As we begin to climb slowly out of the deepest, darkest recession on recent record, it’s normal to want to simply get up, wipe the dirt off our knees, and move blithely ahead saying to ourselves “Phew, that was a close one; never want to go there again.”  For the most part this is a very common reaction that many business leaders have as they look forward to brighter prospects in 2011 and beyond.  As you look ahead, however, we believe it’s important to look at lessons learned, mistakes that could have been avoided, learning from the past business cycle in order to avoid these pitfalls tomorrow.

A way to learn from these lessons is to ask the question: How can we know which industries and customers are good choices in both good times and in difficult times?

Our answer is not that one industry is ultimately superior to another, or that one type of customer is guaranteed to help you over another.  Instead, as we discuss in our strategy book, CoDestiny[1], we advocate that you to follow these three guidelines:

1. Understand your current and prospective pathways to market — your customer chains – and learn who is involved, including later-stage customer chain participants.
2. Examine each stage of your customer chain to understand the participant’s economics drivers, what motivates their purchase decisions, and the competition.
3. Create win-win outcomes for all customer chain participants. If you can create value for each customer along the customer chain, you will be rewarded for this value.

One executive recently shared the following:  “My previous employer was a 35 year old company that was a highly valued electronic parts supplier serving the automotive industry. The company produced such high-end, uniquely designed exterior lighting parts that we had an almost exclusive supplier position with the major automotive companies in Detroit.  As you can image, historically the firm’s fortunes ran parallel to this industry — when the car manufacturers slowed down, so did we.  For decades, the firm’s leadership understood the volatility and risk of this business and managed it accordingly—right up until last year.  In one week during 2009, leadership learned that a competitor had delivered two proposals to two of the firm’s largest, long-time customers, offering to undercut the firm’s prices and essentially buy the business.  When the firm was asked for a response, senior management offered price reductions in an attempt to match the competitor within 1.5 percentage points, and assumed that the supplier-customer relationship was strong, secure, and could survive these pricing challenges.  Unfortunately, in both cases the business was awarded to the competitor who had offered rock bottom pricing.  The relationships did not survive this challenge, and nor did the firm.”

As this story illustrates, there are some firms who clearly faltered during the recent tough times.  Other firms, however, have not only survived the severe downturn, but have managed to solidify their positions and steer clear of these challenges.  As an example, we worked with a firm which also had strong and important customer relationships in the automotive industry.  Unlike the story above, this firm did well over the last few years.  This supplier also offered unique, differentiated products, had healthy supplier-customer relationships, and managed to aggressively cut costs in order to respond with needed pricing reductions when asked.  This firm remains in business, and is currently enjoying the benefit of the automotive industry’s rebound.

So, why did the latter firm prosper and the other not? To the casual observer, each firm faced similar challenges and possessed similar strengths going into this recession.  They both served the same industry, they both had nurtured strong customer relationships, they both offered quality products and services, and they both were willing to offer decreased prices.

There was, however, one major difference between these firms – their customer’s customers. The first firm’s electronic parts were placed on vehicles that were not selling well, and the latter firm’s parts were placed on vehicles – military vehicles and hybrid vehicles – that sold quite well during the recession. The first supplier’s willingness to cut prices to try to match the competition was not enough; the vehicle itself was caught in a descending death spiral and no matter how much cost was taken out and how far prices were slashed, the supplier could never gain enough volume to offset the aggressive margin squeeze.  The math just wasn’t going to work.

In contrast, the second firm had the wherewithal to develop a better plan from the start. This supplier recognized that they needed to look beyond their direct customer, the automotive manufacturer, and focus on being positioned with growing end customer segments.  In other words, this supplier proactively picked winning customer chains, and as the economy turned downward, this firm worked closely and collaboratively with its major customers to maintain its position of strength.

One secret for success is to align with winning customer chains. You can find these winning customer chains by paying attention to participants along the customer chain who are best positioned to respond successfully in the face of change. These participants are ones that know how to bring value to their customers and concurrently capture value for their own shareholders.  The second supplier’s resilience was due in a large part to two winning customer chains:  one that involved the vehicle manufacturer who sold specialty vehicles to the military and the other was the vehicle manufacturer who sold new, high-end hybrid automobiles to environmentally oriented consumers.  In each of these two customer chains, the automobile manufacturer was offering a distinctive product to its customers and was consequently being rewarded for those products.  As such, the supplier who planned, designed, and engineered its parts to partner with its automotive customers in order to participate on the new hybrid and military vehicles was rewarded with sustainable volume.

We advocate that this lesson of picking your winning customer chains should not simply be used to weather a tough economic environment, but instead should inform your growth strategy on an on-going, consistent basis.  For organizations that seek to sustain and grow their business, they must align with winning customer chains – those that are healthy, growing, and resilient.

Author: Atlee Valentine Pope