Using Leverage to Build Value

Last weekend I attended a reunion of former Conquest employees.  Conquest was a very successful technology company founded by Norm Snyder and Bill Anderson that was sold to the Boeing Company in 2003.  It was a treat to see old friends and colleagues but what continues to stick in my mind are the former employees of Conquest that have gone on to start very successful companies.  They include Mosaic Technologies Group, founded by Mike Grier, Summit Solutions, established by Jeff Leco, Dauntless (recently acquired by Abraxas Corporation), founded by Mike Martinka, AVID Technology Professionals, started by Troy Bundy and Entegra Systems, founded by Dean Johnson.

Unfortunately for Boeing, these success stories, representing about $100M in revenues, all occurred outside the confines of their company.  So the question for Boeing, or any other acquiring company is this:  how do you keep talented staff with entrepreneurial tendencies inside the company?  How do you create an environment where budding business leaders and entrepreneurs can stay with their existing firm, share the risk and reap the rewards but continue building value in the parent company?

Successful business leaders are on a continual search for ways to leverage their business.  They look for ways to take what they do well today, and turn that into a revenue enhancer, a cost reducer, a customer benefit or a low risk way to increase corporate value.  A leverage point is that one component of corporate operations that can be turned to over and over again with proven results.  Corporate leverage points are tried and true performers and are continually called upon to deliver.  Corporate leverage points are normally associated with a component of the business representing a vertical slice of the operation.  In the Gilded Age, this translated into Standard of Ohio and Standard of New York carrying the bulk of the weight for Standard Oil.  Today, it’s Google banking on its core search engine revenues to fund all types of new initiatives or Southwest Airlines leveraging its efficient business model and squeezing their competitors by not charging for bags.  Every organization, small or large, public or private, product or services has Leverage Points.  Companies that maintain their success over time actually know what their leverage points are and how they enhance the value of their business.

The Internal Franchise

A franchise is a method for marketing and distributing products and services. Companies like GNC, Jiffy-Lube, Burger King and 7-11 have used franchising to grow very rapidly and secure a significant share of their markets before competitors could catch up.

In a franchise system, a franchisor licenses a business formula–a complete way of doing business–to a franchisee. The franchisee agrees to operate the business according to specific guidelines, and to pay the franchisor a percentage of sales as a royalty. The franchisor/franchisee relationship is governed by a franchise agreement–a binding, legal agreement.

The franchise model is one of the fastest growing segments of our economy. According to the International Franchise Association, franchises employ more than eight million people in more than half a million outlets, and a new franchise outlet opens every eight minutes in the US. Franchising provides the opportunity to run your own business with less risk than starting from scratch on your own. One of the hardest parts about starting a business is to design the business concept. In franchising, that is already done for you. You simply have to learn to run the business. You have a serious head start on competitors who start from ground zero. Because of these reasons, many Americans are turning to franchising to pursue their entrepreneurial dreams.

An Internal Franchise is similar to a traditional franchise operation. In an Internal Franchise the company makes its Operating Model explicit and then “franchises” the Operating Model to its employees.  The employees are then coached, mentored, and trained to operate the business at the highest level of proficiency. In an Internal Franchise, the franchise agreement is not a legal binding contract, it’s the company’s culture – perhaps you could consider it an Ownership Culture.

If a franchise is a method of marketing and distributing products and services, then an Internal Franchise is the last, untapped distribution channel for your products and services. When you can turn to your employees, teach them your Operating Model, and empower them to run the business, you have established a new distribution channel. It is a powerful form of leverage, not to mention it’s a tremendous value proposition for your employees. And, it’s an effective framework for dealing with the challenges of running a business in today’s competitive, rapidly changing environment.  It is your acres of diamonds and if mined properly, the leverage point your business will grow to rely on.

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