What Would 2012 Look Like

In 1985, CBS News Predicts What 2012 Would Be Like

According to CBS News, 2012 looks a lot different than they predicted in 1985 on an evening TV newscast. Their prediction included:

Man would journey to Mars.

• LA would be the largest city, not true NYC still is the largest (and by a factor >2x).
• There would be cows the size of elephants, pigs a foot tall.
• Cars would be commanded by voice.
• Bathroom would be an entertainment center vs. just a bathroom.
• World’s largest city would be Mexico City with ~35M vs. today’s ~21M (slightly larger than it was in 1985)
• There would be drugs that would cure baldness, cancer and a host of other diseases.
• US workers would be working 6 hours a day, 30 hours wk.

Although things change, it is hard to forecast the future with any great accuracy.

However, there are some entrepreneurial elements of success that never change.

•  An individual’s core values still count.
• A good idea is just a good idea without focused execution.
• Expecting the unexpected leads to success vs. an ulcer.
• Failure properly viewed is only a stepping stone.
• Entrepreneurs are generally more satisfied with lives than traditional world employees.
• Without the right people success is illusive.
• A happy customer is still the most important component to success.

Some things never change.

Franchising – Stats

Here are some stats on franchising that you might find informative.

DID YOU KNOW…?

 According to the International Franchise Association:

• 825,000 franchise businesses across 300 business lines, which provide for nearly 18 million jobs and generate over $2.1 trillion to the U.S. economy.
• Franchising is said to account for more nearly 50 percent of all U.S. retail sales.
•  Franchised businesses generate nearly 9.5 percent of the private sector economic output.
• A new franchise outlet opens somewhere in the U.S every 8 minutes.
• Approximately one out of every 12 retail business establishments is a franchised business.
•  Jobs created because of franchised businesses were at least 25 percent of the private-sector workforce in all but four states and the District of Columbia.
• Business-format franchises accounted for more than 600,000 establishments. The balance of the over ~225,000 establishments (total of 825,000 – see above) are trademark franchises, i.e., auto dealers, gas stations, etc.
• Franchising is the predominant business format for conducting commerce directly with the public in the U.S. today.  AND, by all indications, this predominance will gain an even bigger foothold in our economy in the future.

Franchising is something that many entrepreneurs are seriously considering when thinking about getting into their own business. If you are thinking about your own business, you might want to do as a lot of others are doing and take a serious look at franchising.

How Growing Too Fast Can Cause Your Business to Fail

Have you ever heard of a business growing so fast that it went out of business? This may seem oxymoronic, but with the advent of Groupon and a host of other similar coupon offerings, this situation can be a painful reality.

In case you haven’t heard of Groupon, Living Social, or one of the many other companies offering huge deals and discounts on a variety of products and services, their business models are outlined like this:

A small business will use a company like Groupon to make an offer to new customers of a Buy One Get One Free, 50% Off or other amount of savings on their products and services. Groupon uses its extensive database to offer a limited number of its customers coupons from retailers, valid for a period of hours or days before the offer expires.

The common problem for retailers is that the types of customers who flock to these offerings are not necessarily profitable ones. With the economy still in a downturn and TV shows such as TLC’s Extreme Couponing, a cable show that educates viewers about getting cartloads of goodies for pennies on the dollar, there are dangers to businesses lurking if the wrong couponing strategy is used.

A study by Rice University found that over 25% of companies using Groupon actually lost money, and 18% were barely breaking even. The study also found that it may be hurting a company’s reputation. Still, some companies are delighted with the results because it brings in customers during slow parts of the day or week, and many of those first-timers become repeat customers, which is the intent.

In franchise circles there are stories of new franchisees that failed to carefully structure their Groupon offers and ended up attracting an avalanche of new business. This, at first, sounds like great news and the objective of working with a company like Groupon, but in these sitiuations the franchises actually lost money on each sale, hoping they would gain a high percentage of new customers only to be financially devastated when this did not happen. The combination of losing money on each sale without garnering repeat business caused these businesses to fail.

If you are an entrepreneur thinking about how to spend your advertising dollars, when offering major savings to acquire new business and repeat customers, be careful what you wish for –- you may just get too much of it.

Don’t Neglect the ACM

One of the reasons entrepreneurial startups don’t make it is the failure to account for the acquisition cost of new customers. I find that when I consult with entrepreneurs who have started new businesses that are in danger of failing, the missing element in each business plan is almost unanimously a firm understanding of what this cost of acquisition is.

For example, a startup I recently worked with allocated $45,000 for advertising in their business plan. On the surface, for a business in their sector this appeared to be a reasonable advertising budget. However when I dug a little deeper and asked how the $45,000 advertising budget number had been derived, I learned that the methodology for getting to that number was flawed. I’ll explain why:

The entrepreneur and his team used standard industry averages in obtaining the $45,000 figure. Upon further analysis, it was determined that the industry data that had been used was out dated. What’s more, the competitive business landscape has changed significantly over the last few years, increasing the cost of customer acquisition. I suggested the Acquisition Cost Methodology (ACM) be used in arriving at this startup’s accurate advertising budget.

To implement ACM, I asked the entrepreneur’s management team to figure out the average dollar sale that could reasonably be expected from each new customer. Next, I asked the management team to determine what the cost of acquiring a new customer was by analyzing hard data and crunching the numbers. This data may come from internal sources and be based on historical internal sales information, or, in the case of a true startup, this information may have to be obtained by carefully researching competitors’ data. This can take a lot of hard work, which is one reason it is rarely done, but this data is one of the most critical metrics in successful startups.

Finally, I asked the team to target a realistic gross sales number for the next reporting period.

This is a sample summary analysis of one of the clients I worked with:

Average anticipated sales revenue per customer $2500
Projected sales for the next reporting period $1,000,000
Average cost to acquire a new customer $150

From here it’s a straight forward mathematical computation to arrive at the number of new customers needed to achieve their sales goal. In this case, 400 ($1,000,000/2500 = 400).

Now, let’s analyze their existing budget and calculate what the real budget needs to be to achieve their sales goals:

Considering this startup’s existing $45,000 budget and the projected sales based on their customer acquisition cost, the number of new customers that will be achieved is 300 ($45,000/$150 = 300).

The actual sales achieved with a $45,000 advertising budget is in the range of $750,000 (300 x $2,500 = $750,000), leaving a short fall of $250,000 ($1,000,000 – $750,000 = $250,000).

If the right methodology is used to compute an accurate number for the advertising budget, the better budget would be $60,000 (400 x $150 = $60,000).

Although this may seem obvious, I find that very few entrepreneurs understand the importance of using the ACM in creating business plans and budgets. If entrepreneurs neglect this crucial strategy, they are likely to miss their sales targets — and more importantly, this may lead to an outright business failure.

How Successful Entrepreneurs Fail

If you read business news, you’ve likely seen reports over the last few months of the once dominant Eastman Kodak’s bankruptcy. How does a company like Kodak go from crushing any competitor that appeared on the horizon to being forced into bankruptcy?

And more importantly, how did a small start-up like Instagram with only 13 employees create enough momentum and value to be acquired by Facebook for a billion dollars all in under two years?

As I consider these two questions, I ask myself, “Why didn’t Kodak dream up a concept like Instagram?” They certainly had the engineers that understood pictures. In fact, pictures were essentially a part of the DNA of Kodak.

What was it that kept Kodak from leveraging their DNA, technology and understanding of photography to think outside of the box? At the time, their world was changing little and, perhaps, Kodak did not feel the urgency to evolve as a company since they were persistent leaders in their market — but this is a fatal mistake for any entrepreneur to make.

Michael Hawley, a member of Kodak’s board, best sums up the answers to my questions as he addresses this issue with one word: culture.

The phenomenon is also addressed by Clayton M. Christensen, a Harvard Business School professor, in his 1997 book, The Innovator’s Dilemma. In his book he explains “it was as if the leading firms were held captive by their customers, enabling attacking entrant firms to topple the incumbent industry leaders each time a disruptive technology emerged.”

Kodak was not the only photographic firm to disappear. In a 2008 talk at the Yale School of Management, Gary T. DiCamillo, a former chief executive at Polaroid, said one reason the company went out of business was that the revenue it was reaping from film sales acted like a blockade to any experimentation with new business models. This conveys Christensen’s “innovator’s dillema” precisely.

So what should every entrepreneur learn from Kodak and Polaroid? Innovate or die.

Create a culture of disruption. Be paranoid. Never be satisfied with the status quo. Never let success allow complacency. Encourage renegades. But most of all, never stop thinking like an entrepreneur.

Business Rules to Live By: Keep Your Friends Close and Your Enemies Closer — Part 2, Coopetition

Now that we’ve discussed in the last blog posting how the rules of engagement in business are changing from a winner take all approach to coopetition in competition, let’s get into more depth on how this shift in tactic can work for you.

Coopetition is defined as working with a competitor on a strategic or tactical initiative that makes more sense for both parties, as well as the customer, in delivering a superior product or solution.

Here are some venues where coopetition may make sense for your company:

• Your competition is marketing to similar or the same customers you serve. Why not better utilize your resources and  figure out how to leverage the dollars they are already spending?

• Your competition is investing R&D and innovating in your market. Two heads truly are better than one when trying to innovate in today’s fast-paced world.

• Your competition is testing, tracking and optimizing marketing strategies and tactics. A partnership may allow you to be included in their marketing at little or no cost to you, all without hurting profits of both companies and perhaps improving each of your bottom lines.

• There may be opportunities to upsell related services or products after the initial sale by including a special offer in each other’s product boxes (or packaging) and sharing the profits for each cross-upsell.

• If your competitor has a similar or complementary product, you may be able to integrate products and services that can be “bundled” in addition to your normal offering.

These basic suggestions only brush the surface of the possibilities available between two companies partnering to grow their success and profitability.  Hopefully these examples give you the idea that coopetition can be far more profitable than the pure winner takes all competition.

This thinking is best illustrated in recent business history with Bill Gates and Steve Jobs. Although they competed fearlessly in the marketplace, they also partnered when it benefited both companies. Politely stated, Jobs thought very little of Gates’ products, believing Apple to be superior in every way to Microsoft. But when Jobs needed support to rescue Apple from bankruptcy, he offered to allow Microsoft to build MS Office for the Macintosh rather than building a similar office suite in house, which he initially strongly preferred. This decision amounted to a huge investment by Microsoft into Apple of $150,000,000.

In this case, coopetition strategy benefited both companies and eventually led to the resurgence of Apple, which has now become among the most valued companies in the world.

Coopetition is not merely a trend, but is flowing in the direction business is going, so make this strategy work to your advantage now. Whether you are a small business, a SME, a franchise company, a franchisee, a startup business, a first time entrepreneur, a serial entrepreneur or an established line business that has been around for 20-30 years, it’s time you start thinking of the benefits of partnering or developing synergies with your competition.

Business Rules to Live By: Keep Your Friends Close and Your Enemies Closer

Is there synergy in working with your competitors?

I have often been asked this question in different ways and in many different venues.

A couple of decades ago, this synergistic thinking was considered heresy because the Jack Welch mentality was the popular management zeitgeist. His philosophy was a take no prisoners approach, a crush the competition and try to become the number one or two brand in every business type of strategy.

However, the lines between partner and competitor have blurred in recent years.

I believe too many businesses worry about what their competitors are doing and spend unnecessary management resources tracking every move their competitors make and often neglect their own business. They should be using their finite resources to differentiate their services and products to enhance their own position in the marketplace.

Smart entrepreneurs today are thinking about creating alliances with their “competitors” instead of worrying too much about what they are doing. These entrepreneurs follow the Michael Corleone philosophy espoused in “The Godfather Part II,” wherein Al Pacino (playing Michael Corleone) delivers one of the most recognizable lines in the film: “Keep your friends close and your enemies closer.” We hear this line echoed in many places today, but it’s something to remember when growing your business and working towards success as an entrepreneur.