THE VALUE OF BEING CLOSE

THE VALUE OF BEING CLOSE

Doing business in the US seems challenging and difficult, because it is challenging and difficult even to a US business person. In this post, I am going to try to relate to you two stories; one was a personal experience and the other a story of a person who I grew to admire and who I now recognize as a mentor in many ways. Both of these stories have common elements and key decisions.

Eastern Distribution

In my first general management assignment, I was named as President of a Division, part of a large office furniture manufacturing enterprise business, It was located in Seattle, Washington, which is in the far northwest corner of the lower 48 states in the US.

The division was a startup five years earlier, and an acquisition two years earlier. In its entire previous history, it had never made a profit. What was valuable and prompted the acquisition was a very strong product-market fit. Operationally, however, there were many issues. The first order of business was to address these issues. My team made enough changes, in about 90 days, to bring the cost structure into line and make a small profit.

Our Problem

Operational competency, however, was not the only strategic issue. Business growth was stagnant and we needed a way to appeal to more target customers.

The key part of our value proposition hinged on short lead-times and quick deliveries.

Our customers on the West Coast of the US were satisfied with our lead-time performance and business was slowly, but steadily growing. However, the “buying power” of the market west of the Rocky Mountains was only 36% of the total market in the US. For us, about 70% of our business came from the west.

To customers east of the Rockies, most of whom are concentrated on the east coast, we might as well have been in China. They simply had no faith we could be a quick, responsive company if we shipped everything from Seattle.

In reality, the time it takes freight to go from West to East is only a few days. However, reality is not the same as perception. And perception is what controlled the buying determinant in the mind of our potential customers.

Our Solution

Any form of marketing gimmick or trickery was not going to succeed. What we needed was a facility and a team which actually manufactured and delivered from an East Coast location. This is easier said than done.

In the movie “Field of Dreams” there is a line in the script “if you build it, he will come”, which was reference to a long-dead, but talented baseball player. For some, this has become a business reference.

Did we have that much faith? I can’t say we did.

Nor have many others. One of the tenets of the “Lean Startup” movement is to do only what is necessary to validate your business model before you commit to completely building your product.

To validate our thinking, we need to start in a small way.

The first step was to name the general manager for the not-yet-built eastern facility. In retrospect this was a very good decision. The candidate for this position came from the inside of our business and had a strong understanding of the way we operated the business.

The direction I gave the general manager was to find a place where our business would be welcome, our cost structure could be low, talent and labor would be available, and a place where he wanted to live.

After a few months of discussion with state and local government business development agencies, we settled on a community along the main north-south interstate highway in central North Carolina. Transit time for freight to Boston, Massachusetts and Miami, Florida was about the same. The city development agency was very helpful to navigate through all the challenges with permits, zoning laws, and other red tape.

There is a saying in the real estate industry. The value of a property depends on three things; location, location, and location.

The next step in our expansion process was to lease a temporary facility and produce just one product line. We wanted to validate the importance of the location.

After about another six months, we had our answer. Business in this product line was growing nicely and we were attracting new customers. This gave us the confidence to move ahead boldly.

As the next step, we built a full scale, fully capable factory, with identical processes and capabilities as those in the factory in Seattle. This enabled us to ship any order from either factory. To balance our workload between the factories, we arbitrarily said orders from west of the Mississippi River would go to Seattle, and those to the east to North Carolina.

Sometimes this didn’t exactly work out and we jokingly said we were moving the state of Texas to east of the river as the time and cost to Texas was about the same from either location.

What was the end result? In a matter of just a few years, our orders from east and west mirrored the buying power of the regions. The total business ultimately grew 5x.

Wolfgang Hafele

Wolfgang has unfortunately passed away but looking back I remember him as a friend and mentor. What follows was told to me by Wolfgang so forgive me if there are any inaccuracies.

Wolfgang was born in Berlin during World War II. His father was killed during the war. The family business made and distributed furniture hardware and components. After the war, Wolfgang was too young to play a role in the business and his mother brought in professional managers to run the business.

As Wolfgang grew up, he developed a stronger interest in the business and desired to be involved.

The professional managers didn’t want to be bothered by the founder’s offspring and looked for ways to keep him away. Wolfgang was gregarious, creative, fun-loving, and disruptive. He would stand on a chair at the back of management meetings and ask embarrassing questions.

Obviously there was conflict with the staid German management team.

By the mid-1970’s, the managers said to Wolfgang, “why don’t you go to America and start a division there?”

So he did.

The German managers were quite pleased. Their “Wolfgang” problem was solved.

The “solution” was temporary.

Wolfgang started his American division, located incidentally in central North Carolina, and began with a small warehouse. He published and began distributing a catalog in the US. He soon generated a lot of business as the competition for his products was weak. It didn’t take long before a new warehouse and distribution facility was needed. Subsequently, he built a second distribution center in Los Angeles.

What was the end result? The US Division of Hafele became the largest of their divisions around the world, larger than the German Division.

What is common to these stories?

Leadership

In both cases, the assignment to develop and grow the business was assigned to an insider in the business. This assignment was the first step. Building a facility was not the first step. Hiring a sales team was not the first step.

Why is this important? Leadership which knows something about the business is important. Sometimes this is known as “tribal knowledge”. There are always unwritten aspects to a business which an outsider or stranger does not know.

Also, establishing business in a new location or new country is a big assignment. As the top executive in a business, you want someone who you know something about. You know their performance, capabilities, strengths, and weaknesses.

You are also likely naming someone to the position who your organization respects and admires. Even the most capable manager needs the support of others.

If you make the assignment to a stranger you interview and hire, you are not clearly in a position to compensate for issues where they lack understanding or ability.

While your plans for expansion into the US might still be viewed as a process, it is important to have people who fit the process on your team.

Validation

In both of these stories, steps were taken to “test” the business plan before committing to large expenditures. These tests were not the product of surveys or opinions. They were tested by seeing if actual customers would buy products.

The problem with validating your ideas with a survey is people, usually by default, want to encourage you in their efforts. They will tell you what they think you want to hear.

The answer from a survey is not the same as getting validation with real orders from real customers.

Buying Power Concentration

In both of these cases, the businesses adopted an Eastern US, Western US structure. This is obvious if you study the buying power of the two geographies. In the US, buying power is concentrated on the coasts.

If your business plan needs more granular alignment to buying power, you can get more detailed information from the US Department of Commerce. There are statistics available by industry for every state and/or metropolitan area. There is no cost to get this information.


 

About Bob Kroon

Bob is a coach and consultant whose efforts are devoted solely to the success of CEO’s, Owners, and Founders. He has over 25 years experience in General Management roles such as Division President, COO, Group Vice President, and CEO. His clients are primarily in the San Francisco Bay Area. He serves as a mentor in the Innogate Accelerator. He has over 30 years experience as a student and practitioner of LeanThinking.