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6 REASONS TO JOIN AN ADVISORY BOARD

VIDEO:     6 REASONS TO JOIN AN ADVISORY BOARD 

In this video, Rhonda Barnet, Vice President at Steelworks Design, explains how independent advice and support from a board helped her company survive difficult times and find new success.

 

Advice you can count on

BDC - First-ever Canadian study on the use of advisory boards by SMEs. Impact: 86% of leaders believe that having an advisory board has had a significant impact on the success of their business. Areas of impact most often cited: ·         Company vision ·         Innovation ·         Risk management ·         Profitability. Main reasons that SME leaders set up advisory boards: ·         Complementary expertise ·         Need for advice and support in decision-making. Statistical analysis of businesses’ financial results: ·         Sales growth stronger after instituting an advisory board: ·         66.8% sales growth in first three years after an advisory board was set up vs 22.9% in the three previous years. ·         24% higher sales - businesses with advisory board vs businesses without.

ROLE OF AN ADVISORY BOARD - BDC Study

ROLE OF AN ADVISORY BOARD ACCORDING TO AN SME BUSINESS LEADER

It is not unusual for the CEO of an SME to be a “one-man band,” personally seeing to every detail and micromanaging his business. Isolated, he tends to manage everything himself. According to Jean-Yves Sarazin, CEO of the Delom Group, an advisory board allows entrepreneurs to break free from their isolation and to have a sounding board to validate their strategies. An advisory board allows business leaders to question themselves and forces them to reflect. The mission of an advisory board is to ask the most relevant questions and delve deeper into underlying issues. It can also help compensate for weaknesses. An entrepreneur who lacks financial expertise can benefit from the recommendations of an advisoryboard member who has financial expertise. Moreover, an advisory board forces theleader to be prepared, triggering the thinking process: [Translation] “When preparing, one often self-corrects one’s strategy. Having an advisory board builds discipline.”

BENEFITS ACCORDING TO LEADERS

As a governance tool, advisory boards are not common among Canadian SMEs. However, according to business leaders who have set them up, they yield tangible benefits. When asked to rate the advantages on a scale of one to 10, they responded that the advisory board:

·         is an essential tool                                                                        8.2

·         is like having a sounding board                                                    8.1

·         is a support for the owner/management team                              8.1

·         allows you to develop a broader vision                                        8.0

·         strengthens the management team’s convictions                        8.0

·         forces management to look at the company                                7.5

·         challenges the company’s management team                            7.5

·         brings rigour in to the company                                                   7.2

·         is a driving force for the growth of the company                          7.1

            In particular, the existence of an advisory board allowed them to:

·         improve strategic business choices                                             8.0

·         broaden the universe of knowledge and skills                             7.8

·         develop new ideas                                                                       7.8

·         put in place a better management structure                                7.4

·         improve company reputation and image                                      7.3

·         reassure shareholders and investors                                           7.2

·         avoid costly mistakes                                                                   6.7

·         break down the isolation of company executives                         6.4

·         ensure succession of the company                                              6.1

IMPACT OF ADVISORY BOARDS

Most (86%) respondents who have benefited from the advice of their advisory board believe it has had a significant impact on their company. In particular, respondents note that advisory boards had a direct, positive impact on:

·         company vision                                                                            7.7

·         innovation within the company                                                     6.9

·         risk management                                                                          6.8

·         company profitability                                                                     6.8

·         company survival                                                                          6.6

·         sales growth                                                                                  6.6

·         labour relations                                                                             6.5

·         hiring the best emp                                                                       6.2

These results clearly show that an advisory board improves the company’s vision and enables better strategic decisions. Moreover, an advisory board encourages entrepreneurs to think long term and define a direction for their company.

The Five Competitive Forces That Shape Strategy

by Michael E. Porter 

Editor’s Note: In 1979, Harvard Business Review published “How Competitive Forces Shape Strategy” by a young economist and associate professor, Michael E. Porter. It was his first HBR article, and it started a revolution in the strategy field. In subsequent decades, Porter has brought his signature economic rigor to the study of competitive strategy for corporations, regions, nations, and, more recently, health care and philanthropy. “Porter’s five forces” have shaped a generation of academic research and business practice. With prodding and assistance from Harvard Business School Professor Jan Rivkin and longtime colleague Joan Magretta, Porter here reaffirms, updates, and extends the classic work. He also addresses common misunderstandings, provides practical guidance for users of the framework, and offers a deeper view of its implications for strategy today.

In essence, the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly, as if it occurred only among today’s direct competitors. Yet competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products. The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry.

As different from one another as industries might appear on the surface, the underlying drivers of profitability are the same. The global auto industry, for instance, appears to have nothing in common with the worldwide market for art masterpieces or the heavily regulated health-care delivery industry in Europe. But to understand industry competition and profitability in each of those three cases, one must analyze the industry’s underlying structure in terms of the five forces. (See the exhibit “The Five Forces That Shape Industry Competition.”)

If the forces are intense, as they are in such industries as airlines, textiles, and hotels, almost no company earns attractive returns on investment. If the forces are benign, as they are in industries such as software, soft drinks, and toiletries, many companies are profitable. Industry structure drives competition and profitability, not whether an industry produces a product or service, is emerging or mature, high tech or low tech, regulated or unregulated. While a myriad of factors can affect industry profitability in the short run—including the weather and the business cycle—industry structure, manifested in the competitive forces, sets industry profitability in the medium and long run. (See the exhibit “Differences in Industry Profitability.”)

Differences in Industry Profitability
Understanding the competitive forces, and their underlying causes, reveals the roots of an industry’s current profitability while providing a framework for anticipating and influencing competition (and profitability) over time. A healthy industry structure should be as much a competitive concern to strategists as their company’s own position. Understanding industry structure is also essential to effective strategic positioning. As we will see, defending against the competitive forces and shaping them in a company’s favor are crucial to strategy.

Forces That Shape Competition
The configuration of the five forces differs by industry. In the market for commercial aircraft, fierce rivalry between dominant producers Airbus and Boeing and the bargaining power of the airlines that place huge orders for aircraft are strong, while the threat of entry, the threat of substitutes, and the power of suppliers are more benign. In the movie theater industry, the proliferation of substitute forms of entertainment and the power of the movie producers and distributors who supply movies, the critical input, are important.

The strongest competitive force or forces determine the profitability of an industry and become the most important to strategy formulation. The most salient force, however, is not always obvious.

For example, even though rivalry is often fierce in commodity industries, it may not be the factor limiting profitability. Low returns in the photographic film industry, for instance, are the result of a superior substitute product—as Kodak and Fuji, the world’s leading producers of photographic film, learned with the advent of digital photography. In such a situation, coping with the substitute product becomes the number one strategic priority.

Industry structure grows out of a set of economic and technical characteristics that determine the strength of each competitive force. We will examine these drivers in the pages that follow, taking the perspective of an incumbent, or a company already present in the industry. The analysis can be readily extended to understand the challenges facing a potential entrant.

Michael E. Porter is the Bishop William Lawrence University Professor at Harvard University, based at Harvard Business School in Boston. He is a six-time McKinsey Award winner, including for his most recent HBR article, “Strategy and Society,” coauthored with Mark R. Kramer (December 2006).

The True Measures of Success

About a dozen years ago, when I was working for a large financial services firm, one of the senior executives asked me to take on a project to better understand the company’s profitability. I was in the equity division, which generated fees and commissions by catering to investment managers and sought to maximize revenues by providing high-quality research, responsive trading, and coveted initial public offerings. While we had hundreds of clients, one mutual fund company was our largest. We shuttled our researchers to visit with its analysts and portfolio managers, dedicated capital to ensure that its trades were executed smoothly, and recognized its importance in the allocation of IPOs. We were committed to keeping the 800-pound gorilla happy.

 

Part of my charge was to understand the division’s profitability by customer. So we estimated the cost we incurred servicing each major client. The results were striking and counterintuitive: Our largest customer was among our least profitable. Indeed, customers in the middle of the pack, which didn’t demand substantial resources, were more profitable than the giant we fawned over.
 
What happened? We made a mistake that’s exceedingly common in business: We measured the wrong thing. The statistic we relied on to assess our performance—revenues—was disconnected from our overall objective of profitability. As a result, our strategic and resource allocation decisions didn’t support that goal. This article will reveal how this mistake permeates businesses—probably even yours—driving poor decisions and undermining performance. And it will show you how to choose the best statistics for your business goals.
 
Ignoring Moneyball’s Message Moneyball, the best seller by Michael Lewis, describes how the Oakland Athletics used carefully chosen statistics to build a winning baseball team on the cheap. The book was published nearly a decade ago, and its business implications have been thoroughly dissected. Still, the key lesson hasn’t sunk in. Businesses continue to use the wrong statistics.
 
Before the A’s adopted the methods Lewis describes, the team relied on the opinion of talent scouts, who assessed players primarily by looking at their ability to run, throw, field, hit, and hit with power. Most scouts had been around the game nearly all their lives and had developed an intuitive sense of a player’s potential and of which statistics mattered most. But their measures and intuition often failed to single out players who were effective but didn’t look the role. Looks might have nothing to do with the statistics that are actually important: those that reliably predict performance.
 
Baseball managers used to focus on a basic number—team batting average—when they talked about scoring runs. But after doing a proper statistical analysis, the A’s front office recognized that a player’s ability to get on base was a much better predictor of how many runs he would score.

Moreover, on-base percentage was underpriced relative to other abilities in the market for talent. So the A’s looked for players with high on-base percentages, paid less attention to batting averages, and discounted their gut sense. This allowed the team to recruit winning players without breaking the bank.
 
Many business executives seeking to create shareholder value also rely on intuition in selecting statistics. The metrics companies use most often to measure, manage, and communicate results—often called key performance indicators—include financial measures such as sales growth and earnings per share (EPS) growth in addition to nonfinancial measures such as loyalty and product quality. Yet, as we’ll see, these have only a loose connection to the objective of creating value. Most executives continue to lean heavily on poorly chosen statistics, the equivalent of using batting averages to predict runs. Like leather-skinned baseball scouts, they have a gut sense of what metrics are most relevant to their businesses, but they don’t realize that their intuition may be flawed and their decision making may be skewed by cognitive biases. Through my work, teaching, and research on these biases, I have identified three that seem particularly relevant in this context: the overconfidence bias, the availability heuristic, and the status quo bias.
 
Overconfidence. People’s deep confidence in their judgments and abilities is often at odds with reality. Most people, for example, regard themselves as better-than-average drivers. The tendency toward overconfidence readily extends to business. Consider this case from Stanford professors David Larcker and Brian Tayan: The managers of a fast-food chain, recognizing that customer satisfaction was important to profitability, believed that low employee turnover would keep customers happy. “We just know this is the key driver,” one executive explained. Confident in their intuition, the executives focused on reducing turnover as a way to improve customer satisfaction and, presumably, profitability. 

Michael J. Mauboussin is the chief investment strategist at Legg Mason Capital Management and an adjunct professor of finance at Columbia Business School. He is the author of The Success Equation (Harvard Business Review Press, forthcoming), from which this article was developed.

The right way to sell a family business

JACOLINE LOEWEN

Contributed to The Globe and Mail

Ms. McNally says her father and uncle decided to bring in an outside adviser and embrace the creation of a family forum to plan for succession. One of the tools introduced was a “three circle” decision-making model that directed three questions: Is this a decision for the family? Is it for the shareholder? Or is it a challenge for management? Each circle involved different stakeholders, which added complexity to the process, but it worked.

Even though the third-generation family employees were not shareholders, it was decided that it would be sensible to include them in ownership transition discussions because they held important positions in the company. As Ms. McNally’s father and uncle started to step back from day-to-day operations, they needed a plan to do it in an orderly way. Ms. McNally played a key role as change agent working closely with other senior managers.

Many owners underestimate the effort needed to prepare a company for ownership succession and the scrutiny of a buyer. They often think a fresh coat of paint is all it takes or that the business will sell itself. “However, this may not get you the best price or the right buyer,” Ms. McNally says.

Based on first-hand experience, the McNally story shows that a team effort is required to prepare a business for sale. Here are key actions to think about:

The classic chestnut – strategy
Regardless of timing, a business will be more attractive to a buyer if there is a defined strategy. Not only did McNally’s senior management understand the segments of the market that were most attractive, they developed a plan to capitalize on these opportunities and they had a proven track record that demonstrated credibility to buyers.

Figure out what drives profitability
Management realized that as the company grew it needed to focus on its systems and processes and bring them to a higher standard. This required them to extract information from Ms. McNally’s father and uncle and to institutionalize their knowledge into procedures and training that would be in place when they were ready to step away.

Hire your experts early
The shareholders wanted all of their advisers – lawyers, tax planners, family succession and investment bankers – to work as a cohesive team. This required all parties to have an understanding of each other’s roles and required effective communication within the team. The advisers were brought in early and they were given ample time to meet management, assess the go-forward leadership team, and become intimately familiar with the business and where it was headed so they could address the key questions that buyers would no doubt have.

“Selling a business and planning for succession is emotional,” Ms. McNally says. “It creates not only work stress, but family stress as well. That’s when you need to lean on your advisers.”

By 2010, the family forum moved into the final stage. All the preparation by management and advisers provided the family and shareholders with the ability to set realistic expectations regarding value and business fit in the event of a sale.

Ms. McNally and her husband Colin Brown now run a consulting practice called McNally Brown Group, which specializes in preparing family businesses for a sale.

Jacoline Loewen is a director at Crosbie, which focuses on succession advice for family businesses and closely held small to medium-sized enterprises. Crosbie develops customized strategies, particularly in relation to M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. 

Entrepreneurs: Go as Long as Possible Without Taking Venture Capital

 

Often I get asked the question: when is the right time to take venture capital? My answer is: Never. Unless you absolutely need to take a round, the best way to start a company is by bootstrapping it yourself.

When I founded Shutterstock in 2003, I decided to take a different route than most entrepreneurs. Way too typically, one would put together a business plan and find funding. What most people don’t realize, is that there are plenty of tools out there to start your own company with just a few thousand dollars. If you can figure out how to avoid an angel or venture round, you will have much more control in the long run. This isn’t always possible - but I would recommend trying everything you can to remain independent.

Eventually Shutterstock did a growth private equity round five years in. At this point in the company’s lifecycle, we had much more control than we would have in the venture phase.

What are the advantages to bankrolling and not taking venture capital?

• You will fail faster. It took me 10 tries to get to Shutterstock. Most of my startups never made it off the ground. Being an entrepreneur means being able to pivot quickly, shut down a business that isn’t performing and move on. If you use somebody elses cash, you may be forced to continue even though you know it’s time to move on.
  
  
• Every dollar counts. I was hyper-focused on ROI from the start when I was buying Google Adwords keywords. Since I could feel the money moving out of my own bank account, I was very sensitive to my return on investment. There was no room for error. This efficiency later translated into a complex lifetime value calculation that drove our acquisition model to this day.
  
  
• You will concentrate on profitability from the start. All businesses need to create value at some point to survive. While some companies have had successful exits without profits, they are few and far between. By building profitability into your model from the start, you will be able to start scaling. Self-funding will force profitability thinking at every stage.
  
  
• You will own more of the company later. The earlier you are subjected to dilution, the less of the company you will own in the future. Venture capital rounds often involve loss of control, and a majority of the company to be sold.
  

What are the advantages to taking venture capital?

• I recognize that self funding isn’t an option for everyone. If a large amount of capital is required and not taking on a venture round will be truly detrimental to getting your company off the ground, then by all means do whatever you need to do.
  
  
• Often venture partners provide support with areas that the company is weak in. If you need help hiring, scaling, or operating, often a venture partner can provide this help as part of the deal. If you don’t take capital, you’re on your own.
  

How do I make sure that my startup uses as little capital as possible?

• Use as much open source software as you can. Use MySQL instead of MS-SQL/Oracle. use Linux (and specifically free versions like CentOS instead of Redhat). CPAN alone has over 120,000 perl modules that are already written - so why re-create the wheel?
  
  
• Learn how to code. There are great affordable online learning platforms that can help you learn how to code, create html pages, link up databases, etc. Learn as much as you can because the more you can do yourself, the less you will have to hire.
  
  
• Be every job. It may seem overwhelming, but it’s possible. When I started Shutterstock I was the customer service rep, the website developer, the first photographer. By making sure I gave each role a shot, I knew exactly how what I needed so I didn’t overhire. I wasn’t necessarily good at each job, nor was my expertise even close to each job, but I learned a ton and got to delay some hiring. This culture of lean innovation is still very much alive at Shutterstock and has contributed to much of our growth.
  
  
• Use your product as if you were the customer. Not only will you get to know your own product better, but you’ll be doing quality assurance work and testing throughout the process.
  

Bottom line is that it isn’t always possible or practical, but the longer you wait to raise money, the better off you and your business will be.

Posted by:Jon Oringer