Market Inertia Leads to #1 Position

Headlines in the Los Angeles Times and Detroit Free press tell the story. The Japanese automaker may claim the world title from GM next year. Detroit workers have much to worry about as three of Detroit’s biggest auto makers announced nearly 60,000 job cuts in the past week with more to follow. One article says:

“As GM tries to win customers with deep discounts, Toyota is raising prices on some models”.

Clearly U.S. automakers have lost the market inertia they had survived on over the last few decades.

Thirty years ago, my father only bought Plymouths, my grandfather only bought Fords. Today I have friends that rave about their third Toyota purchase or second Lexus purchase and rave about product quality and reliability. Another business associate has had chronic problems with his recently purchased GM truck. The market inertia has shifted to the foreign producers of high quality products and it won’t change soon. The 10 best vehicles according to the latest Consumer Reports analysis are all made by foreign manufacturers with Toyota and Honda leading the pack.

Toyota has the market inertia to lead them to the number one spot and GM will crumble as long as U.S. consumers expect their products to be inferior to Toyota. Like the effect of inertia on turning a big ship, it will take a lot of time and effort to change GM’s direction in the mind of consumers (market inertia) that is leading them away from the #1 spot in the auto market.

Win by Reducing Product Complexity?

Mark Gottfredson and Keith Aspinall wrote a great article in the latest issue of Harvard Business Review on balancing product complexity with customer satisfaction. Their point is that “pursuit of innovation can be taken too far” offering customers so many product options that the cost of production complexity outstrips the benefit of incremental sales. Getting the right “balance” between innovation and profitability is the objective of their analytical process.

They suggest that achieving this balance starts at the source, ‘the way your company views customers and their needs”. I would suggest it also is important to consider how your business is positioned relative to those customer needs and your competitors in the market you serve. For example:

1. The company positioned as the low price competitor can and should focus on every opportunity to reduce cost in order to maintain price leadership. If that means limiting product options (and manufacturing complexity) it is consistent with their market position.

2. The company that occupies the position of the market leader can and should reduce product line complexity by eliminating those product options outside those that meet the basic needs of its customers and understand they will leave open a market position to those higher priced competitors satisfying unique customer requirements with custom or semi-custom products

3. The company that is positioned as the performance competitor often caters to unique customer needs and offers greater complexity in its product offerings as the basis for its competitive success. It must to realize that it cannot compete on price as its costs are higher than most rivals.

Ford, with its Model T, positioned itself as the low price leader in the market and offering only one product. General Motors found it could offer more options (adding complexity) and compete with Ford to win the greatest market share. The first step in addressing the balance between product complexity and satisfying customer needs is to understand where you are positioned in the market battlefield. Reducing product complexity may work for the successful low price competitor or market leader but may not work for the performance competitor. Successful business strategy must be tailored to your market position, what works for K-Mart does not necessarily work for Nordstrom.

Market Leaders can Also Fail

Once the largest corporation in the U.S. and the clear market leader in the automotive market; General Motors lowered 2001 earnings by $300-$400 million and lost $6 Billion in the first 10 moths of the year. Bank of America analyst Ron Tadross said the likelihood that GM will file for Chapter 11 bankruptcy protection in the next 2 years has increased to 40% according to an article in USA Today.

What happened to the overwhelming strategic power of being #1 or #2 in the market your serve? How many business gurus from Tom Peters to Jack Welch have extolled the virtue of being #1 in the market you serve. The strategic power of #1 is derived from economies of scale and typically lets them enjoy higher margins and potentially offer lower prices than smaller competitors. A winning strategy if you manufacture a large volume of a few products that meet most customer needs.

Alfred P. Sloan, the genius behind the early growth of GM recognized how customer needs are different and change over time. He organized GM’s product lines from low cost Chevy’s to luxurious Cadillac’s to cover those diverse needs. In the 70’s and 80’s these product line differences blurred as management focused on maximizing financial returns on each product line - cheapening the Cadillac and overpricing Chevrolets. By cutting costs at every opportunity they degraded their product quality relative to foreign competitors while maximizing union employee compensation and benefits and executive bonuses.

Now they are one of the higher cost manufacturers and losing share to more flexible suppliers that are adapting to changing customer needs as the number of models available in the industry has grown by 30 percent in the last six years and the unit sales per model has dropped by 24 percent. More product models undermine the economies of scale the largest competitor derives from its market position.

How do you bring down #1 - Keep your costs flexible and expand product options to destroy their economy of scale.

How Significant is Your Competitive Advantage?

At what point does a competitive advantage become a “significant” competitive advantage? Easy, when it changes buyer behavior and leads to increased market share, it has become “significant”. Of course, I have yet to meet an entrepreneur who doesn't think their new product idea is significant.

Case in point...

Last week at the 6th Annual Energy “Venture Fair”, we gathered together entrepreneurs seeking funding and venture investors seeking investment opportunities. I listened to numerous presentations by entrepreneurs touting their latest innovations. I heard claims like, “33% energy savings over existing technology”, “reduce costs by 20%”, and “complies with latest federal environmental guidelines”.

From an investor's perspective, the most important questions were often left unanswered. For example, were these claims “significant” in the minds of customers or only in the mind of the inventor/entrepreneur? Will their new product displace existing products, and if it does, can it be easily duplicated by entrenched suppliers of older product designs?

There is only one test to verify the “significance” of a new product idea. Take it to market. When the customers pre-ordered over 2000 new very light jets from Eclipse Aviation, it proved their competitive advantage was “significant”. They sold these jets with brochures, mock-up demonstrators and promotional advertising years before production.

I encourage all entrepreneurs that are looking for funding to take their ideas to the market like Eclipse Aviation. Use low cost brochures, mock-ups, prototypes and advertising to see if customers will place pre-production orders. This will verify the “significance” of your competitive advantage in the mind of customers before you negotiate high cost financing for the production of your product.

Positioning Multiple Buyers as One Customer

As a supplier of technical services to a government agency in the 80’s we were always faced with a multiple set of buyers on each procurement. Each buyer within the agencies selection committee had a different need priority. Yes, we had to assess each buyer’s influence on the decision process and address their individual need priority.

• The Technical Lead wanted the best qualified contract personnel to meet his technical requirements. In many cases he wanted specific technical people with a proven track record.

• The Contract Management Lead wanted suppliers that were able to control costs and meet forecasted budgets and deadlines.

• The Procurement Manager wanted the lowest possible cost in order to meet his limited allocation of funds for the project.

• The Affirmative Action Manager wanted to be assured that each prime contractor would subcontract at least a percentage of the work to minority owned businesses.

• The Agency Headquarters Representative wanted to meet the political agenda of the day and accomplish the overall agency objectives.

In a given procurement we may score best technically and see the contract awarded to the low cost bidder or we may be the low cost bidder and see the contract awarded to the best technical team. Some contracts we successfully bid in the past were preferentially set aside for non-profit or minority owned businesses.

The successful bidder satisfied all team members’ minimum requirements and overwhelmed the team decision maker in meeting their needs. The trick was to know each team members need priority and where the power lay in the decision making team. Consistent winners in government services contracting like SAIC, ManTech, and Lockheed Martin know the customers team, their individual needs and who will dominate the decision process.

When selling to any large organization, do you know all the buyers and their need priority? Do you know which buyer will most influence the decision process?