FullSpeed Ahead.
Black businesses keep an edge on the competition by leveraging partnership and tackling technologyDON'T TALK TO RICHARD G. CAMPBELL ABOUT Y2K; HE DOESN'T have time for it. Or more to the point, he doesn't have the time to be deterred by it. Like most small business owners, Campbell simply can't afford to have Y2K problems derail his $8.5 million plastic engineering and manufacturing business come January 1. That's why he spent some $40,000 this year for new computers, ensuring his Corona, California-based Campbell Plastics Engineering & Manufacturing would be Y2K compliant. This president and CEO has done everything in his power to make sure his operation will be running smoothly--both before and after the New Year champagne toasts,
"We get computer upgrades every two years," says Campbell "So far there hasn't been any concern."
But Y2K is just one issue that small black business owners like Campbell will face as they strategize to successfully, and profitably, transition into the next century. They'll be forced to investigate other aspects of technology, such as e-commerce, which hasn't even fulfilled its potential, yet is predicted to be a successful source of revenue for companies in the next decade.
"Companies that aren't involved in e-commerce won't be in business very long," says Courtland Cox, director of the Minority Business Development Agency (MBDA) in Washington, D.C. "Black businesses have to really focus on this issue."
Those who have relied on federal contracts as a primary source of revenue have already noticed the winds are changing. Now you must prove you're a SDB (small, disadvantaged business) to become certified for 8(a) contracts by the Small Business Administration. Being a minority is no longer the defining qualification. In addition, the federal supplier base is rapidly consolidating, which means that to compete, you must be larger and better-equipped to perform and produce more goods and services.
The good news: the bull economy has allowed many to expand and diversify. There are a record number of small black firms in the U.S. (more than 880,000 in 1997), which bodes well for the future if they embrace technology and are committed to growing by any means necessary--alliances, mergers, acquisitions--to level the hypercompetitive playing field.
Yet small black business owners still face significant challenges, including limited access to capital, and competition from larger firms in a shrinking supplier pool. If small black firms don't expand and take advantage of nontraditional markets, they could have a difficult time staying in business for the remainder of the year, much less thriving in the new millennium.
DRIVING A DOOMING ECONOMY
Minority businesses are branching out from the retail and service industries where they have traditionally predominated into manufacturing, transportation, construction and technology, helping to power the surging economy we've experienced for nearly a decade. In 1997, the number of African American-owned businesses was 881,646, an increase of 108% from 1987. In addition, these businesses produced $59.3 billion in revenues in 1997 and employed 580,000 workers. Skill intensive areas such as business services are the fastest growing kinds of minority enterprises, followed by finance, insurance, real estate and manufacturing.
"Small black firms need to be concerned about the short-term economy, but should also be looking ahead," says Margaret Simms, vice president for research at the Joint Center for Political and Economic Studies in Washington, D.C., and a member of the BLACK ENTERPRISE Board of Economists. "Where the economy will grow next year may not be in the same areas as the past. They should take advantage of demographic trends, including the growth in the minority population, the increased engagement of women in the workforce and the aging population."
And while we're now experiencing a strong economy, a slowdown or recession is still possible. Simms says new firms that have never been in a downturn should assess the elasticity of the demand for their products or services, take precautions with their cash flow and avoid long-term credit or supplier commitments should they find their budgets stretched to the limit.
THE PROCUREMENT PICTURE
There has been a significant shift toward reducing the number of suppliers, and those remaining are expected to provide more than one product or service. This is particularly true of the automotive industry. Small minority suppliers must keep pace by growing larger through joint ventures and strategic alliances.
One example of a successful partnership is the establishment of Bridgewater Interiors L.L.C. as a joint venture which will supply automotive interior systems for General Motors. The joint venture--the product of Johnson Controls Inc. (JCI) and a Detroit-based minority business group--began production last summer. The firm's chairman and CEO is Ron Hall, former president of the Michigan Minority Business Development Council. William Pickard, CEO of Regal Plastics (No. 43 on the BE INDUSTRIAL/SERVICE 100 list) serves on the board. JCI, is a $13 billion majority-owned auto interiors firm,
"The contract was originally awarded to JCI from General Motors with the caveat that they form a joint venture with a minority-owned entity and locate the firm in Detroit's Empowerment Zone," says Hall. "For those who have aspirations of growing and heading up a large company or becoming a Tier 1 supplier, I don't think you'll get there unless you form strategic alliances, especially with a majority company."
However, Hall and other experts agree that partnerships are risky and can cost you--your money or your business--if you choose the wrong mate. You must retain business and management control, particularly if you're partnering with a majority firm, to ensure that you don't absorb a disproportionate share of risks. If you fail to deliver goods or services as specified in your contractual agreement, you could be penalized, so make sure that safeguards which clearly define what is expected of each partner are spelled out in your contract.
Black suppliers who contract with the federal government are by now familiar with the SBA's SDB (small, disadvantaged business) program, whereby businesses that have been determined to be socially, economically disadvantaged are no longer self-certified. Firms must now be officially certified by the SBA or a designated private certifier to qualify for procurement opportunities in private and government markets. The new system is expected to reduce costs, prevent fraud and ensure that the program is administered equally. Once certified and listed on a public online registry, a firm is eligible for a price adjustment of up to 10% for SDBs bidding as prime contractors in selected industries. In 1998, the federal government awarded $5.9 billion in contracts to SDBs, or about 3% of the total procurement budget of $200 billion.
"There was no clear definition of what an SDB was, so people said they were disadvantaged when they weren't," says B. J. Holland, president of BJ Concepts in Fairfax Station, Virginia, which provides business strategy and management consulting sources and is a private certifier. "Now you must fill out several forms and provide certain corporate and personal documents. If you're already an established small business, most things you already have in place. But if you're a small business, it can be time-consuming."
About 7,000 businesses have been certified out of 30,000 in the U.S. The deadline for certification for prime contractors to use the SBDs to receive credit toward their subcontracting goals was September 30.
"A lot of small businesses don't understand the program. If they're not in the 8(a) program, they don't want to do the paperwork," says Holland. "They don't understand the positive aspect--prime contractors must comply and work with SDB firms or face the possibility of being penalized, and small businesses can take advantage of marketing to these primes."
Some fear the program will make it easier for majority-owned firms to qualify as SDBs by lowering the standard of proof to a preponderance of evidence rather than clear and convincing evidence. Also, some worry that those who already opposed minority programs will shut them down altogether.
"I think the certification process is great because the SBA is able to eyeball and see who is truly disadvantaged, but I hope this will help minority companies and not hinder our growth," says Gloria Smith, president of Smithlain Enterprises, a technical support services firm in Huntsville, Alabama. "There's too much emphasis on third-party certifiers. Small businesses can do the paperwork themselves; I did it myself and worked with an SBA specialist."
Another issue on the table involves the National Minority Supplier Development Council (NMSDC), a New York-based organization that matches more than 3,000 corporations nationally with certified minority suppliers. NMSDC's businesses must be 51% minority owned, operated and controlled, but it's considering an option for those privately held minority businesses that are interested in or capable of attracting venture capital from institutional investors. These firms would be able to own less that 51% of stock but management and control would still have to be in their hands. At press time, NMSDC was to vote in October to recommend creating the option for some minority businesses. NMSDC contends that the 51% requirement limits growth and capital opportunities for minority businesses.
Harriet Michel, president of NMSDC, says minority suppliers are most likely in need of venture and equity capital rather than debt financing to grow. This money can come from both nonminority and minority sources. She says the rule would most likely affect less than 1% of its membership, and minority enterprises would be assessed and qualified on a case-by-case basis.
Minority organizations are divided about whether the rule would be good or bad for minority businesses. The debate wages over to what degree minority business owners are in control of their firms if they don't retain majority ownership and the impact on the majority of NMSDC minority firms that won't be able to attract equity capital.
"We believe the 51% should stay in place even though we understand what the NMSDC is doing to try to attract capital. But only a few [larger] firms will benefit and I feel many smaller firms could get hurt by it," says John F. Robinson, president and CEO of the National Minority Business Council (NMBC) in New York.
TAKING CHARGE OF TECHNOLOGY
Information technology and e-commerce will be one of the most challenging issues facing small black businesses. To survive, they'll need to use technology more efficiently and as an integral part of their competitive business strategy. Also, the Internet represents a vast territory of unlimited potential to market, promote and buy and sell products and services (see "Working the Web," August 1999).
"E-commerce is a whole new way of doing business that has become the hottest sales and distribution channel in decades," says Creighton W. Lee, marketing executive, black-owned businesses at IBM Americas in White Plains, New York. "It brings a tremendous opportunity to grow your business to compete by transforming critical business systems to customers, distributors, suppliers and employees through Internet-based systems. Black business owners are moving just as aggressively and quickly as any small business owner toward e-commerce because they're aware that to grow, they need e-commerce technology."
According to the Office of Advocacy of the Small Business Administration, large and small businesses are capitalizing on electronic commerce and the market demand for it. From 1996 to 1998, the percentage of small businesses with access to the Internet doubled from 21.5% to 41.2%. And in 1997, small businesses earned an estimated $3.5 billion in e-commerce sales, with future projections ranging from $25 billion to $300 billion and more. Moreover, it's estimated that by next year, nearly one-third of all business-to-business transactions will be performed through e-commerce.
However, barriers to e-commerce include start-up costs, security of data and skilled personnel to maintain a site. But Lee says the benefits of e-commerce are worth the investment because it allows small business owners to reach new markets globally, creates customer and brand loyalty and allows collaboration with manufacturers to grow revenues and market share.
But Martha V. Daniel, president and CEO of Information Management Resources Inc. in Costa Mesa, California, which provides information technology consulting, says e-commerce isn't for everyone.
"A lot of people go out and decide to put tons of money in a Website without putting any thought behind it," says Daniel. "It's like printing 5,000 brochures, randomly distributing them and wondering why you don't have any business."
Daniel says the first step is initiating communication on the Internet, then understanding who you are, who your customers are, what will sell online and how you'll fill orders.
"Don't spend a lot of money on software and technology until you understand how you can move products and services across the Net and what will sell," says Daniel. "Find a Web or IT service company to install your system or select the right one. Don't buy what your friend has; your firm may have different needs. You need to be selective in finding someone to help you understand how to implement e-commerce into your overall business strategy."
Whether participating domestically or in cyberspace, the baton has been passed to small black businesses. You can remain viable and competitive into the next century and beyond. To achieve this, you must embrace technology and look to one another to share your assets and expertise to win the race to economic independence.
RELATED ARTICLE: Seeking Capital Gains
Studies indicate that minority businesses are significantly more likely to be denied bank credit, and when successful, receive smaller loans than comparable nonminority businesses. Some experts say lenders and investors are also largely unaware of the growth potential of this emerging minority market. Despite the significant growth of minority-owned businesses, the amount of venture capital (and the number of investment funds) that are operated by or targeted to black businesses is inadequate. For example, one study found that minority businesses have an estimated capital need of $144 billion per year. The estimated total amount of investment funds allocated to private equity capital is $85 billion. Yet, of this, only $1 billion to $2 billion is managed by minority-owned firms and/or targeted to minority businesses.
In an effort to spur minority business ownership, a growing number of firms are assisting minority companies in obtaining financing. One such firm, Capital Strategies Inc., was founded in 1994 on New York's Wall Street to capitalize small businesses when lending institutions can't or won't.
"When a loan gets above $100,000, that's when the banks want to know everything," says Capital Strategies founder Bentley Whitfield. "But still prospective loan applicants find that they are still being denied the necessary funds due to admission of faulty credit, lack of collateral or no experience in the area of business."
Darrin Smith, an NFL Seattle Seahawks linebacker, founded Access to Capital Group Inc. in Dallas in 1996 to bring together angel investors and growing companies that service ethnic markets. "The ethnic market is growing and represents a great investment opportunity," says Smith. "There are a lot of people with good ideas who just need capital. We teach them what to do when they get in front of investors."
On the federal front, the SBA has created the New Markets Initiative, a public-private partnership to provide tax credits, investment capital and credit, and technical assistance to stimulate business formation and job creation in underserved rural and inner-city communities. Investment monies will be funneled into these areas through venture capital companies that provide equity venture capital financing and technical assistance. As an added component, the SBA will select approximately 10 nondepository lending institutions to make SBA-guaranteed loans targeted to New Market small businesses. This initiative could lead to investment of as much as $15 billion in these areas, according to the SBA.
RELATED ARTICLE: Making Way For Y2K
Studies show that one-third of small firms haven't even addressed the Y2K problem because they have limited financial means to recover from business losses or to make emergency technical adjustments.
"It's not too late to implement Y2K solutions," says Creighton W. Lee of IBM. "If you don't, your applications won't run, which would have an impact on invoicing customers and supplier relationships."
To protect yourself from the millennium bug, see our recommendations in "More Y2K Glitches That Could Bug You," October 1999, and consider these recommendations from Information Management Resources CEO Martha V. Daniel:
* Make sure your equipment is Y2K compliant. Form a committee or designate someone to create an inventory of equipment; decide what needs to be done (repair, replace or throw away equipment or the software that runs on the equipment); decide if you can make adjustments internally or need to hire a qualified and competent IT consultant; set a budget; fix your equipment; test and retest your equipment; go through a trial run of your Y2K-compliant equipment and set up a contingency plan and update it often.
* Address banking relationships and potential cash flow issues that may be impacted by Y2K. Extend credit lines with your existing financial institutions to address account receivables problems. "Most small businesses operate with three to four large corporations as their client base. If these clients' accounts receivables don't pay on time, you'll have a cash flow situation," Daniel says.
* Talk to your clients' accounts payable departments about issues they would have in making payment. Make sure your firm is at the top of the list to be contacted should problems arise and work out alternative payment methods, such as being paid one month in advance.
* Prestock your inventory, especially if you are a manufacturer. This could head off potential cash flow issues if you aren't able to get supplies to fulfill your contracts. If you run out after the first of the year and Y2K becomes real, you may have to spend more for supplies that will be more in demand.
* Investigate alternative means to moving your product. Set up relationships with suppliers in different geographic locations so that if you're unable to get supplies to the West Coast and you're on the East Coast, you'll have inventory or supplies on the West Coast.
* Where practical (and legal), form relationships with your competitors to create teamwork agreements. Should Y2K create problems, you'll have the means to keep each other in business by sharing clients and suppliers.
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| Title Annotation: | black business management issues |
|---|---|
| Author: | GALLOP, GERDA D. |
| Publication: | Black Enterprise |
| Geographic Code: | 1USA |
| Date: | Nov 1, 1999 |
| Words: | 3033 |
| Previous Article: | ON THE MOVE. |
| Next Article: | STRADDLING BOTH WORLDS. |
| Topics: | |