata.com
While other banks were chasing fast money mortgages during the residential real estate boom, Mark Tipton and Rodney Hall were patiently and deliberately soliciting deposits and conventional loans from small and mid-size companies.
The reckless era seemed like déjà vu for the co-founders of Georgia Commerce Bank, who discovered the benefits of building a diversified asset base as neophyte Texas bankers during the mid-1980s.
“We learned some valuable lessons about diversifying asset classes from watching the oil and gas industry crash and the big banks fail early on in our careers,” says Tipton, a San Antonio native who serves as chairman and CEO.
Although learning from others’ mistakes is one of the hallmarks of successful entrepreneurs, in today’s instant gratification world, executives need discipline and investor support to follow a conservative game plan when brazen competitors are growing at a frenetic pace.
“Every business has to take risks to grow; it’s how you go about it that matters,” says Hall, the bank’s president, who grew up in the Texas Panhandle. “It’s possible to have solid double-digit growth without taking excess risk if you put the right plan and infrastructure in place.”
Later, when the bubble burst and Georgia led the nation with 84 bank failures, this dynamic duo raised capital, made strategic acquisitions, and sauntered past struggling competitors in classic tortoise and hare fashion.
Here’s how Tipton and Hall grew Georgia Commerce Bank’s assets from $13 million in 2003 to more than $725 million in 2012 while averting one of the biggest meltdowns in the history of the financial services industry.
Build mindshare first
Given Tipton and Hall’s penchant for slow and steady growth, they had the foresight to look for like-minded, patient investors when assembling their team. The co-founders maintain that their compatible board and shared vision helped them stay the course as competitors were jettisoning traditional underwriting practices in the quest for subprime loans.
In fact, Hall credits Harald Hansen, one of the bank’s directors, with setting the tone early on.
“On the day we opened, he told me to build the bank like we were going to own it forever,” Hall says. “I’ve never felt like I had to take extraordinary risks to deliver quarter-over-quarter growth. We’ve had the luxury of focusing on our long-term goals from the outset.”
Whether you have the luxury of handpicking your board or you inherit them, it’s a CEO’s job to build mindshare for their ideas, Tipton says.
“If you bounce ideas off your board and use them for strategic planning purposes, they’re more likely to support you during tough times,” he says.
Private meetings with board members are a great way to foster support for your ideas, Hall says. Although they require time, patience and persuasiveness, the one-on-one sessions elicit concerns that might otherwise fester.
“It’s easy to act out of desperation when you’re not in sync with your board,” he says. “The problem is that hasty moves seldom end up being good moves.”
“Naturally, you want your board members to challenge you and speak up if they think you’re headed in the wrong direction,” Tipton says, “but you can’t move forward until you create mindshare for your plan. Otherwise, you may encounter resistance at the first sign of distress.”
Hall and Tipton concede that there were times when the board wondered why Georgia Commerce was not growing as quickly as other regional banks. But taking extreme risks to accelerate growth wasn’t a consideration.
“The idea of leading with price or flexing our underwriting criteria didn’t make sense to us,” Tipton says. “We’ve been able to maintain investor support because they see that our strategy works; we’ve been profitable since our second year.”
Put your eggs in several baskets
Concentrating on one industry or asset class can cause insurmountable problems for banks when the economy shifts and customers in highly affected sectors can’t service debt.
“The insolvent banks we acquired from the FDIC in 2011 had two common characteristics,” Tipton says. “They had a large book of real estate loans and most of them were stand-alone transactions. It’s easy to see why they ran into problems when the housing bubble burst.”
To bridge economic troughs, Tipton and Hall solicit relationships with privately held companies in diverse industries such as manufacturing, distribution and professional services.
“We spread our risk evenly,” Hall says. “We break down our lending goals into sub-targets and continually monitor our progress to make sure we’re not getting too heavy into one type of loan or industry.”
However, the pair’s risk management strategy extends beyond asset-level oversight. They manage risk down to the customer level by using several banks to fund very large loans. Since the lead bank typically solicits the participants and services the loan, using participation loans reduces risk but doesn’t interfere with the development of vital customer relationships.
Although many bankers believe that loans create deposits, Tipton and Hall take the opposite view. Hall believes that deposits serve as an entree to a lending relationship, plus they improve the bank’s balance sheet, increase its lending power and alleviate risk.
He cites the fact that Georgia Commerce Bank was the first institution in the state to pay back TARP (the Treasury Department’s Troubled Asset Relief Program) funds as validation for his contrarian strategy.
“We see deposits as a way to build a relationship and our asset base,” Hall says. “Plus, you lessen the likelihood of default if you get to know a business and its owner before lending them money. That’s why so many banks got into trouble. Their strategy defied sound business logic.”
After searching for several years for an opportunity to jump-start growth, the stars finally aligned in 2011 when Tipton and Hall purchased two failing banks in highly desirable Forsyth and Cherokee counties from the FDIC.
Although the acquisitions would give Georgia Commerce Bank an immediate presence in two affluent areas replete with private companies and professional service firms, the road to success was paved with obstacles and undesirable risks.
For starters, it was difficult to raise capital when banks were failing and outside investors were looking for a quick return. Instead of fighting an uphill battle, they decided to raise $21 million from a small group of current shareholders.
“Everyone else in the industry was hunkered down, but we were able to make a bold move because we were well-capitalized,” Hall says. “However, we still opted for measured, sustainable growth by keeping the transaction within the family.”
To make matters worse, the co-founders inherited a portfolio of delinquent loans that required swift resolution.
Though the acquisitions came with a built-in safety net, specifically the FDIC’s loss-share program, the small bank lacked the staff and customer relationships to rectify the issues within the specified five-year timeframe. So, Tipton and Hall vowed to retain the acquired employees, a move that runs counter to the standard operating procedures of many executives.
“Acquisitions often fail because executives don’t retain the current staff and lose their connections with customers,” Tipton says. “You reduce much of the risk if you keep them, assimilate them into your culture and educate them on your lending policies.”
Once the staff was secure, Tipton and Hall assembled a loss-share team and charged them with isolating risky loans, rewriting terms, resolving issues and looking toward the future by garnering relationships with quality customers.
“Our keys to success include developing markets in a thoughtful way and finding patient, like-minded investors,” Tipton says. “Banks that were in a hurry and took shortcuts didn’t survive.”
So far, their plan seems to be working. The bank has grown from 11 employees to 112 in the 10 years since it opened. And for year-end 2012, it reported slightly more than $7 million in profits.
Last December, the co-founders raised $25.5 million to fund additional acquisitions with the Dodd-Frank Wall Street Reform and Consumer Protection Act on the horizon. Only this time, they turned to institutional investors, like-minded, of course.
“We wanted our investors to believe in us and our vision of reaching $1.5 billion in assets within three to five years by making quality whole bank acquisitions,” Hall says. “We assessed our chemistry with prospective shareholders by sharing our story and our plan. Since we were positioning for future growth, there was no need to rush.”
“My advice is to absolutely resist the temptation to take shortcuts when you’re building a business,” Tipton says. “Companies that try to outrun their headlights get out of sync with their board and their business plan. Look no further than the bank failures in this state to see why slow and steady wins the race.” ●
- Continually build mindshare for your plan.
- Risk diversification is the key to survival.
- Don’t take shortcuts when building
Name: Mark Tipton, Rodney Hall
Title: chairman and CEO, president
Company: Georgia Commerce Bank
Tipton: Bachelor’s degree from Tulane University; master’s degree in business administration from Baylor University.
Hall: Bachelor’s degree in business administration from Angelo State University.
What was your first job and what did you learn from it?
Hall: I learned the value of hard work and the importance of independence working on our family farm. My dad would give me a list of chores and expect me to do them. My experiences helped me become a leader because I had to figure out problems and get things done without someone looking over my shoulder.
Tipton: I learned a lot about people’s expectations and how to read them by waiting tables. For example, business people wanted quick service so they could get back to the office, while someone else wanted to enjoy a leisurely meal. The moral: You better know how to read people if you want a tip.
What is the key to business success?
Hall: If you have the right plan and execute consistently, you’ll overcome obstacles and the things outside your control, and that’s one of the keys.
Tipton: No one succeeds alone. If you surrounded yourself with bright, self-motivated people who work well together and empower them, success is practically guaranteed.
How to reach: Georgia Commerce Bank, (678) 631-1240 or www.gacommercebank.com
Whether your wish list includes manufacturing, medical, transportation or technology equipment, how you finance major purchases may not only impact the return on your investment but the success of your entire company.
“Financing decisions impact cash flow and a company’s ability to capitalize on opportunities or respond to adversity,” says David Beckstead, Pacific Region sales manager for the Equipment Financing Division at California Bank & Trust. “Executives need to weigh their options carefully before making a decision.”
Smart Business spoke with Beckstead about the need for prudent financing decisions when purchasing machinery and equipment.
What should executives consider as they are reviewing various financing options?
The rule of thumb is to match the financing terms to the life of the asset. In other words, it’s best to use short-term financing for short-term business needs, and longer-term financing for long-term business assets such as equipment that will generate revenue or reduce operating costs for the foreseeable future.
You can avoid finance charges and interest by paying cash, but leasing the equipment or borrowing the funds lets companies preserve capital for other purposes. You should also consider the tax implications and the ultimate cost of the equipment along with your ability to make a substantial down payment to secure a traditional bank loan.
When does leasing make sense?
Leasing makes sense when companies want to preserve cash for future growth or expansion, they need flexibility or they don’t have a lot of cash to put down. Since leasing companies usually maintain ownership of the asset, companies can upgrade or return the equipment should their needs change. For example, you can align the lease terms with a customer agreement or upgrade to a bigger, faster model as your company grows. Plus, most leasing companies don’t require a down payment and it may be possible to negotiate a longer-term payment plan, improving cash flow.
With leasing you can usually deduct the lease payments as a business expense on your tax return, and on short-term leases the rental expense may provide a better tax benefit than depreciating the asset. You may be able to transfer the risk of ownership to the leasing company depending on the type of lease.
How can executives research the market and secure favorable leasing terms?
Prioritize your needs, and then search for the best combination of rates, terms, flexibility and customer service by contacting several firms. Bank leasing companies usually have high underwriting standards but lower rates, while finance companies can be more lenient lenders but generally charge higher rates. Vendor finance companies are a third option and are generally the most flexible about taking back or exchanging equipment. However, they usually charge higher rates.
Beware of upfront payments and fees, hefty residual payments, pay-off fees and other clauses that may boost the overall cost of the equipment. In fact, it’s a good idea to ask a knowledgeable third party to review the agreement so you don’t forsake the benefits of leasing by accepting disadvantageous terms.
What should executives look for in a leasing firm?
Always consider a firm’s reputation, check its references and read its contract before requesting a quote. Contracts differ between companies and impact everything from tax deductions and residuals due at the end of the lease to the responsibility for servicing the equipment. Finally, select someone you trust. Your financing partner should provide funding and be committed to your success. ●
Insights Banking & Finance is brought to you by California Bank & Trust
Most companies want to grow — the issue is just how and when. However, determining an advantageous growth strategy can be challenging. Less than 1 percent of companies reach $250 million in annual revenue and fewer still eclipse $1 billion.
“Some companies boost revenue through organic growth, while others diversify their products/services or build strategic alliances,” says Yi Jiang, associate professor and associate director of MBA for Global Innovators for the College of Business and Economics at California State University, East Bay. “The key is understanding your options and selecting a growth strategy that fits your situation.”
Smart Business spoke with Jiang about what growth strategy executives should consider.
How have growth strategies evolved?
History and experience have altered the approach to growth. Vertical integration was a popular diversification strategy in the 1960s and 1970s. Companies boosted profits by expanding into upstream or downstream activities, seizing control of the supply chain.
However, the strategy’s popularity waned when large, multinational companies were accused of monopolistic practices. Many also struggled to manage unfamiliar entities.
Smart companies then turned to building a network of complementary offerings, creating synergistic expansion opportunities and economies of scope. Amazon.com boosted e-book sales with the Kindle. Sony grew to an entertainment provider with a wide range of movie and music products.
Who should focus on organic growth?
Niche companies with limited market penetration should focus on building brand equity before incurring additional risk by venturing beyond their core competencies. Organic growth maximizes existing resources and helps gain market recognition without diluting your brand. It’s a good way to show the strength of innovation to investors who are interested in paying more for a strong brand with a loyal customer following and continuous growth potential.
The downside is time. Executives must be patient, committed to the company culture and willing to make additional investments without succumbing to instant revenue gratification.
When should you look at strategic alliances?
Strategic alliance is a viable expansion strategy when the joined forces benefit all players in the coalition. Google TV is an example where a few strong players — Google, LG, Sony and Samsung — united to make a stronger team, contributing technology and resources and joining market power to develop smart television.
Bottom line: Why risk being left behind when you can be part of a winning team?
Are companies changing the way they integrate acquisitions?
We used to believe that fully integrating acquisitions was the best way to lower operating costs and reap financial rewards. But assimilation is tricky; executives often fail to meld disparate cultures and people.
Instead of making integration mandatory, companies should selectively and strategically integrate parts of an acquired organization. They may combine rudimentary functions such as distribution and accounting, while allowing areas of strength to flourish autonomously. For example, Disney wanted to strengthen its market position with young boys by acquiring Marvel Comics’ cast of super heroes — Iron Man, Thor, Captain America and the X-Men. However, if Disney execs forced Disney’s culture on Marvel, Marvel’s creativity would be stifled.
What should executives consider when selecting a growth strategy?
Time and timing are key considerations because organic growth and synergistic expansion tend to be slow and safe, while an acquisition or merger is risky but jump-starts new growth. Growth is rarely sustained when it results from knee-jerk reactions to unanticipated competitor moves or industry changes. Executives need time to build consensus and socialize their ideas. Half-hearted alliances or acquisitions often fail without the commitment and tenacity to work through the inevitable challenges.
Also, with alliance or acquisition, hope for the best but plan for the worst by developing an exit strategy to end the relationship and still be friends.
Yi Jiang is an associate professor and associate director of the MBA for Global Innovators program at California State University, East Bay. Reach her at (510) 885-2932 or email@example.com.
Learn more about the College of Business and Economics at California State University, East Bay.
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While government regulations and prices for energy and raw materials influence manufacturing competitiveness, having a talented, innovative workforce was deemed the most critical factor in a country’s ability to compete in manufacturing, according to the 2013 Global Manufacturing Competitiveness Index by Deloitte.
Unfortunately, the U.S. is lagging behind other high-wage nations such as Germany and Japan when it comes to innovation in its manufacturing sector. And we’ll continue to lose ground if executives wait for colleges to churn out science, technology, engineering and mathematics graduates.
“We can’t wait for someone else to fix it. The talent issue needs to be addressed today,” says Jennifer McNelly, president of The Manufacturing Institute, a non-profit affiliate of the National Association of Manufacturers.
Experts may not agree about the existence of the so-called skills gap, but they unilaterally concur that manufacturing executives can jump-start innovation without breaking the bank by tapping into widely available brain trusts.
Collaboration is the secret sauce of innovation, John Zegers says. The director of the Georgia Center of Innovation for Manufacturing, Georgia Department of Economic Development, says creativity doesn’t evolve from one person — it comes from inviting different perspectives.
“Whether you’re trying to solve a problem on the manufacturing floor or develop a new product, it’s critically important to garner feedback from everyone who touches the product,” he says.
Historically, manufacturers have expected engineers to be their innovative spark plugs, but the notion of the lone innovator is fading amid the shortage of engineering talent. Today, 90 percent of managers view the manufacturing workforce as full partners in solving problems, improving processes and satisfying customers, according to the 2012 Manpower Manufacturing Workforce Survey.
Moreover, cross-functional teams comprised of accountants to shipping clerks are using their detail orientation and intimate knowledge of supply chain processes to streamline procedures and create new efficiencies.
“Involvement creates ownership and ownership inspires creativity since employees feel empowered to make changes,” Zegers says. “Plus, the cost of marshaling existing resources toward a problem is negligible.”
At the same time, garnering input from people in dissimilar roles broadens a team’s perspective and buoys critical thinking by injecting a dose of cultural and ethnic diversity. Of 321 companies surveyed by Forbes, 85 percent agreed or strongly agreed that diversity is key to driving innovation in the workplace.
While many organizations want the benefits of high-stakes innovation, their culture won’t support it. Executives who resist outside-the-box ideas or penalize failure may unconsciously stifle creativity. If you champion the efforts of cross-functional teams by removing the barriers to innovation and sponsoring a culture that shuns the status quo and rewards risk-taking, the seeds of creativity will sprout and bloom, but only under the right conditions.
Close skill gaps through training and education
Manufacturing executives frequently bemoan the dearth of workers capable of mastering today’s increasingly hi-tech, team-based roles, yet the answer to the problem could be right under their noses.
About 20 percent of all American jobs are now in the STEM fields, with half of those open to workers who don’t have a four-year college degree, according to a new analysis by the Brookings Institution, who refers to these workers as the second STEM economy. Second STEM workers come from high schools, community colleges and vocational schools and are critical to the implementation of new ideas since they advise researchers on feasibility of design options, cost estimates and other practical aspects of technological development.
Manufacturers bear some responsibility for their predicament according to Manpower, since most companies are not recruiting for manufacturing talent as if they were knowledge workers and are not managing them as a knowledge workforce either.
Specifically, they’re neither developing their current employees nor building a pipeline of technically proficient talent to meet near-term hiring needs.
“There are plenty of 40-year-olds working in the industry who were trained in a different way,” says Rick Jarman, president and CEO of The National Center for Manufacturing Sciences. “The talent is there, they just need retraining and development.”
Investing in daylong seminars that use simulation to teach lean manufacturing concepts, kaizen events, overall equipment effectiveness, value stream mapping and so forth can yield big dividends, Jarman says. Workers who understand modern manufacturing concepts may enhance a company’s penchant for innovation.
Plus, ingenuity is a teachable skill. Employees can learn the fundamentals of the innovation process and start generating money-saving, useful ideas after attending a short, four-hour training course. Plus, upgrading your current staff is less risky and time-consuming than developing novices.
Since manufacturing will see a 50 percent increase in the number of mature workers over the next decade, companies should consider this workforce segment as they assess their near-to-medium-term talent acquisition strategies. Innovative organizations are pairing mature workers with technically savvy new hires to facilitate knowledge transfer and mentoring.
Indeed, some industry veterans have the ability and desire to learn advanced technical skills like computer numerical control, machine tools, computer-aided design and manufacturing programs or even robotics, if given the chance. High-potentials are being offered tuition assistance because having a technically competent workforce is critical to innovation.
“Manufacturers can’t capitalize on groundbreaking technology or invest in computer-aided machinery if they don’t have someone to operate it,” McNelly says. “This is just one example of how the skills gap can impact innovation throughout an entire industry.”
Employers can close debilitating talent shortages in as little as three to six months by raising their expectations and requesting certified workers from local community colleges. McNelly cites a pilot program in Northeast Ohio as an example of successful educational alliance. Community colleges provide NAM-Endorsed certified training to students to prepare them for advanced manufacturing careers.
“Just showing up is no longer enough,” McNelly says. “Employers need certified employees to thrive in a manufacturing environment that’s grounded in teamwork.”
Enticing high school students is a long-term solution to looming talent shortages in manufacturing. To succeed, executives need to change students’ perception of the industry.
Offer them apprenticeships and invite students to tour plants so they can see that there’s more to a manufacturing career than standing on your feet all day, says McNelly.
“Show them a distinct career path and the technical aspects of the job, or else bright students with a flair for innovation will pursue opportunities in other industries,” she says.
Cross boundaries to expand your brain trust
Augmenting the creative efforts of a modest staff by crowdsourcing ideas and suggestions from customers and stakeholders is a new approach gaining attention. According to Newsweek, Unilever established an open innovation unit to work with outside partners in 2009, which increased the share of external ideas that are adopted by the company’s business units from 25 percent to 60 percent. Even Starbucks is asking stakeholders to help develop ideas to reduce waste.
While it’s possible to solicit ideas via social media and traditional focus groups, many companies are using online discussion boards to engage outsiders in stimulating conversations with executives and engineers. The back-and-forth banter encourages participation and helps flesh-out creative ideas in real time.
If a shortage of engineering expertise and technical know-how is stifling R&D, one technique is to borrow the requisite expertise by tapping the brain trust at your local college or university.
“Many colleges and universities will gladly provide research, access to labs, professors and engineering students to local manufacturers,” Zegers says. “They can help you develop cutting edge technology or solve problems without adding to staff. They can even help defray development costs by connecting manufacturers with grants or matching funds from state and local governments.”
Collaborative R&D is another way to leverage external expertise and technology in the quest to develop cutting edge products and efficient manufacturing processes.
“Manufacturers can reach the end game faster by pooling intellectual capital and sharing the investment and the return with partners who have complementary talents,” Jarman says.
If you don’t have the wherewithal to source partners and manage large-scale projects, you can still enjoy the benefits of collaborative R&D, by engaging an intermediary.
The National Center for Manufacturing Sciences provides neutral, third-party collaborative project oversight. Or, seek out industry programs that form strong multi-disciplinary teams by matching willing partners with experts from universities, government labs and external funding sources. Collaborating with engineers from the U.S. Department of Commerce’s Manufacturing Extension Partnership or other public/private partnerships is yet another option.
The opportunities to innovate are endless, even for small manufacturers, if executives go out of their way to broaden their talent circles.
“There are more than 300,000 manufacturers in the U.S. and endless opportunities to collaborate,” Jarman says. “Some of the most creative ideas are coming from small and mid-size manufacturers who have crossed boundaries and barriers to pursue talent-driven innovation.”
How to reach: National Association of Manufacturers, www.nam.org; The National Center for Manufacturing Sciences, www.ncms.org; The Georgia Center of Innovation for Manufacturing, manufacturing.georgiainnovation.org
It’s been more than 10 years since Al Bhakta and his partners opened their first Genghis Grill. The shaky launch in 2002 of the build-your-own Mongolian stir-fry restaurant chain, however, seems like just yesterday to Bhakta.
“It was a Tuesday, and we didn’t serve a single customer all night,” says Bhakta, who is the firm’s CEO. “We had personally guaranteed the lease and our SBA [U.S. Small Business Administration] loan, so everything we owned was riding on the success of that first restaurant.”
What Bhakta and his franchisee partners may have lacked in restaurant experience was more than made up for in enthusiasm. They waited tables and put their tips toward expenses, went without paychecks for 18 months, and tried a host of ill-fated promotions to entice new customers.
When desperation set in, Bhakta courageously created a cocktail named “naked,” and discounted the provocative drink in a last-ditch effort to get customers through the door and hooked on the food.
His shotgun marketing approach paid off. Customers fell in love with the restaurant’s unique, interactive dining experience, where they could customize their entree by picking and choosing ingredients.
Bhakta does concede, however, that he may have ruffled a few feathers when he left “naked” advertising fliers on parishioners’ cars at a local church.
“Ultimately, it was a bold marketing move that saved us,” Bhakta says. “You don’t want to step over the line, but my advice is to be a brave marketeer, especially when you’re starting out.”
After his minor brush with disaster, Bhakta went on to become a capable shepherd of the Genghis Grill brand. Today, it’s the largest build-your-own stir-fry chain in the U.S. with 107 locations in 23 states and annual revenues of more than $123 million.
Promote your brand
As the brand took off, Bhakta and his partners, the Chalak Group, purchased the entire company from the original franchisor in 2004 and set their sights on expansion. Since 57 percent of restaurants fail within the first three years due to lack of capital, Bhakta needed to shorten the path to profitability to ensure the success of new franchisees.
Moreover, a shortage of operating capital inevitably leads to cuts in the marketing budget, which is the second reason why restaurants fail. It takes time and money to create brand awareness and a loyal following, especially in virgin markets.
“Initially, there was no science behind it, we just watched every penny,” Bhakta says. “What grew out of that habit was a culture of frugality and the knowledge that unit economics is critical to survival, especially for a start-up operation.”
Entrepreneurs need to understand the levers that impact unit economics, and figure out ways to create structural advantages to shift them in their favor, Bhakta says.
For example, he reduced initial development costs from about $1 million to $450,000 — nearly 40 percent — by negotiating new contracts with vendors, scrutinizing operating costs on a weekly basis, and in some cases, changing the chain’s all-you-can-eat format to a single-bowl concept. The move helped Bhakta lower his prices, which bolstered the company’s brand by creating a higher value proposition for the consumer.
During the process, however, he learned that not all expenses are created equal. When he made the mistake of locating some restaurants in out-of-the-way Class B and C properties, the old adage “location, location, location” came into play.
“We needed street visibility, signage and parking to attract customers, so I learned the hard way not to skimp on real estate,” he says. “Having the right location reduces your marketing costs, so it pays for itself. My advice is to know the drivers of unit costs so you know the right places to economize.”
Keep your brand fresh
The addition of Kahn’s Rewards, a customer loyalty program, as well as a creative use of social media promotions propelled Genghis Grill to double-digit growth in 2009 and 2010. Company-wide, the brand has more than one million fans in its Kahn’s Reward database and 100,000 followers on Facebook and Twitter. So when some stores reported declining sales for the first time in 2012, Bhakta took a thorough look under the hood in the quest for answers.
Typically, a shift in momentum indicates the need for a brand makeover. Companies that fail to detect changes in customer preferences and sentiment may not survive in a world where consumers are bombarded with choices and information. In fact, experts maintain that successful companies of all sizes should revamp their image periodically.
To assess the current state of the Genghis Grill dining experience and brand, Bhakta surveyed staff, franchisees and 32,000 customers from across the country. The results were surprising.
“We really pride ourselves on changing with the times, so we were surprised to discover that 50 percent of the things we were doing didn’t matter to our customers,” Bhakta says. “In retrospect, I see that we should have been reviewing customer feedback and data all along instead of finding ourselves behind the curve.”
Specifically, Genghis Grill had lost ground with females and young families. In fact, the customer base had slowly and silently become 70 percent male. While guys liked the open food bar and all-you-can-eat concept, women wanted efficient service, and they were turned off by the sticky serving utensils on the buffet line.
Like many CEOs, Bhakta faced the challenge of altering his brand to attract new customers and rekindle lost relationships without alienating the chain’s loyal male following.
“You need to add things, not subtract them, to retain your current customers and add new ones when you go through the rebranding process,” Bhakta says. “Otherwise, you’ll trade one group for another and end up in the same place.”
Bhakta assembled a feasibility committee and charged the members with looking at everything from signage to menus and restaurant decor in an effort to revitalize the company’s fading image. The team recommended adding chef-prepared dishes to the menu, an upgraded contemporary look and feel that would appeal to females, and new uniforms so employees would convey the restaurant’s theme and casual atmosphere.
“The reality of what was happening was reflected in our database,” Bhakta says. “Customers are like compasses; if you watch their direction, they will help you find true north.”
To make sure he stays ahead of the curve, Bhakta implemented customer surveys via the web and mobile phones. In addition, he now uses a real-time business intelligence tool to make sense of the information collected and to capture demographics for future marketing purposes.
The solution helps him monitor the health of his restaurant’s brand by providing real-time alerts when customers report a negative experience, automated report cards on each location’s status, a coupon verification system and staff performance rankings.
“Our ability to identify our core customer and demographic has grown with the implementation of our loyalty program and tools,” Bhakta says. “The demographic and behavioral information we have on our loyalty members helps with real estate, growth and branding decisions throughout the country.”
Bhakta vetted the committee’s list of suggested changes with the staff and franchisees before piloting new menu items, cleanliness guidelines and buffet protocols in restaurants located throughout the greater Washington, D.C., area.
“Any time you go through a rebranding initiative or consider major changes, you need to get everyone involved,” Bhakta says. “Our success hinges on support from our franchisees, and it takes time to test and prove new concepts. Even if you don’t have franchisees, executives can’t implement change by shoving their ideas down everyone’s throats.”
Bhakta strategically selected Washington, D.C., for the beta test, since those restaurants are fully owned and managed by franchisees and are located outside the company’s stronghold state of Texas, where many restaurants are co-owned and run by the corporation.
Passing what franchisees perceived as a difficult test helped Bhakta garner buy-in for the proposed changes from franchisees throughout the country.
“We needed unbiased feedback and testimonials from the D.C. area franchisees to convince everyone that we were on the right track,” Bhakta says. “Executive endorsements aren’t enough; you need others to carry the torch.”
Since loyal customers visit a Genghis Grill an average of 2.2 times per month, Bhakta tested the proposed changes for six to eight weeks and monitored customer feedback before inching forward with the rebranding initiative.
“There’s no cut-and-dry answer to the timing issue,” he says. “Obviously, you can’t stay in limbo forever, but you need time to incubate ideas and simmer changes before you roll them out. The rebranding process has taught us to be patient.”
Going slowly helps consumers connect with a new brand, and it gives companies time to tweak their delivery system to match their promises. Ultimately, your customers will determine the merits of your rebranding initiative through first-hand experience.
“If we don’t garner feedback that is current and relevant to our operations, we will fail to deliver on expectations to our fans,” Bhakta says. “Executives need to identify their audience, find the best way to communicate with them and repeatedly test and tweak their marketing and branding programs to develop a steady clientele.”
How to contact: Genghis Grill, (888) 436-4447 or www.genghisgrill.com
The Bhakta File
Name: Al Bhakta
Company: Genghis Grill Franchise Concepts LP
Born: Pecos, Texas
Education: Bachelor’s degree in business with a minor in information systems management from the University of Texas, Dallas.
What was your first job and what did you learn? When I was 12, my brother-in-law paid me $2 an hour to stock shelves in his new convenience store. Seeing the long hours and effort he put in helped me appreciate the hard work it takes to build a business. I learned what it takes to be successful at an early age.
Who do you admire most in business and why? The person I most admire is Herb Kelleher, co-founder of Southwest Airlines. He’s a legend in Dallas who’s known for his charisma, humbleness and his ability to relate to customers and employees. He’s done more than build a company; he’s built a legacy.
What is your definition of business success? I think you’ve achieved success when others believe in your vision and are willing to invest in your concept. You have to do a lot of things right to garner the trust of strangers.
What was the best business advice you ever received? One of our investors told me, you’ll lose the support of talented people unless you strive for a win-win when you negotiate with vendors, employees and customers. You have to give up something to get something even if that means growing more slowly. That advice has helped me negotiate beneficial deals because they work for both parties.
Promote your brand.
Use data and feedback to keep your brand fresh.
Reduce rebranding risk by piloting changes.
You need operating cash to grow your business, but securing a traditional commercial loan isn’t always easy for small and midsize business owners. Fortunately, Small Business Administration (SBA) loans are a worthwhile financing option. An SBA loan typically offers longer terms, more competitive interest rates and, best of all, bankers can be more lenient because the government guarantees up to 75 percent of the loan amount.
“An SBA loan is a sensible option for businesses that experienced a decline in sales and profits during the recession,” says Santiago “Chico” Perez, SBA sales manager for California Bank & Trust. “Bankers can consider your financial projections, along with historical data, when evaluating your loan application.”
Smart Business spoke with Perez about the growth opportunities through an SBA loan.
When should business owners consider an SBA loan, and how do these loans differ?
New ventures traditionally have a hard time securing working capital, but you may get $100,000 to $5 million through a SBA loan, as long as you’ve run a similar enterprise and propose a viable business strategy. You also can use SBA funding to purchase another company or procure equipment or inventory to fulfill a new contract.
Generally, SBA loans can offer more favorable terms. For example, you only need 10 percent down to purchase real estate, and you can roll fees into the loan balance. SBA loans feature higher loan-to-value ratios, longer repayment periods and no balloon payments. Companies often qualify for higher loan amounts because they can amortize the purchase of buildings over 25 years or equipment over the remaining economic life, and need less cash flow to service the debt. Owners also can use funds to buy raw materials, finished goods or equipment to expand into new markets.
How does the SBA’s underwriting criteria differ from traditional commercial loans?
Bankers will review standard requirements such as financial statements and credit reports, but some criteria differ:
- Projections. Bankers consider future sales and historical data when evaluating loan applications. Ensure your projections are realistic and correlate with current financials and forecasts. For example, earnings won’t automatically double with a larger facility or new equipment. Instead, explain how the equipment lowers operating costs or how you’ll use the extra space to add a new production line. Substantiate claims with copies of customer agreements and contracts.
- Resumes. Tout your management team’s industry experience and track record.
- Ownership. Owners with more than a 20 percent stake must submit signed personal financial statements and tax returns.
- Down payment. Lenders must determine the source of a borrower’s down payment, even if the funds are in an escrow account.
- Collateral. The need for collateral hinges on the loan purpose and program so review underwriting criteria at SBA.gov, and state both in your proposal.
- Tax returns. Owners must supply three years of tax returns, financial statements and balance sheets to qualify.
Does the SBA offer other support to small business owners?
The SBA provides myriad tools and support to help owners create a loan proposal and navigate the underwriting process. Small Business Development Centers offer free assistance with financial, marketing, production and feasibility studies, and many centers engage local experts.
The SBA also provides mentorships, free counseling and business plan expertise through the national nonprofit SCORE.
What else can owners do to successfully navigate the lending process?
Loan approval hinges on an accurate, thorough proposal, so take your time and seek expert advice. Bankers want to hear the story behind your numbers; be ready to explain how you overcame adversity and how you’ll use the SBA loan to take your business to the next level. Help your banker understand your customers by including links to your company’s website, LinkedIn page or Facebook page in your proposal. Finally, you can accelerate the process by selecting an approved Preferred Lender who can approve loans without submitting the entire package to the SBA.
Santiago “Chico” Perez is SBA sales manager at California Bank & Trust. Reach him at firstname.lastname@example.org.
Website: California Bank & Trust is an SBA Preferred Lender. Learn more at www.calbanktrust.com/smallbusiness/loans/small-business-loans.html.
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Don’t look now, but family fun has become a prime export for the U.S. thanks to the global expansion efforts of Mike Magusiak, president and CEO of CEC Entertainment Inc., the parent company of Chuck E. Cheese’s.
Facing a 12-year decline in the domestic birth rate and diminishing sales in the arcade, food and entertainment industry, Magusiak has redoubled his efforts to find new markets with a booming birth rate, burgeoning middle class and a penchant for family-oriented fun.
“When I look long term, I see no reason why we can’t have twice the number of stores internationally than domestically,” Magusiak says. “There are lots of places where the population is growing and people like spending quality time with family. Those markets are ripe for a concept like Chuck E. Cheese’s.”
That’s a pretty bold statement, when you consider that the rodent-mascotted chain, which generated revenues of $803.5 million in 2012, currently has 566 sites and only 18 are located outside Canada or U.S. territories.
After a rather slow start, Magusiak and the company are picking up steam. Together, in 2012, they’ve signed seven new development agreements for 42 stores in Mexico, Peru, the Philippines, Trinidad, Bahrain, Saudi Arabia and United Arab Emirates.
Although the international marketplace offers tremendous opportunities for growth, Magusiak says that a number of challenges must be properly understood and mastered before rapid expansion is wise.
“First, you need a differentiated product,” Magusiak says. “It would be very difficult to succeed if we were just selling pizza. Fifty percent of our revenue comes from food and 50 percent from entertainment. It’s our over-all experience that sets us apart.”
Once he’s surveyed the marketplace and verified that his brand will stand out, Magusiak relies on the following three-pronged strategy to identify and develop prime global opportunities.
Assess tangible and intangible assets
Magusiak says selecting an ideal global location isn’t rocket science but it does require an in-depth assessment of a region’s tangible and intangible characteristics.
For starters, he reviews GDP growth, birthrates and income data, but surprisingly, population density is a better predictor of success than discretionary income. Historically, Chuck E. Cheese’s stores in affluent areas haven’t fared as well as those located in lower income areas with high-density levels.
“We offer customers a great value, so we need sales volume to make our model work,” Magusiak says. “And because margins tend to be lower overseas, our international locations need even more volume than our domestic locations to turn a profit.”
Magusiak honed his location hunting formula by examining the profiles of top producing domestic stores like the one located in Bell, Calif. The store is adjacent to East Los Angeles, a largely Hispanic community that happens to be the most populous unincorporated region in California.
As a result, his initial forays into the global marketplace were focused on Latin American locales with similar demographics; however, the general population must also pass Magusiak’s cultural scrutiny.
“Our executive team visits the area and talks with prospective franchisees and guests to assess the cultural fit,” Magusiak says. “I’ve personally traveled to more than 150 locations including Abu Dhabi and the Philippines to gauge the local appetite for family-oriented entertainment.”
He says it’s easy to adjust menus, game distribution and pricing options to appease customers once they visit a store, but sustained growth hinges on cultural similarities, especially for a unique brick and mortar operation like Chuck E. Cheese’s.
“It’s not a ‘build it and they will come’ model; our guests have to like what we offer and what we represent,” Magusiak says. “You have to get out there and talk to people to see if your values match before committing to an overseas location.”
Find competent, passionate partners
A country’s populace isn’t the only place where Magusiak looks for compatible values; it’s a must-have requirement for Chuck E. Cheese’s franchisees. Successful candidates need business acumen, local market expertise, sufficient capital and what he calls a passion for the food and entertainment business.
“We don’t want absentee owners,” Magusiak says. “We’re looking for franchisees who are willing to immerse themselves in the business and interact with guests, because it’s their hands-on involvement that creates mutual success.”
Although 514 U.S. locations are company-owned, local ownership has been a critical component of Chuck E. Cheese’s early global success. In fact, every international franchise has been profitable from the outset.
Prospective franchisees are screened by staff and then interviewed by the executive team. Those passing muster then spend time in a U.S. store to get a feel for the guest experience and the basic operating model.
“We spend a lot of time with prospective franchisees, and we turn down a lot of people, but our slow and cautious approach has helped us avoid false starts,” Magusiak says. “Actually, many of our franchisees have been so successful they’ve asked to purchase additional development rights.”
In addition to turning a profit, Magusiak expects franchisees to boost the local appeal of Chuck E. Cheese’s brand by suggesting advantageous modifications to the company’s menu and operating procedures. For example, the franchisee in Monterrey, Mexico, added piñata rooms, and in Santiago, Chile, the chicken wings are spicier than those served in U.S. restaurants to satisfy the taste buds of local residents.
To ensure that modifications don’t stray too far from the company’s core values and brand, alteration requests are reviewed and approved by the company’s executive team.
“We don’t want to change what’s sacred about Chuck E. Cheese’s,” Magusiak says. “But if you hire smart, passionate people with good judgment, you need to listen to them.”
For instance, targeting teens instead of children isn’t an option, and it’s not OK to remove pizza from the menu. But Magusiak had no problem shutting down a salad bar in a Chilean store after sales records showed that locals weren’t embracing the concept.
“Customization is less important if you’re selling products over the Internet,” Magusiak says. “But it’s vital when you’re selling an experience and our franchise model has been instrumental in helping us develop a local approach and a solid business plan.”
Walk before you run
Magusiak honed his expansion strategy for three to four years while using his existing staff to identify and develop selected global opportunities. While some executives might question his speed, his methodical approach was designed to protect the company’s bottom line, iron out the kinks in the franchisee selection and assimilation process, and ensure the success of early adopters.
“We didn’t try to force things,” he says. “We wanted to remain profitable by expanding our model based on demand and by adding resources as necessary. Now that we’ve built out our infrastructure, we’re in a perfect position to jumpstart global expansion.”
To keep costs low, early franchisees were trained in U.S. locations. For example, the Peru franchisee spent time in Bakersfield, Calif., learning the nuances of Chuck E. Cheese’s guest service model before transferring the concept overseas. In addition, Magusiak insists that locations are profitable before granting additional rights to global franchisees.
“Going slow helps us tweak game distribution, token pricing and the details that contribute to a store’s profitability,” Magusiak says. “Plus, we can fund infrastructure investments as we go, which helps us try new things without incurring substantial risk.”
Once the company got solid footing, Magusiak hired an experienced globe-trotting Sherpa to identify new locations and a salesperson to recruit franchisees. He also hastened the franchisee assimilation process by adding a regional trainer.
Proof of Chuck E. Cheese’s concept, a proven track record and the addition of resources are behind the company’s recent surge in global expansion.
“You have to be patient,” Magusiak says. “We’re not just selling food. You have to make sure your brand aligns with the local culture when you’re selling quality family time and memories.”
How to reach: Chuck E. Cheese’s (972) 258-8507 or www.chuckecheese.com
Identify global expansion opportunities by evaluating a region’s tangible and intangible assets.
Look for aligned values when selecting business partners.
Be patient, test and achieve profitability before aggressive global expansion.
The Magusiak File
President and CEO
CEC Entertainment Inc.
Birthplace: Warren, Ohio
Education: He received a bachelor’s degree in accounting from the University of Southern Mississippi and a master’s degree in business with an emphasis in finance from the University of Texas at San Antonio. He’s also a CPA.
What was your first job and what did you learn from it?
I worked as an auditor for Holiday Inn in Memphis, Tenn., after graduating from college. It was there that I got my first exposure to international business, because I traveled all over the world auditing various subsidiaries.
Who do you admire most in business and why?
I admire Dick Frank, who served as chairman and CEO of CEC Entertainment Inc. from March 1986 to December 2008. He was not only a great person, but from a business perspective, he was a great simplifier. He was bombarded by opportunities, demands and challenges all day long, but he had a way of filtering everything down into a few simple priorities. He would often say that the key to business success is keeping guests happy or pursuing the right opportunities. He definitely had a knack for keeping everyone focused on what was important.
What is your definition of business success?
First of all, I’m not sure that you ever get there because success is a never-ending journey. But over time, seeing people grow is not only rewarding it’s the hallmark of a high-quality organization that’s financially successful. It’s all linked together; you can’t have financial success unless you have successful people.
What was the best business advice you ever received?
You can’t go from good to great if you get spread too thin. Focus on what you do best, execute and your company will be successful.
Marcia Taylor isn’t your run of the mill CEO. She’s a soft-spoken matriarch, who transformed Bennett International Group, LLC, from a small, five-truck contract carrier into a $266 million logistics and freight services powerhouse.
Taylor attributes her early success to fostering a family-oriented culture and deliberately sidestepping head-to-head battles with conventional competitors.
“We grew organically by adding services to meet the unique needs of our customers,” Taylor says. “We were positioned outside the mainstream, so we were used to competing against just four to five firms.”
Riding the coattails of customers helped the company expand beyond long haul trucking into lucrative new segments like warehousing, logistics and vehicle transport.
Over time, Bennett International built a stable of disparate companies and service lines with random reporting lines, while earning a reputation for being one of Atlanta’s best employers. In fact, the company has been recognized as one of the top workplaces in the area by The Atlanta Journal-Constitution.
But the Great Recession illuminated the shortcomings of Bennett International’s unorthodox structure as domestic revenues sagged and the management team struggled to win new contracts, especially in burgeoning international and government segments.
“I think we became a bit complacent before the recession because things were going well and we were making money,” Taylor says. “In hindsight, I can see that we weren’t as efficient as we needed to be and our management structure prevented us from offering clients bundled services or a single point of contact, which were essential to winning bids and new contracts.”
Realigning a family-owned company is never easy. Here’s how Taylor got Bennett International back on track without sacrificing key staff or its family-oriented culture.
Prioritize people over profits
Taylor wanted to avoid draconian staff cuts and the potential loss of institutional knowledge that could impede Bennett International’s ability to rebound when the economy improved. Plus, she didn’t want to violate the trust of long-term employees or tarnish the firm’s vaunted employment brand, so she reduced ancillary expenses, watched cash flow like a hawk, and asked everyone to make small sacrifices.
“I’ve always believed that if you treat people right and give customers great service, the profits will come,” Taylor says. “Our goal was to come out of the recession in a better place and we achieved our mission because our employees were willing to pitch in which helped us avoid massive layoffs.”
Taylor asked employees to take off one day per month without pay, while the management team worked on reorganization and hunted for new sources of revenue. The camaraderie was so strong, that financially secure employees helped out their cash-strapped co-workers by volunteering to take off additional days without pay.
“Our employees supported our long-term strategy because we didn’t make hasty decisions and kept them in the loop throughout the realignment process,” Taylor says. “CEOs can reduce fear during times of crisis by being candid about their motives, prioritizing the needs of their customers and employees, and avoiding cuts that might hinder growth and profits down the road.”
So far, it seems that Taylor’s penchant for delayed profit gratification is paying off. Bennett International is projecting revenues of $275 million in 2013 and Taylor says the organization can sustain 20 percent annual growth for the foreseeable future without increasing overhead thanks to its increased efficiencies.
Exploit synergistic opportunities
Given her intimate knowledge of logistics, it’s not surprising that Taylor took a methodical approach to Bennett International’s realignment initiative. Her management team pinpointed the needs of current and prospective clients and redefined the firm’s core services, while looking for ways to streamline and consolidate its vast slate of offerings.
They also looked for ways to extend their capabilities by leveraging the firm’s prized fleet of owner-operator truckers, who have primary relationships with Bennett International and a vested interest in the company’s success. In turn, Taylor earns the loyalty of owner-operators by treating them like family, which is smart, given the current and projected shortage of transportation professionals.
“We looked for synergistic opportunities to combine several services under a single umbrella and leverage our existing assets and owner-operators so we could up sell current customers and attract new clients by offering them a package of services,” Taylor says. “Second, we wanted to be more efficient by leveraging our existing technology and consolidating back office tasks without inconveniencing our existing clients.”
The goals served as the linchpin for the reorganization initiative and a rallying point when the team disagreed or veered off course. In the end, they were able to segue from a company with a host of competing fiefdoms into an integrated firm with several divisions. Plus, realignment created opportunities to consolidate billing and accounting systems and eliminate redundant processes that increased overhead while adding little value.
For example, the team created an international logistics division by bundling project cargo, cold chain and other services that had been housed under different entities giving the firm expanded capabilities in full spectrum logistics planning and support. They also created Bennett International Transport and Bennett Distribution Services to enable rapid expansion into key segments of the international marketplace.
Early realignment efforts spawned new contracts from clients with international needs and the U.S. General Services Administration, and validated the efficacy of the team’s strategy.
While some CEOs might hammer out a major reorganization plan in a few hours or days, Taylor’s team worked on the initial blueprint for nearly six months.
They often argued behind closed doors but eventually reached consensus by listening to each other and staying true to their goals and the company’s values.
“I think it’s healthy to disagree but you need ground rules so the discussion is respectful and fruitful,” Taylor says. “We’d take a break when we reached an impasse. I’ve always thought that sleeping on a problem is a great way to break a stalemate.”
Match the right people to the right jobs
Once the new divisions were created, Taylor faced the difficult task of realigning the company’s senior management team with its new structure. Taylor took stock of each person’s strengths and performance before asking them to take on new roles. The fact that the senior management team includes outsiders and her two sons added to the complexity of her mission.
“I believe in putting people into roles that give them an opportunity to grow and maximize their strengths and talents,” Taylor says. “The decision to realign employees is difficult, but it gets easier if you put them into positions where they have the best chance to succeed.”
Taylor referenced the needs of clients and the company’s history of exceptional customer service to bolster support for her management realignment strategy. She’s an advocate of values-based decision making and says that her business decisions support the company’s mission and core values. She also uses data to make tough calls but says executives make the best decisions by balancing data with intangible factors and thinking about what’s fair.
“I think if you have a lot of passion for your ideas and convey a clear vision people will accept change,” Taylor says. “It may take time, but if the logic is there and your decisions don’t conflict with your values, people will eventually come around to your way of thinking.”
Taylor takes her time when making difficult decisions but defends her sluggishness by saying that she’d rather be slow and accurate then have regrets, especially when her decisions directly impact the financial health of the company and its nationwide team of more than 3,000 contractors, agents and employees.
While Taylor acknowledges that she and her children don’t always see eye to eye, she says they’ve found success as a family-operated company by fostering open communications and supporting each other through thick and thin.
“We’ve learned some valuable lessons from this experience, and we don’t plan to repeat our mistakes,” Taylor says. “By leveraging our excellent reputation, repositioning for growth, and remaining true to our customers and what we do best, I believe our company and our extended family will continue to do well for the foreseeable future.”
How to reach: Bennett International Group, LLC, (800)866-5500 or www.bennettig.com
The Taylor File
Name: Marcia G. Taylor
Company: Bennett International Group, LLC
Birthplace: Clifford, Ill.
Education: High school graduate
What was your very first job? I was an apprentice pharmacist in a small, solely-owned compounding pharmacy in Mt. Vernon, Ill. There were only four of us on the staff so I learned the benefits a family-oriented culture at an early age. The pharmacist would extend credit to customers who couldn’t afford their medications so I also learned the importance of ethics and the value of prioritizing people over profits. Profit is important but it’s not the primary goal. If you treat people right and give them great service, you’ll have loyal customers, plenty of referrals and profits will follow.
Who do you admire most and why? I admire Margaret Thatcher for sticking to her guns when she felt something was right. Although our styles differ, I appreciate the way she went about things. She was a tough lady who accomplished a great deal because she wasn’t afraid to take a stand and voice her opinion on difficult issues.
What is your definition of business success? When your employees and customers are happy you greatly increase your chances of success. Set high standards, focus on being the best instead of the biggest, and success will follow.
What was the best business advice you ever received? Don’t rush to judgment or make rash decisions. Step back and think things through. And when you’re facing a tough decision, rely on integrity as well as facts and think about what’s fair. I’ve found that by practicing values-based decision making, I make the right call most of the time. Plus,it’s hard to undo the damage when a leader makes unethical choices.
What’s the secret to working with family?
Set ground rules and then hash things out behind closed doors. Always speak with a unified voice when addressing the staff and don’t take things personally. Businesses come and go but you can’t replace family.
- Garner support for your reorganization plan by prioritizing people over profits
- Create operating efficiencies and new revenue streams by exploiting synergistic opportunities
- Execute your plan by matching the right people to the right jobs