How to determine if opening up a branch office during tough economic times is right for your electrical contracting business
Everywhere you look these days, electrical contractors are relying on a depleting backlog and sheer management skills to get through the economic downturn, making a calculated effort to “circle the wagons” and preserve what they have until better times cycle back around. But is this the right course of action? As history has shown, this strategy can lead to a continual erosion of liquid assets, a customer base that sets aside long-standing relationships in an attempt to take full advantage of downward spiraling costs in a given marketplace, a growing population of overly aggressive competitors willing to cut their price, and a skeleton workforce made up of a handful of employees the company is just barely able to hold onto. Projecting 12 to 18 months out — when the latest recession is expected to give way to more prosperous times — what exactly will these contractors have left that will set them apart from their competitors?
An alternative approach is one cereal giant Kellogg's aggressively embraced during the Great Depression. In the 1930s, two companies dominated the market for packaged cereal: Kellogg's and Post. At the time, a lesser known Kellogg's was attempting to develop a relatively new market, although most Americans didn't see its products (packaged cereal) as a viable alternative to the staples of Cream of Wheat and oatmeal.
During the Great Depression, few marketing professionals had any idea what consumer demand would ultimately be. Post pursued the predictable path of “circle the wagons” by grabbing control of expenses and slashing the advertising budget. Kellogg's, on the other hand, decided to take a different approach by doubling its advertising budget and finding new media outlets to push its new cereal (Rice Krispies). As 1933 came to an end — and the economy continued to free-fall — profits for Kellogg's began a dramatic trend upward (reaching highs of 30%), creating the foundation for what the company has become today.
Years later, research has shown companies like Post that embraced the philosophy of “circle the wagons” during an economic downturn usually didn't fare so well once the recession ended. According to Bain & Co., a global business consulting firm headquartered in Boston, during the 1990-91 recession, twice as many companies vaulted from the bottom of their respective industries to the top. In fact, what Kellogg's started, by way of undertaking bold moves during uncertain economic times, has also been embraced over the years by a few courageous and visionary companies. For example, Kraft introduced Miracle Whip in 1933 and watched as it became America's best-selling dressing in six months; Texas Instruments brought out the transistor radio during the 1954 recession; and Apple launched the iPod in 2001 as the dot.com bubble burst, pushing the economy into a recession.
There's no question it's difficult, not to mention expensive, for most companies to gain any type of consumer recognition or brand loyalty when competitors are attempting to do the same thing. However, it's a widely shared business acumen that, as an economy begins to tighten, fewer competitors are willing to spend the necessary funds on advertising and marketing to gain consumer recognition. Paradoxically, this “circle the wagons” philosophy is embraced at precisely the same time consumers are aggressively looking to be more selective when it comes to spending. More often than not, companies willing to spend money on advertising, marketing, and strategic market expansion during less-than-favorable economic times recognize a higher return on their investment when the economy eventually cycles back around.
What can electrical contractors learn from these examples? First, economic prosperity is cyclical, usually expanding for five to seven years, then retracting for two to three years. Second, every company has a “maturity cycle,” most lasting between 20 to 25 years. The decisions made by senior management during downturns in an economic cycle will greatly affect how competitive the company will be when things turn around.
Developing a branch office strategy is one way to take advantage of an upturn in the economy while gaining an advantage over timid competitors — like Kellogg's did to Post during the Great Depression. Contemplating a branch office strategy is an exciting time for a contractor. It is also the only way for a company to truly maximize its “organic” growth potential, reward top performers who have an entrepreneurial spirit, and most importantly, allow for the next generation of managers to step up and create a new future “maturity cycle” for the company (a.k.a. succession planning). Following is a discussion on how to tell if your company is structured to successfully implement a branch office strategy.
Sizing up the situation
The most difficult part of a company's decision to embrace a new branch office strategy, which brings along with it the fear that a certain amount of control and influence over well-established policies and procedures will be lost in the process, begins and ends with taking a realistic view of the company's existing organizational structure. This comes with deciding if it best reflects the rigid functional symmetry of a “wagon wheel,” the pastoral field of “divisional silos,” or an “entrepreneurial” matrix, where technology plays a significant role in allowing employees to stay focused on creating and maintaining customer relationships (The Role of Technology on page C26).
The wagon wheel — One of the most overused examples for how small- and medium-sized businesses operate is the “wagon wheel” structure. In this setup, the CEO (or majority owner for small- and medium-sized companies) is the hub, and individual departments represent the spokes, all supporting the outer rim known as the business. For most companies, whose size is pegged to a specific market's economic condition, this approach provides the necessary control over every aspect of the business, limiting any change or flexibility. Unfortunately, by the very nature of the structure, there is no need for an entrepreneurial spirit beyond the central office. Because of the inherent limitation surrounding the central office (one person can only do so much), companies operating under the wagon wheel structure are not conducive to a branch office strategy.
Divisional silos — Organizations that grow and become more diversified in their service offerings tend to become hierarchical and operationally clumsy as the company expands, creating the perceived need for more centralized control — ultimately taking on the structure of “divisional silos” standing next to one another, connected only at the top by divisional heads or management committees. Unfortunately, for divisional silos to communicate with one another, information is required to flow up the chain of command within a given silo, then back down the intended silo — subject to a filtering process at every stop along the way. Although this structure is an effective way to control and influence policies and procedures of a growth-orientated company (the mechanical and electrical roll-ups of the 1990s typically exhibited this type of organizational structure), it is an inefficient and costly way to operate a business — just ask General Motors.
Entrepreneurial matrix — Whether they're small, medium, or large, companies that understand and operate under this structure are typically more flexible, creative, and entrepreneurial by nature. Everything about an “entrepreneurial matrix” structure is designed around one common philosophy — the creation and maintenance of customer relations, both internal and external. Moreover, the organizational structure tends to be flatter (Microsoft and Southwest Airlines immediately come to mind), expanding and contracting horizontally as profitable markets come and go. As the company grows and expands, control and influence over policies and procedures becomes more transparent with the use of virtual communications. Information is readily accessible for reference and much less restricted between divisions and departments, allowing employees the ability to make informed decisions quicker and more confidently. This type of structure is very conducive to undertaking a branch office strategy.
Tips on starting up your own branch
An individual branch office will succeed or fail due to one or more of the following reasons:
Force-fitting conflicting philosophies (home office vs. branch) — In order for a branch office strategy to succeed and prosper, a certain level of autonomy must be afforded to the individual branches themselves. Whether a branch office is started by an acquisition or through a “greenfield” approach, there will always be an expressed anxiety over the limits of command and control. Embracing a branch office strategy is a lot like sending kids off to college — anxiety levels rise in direct proportion to the distance one must travel to resolve a potential issue. Some organizations, like doting parents, have a tendency to be more protective of their assets, while others take a more laid-back approach. Those companies operating under a more protective and controlled environment usually struggle with a branch office strategy (as do parents who start losing control over every aspect of their maturing child's life). Not only does the home office try to force-fit well-established policies and procedures, but the manner in which they tend to do so is very autocratic — suppressing any type of entrepreneurial spirit that may come from the branch.
Inability to generate revenue — Peter Drucker, the famous management guru, once said there is only one valid definition for the purpose of a business: the creation of a customer. All too often, however, when companies decide to undertake a branch office strategy, they do so at the behest of an individual opportunity, paying little or no attention to what may happen after the opportunity expires.
The key to sustaining a presence in any given market, beyond the maintenance of a customer or particular opportunity, is the ability of a company to develop a perpetuating process that normally includes hiring local talent who are familiar with the inner workings of the target market. This perpetuating process allows the company to continually identify the needs and wants of customers, in addition to making quick adjustments when things like the economy begin to change.
Restricting an entrepreneurial spirit — Central to Drucker's philosophy was the belief that highly skilled people are an organization's most valuable resource, and its a manager's job to prepare and free up people so they can perform at the highest levels possible. He went on to say that good management can bring economic progress.
Jack Welch, retired CEO of General Electric, echoes such sentiments when he tells managers and executives that their jobs are no different than managing a sports team — whoever can field the best team will win, which means managers must simultaneously encourage those who are struggling to do better, show everyone how to succeed, and recognize and compensate top performers. All too often companies (home offices) fall into the trap where they allow themselves or individual departments (like IT or accounting) to take precedence over every aspect of the business, including creating and maintaining customer relations — consequently choking off a company's lifeblood and forgoing the fact that no one has anything to do unless someone sells something. Entrepreneurs, by nature, understand better than most how to create revenue.
There is no question branch offices have to operate under certain guidelines; however, many endeavors fail because of uncertain manifestations being generated by the insecurities of the home office. If you want your new branch office strategy to succeed, minimize restrictions imposed on the entrepreneurial spirit so that managers and supervisors you put in charge can do the job you hired them to do.
Schultz is one of the founders and managing members of Powercom Industries, a consulting firm based in Cary, N.C. He can be reached at email@example.com.
Sidebar: The Role of Technology
Most companies today access the Internet via T1 lines, DSL lines, or cable providers for practically every form of communication — voice over Internet protocol (VoIP), e-mail, instant messaging, videoconferencing, and document exchange. Not only are a number of businesses moving to create their own “cyber-community,” — which allows for more control and security over employees' access to and use of certain Internet Web sites, necessary software applications, additional licensing fees, and intellectual property — but they are also adamantly committed to creating a paperless work environment, thanks in part to the advent of document scanners. For companies considering a branch office strategy, secure internal (e.g., LANs and VPNs) and external networks (e.g., Citrix) are essential to effectively managing business-critical applications, such as those outlined below, from anywhere in the world.
Estimating — The cornerstone to any specialty contracting firm is its ability to generate accurate and timely estimates. By being part of a network community, senior management at the home office has the ability to provide real-time oversight to large, complex bids without the added cost of traveling to a particular branch office or project location prior to the date of the bid. Furthermore, as software applications continue to be upgraded, companies that have the ability to provide network access to their employees find themselves with a distinct cost advantage over competitors when it comes to remotely training new and existing staff members.
Payroll/accounting — There is nothing more important to a specialty contractor than having accurate and timely financial information accessible through secured levels of the organization. In order to make “real-time” decisions in today's fast-paced business environment, sophisticated contractors have implemented cost-measuring techniques through the use of “cost codes,” which require home office, branch offices, and field managers to have the ability to input and analyze information locally and remotely — without having to wait on faxes, postage, or carrier services. Providing a fast and secure network allows every employee to work productively in real time, despite their location.
Scheduling, design, and project management — As with estimating and payroll/accounting software — not all licensees or approved users are logged in during particular times of the day. The costs associated with licensing and supporting scheduling, design, and project management software can get very expensive. As project durations continue to get shorter, even though their size and complexity continue to expand, the need for quicker, more reliable access to communication links (e.g., FTP sites) is essential to the success of any project. Contractors who find themselves unwilling or unable to provide quick, reliable network access to essential scheduling, design, and project management software and/or network communities will one day find themselves scrambling to catch up with their competitors and the industry as a whole.