By Walter J. McDonald with Franco Carlini, Guest Contributor
The fundamental challenge for machinery manufacturers in the next decade is not so different from the last: produce a better product, at a lower cost, and put it in customers’ hands faster than your competitors. Some OEMs (and machinery dealers) have adjusted more effectively to the realities of today’s dynamic marketplace than others.
The priority business action agenda will continue to be Increase Revenue, Avoid Costs and Improve Service (IRACIS).
There are three fundamental drivers that impact this agenda: expansion of the enterprise, diversification and changes in the basis of competition. To address these drivers, each company must search for and follow through on its unique strategic opportunities.
These opportunities come from self-evaluation and comparisons:
- Expansion of the enterprise, driven by success and growth. (Example: adding new distribution territory through acquisition.)
- Diversification, driven usually by management’s desire to sustain growth, spread risks or reach to changing markets. (Example: adding machinery rent-to-sell program.)
- Change in the basis of competition, driven by customer requirements, changes in competitors’ strategy, introduction of new technology new government legislation, changes in raw materials sources and/or changes in regulation. An evolution or shift in the primary factors that determine why customers choose one company’s offering over another in a market. The basis of competition is the key differentiator—such as price, quality, features, convenience, tech support, brand, speed or innovation—that drives competitive advantage. When this basis changes, industries are disrupted, incumbents may lose ground, and new strategies emerge. (For example: video cassettes >> DVDs>> network streaming.)
Management Challenges
Expansion poses several challenges. These challenges naturally include those of simply learning to manage a large, more dispersed and complex organization. Expansion also entails making decisions of greater financial and long-term impact.
Small business owners tend to have a hard time letting go and have a tendency to micromanage their business due to the fear of decreasing the quality of their products. In other words, they sacrifice long term expansion for short term quality assurance and the business stagnates.
Diversification could offer a way to continue to fuel growth through entry into new markets and/or new products and services. These moves could create major new challenges for such organizations. They range from the need to develop and introduce new products and product support capabilities and learning how to operate businesses with new value-added structures that might differ markedly from the core business to the need to allocate resources among competing business and to understanding new competition.
Diversification is a big topic, but a few things to consider are:
- Profitability of competing projects/business lines
- Correlation between products (search for true diversification)
- Geographical diversification (important in a globalized economy) protects you from government policy (potential tariffs) and can help you increase margins.
- Customer diversification (you don’t want to have a low negotiation power with a few customers who contribute almost all your profit)
- The benefits of a partnership: when going into a new market— it is wise to partner with an already established firm so learning the new industry is faster, with fewer mistakes. This approach is widely used in many industries with international footprints.
- Cross selling services/products in related industries. A business might not seem attractive at face value, but there could be added services that make it an attractive opportunity.
Competition can change the entire landscape creating many challenges. The principal ones drive the need to recognize a demand for new business strategies, the need to re-segment the firm’s core markets, the adaptation of new technology, and, the need to understand change in the firm’s product/process/service value-added, and/or cost structure.
These three drivers impose significant challenges and highlight the need for a continuing set of changes within the firm. These drivers create major threats to the enterprise. And, these challenges require that management recognize, react to, and force change in their business in time to avoid catastrophe. These management changes, called “opportunity transitions,” are crucial to success.
Early warning signs usually occur that indicate the need for new opportunities. These warning signs can be used in diagnosing the need for changes (and which ones) and in leading managers to make the necessary transitions ahead of the crises which often develop.
Opportunity transitions describe the dynamic process by which market opportunities emerge, evolve, mature and shift—often triggered by disruptive forces like technology advancements, changes in customer needs or competitive disruptions. This involves moving from one set of high-value opportunities to another, requiring the organization to detect, prioritize and capitalize on these shifts to avoid obsolescence and sustain growth.The transition process is not voluntary; many of the changes are externally driven. Yet, every company has a considerable degree of influences over the opportunities it attempts to pursue. Insightful management can set the stage for change in dealing effectively with competition, the marketplace, and internal realignment.
Searching Out Opportunities
A variety of methods and techniques are available to assist in finding new ways to achieve or sustain competitive advantage. And an eight-step approach, incorporating some powerful management tools, can be used to identify opportunities for this strategic effort. These include:
- Select a strategically distinct business: product group or organizational entity.
- Thoroughly understand that business: environment, competition, and market place.
- Survey buyer purchase criteria. But keeping in mind that for more innovative industries, the customer may not be aware of possibilities.
- Set a creative climate and build a team for search and follow through. Small business could focus on growing internal talent (new graduates), at lower cost, providing fresh views and insights.
- Do a value chain analysis of problems, issues, and linkages.
- Perform technology leverage analysis.
- Begin creative synthesis of actions with the search team using opportunity value indexing for screening and selecting opportunities with high potential.
- Make search and analysis a permanent part of the business action agenda.
The value chain analysis is a strategic tool used to identify and evaluate the activities within a business that create value for customers, while pinpointing opportunities to reduce cost, improve efficiency, or gain competitive advantage. It helps OEMs and distributors understand how each step in their operations contributes to the final product or service and overall profitability.
A companion to this assessment is an appraisal of what customers perceive as their needs, the things that have “value.” These things encompass both product and nonproduct attributes (e.g., product support). The goal is to increase value to the attractive buyer. This is what buyer purchase criteria is all about and it takes customer surveys and internal reviews to find out what is really important.
Next, consider technology leveraging. This refers to the strategic use of digital tools, systems and innovations to optimize operations, boost efficiency and productivity, drive growth and create competitive advantages in manufacturing or distribution businesses. Product process, and information technology should be considered, alone and in combination. Value chains, purchase criteria and technology leverage show where opportunities are present. New graduates tend to be more familiar with newer technologies, so a mixed team of young tech savvy employees with more experienced and industry knowledgeable peers should give the best chance of leveraging technology in the most effective way possible.
These analytical methods stimulate new patterns of thinking about the business in your management team. The outcomes from these methods need to be coupled with creative group problem solving to address the challenge of selecting the opportunities to pursue.
Once the opportunities have been generated, they need to be evaluated and ranked to consider cost, benefit, and risk. Opportunity value indexing (OVI) is one method for performing this rating. OVI is used to compare and rank the relative worth of a series of opportunities within the context of a specific set of company objectives, capabilities and resources. OVI helps avoid over-focusing on ROI alone, incorporating opportunity cost and long-term value.
This process provides the means of examining and obtaining a common interpretation of large quantities of objective and subjective information. Because resources are always limited, the selection of the best opportunities must be organized, rationalized and documented. This assures that the alternatives which are considered meet the needs of the organization.
Franco Carlini is a guest contributor and a Duke alumnus of the Master of Quantitative Management. Franco worked in the pharmaceutical industry for two years prior to pursuing his master’s degree. Franco now works as a Business Analyst for a Port Agency company with offices in many countries in North America and the Caribbean.
Additional Resources
For a non-technical, non-mathematical illustration of this process for a machinery dealership please refer to my Strategies, Tactics, Operations for4 Achieving Dealer Excellence text, Chapter 2, “What Produces in Which Markets?” pages 35 – 60