Big companies are always selling off operations on which they do not make enough money. It's not unusual for the new buyer to quickly increase the profits, cash flow, and market share.
Why is this possible? It's simple to understand this success: Upgrade the business model to eliminate the weaknesses that harm business results under the old ownership.
Let's look at an example to see what's possible.
American Woodmark was already a high volume manufacturer of kitchen cabinets when it realized that its profitability would be much higher if volume could be further increased. More effective plant utilization would make this profitability benefit possible.
With the rapid geographical expansions of Home Depot and Builder's Square stores, American Woodmark realized that it could become the first cabinetmaker to offer one week delivery for builders, remodelers, and do-it-yourselfers. When time was of the essence to the building supply store customer, American Woodmark would have a cutting edge advantage.
In 1980, the company established up a new production schedule and set of distribution centers to make this one-week performance possible. Selling through Home Depot and Builder's Square mean that distributor mark-ups could be much lower than through existing channels. When price was of the essence to the building supply store, American Woodmark would have an important advantage.
As a result, anyone could get quality kitchen cabinets faster at lower prices for the first time. When both advantages were issues, American Woodmark could expect a double-edged advantage.
The new distribution channel provided a further advantage. Homeowners, builders, and architects could also conveniently see the cabinets by visiting a local store in order to pick out the ones they liked best. Seeing the cabinets and being able to hold samples of countertops and flooring next to the cabinet finishes allowed savvy homeowners to get a more pleased installed result.
Volume climbed as these cutting edge advantages removed competition from expensive cabinetmakers who took a long time to deliver. By 1985, the company (which had been an LBO of a Boise-Cascade operation) went public to raise the capital to finance its rapid expansion.
What are the lessons?
1. Look for what is not working very well.
2. Consider how trends could be used to improve that performance.
3. Identify and implement new business models that present outstanding ways to capture the benefit of the trends.
Copyright 2008 Donald W. Mitchell, All Rights Reserved
