Insights

Growth Choices: Which Business Units Offer the Greatest Potential?

The lyrics to The Gambler focus on choices: “Know when to hold ’em, know when to fold ’em.” For most businesses, identifying the best choices is among the most critical contributions of their planning process. Which business units or market segments or innovation concepts offer the greatest potential for profitable growth, and therefore represent the best use of our scarce investment resources? Correctly answering that question can ensure that goals are realized and shareholders are rewarded.

It is always a challenge to accurately assess the growth potential that exists across a firm’s various business units and market segments. But it is a challenge that must be addressed, given the reality of scarce resources for investment and the need to spotlight the initiatives that on which management should focus its attention. Peter Drucker once observed “Whenever you see a successful business, someone once made a courageous decision.” Placing bets as to where growth can be realized will always require a bit of courage, but a systematic approach to assessing growth potential can yield insights that clarify choices and lessen the extent to which the leaders of the business feel that they are in fact gamblers.

A process for gaining such insights involves looking at factors that characterize the market environment in which a business unit operates and at other factors that characterize the strength of the position held by that business unit vis-à-vis its competitors. In the sections below, this process is outlined, including a high-level approach to assessment that can help to identify those business units or market segments that have the strongest potential to yield success.

Market Considerations

Three factors that reflect Market Considerations – Headroom, Market Growth, and Margin Improvement Opportunities – can be assessed across a firm’s business units or across the market segments in which it participates. In working with a variety of firms, there have been sharp differences across their business units and market segments along all of these dimensions.

The Headroom metric emphasizes the extent to which the market in which the firm participates offers sufficient room for growth. With respect to Headroom, the favorable end of the spectrum involves instances in which the existing business, defined in terms of both customers (and nearby prospects) and products, offers sufficient room for growth, while the less favorable end involves situations in which significant diversification or new business models are required.

Assessing the available headroom for growth must be done carefully. In all but a few exceptional circumstances in which a business owns a commanding market share, a first pass look will always say there is sufficient room for growth. But that look can be misleading. The more appropriate approach is suggested by an analogy drawn from the recent U.S. Presidential elections. Over and over, we heard about states that were “solid red” or “solid blue,” ones that were virtually certain to be in the camp of one candidate or the other. The same is true of markets and customers. An accurate assessment of headroom must look for the equivalent of “swing states,” those which could realistically be won by the business unit in question. In one application in the medical equipment market, while the business unit for which the assessment was done only had a modest market share, between situations involving long-term contracts and others involving “committed customers,” the available headroom in the coming year was only about a tenth of the overall market.

Market Growth is the second key factor to assess. It is always a major plus to be selling into growth, rather than having to battle to take share from existing suppliers. The most favorable indicator of solid growth potential is when market growth is at or above the growth rates goals of the business unit. Slightly less favorable, but still attractive, are those situations in which a unit’s growth goals can be realized by capturing a larger-than-normal share of the growth increment in the markets in which it participates. The most challenging situation involves a requirement that existing business be taken from competitors in order to realize growth goals.

Part of the assessment of Market Growth involves looking at not only currently-served markets, but also those that are viewed as nearby or adjacent. Most western firms can quickly say there is sufficient market growth if they include growth from emerging markets like China and India. Less extreme, but equally frequent, are assessments that identify adjacent vertical markets or product line extensions that offer meaningful growth increments. Including such additional markets in the assessment of growth potential can be quite misleading, and should only be done if there is truly a base upon which to build and if movement into such nearby or adjacent markets can be done without a significant shift in the business models operating within the firm. The time frame of the assessment is also relevant in this regard; success in even truly adjacent markets rarely comes overnight.

The third factor in this cluster focuses on Margin Improvement Opportunities, which are closely linked to the intensity of pricing pressures[1]. Capacity balance, barriers to entry, healthy markets, and strong customer relationships are the factors that yield positive scores along this dimension. Excess capacity, ease of entry of competitors with look-alike products, troubled markets, and distant arms-length relationships with customers are characteristics of the other, unfavorable, end of the spectrum.

But it is not only the intensity of pricing pressures that enters into this calculation. Also relevant is the importance of pricing to the success of the business unit being evaluated. There are several factors that define how important pricing is to a business. One is the degree to which profit swings are dictated by pricing, instead of being driven by volume, productivity, cost management, and other factors. Another factor is the extent to which customers’ purchase decisions swing quickly in respond to price changes. Situations in which customers involve dual source supply relationships often result in such swings. Vulnerability to purchased commodity price swings is a third factor defining the importance of pricing to a firm.

The best circumstance is one in which there is low intensity of pricing pressures and pricing is only of limited importance to the firm’s profitability. In such instances, the firm has many options available to it (including raising prices), and can select from among them those that are most likely to foster long-term profitable growth. The worst situation in one in which intense pricing pressures are combined with a high importance of price as the main determinant of success.

Positioning Considerations

A second set of factors focuses on Positioning vis-à-vis the competition. Here, once again there are three factors that can be assessed: Purchase Decision Factors, Short-Term Fit, and Business Drivers. There are market factors that affect all three of these metrics, but the most important aspect of the assessment is the comparison of a business unit’s position to that of its competitors.

The quality of positioning with respect to Purchase Decision Factors involves the match (or lack of it) between a business unit’s competitive strengths and the factors that are top on the list in terms of customers’ purchase decisions. If the customers in a business unit’s market are focused on price, then a cost advantage is a critical determinant of a firm’s growth prospects. If the customers are focused on technology and looking for leading-edge products, then advantages along those dimensions will be critical to success.

Most markets are made up of multiple niches, with, for example, some customers focusing on price, others on product leadership, and others perhaps on service offerings. In the assessment of a business unit’s positioning in terms of Purchase Decision Factors, the sizes of each of those segments comes into consideration. A firm that is well positioned in terms of product leadership cannot claim strength in terms of this factor if the segment in which product leadership matters is only a small niche.

The Short-Term Fit assessment involves such factors as first-mover advantages, sales model and channel advantages, major customer relationships, and the relevance of the installed base. While choices as to growth priorities shouldn’t focus on the potential for quick successes alone, gaining a head start on the competition can be a factor contributing to long-term success. The first mover advantages of firms that are ahead in technology and product development are seen over and over in market after market.

The other elements of this assessment involve different short-term considerations. The focus on sales model and channel advantages reflects the challenges that always exist which a firm has to make changes to its existing business model[2]. Avoiding such challenges is an important factor in quickly getting to market. Strong major customer relationships are a similarly important factor enabling early success, with firms that can draw upon strong and trusting relationships to gain sales and “reference successes” likely to be the ones that succeed in other markets as well[3]. And the quality of the match between a new product and customers’ installed base is always a factor determining acceptance.

Evaluation of Business Drivers not only focuses on whether a business unit’s offer addresses the key forces motivating customer interest and solving the problems that are keeping them awake at night, but also whether prospective changes on the horizon work for or against your position. Over and over, disappointments in terms of product development are linked to a mismatch in this regard[4]. Knowing the unmet or poorly met needs of customers is critical to success, and growth potential is highest when initiatives match well to the needs highest on such lists.

There is an important future dimension to the assessment of Business Drivers as well. Often, short-lived successes are associated with mismatches between the offer brought to the market and changes that take place in the business environment. A solid assessment of plausible future scenarios and scoring of the degree to which such changes are positive or negative is an important element of the process. The best growth choices are those that remain relevant and deliver value to customers under all of the likely scenarios that define the future business environment.

Assessing Growth Potential

The previous sections of this paper have defined six metrics, three involving Market Considerations and three involving Positioning Considerations, which can be used to evaluate the relative growth potential of a firm’s business units or of the segments in which it operates. Accurate assessment along each of these dimensions is complex and involves many considerations, as described above. Without reflecting all of that dimensionality, the table below provides a quick summary of the assessment themes and a short statement defining the characteristics of assessments that suggest Low, Average, or Strong Potential for growth:

The earlier sections went into considerable depth about the many dimensions relevant to the assessment of each of the six factors included in this table, and the short summary statements in the table are, at best, quick tests as to whether the evaluation of a business unit’s potential along each dimension is a reasonable one or not. But unless the leadership team doing the assessment can say that the statement in the table is a fair and accurate summary, it should go back to the drawing board and look carefully at the detailed considerations that have been defined in the earlier sections of this article.

One the lessons that has emerged from applications of this process is that “red flags” along any of these dimensions have to be viewed with great concern. Pluses and minuses don’t neatly average out. If there are dimensions along which the assessment for a business unit or market segment identifies negative elements, these must be taken very seriously, as they are more likely than not to thwart growth aspirations. One executive commented that “The greatest value that came from this exercise was identifying the ‘red flags’ for each of my business units. That will define my action plan priorities for 2013.” The lyrics to The Gambler also include advice as to the importance of “knowin’ what to throw away and knowin’ what to keep.” At least over the medium term, it’s possible to change some of the factors that enter into the assessment of growth potential, much as a gambler can change some of the cards in his or her hand. A focus on shortcomings that identifies action plans to remedy them can transform a business’ potential favorably.

Being able to identify the business units or market segments where investments will yield rewards is a critical element of business planning. A systematic process of examining the relative strengths of each business unit or market segment in terms of both market considerations and positioning can allow for scarce resources to be targeted at the best opportunities and for attention to the factors that are inhibiting the growth potential of other units or segments.

Author: George F. Brown, Jr.

1. See George F. Brown, Jr., How Real Are Those Price Pressures?, Business Excellence, March/April 2011.
2. See George F. Brown, Jr., You Know It Ain’t Easy, Business Excellence, September 2011.
3. See George F. Brown, Jr. and Atlee Valentine Pope, Best-in-Class Behaviors in Business-to-Business Relationships, Blue Canyon Partners, Inc., © 2007.
4. See George F. Brown, Jr., They Only Had One Pig, iP FrontLine, September 2012.

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Insights

Houston We’ve Got a Problem

The phrase used as the title to this article, taken from the communication by the crew of Apollo 13 to the NASA ground controllers and subsequently made famous in a couple of movies, was repeated to me recently by a vehicle parts supplier that had been placed on “new business hold” by one of its largest customers.

While not life threatening like the situation faced by the astronauts, it was a significant event for this firm, with dire consequences for its business outlook. Basically, this important customer told the supplier that it would not be awarded any new business until there was a substantial improvement in its performance.

Through interviews with executives in the two organizations about the performance issues that led to this situation, three root causes of the problem were identified. First, in the words of one of the customer’s executives, “They just don’t listen, and as a result, they not only failed to meet our performance standards, but they didn’t even know what we expected.”

The other two problems were also viewed as significant. Again, as summarized by another executive in the customer organization: “When my children were young, I used to read them the Mr. Men books. Well, this supplier has become Mr. Late. And that’s not just a delivery issue, but it’s across the board. They threw our development cycle off track recently by failing to meet their commitment on a key component spec.” The third issue related to business systems, which were described as being “a nightmare, just an enormous time sink for even simple transactions.”

All three of these issues can frequently disrupt important supplier-customer relationships. Best-in-class suppliers are described by their customers in terms of strong linkages, timeliness, alignment along all dimensions including processes and standards, and as delivering positive surprises through best practice competencies. Such strong suppliers are known for their listening skills, and for taking actions on the messages they hear. This supplier’s challenge was to overcome legacy problems along many of these critical dimensions.

The supplier was correct in underscoring the seriousness of the situation – and perhaps in retrospect will someday thank its customer for the wake-up call. In our experience, far more relationships have failed due to implementation problems than any other single factor, even in markets defined by strong price pressures and intense competition. “The gang that can’t shoot straight” often has a short-lived relationship with its customers.

For firms aspiring to improve these key implementation competencies, a research paper[1] we published a few years ago provided a list of ideas drawn from working with strong firms in multiple industries:

1. Get your customer to react to your company’s performance goals and the metrics that it uses to assess performance. Understand your customer’s metrics for evaluating suppliers and see how well they match with your own company’s metrics.
2. Create linked teams from the appropriate functional areas between the two organizations to share plans and identify performance improvement opportunities.
3. Document the geographic and organizational touch points between the two companies and assign individuals to establish communication links at each touch point.
4. Establish an operations champion for the customer relationship.
5. Research and document how your company can contribute to your customer’s success with its own customers. Define clearly – and discuss with your customer – the ways in which you can contribute to successes further down the customer chain.
6. Create a forum to discuss globalization challenges and strategies. Discuss the future of the supplier-customer relationship in terms of the new regions and countries in which it is likely to operate.
7. Identify what firms serve your customer’s competitors, and document ways in which you can outperform your customer’s competitors’ suppliers.
8. Ask your customer to work with your firm to develop insights as to expectations for the business systems of the future.
9. Sponsor process improvement programs jointly with your customer, focusing explicitly on the areas in which there are linkages between the two companies and/or handoffs that determine how well the overall system works.
10. Share benchmark information and other research information with your customer in meetings that include functional experts in key areas where linkage matters.

Avoiding relationship-threatening implementation problems should be a key priority for any business supplier that depends on continuity and growth in its key customer relationships. Making the investments associated with these ideas, and demanding a company-wide commitment to excellence in execution, is the route to avoiding having to ever relay the message “We have a problem!”

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Newton Was the One Who Asked 'Why?'

I recently had the opportunity to work with a client that had decided to implement a new, forward-looking approach to their voice of the customer initiative. Their priorities were sound, as they looked to get beyond the retrospective report cards they had been getting for many years. Their goal was to produce messages that were more actionable and focused on future opportunities through which they could create and capture value. Their initial iteration on the interview guide designed for this purpose was a very strong beginning. It asked “What?”, “When?”, and “Who?” quite frequently, and even included a number of questions that got to “How?”

There was, however, one missing ingredient. Financier and statesman Bernard Baruch once observed “Millions saw the apple fall, but Newton was the one who asked why.” I’ve learned that “Why?” questions can produce some highly-valuable insights.

Some years ago, I worked with a client in the building systems industry that was looking to identify some headroom for growth in adjacent markets. Among the approaches that were used to identify possible nearby product options was that of examining what their customers also bought on the purchase occasions on which they bought this firm’s products.

This effort spotlighted a few adjacent products that fit well with this firm’s growth ambitions and competencies. The inquiries also enabled the firm to identify the pivotal product that was bought on those purchase occasions, the one that customers viewed as driving their selections among brands across all the products purchased on those occasions. Unfortunately, for various reasons, there were not feasible options by which this firm could become a supplier of these pivotal products. But, by asking “Why?”, the firm gained insights that produced a growth bonus for them.

What they learned by asking “Why?” was that customers had classified the suppliers of these pivotal products into two clusters, based upon a subtle but important difference in the technology on which their offerings were based. Either technology was viewed as an acceptable choice, and customers often considered suppliers using both technologies for a particular application before making their purchase decision. What our client learned by asking “Why?” was that their own product was viewed as working very well with one technology option, but not the other. They in fact were ruled out in instances in which a customer made a pivotal product choice that involved the technology where their product was not viewed as a good match. When this supplier learned of this, they were able to introduce a sister version of their product that resolved the issue and made their firm a viable choice regardless of which direction was selected for the pivotal product, thereby opening up a much greater available market. Asking “Why?” yielded a sizeable gain in sales and market share.

In a different engagement with a firm in the telecommunications industry, asking “Why?” produced very startling and important insights. Our firm was an ingredients supplier serving the major equipment manufacturers in the industry. While they continued to get orders from these customers, they felt that they were getting far less “mind share” than in past years, and worried that might translate into future disappointments. The “Why?” question produced a very unexpected answer. What we heard from several of this firm’s major customers was that they saw the industry changing, and were prioritizing their own efforts – and their supplier relationships – to move in new directions seen as critical to their future.

This finding included both bad news and good news elements for the firm with which we were working. The bad news was that the line of business on which they had built these key customer relationships was going to decline under the scenarios that their customers had accepted as part of their own planning processes. The good news was that those same scenarios offered the potential for high-value contributions, albeit with different products, and, in some instances, with a change in the mix of customers. Learning “Why?” – and gaining that answer early – made a huge difference for this firm, enabling it to redirect its own efforts in a way that better matched the direction in which their industry was headed.

The answers to the “Why?” questions in the two case studies above didn’t change the world to the extent that Newton’s discovery did, but they clearly were quite important to the firms involved. “Why?” questions belong on the roster of questions to ask when firms try to develop strong messages from the market that can inform their strategies and plans. They are a critical element of effective voice of the customer programs.

Author: George F. Brown, Jr.

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Sometimes, What You See Is NOT What You Get

In an earlier article on the challenges of managing changes to a firm’s business model, I described the experiences of a manufacturer of capital equipment that had introduced a new service offering.[i] The experience wasn’t a pleasant one, as unexpected challenges appeared from multiple quarters. An executive from that firm, summarizing the learning that accompanied the experience, offered the following observation: “I didn’t even know what our business model was, but I’ve learned my lesson—whatever it is, beware of making changes to it.” His advice is definitely worth keeping in mind.

Recently, we worked with a distributor with a long-established and market-leading position in its segment, including a strong base of suppliers whose products were included in their catalog and a solid roster of loyal customers. For a variety of reasons, mostly related to emerging competition from overseas manufacturers who were entering their market at a very low price point, this distributor decided to develop and introduce a private label offering in certain product segments. Its goal was to ensure that its catalog included a ‘good-better-best’ product spectrum broad enough to provide an alternative to those new offerings.

At a first glance, this initiative looked to this firm as though it fit into the ‘current products, current market’ segment of the growth matrix first developed by Igor Ansoff in the 1950s.[ii] In fact, the product lines involved were ones that had been in this distributor’s catalog for decades, and the customers that were the sales targets were unambiguously on the roster of “usual suspects.”

The distributor therefore thought this was a relatively straightforward growth initiative, certainly less demanding than ones that involved either new products or new markets or, even higher on the degree-of-difficulty scale, both new products and new markets.

An executive from this distributor later noted: “Sometimes, what you see is NOT what you get.” He went on to reinforce the recommendation of the executive from the capital equipment company quoted earlier, saying, “What we missed was how many changes would be required to our business model to be successful with this private label offering. Most of our previous experiences in broadening our product line or moving into new markets were a walk in the park compared to the challenges we faced this time around, all due to the new elements to our business model that we had to master as a result of this initiative.”

This firm’s experience is not unique. In many industries, other firms have struggled as a result of new business model dimensions that were introduced by a strategic plan, even in instances in which the product line and market being served were very familiar. A firm that shifted from print product delivery to electronic product delivery described similar pains in implementing that transformation. Another grocery retailer described the introduction of ready-to-eat meals as “demanding beyond belief in terms of what we had to learn that we hadn’t anticipated”. In both of those instances, and in many other cases, the problems were associated with business model elements more than any other factor.

One lesson to emerge from these experiences is the importance of hearing lessons from other environments that can help to anticipate and address the changes required to implement growth strategies involving new business model elements. In the case of the distributor described above, it had failed to tap what was in retrospect an obvious source of insights, namely the manufacturers whose products were already in their catalog.

The executive quoted earlier provided this perspective: “What we missed was that our suppliers handled a substantial number of issues that our firm didn’t have to address. I guess we just thought those things took care of themselves. We learned otherwise very quickly, when the only one available to address the issues was us. Like all learning experiences, this one wasn’t particularly fun.”

The sources of insight aren’t always as readily available as was the case for this distributor, but the benefit from identifying and tapping into experience and expertise is substantial for firms implementing changes to their business model, even when other elements of the strategy like product and customer are very familiar. The insights that can emerge from effective efforts to hear lessons from other environments can make such changes go far more smoothly and avoid start-up disruptions that have the potential to derail an otherwise good growth concept.

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Insights

Three Essential Growth-Planning Targets for 2013

Make sure your customer is the right ‘fit’ and look beyond mature markets to boost sales in the year ahead.
A client recently posed the following question to me:

“It’s Labor Day, and for my company, that means we get into the growth planning cycle with a vengeance. We’ve already seen the guidelines that say that the goal is to deliver growth that is five points above our blended-market forecast. And with us already pretty strong in the emerging markets, that target isn’t an easy one. What’s the secret sauce? What should we be focused upon to develop growth plans that can achieve that goal?”

With today’s challenging markets and the full roster of political, economic and other uncertainties that we read about every day, the 2013 growth challenge will be a formidable one for most companies. I think about three factors when working on growth plans — ones that I think can be applied, with care, to the 2013 business environment.

Sell Into Growth

First is the fact that selling into growth should always be a cornerstone to your own growth. The potential for success when selling into growth is much greater than what exists when you are trying to take share in a mature or declining market. Know how much each of your market is going to grow and look to capture a share of that growth as a first step in the planning process.

Selling into growth currently spotlights emerging markets. David Hartman presented a statistic in a recent paper that we need to always keep in mind:

“While the world’s developed country markets account for roughly 70% of the world’s total base market demand, the emerging country markets will account for roughly 70% of all the new growth going forward.”
That defines opportunity and also the challenge.

The companies that have been active and successful in the emerging markets know that each successive increment to growth involves a new segment of the emerging middle market that has reached the income level at which they can participate and become interesting prospects.

The strategies and offerings that were successful in the previous segments of the market probably won’t translate easily into the new growth segments. And the competitors, channels and even the regions within the emerging countries in which that growth will take place will often differ from those of the past.

But where the customers are new to the market, the market is “up for grabs”. Growth of 10% can mean that 10% of the market is available. It could be more plausible to double your 10% market share in such a market than to grow slightly faster than overall growth in a mature market.

Growth segments define the first and best opportunity, and the challenge is to find ways to overcome the obstacles.

Build on Major Customer Relationships

The second cornerstone of growth strategy is to focus on your largest customers. Over and over we see that while the grass looks greener with your competitors’ customers, some of the strongest pockets of growth exist within your own major customer relationships, the ones that are already in place.
Applying the concepts developed over 50 years ago by Igor Ansoff to specific, individual major customers often yields strong growth plans.

Think about Ansoff’s growth matrix on a customer-specific basis, looking at all of the divisions, locations, and other segments of your customer’s organization.

Where can you gain share with existing products with those you are already doing business with? Which new units of your customer organization might be prospects for the products you already have? What new adjacent products and services could be sold to the units and divisions you already serve?

Major customers can be a wonderful source of growth, often with a relatively low cost to sell and a low cost to serve, especially for business-to-business suppliers.

Focus on Fit

The third theme to emphasize in growth planning is to focus on Fit in your growth plans. In an Industry Week article several years ago, I noted that it wasn’t just you that had identified growth opportunities like China, renewable energy, nanotechnology, or 4G phones.

Your competitors have also identified those opportunities.

What will determine whether it is you or they that realize the growth potential associated with such opportunities is the degree to which your firm has a better “Fit” than those competitors.

Look for situations where your firm best responds to the factors that drive purchase decisions. Ask yourself whether you can win on cost competitiveness when that is the basis on which purchases are made. If not, you need an action plan to get there. Find areas in which you are ahead of the pack in technology, if that’s what customers want.

Where do you have a better starting point than your competitors? The gold medal awards in London last month would have gone to different people if some of them were given a ten meter lead in the sprints.
Established relationships with the customers or channel organizations will be critical to success in the fast-growth markets. In fast-moving markets involving new technologies, there is huge a premium from getting to market ahead of your competitors.

Determine where your expertise ensures sustained success based on the underlying business drivers that are creating the growth opportunity. Beware of those cases in which you likely to at best enjoy transient success – and dig a growth hole for yourself next year – as other firms that are better positioned eventually capture the market. In growth planning, play where you can win next year and continue to win thereafter.
With planning season now underway for most firms, attention to the three themes outlined here — selling into growth, spotlighting opportunities with existing major customers, and focusing on Fit as a basis for prioritization among opportunities – can create the foundations for success.

The year 2013 can be a rewarding for those firms that can develop plans that are built upon those three foundations.

Author: George F. Brown, Jr.

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Manufacturing’s Future in the US

The U.S. is still a market of consequence for the world’s manufacturing companies. What remains uncertain is the ability of the U.S. to regain manufacturing jobs, or whether its manufacturing firms will continue to expand mostly outside of the country.

In 1984, Data Resources Inc. founder Otto Eckstein completed a study on the future of manufacturing in the U.S. Eckstein, a Harvard University professor and former member of the Council of Economic Advisors, said “economic instability, high cost of capital and high exchange rates have created an untenable atmosphere for industrial growth.”

He noted that manufacturing is a vital segment of the economy, and that “to bet the future of our economic system on a service economy is a high-risk gamble that is hardly likely to succeed.”

The years since then, unfortunately, have seen a continuing erosion of manufacturing employment in many segments of the economy, even though industrial production has generally continued to rise, driven by productivity gains and other factors. Recently, however, IndustryWeek reported on studies that project manufacturing jobs returning to the U.S. over the next decade. Other press reports have recently cited plans for new U.S. factory construction and hiring by global firms such as Airbus manufacturer EADS NV (IW 1000/59) and Toyota Motor Co. (IW 1000/8).

Optimism about the possibility of improvements in manufacturing employment is largely based upon rising costs of labor in countries such as China that have drawn manufacturing jobs from the U.S. over the past several decades.

That is happening, but China and other developing countries still have huge labor pools that can be tapped at wage rates far below those that prevail in the U.S. Competition for manufacturing jobs will not go away. And, with capacity utilization about back to pre-recession levels, it will take investments in new capacity in order to yield gains in manufacturing employment.

The U.S. is still a market of consequence for the world’s manufacturing companies. While China’s growth over the past two decades has captured the headlines, the U.S. still prevails in terms of the scale of most markets and, even at currently slow growth rates, contributes a meaningful share of global growth.

Moreover, world economic growth, propelling millions of consumers into the middle incomes, will create a substantial new source of demand for manufactured products. The domestic and global foundations are both there for U.S. manufacturing firms (and those from other countries) to grow and yield strong returns to company shareholders.

Providing Clarity to Manufacturers

At this crossroads, what remains uncertain is the ability of the U.S. to regain manufacturing jobs, or whether its manufacturing firms will continue to expand mostly outside of the country. Some of the same challenges that Eckstein cited in 1984 regarding the future of manufacturing in the U.S. are ones that must be addressed today. The issues of economic instability and uncertainty that he cited are certainly on that roster. For manufacturers to invest in new capacity and in worker training, they must have clarity and a positive perspective about the U.S. business outlook and climate.

There are many factors that will enter into that assessment. Among the other recommendations that Eckstein made was one that suggested that the U.S. must give “the industrial viewpoint weight in policy decisions and make industrial development an explicit goal.”

That this remains true today is underscored by the recent good-news announcements of new factory construction and job creation, which is largely concentrated in states in which the climate for manufacturing is viewed as important by the political leadership.

Another data point supporting that argument, from a less positive perspective, is the near-daily headlines about firms challenged by regulatory themes and hurdles that are moving to more hospitable environments. If manufacturing is going to grow in the U.S. rather than in other countries, it will require more than healthy world markets to accomplish that. The quality of the U.S. business climate remains a barrier to manufacturing growth here.

Eckstein’s recommendations emphasized the need for U.S. firms to be able to succeed in world markets. That remains equally true today, although the basis for such success is quite different from that of three decades ago. It will be important that U.S. technology leadership continues, but it will become equally important that U.S. manufacturing firms focus on meeting the needs of the new entrants to the middle class, consumers and businesses that are probably more focused on price than on advances in the state of the art.

With such customers likely to be the source of most of the growth in demand for manufactured products, abandoning them to manufacturing firms from the developing countries that can produce “almost as good products at a great price point” will put enormous pressure on U.S. firms.

The discussion about manufacturing’s future calls to mind Yogi Berra’s observation about “déjà vu, all over again.” There are solid reasons why this sector of the U.S. economy could grow and prosper, and equally solid reasons why doing so will require that the country respond to significant global competitive forces.

Addressing economic instability and uncertainty, creating a positive climate for manufacturing and building a competency base that allows success in rapidly changing domestic and global markets alike are no less important today than when Eckstein authored his recommendations.

Author: George F. Brown, Jr.

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Posing Provocative Questions

Bono, U2’s lead vocalist, once observed “We thought that we had the answers, it was the questions we had wrong”.  Several years ago, after completing an interview with one of the largest customers of a client, he told me that he enjoyed the discussion, saying “I usually don’t look forward to these sessions, but do them out of respect for our key suppliers.  But you had some provocative questions.”  While making an interview enjoyable is not itself the goal, I’ve found that provocative questions are a key route to insights that yield an “Ah-ha” in terms of the potential for new value-creating actions.  Rephrasing Bono’s quote, if you want to get valuable answers, get the questions right.

Over the years, I’ve worked on compiling a roster of provocative questions, ones that are somewhat unexpected and that allow a discussion to evolve in interesting directions.  One example of such a question is featured in an article in the March 27, 2012 Industrial Distribution, titled I Would Pay 50% More….  Asking what it would take to get a customer to pay 50% more for a product has yielded some creative insights to guide clients’ product development and innovation processes.

Provocative questions don’t always yield a result.  In fact, the success rate is probably no greater than 50%, but getting unexpected, high-value insights from half of the discussions on an important topic is at least the equivalent of making it past the first round of the playoffs.  Here are three provocative questions that have in a number of instances yielded interesting discussions.

“What keeps your firm from growing at double-digit rates?” [Or, if you are speaking to an executive of a Chinese firm, end the question with “…from doubling your current growth rate?”]  I visited Detroit recently, where the automotive industry has been in distress for most of the past decade, only beginning to show renewed signs of life and profitability recently.  That history made me worry a bit about even asking that question of a supplier with whom I was talking, but the response that I got – “Supply chain constraints” – was totally unexpected and opened the door to an important conversation.  In another instance, a number of years ago, the question was first met with a rather long period of silence, after which the executive replied “I think it’s because our product development process takes too long.”  The discussions and actions that followed yielded some major changes, and a success story in that the firm involved actually reached double-digit growth rates last year.

“If your CFO called and said, ‘This is a one-time thing, but you need to spend $1 million in the next three months.’  How would you spend it?” [Or substitute some other spending target more appropriate to the firm and business unit with whom you are speaking.]  While the most frequent response that I’ve gotten to this question is of the form “I don’t have to worry about that, he’d never call with that request”, other responses have triggered important insights for suppliers.  Many responses have been critical in defining the most significant unmet needs of the organization providing the answer, sometimes leading to ideas as to how those needs can be met without having the CFO call asking for help in ramping up spending.  Other responses have provided a preview of future spending that was clearly in the plans, if not the budgets, of the organization giving the response.

“If your CEO walked into your office and said, ‘Did you see the news?  Having THAT firm buy into our industry is really going to change things.’  What firm do you think had him so agitated?” This question has yielded fascinating discussions, not so much because of the firm that was named as the best guess as to who ‘THAT firm’ was, but in the follow-up discussion about what it was about the firm that made it such a fearsome prospect.  I’ve heard examples of such attributes that span the spectrum, across discussions with firms in various industries.  One firm was cited as worrisome because it had a history of triggering vicious price competition.  Another firm was cited because its healthy balance sheet would allow it to make some investments that could transform the industry.  Another instance involved a firm with strength in ‘e’ channel sales.  For any organization, getting a handle on the game-changers that could occur in the future is important to planning, at least contingency planning.  This question often yields a major lode of insights.

A good program to gain insights from customers must include some basic, blocking-and-tackling themes, and questions in such categories remain the core of most voice of the customer programs.  But posing provocative questions can augment such efforts, often being the ones that yield the “Ah-ha’s” and that motivate actions that create value for both customers and shareholders.

Author: George F. Brown, Jr.

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Insights

Finding Growth Opportunities During Lackluster Times

Whether or not businesses anticipate lackluster earnings results during the first half of the year, the mandate for growth still remains. To achieve more sustainable rewards for shareholders in 2012 and beyond, companies should pursue strategies that create top-line growth.

In 2010-11 corporate profits grew owing to the cost cutting moves that many firms made to survive the recession of 2008-09. As the economy recovered and demand returned to normal levels, bottom lines benefitted. However, as this year’s earnings for many companies may demonstrate, cost cutting measures usually produce short lived effects.

An article published earlier this year in The New York Times pointed to slowing growth in emerging markets and commodity price inflation as other possible factors contributing to the disappointing results. While these areas certainly present challenges, they also offer opportunities. Firms should take advantage of these and other opportunities and take action to grow.

Expansion into emerging markets remains a huge business opportunity, even as the media emphasizes the slowed growth Asia and other emerging markets are experiencing.  It is important to note that this slowed growth is occurring in a dramatically faster growing economy than existed in the past. Data suggests that from 1999 to 2009 the regional distribution of GDP remained largely unchanged. Traditional Europe (defined by the EU 15, before the expansion to include Eastern European countries) combined with the U.S. and Canada represented nearly two thirds of the world’s GDP. Add to this number Japan and the rest of Europe and the developed world accounted for nearly 80% of global spending power.

The important story, however, involves examining the regional growth factors. In the last five years, China’s economy alone has accounted for more than a quarter of global growth, more than the U.S. and EU together. Add in the rest of Asia, Latin America, and Europe outside the EU 15 and these fast-developing regions account for 60% of all the growth in the world.  And after these years of economic progress, the citizens of these emerging markets are enjoying income gains. Consequently, a significant middle market segment has appeared. Unlike premium buyers in these emerging economies who prefer high-end, sophisticated products and services, the mid-market buyers instead purchase “good-enough” products priced at a level significantly below the best alternative. These mid-market buyers are not interested in buying low-end, locally made cheap counterfeits—products traditionally sold by indigenous suppliers.   With the right strategy, US based firms can compete with the local companies that currently profit from dominating the low-end segments and are now positioned to enter the mid-market segment.

Effective pricing strategy can also offer promising growth prospects even while commodity price inflation is cited as drag on profitability. New approaches to pricing analysis build upon insights about the extent of pricing pressures in each product-market segment, allowing firms to determine whether price pressures are real and unavoidable or imagined. While pricing is not the only factor that drives customer purchase decisions, pricing has many dimensions and firms can get smarter about pricing if they focus upon these analytics to understand what is and what is not driving profitability.

The best place to start is by examining a spectrum of factors such as volume changes, price recovery, and productivity.  The goal, of course, is to learn to what degree do you as a supplier have control over or can substantially enforce your will over pricing. Additionally, your team must understand how important pricing is to your ability to earn profits.  Are you operating in an environment where capacity is tight and your products are in demand? Is your offering strongly protected with unique technology, substantial services, or a strong brand? What is the elasticity of profit with respect to price  — do small swings in prices cause large swings in profit?  These questions and more can help determine the degree of your control over pricing and the importance that pricing plays in your business.  Now is the time to take a proactive approach to pricing strategy because even a modest improvement in price realization can yield a dramatic profit increase.

In any case, thinking beyond emerging markets and pricing successes, now is the time to look under every crack and cranny for growth opportunities. In recent months, our clients– firms that operate across various industries–have followed this rule to gain promising outcomes. The lessons from some of their projects: examine your legacy business and explore options to harness organic growth; revisit your customer segmentation structure and consider what matters to each target segment; query customers about unmet needs – are they crying out for better information, willing to reward a strategic supplier on whom they can count, or looking for a more complete solution?  Lastly, pinpoint changes that occurred during and since the recession and adjust your business models accordingly.  We have found instances in which all of these growth drivers were present, waiting to be tapped.

The list of growth opportunities goes on and on. The fact that so many firms continue to find avenues to growth is empowering. It also emphasizes the need to drive future profit reports from the top-line.

Author: Atlee Valentine Pope

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