Catherine Vigil, Tucson Business Coach

The Story

Michael Shoel grew up in Seattle, attended the American Academy of Dramatic Arts in Pasadena, California and stayed in Los Angeles to pursue an acting career.

To support himself, Shoel worked in telemarketing and owned a catering business. At one job, he hawked the movie "Pippi Long stocking," in VHS and Beta formats, to independent video stores.

In 1987, he started a film distribution company, Phoenix Distributors. Shoel sold low-budget horror films to independent video stores, including his first private label film, "Cannibal Campout."

To release a private label film, Shoel acquires film rights for a fee or future royalties, invests in packaging and marketing, and ships orders. Sales grew steadily and in 1989, Shoel's life partner, Donald Zelkowski, became his business partner. They moved to

Tucson in 1994 and changed the business name to Ariztical Entertainment. The duo pushed for more sales by expanding to 200 titles, including 10 on private labels.

In the last decade, sales peaked twice at $900,000. At each peak, the average transaction was low, the shipping process became inefficient and sales margins dropped.

Personnel management was difficult as numbers of employees rapidly grew. "Cash was coming in the door as sales increased and, due to inexperience, I was losing money and didn't know it," Shoel says.

Each peak was followed by a big drop in sales as the company retreated to comfortable sales, staffing, and profit levels.

Shoel's partner unexpectedly died October 2001, leaving a void in vendor and customer relations.

This year, Ariztical should hit $400,000 in sales and is once again in the black. There are three part-time employees.

The company specializes in films with gay and lesbian themes, plus foreign and art films. About 30 percent of sales are to major retailers, such as Blockbuster and Hollywood Video. The remainder are to independent video retailers.

Shoel still wants to increase sales. His long range goal is sales of $2 million and ownership of rights to 50 to 100 movies. This time, however, he wants to grow profitably.

The Advice

"The company experienced problems typical of those in transition to professional management," says Catherine Vigil.

There was an effective sales engine but owners performed most day-to-day operations. Without time or training for business analysis, cash flow was high but profits were marginal.

Shoel must shift to a leadership role. The company's mission, and Shoel's vision, should be clearly communicated to staff, vendors, and customers.

The mission should become the operating principle guiding strategic planning, product development and transactions.

To carve out time for strategic management, the owner should delegate key tasks and manage mistakes as they occur, rather than personally managing each aspect of the business. Formal processes should be backed up by written policies and procedures. In this case, a long-time employee was assigned the task of writing a policy manual. It is frequently reviewed and changed, subject to Shoel's approval.

"Most business owners do not understand how to read balance sheets and profit and loss statements," says Vigil. "You don't need to be an accountant to have a working knowledge of the basics."

Periodic review and analysis of financial and other reports is essential for monitoring important business trends and company earnings.

In growth stages, additions to overhead costs often cause profit dips. Careful management, with an eye on long-term objectives, keeps costs from spiraling out of control.

The most critical element to address is defining core business. This is complex, requiring judgments about products, processes, business models, and intellectual property. Shoel inventoried five assets - most profitable customer accounts, unique strategic capabilities, critical products, important vendor and other relationships, and important strategic assets such as brand names or patents.

In this case, Ariztical's product offerings included eight films generating 80 percent of profits. Each film's distribution rights were exclusively licensed to the company and marketed with the company's label.

Accordingly, Shoel is shifting promotional activity to exclusively owned products and planning releases of newly acquired films. New films should meet the test of fulfilling the company mission and fitting this strategy. Shoel's partner, Zelkowski, was a day-to-day contributor to operations. His absence increases the importance of delegation and strategic planning. Company management now rests squarely on Shoel's shoulders and he does not have time or energy for marginally profitable products or inefficient business processes.