Insights

My Customer’s Competitor Is My…

An Arabian proverb says, “The enemy of my enemy is my friend.” While the logic is straightforward, these days firms in market after market often ponder a revised version of the saying, as in our article’s title. This is a much more difficult question to answer. Companies are increasingly asked to become suppliers to their best customers’ emerging competitors. Of course the quandary of whether to supply a strategic account’s competitor is far from new, but what creates so much angst in business-to-business circles today is the rapid emergence of potential customers that follow a very different business model. They unsettle the competitive environment and challenge the supplier, and they frequently come from China.

The second mice are coming

We recently wrote about China’s “fast learner” economy, using the adage, “The early bird gets the worm, but the second mouse gets the cheese.”1 The Chinese have finely honed their Second Mouse skills and are downright proud to be fast followers. Someone saying they produce “me, too” products is sometimes considered worthy of posting on company websites. In fact the ability to quickly learn and copy products and technologies that were developed elsewhere has already propelled numerous Chinese firms to global stature. They and many more will soon become a force in the United States and other markets around the globe. Strong Second Mouse companies, including Huawei Technologies Co. Ltd. (telecommunications), Haier Group (consumer appliances), Sany Group Co. Ltd. (construction equipment), Mindray Medical International Ltd. (medical equipment) and Zhejiang Geely Holding Group Co. Ltd. (automobiles), span industries and will soon be recognized as global leaders in their respective industries.

One telling reflection of Chinese firms’ progress comes from the Fortune Global 500. In 2005 only 13 Chinese companies made the list, with three among the top 200. Just five years later 46 made the list, including 14 among the top 200. Alongside large corporations becoming global brands, such as Haier and Huawei, are literally thousands of medium-size companies that have ambitions to serve consumer and business markets in America. A large majority of these organizations are in business only because they understand better than their competitors how to be the Second Mouse. The companies learn from other enterprises’ experiences what should be produced, take advantage of China’s low manufacturing costs and incrementally improve products, especially ones focused on removing costs. The companies operate at “China speed” and are skilled at realizing which features customers consider unnecessary – and willing to engineer the features out of the product and cost structure.

Regardless of whether you supply them, these firms will be strong competition for your strategic accounts in almost all cases. The way the new companies compete should especially challenge your current customers because the message is not the familiar “We are better than our competition” but rather “We offer products that are almost as good as those of our competition but at a much lower price.” These corporations will try their hardest to copy your best customers’ products at least in function. Sometimes the price is so low customers served by your strategic accounts find it almost irresistible to explore, as quite a few companies learned during the recent recession. The new organizations probably will change your customers’ industries forever. How you respond to these companies’ requests will shape your future.

Second Mice need friends, too

Second Mice must be clever and quick to take advantage of opportunities. After all, the third mouse avoids the trap but achieves nothing positive. Being adept is one thing, but emerging fast-follower companies also need help from like-minded suppliers to accomplish feats of speed and performance and arrive at a point where products that are almost as good as originals can be offered at a great price. Requests the firms make to suppliers often seem outrageous, yet this is only what should be expected under China’s Second Mouse business model. Cutting-edge creativity is not part of the mix, but creative cost reduction and ways to verify quality to the companies’ prospective customers are critical. Recent examples we have heard in our work include:

• “We want you to sell us exactly what you supply to (your best customer).” This request involved a highly customized component that had been jointly developed for a consumer electronics product.

• “We will buy the exact same part as (your best customer) at the standard price minus development expenses because, after all, you already developed it.”

• “We want to buy that exact part but made from lower-grade materials to cut the cost since we don’t give a long warranty like your other customers do. And you don’t need to do any testing; we know what we are getting.”

• “We want to use your name in our advertising to prove that we use the same components as the foreign competition.”

• “We want to use you in our advertising, named as the supplier to (your best customer) to prove that we are just as good.”

Responding to such statements, whether simple or outlandish, creates a conundrum. No supplier is ever happy to turn away an eager new customer. But while normal customers that suppliers have been serving would usually rather have an exclusive deal, the requests made by these Second Mouse customers raise a supplier’s potential for conflict with existing customers to a whole new level. A supplier’s ideal situation, yet one that causes the toughest quandary, is when the fast follower would be severely disadvantaged by not having you as a supplier. That gives a say to you in defining the future for both your existing and potential customers.

Should one of those friends be you?

Every supplier that experiences these discussions must ask itself, “Do we really want this business? If so, how far are we willing to go?” Specifically:

• “Are we willing to sell to a fast follower that will use us to compete with our best customer, possibly alienating it in the process? Or is the fast follower’s competition with it inevitable, so we would relegate ourselves to a shrinking market by refusing to work with the follower?”

• “Are we willing to sell at a lower price to a new entrant that makes only ‘me, too’ demands of us, putting our best customer at a disadvantage? Or is a Second Mouse’s advantage overwhelming in any event? Or are our traditional customers’ early bird markets so distinct from the Second Mouse markets served by fast followers that we can play in both?”

• “Are we willing to sell to a fast follower that will invariably use our reputation as part of the company’s sales pitch? If we refuse, would we give up a once-in-a-lifetime opportunity to become indispensable to the future market leader?”

Finally, a supplier considering a new relationship with a fast-learner firm from China or elsewhere must answer two other strategic questions:

• “If we supply this fast follower, will our win be temporary as the company or others in its supply chain implement on our products the same Second Mouse competencies the corporations used to move into a position to challenge our traditional customers?”

• “By supplying the new competitor, do we forever change the economics of the customer chain in a way that tends to commoditize our customer’s product and eventually push price pressure back on us, as well?”

These decisions should not be made lightly

Especially when still emerging from a recession, it is tough to turn down new business. And it’s doubly tough when the Second Mouse offers a package deal including as a sweetener access to China’s dynamic, fast-growing domestic market along with participation in the firm’s efforts to enter global markets. But the implications of supplying a fast-learner company competing with established strategic customers need serious thought. Loyalty and history aside, hastening the time when competition in your customers’ industries is more price-based and possibly challenging for you is a distinct possibility. When we help our clients make these tough decisions, the most significant factors we consider include:

• “Is the new customer coming in anyway with or without our help? What are its chances of success with and without our help?” There are so many examples of when even the best-intentioned industry leaders couldn’t stop structural changes in their industry. The burden of proof should be on those who argue that not working with the fast-learner firms will change the medium-term outcome.

• “If we help the new customer become established, what actions will guarantee that it continues to need us for the long haul? If we do not help it now, which supplier will? Will there be a chance to replace that supplier later?” Linking your company to a rising rocket is far better than to a sinking ship, and tough choices often have to be made as to which customers will eventually win the battle for global leadership. And implementing some forecasts involves negative short-term consequences even though the long-term implications are the best available.

• “How important is our product to our strategic accounts’ success? Is that importance visible to our customers’ customers? Is our brand visible to our customers’ customers? Can it become so?” Firms able to establish end-customer preferences for ingredients are in much better position to work with multiple competitors than companies whose contributions are invisible. If this isn’t already the situation, corporations considering relationships with fast-learner customers from China and other emerging markets must examine whether they can quickly get to that position as a tool to ensure stability in such new relationships.

• “Can our company continue succeeding if we don’t retain our relationships with traditional strategic customers?” In many industries, especially those emphasizing early bird leadership in technology or design, customer relationships are significantly important to firms in their supply chain. Not every supplier can make the shift to participating only in market segments involving fast-learner competencies.

• “After the shock waves flow through the customer’s industry, will what is left be an attractive market for us? Is there anything we can do as a supplier to help ensure this?” Sometimes market entrants simply generate a new roster of winners among competitors and entrants’ suppliers. In other instances entrants create a pool of excess capacity that yields price pressures and a future in which no one makes money. Times of change such as this therefore always require a re-examination of earlier decisions as to an industry’s attractiveness.

Conclusion

In most cases when the opportunity to work with a new customer from a fast-learner country emerges, there is a mix of opportunity and risk. Considering every aspect of the decision and getting answers to the aforementioned key questions can at least make the decision one that is deliberately taken with a clear understanding of all implications of the chosen direction.

Author: George F. Brown, Jr.


1 George F. Brown Jr. and David G. Hartman, “The second mouse gets the cheese,” Sales and Service Excellence, May 2011, www.leaderexcel.com; and George F. Brown Jr. and David G. Hartman, “Are you ready to take on China’s next-generation competitors?” Chief Executive, September 2011, www.chiefexecutive.net.

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