Network: December 1992
I am a partner in a three-man machine shop with sales of about $150,000. We have some very large clients, and we want to let them know we appreciate their patronage. What are other CEOs giving during the holidays?
Stevensville, Mich.* * *
A gift should represent your business, of course. But that leaves most companies to make a leap of imagination. Larry Pentz, CEO of Pentz Design Pattern & Foundry, in Duvall, Wash., made that leap five years ago. He enlisted the assistance of one customer, a candy maker, for whom he had fashioned detailed chocolate molds. Pentz made a special mold for the holidays, and gave each customer a candy bar embossed with Pentz's logo.
This year Pentz is in the gift-giving mood again. He may cast miniature aluminum anvils for customers -- a couple hundred at about $15 apiece. John Deere and other foundries traditionally gave similar anvils at the holidays, so the gift demonstrates the company's heritage. The manufacturing demonstrates its ability.
The Delahaye Group, in Hampton Falls, N.H., measures the effectiveness of clients' public-relations efforts. CEO Katie Paine wanted to work the measurement theme into her holiday gifts. She considered giving rulers, watches, calendars, or egg timers. But a consultant advised her "not to hit customers over the head during the holidays." So last December Paine sent clients and prospects pottery made near her offices and a hand-drawn card, at a cost of about $10 per recipient. The gifts stressed her New Hampshire location and the solidity it implies. Afterward, she got not only thank-you calls but orders from people she'd been trying to reach for months. She's repeating the gift this year, and the cards will carry a sketch of the French town where Delahaye recently opened its first European office.
For the past 15 years I have worked hard to grow a fledgling media-production business. But I feel I've wasted those years because I don't own the company. The owner, who runs another business full-time, gives me complete authority but will not give me ownership. I might start my own company, but I signed a noncompete agreement. What can I do?
Name Withheld* * *
"It's a catch-22," says Glenn Cafritz, who wriggled out from under a noncompete to become a partner in Global Mail, a $13-million international delivery service in Sterling, Va. (#35 on this year's Inc. 500). "You learn a business, then the courts say you can't do what you've learned." His first tip: go over the agreement with a lawyer to see if it's overly broad.
A noncompete agreement should protect your employer's business, but it should not punish your initiative. If the agreement defines your employer's industry or its geographical market too broadly, or if it runs for, say, 10 years, a court may "blue pencil" it (that is, pare it back to reasonable limitations), probably in a preliminary hearing.
If the agreement looks reasonable, you should stick to it. Your employer, too, must honor the agreement. Make sure he or she has kept to the provisions -- written and unwritten -- under which you signed. Before Cafritz made known his plans to leave, his employer cut his commission in half. Cafritz and his attorney considered that a breach of his agreement. Cafritz maintained that his original commission was a provision of the agreement, and said as much in a registered letter to his employer. His employer never sued.
One of Cafritz's new partners, formerly a salesperson at the same company, had also signed a noncompete, but he was fired a few months before starting Global Mail. Stuart Cable, a partner at the Boston law firm of Goodwin, Procter & Hoar, says that many noncompete agreements kick in only when an employee quits, not when one is fired. But, he adds, "a well-drafted agreement makes no distinction, because in many cases it's hard to tell what happened." Although the partner's noncompete was well drafted in that regard, the employer never pursued the issue, partly because in his new job Cafritz's partner controls no accounts directly.
What if the noncompete is reasonable in its limitations, your employer hasn't cut your pay, and he or she won't fire you? Well, some CEOs say, don't worry, noncompetes are worthless.
Cafritz, of all people, disagrees. His company requires all salespeople and key personnel to sign noncompetes. He limits the agreement to one year, and to proprietary information. Employees can leave for a competing company, they just can't use Global Mail's secrets.* * *
International Credit Checks
We are starting to make international sales. How should we check the credit ratings of foreign companies?
Laguna Hills, Calif.* * *
"First, take advantage of connections with your bank," advises Richard Worth, CEO of R. W. Frookies, a cookie maker in Sag Harbor, N.Y. It should have access to information on foreign customers' credit, especially if it has branches or affiliations overseas. If not, maybe it's time for a bigger bank.
Also try the international-trade division of your local chamber of commerce. Within 30 to 60 days it can provide you with World Traders Data Reports, which are available for most countries with a market economy. A one-page report costs $100 and includes contact information, annual sales, and an assessment of the company's overall financial status. The reports are compiled from research provided by private firms and embassy staff members through local contacts.
The World Traders Data Reports may cost you less than reports from commercial agencies. For example, Dun & Bradstreet's International Division (800-932-0025) charges $148 for a report on an African company. Reports are also available on-line from groups such as Graydon America (800-466-3163), Justitia International (203-589-1698), Owens OnLine (800-745-4656), and Piguet International (203-584-8088). They cover companies' credit in all countries with a market economy.
Or you could avoid the expense by requiring letters of credit (L/C) from customers. Written by a bank and given to the seller at the request of the buyer, an L/C guarantees the payment of a customer's drafts up to a specified amount within a specified time limit. It allows exporters to draft a bill of exchange on the bank instead of on the importer, and transfers risk to the bank. But you pay for transaction costs, for mistakes (say, typos or missing signatures), and for every amendment.
Instead, for hands-off international sales, John Rennie, CEO of Pacer Systems, in Billerica, Mass., recommends working with an export-management company (EMC) for a few years. It buys and resells the product after checking customer creditworthiness itself. "The responsibility becomes theirs," Rennie says. That's how he sells his satellite-navigation equipment.
There are trade-offs. By selling to an EMC at 15% below the U.S. list price, Rennie forfeits about 10% of profit, as well as direct contact with customers. But he thinks it's a good way to test international waters. Once you see that your product is successful, you have the option of selling directly.* * *
Opportunity Cost Redux
I wish you would resolve a dispute between me and my friend. In your quiz on economic literacy (FYI, April 1992, [Article link]), you asked about opportunity cost. How is it derived? And was your answer correct?
Plymouth, Mass.* * *
Let's replay the question: "Sandy Smith can take a job paying $10,000 a year when she graduates from high school, or she can go to college and pay $5,000 a year for tuition. Measured in dollars, what is her opportunity cost of going to college next year?" The correct answer (and, yes, we gave it) is $15,000. Several question-authority types disputed that, so we consulted Robert Strom, vice-president of the Joint Council on Economic Education, based in New York City, which publishes the longer test from which we took our quiz.
"The opportunity cost is the highest valued alternative that must be forgone because a particular choice is made. In Sandy Smith's case, the major cost of going to college is the forgone wages that could be earned by her participation in the job market ($10,000). Tuition, however, is another part of the opportunity cost of college, because the dollars spent on tuition ($5,000) cannot be spent on an alternative good or service. Therefore, in this case the 'real' (or opportunity) cost of Smith's year in college is $15,000.
"Our decisions as individuals, as businesses, and as a nation would be much improved if everyone understood this economic concept." n -- Reported by Michael P. Cronin, Christopher P.Fontes, and Vera B. Gibbons.