There has been the occasional business leader whose reign has been magical (Welch and Jobs come to mind).  Yet their business often fall to sustaining enterprise value after they leave. GE’s revenue and stock appreciation has been stuck in neutral since Welch’s departure, as the 20^th century’s most profitable company tries to find its way.  Apple has been trading all over the map in the last few weeks as the market tries to reconcile a world without the imagination of Jobs and his fancy gadgets.

A systemic problem for private companies is that a lack of management and bench strength.  This dearth of talent goes deeper then inhibiting productivity in the short term; it is a significant barrier to value creation for the entrepreneur.  If an exit is an objective (as is often the case), buyers generally want to see a strong management team and bench that can support future growth. If it is the business owner and his brother-in-law that possess all of the tribal knowledge (intellectual capital) about how a business operates successfully, the enterprise can lose luster with investors.

There are similar problems when one or two employees within a company are technically superior to those around them. Often, feeling their power and value, they are unwilling to teach, document, and delegate. When management and boards allow such conditions to persist, they are doing a disservice to the shareholders and are putting the company at risk.

Organizations should:

1. Require that every manager have a delegate – Identify and develop strong number twos that can eventually step in and take on the job duties of every manager. If people can’t attend conferences or go on vacation, because no one else can cover their desk, it is a sign that they have not developed the talent around them. To develop others takes time and investment including focus on performance reviews, career pathing and training.
2. Institutionalize activities, duties and best practices – Develop thorough documentation. Companies must maintain policies and procedures if they are going to be operationally excellent. When a supplier errs, it is usually because an inexperienced junior staffer doesn’t do something the way his senior counter-part would have. Often the junior staffer is criticized, even though it is their management who put them in position to fail.
3. Teach - Great leaders are usually great teachers; they aspire to develop others through daily interaction, and the sharing of information. The inability to teach is often a sign that a manager views themselves as the only person competent enough to complete certain tasks, and makes excuses as to why they can’t find other people to step up.  Great companies have development plans for every key employee, and make resources available for their continuous improvement.

Organizations that formalize these practices in their companies will maintain a long term strategic advantage over those who do. The talent war has only just begun.

I recently had a conversation with a CEO who was lamenting about the disparity between public company valuations and those of privately held concerns. As of July 2011, the S&P is trading at a multiple of 14, while private company multiples remain in the 5-6 range. Investors value public company access to capital, and scalability into large consumer markets.  Of the Top 10 U.S. companies by size, none are pure play B2B companies.

Small companies come in all forms; some compete with larger branded companies, and some market directly to them.  In the age of confluence, some do both. How can small companies survive in a land of giants?

The primary difference between Fortune 1000 companies and smaller ones is more fundamental than which markets they serve. Intel founder Geoffrey Moore makes a distinction about business architecture – the difference between “complex systems” and “volume operations”[i].

Many smaller B2B companies are built to support specialized and custom solutions, while most Fortune 500 companies are built from the ground up to serve the masses. While customization may command higher prices (per transaction) than generalization, high volume companies cross a threshold where their infrastructure promotes a lower cost per unit and the experience curve takes full affect. Thus, B2B companies face an inherent profitability disadvantage.

Where Microsoft offers its highly useful suite of Office products at around $400 per license, Apple’s B2C model (which is often utilized by small businesses and micro-businesses such as designers and the like) offers Pages and Numbers at $9.99 each. One offer is based on high intellectual capital value and the other on mass appeal and ease of use.

For smaller B2B companies to reach new levels of profitability, requires they find a path to scalability. Of course not every business wants to be big. Some entrepreneurs prefer a “family culture” and more tempered growth (with less risk).

One way to effect profitable volume is to find a balance, where products and services are “mass customized”. Mass customization is all the rage in consumer products where individuals can even build their own handbags and Nike basketball shoes to their specifications.

Smaller companies (B2B and B2C alike) should seek out solutions that allow for better utilization of existing solutions across more customers. In other words, the provider should not need to reinvent the wheel with each project. Often, optimizing margin requires leverage of a base product or service that can be replicated, at times with features configured to the customer’s individual needs. To configure from a menu of choices is considerably different than satisfying each specific whim, which may offer greater intimacy with the customer, but may also require the business to sacrifice profit. For every feature created for an individual customer, there is a resulting opportunity cost (time, money and energy that could be invested elsewhere).

The other requirement for getting big is a shift towards systems thinking, where management teams make decisions within the framework of their company’s capabilities. For a new initiative to succeed requires careful analysis of the resources required to implement it. The key for smaller companies who aspire to do business with larger ones it to utilize systems and processes consistent with the expectations of the customers they serve.

Competing against larger companies requires a unique mindset. Often small businesses use concepts like judo (where the larger opponents energy is often used against him) to beat the larger foe at the point of attack. Consider the depth and width of the market you want to serve, and scale your resources accordingly.

As a result of the liquidity crisis and the giant sucking sound that followed, business-to-business customer relations have taken a dramatic turn.  Salespeople, beaten down by heightened customer demands and rampant discounting have become far more tactical.  As customers have attempted to flatten the playing field through RFQ’s and reverse auctions, vendors have been conditioned to comply with a new set of norms. How tedious and unfortunate.

The art of dissecting customer needs has deeply eroded. These new realities put the seller at a tremendous disadvantage, and often impacts margins and profitability. Selling organizations are better off identifying the minority of customers who are still willing to have strategic conversations.  Below are 4 types of questions you should be prepared to ask in a strategic meeting.

Perhaps the most critical element of consultative selling is getting to a decision maker. Procurement departments are typically focused on one variable; price. One way to orchestrate a senior level meeting is to ask for a strategy session or peer review. This can be positioned simply as…”the senior management of my company is planning a trip to…and they wanted to know if we can have a strategic conversation about the future and how we can; take cost out of the system, improve customer experience, reduce cycle time, etc…” In some cases, you may need to be prepared to suggest that you are considering investments that will decrease the total cost of doing business for the customer (that does not mean a price concession).

Salespeople should prepare rigorously for the meeting, digging up every possible piece of information on the company, their customers, their competitors, your competitors and about the people you are meeting with. Linked In, Facebook and other internet sites offer all type of information about clients-everything from the alma mater, to hobbies and interests.

Always allow the client to be seated first, but if possible, position so that your organizations are not seated on opposing sides of a table. Begin the meeting with opening questions and quickly transition to strategic questions. You want to first set a tone that you are there to probe and listen:

Stage 1: Opening Questions

• How many years have you been in the industry, or how many years have you been here?
• What did you do before?

Stage 2: Strategic Questions

• What is your vision for growing the business?
• What are your strategic objectives?
• What separates you from you competition?
• How will your company need to change to maintain its advantage?

Explain to your salespeople that if they interrupt the customer, or speak while you are asking questions, you will fire them on the spot (and mean it).  Many will have an overwhelming desire to present (and not to listen). Here is the golden rule: if you are speaking for more than 20% of any meeting, you are losing!

While asking strategic questions, you are observing the customer’s tone, pace and body language. If they are tactical thinkers, or simply don’t want to have a strategic conversation with you, you will observe their discomfort and move on to lower level discussions (which you should be fully prepared for).

After you have established the fundamental business problems, create a transition where the customer views you as the solution (without you even suggesting it).

Stage 3: Anchor Questions

• What are the long term ramifications of …?
• What would be the affect on revenue/profit/cycle time/customer experience, if …were to continue?

Stage 4: Closing Questions

• Do you have any initiatives to outsource … to suppliers?
• What if we were to…?

Here is the hammer. Companies (and especially purchasing departments) have seen dramatic contraction of headcount. If there is a way for your organization to accept the burden of certain  activities on behalf of the customer, you have reduced their total cost of ownership.

This approach will not work with all of the customers all of the time, but it will promote dialog the most profitable customers and those are the ones who are worthy of our time and investment.

Adapted from A Seat at the Table by Marc Miller