bizzXceleration: Performance, Value and Profit

Adaptive Responses: Case and Stories

New and Improved Across the country, many businesses, especially small ones, are finding the key to survival is to broaden their appeal in new markets while increasing their profitability among existing clients. "You have to diversify," says Marvin Powell, a business coach in Centreville, Va. Small businesses can usually remake themselves faster than larger companies, he adds, since there are fewer decision makers -- a significant advantage in a tumbling economy. Here's a look at five businesses that are improving their bottom lines with new product lines. One-on-one instruction has been the cornerstone of Mike George Fitness System since the upscale training boutique opened in 1995 in Chicago. Clients pay about $1,000 a month for three one-hour personal-training sessions a week, says founder Michael George. Revenue grew steadily until the recession started to take hold in 2008. New business slowed and existing clients were leaving. By September, the company had suffered nine straight months of decline, says Mr. George -- a 50% drop in revenue. But perhaps the biggest change was introducing training sessions for groups of four to six people -- which cost participants about $270 per month instead of $1,000. Mr. George says monthly revenue has increased 33% since October. He doesn't know yet if this move will replace all of the lost revenue, but he says it might. Small-group classes remain true to the original concept of the business while bringing in more money per hour than individual sessions, says Marianna Hayes, president of HALO Business Advisors in Clinton, Miss. The group approach also enhances word-of-mouth marketing, Ms. Hayes says. While individual clients may be more private about their training, group members "want to talk about it with their friends," she says. Mr. George is now marketing the group-training concept to hospital-based weight-loss programs, in which he groups participants according to limitations -- for example, those with hip conditions or other orthopedic problems. "The process of change begins with fear: Companies see signs in their own financials," says Michael J. Franz, an adviser with the Washington Small Business Development Center in Seattle. Businesses must examine whether their market is shifting, Mr. Franz says, and how their customers' core needs align with the company's current product offerings.

Squeezed in the Middle  Alibaba.com Ltd. has positioned itself as a virtual middleman between smaller Chinese manufacturers and foreign buyers of their goods. So when the global economic crisis started battering Chinese exports last fall, it seemed to spell gloom for the fast-growing Internet trading company.  Instead, Alibaba.com, one of China's most prominent Web companies, took a series of measures that have allowed it to keep growing and stay well in the black even as China's exports have plunged. The company, which charges sellers for listings and other services on its site, cut prices for the kinds of customers that form the core of its business and created a loan program to help them through the financial crisis -- in effect expanding its target market. In the first month after introducing the lower prices, Alibaba.com saw its number of paying members surge by more than 12,000. That was more than 10 times the number of net new "Gold Supplier" members -- those who had bought the full-service listing package -- in the first nine months of the year. And despite the price reduction, the company reported a 27% increase in revenue in the fourth quarter of 2008 from a year earlier, to 805.9 million yuan ($118 million). Now Chief Executive David Wei predicts the number of Gold Supplier clients may nearly double between 2008 and 2011, and he says that Alibaba.com plans to hire 2,000 to 3,000 new employees this year, increasing its work force by at least 25%. "This is a company whose clients are dependent on exports to the rest of the world, primarily to the U.S. and Europe," says Jason Brueschke, an Internet analyst for Citigroup in Hong Kong. "Knowing that their customers are going to be struggling for quite a while and things were going to be very, very bad...Alibaba decided to transform their business model." As a result, Mr. Brueschke says, Alibaba.com "is positioning itself to be bigger and stronger and more powerful when China comes out of the economic slowdown that it's in."

Sweet Returns  As the economy began to deteriorate in early 2008, a few things became clear to Gary Gottenbusch, owner of Servatii Pastry Shop & Deli Inc. in Cincinnati: Customers were purchasing smaller items in an effort to be frugal, and soaring prices for flour and other commodities were threatening to eat into his profits. A trained baker whose family has been in the bakery business for decades, Mr. Gottenbusch knew the danger the situation posed to his small business, which sells upscale European cakes like Vienna tortes, along with more common fare such as cinnamon bread, at 10 retail locations in and around Cincinnati. So, instead of hunkering down and hoping the economic downturn would be short-lived, Mr. Gottenbusch reinvented his business. With the help of the Manufacturing Extension Partnership, a program partially funded by the Department of Commerce and designed to give small firms access to manufacturing specialists and other advisers, Mr. Gottenbusch looked for new customers in unusual places, created unique products to drive store traffic, joined a purchasing association to keep costs in check and took advantage of the real-estate slump to scoop up a new store location on the cheap. The result: Servatii not only survived last year, it thrived, with sales rising 15% to $8.5 million. Mr. Gottenbusch declined to give profit figures. Mr. Gottenbusch says working with outsiders took him "a little out of my comfort zone," but it forced him to examine his business processes with a fresh eye. Among other things, the advisers pushed him to create products that were unconventional and unlikely to be offered by rivals -- such as a pumpkin-flavored pretzel that, he says, was surprisingly good and did really well. They also helped him set specific goals for sales and marketing and met with him regularly to track his progress.

Recipe for Success Chef and restaurateur David Burke's business sounds like a financial-crisis perfect storm. Consider: His restaurants are mainly in hard-hit areas including Manhattan's Upper East Side and Las Vegas. Mr. Burke has no experience owning restaurants in a down economy; he launched his empire during restaurant boom times, starting in 2003. And the $7 billion fine-dining industry will see a 12% to 15% drop in sales this year, according to Technomic, a Chicago restaurant industry consultant. And yet...Mr. Burke reports overall growth, some of his restaurants are booked to capacity on some evenings, and restaurant-industry analysts say he is one of the few high-end players with the right idea for the times. How could this be? Mr. Burke, it seems, has figured out a way to navigate the downturn. His strategy is to throw out the high-end-dining playbook that says discounting should be subtle. Instead, he is offering dramatic, attention-getting and significant discounts. By engineering the menu carefully and keeping labor costs in check, he is able to slash prices without losing money, he says. His promotions have included $20.09 three-course meals with items such as oysters and lobster at many of his upscale restaurants, including two in Manhattan (where, without discounts, entrees run $29 to $44), and $5 burgers and milkshakes at his Chicago steakhouse (where a 14-ounce sirloin is $48 on the regular menu). On one menu, he crossed out prices of wine and listed new prices with the term "sale" -- a rarely seen word in fancy restaurants. One of his most unusual promotions is the Wine Auction at the tony David Burke Townhouse in Manhattan. Diners are handed a list of high-end wines with prices ranging from $200 to $600 struck out with red ink. The sommelier approaches the table, suggests that diners make him an offer and begins a negotiation. Wine director Bruce Yung says he sells an average of five bottles a night, meeting his reserve price or better.

Chain Links  You don't have to tell Dave Hogan that people have cut back on remodeling. Prospective clients debate for months whether to buy new floors from his store here, he says, and increasingly they decide against it. The drop in his business reflects the experience of many Floor Coverings International Ltd. franchisees, and of tough times in the flooring industry in general, where revenue fell about 20% in 2008. But rather than hunker down and seek just to outlast the recession, Floor Coverings International, the Smyrna, Ga., franchising company behind Mr. Hogan's store, is using an aggressive marketing strategy to help its franchisees go after new customers. After adopting the strategy early last year, the company beat the industry trend and posted a 4% increase in sales for 2008. Floor Coverings offers its 85 franchisees direct assistance in building networks for referral business. Under what it calls the Fast Start program, Floor Coverings will send an employee to each franchisee for a few days with the mission of helping the franchisee build relationships with other companies that can send clients its way. Typical businesses the team reaches out to include real-estate agents, restoration companies, home inspectors and kitchen remodelers. "The local franchisee often doesn't have the time, or doesn't make the time, to make these contacts," but referrals are essential in this business, says Tom Wood, president of Floor Coverings International. The company's franchisees tend to get 90% of their jobs through at-home consultations, says Mr. Wood, whose company is majority-owned by Franchise Co., an Etobicoke, Ontario-based owner of several franchisers. Franchise Co. itself is a unit of Toronto-based FirstService Corp. Dick Rennick, a Palm Springs, Calif., coach for franchisers, and a former chairman of the International Franchise Association, says he knows of no other franchise company that is using a team of employees to assist its franchisees directly in developing referrals. Fast Start offers a model that other service-industry franchisers could potentially use, he says. The approach is "brilliant," he says, because it allows the company to target customers more effectively and forces franchisees to network -- a vital practice they're often too busy for, he says. "In today's economic climate, we're going to have to be extremely proactive to keep our franchisees getting leads." Franchise experts say another benefit is that the strategy improves communication between franchisees and headquarters. Mr. Wood says he began the Fast Start program after sales growth shrank to 6% in 2007 from 12% in 2006. "We needed to respond quickly or we faced the same type of declines the industry was seeing," he says. Since the program started, sales grew to roughly $27 million last year, and Mr. Wood projects an 8% increase for 2009. By contrast, the industry this year is widely expected to continue the sales declines it has experienced for the past two years. The franchise owners say the help they've been getting is vital. While referral networks are not unusual in the industry, or for franchises, such face-to-face assistance from headquarters on the matter is rare, franchise and flooring associations say.

May I Help You?  Spotting a checkout lane without a bagger at a local Publix supermarket here, Todd Jones offers to help out a waiting customer before another worker intercedes. "I can't let that happen," says Mr. Jones, president of Publix Super Markets Inc. "Mr. George is watching." Mr. George is George Jenkins, who opened the first Publix in 1930 and built the Southeastern grocer into a regional powerhouse by the time of his death in 1996. Mr. Jenkins's simple philosophy stressed customer service -- the same relentless focus that is helping the company through the current tough market. The economic slowdown has ground the growth of big supermarket chains to a halt, but Publix is forging ahead. Without Wall Street to look over its shoulder at every turn, the employee-owned company -- with 1,003 stores and 2008 revenue of $23.9 billion -- has put short-term profitability aside during the downturn. Publix is staying at full staffing levels and lowering prices, in hopes of keeping its existing customers happy and attracting new ones. "Publix is always at its best when the economy is at its worst," says Burt Flickinger, managing director for Strategic Resource Group, which consults in the supermarket industry. "Competitors are now cutting back or contracting, and that's when Publix sees the most opportunities for expansion." The Lakeland, Fla.-based grocer opened 79 stores in 2008. It also acquired 49 stores from Albertsons Inc. for $500 million. Rival Kroger Co. last year opened 60 stores, a figure that includes relocations and expansions. Whole Foods Market Inc. opened 20 stores; Supervalu Inc. added 14 stores. Publix seems to be doing something right. It had the supermarket industry's second-highest annualized sales per square foot, $548, behind Whole Foods' $820, according to fourth-quarter sales calculated by Andrew Wolf, an analyst with BB&T Capital Markets. Kroger, Supervalu and Safeway Inc. all had sales figures at their supermarket-format stores between $460 and $490. And customer approval is high. Publix received an approval score of 82 out of 100, according to the American Customer Satisfaction Index, a national survey of grocery shoppers conducted by the University of Michigan. It was the chain's 15th consecutive year ranking above Kroger, Whole Foods and Safeway.

Pedal to the metal IT IS just as well that high-stakes industrial poker is a game familiar to Sergio Marchionne, the chief executive of Fiat Group. In 2005 he laid the foundations for Fiat’s spectacular recovery by extracting $2 billion from General Motors (GM) as the price for removing a put option that would have forced GM to buy the then-ailing Italian car firm. But even by his standards the next few days will be a daunting test of nerve and stamina from which only two outcomes are possible. Either Mr Marchionne will end up in control of Chrysler, the smallest of Detroit’s Big Three—or he will have quit the table, consigning the sickly carmaker to almost certain bankruptcy. Everything hinges on the negotiations taking place between Mr Marchionne, America’s Treasury, Chrysler’s current management, the unions and secured debt-holders. Mr Marchionne is confident that a deal can be done that keeps Chrysler out of the bankruptcy courts, but he recognises that a lot can still go wrong. Why does Mr Marchionne believe he can salvage something from a firm that the rest of the industry sees as a basket-case—and which has defied the best efforts first of rich, successful Daimler and later of Cerberus Capital Partners, a sharp-elbowed private-equity group that acquired an 80% stake in Chrysler from the Germans two years ago? Quite simply, because he has done it before. When the Agnellis, Fiat’s dominant shareholder, turned to Mr Marchionne, a corporate troubleshooter who was running another company in which they had an interest, they knew that Fiat’s car business, representing half the group’s turnover, was dying. Poorly led, bleeding cash, heavily indebted and saddled with ancient factories, stroppy unions and outdated products, Fiat had become synonymous with failure at every level. Mr Marchionne’s approach to Chrysler, if a deal can be done, is likely to be similar to what he did on arrival at Fiat in 2004. “The single most important thing was to dismantle the organisational structure of Fiat,” he recalls. “We tore it apart in 60 days, removing a large number of leaders who had been there a long time and who represented an operating style that lay outside any proper understanding of market dynamics.” In their place Mr Marchionne brought in a younger generation of executives who could respond to his demand for accountability, openness and rapid communication. Two key requirements that everyone had to understand were the need for speed and an end to the crippling political battles that resulted in scarce capital being wasted on little or no standardisation of parts and a ridiculous number of platforms (19 in 2006 will become six by 2012). The time taken to bring new cars from “design freeze” to production was reduced from 26 to 18 months, and a succession of handsome new models followed, capped by the launch in 2007 of the Fiat 500, the cool, retro-styled city car that embodied Fiat’s renaissance.

The Big Picture: Trends, Changes, Outlooks and Key Issues

In Slumping Economy, a Shift in Shopping Habits PACO UNDERHILL, author, "Why We Buy": We cannot sustain the juggernaut of consumption that we have had here in the United States over the past decade. PAUL SOLMAN: But you want us to be spending as much, don't you? PACO UNDERHILL: I want you to be spending what you can afford. We have Americans out there whose credit card debt exceeds their annual income. We have an entire generation of Americans with little or no fiscal discipline or financial knowledge. Our houses are too big. Our cars are too big. Our debts are too big. Our bellies are too big. Now it's time to go on a diet. PAUL SOLMAN: Do you think that because many of us can't afford to shop as much now, we feel more isolated? PACO UNDERHILL: I think so, yes. And many Americans are deeply frightened. They are frightened because they are facing things that most of them have never thought of in the context of their lifetime. We also know that there is something in our culture called shopping sickness. One of the fundamental issues I think we're trying to discover as consumers is that there are no acquisitions that are transformational. Acquiring that iPod or that tube of lipstick or that Maserati doesn't change us into anyone other than what we were to start out with and that, therefore, our relationship to consumption here has to be more real. 

• Poor Economy Isn't the Sole Cause of Retail SlumpJohn Champion, Vice President, Kurt Salmon.Retail is seeing a real shakeout, and the economy is only one thing that's driving a change in shoppers' behavior. An overabundance of look-alike stores and a fair amount of unpleasant retailer-customer interaction also pay a large part in the recent sales downturn.

Mr. Moms (by Way of Fortune 500) AS the 3 p.m. bell rang recently at the local elementary school here, there were some unusual faces in the crowd of mothers and nannies outside: a half-dozen or so fathers, part of the growing ranks of unemployed men in this affluent suburb. As they waited to whisk their children off for after-school snacks and play dates, these men, veterans of some of the most demanding, highest-paying professions in the country, exchanged news of their kids’ activities, extending what one father, Jerry Levy, called the “secret dad handshake.”  Mr. Levy, 46, who lost his job at a hedge fund last summer, greeted Andrew Emery, 45, who worked in insurance and has been unemployed for a year. They are among the 5.1 million people across the country who have lost jobs in a recession that has put more men than women out of work, according to the Bureau of Labor Statistics. In Pelham Manor, unemployed fathers can now be seen at the elementary school and the grocery stores, or walking with children along the quiet streets, taking their places, by necessity, in the largely women’s world of childcare, housework and school life.

Delta Air Ends Use of India Call Centers Delta Air Lines Inc. said Friday it has stopped using India-based call centers to handle sales and reservations, making it the latest U.S. company to decide the cost benefits of directing calls offshore are outweighed by the backlash from customers. Delta said it stopped routing calls to India-based call centers over the first three months of the year. Customers had complained they had trouble communicating with Indian agents, the airline said. Last month, Chrysler LLC said it would move its customer-service center back from India. "It is fundamentally cheaper to do it in India, but there's also the question of whether it's better to do it cheaper or better to do it better in terms of the relationship with your customers," said Ben Trowbridge, chief executive of Alsbridge Inc., a Dallas-based company that advises on outsourcing. Call-center representatives in India earn roughly $500 a month, or about one-sixth the salary of their U.S.-based counterparts, he added. The Indian outsourcing industry has been struggling amid the global economic slowdown and growing protectionist sentiment in the U.S. American customers account for more than 60% of Indian outsourcers' revenue, and the industry has seen its growth come to an essential standstill as the U.S. economy slowed. Earlier this week, Bangalore-based Infosys Technologies Ltd., India's second-largest outsourcer by revenue, gave a dismal forecast for the fiscal year that began April 1, saying it expected revenue in dollar terms to be as much as 15% below a year earlier. Last week, SLM Corp., the student lender known as Sallie Mae, said it would return to the U.S. 2,000 jobs it outsources in India, the Philippines and Mexico. The jobs, mostly call-center and information-technology positions, were recently moved overseas as part of a plan to trim 4,000 jobs from the company's overall U.S. payroll of 12,000 employees. Delta isn't pulling back from the use of all foreign call centers. It will keep some Jamaica and South Africa centers, which haven't generated such vociferous complaints. "The customer acceptance of call centers in foreign countries is low," Richard Anderson, Delta's chief executive, said in a recorded message to employees. "Our customers are not shy about letting us have that feedback."

Get on the phone!  Last week we hosted a webinar along with our friends from Miller Heiman. The session focused on the findings of Miller Heiman’s annual best-practices survey. They’ve been doing the survey long enough that they have an excellent methodology worked up, which allows them to compare world-class sales organizations to the run of the mill. As you might guess, the differences between the two groups are many, but one finding in particular jumped out at me. In response to the statement “We always review the results of our solution with strategic accounts,” world-class companies agreed at a 90 percent rate. And the non-world-class outfits? Try 42 percent. Let me put that in another, even more horrifying, way: 58 percent of so-so sales organizations failed to review the results of what they sold with their strategic accounts. This is one of the things that convinces me that good outfits have a great chance to weather the current economic storm: 58 percent of your competition is sleeping on the job. That’s what it means when 58 percent of your competition can’t figure out how to follow up with their most important customers.

• This is broken (Seth Godin’s wonderful  three year old, 20 min. pitch on “stupid business tricks” or the “absence of common sense”).

Think Disruptive In my position as a lecturer at Stanford Graduate School of Business, I’ve been working with my colleague Professor Robert Burgelman to examine how large companies can defeat the law of big numbers. Successful businesses sooner or later encounter a situation in which the reward for their success becomes a punishment of sorts. The reward is that they get big. The punishment is that when they get big, it gets harder and harder for them to grow. And then their investors pile on the abuse. In looking at various companies that have been hindered by their own success, we found that under certain conditions a firm can create a new growth spurt for itself by entering an entirely different industry. The target industry must be stagnant and populated with companies that cling to doing business the way they always have. The corporation that enters this environment with an innovative product or service can shake up the status quo and reap big profits. Burgelman and I call this phenomenon cross-boundary disruption, or XBD for short. The defining example of this kind of move is