Arm yourself to win
A new book by Jim Champy reveals how small, high-growth companies are creatively beating the competition in tough times.
(FORTUNE Small Business) -- In this economic dip, the lessons found in Jim Champy's new book, Outsmart! ($22.99), should prove particularly apt for any business owner looking to grow. The management consultant who co-authored the bestselling Reengineering the Corporation, Champy introduces us to entrepreneurs who thrive amid chaos by outsmarting and outpacing their competitors. Here are a few of their stories.
Do everything yourself
A rare and stubborn group of leaders has bucked the outsourcing wave of the past two decades and outsmarted rivals by doing it all themselves. In theory, outsourcing is a positive-a firm can cut expenses while maintaining long-distance control and may benefit from its partners' expertise. But when a product must be tailor-made for each client or when it must meet exacting standards, outsourcing might be the wrong path.
Special Application Robotics falls into both categories. The firm designs custom remote-control robots to exacting standards to keep workers safe as they perform the deadly job of deactivating, decontaminating, and dismantling nuclear and other hazardous-waste facilities. The robots, some of which are 100 feet long and cost as much as $2 million, are specially constructed to operate in a range of hellish conditions. If they break down, no one can go in to get them for repair.
S.A. Robotics was started in 1992 by Dan Johnson in his Loveland, Colo., garage. It grew into a 12-person operation for designing and creating technology in a variety of areas. But by 2001 revenues had topped out at $1.2 million, and the company was deeply in debt. Johnson sought help from Mike Cappello, who became co-owner and CEO of the firm.
Virtually from the moment he arrived, Cappello insisted on bringing every aspect of the operation back into the company. All the jobs that had been subcontracted out - for example, software code writing and the supply of high-tech raw materials such as carbon fiber - are now handled in-house. A visitor to S.A. Robotics can experience the whole process, from design, to shop floor, to product test facility, to shipping department. Within four years annual sales rose to more than $17 million, and the workforce grew to 140.
Cappello likes knowing that his personal success or failure, as well as that of the company, is not in outsiders' hands. "I can't subject myself to being a victim," he told me. "If I promise a customer a delivery, I don't want it to depend on some subcontractor coming through with his piece of it." His take-control instinct has been bolstered by financial concerns. An unexpected cost increase or delivery failure could turn profits into losses.
If you manufacture a complex, customized product, the need for control is clear. If you provide a more commoditized product or service, however, outsourcing part of your work might be a legitimate option. An outsourcing partner might be able to do some of your work better, faster, and more cheaply - and might also bring industry know-how and capabilities that will improve your product or service.
The key is to know what you are really good at, what makes you distinctive, and therefore what you need to keep in-house. If you decide to outsource the manufacturing of a particular component or an entire process, don't pick your outsourcing partner on the basis of price alone. Make sure that your partner shares your business values and priorities. With this shared perspective, you're far less likely to have problems with quality, scheduling, or communication.
Questions to Ask Yourself
Do you know the source of your distinctiveness? What do you do really well? If you choose to outsource any of your work, do you know who will do it and the business values by which they operate?
Piggyback on a Trend
Sheri Schmelzer was a boulder stay-at-home mom who loved Crocs (CROX), the clogs that mold to the wearer's feet and sport cooling holes. One day in 2005, Sheri and her daughters were working on an arts and crafts project when Sheri stuck a silk flower through a hole in one of the clogs. By the time Sheri's husband, Rich, a serial entrepreneur, arrived home that night, his whole family was wearing bauble-decorated Crocs. He saw the potential in a flash, and wasted no time patenting the idea and organizing a company called Jibbitz.
What Rich realized was that customers who identify with hot brands such as Crocs create secondary markets for entrepreneurs agile enough to piggyback on the original company's success. By summer 2006, Jibbitz had 40 employees. Its products were offered in 3,300 stores in the U.S. and hundreds more in Europe and the Middle East. In October 2006, Crocs announced its purchase of Jibbitz for $10 million.
To build the company, Rich relied on word-of-mouth marketing and Jibbitz.com; he avoided spending on traditional advertising. He also made certain that efficiency didn't suffer. Sometimes a market responds so fast to your idea that you lack time to build the necessary delivery capability without risking a quality sacrifice. Rich understood that without the infrastructure to handle potential demand, he had to limit commitments to customers. If you're too busy to answer the phone or deliver on time, you'll lose customers no matter how popular your product.
Rich kept his eye on Jibbitz's future. He knew that piggybacking on a fad could last only as long as the fad itself. So even amid the mushrooming demand for Jibbitz-enhanced Crocs, he and Sheri were developing new product lines, including wristbands, belts, and anklets-anything with holes that customers could insert their decorations into. If Crocs had worn out their welcome, the Schmelzers' diversification could still have yielded a viable, if much-reduced, business.
All the firms I researched for this book began with a lean attitude; Jibbitz maintained just 40 employees even as it grew in overseas markets. That said, the temptation to hire as you grow is always there. In my reengineering work, I found that throwing people at problems was often a company's first, albeit ill-conceived, course of action. It often worsens problems and increases operating costs.
Questions to Ask Yourself
Have you bought any popular products lately that demand an unavailable accessory or service? Is this something you could design, make, and sell? If your piggyback product or service proves popular, is the product you're hitched to doing well enough to provide a growing market? Can you control your growth? What will you do when growth of the host product slows?
Create Order Out of Chaos
The business of providing replacements for consumer items such as TV remotes and oven knobs had long been a disaster area. Customers often had to wait months, and retailers weren't solving the problem. There was no way they could keep thousands of parts from the dozens of manufacturers on hand, so customers had to jump through hoops to order what they needed (What's the part number? What's the model number on the machine?) and then wait endlessly for it to arrive. Enter Dean Summers and Glenn Laumeister. Summers managed a chain of electronics stores and knew the routine, which regularly left his customers frustrated and angry enough to seek their next purchase elsewhere. Laumeister, an entrepreneur and marketer, specialized in using technology to solve complex business problems. Together in 2001 they created New York City-based Partsearch Technologies, bringing order and sanity out of chaos.
Partsearch developed a catalog in which each model of home appliance, electronic product, and the like was presented with a list of its parts. The company targets both professionals who repair appliances and electronics, and individual consumers - those with the skill and patience to make their own repairs. Today its catalog lists eight million parts and accessories for more than 560 brands. Its clients include Best Buy (BBY, Fortune 500) - its first partner - and Comp-USA. The company had 2006 revenues of $63.7 million-plus an astounding compound annual growth rate since 2001 of 85%.
While dysfunction exists everywhere, you must choose the right chaos to tame, just as Partsearch did. There's no point in tackling a problem to which you bring no special resources. With his background, Laumeister knew how to use information technology to solve complex problems. Fixing the dysfunctional parts market was a challenge suited to his skills.
If you have an appetite for a strategy based on simplifying complexity, seek an industry that lacks an integrated set of services to quickly respond to customer needs. Fragmented industries such as health care - those in which there are many operating parts that do not work well together - provide some of the best opportunities for high-growth strategies.
A heavyweight partner can help ease a launch, as Partsearch found, but you risk being overwhelmed - or overtaken - by your partner. Before Laumeister sought help, he had already developed a capability that could not be easily replicated. Establish a unique and valuable proficiency before you seek a partner to enter a market. You will be taken more seriously and be better able to protect your interests.
Questions to Ask Yourself
Do you have the appetite for dealing with chaos and complexity? Can you find a fragmented industry or fragmented part of an industry to tame? Will your approach allow you to deal with scale and complexity? Can you break into the business or industry alone, or will you need partners? Have you gone far enough in developing your ideas and business so that you have some leverage in negotiating with your partner? 
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