Concrete Products covers the issues that attract producers of ready mixed and manufactured concrete focusing on equipment and material technology, market development and management topics.
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MANAGEMENT BY DAVID E. SHEDD COMPETING IN A "LOW PRICE" WORLD In most industries, the business environ- ment remains brutal; growth is slow or non-existent and price competition ram- pant. The question on the minds of many business executives is simple: How can I in- crease profits and grow when all my cus- tomers care about is low price, low price and low price? Of course, there is no easy answer to that question. If there were, the airline industry would not have a 20-year-plus record of de- stroying corporate value. Still, there are steps you can take to combat this epidemic of price competition. Perform Today The prime reason that companies are stuck in brutal price competition is that customers do not perceive any difference among their competing suppliers' prod- ucts and services. With everything the same, all competitors are just competing "to be the best" by offering the best price, best service, etc. Long-term, such competition is hugely destructive, but short-term it might be the reality. To deal with it, perform with good quality, good service, and good customer rela- tions. The dirty little secret is that in many—if not most—industries doing what you say and performing will differ- entiate you immediately. Especially in the business-to-business world, a quick test to see whether you are performing better than the competi- tion is whether you are getting the last look from customers and the opportunity to accept or reject the work. Many cus- tomers will reserve last look for their fa- vored suppliers, owing to performance or relationships. If you are not getting the last look, how you can improve your re- lations with your customers to get that last look for nearly all work? Performing well will only get you so far. To escape the underworld of price compe- tition, you must differentiate your prod- ucts and services in order to create unique value that your customers want and are willing to pay a good price for. Differentiate (Part I) The first step in differentiation is to iden- tify the products and markets where you already are differentiated. Look at all your product lines and markets and find those areas where the margins are the highest and the price pressures the lowest. WWW.CONCRETEPRODUCTS.COM • What is it about that part of the busi- ness that makes it different from the others in the low price arena? • Is it your relationship with the cus- tomer? • Is it in a different market niche? • Are you offering a unique product or service to these customers? • Is this part of the business growing? Once you have answered these questions, your focus should be to mimic the differ- entiable features in your other business or to focus on getting more work on that "better" part of the business. Differentiate (Part II) The next step is strategy. What can you do with your customer base and/or your prod- uct and services offering to make some- thing unique, something valued, and something not easily copied? • Can you create new value with a truly unique and distinctive offering? • Can you offer additional follow-on items or services that customers value but that are not as price sensitive? Think of the company that performs routine maintenance on a complex prod- uct that offers re-sale and upgrade items or follow-on services at a good (not lar- cenous) price. • How else can you improve the cus- tomer's experience of using your products? • What other complementary mar- kets would it make sense to enter? • Other industries or markets to which your suppliers sell? • Other industries that companies in the chain of purchasing sell to? Differentiate (A Cautionary Tale) In finding a way to differentiate, avoid adding features or services that are eas- ily copied and just raise the cost of doing business for all competitors with the in- creased value going to the customers and suppliers. The perfect example of this is the airline industry where many new in- novations—frequent flyer miles, busi- ness and first-class upgrades—did not differentiate the airlines involved. In- stead, all the value and benefits accrued to the flying public. To paraphrase business strategist Michael Porter, competition within an industry is not just among competitors, it is also a tug of war over value between a company, its customers, and its suppliers. The End Game? I hear some of you saying: a) All of our work is low price; b) We get last look on every- thing; c) We have tried to find new and in- novative ways to solve our customer's problems; they don't exist. If this is really the case, then you have two choices: milk the business or exit. In milking the business, you slim down and try to make as much money as you can for as long as you can. Michael Porter (this time quoted directly) says it well: Sometimes, at the end of the day, the answer is that there are few opportuni- ties to grow rapidly with your strategy and do it profitably. You've got a strong position in your space, and no good way to expand it significantly. Here, the huge mistake is to deny that reality and to try to turn lead into gold. Instead, you should simply make a good ROIC (return on invested capital), pay good dividends or otherwise return capital, and enjoy creating value and wealth. The second choice is to exit or sell the busi- ness. All too often, continuing to work hard in a permanently depressed and ultra-compet- itive business is like beating your head against the wall. It only feels good when you stop! David M. Shedd heads Winning B2B Leadership, an advisory firm serving small to middle-market companies in the concrete prod- ucts and other manufacturing industries. His experience includes 10-plus years in executive positions with a major precast concrete producer. He is the author of Build a Better B2B Business and main- tains a blog at www.helpingleaderswin.com. He can be reached by e-mail at david- shedd@cox.net, or by phone at 480/734- 0569. This is the fifth in a series of columns addressing leadership and business success for the concrete products executive. SEPTEMBER 2012 | 9