How to Deliver Sustainable Value.

Those of us who run entrepreneurial companies suffer from a common affliction. We go to bed at night thankful for the abundance and flexibility that entrepreneurship offers us. We wake up excited about taking advantage of the opportunities ahead. In between, we occasionally wake up in the middle of the night in a cold sweat, worried that we could run out of runway.

Any business worth pursuing will attract competition. It is as if your core competency is on a collision course with obsolescence. Every business has an inflection point where things get a lot harder. A business that once grew at 20% gets to a point where it can only sustain 5% CAGR. Margins get tighter. Customers who have moved to professional procurement don’t call you back anymore. How does a business fight through such inflection points?

The key to delivering sustainable value is participating in multiple steps in the value chain. Companies who only provide a singular product or service offer only token resistance to copycats and commoditization. Clearly, specialists command higher prices than generalists. However, the constant evolution of a business model within market niches is a vital element of value creation that can survive the onslaught of competition.

Consider this case in point. Our client Kravitz is a third party administrator (TPA) firm specializing in the design, administration and management of retirement plans. Their clients are small to mid-size businesses, including many professional services practices. TPA firms face intense price competition and mass commoditization of services in a relatively flat 401(k) market and a rapidly shrinking defined benefit pension market.

By the mid-2000s, company president Dan Kravitz saw the writing on the wall for the heavily saturated 401(k) market, and the etching on the tombstone of the traditional defined benefit pension industry. He took a strategic risk on a newly emerging, little known and difficult to administer type of plan, the Cash Balance or “hybrid” retirement plan.

Kravitz created a separate joint venture firm with the fixed income fund firm-Payden & Rygel. Launched in 2009, the Payden-Kravitz Cash Balance Plan Fund today manages plan assets in excess of $250M. Next was a training and certification program, Cash Balance Coach®, to help educate financial advisors and plan consultants about the emerging Cash Balance market. After paying Kravitz for their certification, alumni grew their advisory businesses with Cash Balance plans, and in turn brought new plan sales to Kravitz.

Thanks in part to marketing and public relations efforts by Kravitz, which included a popular financial industry book, “Beyond the 401(k)” and publishing the media-friendly National Cash Balance Research Report every year, Cash Balance plans took off.

Meanwhile, many TPAs who wanted to get a piece of the emerging Cash Balance market were struggling, lacking the requisite experience and unable to invest in actuarial staff and technology. Kravitz saw the opportunity and quickly developed another spin-off company in 2011, Cash Balance Online, Inc., a seamless web-based back office solution allowing TPAs to “private label” the Kravitz Cash Balance product at a lower price point.

Every year, more upstart competitors push into the Cash Balance market, requiring Kravitz to step up the pace of innovation. The company introduced a daily record-keeping system, a mobile-friendly client portal and “Actual Rate of Return” plans, a flexible investment option made possible after recent legislative changes. Six years after shifting the firm to a singular focus Cash Balance plan, Kravitz has created true vertical integration, where the company serves diverse market segments across the entire value chain.

B2B (business-to-business) organizations should learn from these platforms and find ways to combine disparate services as to deliver greater value. Leveraging multiple steps in the value chain is the key to maintaining some form of pricing power.