Respond to the Competition
The Challenge: Our client’s business involves competing for long-term contracts under which they would operate for many years. The firm understood that contract terms were quite important, as the contracts would determine the company’s profitability for several years to come. Some competitive bids were quite formal, such as those involving sales to government agencies. In other cases, less formal processes were in place, but, nonetheless, several firms were always engaged in discussions with the buyers. Our client wanted to develop a framework to determine the pricing strategy appropriate in each such competitive situation.
Assessment: Blue Canyon assessed the factors that were likely to drive purchase decisions in each of our client’s market segments. In conjunction with this assessment, we also developed a competitive response model to help our client understand the likely bid positioning of other competitors. Based on the competitors positions, the model offered our client an appropriate bid response that was consistent with customer decision making, the directions from which the competitive threat was likely to come, the options available to the client, and its own cost structure. In parallel, Blue Canyon helped develop a planning tool that examined the profitability of contracts under alternative scenarios based on market conditions, cost factors, and activity levels.
Strategic Solution: These bid response tools and planning models were applied, as a test, to several competitions the firm had participated in during the previous two years. This process identified several instances in which the firm’s response had focused on lowering prices when an alternative strategy would have been more successful. One of these instances was a money losing contract that could in fact have been profitable. The firm also identified two variables that were critical to determining the profitability of contracts over their life cycles.
Results: Our client implemented this framework and tools as part of its decision-making process for bidding on major contracts. It also changed its contract terms to incorporate the new learning that had emerged about the factors that were likely to influence profits in the later years of contract lives.