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Archive for the ‘Management’ Category

Organize the Business Structure That Is Right for Your Opportunity

Sunday, August 23rd, 2009

by: Geoff Ficke

Every business requires a structure that will withstand necessary legal and governmental scrutiny. The choice of how to organize a new enterprise should be made based on the needs and capacity of the owner(s) to maintain and detail the records, history and finances of the business.

Many simple service businesses are set up as a sole proprietorship. The lawn service I utilize is a sole proprietorship. I make out the check in the name of the person providing the service. If I do not spend over $600 per year with any sole proprietor I am not required to fill out tax form 1099 and provide the information to the Internal Revenue Service and the service provider.

The sole proprietorship is the method of structuring most entrepreneurs utilize when starting out in a small-scale commercial venture. This works if services provided are simple, of relatively small transaction size, small inventory required and there is no need for hiring and paying employees. As sales grow and the need to expand becomes apparent the entrepreneur will probably want to consider a more formidable structure.

Here is my advice when considering the business structure best suited for your business, based on present and future needs: consult an attorney. Taxes, investment vehicles, partnering, harvesting profits, incorporation options, and depreciation or only a few of the areas of concern a new business may need to consider and decide upon. A business attorney will have expertise in every area of concern and can construct the most appropriate structure for your business and personal needs. The ability to memorialize in precise legal documents the exact terms, conditions, and responsibilities of all officers and/or share holders in the company is invaluable when disagreements occur.

The importance of written agreements and contracts, signed by all parties to the transaction, cannot be overstated. No one ever enters into a business situation if they are 100% sure it will fail. There is always an air of confident expectation that the business has a good chance of success and will ultimately prosper. Unfortunately, there is always a significant chance that results will be disappointing and disagreements will occur. Make sure that all parties to a deal have a full awareness of the business structure they are participating in.

Oral contracts and agreements have been upheld in courts. However, they are much more difficult to enforce than properly written and executed business contracts. Do not leave important details to chance. Have proper documentation on hand for the protection of all parties.

Partnerships, limited partnerships, limited liability corporations, and corporations are popular vehicles for housing the legal structure of a business. Each has benefits and liabilities, depending on the needs and requirements of the business owner(s).

A partnership can be useful when several parties bring complimentary assets to a venture. One partner might have a patent that represents a commercial opportunity. Another might have investment resources they can bring to bear. Yet another potential partner has specific management experience to contribute.

I have entered into several partnerships in the past with mixed results. If there is a bit of advice I can offer to potential partners before they start it is this: have full agreement on how to harvest profit/loss when success/failure occurs. One partner wants to grow and mature a business, while another wishes to cash out after a few years and this is where the seeds of destruction are sown. Goals, as well as duties and responsibilities must be fully transparent.

The Limited Partnership can be an excellent opportunity for the entrepreneur wishing to put capital to work, but not physically committing to work on a project. Typically a General Partner will manage the business, and the Limited Partners provide the pool of money required in funding a business. Usually units of a Limited Partnership are sold in equal dollar amounts. Be sure and read the deal prospectus carefully and skeptically. In addition, be sure to familiarize yourself with the laws of the state where the business entity will be domiciled as the various states have different laws in this area.

A Limited Liability Corporation is a relatively new corporate structure that offers many of the advantages of the corporation and the benefits of individual tax rates. An attorney will be able to advise if the Limited Liability Corporation is appropriate for your particular needs.
A Corporation is the vehicle that requires the most care and maintenance, as well as providing maximum personal protection. A Corporation is ostensibly a legal entity that acts as if it were a person. Losses are incurred by the legal entity of the Corporation, not by the shareholders of the Corporation. Assets of an incorporated business are property of the Corporation, not the individual shareholders. The owners of stock in the Corporation enjoy benefits based on the number and class status of their shares.

An attorney can advise the best state in which to incorporate based on your anticipated needs. Nevada is the best state for secrecy. Delaware is excellent for transparency and resolution of disputes. Some states are more business friendly from a tax and regulation standpoint and all of these areas must be considered before filing for incorporation.

A Corporation will need to be assigned a Federal Identification Number in order to open a bank account at any financial institution in the United States. The Federal Government utilizes this number when tracking tax, financial and employment data on every incorporated business.

The Articles of Incorporation, annual meeting minutes, a board of directors, corporate fees and filings, state compliance and filing local, state and federal tax returns require a detailed, and potentially costly execution of corporate governance. In addition, stock certificates must be appropriately accounted for and capitalization requirements met and maintained.

Be realistic when choosing the business structure that will offer your fledgling enterprise the most useful features based on present and future needs. Many people file for incorporation, then realize they do not need the hassle of maintaining detailed books and records. Use the business structure that enables you to legally perform every obligation required, while allowing you to be a slave to your business opportunity, not a slave to your corporate structure.

Why Great Companies Become Also Rans – Consider Firestone

Monday, November 17th, 2008

by: Geoff Ficke

Many sterling companies have attained great heights in the last 100 years, only to plateau, decline and disappear. Bethlehem Steel, American Motors, Montgomery Ward, PanAm, TWA, Faberge and Marshall Field are prime examples of famous companies that no longer exist after enjoying generations of success. There are hundreds of other examples. Why do organizations expire after gathering such power?

Currently the three American automobile giants are staring at an agonizing death by a thousand cuts. Ford, General Motors and Chrysler are case studies in how to lose direction and implode. They have not responded to changing market conditions, agreed to unrealistic and unfavorable labor and dealer contracts, been indifferent to product styling and let the competition assume a perceived advantage in quality and price. For these, and many more reasons, their future is very hazy.

At one time, these companies were considered great examples of superior American management. Their international reputations were among the highest enjoyed by business anywhere. One of the great suppliers to the auto manufacturers was Firestone Rubber Company. Firestone’s tale of decline is cautionary.

Leonard Firestone built his eponymous tire and rubber production company during the early 20th century, riding the coattails of the burgeoning American automobile industry. Firestone was the gold standard in tire production. Its management was considered the best of the five American tire manufacturers. As the century progressed, the company prospered greatly but grew arrogant. The business developed a strange aversion to new product development.

In the 1960’s Michelin, a French tire manufacturer, developed the first radial tire. Firestone decided to stick with belted tires. The advantages of radial tires were soon obvious and the world’s auto companies gravitated quickly to these new tires. Firestone’s American competitors Goodyear, Uniroyal, General Tire and tiny B. F. Goodrich tried to compete by introducing belted bias tire technology. They were unsuccessful in this effort and soon decided to jump into the radial business. The great Firestone Company was alone, and very late to get into the radial game.

It took Firestone until 1972 to attempt to market radial tires. A major mistake was made when the management of Firestone decided to simply rework belted tire production lines to produce radials. They decided to take this route to minimize capital expenditures. Nevertheless the historic goodwill the company had accrued made Firestone Steel Built radials the fastest growing tire in the world in the 1970’s. Unfortunately the company had compromised quality in their radial tire production process. The result was the largest tire recall in history in 1978 because of safety concerns. The company became a favorite target of consumer groups.

By 1988 Firestone was exhausted from the radial battles. The Firestone Tire and Rubber Company was purchased that year by the giant Japanese tire manufacturer; Bridgestone. This left only Goodyear as an American owned producer of tires. Why had an iconic, historically well managed company, reacted so disastrously to competition and new technology?

The best answer, and it applies to all fallen giants, is active inertia. Large companies become inert, listless, and ponderous. Their historic corporate relationships become blinders. Values harden into dogma’s, we have always succeeded doing things this way, so we will continue to do things this way. Corporate processes and policies harden into routines.

Leonard Firestone was a visionary. So was Charles Revson (Revlon), Alfred Sloan the architect of General Motors, Henry Ford, Juan Trippe at PanAm and Howard Hughes at TWA. These companies were their heritage. As the businesses evolved into public companies and the entrepreneurs who had had the visions to create and nurture their success retired or died a corporate malaise can set in. Businesses die if this is allowed to happen.

The United States government is the best possible example of failure. This enterprise is structured to fail. It is wasteful, duplicitous, mission confused and counterproductive. Money cannot be accounted for, results are not quantifiable and responsibility for program failures is never assigned. The government is not created to solve problems, it is organized to institutionalize and perpetuate problems. This is why the bureaucracy enjoys never ending growth, even as so little is ever accomplished.

History is the best teacher. Those who do not learn the lessons of history are bound to repeat their mistakes. This piece could have been written about any one of a hundred formerly iconic brands or businesses that failed. The failures are readily available as teaching tools. Hopefully our leaders will start to review some of these case histories before deciding which industries are to be winners and losers.

Why Do Large Enterprises Incur So Much Unneeded Waste?

Thursday, October 9th, 2008

by: Geoff Ficke

When the Soviet Union fell in the early 1990’s and the government of Boris Yeltsin began to promote democracy and co-operation with their former Cold War foes, principally the United States: we discovered much that was amazing and instructional. It quickly became apparent that our decades long fear and competition with the Communist titan was based on wrong assumptions. Russia was actually a third world country with a first world army. Aggressive? Yes. Dangerous? Yes. Belligerent? Yes. But, the rivalry was really a one-sided competition between Russia’s lumbering, poor, creaky, stifled centrally planned system and America’s continually evolving, dynamic, rich, energetic model, fully utilizing the benefits of a free and capitalist system.

This disparity in resources and real strength, now so obvious, poses an interesting question: How did the Soviet Union deceive the western democracies into believing that they had the capacity to potentially control the world? Studying the history of the cold war is an interesting exercise. The opening of old Soviet record’s reveals so much that counters widely believed thoughts of that time. Distilled down, the Communists perfected a type of hyper-public relations (propoganda) created to instill dread in their own population while engendering fear and compliance in the satellite states they maintained and occupied under military force. Russia’s western foes were continually forced to react to threats, charges and bullying. Yes, the Russians were classic schoolyard bullies!

The Potemkin-type steps and guises that the Russians undertook to appear larger, tougher and more capable than their reality was a very clever strategy. The ability to appear larger than you are is a time-tested strategy. It is a strategy that I have used for myself and for many clients in positioning products, inventions and small businesses for maximum leverage in campaigns to feint and confuse much larger competitors.

Why do larger enterprises, countries and companies allow themselves to be bullied and out-maneuvered by smaller or weaker foes? How did the downtrodden Russians fool the all-powerful United States and its allies for decades? How can small businesses and entrepreneurs manipulate markets and large companies into reacting to perceived, but unproven rumor or reality?

I believe that the answer to these questions is contained in the very elements that occur after successful enterprises mature. Success and maturity typically crimp invention. Energy and ambition are not as highly prized. The entrepreneurial spirit can create fear inside large organizations. Profit, cash and donations dim the urgency to be inventive. Waste is often tolerated after success occurs. Why? Because urgency and leverage are often mitigated as enterprises become fat and happy.

How did Coca-Cola miss out initially on the bottled water business opportunity? How did the United States miss the obvious signs of ultimate Soviet implosions? Why has WalMart, 30 years ago a start-up, supplanted Montgomery Ward, W. T. Grant, Woolworth, Kresge and many other entrenched retailers? Why was FEMA so incompetent during Hurricane Katrina while FedEx, Home Depot and WalMart were so much more successful in delivering timely service and aid? In every business category we see young, energetic market leaders that have leapt past mature but doddering older competitors.

The Soviet Union was very competitive with the United States in the race to outer space. Using inferior equipment, the most basic technology and primitive logistics the Russians, nevertheless, maintained an active space program. The American space program was blessed with amazing levels of funding, pristine facilities and a military/industrial/scientific support complex unlike any in the world. Yet, despite the huge disadvantages the Soviets faced, they were more than competitive. They had to be. They had no margin for error or waste.

A perfect metaphor for the difference between fat, happy and wasteful, and lean, creative and thrifty is the development of the space pen. The simple act of writing in the zero gravity atmosphere of outer space was actually quite a challenge. The National Aeronautic and Space Association (NASA) tried to perfect such a writing utensil without success. Contracts to develop and produce such an implement were let on several occasions. However, none of the prototypes offered could withstand the effects of gravity, extreme propulsion and weightlessness all occurring inside the enclosed environment of the space capsule. Millions of dollars were spent in pursuit of a customized space specific writing implement.

When the Soviet Union fell, and the two countries began space collaboration, an interesting discovery was made. American scientists asked their Soviet counterparts what they used to write in space. The Soviet reply: “A #2 lead pencil”. The Soviets did not have millions of rubles to waste. They reverted to a simple common sense answer to a basic need. The Americans were able to spend millions to pursue an obtuse technical solution to this simplest of problems because they simply could. The money, though wasted, was of little import in the huge financial machinations and of NASA and the federal government.

This small example is not unusual or an aberration. Waste is an issue any time large, lead-footed enterprises are confronted by smaller, hungrier, more nimble adversaries. This is the entrepreneur’s natural advantage. The space pen model is repeated every day as entrepreneur’s rush to fill voids vacated or unnoticed by large, successful enterprises.

My consulting firm, Duquesa Marketing, Inc. works every day with entrepreneurs to customize strategies necessary to nimbly overcome the effects of size and maturity. The successful entrepreneur sees the #2 lead pencil as an obvious answer to the space pen problem. Seeking, and achieving simple solutions to real or perceived problems is the reason there will always be a successful inventor class.

American Automakers Have to Change – So do We!

Tuesday, October 7th, 2008

by: Geoff Ficke

The past few months have presented nothing but bad news for the formerly world leading American automobile industry. Henry Ford must be rolling over in his tomb. Alfred Sloan, the architect of the multi-division General Motors juggernaut, is a very sad “car guy” in the sky these days. Plant closings, huge employee layoffs, lost market share and horrid fiscal performance indicate that the “big three” (including Daimler-Chrysler) are in big trouble. They must change, and change is not pleasant for huge business complexes, or for employees, suppliers or customers.

This brings to mind a change that occurred right before my eyes as a small boy growing up in Kentucky. Several times each week, a horse drawn ice wagon would pull up in front of our little house and deliver block ice. The iceman was named Herb. My mother would always pleasantly greet Herb and they would exchange small talk, how about that the Reds game last night or the nice weather we were enjoying. Herb was a hard working and very nice man. And then, one day this regular ritual in our lives abruptly ended.

My parents bought a refrigerator. The hand delivered block ice that was essential to keep the old icebox cool was no longer needed. My mother was very concerned about the effect our new wonder appliance would have on Herb. She met him in the yard and told him as gently as possible that his ice deliveries were no longer needed. Then she asked him if he would like some iced tea and to sit a minute.

As clearly as I remember anything in my youth, I remember that conversation. Herb knew the inevitable march of progress and technology; in this case a 12 cubic foot Frigidaire, meant that he was soon to be looking for another line of work. It was sad. He was very matter of fact and my mother tried to be encouraging. Over the next few months we saw Herb in the neighborhood less and less. Within six months the ice Company was out of business.

Accept Change or Get Run Over

Like the barrel industry, the bicycle industry or dozens of other formerly thriving business segments, the ice delivery service, and now the American automobile industry was forced to change business models. If change were not embraced, indeed aggressively pursued, industry subsets would be superceded by new upstarts and technologies. “The Big Three” still have an opportunity to adjust to new market realities, but they will have to be relentless in the pursuit of economies, creativity and changing cumbersome bureaucratic business cultures.

Change is short-term pain. Managers will be significantly fewer. Blue-collar workers will not earn $65,000 per year plus benefits for unskilled labor in new jobs. Communities will undergo brisk changes in tax revenues, real estate prices and shopping patterns. College plans will be upset. Retirement dreams will be delayed, in some cases destroyed. Parts suppliers will be pressed on pricing. And yet, the future for all effected parties can, and should, be bright.

Since the Luddites in the mid-19th century attempted to stop the industrial revolution and preserve old-world work models, there have been groups trying to thwart progress. Progress requires change. Fortunately, looking in the rear view mirror is not a widely admired American trait. The parties most effected by this sea change in the American auto business have multiple opportunities to re-train, re-strategize, and start new businesses and services. With normal American drive, work and creativity our society will be blessed with a new generation of wealth creation, entrepreneurs and growth. It has always been so.

We live in a global market place. Nothing will change that. If foreign auto companies make better products at a better price we have to confront, and overcome, these market realities. Americans always have in the past, and there is no reason not to foresee a bright, but different future, for every current participant involved in the radical restructuring of our formerly great auto business.

The American economy is the most dynamic in history. Opportunity abounds and is available to every citizen willing to compete in the marketplace of ideas, work hard and not look backwards. Ford, Chrysler and GM can survive and prosper. Nevertheless, understanding and preparing for change will separate the successful from the losers, or modern day Luddites.