3 posts from August 2009

Value of Marketing

Many business owners (going concern or pre-revenue) are surprised that a key starting point for MacDuff Partners' engagements, after conducting a 360° business audit, is to begin defining a company's brand. We start with "brand" based on experience that strongly demonstrate branded companies and products lead to superior profitability.

Brand is the character of a business, along with the essence of what is promised and delivered to customers every day. As important to company owners, brand strategy provides the organizing concept, a theme, from which to lead an entire company. By extension, having a clearly articulated brand integrates the company's vision and mission and is the platform for sustainable wealth creation when the company is sold.

As small business owners struggle accepting brand as the core asset for a company, it appears management of Fortune ones do as well. A recent article in Advertising Age discussed a finding that on a global basis only P&G and Reckitt Benekiser communicate the importance of brand to the bottom line. The article summarizes a global survey by the Institute of Practitioners in Advertising in the UK covering the top 50 marketing spenders on all continents.

Ad Age gives an example of P&G as a thought leader in business communication based on their annual reports. The article pointed out that P&G's marketing strategy was integrated into the company's overall business commentary. A.G. Lafley, Chairman, explained throughout the report on a brand-to-brand basis how his company's focus on innovation and understanding customer needs delivers high value. (See our discussion of customer focus.)

An analyst, Seamus Gillen, concluded:"There's a correlation between how a company talks about its business and how it runs its business. The stronger the role played by brands in generating a company's revenues, the more important it is for there to be appropriate disclosure on the role of brands in developing and delivering the value proposition." Net, net, even for publically traded companies, strong brands translate to revenue, and revenue to value, thus value to wealth.

Many books and programs are dedicated to methods and practices for developing brands. Look in the MacDuff "Resources" section from some tools to use. A terrific quick read on brand building was written by Allen Gorman, President of Brandspa, "Briefs for Building Better Brands".

All business owners must spend time re-thinking the value of their company's and product's brands. Despite day to day operating challenges, time conflicts and emotional hurdles we go through running our businesses, long term brand equity is the critical asset for wealth creation.

Government Created Markets: New SME Business Opportunity Part II

Earlier I discussed the need for business owners to reconsider government created markets as part of their strategic plans. McKinsey illustrates this point extremely well in an article called Electrifying cars: How three industries will evolve.

The essence of strategic thinking is understanding that there is enormous wealth and brand equity to be created due to the inherent volatility of government legislated or controlled markets. The issue for each entrepreneur is to identify the strategic entry point, develop a plan to exploit the opportunity and take action.

I am not taking a moral or political stance. This is about wealth creation (freedom) within government created economies. Pharmaceutical, oil, nuclear, tobacco, mortgage and even liquor industries experience the vicissitudes of political action. Scale of opportunity and threat of loss is beyond historical precedence in our current economic ecosystem.

Yet, it is impossible today to forecast where opportunities will lie. First, most of congress does not even read bills they pass (excerpt from healthcare discussion). Senator Hoyer from Maryland, for example, even derides the concept of reading them because it takes too much time.

Secondly. unexpected events may subvert a seemingly winning decisions. For example, unions stopped the building of solar panel plants and solar farms in California by issuing a 62 page data request with the California Energy Commission related to alleged environmental violations. (California mandated renewable energy use a a percent of total. Never-the-less politicians sided with unions to extend the reach of environmental laws originally intended for other purposes, and apply them to desert land being developed for solar farms.)

Despite uncertainty and volatility, my belief is entrepreneurial businesses must participate in legislated new markets. The entry point is likely to be in supporting core infrastructure companies. Through analysis, get to know target customer needs. Either building information or e-commerce web sites or coaching executives in high stakes presentations; whether advising gas station chains to install electric recharging units or junk yard facilities to convert from metal reprocessing to battery recycling, opportunity calls. Analyze market data. Anticipate and respond to the future politicians are creating.

Think deeply and act boldly now or prepare to reap the winds of inaction.

Obamacare will Bankrupt My Company!

In a meeting last week, a business-owner client with about thirty full-time employees made a comment that the pending changes in health care would bankrupt him in several years despite reductions in his work force to control operating costs.

Later, I asked Scott Peloquin, CEO of benefEx, a leading New Jersey employee benefit consultancy for small and mid-market companies, how I should begin advising my clients to think about the upcoming changes in federal health insurance mandates.

Scott said: “First, I don’t think the reforms now being discussed could possibly go through.  Even if they do, the most efficient solution today is for employers to deploy a consumer driven program, rather than retaining more traditionally designed – and expensive - plans. This was innovative thinking to me about how to rebalanced risks and costs, so I rhetorically wondered how the program worked and what a representative cost impact could be.

“In a nutshell traditional plans charge about $4,000 monthly in premiums to insure about $3,000 of up-front risk, or ‘deductibles’ (think about this as though you were lowering your annual auto insurance premium by increasing your deductible from $ 500 to $ 1,000).  The current higher cost arrangement is profitable for the insurance company commission-based insurance brokers.  High-priced insurance also produces disproportionate revenue for state governments which further increases health insurance costs. 

This ‘dirty little secret’ rarely enters the discussion, that states embed a premium tax into insurance rates as a flat percentage of gross premiums.  New Jersey is so concerned by the potential loss of premium tax revenue as companies switch to consumer driven programs that it is requiring a “declaration of understanding” attestation – part of a effort to dissuade employers from offering these more efficiently designed health care financing programs.

For example,  a 7-employee company paying nearly $98,000 / year for their health care program, before proposed rate increases to more than $111,000 in 2010.  Working in conjunction with the company accountant and HR administrator, they were able to restructure the health care financing so the worst case scenario cost was under $75,000.

Employee contribution rates and out-of-pocket maximums were reduced, and – if the plan performs better than expected, the employer may recover as much as an additional $25,000, thanks to a federally approved ‘dividend’ structure  an important, recurring part of the plan’s architecture.

Though he did caution that each company situation is unique, he stressed “…the same principal applies whether an employer has seven, seven hundred, or seven thousand employees!”  He also pointed out that benefEx converted 85% of clients to some form of consumer-driven healthcare solution – as compared to an industry standard still hovering around 7%.  Not a single employer group has returned to a traditional plan, which speaks well to both the sustainability of consumer driven program, and their popularity with covered employees.”

This issue is of major interest to company owners.I believe significant tax increases targeting small businesses next year are inevitable, thus recommend that owners spend at full available. Invest specifically on building a rock solid team of employees, along with a strong brand.Companies that do so will be best positioned in their markets six – eight years from now (when tax policy reverts to a more rational structure) to gain profitable market share, or enter into a profitable merger / sell transaction.

Other insights Scott shared with me is that businesses must proactively assess their Family Medical Leave Act (FMLA) and COBRA compliance. Speculation is that federal regulatory actions positioned as worker protections may be launched as “revenue enhancement” initiatives. From a cost management standpoint, outsourcing the complex administration of these federal mandates is more effective than in-house administration and more efficient since outsourcing costs dropped by 50% over the last three years.

Business owners building a highly profitable company in this political and economic climate need consider implementing a thoughtfully designed disability program. Done smartly it could mitigate some risks associated with FMLA. Communicated properly, more than two thirds of employees may actually volunteer to pay these premiums rather than having employers pay, due to the adverse tax implications inherent in most employer-paid disability plans.

The lesson to be learned is that owners must ramp up innovation throughout their companies. Innovation is required not only for profitable new revenue production but also for ongoing cost management. Building a highly profitable company demands customer focus more than ever, supported by a cohesive employee team.