Last Year’s Model and Flawed: A Good Investment for the Operations Warrior

With private equity groups out and about, constantly shopping for luxury goods companies and with the economy not recovering as fast as everyone had hoped, brand valuations are a good sport for buy-out specialists. This is because at the moment most valuations reflect the brand’s profit making ability, which is very low, while private equity firms gamble on the value of the intangibles. According to the Financial Times’ “Special Report on the Business of Luxury” (June 14, 2010), there is a lot of activity in the buying and selling of luxury brands and this reflects the eagerness of several private equity firms whose main goal is to capitalize on their record-low acquisitions of yester year and take advantage of the slightest signs of economic recovery. Luxury goods make for a cyclical industry that requires finance professionals to be bold when it comes to fashion.

In the case of Ferré’s auction one hopes that the results are going to be a little bit different. Gianfranco Ferré, the Italian designer who founded the Ferré Fashion House, passed in 2007, while his firm had already been bought by IT Holding, a luxury brands group that went bankrupt last year due to the economic recession. (The Financial Times, June 17, 2010, http://www.ft.com/cms/s/0/5d55973c-796a-11df-b063-00144feabdc0.html)

But in bankruptcies of that type is when things get interesting, not so much for the sport-loving buy-out shops, but rather for the hard-core operations-driven private equity firms. These are the people who roll-up their sleeves and bring out the operations manual with the goal to turn the firm around and create economic value for the firm, their own team, and the rest of the stakeholders. Their success is based on their ability to identify flaws and work with them, around them, or against them. Whichever the case, here is what the rest of us should keep in mind for ventures of similar kind:

Manufacturing management: Production processes are key, more so than production capital (machines, manpower, or space) to produce the product. Process is what consumes time and resources to produce quality. The latter is a major differentiation point from the competition.

Inventory control: Make inventory control part of your production process or at least try to identify where the two models intersect.

Quality control: Setting standards and inspection systems should happen on both the micro and macro level. Dumb proof checklists will never amount to anything useful if you don’t give your own management breathing space for macro inspection. Rethink your systems on a regular basis. Where your processes fail is where your business model needs tweaking.

Purchasing: Identify supplier sources and work with them to add value to their business model. If you hesitate ask yourself why. This could reveal an opportunity for business expansion for you (vertical or horizontal integration).

Operations skills and management: Don’t be afraid to spend some time in the “production trenches” before holding a meeting at the senior management level. Take some time to reflect on what you learn on the trenches and ask a lot of questions even if, as the company owner or CEO, you are supposed to hold all the answers.

Working with Flaws Part II

It is important to indentify weaknesses in any plan, strategy, or venture. These weaknesses are the cause of business disruptions. If these have to take place, it is better to be the one who provoked them (you: the master planner, strategist, entrepreneur) rather than allow your competitors to disrupt your business. To be the first, you need to know where to look. If you already have a good team in place, you are most likely to identify weaknesses in the following areas: marketing and sales; operations; research, development, and engineering; financial management; general management and administration; personnel management; legal and tax structures.

Knowing that flaws in these areas can bring down a sovereign state (see entry of May 29, 2010) should be enough to motivate you to pay close attention to the specifics. Perhaps it would be best to elaborate in one area at a time, even though the CEO of a company should keep a close eye on all seven simultaneously.

Marketing and Sales

Marketing planning: How are you planning to structure your overall sales, advertising, and promotion programs? What are the determining factors in establishing distribution systems? Who are your sales representatives and why?

Market research and evaluation: Are you or someone on your team able to design and conduct market research studies and to consequently analyze and interpret the results? What is your experience with the fundamentals in the field? Have you worked with questionnaire design and sampling techniques before?

Merchandising and Sales: You must feel able to organize, supervise, and motivate your sales team. You must have an understanding of territory analysis in order to forecast account sales potential and to steadily gain market share in the target market.

Customer generation: How are you developing new customers? How are you identifying sales potential within your network and what is the strength of your sales closing record?

Service: What are the needs that arise from particular products or services you are selling? What is your strategy in handling customer complaints and what is the channel that brings these complaints to the CEO’s attention?

Channel management: Have you planned the flow chart of your product from inception to manufacturing to distribution to the customer? Do you have an understanding of the costs involved in each step of the process? How can you buffer the process if one of the parts fails?

Rethinking marketing as the sum of all the parts listed above will help you avoid pitfalls that can ruin your product, reputation, sales, and ultimately your business. Your skills as the CEO should reflect a thorough understanding across all of the aforementioned areas even if you are not an expert in each one. Someone else on your team should be.