International trade and finance initiatives coupled with going to one step distribution became a game changer

1. No Man’s land | 4ms | The MODEL
by Peter duff
MODEL issues
1.
2.
3.
4.
Infrastructure for growth
Analytics and for casting abilities
Metrics
New products, strategies and services
In an earlier article we explored the 5 habits necessary to get through
“No Man’s Land, that is the place where middle market companies
falter, where the company is too big to be small and too small to be
big. The chart above takes one of the four areas or barriers that a
company faces and needs to get right. Let us be positive and not refer
to them as graveyard areas but the more generous approach of calling
them business growth speed bumps. In this particular discussion we
are going to focus on model issues.
The particular model issue I want to focus on is the appropriate
distribution system for a an Austin electronics company that is
selling internationally. The model worked fine in the earlier years
as the company grew and that was a two-step distribution system
into Europe (this replicated what had worked well in the US). That
is selling to a major distributor in a prime location or in the case of
international sales, a prime country, and let them sell on to other
smaller countries. The Austin Company wasn’t particularly worried
that the smaller countries were not well serviced. The opportunity at
that time was seen as small and business size for the total business
was considered adequate. You can see in Figure 1 how the distribution
worked and the example of how the German Distributor went on to
service the Croatian customer or the UK Distributor went on to service
the Scandinavian countries.
USA
About Peter Duff
Peter is a partner in the
Newport Board Group A CEO
and Board Advisory firm of 70
Partners. The partnership
advises middle market and
early stage companies to
transition to higher levels of
profitability. Reach Peter at
Peter.Duff@NewportBoardgroup.com.
Prime countries
GErmany
To Croatia, etc.
UK
to scandinavia
FIGURE 1

2. The chart shown on the last page described a system that had worked well in the past. The
company was glad of the distributor support for not only the prime European Country but the
smaller surrounding countries. The model constrains began to emerge as the company looked
for further growth from the outlying countries. Price resistance was felt when the prime country’s
distributors’ profit margin plus freight was added on to the final price. The product became
substantially less attractive. Additionally these outlying companies needed assistance with purchase
financing and having two steps prohibited that support. A new model was required when the value
proposition and the value chain are out of sync then it must be addressed quickly to maintain the
growth posture of the company. Figure 2 below.
REVENUE
VALUE PROPISITION
Product >
Value >
Cost >
PROFIT
$.00
VALUE CHAIN
COST
LOSS
FIGURE 2
If the customer obtained the product directly a lower price for the product landed in the country
could enable more sales for the customer and of course facilitate extra sales for the Austin based
electronics manufacturer. If the customer took purchased directly the manufacturer could enable
third party financing for the transaction. While the Austin based manufacturer would not be a
party to the financing transaction it could facilitate the provision of finance.

3. NEW MODEL
USA
Germany, UK
USA
To Croatia, Scandinavia, etc.
FIGURE 3
The new model is shown above in Figure 3. What we see is the prime countries serviced directly as
shown of Germany and the UK. But by passed for servicing the smaller countries who are serviced
directly. Eliminating the prime country’s distributor’s profit margin enabled a price drop to the
outlying country organization and made the product substantially more attractive. Additionally the
company went out to lending organizations in Europe ( a multi lingual broker in Amsterdam ) and
enabled leases to be subsidized (zero percent financed leases). This again was paid for by the prime
country’s distributor’s margin elimination. The electronics company margin here in Austin was not
diluted. The final customer bought lower priced product, availed themselves of zero percent financed
leases and positioned the electronics company to receive not only the initial increased volume but
the customer’s credit line was untouched enabling follow on sales of accessories and parts.
This is just once example where the model needed to change and was changed without too
much disruption to the business. For many entrepreneurs, the choice is not as straightforward.
They must systemize their business, so, as it grows the model accommodates the delegation and
professionization of the business. More next time on navigating around the Four M’s of Model,
Market, Money and Management.
More next time on the 4 M’s when we address
the challenges of Management. Resource
center www.BusinessBankofTexas.com.