Many companies talk about the need for employee engagement, but few are taking the necessary steps to engage their workforce.
“While it’s a commonly used term, it’s not common practice. For example, 75 percent of leaders have no engagement strategy, yet 90 percent consider engagement to be a critical component of a company’s success,” says Beth Thomas, executive vice president and managing director of Consulting Services at Sequent.
“Right now, 70 percent of employees are disengaged at work, and it’s costing companies over $300 billion in lost productivity, turnover and diminished business success. Based on statistics, you would think that companies would view this as a critical initiative,” says Thomas.
Smart Business spoke with Thomas, author of “Powered by Happy: How to Get and Stay Happy at Work,” about how to boost employee engagement.
Why have companies been slow to address engagement?
There are several reasons. Some companies believe customer satisfaction is engagement — it’s not. You can have happy, disengaged employees who are genetically happy or pleased with the company, but are not engaged in their work or in the right role.
Surveys will address items like wages, benefits and the company café, but that doesn’t get into the emotional connection to work and employees’ desire to use discretionary effort to be the best performers they can be.
Sometimes companies conduct surveys and do nothing with the results, which creates even more disengagement.
What is the process of engaging employees?
We utilize a nine-step process:
- Create a vision. What do you want to achieve? What’s the value proposition?
- Determine the metrics of success. Use benchmarks and create performance goals needed to improve engagement, which will also build customer loyalty and your bottom line.
- Align expectations. Once you have a vision and decided how to measure success, develop an employee engagement survey designed to get the information needed to improve engagement.
- Execute the survey. We conduct an educational webinar first, so employees know why the survey is being done and their role in making it a success.
- Create an action plan based on the survey results. The plan should prioritize tasks and assign ownership and timing to each milestone. Communicate the survey results and how they are being used.
- Establish a team of influencers. This group will organize activities — based on survey results — to help achieve and sustain a higher level of engagement.
- Develop leaders and frontline managers. They need to understand how to impact the company culture and employees every day. Many managers think they are prepared to coach and lead engagement, but they really aren’t.
- Evaluate if course correction is needed. Training or action plan activities may need to be modified to ensure you’re set up for a successful journey toward engagement, rather than a pit stop.
- Ensure sustainability. Creating that initial engagement is easier than sustaining or improving engagement. We have an engagement application that provides managers with a support network of tips, tricks and hints on how to continually drive engagement. You have to create engagement as a habit; it occurs naturally because of the way you manage people.
What mistakes do companies make when implementing engagement strategies?
One is rewarding performance without behaviors. Someone might be a great producer, but have a bad attitude. Knowing that they have a bad attitude and rewarding them based on sheer numbers or performance is a mistake.
The management and leadership team also has to believe and drive the engagement process; it’s not enough just to say it’s an important initiative.
The benefits of engagement are so great that more companies should make it an emphasis. Engaged employees generate 40 percent more revenue than disengaged ones and are 87 percent less likely to leave. So being able to recruit, retain and benefit from engaged employees will impact your bottom line and the success of your company. ●
Insights HR Outsourcing is brought to you by Sequent
As you set your New Year’s business objectives and goals, the bulk of your attention is probably focused on driving revenue growth, budgeting, cost control and other operational matters. But these are all part of a greater business purpose: To serve your customer.
What better time than at the beginning of a new year to analyze who your customer and target audience really are? If you don’t know, then no matter how extensive your sales and marketing efforts are, they may ultimately prove fruitless.
Are you aware of your traditional customer’s current needs, attitudes and behaviors? Do you know if they’ve changed those behaviors? And if so, how and why?
With our own customers, for example, we hear a lot about aging supply chains, changing workforces and evolving customer bases. People that your team members have been working with for years are retiring. Your client — and your client’s client — has transformed.
Observe the landscape
There is a younger generation of buyers who look at things differently. Those leaving the workforce may not have relied as heavily on the Web. They may not have invested time, energy and resources thinking about search capabilities and their digital presence. But this new group does.
What is it that the new buyer wants? And is the person who used to knock on your door to see you now going to research you online before they’re willing to sit down and talk? Buyer behavior has changed, and you better know your changing customer because they know you.
According to a report from Forrester Research, “Buyers are often more than two-thirds of the way through their problem-solving cycle before they engage with a supplier’s sales department. By the time they interact with salespeople, they demand more detailed information and expertise, which requires marketing and sales to deliver a well-orchestrated buyer experience.”
This means by the time you actually make contact with that potential customer, he or she is already familiar with your organization. Your team better have the same message internally as the one you’re putting out there online. You never know where or how you’re going to be found.
Start this process by conducting an internal analysis of your customers. Learn how the new customers with whom you’ve worked over the past year found you and whether this is different than in the past. Look at your long-standing customers and identify where they met you. Was it at a trade show, through a referral or in the Yellow Pages? It’s likely that your more recent clients found you through completely different means.
Examine what you’ve found
Next, analyze the results. These will help you see whether you are marketing to where your new clients will find you.
Keep in mind that before you can effectively develop any marketing strategy and implement the tactics, you need to know how your target audience will consume your content and where. Don’t waste money attracting the wrong audience.
As they say in search, it’s not how much traffic you get; it’s whether you’re getting the right traffic. If converting your audience is the goal, then when you’re not reaching the right audience your message gets lost.
One way to ensure the right message for the right audience is by holding a customer roundtable. This not only provides the benefit of networking, it gives you the opportunity to directly ask your clients, “Why did you choose us? How did you find us? And what was the value proposition that ultimately was the decision-maker?”
You may think you know the answers, but getting a group of people together in an open forum could lead you to understanding behaviors and reasons you hadn’t previously recognized.
All of this may sound complicated, but it is really pretty simple stuff: The more you know your customer, and the more you know the best way to communicate with them, the more effective your relationship is going to be.
Dave Fazekas is vice president of digital marketing for Smart Business. Reach him at email@example.com or (440) 250-7056.
Few companies today consider the vacuum cleaner market as an area to grow and expand business. That market four or five years ago, however, was very interesting and caught the attention of executives at Euro-Pro Operating LLC, a Newton, Mass.-based pioneer in innovative cleaning solutions and small household appliances.
The company looked at the market at the time and noticed it was divided into two segments. There were well-entrenched brands like Hoover, Bissell and Eureka selling at low price points, under $100. Then Dyson came into the market and become the No. 1 brand selling vacuum cleaners at more than $400.
“It presented a very unique opportunity,” says Mark Barrocas, president of Euro-Pro. “As we looked at the market, we had a compelling strategy within the vacuum cleaner market where we felt consumers wanted lightweight, more-maneuverable vacuum cleaners than what were present in the market at that time, and they wanted it at affordable prices.”
Euro-Pro entered the market with its Shark cleaning appliances in the $150 price-point range, a challenging arena that the marketplace called no-man’s land.
Here’s how Barrocas and Euro-Pro turned no-man’s land into a billion-dollar business.
Find new markets
Five years ago when Euro-Pro was looking at entering the vacuum cleaner market to grow its business, the company considered three keys to being successful.
“We looked at Euro-Pro’s capabilities, competitor weaknesses and marketplace opportunity,” Barrocas says. “We looked at how those three things converge with each other and the center point of how those converge on each other was where the product innovation or the opportunity was for us.”
Euro-Pro had the technology to make vacuum cleaners that were lighter-weight, more versatile and were able to deep-clean carpets better than the competition.
“When we looked at the competitor weaknesses, we looked at the fact that competitors were making heavy vacuums,” he says. “And the marketplace opportunity was a huge spread from $100 vacuums to $400 vacuums. As those three things converged, it presented an interesting white space for us.”
The company took its findings in the vacuum cleaner market and began to transform its own product.
“You can’t innovate based on looking at what everyone else does and trying to incrementalize,” he says. “You have to find your own white space where you’re going to be able to differentiate and create a unique proposition for the consumer.”
Euro-Pro heard from consumers that no matter how much they vacuumed their home, there were still issues with their vacuums getting their homes clean.
“These were issues where we looked at consumer problems and we created technology solutions to those problems,” he says. “Then through our media strategy, where we spend more than $100 million on TV advertising a year, we were able to educate the consumer on why this technology would be of strong benefit to them in their home.”
Create new innovation
Not only did Barrocas and his team want to educate consumers about their new vacuum product, they wanted consumers to educate the company itself for innovation purposes.
“Innovation for us comes from a lot of different places,” Barrocas says. “It’s being able to take a lot of different insight and data points and synthesize it down into a hypothesis. A tremendous amount of work goes into building that hypothesis. That insight comes from our capabilities, the competitor’s weaknesses, the consumer insight and the market opportunity. That all synthesizes down into a product innovation hypothesis.”
The company then takes that hypothesis and starts to move it forward into prototypes. Those prototypes are then given to consumers to test.
“We go out and talk to consumers and observe consumers using, interacting and commenting on those prototypes,” he says. “Based on that, we continue to refine our hypothesis and concept until it goes down a product innovation funnel that ultimately leads us to a product we feel good about moving forward with in the market.”
If there is a key to what Euro-Pro tries to do, it’s that the company doesn’t marry its product hypothesis.
“Our hypothesis is not a religion; it’s just a hypothesis,” he says. “If it proves out and there are enough data points that force us to think differently about it or change it, we are very quickly able to do that without feeling constrained.”
If you look inside Euro-Pro, some of its biggest successes have come from projects that have failed or been scratched.
“We try not to throw the baby out with the bath water and try to find the nuggets of things that were good or positive about what we developed and then build on them in some other way,” he says.
In addition to the company’s attention to the innovation process, it also spends quality time educating consumers and listening to their needs.
“All too often there are amazing products in the market, but one of the challenges to consumer products companies is to educate the consumer about what is unique about their products,” Barrocas says. “When you walk through a Target or a Wal-Mart, there are tens of thousands of products on the shelf. Challenge No. 1 is how do you get to the retail shelf. Challenge No. 2 is getting off the retailer shelf and into consumer homes.”
That’s where Euro-Pro takes a unique approach to things. Many companies in its industry focus on the buyer or retailer. Euro-Pro focuses on the consumer.
“What does the consumer need?” he says. “What does the consumer want? What is going to excite the consumer? Then, how do we use TV advertising and the Web to educate them on what we’ve done?”
The company has an interesting go-to-market business model where it advertises significantly on television. In fact, Euro-Pro is the largest appliance advertiser on television.
“We create consumer demand through TV advertising,” Barrocas says. “A portion of that demand is fulfilled directly to us, and we ship products to consumers. However, 90 percent of the demand is fulfilled through retail stores such as Macy’s, Bed, Bath & Beyond and Wal-Mart.
“Our business model is really based on three core principals — one of which is product innovation, second is product quality and the third is creating consumer demand. Our view of the world is how do we bring those three things together to ultimately create a solution for the consumer?”
If you’re going to shop today for a vacuum cleaner, the odds are that a majority of Americans are going to go online and look at consumer reviews.
“As we started our vacuum cleaner business five years ago, we were focused on making sure we were driving exceptional consumer satisfaction,” he says. “We want to see five-star ratings online about our products. Over the course of the last five years, we’ve driven very high satisfaction levels to the point where over the last two years our Shark vacuum brand is rated the most recommended vacuum in America.”
The growth of Euro-Pro and the Shark brand has really been driven by a strong focus on redefining markets that are in place. The company has gone from 1 percent share in the vacuum cleaner market five years ago to 23 percent market share today. At the price point between $130 and $250, the company holds a 70 percent market share, and at an even deeper level, it has 90 percent share of the steam-cleaning category.
In five years, Euro-Pro has developed into a 600-employee, more than $1.2 billion company.
“We’ve been able to take share in some very well entrenched markets,” Barrocas says. “I think our business model and product innovation approach has demonstrated to be scalable, and there are a number of additional categories for us to be able to scale that across.” ●
How to reach: Euro-Pro Operating LLC, (800) 798-7398 or www.sharkclean.com
Starting a new year can be a time of mixed emotions. I know because I greeted six consecutive New Year’s sitting in North Vietnam prisoner of war camps. Fear was the foremost emotion in those first three years, and the others were somewhat daunting, too.
Yet, we always kept hope that the new year would bring an honorable end to the war. In spite of the difficult conditions, our leaders stayed positive and inspired us to bounce back as they did so often. They also taught us to resist the enemy and survive so that someday we could return with honor.
Dealing with paradoxes
One of the difficult challenges for leaders is paradox — the fine balance between being:
- humble and strong.
- decisive and willing to listen to the ideas of others.
- confident and vulnerable.
- tough and compassionate.
- detached and sensitive.
A healthy paradox to start the new year is facing the future with both hope and realism. In his best-selling book, “Good to Great,” Jim Collins addressed the process that kept the Vietnam POWs going year after year, and he named it after his friend and one of our senior leaders, Vice Adm. James Bond Stockdale. Collins insightfully categorized the importance of this dynamic tension as the “Stockdale Paradox:”
“You must never confuse faith that you will prevail in the end — which you can never afford to lose — with the discipline to confront the most brutal facts of your current reality, whatever they might be.”
So as you look forward to 2014, are you naturally optimistic and seeing the positive potential of what can happen this year?
If so, then you may need to sit down with some friends and teammates who are more realistic to help you confront the brutal realities of your situations. If you do not have them, you need a strategy and a plan in place to address the tough days ahead.
Find the half-full glass
On the other hand, if all you can see is barbed wire and hard times ahead, then you probably need to begin the new year with a time of thanksgiving to count your blessings and recalibrate your attitude.
Determine where you can get a foothold of hope and optimism to inspire yourself and others. Optimism generates positive emotions related to faith, belief, conviction and confidence, and it’s from these emotions that we gain the inspiration to persist when things look bleak and hold on until we can ultimately prevail.
Yes, diligence and dedication are important, but never forget that inspiration is the source of power. Stockdale was right — “faith that we would prevail” is the essential principle of successful business leadership. It enabled us to resist and survive as POWs and return with honor.
This same thinking enables poor men to become rich, sick people to become well, last place teams to become first and each of us to reach our potential as human beings and business leaders. It’s more than positive feelings — it’s the choice of belief.
Most New Year’s resolutions never last as long as 90 days, but given the impact your attitude and behaviors can have on the year 2014, why not commit to lead with honor by following the Stockdale Paradox? Deal with the brutal realities of your situation, and choose a positive belief of great hope and expectations that you will prevail.
When the hard times come, it’s the leader’s attitude that lifts others to victory. The POW leaders shined the light through dark times, and that’s a lesson for all times.
As president of Leadership Freedom® LLC, a leadership and team development consulting company, Lee Ellis consults with Fortune 500 senior executives in the areas of hiring, teambuilding, leadership and human performance development, and succession planning. His latest book about his Vietnam prisoner of war experience is entitled “Leading with Honor: Leadership Lessons from the Hanoi Hilton.” For more information, visit www.leadingwithhonor.com.
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First, a quick refresher. The term red herring is derived from the practice of training hounds to follow a scent, or distracting them with a different smell, during a fox hunt. In a story it can be a clue that leads the reader towards a false impression or conclusion. Not to muddy the waters, but this term also refers to a preliminary prospectus sometimes used for an initial public offering (IPO) that intentionally provides only a portion of a company’s vital data.
A red herring can also be a diversionary tactic used in business to make an argument, or raise a concern, that is not relevant to the central issue, but appears initially to be plausible.
Has the tide turned?
Here’s an example: You have been working on an acquisition and finally the other side has agreed to a face-to-face powwow on your turf to seal the deal. After months of sweet-talking, playing nice and being on your best behavior, you think you can make this transaction finally happen.
Then out of the blue, a few days before the visit, you start to get not so warm and fuzzy emails from the other side referencing the offer price. Your touch-base calls suddenly go unreturned and you get that sinking feeling that the tide has changed.
What gives? First you must take a step back and retrace everything that has transpired since the tone began changing. Once you’re sure it’s not you, rather than improving the deal, you move to a watch and wait mode.
On the appointed day your guests arrive, you rush into the room, hand extended with a big smile on your face, but they signal indifferent expressions and reciprocate with wimpy handshakes.
To avoid making a huge tactical misjudgment, you must immediately move to detective and interpreter mode. The detective portion of this persona requires you to look beyond the obvious, not accepting circumstantial evidence as gospel, learning to think like Sherlock Holmes — assessing information and searching for real meaning from scraps of random comments and innuendos.
Part and parcel of this is also the need to function the same as a United Nations-type, interpreting words and body language to translate what is said into what is really meant. Effective managers instinctively can read between the lines to drill down to the lowest common denominator to get beyond red herring statements that merely become diversions to solving the real problem.
Playing a bargaining chip
Fast forward to the end of this dramatization and we learn that the visiting team was simply trying to put you on the defensive by employing a “big chill” technique to cause you to second guess your economic offer.
Their real objective was to gain a bargaining chip to get you to agree to allow them to keep their existing titles so they could save face in the community. This is right out of Red Herring 101.
Red herrings might provide some direction but, more frequently than not, they can send you down the wrong path.
With a little practice, a degree of healthy skepticism and a resistance to jumping to conclusions, red herrings can be readily spotted once it’s understood how people use them, either intentionally or inadvertently. A good starting point is to remember that red herrings, just like their real life namesakes, don’t pass the smell test.
Michael Feuer co-founded OfficeMax in 1988, starting with one store and $20,000 of his own money. During a 16-year span, Feuer, as CEO, grew the company to almost 1,000 stores worldwide with annual sales of approximately $5 billion before selling this retail giant for almost $1.5 billion in December 2003. In 2010, Feuer launched another retail concept, Max-Wellness, a first of its kind chain featuring more than 7,000 products for head-to-toe care. Feuer serves on a number of corporate and philanthropic boards and is a frequent speaker on business, marketing and building entrepreneurial enterprises. “The Benevolent Dictator,” a book by Feuer that chronicles his step-by-step strategy to build business and create wealth, published by John Wiley & Sons, is now available. Reach him with comments at firstname.lastname@example.org.
In the sports world, there is a clearly defined champion each year. Every team strives to be the one that finishes on top, but most don’t make it. Many teams have good seasons and might be satisfied with that, but only one is the true No. 1.
The question to ask yourself is, what is your goal? Are you trying to be the No. 1 player in your industry? Or are you happy with just having the equivalent of a good season? A lot of you might say you are aiming for No. 1, but are you really putting in the effort to get there?
Tiger Woods and Warren Buffett know what it takes to win. Steve Jobs created a dynasty.
Here are four observations on what it takes to get to the top.
Continuous improvement. Tiger Woods has a coach. One of the best golfers in our lifetime has a coach and works with him to get better. The road to the top requires long hours of identifying every flaw in your organization and then working tirelessly to eliminate those flaws. Once you are on top, you have to work even harder, because all of your competitors will be using your success as the new benchmark.
Look ahead. Winners identify trends before anyone else and are able to take advantage of that knowledge. If you are working on continuous improvement, you’ll obtain what you need to move quicker than your competitors. Why? Because you will have networked more than the next guy, talked to more of your customers and interacted with your employees on the front lines. Steve Jobs of Apple Inc. was ahead of the competition with almost every product he launched. His few failures were partly because he was too far ahead and the market wasn’t ready.
Desire. If you don’t have the desire to be No. 1, then don’t expect to be No. 1. To be a champion, you have to have the heart of a champion. There’s nothing wrong with just being a “good” business, but don’t try to fool yourself by saying you want to be the best when you don’t really have the desire to do what it takes to get there.
Commitment. One clue that you might be lacking the desire to be the best in your industry is a lack of commitment. If you are only working 40 hours a week, you are probably not committed to being No. 1. With the talented CEOs who are out there, it would be almost impossible to work fewer hours than they do and expect to beat them. Warren Buffett would often start his day at 4:30 a.m., and he also saved $1,000 by the time he was 14 — a lot of money back in the 1940s. He was committed at an early age to being a success.
Do you have what it takes to win it all? ●
Contact President and CEO Fred Koury at FKoury@sbnonline.com
To organize and carry out your household financial plan, you need to ensure finances are checked regularly and action is taken as needed.
“It’s easier to do these things in small bites. You don’t want to try and do a year’s worth of financial planning in one sitting. It can be too daunting, and then it never gets implemented,” says Geoffrey M. Zimmerman, CFP®, senior client advisor at Mosaic Financial Partners Inc.
Smart Business spoke with Zimmerman about executing personal financial planning.
What should a year of financial planning include?
January — Prepare a household net worth calculation that looks at all your assets against debts and liabilities. Compare last year’s statement to this year’s to see if you increased your household net worth. Also review your spending plan for the year as year-end reports become available.
Adjust your payroll elections to maximize contributions to employer retirement plans and/or executive top hat plans. For corporate executives, implement any exercise and hold strategies with incentive stock options.
February — Review your property and casualty insurance, such as homeowners and auto, especially if you made a major purchase last year. Your excess liability coverage needs to be adequate relative to both your current net worth and earnings potential.
March — Pull out old statements and clear out the deadwood. You’ll need to keep certain documents for tax purposes, like your cost basis on securities, but your advisers can suggest how long to retain documents.
It’s also time to look at your portfolio, and rebalance it if needed. According to Gobind Daryanani, in a 2008 Journal of Financial Planning article, if you look frequently and rebalance when an asset class has deviated from its target by 20 percent or more, you can pick up some additional returns.
April —Increase your Individual Retirement Account (IRA) contributions for the prior year before the tax-filing deadline. By funding your IRA now with $5,500 annually, $6,500 if you’re older than 50, funds are less prone to leak out of the ATM.
May — Update estate plan documents. Have there been changes affecting the people you have in place to act on your behalf? Were there changes in the tax laws, exemption amounts, your net worth or state of residence?
June — Time for a midyear review. Evaluate your placement of assets for tax efficiency, rebalance your portfolio and consider midyear tax loss harvesting in your after-tax accounts. If your non-IRA account has a security at a loss, you can sell it, take the loss and buy something similar but not identical. The losses can be used throughout the year or carried into the future.
July — Think about the future with your significant other, spouse or partner. Kick back, dream about what you and your family want, and jot down a few notes.
August — Check your Section 529 savings accounts for the kids and grandkids. If they aren’t set up yet, don’t wait; college isn’t getting cheaper. These plans allow contributions to be made to pay for post-high school education at a qualified institution, tax-free.
September — Pull out the notes on your future plans from July. Use it to update the financial plan, looking for necessary changes. Also, rebalance your portfolio.
October — With open enrollment, review employee benefit elections for medical, life, disability, vision, dental, etc. Also look at your outside insurance such as life and long-term care against current needs. Corporate executives with nonqualified deferred compensation plans need to elect salary deferral for the following year.
November — Begin year-end tax reviews to manage tax liability. It’s also a good time to finalize remaining charitable donations, including appreciated stock.
December — Do an end of year wrapup, such as annual gifting, financial portfolio rebalancing or tax-loss harvesting. IRA to Roth conversions must be done before Dec. 31. Also, go back to exercised incentive stock options and decide whether to do a disqualified position and sell that stock, or to hold it into the following year.
Finally, take a look at this list and see how much you were able to complete this year. Were you able to do it all? Lift a cup of egg nog and celebrate. And, if you didn’t, then consider enlisting the help of a financial planner to help you stay on track. ●
Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.
After a couple of years sitting stagnant at 3.25 percent, the prime interest rate is expected to go up in 2014, making this a good time to secure a business loan.
“There’s not a lot of inflationary pressure yet. The Federal Reserve has been signaling a desire to come off of quantitative easing, and they’ve been trying to set the market up for rate increases. But every time it’s mentioned, the stock market drops 100 points,” says Michael Hengl, senior vice president and group manager of Corporate Banking at Bridge Bank.
Eventually the expectation of higher interest rates will be set to the extent that the impact to the stock market will not be that great, and the rates will go up, Hengl says.
Smart Business spoke with Hengl about the state of the commercial banking industry and what’s in store for 2014.
How substantial will interest rate increases be in 2014?
Rates will start easing in the second half of 2014, but we’re not going to see big jumps.
Some sectors of the economy are doing very well. The Bay Area is dominated by technology companies that are going gangbusters right now. The energy industry is doing very well in places like Texas and North Dakota. However, there are still elements of the economy that are struggling.
That’s what makes it a good time for a small or midsize business to get a commercial loan. Right now, there is a lot of liquidity in the banking system, and banks want to make those loans. There just is not enough demand.
Is that because businesses are reluctant to increase debt?
Business managers are being very cautious. When it comes to hiring, they are taking it to the point where they’re maximizing the people they have on hand. Or if they’re buying equipment, it’s all replacement items. There’s been a decent amount of equipment financing, but it’s for capital expenditures that companies deferred in 2009, 2010 and 2011. They’re catching up with those needs.
Businesses are not buying equipment for expansion; when that happens, that’s when interest rates will start climbing.
Will anticipation of interest rate increases spur activity early in 2014?
Many commercial loans are variable-rate, so they’re much less rate sensitive. If you need a line of credit for inventory, you get the loan. However, equipment loans may have fixed rates, which you want to get at the lowest possible rate, and there have been more commercial real estate acquisitions.
One deal earlier this year was done solely because long-term rates were creeping up. Back in early summer, there was a big jump in mortgage rates.
Other than rate, are there advantages to getting a loan now?
Sure — when a company approaches a bank for a loan, they’re going to find the bank very receptive. Still, there were lessons learned from the financial crisis, and banks will exercise additional due diligence. That’s an advantage to business owners because it improves communication between the bank and the borrower, which is the cornerstone of a banking relationship.
A good example of how businesses can be helped by this process involved a company in the food industry, which had strong growth, but profits were lagging due to a manufacturing operation overseas. It couldn’t close the facility because of the impact on liquidity, and an operating line of credit was needed to fuel growth. By understanding this, a bank could cover the short-term need, knowing the company would recapture that over the long term.
That’s why it’s important for a company to sit down with its bank, go through the due diligence process and not be frustrated if it’s more work than it was five years ago.
In another case, a client bought a much larger company, a risky proposition. The company had a strong set of projections and acquisition plan, which was actually strengthened by the bank’s due diligence process. Now, the bank’s comfortable with the deal, and the company has a better business plan in place.
The bottom line is that it’s important to be proactive in communications with your banker, so the bank can react quickly when you need help. Ultimately that good relationship should help mitigate risk for both parties. ●
Insights Banking & Finance is brought to you by Bridge Bank
California State University, East Bay: How corporations use politics to improve social responsibility imagesWritten by Jayne Gest
Corporate social responsibility is the duty of a corporation to create wealth by using means that avoid harm to, protect or enhance societal assets.
“Since the U.S. is a developed country, people are more sensitive about not only the quality of products but also the actions of the corporation,” says Ekin Alakent, an assistant professor in the Department of Management, College of Business and Economics, at California State University, East Bay. “This is even true for companies that do not act responsibly in other countries where the public does not have the opportunity to voice an opinion.”
For example, the negative reaction to Apple, Inc., which was criticized for working conditions at the Foxconn factory in China a few years ago.
So how do corporations counteract a negative image?
One strategy is to get involved in public policy, by investing in lobbying, establishing political action committees or making soft money contributions, to offset negative corporate social responsibility records.
Smart Business spoke with Alakent, who researched this topic, about her findings.
How are corporate social and corporate political strategies interrelated?
Both corporate social and political strategies are considered nonmarket strategies, which deal with a company’s engagement with society. Therefore, both strategies have uncertain outcomes, and it’s very difficult to measure their effect on profitability.
To further cloud the causality, smaller companies can indirectly benefit from the investment of a larger company in the same industry. They may also belong to a chamber of commerce that has political action committees to lobby on their behalf.
However, in most cases, companies use both strategies simultaneously.
Which companies are more likely to use political strategy to improve public opinion?
One consideration is what issues are relevant. If there’s an upcoming election and a proposed regulation that would increase business costs, that year a company might heavily invest in issue advocacy groups.
In addition, companies that have poor social responsibility records tend to spend more money on political strategies to offset their negative image in society, such as those in oil and tobacco. Other factors that increase political strategy spending are available resources, size, industry and the extent they depend on government subsidies or support. For example, sugar, energy and agriculture all spend a lot of money on political strategies because they are directly affected by public policy.
Businesses that are more visible, measured by their advertising, care more about their public image, and tend to spend more money on political strategies.
Are there negative side effects to using corporate political strategy?
There is that possibility. Companies that heavily invest in lobbying — and that data is available, who invests and how much, on the OpenSecrets.org database — can be perceived as buying politicians. But, overall, the effect of not investing in political strategy is much bigger.
Corporations tend to overwrite the possible negative image. In fact, businesses spend more money on lobbying than other political strategies.
What do you think business leaders can learn from your research?
An important implication is that political involvement can benefit organizations in many ways. It helps them pre-empt unwanted regulation that could significantly increase their operating costs and improve their public image.
Since both formal institutions, such as laws and regulations, and informal institutions, such as social groups and nonprofit organizations, influence companies, they need to engage with their social and political environment. Be active in shaping the rules of the game. Being proactive with nonmarket strategies can help companies have strong brand reputation and forestall costly legislation.
By using these strategies, businesses are actually investing in a safer, better-educated and healthier society. It shouldn’t only be about offsetting negative public image, greenwashing or having a window dressing. It’s in their best interest to invest in their communities and act responsibly. ●
Ekin Alakent is an assistant professor in the Department of Management, College of Business and Economics, at California State University, East Bay. Reach her at (510) 885-2076 or email@example.com.
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Ropers Majeski Kohn & Bentley PC: How to address common problems when purchasing, managing buildingsWritten by Roger Vozar
Just as you would when buying a house, it’s important to conduct a thorough review when considering a commercial property purchase.
“Next time I buy a house, I’ll be walking around with the inspector to make sure that they’re doing a thorough job. I’m going to be turning on the faucets and flushing the toilets just in case the home inspector misses it,” says Todd J. Wenzel, a partner at Ropers Majeski Kohn & Bentley PC. “It’s a little different with commercial properties in that the concerns aren’t the same, particularly if it’s an investment property. But you have to do your due diligence.”
Smart Business spoke with Wenzel about problems commercial property owners need to watch for, whether they occupy the space or serve as landlords.
What due diligence should be conducted before completing a purchase?
It depends on the age and size of the building, but for the most part it’s not as involved as with residential properties. With owner-occupied properties, it’s more about checking for any structural problems with the building. However, if it’s an investment property, look at occupancy certificates and rent rolls. Ensure leases are up to date with no outstanding renewals or rental payments.
With commercial properties, it’s important to have full disclosure. It’s expected that parties on both ends are sophisticated, so the law does not provide the same protections that residential purchasers receive.
Should you check on tenants as well?
There should be a file on each tenant, complete with financial background checks to confirm that tenants have the wherewithal to continue making payments. Be sure to look at whether a tenant has a history of late payments or nonpayment of rent.
In a recent situation, there was no credit report run on tenants. The client that purchased the property received a good purchase price, but the tenant files were very thin. It turned out that some tenants were in immediate default after the purchase. Ultimately, one tenant breached his or her lease, left and litigation ensued. Obviously, a buyer wants to avoid that; if you see tenant information missing, run your own credit check as part of your due diligence.
Considering the moist climate in Northern California, how big of a problem is mold?
It can be a real problem. You typically see mold claims in residential settings, but it can happen in commercial ones, too. Tenants must notify a landlord as soon as they suspect mold, because it becomes problematic once spores are airborne. Commercial leases should contain specific notice provisions required of the tenant to notify the owner of the first signs of mold.
A commercial tenant client recently suffered property loss and business interruption when a roof leak caused water to drip into the office space and storage room walls for months (possibly longer). When they opened the wall, they found mushrooms growing. Mold in a commercial setting is not as serious of a health risk as in a residence because no one is sleeping there, but you still can have people working around it eight hours or more a day.
If the problem is hidden in the walls, landlords have some defenses if they had no notice or reason to know. But if it’s indicative of a persistent water leak, the owner may be charged with constructive knowledge. The legal exposure is worse if the landlord knows and acts slowly to address the situation.
What key items need to be looked at when considering facility expansion?
The main concern is structural integrity and the foundation, making sure the soil will support an addition. Get engineers to check piers and other foundational measures.
If you’re doing an extensive renovation on an older building, you may need to bring it up to current codes. This cost estimate should be part of a preconstruction checklist.
Ask architects and engineers if they can incorporate green-building elements into the project. It may cost a little more, but it’ll speed up the permit process and can help in terms of public relations.
Although it’s difficult to get contractors to guarantee a maximum price because costs are based on time and materials, it’s a good idea to include a cap when bidding projects — a $50,000 job cannot exceed $15,000 in change orders. Otherwise, some contractors submit low bids, hoping to make up the difference in change orders. ●
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