Monday, May 16, 2011

It's a Jungle

Steven Schussler's "It's a There" depicts an entrepreneurial narrative using his experience creating the commercially successful "Rainforest Café" as a framework for providing insights, lessons, and inspiration for any aspiring entrepreneur. Schussler narrative is made even more compelling since success did not come easily - he suffered the indignity of being fired, survived financial hardship, and was even "mauled by" his own dog! The dog mauling had to be a low point.

"It's a Jungle..." is developed around Schussler's five Ps for entrepreneur success - personality (do you fit?), product (do have something people need and will buy?), persistence (can you embrace failure and continue?), people (do you care for those around you?), and philanthropy (are you willing to give back?). He fleshes out each factor with examples from his experience and shares the hard lessons learned along the way.

I particularly enjoyed the section on personality. In this section, Schussler challenges the reader to reflect on the importance of passion. Will you have the level of passion required to overcome the failures, challenges, doubts, and uncertainties that will provide obstacles on the path to success? What motivates you to work? What motivates you to work 60+ hours a week?

The self-examination question he asked: “If were independently wealthy and never had to work a day in your life, would you still spend your time attempting to become a successful entrepreneur?” is a great question. Too many people attempt to do something for the wrong reasons. Whether it is money, recognition, or some other reason, without passion for what you are doing the persistence will not be there. Passion will also help to provide the inspiration for the sometimes desperate actions necessary to be successful. Schussler’s story of being nailed into a barrel to get the sales job is an example of going well beyond your normal comfort zone to accomplish a goal—all due to a high level of passion.   

Saturday, May 7, 2011

Week 8

International Markets

If I had a product that I could market internationally I would certainly consider doing so. Depending on the product or service proper planning is critical. International business success relies on a well-designed strategic business plan. One of the first steps I would take would be to learn as much as I could about the cultural and financial context of all the countries in which my business would operate. The next part of my plan would be to conduct detailed market research. The United States Commercial Service Market Research Library is a great resource to use because it links to each country's commercial guides.

 I would also try to understand the legal framework and develop contingencies to resolve potential disputes that may arise. For example, import and export duties and documentation vary with the country of origin and the destinations so compliance with these types of regulations can prevent ruinous legal disputes. It is also generally a good idea to find advocates in your targeted culture. In addition, some markets may best be entered by contractual arrangements or partnerships with companies within your targeted country. 

Before beginning international operations I would also make sure timing was right for my company. Expanding too quickly can be a big mistake. If the proper groundwork is not laid problems with internationally market can be a drain on resources and time. Local, regional, or national markets may be more feasible to develop for a new company.


Week 7 Posting

Pros and Cons of JIT

A solid JIT system is built around a number of core elements:  build-to-order manufacturing, large-scale customization, partnerships with suppliers, just-in-time components inventories, direct sales, customer service, and extensive information sharing with both supply partners and customers. Utilizing this strategy it is possible for a company to achieve "virtual integration"—a combining of a company's business with its supply partners and customers in real time in such a way that all three entities appear to be part of the same organizational team.

There are numerous benefits to such a system. The most obvious benefit is near zero inventory which results in tremendous cost savings. A typical computer manufacturer, for example, has a tremendous amount of resources tied up in inventory. A company using JIT is in a very different financial position. An order would work something like this: a customer calls the company or visits the company website and places an order for a computer and pays for the order. The company then orders components from suppliers and begins assembly when they receive the components. The company typically pays the supplier within 30 days. Instead of having millions of dollars tied up in inventory which may not sell for weeks and months, a company using JIT can be paid by the customer before they incur any significant costs. Also, the cost of computer components tend to go down over time so a traditional manufacturer's cost of components may be higher. In addition to freeing up cash, other resources, such as resources used for warehouse space and workers, are liberated to use elsewhere in the company. 

The primary disadvantage to JIT is its relative complexity. Management must reconsider the entire work flow of the company, from the intake of raw materials to the output of a finished product. Supply-chain relationships must be nurtured involving multiple suppliers, closer locations, or companies that can supply materials with little advance notice. Quality control issues can lead to shutdowns due to defects. Staff must be flexible and well trained to understand more of the entire process and shift to where they are needed as work flow ebbs and surges due to customer demand swings. This overhaul requires a sizable investment of time and money initially, plus a commitment to stay the course in implementing JIT, otherwise the system may never gaining traction within the corporate culture. Supply-chain interruptions can also be problematic. The recent disaster in Japan has created numerous hardships for companies with suppliers in that region.


Quality Control Gone Awry

A common problem with quality control occurs when management uses quality assurance metrics as part of employee evaluation. One reason this can be a problem is that the metrics can be manipulated by the employee.  The purpose for using metrics as an evaluative tool is to influence the behavior of the employee, often with the best of intentions. Unfortunately there are often unintended consequences of using metrics to evaluate employees.

Years ago I worked for a well known bank which used a customer service metric as part of employee evaluation for their brokerage division.  Customer wait time was considered an important measure affecting customer satisfaction. A monitor with real time data for customer wait time and the number of customers waiting was prominently displayed. when the work load was manageable customers usually experienced little or no wait. However, during heavy volume times the number of calls could overwhelm the ability of the brokers to service the customers within a reasonable time. Wait times could exceed 10 minutes with heavy volumes. The long wait times created considerable anxiety with customers concerned that they might lose money or miss an opportunity to make money while on hold. In an attempt to improve customer service management decided to make wait times and the number of calls answered a quality control metric for employee evaluation.

There were at least two unintended consequences of this method of evaluation. The first was that while brokers began answering more calls the calls tended to be shorter in duration, often to the point that the customers complained that they were not getting the service they required. Another problem was that brokers began to "game" the metric by answering and immediately releasing calls. The customer had no idea what happened since they never spoke with a broker so they would call back. This manipulation of the metric was a particular problem at closing time-5pm. The departmental policy was to answer any calls remaining in the queue at closing before switching over to an answering machine. The problems surfaced during heavy volume days when 40 customers could be in the queue at 5pm. Some brokers would simply answer and release calls in a rapid-fire manner to empty the queue.

While the metrics may have shown a substantial improvement in calls answered and wait time customer complaints increased accordingly. Unfortunately management was slow to realize that their metric was creating problems so the division lost a number of customers. I have posted a cartoon which, I believe, summarizes my point well.   


Sunday, May 1, 2011

The Impact of Fraud on Small Business

Businesses of all sizes are susceptible to Fraud but small businesses are particularly vulnerable because they often lack stringent internal controls to prevent fraud. Losses due to fraud in smaller businesses often go unnoticed or are attributed to lower sales. The current recession has led to an increase in fraud as employees supplement their worsened economic situations through fraudulent means. The Association of Certified Fraud Examiners reports in the Report to the Nation on Occupational Fraud and Abuse  that the median loss suffered by organizations with fewer than 100 employees was $200,000, a figure higher than the median loss in any other category including the largest organizations.  

Highlights of the report include:
  • Check tampering and fraudulent billing were the most common small business  fraud schemes.
  • The typical fraud in the study lasted two years from the time it began until it was caught by the victim organization.
  • The most common fraud scheme for businesses of all sizes was corruption, which occurred in 27 percent of all cases. Fraudulent billing schemes happened in 24 percent of the cases.
  • Financial statement fraud was the most costly category with a median loss of $2 million.
  • Occupational fraudsters are generally first-time offenders.
  • Fraud perpetrators often display certain behaviors that can indicate possible illegal activity. The most commonly cited red flags were the criminals living beyond their apparent means, or experiencing financial difficulties,
  • In financial statement fraud cases, excessive company pressure to perform well was a contributing factor.

The implementation of anti-fraud controls appears to have a measurable impact on an organization’s exposure to fraud. Many of these controls may seem like common sense but they are very effective when properly employed.

Steps to reduce fraud:
  • Let employees know you are looking for fraud.
  • Conduct background checks and drug screenings for people handling inventory and money.
  • Maintain strong internal controls.
  • In retail locations use video camera monitoring at cash registers and where inventory is stored.
  • Conduct surprise audits.
  • Use a third-party hotline to solicit tips from employees: customers and vendors are also potential sources for tips.
  • Establish a written fraud policy: a formal fraud policy should be established and communicated to employees through orientation, training, and other ongoing communication. A policy does not have to convey a lack of mistrust towards employees; a more productive approach would be to make employees part of a fraud prevention initiative by making them aware of ways to spot fraud and what to do if they suspect fraud.     
  • Require mandatory vacations.

Useful Links

A company's creditworthiness is determined by what are known as the four C's of credit: character, capacity, capital, and conditions. The components of the 4 C's can be found can be found in the company's credit report.
Character includes factors such as size, location, number of years in business, business structure, number of employees, background of principals, willingness to share information, media coverage, legal history, stock performance, and comments from references.
Capacity assesses the business' cash flow situation which is a measure of the company's ability to pay its bills. It also includes the structure of the company's debt, and the existence of any unused lines of credit. Any defaults must also be disclosed.
Capital assesses whether a company has the financial resources repay its creditors. In general, this portion of the credit report contains the most objective information reviewed by credit analysts. The most consideration is given to information from financial records and statements such as working capital, net worth, and cash flow.
Conditions consider the external factors surrounding the business:  market fluctuations, industry growth rate, political/legislative factors, etc.

 Capacity, Condition, and Capital helps answer the ability to pay question.  However, these three Cs of Credit do a very poor job of answering the more important question of Willingness to Pay. Character does a better job of addressing the question of willingness to pay, which I believe, is the most important "C". The company's overall reputation as well as the history and reputation of the principals are perhaps the best indicators of the company's character.

Useful Links:

How does the extensive use of credit cards by their customers affect small businesses?

For entrepreneurs, the benefits of credit card use by customers includes the fact that credit cards are an important source of financing and have enabled a vast expansion in the market for the goods and services they produce. Credit cards also guarantee payments and have become a critical instrument for helping entrepreneurs weather the economic recession. Credit cards also enhance efficiency for small businesses, and eliminate major costs that they would incur if they had to establish their own credit and billing systems. 

While credit cards have offer many benefits to small business they are not without their disadvantages. The costs associated with credit cards can be a concern, especially if the business is operating on slim margins. Many credit card processing accounts will charge a discount fee per transaction. This is a percentage of the total purchase amount that will be charged to the retailer for processing the credit card transaction. In addition, many will also charge a per transaction fee of 20 cents to 50 cents. Some merchant accounts will also charge a monthly, quarterly or annual fee. Due to the variation in fee arrangements it is a good idea to shop around and find the best credit card processor based on the needs of the business. It is also important to note that many times, the processor will charge for every transaction that is made, including for refunds. Businesses often complain that the charges by the card companies are unfair. A common complaint is that the business owners are the ones paying for the rewards programs advertised by the credit card companies. Business owners also complain that credit card companies use rewards programs to entice consumers into using credit cards instead of debit cards. Since credit cards costs businesses more to accept so business owners are often unhappy with this practice.    


Three Ways for Reducing the Risk of Credit Customers

1. Set Up a Credit Policy
With customers losing their jobs in our current recession and getting behind in payments or even defaulting entirely it's time for small businesses to examine their credit policies. The following simple steps can help improve a company's credit policy and improve the percentage of customers who pay on time.
1. Print out or buy credit applications.
2. Have the applications available at your business, or on your website.
3. Have every new credit customer fill one out.
4. Mail one to every existing customer with a stamped, addressed envelope.
5. Check ALL references.

2. Implement Your Credit Policy
It’s one thing to set up a policy, it can be quite another to enforce the policy. The business owner should decide at the beginning of the process of setting up the policy how they will handle customers who do not pay.
·        Do you want to revoke that customer’s credit?
·        Do you want to freeze until the past-due balance is paid?
·       Will you call the customer or mail a letter?
·       Will you involve the person who made the sale?

It’s important to refer to your policy when answering these questions. Consistency is vital to an effective credit process.

3. Review and maintain the policy. It is important to make sure that you don’t get into the habit of letting your receivables become overdue. Monitor your approved customer and make sure the credit applications stay up-to-date, as well as a credit limit that works well for them and for you. If anyone is past due, take steps immediately to resolve any issues.

Good review procedures include:

·        Reviewing your accounts receivables monthly.
·        Stay motivated to collect as much money as possible.
·        Stay focused; don’t let excuses veer you off track.


    Saturday, April 23, 2011

    What are the Pros and Cons of Doing Business Entirely Online?

    The internet and related technology has opened new frontiers for entrepreneurs seeking to start new ventures. E-Commerce is not suited for every business situation. Entrepreneurs need to carefully review the pros and cons of an online business and decide if it is a good fit with their business model and personal strengths and goals.

    eBusiness Pros:

    Lower costs: Start-up costs are relatively cheaper than bricks and mortar businesses. If you are setting up your own website with your business plan you may only need to pay for a domain name and web hosting which could cost less than $100. More complex sites may require many thousands of dollars to develop but when compared to opening a restaurant, for example, the costs are very low. In addition to lower start-up costs, overhead, operational costs and administrative expenses are also relatively lower than other businesses due to little or no staff required as well as lower (or zero) physical location costs.

    Global Web presence: International customer access is crucial to many businesses in our global economy.

    Business conducted 24/7

    Quick response to customers: Information that customers need can be readily available online in a convenient format. Technology also enables many automated services which makes shopping fast nad convenient for customers.

    Control and flexibility: The fact that they are doing if online means they can do it anywhere, anytime, be it at the office, at the park, or from the comfort of your own living room. Work from home or remotely: Spend more time with your family.

    eBusiness Cons:

    No immediate customer visibility: Customers cannot see or evaluate your location. Customer awareness for your business may be slow to develop due to the considerable time and expertise required to build web traffic.

    Lack of physical contact with customers: Customer loyalty is often forged with direct physical interaction with customers. Credibility and trust are also enhanced when customers know where to find you. Online is still seen as inherently riskier.

    Constant need to maintain sites

    Long hours: Just because there is more flexibility with an online business does not mean a reduction in working hours. In fact, owners of online businesses may find it difficult to distinguish between working hours and personal/family hours.

    Competition is high: Increasingly people are becoming aware of the advantages of running an online business and also more technology savvy and are starting and growing online businesses. With the number of people starting a business online increasing at high levels there is greater competition for traffic which makes it harder to break through. Even when the entrepreneur has a winning business model, competitors can often easily copy it and therefore impact negatively on profits.

    Consumers prefer to buy some products in stores: Some products are better sold in stores where they can be inspected, tried on, or tried out. (Interestingly, there is a growing segment of consumers who will inspect a product in a store and order the identical product online.) Other reasons to buy products in stores include convenience and additional services such as installation, expert advice, maintenance agreements, etc.

    Useful Links