Vertical Pulse

Definition of Market Share

Jack Welch, former CEO of General Electric, became famous for demanding that each of GE's business units become the number one or number two players in their industries. If the division managers could not capture the first or second market positions, Mr. Welch would insist that GE divest such businesses.

There are at least two major problems with this strategy. First, the division managers began defining their markets extremely narrowly so that they would be the leader or runner-up in their space. Second, by focusing on too narrow of a market opportunity, business leaders were missing opportunities that would have been discovered if their field of vision was broader.

Some Considerations For Starting Or Growing A Business

I'm sure as many business owners and CEOs can tell you, starting and growing a business is extremely difficult. It can be so overwhelming that business owners often turn to consultants or venture capitalists to assist in fund raising and operational expertise. Obviously a lot of planning has to go into business strategy, corporate culture, budgeting, competition, marketing, intellectual property, target costumers, law, costs, and location. I would like to focus on the last two.

Something that business development pros and venture capitalists may overlook from time to time is the impact of government regulatory costs on small businesses. It is something that owners should pay attention to. In September 2005, the U.S. Small Business Administration's Office of Advocacy reported that "research shows that small business continue to bear a disproportionate share of the federal regulatory burden ... the cost per employee for firms fewer than 20 employees is $7,647." Companies with 20 to 499 employees had a per employee cost of $5,411 while companies with 500 or more employees had a per employee cost of $5,282.

The study measured economic, workplace, environmental, and tax compliance regulations. "Environmental and tax compliance regulations appear to be the main cost drivers in determining the severity of the disproportionate impact on small firms. Compliance with environmental regulations costs 363% more in small firms than in large firms. The cost of tax compliance is 67% higher in small firms than the cost in large firms," the study points out. It went on to report that economic regulation impacted large firms more than small- to mid-sized firms. The authors conclude that regulation of international trade, which falls into the economic regulation category, contributed to the higher cost for large firms by virtue of their potential international reach.

The way things are going in Washington these days those costs will only rise. Small business owners should lobby their Congressional representatives to mitigate the cost impact of these laws.

Location, location, location. Another important aspect of growing one's business is location selection. Business 2.0 researched 10 major urban locations that have just about hit rock bottom because of the housing crisis, which may offer opportunities for investors. Dallas; Indianapolis; New Orleans*; Atlanta; Montgomery, AL; Mobile, AL; Memphis, TENN; Austin, TX; Houston; and St. Louis made the list. While the story focused on residential real estate deals business owners should take into consideration the low real estate prices and the pool of educated, skilled workers these locations offer.

Business owners along with their consultants and VCs should also consider the tax climate before expanding into certain locations. According to the Tax Foundation, Wyoming, South Dakota, Alaska, Nevada, Florida, Texas, New Hampshire, Montana, Delaware, and Oregon have the top 10 business tax environments, in that order. The 10 least competitive tax jurisdictions, beginning with the worst, are Rhode Island, Ohio, New Jersey, New York, Vermont, California, Nebraska, Iowa, Maine, and Minnesota.

Nardelli Back In The News

Robert Nardelli resurfaced in the news this week after a seven month hiatus when he left Home Depot as its chief executive in January amid criticism that his $210 million severance package was absurd. As we all know by now Mr. Nardelli will be taking the helm at Chrysler LLC to turnaround the ailing American auto-maker. Several months ago hedge fund Cerberus Capital Management acquired Chrysler through a classic private equity buyout deal. For the last several years executives have been leaving public companies (and the criticism that comes with it) to work for quieter, less noticeable private companies.

Shortly after Mr. Nardelli left Home Depot I wrote up a report for IncreMental Advantage that delved into the contentious issue of executive compensation. It explored some of the regulatory proposals aimed at executive compensation and why some executives were heading to privately-held companies. "As overall regulation and criticism mount, the media has reported on CEOs and other executives leaving public companies (or taking public companies private) for privately held organizations, and especially, private equity firms in the pursuit of making hefty sums of money without bearing public scrutiny. All of our sources who agreed to go on record said compensation and pay were of course a big factor in CEOs decisions for heading to private companies," the report states, which you can read in its entirety here.

Mr. Nardelli proved to be no exception to the trend. For months Mr. Nardelli had worked on the Chrysler deal for Cerberus, which has retained other big names like former U.S. Treasury Secretary John Snow, who serves as the firm's chairman. The Wall Street Journal today ran a story today about what Mr. Nardelli will bring to Chrysler, how the job may redeem his reputation, Chrysler's corporate strategy, and other issues surrounding the car-maker and its new boss.

These are some of the issues discussed at IncreMental Advantage's conferences. For more information please visit www.incrementaladvantage.com.

Competitive Intelligence

I recently read The Secret Language of Competitive Intelligence by Leonard M. Fuld. Among the pointers gleaned regarding obtaining competitive intelligence were: a) for intelligence to be truly intelligence, it must be yours alone (even if it is for a very short period of time); b) information about a competitor's equipment can be gleaned by conducting UCC searches; c) information about a competitor's factory lay-out can be revealed by reviewing floor plans on file at city agencies; and d) information about employee compensation and responsibilities can be discovered by reviewing job postings from competing companies.

Patterns of Extraordinary Careers

I recently read The 5 Patterns of Extraordinary Careers: The Guide for Achieving Success and Satisfaction by James M. Citrin and Richard A. Smith. This book was based on the research and years of accumulated observation of some of the nation’s most successful executives by these leading executive recruiters from Spencer Stuart. I found the book to be well-written and insightful.

Among the major findings in the book were:

• The most successful executives never take their job descriptions too literally and always find ways to expand their responsibilities within their organizations.
• The process of building a successful career is step-by-step and is similar to compounding interest. In a career, success must be measured by the positive actions taken, not the immediate results.
• According to Watson Wyatt Worldwide, low-performing companies have nearly twice as much turnover among top-performing employees as high-performing companies. 
• One’s value in the talent marketplace is derived from two distinctly separate elements – the value of one’s potential and the value of one’s experience.
• Extraordinary success is achieved by making those around you successful. Top-performers are almost always surrounded by other top performers.
• The most successful people do not like being managed, especially not being micromanaged. They prefer to be provided with a clear set of goals and objectives and given the creative freedom to accomplish their targets. The most successful people place a high value on being well regarded in their companies and industries.
• One problem with making yourself invaluable in your current job is that it becomes very difficult for your superiors to promote you.
• Clarifying and expanding the scope of what you have permission to do is a skill you must master for extraordinary success. The most successful professionals view their job description as merely a starting point – a platform on which to build.
• The best performers channel their energy into the events that matter the most. For instance, in 2002, Lance Armstrong decided to stop racing in the U.S.– except for one or two special events. Also, Tiger Woods plays fewer tournaments over the course of the year than his PGA brethren and previous champions such as Arnold Palmer and Jack Nicklaus.
• The most successful executives take liberties with their permission by doing the things that have the biggest impact on the value drivers of their organizations.
• When weighing options in life, most people try to determine the net present value of taking a course of action and then subtract the present cost of taking such action. However, the authors astutely point out that “In any investment decision, the value of the creation or reduction of options must also be considered.”
• The extraordinary organization is not merely a collection of successful individuals, but a creator of them.

Staying in the Flow

I recently read most of Flow: The Psychology of Optimal Experience by Mihaly Csikszentmihaly. This was an interesting, although highly pedantic, book about maximizing performance and satisfaction by getting and staying in the groove. Flow is defined to be the state in which people are so involved in an activity that nothing else seems to matter; the experience itself is so enjoyable that people will do it even at great cost, for the sheer sake of doing it. Research for Flow was conducted, inter alia, by monitoring people who wore an electronic paging device and by having these people record their feelings and thoughts whenever the pager signaled.

Among the interesting points of discussion in Flow were:

• The best moments usually occur when a person’s body or mind is stretched to its limits in a voluntary effort to accomplish something difficult and worthwhile.

• Attention is like energy in that without it no work can be done, and in doing work it is dissipated. We create ourselves by how we invest this energy.

• The eight major components of enjoyment are: a) The experience usually occurs when we confront tasks we have a chance of completing. b) We must be able to concentrate on what we are doing. c and d) The concentration is usually possible because the task undertaken has clear goals and provides immediate feedback. e) One acts with a deep but effortless involvement that removes from awareness the worries and frustrations of everyday life. f) Enjoyable experiences allow people to exercise a sense of control over their actions. g) Concern for the self disappears, yet paradoxically the sense of self emerges stronger after the flow experience is over. h) The sense of the duration of time is altered; hours pass by in minutes, and minutes can stretch out to seem like hours.

• Those who seemingly take huge risks derive their enjoyment not from the danger itself, but from their ability to minimize it.

Business Communications

I recently read 10 Simple Secrets of the World's Greatest Business Communicators by Carmine Gallo. I believe that the book did a great job of emphasizing the importance of delivering effective speeches and I found the book to be very practical in helping business leaders refine their speaking abilities. The following are among the most valuable pieces of advice imparted in the book:

• Never start a speech by telling a joke.
• Speakers must be well prepared. The less speakers refer to their notes, the better received they will be by their audiences.
• In preparing speeches, speakers should ensure that their comments cover: a) What audience needs to know? b) Why the audience should care? c) What action does the speaker want the audience to take? d) How can the audience save money? e) How can the audience make money? f) How can the audience boost its productivity? g) How can the listeners boost their visibility in their industry?
• Proper physical training is important as it leads to better posture, enables speakers to exude more energy and prepares people to handle the demands of a busy professional life. Exercise sends oxygen-rich blood to the brain. People who exercise are shown to do better on tests requiring critical thinking. If regular aerobic exercise can make you think better, then it should enable you to speak better.
• Speakers must be passionate about the topic of their speeches. The best speakers incorporate stories into their presentations.
• Words are not the only thing that matters when speaking. 55% of communications is visual (body language, eye contact); 38% is vocal (pitch, speed, volume variation); and only 7% of communication involves the actual words. According to research, the ideal voice must show emotion, be lower pitched, be moderately paced and must be free of distracting qualities.
• According to the International Journal of Instructional Media, the best speakers speak at close to 200 words a minutes. Speakers who speak faster than average are perceived to think faster than average and exude more energy and passion.
• The best speakers dress for success. People are flattered if they feel the speaker considered them important enough to look a little special for them. The best money spent is on things that create the image of success...perception creates reality. In fact, two professors from London Guildhall University found a correlation between attractiveness and career success. In a survey of eleven thousand 33-year olds, the professors found that unattractive men earned 15% less than those perceived as attractive. They even equated good looks with a higher probability of of lawyers receiving early partnership.

In Negotiations "Start With NO"

I recently read Start With NO by Jim Camp. I also had the pleasure of interviewing Jim and look forward to hosting him at our Mergers and Acquisitions Due Diligence Conference in New York on October 16-17, 2006. Jim believes that the win-win mentality that is popular with amateur negotiators is just a ploy to get the other side to compromise unnecessarily. While sometimes compromise is unavoidable, one should not begin negotiations with compromise which is a central tenent of the win-win mantra.

Among the lessons to be learned from reading Start With NO are:

• Never be obsequious to an adversary since this puts you at an immediate disadvantage.

• Control and lower your voice in times of inner turmoil. Never show the other side that you are feeling pressure.

• Don't fall into the trap of allowing the other side make you feel important because you have access to impressive people at important companies. The threat of losing this access often scares people into making poor decisions out of fear that they will lose such coveted access. Similarly, adversaries often try to befriend their opponents so that they will feel badly about disappointing or losing their friend.

• One negotiating tactic is to let your adversary feel that he is in control by purposely making small faux pax. Your adversary's illusion of being in control, allows you to maintain control.

• Don't let your emotions run ahead of the negotiations. Don't let fantasies of becoming a hero for bagging a major client or generating a large commission force you into unwise concessions.

• It is important to nurture (or, put at ease) your adversary. Such nurturing can be accomplished verbally and by body language.

• Instead of trying to falsely excite your adversaries to close the deal, you should repeat the closing offer several times to ensure that there is genuine buy-in.

• The simple act of note taking is important because it impresses upon your adversaries your sincerity and it focuses you on absorbing what your adversary is saying.

• When negotiating to hire a new employee, it is advisable to tell the candidate that you will not reveal the offer until the candidate gives a commitment to take or reject the offer. Thus, the candidate can not go back to his employer to demand a better deal.

• It is extremely important to frame the scenario that will likely prevail if your deal is accepted. You must be able to convince your adversary that your vision of the future makes your proposal worth accepting. For instance, if you are trying to drive down the price of an acquisition, you may want to try to convince your opponent that not accepting the offer will leave his company in a vulnerable position in an industry that is increasingly inhospitable to small companies.

• Do not let your opponent waste so much of your time contemplating an unattractive offer that you become amenable to such offer because you have already invested too much time and emotional capital.

• Don't let yourself be locked away during negotiations. Take breaks and walks to keep the energy up and the head clear. Alcohol can steal your energy. Beware of social gatherings combined with business.

• Agendas are important because they help maintain emotional control. Every interaction you have with anyone you want to transact business with must be preceded by writing down an agenda for that interaction.

• Be aware that negotiations never end. If your value proposition is not truly adding value to your counterparty, they will try to abrogate it.

To find out more on IncreMental Advantage's Mergers & Acquisitions Due Diligence Conference on April 17-18, 2007 in San Francisco, visit www.incrementaladvantage.com/conferences or contact Neomi at neomi@incrementaladvantage.com or 609.919.1895 x100.

The Art of War for Managers

I recently read The Art of War for Managers in which Gerald A. Michaelson adapted Sun Tzu's teachings to contemporary managerial practices. Among the wisdom imparted by this book is:

1)   The strength of belief that the purpose is morally sound rallies a fighting spirit and generates a firestorm of commitment.

2)   Too much time spent planning can breed indecisveness and error. It is often better to engage in some form of simultaneous planning and implementation. Tactical plans must be shaped in relation to reality with the information learned from contact.

3)   Think about providing opportunities for everyone to win. Make the award cycle short and issue rewards immediately after the event. Always gather an audience when you give recognition.

4)   To win one hundred victories in one hundred battles is not the acme of skill. To subdue the enemy without fighting is the supreme excellence. Thus, the best policy in war is to attack the enemy's strategy. The second best way is to disrupt his alliances through diplomatic means. The next best method is to attack his army in the field.

5)   Most battles are won before they are ever fought. Do not fight enemies that are much stronger thank you. As Napoleon said, "God is on the side of the heaviest artillery."

6)   There is a difference between instructions and orders. Instructions are expressions of the commander's wishes, not to be carried out unless maNifestly practicable. Orders are to be obeyed instantly and to the letter. However, orders can only be issued by an officer actually present with the troops concerned and fully aware of the situation.

7)   Keep on the Offensive: Being on the offensive preserves freedom of action and keeps you in control. The offensive action also strengthens the morale and confidence of the aggressor.

8)   Structure follows strategy, always. First determine the strategy to achieve your vision, and then develop the organizational structure. Finally, put the best people in place.

9)   Successful strategic thrusts are achieved by rapidly accumulating power (momentum) and releasing that power when it will have the most desirable effect (timing).

10)   When you cannot have absolute superiority, you must concentrate your strengths against your opponent's weaknesses to achieve relative superiority. It's a business fundamental that you must focus your resources where you can achieve decisive results profitably.

11)   In business as in nuclear fission, a concentration of energy must be attained to achieve the critical mass. The manager must focus his energy on performance of the tasks most critical to success.

12)   An ancient strategist once said, "Do not do what your enemy wants, if for no other reason than he wants it."

13)   When the enemy is not in dire straits but asks for a truce, he must be plotting. When the enemy sees an advantage but does not seize it, he is fatigued.

14)   When the soldiers are strong and the officers weak, the army is insubordinate. If a general regards his men as infants, then they will march with him into the deepest valleys. He treats them as his own sons and they will stand by him unto death. If, however, a general is indulgent towards his men but cannot employ them, cherishes them but cannot command them or inflict punishment on them when they violate the regulations, then they may be compared to spoiled children, and are useless for any practical purpose.

15)   Expect that plans will break down, that your opponent will behave in an unexpected manner, and that units will not achieve their objectives. Don't try to overcome the confusion by pausing to regroup after each breakdown. Keep everyone moving in the right direction.

16)   In internal politics, while defending your position, target your battle against processes and systems instead of individuals. The person you attack may someday be your boss. While you should not fight political battles you cannot win, when you fight political battles and make enemies, you run the risk of becoming weaker. When you can win and retain good relationships, only then can you become stronger.

Confidence

I just finished reading Confidence by Rosabeth Moss Kanter. In this book, Ms. Kanter explained that one of the key factors that enables winning companies and teams to continue their winning streaks is confidence in the entity's mission; confidence in leadership; the leader's confidence in the employees or players; and, the leader's ability to instill confidence on the part of critical external entities such as investors and the media. On the other hand, losing companies and teams are not able to reverse their misfortunes until they are able to generate confidence throughout their organizations.

Among other powerful points provided in Confidence are:

1)   On the way up, success creates positive momentum. People who believe they are likely to win are also likely to put in the extra effort at difficult moments to ensure victory. On the way down, failure feeds on itself.

2)   Failure and success are not episodes, they are trajectories. They are tendencies, directions, pathways.

3)   Winning begets winning, because it produces confidence at four levels: a) Self-confidence - an emotional climate of high-expectations; b) Confidence in one another - positive, supportive, team-oriented behavior; c) Confidence in the system - organizational structures and routines reinforcing accountability, collaboration, and innovation; and, d) External confidence - a network to provide resources.

4)   The Pygmalion Effect - in which treating people like high achievers causes their performance to improve - is powerful.

5)   Two beliefs shape a positive emotional climate in the workplace: first that it is possible to to meet high standards, and second, that there is a purpose worth achieving.

6)   "Kanter's Law" is that everything can look like a failure in the middle. Winners are truculent and keep charging ahead.

7)   Leaders must be aware that momentum is not running down. Early signs are that sloppiness is occurring around the edges and that less attention is being paid to detail. Companies and teams should try not to lose twice in a row.

8)   Perhaps the most important point revealed is that powerlessness corrupts. Powerlessness erodes confidence. When people start to feel that they are losing, it makes them want to hide, deny, and cover things up. Discipline erodes, respect decreases and isolation increases. They start to blame each other and head for the exits.

9)   Emotional contagion works to spread a positive atmosphere for winners, and it does the same thing to spinkle negativity in the vicinity of losers. People become adept at reading cues associated with the negative or positive moods. Body language becomes an important key.

10)   While mathematically each new game or each new quarter the scoreboard on the field might say 0-0, the scoreboard of history is already filled. Each game does not reset the organizational score to zero, any more than each quarter is a fresh beginning for a business or than each day is a new life for a person. Having performed well or poorly creates a legacy, a record, that is carried into the next rounds. Past performance shifts expectations, and expectations can often turn into self-fulfilling prophecies.

11)   In terms of fostering an optimistic outlook, there is merit in shutting one's self off from the news.

12)   Winners never give up. In Notre Dame football games, everyone expects something miraculous to happen in the last two minutes, so no one leaves. This is much different from the exodus of fans expecting other teams to lose the game in the final moments.

13)   Taking small steps to improve morale such as painting an office are often more important than grandiose speeches. Big visions are just words, but the equipment and decor are in sight every minute and make a difference in carrying out tasks every day. Also, all of the employees' spirits are lifted by such measures because they affect everyone.

14)   People are more likely to work harder when they believe their work is important. It is crucial to convince people that they don't have meaningless responsibilities, but that their efforts are a crucial part in achieving the mission of the company.

15)   One danger of companies relying on outside consultants is that doing so often sends a message to the employees that they are not capable.

16)   Resources must be shifted to support small wins that build confidence and then join with other wins to produce major victories. Start with small wins - things that people can control. Let them taste victory, and further victory will be in their sights.

17)   While not a part of management theory, it was interestingly to learn that South Africa had an extremely inclusive and democratic process when it went about drafting its constitution. A total of 1.7 million submissions were received by South Africans who shared their thoughts on what the constitution should include. After integrating the public submissions, over 4 million copies of the draft constitution, accompanied by explanatory material, were distributed.

18)   One indication as to the importance of optimism is that in 18 of 22 U.S. presidential elections from 1900 to 1984, the optimistic candidate won.