Thu, September - 9 - 2010 |
(on a truly global perspective)
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Did
you ever read The Perfect Storm? The book by Sebastian
Junger recounts the disappearance of the "Andrea
Gail", a fishing vessel that in the fall of 1991 left the port of
Gloucester, Mass. and headed for the fishing grounds of the North Atlantic. Two
weeks later, an event took place that had never occurred in recorded history:
The collision of three huge storms. It
has been characterized as the storm of the century and the Andrea Gail was
caught in the middle of it. The story and
tragic ending of its crew has since been made into a movie.
If
we stop to consider the macro-economic forces affecting today’s business
climate, it could be said that we are confronting our own storm of the century.
But we are confronting a collision of more than three storms at once: Exchange
rates, Industry Consolidation, Increased Competition, The Wal-Mart Approach,
“Good Enough”, and the increasing influence of China in the global economy.
Let’s take a closer look.
·
Exchange
rates: the
expensive Euro has put an anchor on
European exports and a tremendous pressure on the final pricing European
manufacturers can obtain for the products they sell overseas. To remain price
competitive many Companies have been forced to neutralize the exchange rate
disadvantage by lowering the price, chipping away at traditional margins and
significantly eroding profitability.
·
Industry
Consolidation: Is
this the seed or an offspring of
Globalization? What we know for sure is that consolidation has reduced the
number of available customers. In this environment even if the number of
suppliers serving the same industry were to remain the same, there is not enough
water in the well to allow everyone to take the same (market) share as before.
Inevitably market shares shrink, and/or profitability decreases.
But, you may say, consolidation is not something new. We have been
through other periods of industry-wide consolidation before. Just what is it
about consolidation in 2004 that is different from other consolidation trends of
the past? The difference in my view is that most our customers are confronting
the same challenges mentioned above with their own customers. Consequently, they
also have fewer customers. With fewer
customers themselves, they are also losing market share and/or profitability.
This leaves us all in the same boat drifting through the age old currents of
supply and demand, in which the only possible outcome will be determined by the
Darwinian rules of survival of the fittest. Some of us will navigate through
this storm and survive to sell another day, but it is very likely that some of
us will not.
·
Ruthless
Competition:
As said before, during periods of consolidation if the number of suppliers in a
given industry remains the same, supply will become greater than demand. But
newcomers also are appearing on the scene upsetting the playing field. The
consequences are predictable. At the same time due to their own struggles to
maintain profitability, uphold share prices, and increase share value, many
Companies are forced to work with reduced capital expenditure budgets. Not only
the rules, but also the game itself changes. Increasingly we find that our
consolidated customers appoint a central purchasing manager, often with little
or no product, process, or technical knowledge. But to their credit they are
well trained to buy, at the lowest price, period. Some seem to spend every
minute of consciousness (and sub-consciousness) immersed in a virtual world of
Excel. While crouched over their laptops, they feed on constant connectivity and
rely on Outlook Express for communication with the outside world. (I know what
you are thinking, but try to disconnect that Ethernet cable and risk your
life!!) Unresponsive to any forms of
communication that do not begin with price and delivery, this breed of the 21st
century purchasing manager relies on monologue (his) and not dialogue (yours).
He seems oblivious to any talk about product differentiation that is not
numerical and therefore cannot be plugged into a spreadsheet. Inevitably, these
buyers look beyond their traditional qualified suppliers at lower cost
unqualified alternatives with the promise of obtaining the same product and
quality at half the price. Suppliers who had not been granted so much as an
appointment in the past suddenly find a “welcome mat” by the front door,
that is unless the entire transaction is made via the Internet…
·
The
Wal*Mart Approach
of doing business is quickly becoming a common term in the business world
requiring no translation into any language. Some economists argue that this new
business approach may legitimately be considered as an offspring of
Globalization, although they agree DNA testing may be required to prove it
conclusively… What is the Wal-Mart Approach? It is a way of doing business in
which the focus is on price, price,
price.
price,
price,
price
price,
price.
Do you get the picture yet? The Wal-Mart approach aims to commoditize the
products of each of its suppliers. It is a continuous persistent approach in
which the buyer leaves no place in any discussion for a serious product
differentiation and comparison. Its aim is to limit each negotiation to a fast
conclusion of arriving to price and delivery, while stripping you of your
commercial self-esteem. And then, just when you thought the negotiation has
finally reached its conclusion in your extremely diminished favor, you discover
that it was not a conclusion at all. It was only a pause. The next time Wal-Mart
calls you will be expected to lower the price for the same product because,
thanks to Wal-Mart, you “the supplier” should learn with each new order how
to lower production costs, become more efficient, and pass these savings on to
Wal-Mart”. No excuses. That’s the school.
“Your
product may be better
But
your price is too high,
I
found a cheaper alternative
So
thanks, now goodbye!”
And
that’s the song. The Wal-Mart approach takes but does not give. Any of the
sacrifices, extra efforts, and free services you may have provided yesterday is
not linked to the negotiation of tomorrow. In fact they may only be a liability
because the Wal-Mart factor places no value as to what these commercial virtues
cost you as a supplier. They are not recognized. They do not make the Wal-Mart
list of the ‘top ten’ purchasing decision criterion.
The more you give at no cost, the more it will be taken for granted, and
the more it will affect your own bottom line. Of course while I refer to
Wal-Mart because they are know to have developed this approach, today this
approach has spread and is practiced globally by most of the large retailer, but
also across industries. No matter where in the food chain your business finds
itself, you, your customer, his customer, your suppliers and your customers’
suppliers have all surely crossed paths with exuberant graduates of the Wal-Mart
schools. And if you have not, it is only a matter of time. We are living in
unusual times, but this vicious cycle in which we presently find ourselves is
the equivalent of Economic Cannibalism. So please, take your seat, and while
you’re at it, could you pass the salt & pepper?
·
"Good
enough”:
This is the one that scares most of us the most because it threatens to "commoditize"
our industry, if we allow it. Many
businesses are being hit from below by the development of much cheaper
alternatives. Since many corporations due
to decreasing profitability are dealing with limited capital expenditure
budgets, the less expensive alternatives are very appealing. The technology used
in the cheaper alternatives may not be as good as that employed by your Company,
but it is suitable for some of your customers’ needs, and it is only about
half the price. This invasion of cheaper alternatives points to a wider trend.
Low-cost technologies that are considered “good-enough”, even if they do not
match the performance of cutting edge products. Good enough alternatives are
starting to determine how technology leaders will operate in the future. To
defend market position, many Companies have had to adopt the technology as well,
eating into their own sales and gross margins. Margins slip and inevitably the
first victim is the R&D department, as a decreasing percentage of earnings
is made available for the development new products. Companies are finding
difficulty in defending their higher cost base in the face of aggressive pricing
and sales conditions of its most ardent competitors. With such slim gross
margins to work with, even some of the largest buyers are retreating from high
cost solutions of the past, concerned of the impact such large expenditures will
have on their ROI, profitability, and share prices.
In
the past, when confronted with any one of these forces at one time, most
businesses found a way to successfully navigate through the storm. However at no
time in history have all of these forces collided at once. Choosing a course and
strategy for your business has never been so challenging, but calm heads, not
over reaction will prevail. To navigate through this storm will require
patience, focus, and the formation of flexible business strategies. Innovation,
creativity, and time will energize this process, and while it may be painful,
there is room for optimism when we remember that no trend lasts forever. That is
why it is called a trend. This consolidation trend had its beginning, it will
also have its end. The same I believe will be true of the Wal-Mart approach to
doing business. And although it may be difficult to understand today, it is also
plausible that for those who survive and emerge from this storm, they may find
that the end actually justified the means.
I
am not qualified in this article to mix the emerging economic impact China adds
to this storm due to the fact that I reside in a region where only the outer
bands of this storm have reached our shores. And although their impact spreads
across a wide spectrum, they are felt mostly in subtle ways, difficult to gauge,
and even more difficult to attempt to control. But the impact of China will be
felt more and more, here, and throughout the world as we go forward.
So
my friends choose your course, and good luck. How we navigate through this storm
will determine our future, how we do business, how our customers do business,
and our own existence. I wish you good fortune and, good sailing…
From
The Watchtower, this is the Hawk.
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