Insights

50 Ways to Win in China

Insights

50 Ways to Win in China

In 1975, Paul Simon released the song 50 Ways to Leave Your Lover, which, despite the promise of the title, offered only five such possibilities within the lyrics. We consider this to be a solid example of literary license (rather than outright deception) and will therefore follow his practice in this article and offer five suggestions about how to succeed in Chinese markets. While only five in number, these suggestions are ones we believe to be critical to success in the world’s fastest growing and most rapidly changing market.

Perhaps Simon’s decision to limit his list to five reflected the fact that rhymes involving the names Jack, Stan, Roy, Gus, and Lee are relatively easy to come by. We will also follow his lead in this regard, and present our recommendations in the style of Simon’s hit song. But we should note that the listener to Paul Simon’s song could actually leave his or her lover by using any one of Simon’s options. To succeed in China, it will be necessary for firms to follow all of the five recommendations we present below.

China’s dynamic and challenging market is one in which it would be much easier to write an article titled Fifty Ways to Fail in China, but our belief is that the five recommendations in this article can help firms that want to succeed in China to do so.

Enjoy the pack, Jack.
Anyone who has been doing business in China already recognizes the fact that transactions aren’t the “one to one” variety common in most western markets. In China, the reality is “one to a pack”, with the “pack” reflecting the various organizations involved in business decisions in that country. The most common additional participants in the “pack” are still governmental organizations, both national and regional. Most China-savvy practitioners know that it makes good sense to get to know the mayor and key party officials. In instance after instance, we’ve seen what would be considered a pure business decision in the west influenced by the potential impact on local employment or some other metric important to the mayor or other government officials.

The roster of the participants among the “pack” goes far beyond government, however. Universities, design institutes, and trade associations are among other important examples. And, like government, while the descriptor of the organization is the same as in western markets, the roles played by these organizations are very different. In previous time, for example, Chinese trade associations often actually ran their industry. That defined their roles far differently from their western counterparts. As an example, the China Valve Industry Association cited its roles as inclusive of product purchasing, investigating “internationally famous valve companies”, participating in the technical verification of foreign valves, and helping project investors to choose valves. It is hard to imagine, for example, a US trade association taking on the role of recommending one of its members over the others.

An extreme example of the “pack” was recently provided by a client working in the commercial vehicles market:

“We were involved in negotiations with a Chinese firm that we felt would be a good partner for one of our product lines. The relationship was envisioned as a key element of our strategy to enter one of China’s key regional markets, and our efforts to build this relationship had, we thought, covered all the key bases. We knew the government agencies involved, and had made sure our business case emphasized the positive benefits for the region in which this firm was located. It was our expectation that we’d close a good contract on the visit last month.

“When we got to the meeting, along with the expected participants, there was a surprise. Our prospective partner had brought to the meeting executives from a firm that for all practical purposes was a Chinese equivalent of our own firm. The only reason we weren’t competing was geography and history – neither firm had previously ventured into the other’s markets. The signal we got from our prospective partner was that this firm was ‘an important and trusted member of the local business community,’ one that our prospective partner felt could ‘be an important element of a future relationship’.

“The normal reaction we would have had would have been ‘No #&$% way’. That certainly would have been the reaction in the US or our other major markets. But we recognized, just in time, that we were in China and that familiar rules don’t apply. So we are now in the process of rethinking the business model so as to include this firm in the relationship.”

As this example illustrates, the “pack” can include quite a number of diverse participants. Be prepared for not only numbers, but also surprises as to which organizations and firms become relevant to your business transactions in China. It’s helpful to go into negotiations from the perspective that nothing would surprise you and to be creative in your ability to craft a solution that creates a win for your organization and the members of the “pack”.

You are the man, Stan.
In China, the personal dimension of business relationships exceeds that of most other markets. One experienced executive responsible for his company’s strategic accounts described his typical message to his team as follows:

“You are our company’s point person with your assigned accounts, but it’s about the company, not about you. You need to make sure your customer sees that the relationship is with the company, not with you. You can think of yourself as the conductor of the orchestra, but always remember that it’s the orchestra that makes the music.”

His advice is correct for most market settings. Our research into strategic relationships clearly shows that company-wide competencies in implementation and innovation are the foundations for long-term successes[1]. An individual’s relationship skills can help his company move from a traditional supplier relationship to a stronger position, but that alone typically is not enough. It takes company-wide efforts to sustain higher-level relationships.

The same executive went on to describe his company’s experiences in China:

“We went into China and were quite successful as a firm. We benefitted from the incredible rate of spending on infrastructure there, to be sure, but our sales outpaced the market. A significant part of our sales involved two major customers, and we quickly elevated them to strategic account status and assigned one of the key ex-pats on our China team to manage these relationships. It was great making quarterly presentations about our successes in China, which were moving the needle for our company.

“Then we hit our first speed bump, for a reason we had never anticipated. We replaced the ex-pat who had been working with the two strategic accounts with another individual. This was part of our normal rotation, with the first individual’s career path bringing him back to the US to assume a group leadership position and the second one transferred to China to gain some global market experience. The person we transferred was a highly-ranked professional, on a fast track, so we were confident he would be a more-than-adequate replacement.

“But what we heard was exactly the opposite. One of the major customers said they were insulted that we would make such a change, particularly without consulting them in advance. It was clear that they believed they had a say, a major say, in our personnel decisions. The second customer wasn’t as explicit, but we saw that their orders started to decline and learned that they were now splitting orders between our firm and one of our competitors. This was clearly fall-out from the personnel actions we had taken.”

This experience is far from uncommon. The personal element to business relationships cannot be underestimated in China. “It’s a long-term job, Bob.” It takes a considerable adjustment in the human resource policies of most companies to avoid disruptions such as those experienced by the firm whose executive was quoted above. Selection of individuals and management of eventual changes requires a new emphasis and level of skill.

Learn to deploy, Roy.
The concept of “China speed” is among the most challenging of concepts to communicate. One of the strongest messages we have provided about what it takes to succeed in China is that firms must change their processes to move at China speed or face a serious competitive disadvantage.

Perhaps this concept can be best understood in the context of China’s amazing pace of economic development. The country’s economy has grown at a double digit pace for twenty years, with the country’s income about eight times higher than it was just two decades ago. As a result, literally hundreds of millions of consumers have had the opportunity to buy their first cell phone, their first DVD player, their first color television, their first car, and their first condominium in a period of less than two decades. The number of passenger vehicles in China went from about four million in 2000 to more than sixty million in 2010.

While only about 10 percent of China’s population had an income over $10,000 in 2000, 60 percent exceed that level today. And these more prosperous consumers are impatient, eager to enjoy the higher standards of living that have become possible to them. As a result, speed matters and the firms that aren’t able to meet consumer demand are going to fall by the wayside.

There are still other characteristics of China’s market that reinforce the importance of speed. Markets are not only growing rapidly, but are very fluid, with tastes shifting quickly and the annual new entrants into each income strata are so numerous as to create a new market on their own, with no history or prior purchase patterns. New technologies or fashions can thus see explosive overnight sales gains. The firms that supply products have very little in the way of brand loyalty, given the absence of history, so a new entrant, from China or abroad, can quickly gain market share with the right product and sales campaign.

And processes in China are different as well. The ready availability of labor at costs that are still low by global standards allows China’s firms to do things differently than is the case in other markets. Research and development processes, for example, often reflect China’s ability to swarm a task with labor, even if the required labor involves skills like engineering. And many Chinese firms continue to bring products to market with minimal beta testing, knowing that they can swarm performance problems with service labor[2].

An executive from a major automotive parts supplier provided the following description of what his firm learned:

“China moves so fast that it required a totally new set of internal management systems. Our reporting relationships had to be streamlined. It just took too long to get anything approved. The same was true of spending approval systems. By the time we had approval, it was typically too late. And our approach to product design was a nightmare. We would be two generations behind before we had launch approval.

“Our CEO from the US saw it firsthand. He visited our largest US OEM customer at their office in China and was told that to win the business with their joint venture in China, we would need to deliver off-tool samples of components in a quarter the time that is standard in the rest of the world. We were at risk of losing our most loyal global customer. We can’t afford that and they can’t chance missing the market due to their suppliers not matching the requirements of doing business in China. In short, the market is simply too volatile and competitive for the type of planning, both by OEMs and suppliers, that we are accustomed to.”

For the foreseeable future, none of these factors will change much, even as China’s economy continues to grow. “Get used to speed, Reed.” The firms that will be best prepared for success in China will rethink their processes and systems to take time out if they are going to be competitive in this market.

Stay on the bus, Gus.
In an earlier part of this article, we emphasized the personal nature of relationships in China, requiring that firms implement personnel policies that reflect the importance given to relationships by the Chinese organizations with which they are doing business. Stability is a key success factor in China. This need goes far beyond ensuring stability with Chinese customer organizations.

One reason for the criticality of stability is the fact that contracts are not reliably enforceable, so relationship is the way that interests are protected. “The rules” are often unwritten in China and are frequently unpredictable in application, so the importance of a strong relationship extends to officials as well as to customers. If a firm changes its players, the odds are good that the Chinese will think that contracts and rules are open to change as well.

The quotes that follow, from distributors of commercial and industrial large equipment, are representative of the vast majority of interviewees who said that stable relationships are the most important factor in their successful business transactions:

• “The market in Chongqing is not standardized. Regarding projects, it doesn’t matter if the quality is good. The relationship is more important.”

• “Sales are made through good relationships that have been built over time.”

• “A big percentage of business is dealing with loyal customers or introduced through ongoing relationships.”

• “I worked for the China Ministry of Construction before, so I have many friends there. Relationship accounts for 80 percent in bidding.”

• “Strong and stable relationships are the most important factor in doing business in China, including with private companies. When a government department hints at using a certain product, the customer listens. Brand and service are also important, but relationship is first.”

• “Relationship is very important to doing business in China. Nearly all foreign companies are concerned about that and realize that you can’t win business when your competitors are doing their best to build relationships while you are doing nothing.”

“Don’t pass the baton, Ron.” Success in China requires building many key relationships and sustaining them, presenting a picture of stability to all of the organizations that make or influence decisions along the customer chain. Without stability in key relationships in China, success stories will be few and far between.

The city is key, Lee.
Despite the incredible growth that China’s economy has experienced, it is a very diverse country market, far more like the European market of several decades ago than the US market. The eastern part of China, including Beijing/Tianjin, the Shanghai area, and Guangdong Providence, is by far the most developed region, with the highest incomes and the greatest concentration of global firms in operation. Incomes and the business mix vary widely across the rest of China, with rapid changes taking place due to government incentives and even a western migration spurred by increasing costs in the coastal regions.

But it is not only economic geography that makes it important to focus upon the unique characteristics of regional markets in China. One executive provided the following case history:

“Our firm provides some key products used in major construction projects, like large office buildings, condominiums, and various infrastructure projects from airports to stadiums. We had done very well in Beijing, spurred in part by the boom associated with the Olympics. From a standing start, we were very proud of the inroads we had made in China in just a short period of time. Our business plan was to expand into other city markets and continue the fast growth of the last several years.

“Were we in for a surprise. In the first new market that we targeted, we learned quickly that our technology hadn’t been accepted by the design institutes located there. This hadn’t been an issue in Beijing – in retrospect, we learned that one of our competitors from Germany had done the spade work many years earlier to gain acceptance prior to our arrival in China, so we had smooth sailing. But that wasn’t the case in other markets. In this particular market, customers are still cautious until they see design institutes embracing our technology, and we’re going into our second year of the situation. No one seems to have any urgency on the design institute side, probably because there are local companies serving the market with a different technology. We think ours is superior, but it would threaten the incumbents, and we have no relationships to draw upon.

“A second difference we’ve seen as we tried to move west was that the projects of interest to us are all basically run by government agencies. In Beijing, it seemed much closer to the traditional mix of private companies managing the projects, albeit with government clearly in the mix, often as owners. Here the customer is government, and doing business with them is a far cry from anything we experienced in Beijing.

“A third difference is in the standards. In Beijing, probably because of the Olympics, every project had to be a showpiece. Even in the US, we rarely saw such attention to every detail along dimensions that ranged from environmental performance to state-of-the-art technology. In the other markets we’re targeting, while there are standards, price is far more important and some of the credentials we had been citing from our experiences in Beijing fall on totally deaf ears.

“So while things are still going strong for us in Beijing, we are some number of years away from being able to claim successes elsewhere in China. My yearend report back to headquarters started with the statement that ‘the rest of China is a whole different world’.”

This company’s experiences are far from unique. Widespread differences exist across China’s cities and regions, starting with rules and regulations, competitors, customers, and extending along almost every dimension that is relevant to business success. Plans for short-term successes in new regions typically result in disappointment; the better strategy is to assume the need for a reasonable start-up period during which relationships can be developed and the local rules of the road can be learned.

Conclusion
China’s markets offer some of the best opportunities for growth in the world, but achieving success there remains a challenge. The five key recommendations developed in this article can raise the probabilities of success and shorten to some extent the time required for success. Plan to create a “win” for the pack of participants in business transactions and decisions; remember the personal component of business relationships in China; make the changes in your processes and systems that are necessary to operate at China speed; create stability within your organization; and recognize the inherently distinct nature of China’s regional markets.

We close with one final recommendation, again drawing upon Paul Simon: Never forget that China is Still Crazy After All These Years. It isn’t just the rapid rate of growth, but the incredible pace of change that is occurring in that market. Be ready for it, and enjoy the ride.

Authors: George F. Brown, Jr. and David G. Hartman

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Are You Ready to Take on China’s Next-Generation Competitors?

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Are You Ready to Take on China’s Next-Generation Competitors?

Over the past decade, many western firms have identified and targeted China’s exciting, fast-growing markets. Most of these firms had already established manufacturing and sourcing operations in China, lured there by the low labor cost environment and its potential for delivering significant cost savings. Soon, a network of western firms emerged, with many traditional supplier-customer relationships transported into China. Over time, those firms turned their attention to selling to Chinese businesses and consumers, joined by other first-time participants in that country’s markets. Many of the western companies that established a presence in China were among the “early birds” of western markets, leaders in technology and design, with product offerings far beyond anything previously available to China’s customers.

Most of these companies found success in China. From a base of nearly zero, China became their company’s “growth story”, expanding year-after-year at significant double digit rates and within a short time achieving enough scale to move the needle in terms of both the top and bottom lines of their income statements. “Our continuing success in China was a major factor driving the past quarter’s results” remains a common statement in the earnings releases of many western companies.

The customers reached by these western firms with their leading-edge products were the elite of China, a combination of western firms operating there that needed ingredients for their export-oriented manufacturing and the highest-end of China’s own society. Western firms operating in China carried their standards and expectations with them, as for the most part, their operations in China were oriented towards production to serve western customers. They expected their suppliers in China to be no different than their suppliers in developed country markets – and in fact in many instances, these suppliers were the exact same firms. The elite consumers in China quickly gained awareness of the best that western firms had to offer, and had the income levels necessary to buy those products. And for these elite Chinese consumers, buying products that represented the best that the west had to offer was a statement of their stature in a country where that matters considerably. The number of these elite customers grew very rapidly, from a minuscule fraction of the population, to a tiny fraction of the population, to a usually-still-small fraction of the population today. As the bell-shaped income curve shifted to the right at China’s growth rate, with its 1.3 billion people, even small shifts generated huge numbers of consumers at the higher-income levels. For the western firms, doing business in China was thus a natural extension of their activities elsewhere, as customers were either familiar western firms or elite Chinese with preferences much like those of western consumers.

As western firms enjoyed the growth described above over the past couple of decades, a new group of Chinese firms emerged, many from the state-run or local enterprises of prior years. These firms had access to the lowest cost labor pools that were available throughout China, and in fact practiced “China economics” in a way that enabled them to achieve price points almost unimaginable to western firms.[1] Many of these Chinese firms sold to their own customers at prices that were dismissed by western companies as either the result of government subsidies or a cultural belief that they could “lose money on every unit, but make it up on volume”. Their products lacked the sophistication and refinement of the western brands, often characterized as low-quality knock-offs of similar products manufactured by western companies.

In many instances, these Chinese firms also developed solid manufacturing competencies, and began to be “hired” on some basis by western firms to make products for them, creating a cycle in which they strengthened their manufacturing skills under the tutelage of the western firms for which they were working. Furthermore, through these relationships, they were also exposed to western technology and design on an ongoing basis. Haier, for example, got its start manufacturing refrigerators for Germany’s Liebherr Group (and eventually borrowed its present name from the ‘herr’ portion of that firm’s name in Chinese). In other instances, western firms were delighted to license technology and design to Chinese startups, often that of past-generation products. Geely entered the automotive industry in such a manner, with its first car based upon the design of the Daihatsu Charade seen all over Asia with local brand names.

Most western firms dismissed these new Chinese firms as in any way representing a threat to their business. Their products, especially in the early years, were viewed as primitive and often laughable, only interesting to the low-income Chinese that couldn’t in any way afford the quality embedded in western products. And such western companies comforted themselves with the knowledge that those Chinese consumers who had risen in the income distribution were clearly signaling their preference for the offerings of western firms, even though these low-cost imitations were widely available. In terms of western markets, it was widely believed that it would be many generations before a Chinese firm could meet the standards, regulations, and expectations of western consumers. And furthermore, in many industries, it was argued that even the primitive offerings of these Chinese firms were the product of stolen western intellectual property, a practice that might work in China, but which couldn’t be exported elsewhere.

The emergence of the Chinese firms described above poses two significant challenges to western firms. The first of the challenges involves the new face of the global competitive environment. We have written previously about the emerging wave of Chinese competitors that are not only being successful in China’s broad middle market, but also gaining stature around the globe[2]. We have labeled the emerging global competitors from China as Second Mouse firms, drawing upon the saying “The early bird gets the worm, but the second mouse gets the cheese” and reflecting the fast-learner and fast-follower capabilities of these firms. There are many such Second Mouse firms around – Huawei in telecommunications equipment, Haier in appliances, Sany in construction equipment, Mindray in medical equipment, Geely in autos, among many other examples. All of these firms got their start in China, learning from western firms, showcasing strong manufacturing and economic competencies, and establishing a strong position serving those Chinese consumers below the points on the income distribution where western products were an option.

Our characterization of these companies as Second Mouse firms doesn’t just reflect their ability to learn from and follow the leaders from the west. They were also genuinely second in the race, faster than the many other Chinese contenders who started up at the same time and with the same roots. They grew to significant scale in China’s markets, and evolved from their early position as contract manufacturers to become legitimate firms. But for many years, their focus remained centered on the middle markets of China, and over time they evolved products that were “almost as good at an incredible price point”, a considerable improvement over the early knock-offs belittled by the western firms in their industries. In part, their ability to achieve nearly-comparable products was due to their mastery of “China economics”, but a significant factor reflected important elements of China’s business culture, including an ability to think far outside of the box, processes that allowed progress at “China speed”, insights about what actually mattered to customers in their target market and a willingness to engineer unnecessary features out of the product and out of the cost structure, and service competencies that redefined relationships with customers and allowed the substitution of low-cost labor for high-cost product elements and business processes.

These Second Mouse firms are no longer constrained to China’s markets. As the examples cited above suggest, they are now significant global players. Some, like Huawei and Haier, are among the leaders in their industries, having surpassed well-established western firms in terms of sales and global market share. The transition of these firms into global markets has been gradual, with most of them first venturing into other developing markets in Asia, then into developing markets elsewhere, and only recently into the developed country markets of North America, Europe, and Japan. In many industries, these Second Mouse firms haven’t yet arrived in the developed markets of the west, allowing western firms to continue to embrace the fiction that they aren’t serious global competitors. But it is more likely just a matter of time until they arrive and become the most serious competitors of the coming decade.

Western firms face a second challenge, one that reflects the difficulty they will face in terms of getting to the point where they can compete with Second Mouse competitors. What western firms didn’t recognize was that in their strategy for entering into China’s markets, they fell into the “first mouse trap”. By entering the high-end of China’s markets and prospering there, these western technology and design leaders, with their advanced products and high price points, had created a conundrum for themselves. To later enter the broad middle market, where almost-as-good products at very attractive prices are prerequisite to success, they would have to take actions that would threaten their income and profit streams from the elite market segments and from their China operations oriented towards serving western customers. And doing so would disrupt the steady growth expected from these firms’ China operations. Since the elite segments of the China market were initially the fastest growing parts of the market (in percentage terms), growth rates in sales were impressive indeed. Naturally, most of these western firms remain focused on the elite segments of China’s markets, earning solid margins and continuing to grow at reasonable rates, but without an ability to expand into the broad middle markets of China without compromising their position – and their profits – in China’s elite market segments.

As a result, the broad middle markets of China remain the territory of the Chinese Second Mouse firms. Fortunately for the Second Mouse firms and unfortunately for their western competitors, those markets are where most of the growth of the next decade will be found. It will be hard for any firm to be among the global market leaders in 2020 unless they have a meaningful share of the broad middle markets of China (and India, Brazil, etc.). Ceding these markets to the Second Mouse firms not only most likely hands over global leadership to them, but also enhances their abilities of the Second Mouse firms to compete in the west, both as a result of the earnings from emerging markets and from their continued access to the world’s best laboratory from which to evolve products that can compete and win around the globe. Evidence of this is already plentiful, as a quick reading of press releases describing Second Mouse investments and acquisitions in the west will verify. And even in the elite segments of China’s markets, the future will begin to threaten the western companies in terms of market share and sustained impressive growth rates and profit margins. As China’s income distribution continues to shift, the new entrants into the elite segment will face a choice between western brands and those “almost as good products at a great price point” from the Second Mouse companies, an option much different from the earlier choice between western brands and laughable knock-offs.

The strategic implications of these two challenges are clear. Future growth will require western companies to develop the ability to compete in the broad middle segments of emerging markets like China. And future competitive success in even traditional western markets will require responses to new Second Mouse competitors that will quickly offer western customers “almost as good” products at highly attractive price points – a value proposition likely to find as many takers in the west as it did in China and other developing country markets. Those that are skeptical of this should reflect on western firms like Southwest Airlines and Vizio that generated great success using what is basically a Second Mouse business model.

For most firms in most industries, while this challenge is on the way, there is still time to shape a response to these challenges. We believe that an effective response will require western businesses to evolve, blending what they already do well with the competencies that characterize Chinese Second Mouse firms. It will no longer be enough to be an “early bird” leading the way with innovative technology and design. The growth markets of the future will place a much more significant premium on price, with the competitive winners far more likely to be those with “almost-as-good products at a great price point” than those with state-of-the-art technology. This prescription is very different from the mantra that most western companies have repeated over the years: “We must step up our innovation capabilities in order to maintain our lead on the Chinese competitors.” The global leaders of the future will have to figure out how to blend both competencies, sustaining leadership over the full technology life cycle.

To accomplish that, most western firms will have to bring what the Chinese do so well into their own firm’s cultures, most likely through acquisition of companies from developing markets like China. Doing so will require a different perspective on acquisition strategy and about what is to be accomplished in the integration process. Acquisition priorities must be refocused on strong Second Mouse companies, and integration priorities must emphasize not just retaining, but fully assimilating, the core competencies that these acquired firms can bring to the firm that acquires them. The task ahead is monumental, but it is one that must be tackled by western firms aspiring to sustained global leadership.


[1] See David G. Hartman, China Economics: Unraveling the Mystery of China’s Low Cost, Blue Canyon Partners, Inc., © 2007.

[2] See George F. Brown, Jr. and David G. Hartman, They Aren’t Who We Thought They Were, Industry Week, January 2011; George F. Brown, Jr. and David G. Hartman, The Second Mouse Gets the Cheese, Sales and Service Excellence, May 2011; and David G. Hartman and George F. Brown, Jr., Change Before You Have To, Business Excellence, August 2011.

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Driving M&A Success In 2011

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Driving M&A Success In 2011

The increased pace of merger and acquisition activity late in 2010, including some huge deals, suggests that 2011 will be an active year. Low interest rates, significant cash on many firms’ balance sheets, and stock prices that are low enough to attract buyers but high enough to move sellers off the sidelines all reinforce that possibility.

Decisions on acquisitions are always a challenge. There is extensive literature that documents the too-high percentage of failed combinations, ones that failed to reward shareholders with a positive return on their investment. Yet most firms are motivated to consider acquisitions as an element of their growth strategy, citing the potential contributions from acquired firms, including ones targeted to fill gaps in a firm’s portfolio and ones seen as having the potential to help create a game-changing position. And often it is the case that an acquisition can bring assets and competencies that are otherwise either unavailable or that would take years to develop.

The hardest acquisitions to evaluate are those that involve a decision to enter a new line of business and new markets. “Bolt-on acquisitions” are far simpler, involving familiar business environments with known characteristics and risks. Often, the acquisition target in such situations is quite familiar to the acquiring firm as one of the well-known players operating in the same market. But when the acquisition option involves a new and unfamiliar situation, the need to ask the right questions becomes paramount.

Most corporations have established solid processes of due diligence to evaluate acquisition candidates, spanning a wide spectrum of economic, legal, and other factors. In the implementation of these processes, there is an intense focus on the firm targeted to ensure that its market position is solid, its assets secure, and its financial structure sound. Such assessments are critical to decisions likely to yield success in the end.

In analyzing acquisitions that succeeded and ones that failed, one insight that has emerged is that this strategic due diligence process should also focus on the overall market in which the acquisition candidate operates and link insights that emerge to the capabilities of the acquiring firm itself. Quite a few of the problems of failed acquisitions had nothing to do with the firm that was acquired. Rather, they could be traced to changes taking place in the broader business environment that the acquiring firm was ill-prepared to address.

The starting point for this assessment is a set of questions that are already part of the due diligence process for most firms. Is this a good business to be in? Do the firms in this business make money, and does the forecast point to a positive future outlook? Does the business create legitimate value for its customers, and is this value recognized? Are the firms in this industry that create value for their customers rewarded for their contributions, or is the business characterized by aggressive price-buying?

Adverse answers to such questions trigger the caution flags, and appropriately so. But even when the answers are positive and the future outlook appears rosy, it makes sense to develop scenarios that are disruptive. A starting point is to ask the acquisition team and available experts the question “If five years from now, this industry looked totally different, can you give me a scenario as to how that might have happened?” In quite a few cases, that question has triggered ideas about opportunities that exist for a “game changing” strategy that will generate value and rewards for the firm that implements it.

Sometimes the scenario involves changes that are taking place in the business environment (e.g., technology innovations, new regulations, changes in demand patterns, distress situations involving current players in the market, etc.). Other times the scenario involves a firm implementing a strategy that creates value in a new way (e.g., through rolling up smaller firms and creating economies of scale, through some technology foundation that provides an advantage, etc.). Sometimes the scenario involves changes that undermine the current foundations for industry profitability (e.g., new competitors that overcome barriers to entry). And sometimes the scenario involves growth through the industry’s expansion into new global markets or adjacency businesses. In all of these cases, when it is possible to identify a disruptive strategy that creates a “leadership position” that can be sustained, it has to be taken as a serious possibility.

Whether the disruptive scenario is one involving a great upside or a significant downside risk, it has to be included in the acquisition evaluation and plan. That evaluation and plan must start with self-examination on the part of the acquiring firm. The acquiring firm must ask if it is the “right firm” to implement such a strategy. It must ask whether there are reasons why it is better positioned for success than are others (e.g., expertise in the market, synergy through existing operations, core competencies that are transferrable, assets that can be leveraged). It must ask if the business model changes that will be required are practical in terms of their demands on resources (financial resources, human resources, etc.). It must assume that competitors will react, and decide if their reactions can be thwarted in order to ensure that the pro forma forecasts associated with the strategy are realized. Far too often, the acquisition decisions and business case assume a “steady-on-course” future for the acquired company, when the reality in fact involves significant change, disruption, and requirements for investment of time, money, and expertise.

The business environment of 2011 and beyond is one in which this guidance is likely to be of even greater importance than normal. There are significant changes taking place in many markets, as they recover from the recession, as the forces of globalization introduce new competitors and sources of innovation, and as slow-moving trends in the economy motivate decisions to implement new business models. Evaluating the potential for disruption and determining if your own firm is in a solid position to gain during such times can allow decisions on acquisitions to result in success stories that strengthen your prospects for sustained profitable growth.

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Creating Your 2012 Business Plan

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Creating Your 2012 Business Plan

As the last quarter of 2011 dawns, your 2012 business plan should involve initiatives that address three important themes. While these themes are familiar to many and do regularly find their way into annual plans, our team at Blue Canyon Partners believe that next year in particular it will be crucial to address their finer points.

1.     Address the Emerging Middle Market. While participation in emerging markets has probably been a part of your firm’s strategy in the past, next year it will be necessary to intensify your attention on these markets.  Marketplace transition will continue throughout 2012 as the middle markets in these economies grow. Success in 2012 will require you to determine how to shift from exclusively serving western companies and elite customers towards building a presence with customers who are part of the much larger and more challenging emerging country middle markets.

2.     Become a Solutions Provider. Next year, plans should be in place to help your company evolve from “selling a product” to become a “solutions provider.” Competition from low-cost countries like China will challenge product-centric businesses by offering very attractively priced almost-as-good products. In order to respond to this challenge, stop commoditization, and prevent its adverse implications on prices and margins, your 2012 plan must include how to move towards offering an integrated package of products and services that addresses the key challenges faced by your customers.

3.     Create Headroom for Growth. Responding to the strong balance sheet that your firm has developed since the 2008-09 recession, you will hear about interesting opportunities for acquisitions and investments.  Consider investments that will create headroom for growth and that can be justified by both top- and bottom-line arguments.  Technologies like cloud computing and social networking can open up new avenues and sources for revenue.  In addition to looking for growth through acquisition, consider expansion into adjacent product and market spaces.

All these initiatives reflect the opportunities available in today’s business environment, those which contribute to future growth and sustained margins. Successfully planning and executing these strategies will reward your audience’s firm with growth—but the challenge lies in making requisite changes to your business model in order to carry out these strategies. To ensure that the good ideas underlying your 2012 plans don’t fail because of implementation issues and resistance to change, it will be important to include the appropriate funding for the implementation team in these 2012 plans.

Author: George F. Brown, Jr.

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Bringing Outsiders In

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Bringing Outsiders In

One of the most important lessons in business is that when you create value for your customers, you have the opportunity to capture value for your shareholders.

There are three ways a supplier can create value for its customers. A supplier can help its customers sell more. Sometimes this involves taking market share, and sometimes it involves bringing new customers into the market. A supplier can help its customers achieve premium prices. Sometimes this involves product improvements that help a firm move up along the good-better-best spectrum, and sometimes this involves developing product and service options that customers are willing to pay for. The third opportunity involves bringing ideas that take costs out of the system through various types of process, materials or other efficiencies. Firms that can identify and implement strategies that achieve any of these three contributions position themselves and their customers for profitable growth.

The following three case studies illustrate contributions that created value for customers and translated into value for the firm making the contributions:

  1. An electrical products manufacturer studied purchases made by electrical contractors from its distributors for one line of its low-voltage products. It learned that four product bundles accounted for more than half of the unit sales from that product line. It developed a “kitted offer” of those four products. The result was widespread applause from distributors and contractors who loved the simplification that resulted in ordering, fulfillment and inventory management. All parties, including the manufacturer, benefited from cost savings. And the manufacturer saw an increase in sales as contractors shifted to this manufacturer’s products because of the time saved from these kits.
  2. A food equipment supplier whose customers were food processing and packaging companies had heard significant complaints about its order entry process. Most of this company’s products were engineered to order, and in its study of these complaints, it concluded that it forced customers to go through parallel and often duplicative tracks, one associated with placing the order, the other associated with defining the equipment specifications. It re-engineered its processes and found that the time required to place an order successfully was reduced by more than 25 percent for both customers and its staff.
  3. A drive train parts supplier serving commercial vehicle manufacturers was asked to identify ways to achieve double-digit cost savings for one of its large customers. Teams from the two companies, working together, spotlighted packaging as one opportunity. As one engineer observed, “We spend a lot of money and resources packaging the product, and then our customer spends a lot of money and resources unpackaging it. There was no good reason, such as damage protection, for this. It was just something we had always done.” Eliminating this activity alone yielded half of the cost reduction goal.

Internal vs. external

Over the years, industrial engineers have made significant contributions – ones that helped to improve the bottom line – to their firms. The majority of these contributions can be characterized as an internal focus, identifying improvements in the company’s own processes and systems. While such improvements translated into better competitiveness or resolved a technical challenge important to the success of the business, they largely were invisible to the firm’s external customers.

The examples in the three case studies above involved an “external focus,” creating value along one (or more) of the three ways described above for both external customers and their company’s shareholders. There are many such opportunities, and this paper shares lessons that can help IEs contribute more frequently and effectively by creating value for customers and translating that into value captured by shareholders.

Advocating an increased external focus has nothing to do with the relative quality of contributions between those that are mostly internal and those that involve an external impact. But there are numerous untapped opportunities for value creation that can be realized, with high payoffs all around. The companies that make each and every department and employee customer facing are those most likely to lead their industries. IEs can take three actions that can allow their companies to become part of such success stories: looking down the customer chain, analyzing economic relationships and investing in relationships.

Customers on a chain

Lesson one: Look down the customer chain and identify the ways in which your company connects to later-stage customers. A customer chain is the pathway from a business to its customers, often extending for many stages and involving multiple third-party organizations. For the electrical product manufacturer, the customer chain extended from the manufacturer to its distributors to electrical contractors to end customers. The insights that sparked the kitting concept originated with a study of the contractors, their typical job applications and associated product requirements. In the other two case studies, the insights only required understanding the next stage of the customer chain. But even that source of ideas is ignored far too often by businesses looking for opportunities to create value.

Looking down the customer chain is a demanding task, requiring much more than a casual effort to understand how products and services travel from loading docks to the end customers. It is necessary to understand exactly how the company’s products and services are used at each stage of the customer chain, and how they affect operations, market position and the customer’s cost structure.

For example, one company supplied engines to various equipment manufacturers. The engine share of the bill of materials ranged from less than 10 percent to more than 50 percent, across equipment types. And the “adjacent costs” that were connected to the engines, spanning everything from manufacturing assembly to warranty, ranged from less than 5 percent to more than 25 percent. For those equipment costs in which either (or both) of these engine shares were high, there was enormous opportunity for optimization yielding shared savings and success stories. Knowing which equipment manufacturers’ operations offered high potential allowed this firm to focus its resources correctly and invest in a detailed understanding of what actions could be taken to save costs.

The strongest argument for taking a customer chain perspective when looking at opportunities for process or systems improvement is that there are far more opportunities for optimization when a larger system is considered. In all three of these case studies, at best a part of the potential could have been identified and realized had the analysis been confined by the company’s own boundaries.

Businesses should develop models that help them understand the degree to which their companies’ products and services enter into their customers’ profit-and-loss statements. As the engine example above suggests, the opportunities for a high-impact cost saving initiative are greatest when a supplier’s product or services account for a significant element in the customer’s cost equation. Several other signals should motivate IEs to look for opportunities that involve an external focus. For example, sometimes a customer faces price pressures in its end market, but the supplier’s product only accounts for a modest component of the customer’s cost structure. In that instance, opportunities to re-engineer the overall process, taking costs out of the system, likely will be embraced by the customer as a route to improved cost competitiveness.

A lesson in economy

Analysis of the economic relationship between the supplier and the customer motivates the second lesson, namely to be open to shifts in the roles and boundaries between a supplier and its customers or between departments within an organization. The kitting role assumed by the electrical products manufacturer replaced a task previously done in some combination by the distributor and the contractor. The new order entry system developed by the food equipment company shifted responsibility for pricing to the engineering team that worked with customers on specifying the design for the equipment that they wanted to order. And the “no packaging” option developed by the vehicle parts company and its commercial vehicle customer required changes in the logistics and quality control processes of both companies. Again, the lesson is that removing boundaries creates more and more opportunities for value creation.

The value of breaking down boundaries is best illustrated by the case study involving the food equipment company. The engineers that looked at that problem commented, “Both the order entry team and the equipment design team were truly efficient. Both had processes that were streamlined about as much as could be done. It was only because customers were complaining about having to answer the same questions twice that we even looked at this. And then we saw we were in fact doing the same thing twice, efficiently, but nevertheless, twice.”

Over and over, IEs have seen the contribution that customers can make to a supplier. More often than not, the customer knows what changes the supplier could make to become a better supplier. And the firms that have the relationships that allow such insights to be learned are those that win in the end.

One tool used successfully in many applications is a reverse audit. In this case, teams from the supplier and customer review the other company’s processes and systems in areas that overlap between the two companies and in areas where the auditing organization has expertise. Insights like the one cited in the food equipment case study frequently emerge from this process, with customers pointing out ways that their suppliers can improve.

There is value associated with such reverse audits in the other direction. They are an exceptional way for a supplier to bring value to its customers, and many organizations use this concept to elevate customer relationships to a higher level. Suppliers have a unique vantage point in that they often serve customers in very distinct industries and across firms that differ in heritage, size, management style and other factors. As a result, they implicitly develop insights about best practices involving the use of their own products and services. Most of the time, executives of supplier organizations can identify their smartest customers, those that were most efficient or otherwise stood out in how they used the supplier’s products. These insights can become highly valuable when applied in the context of a reverse audit.

A relational perspective

The third lesson is that investments in relationships can yield major dividends in innovations that take costs out of the system. In all three of the case studies, the companies involved had strong and successful business relationships, ones that extended far beyond the sales team and the purchasing executive. The industrial engineering teams that created the “no packaging” option had a strong track record of successful interaction. In fact, in the prior year, each had done a reverse audit of the partner organization’s operations, working to identify ways that each firm could implement best practices.

In studying supplier-customer relationships that work, multiple touch points are characteristic of successful relationships. The relationships portrayed as two pyramids touching only at the point where the sales executive interacts with the purchasing executive are ones that lose the information and familiarity needed to identify opportunities for improvement. Those that have a spectrum of touch points, bringing functional experts together with their counterparts, are those more likely to create shared successes.

Such relationships cannot be created without an ongoing commitment. For example, one firm experienced a “perfect storm” in 2009 when three of its largest customers came to it demanding price concessions – a reality experienced by many in that year’s tough economy. In one case, the firm had a strong and healthy relationship with the customer, and it collaborated to find cost savings that more than met the original demands for price concessions. In the other two instances, the supplier’s same offer to work together to find cost savings was rebuffed. It was a case of too little, too late. Investing now in the relationships that can provide an ongoing stream of value contributions is also the way to prepare to respond to future demands made by customers.

Company-wide is a good thing

Recently, a company’s senior vice president of sales wanted to take a different approach to the firm’s largest customer relationships. His business had organized its sales force by region, but many large customers had facilities in many different regions. He had worked with his sales team to determine which customers were the largest, across all regions, and was contemplating anointing them as strategic accounts to be managed by a single team.

While applauding his recognition that some customers likely were strategic and required a different approach to the relationship, his plan had two elements of concern. First was the fact that size alone does not define strategic importance. Second was the fact that this initiative had not been extended beyond the sales organization.

The primary basis for calling a relationship strategic is the supplier’s ability to deliver value to that customer, as a one-sided strategic relationship will go nowhere. And, without any negative reflection on the sales organization in this and other firms, the ability to deliver value to a customer goes far beyond sales. More often than not, it is from product, service, engineering and other parts of a business organization that value creation opportunities will emerge. The company’s senior vice president of sales agreed to bring other parts of his firm into the discussion to identify relationships that could create real opportunities for value, projects that would be significant in terms of scale and growth.

The roster that emerged was markedly different than that defined by size alone. And, more importantly, as this company began to implement new approaches to the selected relationships, it was able to draw upon expert resources from throughout the firm, bringing to these customers the types of value-creating expertise illustrated in the above case studies.

Conclusion

These shared lessons come from work with many organizations over many years. In some instances, executives respond to external process improvement plans with: “Of course. That’s what we do. It’s second nature in our firm, and we appreciate the lessons learned from other businesses, as we’re always looking for ways to do it better.” That happens about 20 percent of the time. The more frequent response of executives outside of sales is something like: “We really wish we could do that in our firm, but seeing a customer is like seeing the Loch Ness monster. There are rumors that they exist, but none of us have ever actually seen one.”

The latter situation is a sorry one. These same companies typically are consumed with the goal of figuring out how to avoid becoming a commodity and learning how to become a strategic supplier to their customers. They are missing an opportunity. In almost every instance in which suppliers have listened to their customers, the businesses have heard suggestion after suggestion as to how they could do a better job and increase the value that they contribute.

The potential is there. What is required is the willingness for suppliers to challenge – and empower – their entire organization to help their customers point out the most effective route to overcoming the supplying company’s obstacles to growth and profitability. Taking an external focus, being open to changed roles and boundaries and building strong supplier-customer relationships centered on value creation are critical steps in the process that puts businesses on the path of profitable growth.

Authors: George F. Brown Jr. and Atlee Valentine Pope

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Come Together: Creating M&A Success Stories

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Come Together: Creating M&A Success Stories

The increased pace of merger and acquisition activity late in 2010 and early in 2011, including some huge deals, suggests this will be an active year. Low interest rates, significant cash on many firms’ balance sheets, and stock prices that are low enough to attract buyers but high enough to move sellers off the sidelines all reinforce that possibility.

Decisions on acquisitions are always a challenge. There is extensive literature that documents the too-high percentage of failed combinations, ones that failed to reward shareholders with a positive return on their investment.

Yet most consulting firms are motivated to consider acquisitions as an element of their growth strategy, citing the potential contributions from acquired firms, including ones targeted to fill gaps in a firm’s portfolio and ones seen as having the potential to help create a game-changing position. And often it is the case that an acquisition can bring assets and competencies that are otherwise either unavailable or that would take years to develop.

The hardest acquisitions to evaluate are those that involve a decision to enter a new line of business and new markets. “Bolt-on acquisitions” are far simpler, involving familiar business environments with known characteristics and risks. Often, the acquisition target in such situations is quite familiar to the acquiring firm as one of the well-known players operating in the same market. But when the acquisition option involves a new and unfamiliar situation, the need to ask the right questions
becomes paramount.

Most corporations have established solid processes of due diligence to evaluate acquisition candidates, spanning a wide spectrum of economic, legal, and other factors. In the implementation of these processes, there is an intense focus on the firm targeted to ensure that its market position is solid, its assets secure, and its financial structure sound. Such assessments are critical to decisions likely to yield success in the end.

Stay Market Focused

In analyzing acquisitions that succeeded and ones that failed, one insight that has emerged is that this strategic due diligence process should also focus on the overall market in which the acquisition candidate operates and link insights that emerge to the capabilities of the acquiring firm itself. Quite a few of the problems of failed acquisitions had nothing to do with the firm that was acquired. Rather, they could be traced to changes taking place in the broader business environment that the acquiring firm was ill-prepared to address.

The criticality of a strategic due diligence process that includes both traditional elements and ones that look at the potential evolution of the business environment cannot be understated. Despite the long roster of ways in which acquisitions can create value, studies of acquisitions find numerous examples in which eventual problems were rooted in shortcomings in the business case that justified the acquisition.

Harding and Rovit, for example, reviewed more than 1,700 mergers and acquisitions and interviewed 250 CEOs. They found that “less than one in three CEOs interviewed had a clear strategic rationale for the M&A decision, or understood the contribution the deal would make to their company’s long-term financial future.” Furthermore, “over half of those companies with a clear rationale underpinning their M&A activity came to a post-M&A conclusion that their rationale had been wrong.”

Ask the Right Questions

The starting point for an expanded assessment that considers the potential for disruption in the business environment is a set of questions that are already part of the due diligence process for most firms. Is this a good business to be in? Do the firms in this business make money, and does the forecast point to a positive future outlook? Does the business create legitimate value for its customers, and is this value recognized? Are the firms in this industry that create value for their customers rewarded for their contributions, or is the business characterized by aggressive price-buying?

Adverse answers to such questions trigger the caution flags, and appropriately so. But even when the answers are positive and the future outlook appears rosy, it makes sense to develop scenarios that are disruptive. A starting point is to ask the acquisition team and available experts the question “If five years from now, this industry looked totally different, can you give me a scenario as to how that might have happened?”

In quite a few cases, that question has triggered ideas about opportunities that exist for a “game changing” strategy that will generate value and rewards for the firm that implements it. In a few instances, the firm considering the acquisition identified a strategy through which it could gain far more from being the change agent than had been anticipated prior to then.

Getting Disruptive

Sometimes the disruptive scenario involves changes that are taking place in the business environment (e.g., technology innovations, new regulations, changes in demand patterns, distress situations involving current players in the market). Other times, the scenario involves some participant from within or outside the industry implementing a strategy that creates value in a new way (through rolling up smaller firms and creating economies of scale, through some technology foundation that provides an advantage).

Sometimes the scenario involves changes that undermine the current foundations for industry profitability (e.g., new competitors that overcome barriers to entry). And sometimes the scenario involves growth through the industry’s expansion into new global markets or adjacency businesses. In all of these cases, when it is possible to identify a disruptive strategy that creates a “leadership position” that can be sustained, it has to be taken as a serious possibility.

Whether the disruptive scenario is one involving a great upside or a significant downside risk, it has to be included in the acquisition evaluation and plan. That evaluation and plan must start with self-examination on the part of the acquiring firm. The acquiring firm must ask if it is the “right firm” to implement such a strategy. It must ask whether there are reasons why it is better positioned for success than are others (for example, expertise in the market, synergy through existing operations, core competencies that are transferrable, assets that can be leveraged).

It must ask if the business model changes that will be required are practical in terms of its demands on resources (financial resources, human resources, etc.). It must assume that competitors will react, and decide if their reactions can be thwarted in order to ensure that the pro forma forecasts associated with the strategy are realized. Far too often, the acquisition decisions and business case assume a “steady-on-course” future for the acquired company, when the reality in fact involves significant change, disruption, and requirements for investment of time, money, and expertise.

Identifying a disruptive scenario need not derail the decision to go forward with an acquisition. After all, in many instances, such scenarios are correctly characterized as low probability events, and the attractiveness of the acquisition under more likely forecasts should be the primary driver of decisions. But there are several ways in which the acquisition implementation plan should be modified so as to reflect such scenarios.

For example, in any implementation plan, it is critical to identify the “killer variables” that will determine whether the plan succeeds or fails. The integration team should develop a monitoring plan that allows them to forecast whether the base case forecast is unfolding or whether one of the disruptive scenarios is beginning to develop.

Conclusion

The business environment of 2011 and beyond is one in which this guidance is likely to be of even greater importance than normal. There are significant changes taking place in many markets, as they recover from the recession, as the forces of globalization introduce new competitors and sources of innovation, and as slow-moving trends in the economy motivate decisions to implement new business models.

Evaluating the potential for disruption and determining if your own firm is in a solid position to gain during such times can allow decisions on acquisitions to result in success stories that strengthen your prospects for sustained profitable growth.

Author: George F. Brown, Jr.

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Change Before You Have To

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Change Before You Have To

Here is the question that we think belongs on the top of your firm’s strategic agenda. “Do we need to bring what they do very well in China into our company?” If your firm aspires to global leadership, we believe the answer is yes—and there is an urgency to take actions that are consistent with that answer. Jack Welch’s challenge to “change before you have to” is excellent advice. For some firms, it may already be too late, but for most, the opportunity is still available.

The change that will be required will impact on most elements of business strategy, with a very significant impact on acquisition strategy. The need goes beyond just acquiring firms in China. It will require that acquisition decisions and integration processes evolve rather dramatically to be in tune with the markets and the competition of the twenty-first century.

Most businesses are already fully aware of the relatively benign rationale for the need to respond to this challenge. China’s extraordinary growth has already propelled it onto the leaderboard in terms of country markets—and that growth will continue. In the future, success in China (and other emerging markets) will require serving the broad middle segments, not just the elite segments involving the operations of global firms in China and the extreme tail of the income distribution. Few western firms are even close to ready to challenge Chinese competitors in those broad middle market segments. And, while China is the most prominent current example, the other emerging markets starting with Brazil, Russia, and India will hold precisely the same opportunities.

But that’s only part of the rationale and the other part is defensive, with an alternative that is far more frightening. There is no reason to be content about your firm’s leadership position in traditional western markets. In the near future, it is likely that you will have to respond to a challenge that will be mounted by a new type of competitor now springing up in China and other emerging markets.

We recently wrote about the “fast learner” economy in China, using the saying: “The early bird gets the worm, but the second mouse gets the cheese.” When we first thought through that statement, it was jarring to us. As Americans, we celebrate from childhood on the early bird—the creative, the brilliant, the far-sighted. Many of us started our education in high schools named for early birds like Thomas Edison, Benjamin Franklin, or George Washington Carver. Few of us were raised reading biographies of the second mouse—the one who arrived a bit late but faster than all the others, the one who ended up avoiding making the mistakes of the first mouse, and (stretching the analogy) often skillfully learning from the pioneering work of the early birds.

The Chinese are our example of emerging market participants because they not only have finely-honed second mouse skills, they are downright proud to be fast followers. It is one of the factors that drive their success in the middle market of China, as they evolve western products and technologies to meet the needs of Chinese customers at acceptable price points. Those same competencies will enable these firms to become a force in western markets, as they achieve scale in China and then turn their attention (often with government support) to expanding into global markets. In fact, the ability to quickly learn and copy products and technologies developed elsewhere has already propelled numerous Chinese firms to global stature. Firms that compete with Chinese companies like Huawei, Haier, and ZTE have already seen this transition, as those firms evolved from dominance in China’s market to positions of global leadership.

To meet the inevitable competitive challenges in their home markets and to succeed in the middle markets of China, western companies will also need to hone second mouse skills, sometimes as an additional weapon in their arsenal, more often as their primary mode of competing.

The change we are recommending in acquisition strategy is about addressing the emerging realities about what will be required for growth and what will be required to remain competitive. The solution is all about combining the best of the traditional western early bird business model and the emerging market second mousebusiness model. It may turn out to be possible to do this without making an acquisition of a confirmed second mousefirm, but we are skeptical.

Rethinking acquisitions
The types of acquisition which have been successfully implemented in the past have frequently delivered value to shareholders through various contributions:

  • Introducing new technologies to an existing product portfolio
  • Bringing differentiated products to the portfolio to serve existing customers
  • Creating entry into new markets, providing presence and relationships
  • Producing profits as part of a portfolio of assets.

The traditional goal of strategic acquisitions has been strengthening the company and promoting its core business model, as those examples suggest.

For most firms, the primary challenge in realizing value from acquisitions involves successfully integrating the acquired company, particularly if the acquired company comes with a different business culture. When doing an acquisition in China, for instance, the major post-acquisition implementation actions often involve upgrading technology, teaching mature economy business methods, and bringing control to the free-wheeling business cultures found in the acquired company, while taking advantage of Chinese economics and the opportunity to enter a new geographic market.

We have been involved in developing many implementation plans of exactly this type, and acquisitions of this character will continue to be consummated and will continue to provide advantages and profits, if targeted and implemented well. But their objectives and results are limited to “taking what we do very well in the west to China.”

That strategy will not prepare a firm for the challenges of the future. Faced with the extraordinary challenge of realizing growth in the middle markets of emerging countries while warding off the competitive challenges of second mouse competitors in western markets, companies will need a new emerging market acquisition model. That new model will create value, not by molding the acquired new company to fit with the acquirer, but by embracing the wider diversity inherent in the acquired company. It creates by acquisition and preserves in integration the acquired firm’s second mouse capabilities.

We began by saying that bringing what they do well in China squarely into western companies belongs at the top of today’s strategic agenda. Among the reasons for our advocacy of this primacy are the contributions that second mouse acquisitions can provide:

  • Products and technologies that address the needs and price points of customers in the broadest segments of emerging markets—the locus of growth opportunities for the foreseeable future
  • The competencies of speed, innovation relevant to emerging market economic conditions, and the ability to sustain leadership over the entire technology life cycle (rather than ceding leadership soon after innovation to second mouse companies)
  • The opportunity to shape a company that can be a global leader in the radically different business environment of tomorrow.

These new acquisitions introduce new competencies and a new business model, giving the acquiring company the chance to become faster, more willing to experiment, and able to serve markets that are focused on cost as well as ones focused on breakthrough innovation. Rather than changing the business model of the acquired company to be more like the western company that made the acquisition, it is the business model of the acquiring company that needs to adapt to that of the acquired company, in order to make this transition.

This concept changes the traditional perspective about globalization. The traditional perspectives involve either arbitrage or aggregation. Western firms initially went to China to take advantage of their low labor costs as a source of advantage in their home markets. Many stayed in China as the country’s growth yielded enough customers to meaningfully contribute to scale. Implementing the acquisition and integration strategy we’ve defined will represent the dominant contribution of globalization in future years, namely combining competencies that are strong in different global markets and cultures in order to achieve competitive leadership across all markets.

Challenges
We are aware that what we are suggesting will be challenging in the extreme. To make an acquisition of a company that most would perceive as “naïve” or “primitive” in both products and methods of operating and then taking on that company’s business model requires both courage and hard work. We will have to overcome the western preference for the early bird and learn to embrace the second mouse.

There are challenges galore in trying to change the face of a parent company to match the business model of an acquired company. This is particularly true because there are likely to be parts of that acquired company’s business model that do require changing. Companies that have done acquisitions in China are familiar with many of the elements of the status quo that must be changed:

  • Existing products may have been developed in disregard of intellectual property rights
  • Human resource policies may not be consistent with western standards
  • Corporate governance may not match the requirements of a public company
  • Relationships, especially with government, and transactions with customers and intermediaries may not pass muster with western laws.

But, while changing what is “wrong”, it is important to keep the acquiring firm from changing what is “right” in the companies they acquire:

  • Business systems that are oriented towards responding to the need for speed that is inherent in the economies of China and other emerging markets, relying on large available labor pools and processes that often involve trial and error instead of slow, deliberate strategic plans
  • Standards and processes that are consistent with local economics and customer expectations—for product performance, product life, and service delivery—not some historical western performance standard
  • The lack of a product legacy (and the fact that most customers in markets like China are first-time customers for almost every product), which creates an environment in which thinking is often not just out of the box, but out of the stadium.

The goal of the type of acquisitions that we are recommending is to bring what they do very well in China into your company. The mantra of the integration process must therefore be to change what must be changed without destroying what must be assimilated into the acquiring company.

Summary
The strategic challenges are clear. Future growth will require an ability to compete in the broad middle segments of emerging markets. Future competitive success in even traditional western markets will require responses to new competitors from emerging markets that will quickly offer customers “almost as good” products at highly attractive price points.

To address these strategic challenges, western businesses will have to evolve, blending what they already do well with the competencies that characterize mainstream Chinese firms. To accomplish that will require a new focus of acquisition strategy and a new perspective about what is to be accomplished in the integration process. Acquisition priorities must be refocused on strong second mouse companies, and integration priorities must emphasize not just retaining, but fully assimilating, the core competencies that these acquired firms can bring to the firm that acquires them.

Authors: George F. Brown, Jr. and David G. Hartman

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Opinion: Can This Marriage Be Saved?

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Opinion: Can This Marriage Be Saved?

It takes a significant effort on the part of suppliers and customers alike to ensure that strains on key supplier-customer relationships are avoided, and there is a common focus on the contributions that create value.

The logistics industry learned that lesson during the recent recession, when trouble in the economy and excess capacity in the industry created enormous pressures on volume and rates.

Now that the economy is recovering, and business is finding better footing, it’s time to be proactive and plan for the possibility of future distress of the sort that could derail a key business relationship.

It’s also a time to rebuild the foundations of key customer relationships and make sure both organizations — yours and theirs — have a clear understanding of how they can continue to participate in a strong, value-creating relationship.

A few years ago, my firm conducted interviews with two companies that had a longstanding customer/supplier relationship. Those talks revealed and described that relationship’s painful deterioration.

Executives in the supplier organization pointed fingers at their customer, noting that a new executive had arrived who gave no weight to the long history of contributions made by the supplier, especially during tough times. They felt the customer now placed all of its weight on price — even showing a willingness to engage a rival supplier with a long history of performance problems just “to save a few bucks.”

Like most stories, of course, this one had two sides. Executives in the customer organization pointed to their own challenges, including fierce new competitors that had appeared even as the economy was sinking. From their perspective, every penny mattered, not just to their success, but to their very survival. They felt their longtime supplier had “simply stopped listening” and its personnel heard only what they wanted to hear.

Two solid recommendations emerged directly from this case study, and they apply in good times as well as bad:

• It is essential for the key principals in a supplier-customer relationship to get together regularly and ask this question: In terms of your expectations and priorities, what has changed since we last met? This question must be asked regularly, and the answer has to be taken seriously, even when its implications are painful.

• In any significant supplier-customer relationship, there are going to be many “touch points” between the two organizations. That’s almost always a very good thing, as the insights necessary to spark valuable contributions often emerge from unexpected connections across the two organizations’ departments and staff — but sometimes there is a down side. The second recommendation, therefore, is that the principals in the relationship must regularly say to each other, “This is what we’re hearing from your organization and how we plan to react to it. Are we all on the same page?”

Beyond these basics of blocking and tackling that are so important to the success of key relationships with customers, it’s important to re-emphasize the types of efforts that had made this supplier so valuable in years past.

The transportation and logistics industry is going through many changes — shifts in the modal mix, changes in work rules, introduction of new technologies that can have a major effect on productivity and fundamental changes being made by shippers in the structure of their distribution centers. Add to that the ongoing evolution of global trade and in the mix of commodities being shipped, and the importance of focusing on value creation becomes quite clear.

The questions raised above are a good start in that regard, but best-practice firms work aggressively to interact with their customers about their future plans. Ask detailed questions that can spark a dialogue about the future challenges facing each customer organization:

  • “Looking forward, what changes do we have to anticipate and address?”
  • “What new nightmares are keeping you awake?”
  • “What changes would best help you to be prepared for the business environment your firm sees in its future?”

Again, asking these questions and then giving serious attention to a high-quality response can create a foundation for sustained success.

Formally engaging in supplier-customer discussions about what creates value is not an easy process, especially when everything seems to be going well, but it is far easier than losing a valued customer because the discussion didn’t take place.

Best-in-class organizations on both sides of the supplier-

Customer relationship must take the steps necessary to create a dialogue to ensure that each firm understands the other and to form the basis for an effective information and communications flow that establishes the foundation for shared successes. Firms that do so are well-positioned for success, with outcomes far more likely to be translated into bottom-line rewards for their shareholders.

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Building a Customer Facing Culture

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Building a Customer Facing Culture

Even from among firms that are best defined by the products of their R&D departments and laboratories, it is increasingly common to hear an executive state the goal of making his or her company one that is customer-facing. That orientation is laudable. The best companies thoroughly understand their customers and fully incorporate customer insights into their plans and priorities. The challenge is implementing that vision. It’s far easier to profess the desire to be a customer-facing company that it is to actually build such a culture.

Research into the best practices of suppliers serving business markets has generated a fascinating roster of success stories and horror stories told by customers about their suppliers. While the actual stories span the spectrum of topics and circumstances, at both ends of the spectrum, the focus of these case histories clusters around certain themes. There is an important implication of this clustering for executives in terms of the ways in which businesses must evolve their culture to ensure that their company actually delivers on the promise of being customer-facing.

In the case of the many highly-positive success stories are by customers about their suppliers, a significant majority involve innovations brought by the supplier to the customer. The word “innovation,” however, must be interpreted in the broadest possible way, reflecting in a dictionary definition sense “the introduction of something new”. The success stories reflect new products, new services, new business systems, new processes, and just about every other dimension of “new” that a business firm can envision. Sometimes the success story involves solving a problem; other times it involves getting ahead of an opportunity. When customers provide their success stories involving innovation, they describe the contributions with phrases like “they helped us get out in front of [some situation]” and “they enabled us to take our performance to a higher level”.

Unfortunately, customers also have horror stories to tell about their suppliers. They too vary from case to case, but, once again, the majority of horror stories share a common focus. In this instance, the common focus is a failure in implementation, suppliers that in some way failed to deliver on their commitments and promises to their customers. Again, the dimensions of implementation failure are many: late deliveries, short shipments, products that don’t work, calls that weren’t returned, service personnel that didn’t show up, wrong answers provided by technical support teams – the list goes on and on. The customer horror stories involve phrases like “they left us hanging” and (in the horror stories told with the most emotion) “they embarrassed us in front of our own customers”. As the latter statement suggests, many of these horror stories had further repercussions as the implementation failure rippled down the customer chain. Those telling such horror stories had extremely long memories – and very low forgiveness rates.

I provide those generalizations about success stories involving innovation and horror stories involving implementation failures to underscore the importance of building a customer-facing culture throughout every department in your company. In the vast majority of the success stories and horror stories that we’ve heard, the focus wasn’t on the supplier’s sales organization or its account management team. Rather, the success story originated with the product development team, the customer service team, the installation team, the logistics team, or some other part of the supplier’s organization. Similarly, the horror stories in almost all circumstances originated in parts of the supplier’s organization that had been largely unconnected to the customer prior to the incident that defined the horror story.

Building a customer-facing culture throughout a company is a difficult task. After all, unlike the sales organization and the strategic accounts team, individuals in other job functions have many day-to-day assignments that don’t involve interactions with customers. For many of these individuals, the customer-facing assignment even seems like an add-on task, possibly even in the “make work” category. It often goes to the end of the queue in terms of priorities.

The payoff from success in building a customer-facing culture is enormous. The number of CoDestiny success stories, in which a supplier created value for their customers and captured value for its own shareholders, attests to this[1]. The best business strategies originate from a foundation of shared successes in which suppliers and customers reach new markets, achieve higher price points, or improve their bottom lines by taking costs out. To be part of such shared successes, the entire organization must believe in and contribute to creating and nourishing CoDestiny relationships.

There are four lessons that have contributed in firms that have been successful in creating an organization-wide customer-facing culture. Implementing these lessons in your firm can reduce the degree of difficulty in making this change.

First, create the right connections between your people and those in the customer organization. Too often, the implementation of “getting other departments involved” is taking them on sales calls. Sometimes this is useful and even necessary, but it rarely is the way to build an ongoing interaction. On the other hand, when the right connections are made – your product development experts with the customer’s product development experts, your logistics managers with the customer’s logistics managers, etc. – the discussions can be fruitful and the start of an ongoing exchange. Many of the success stories originated with such connections. And many of the horror stories could have been avoided had such connections been in place.

One executive reflected on his firm’s own history as it related to connections to customer organizations as follows:

“For years, we worked hard to eliminate these ‘disruptions’. We taught our customer service people to shield the people in other departments from customer calls. We had a four step process to follow before we would allow them to go someone in the manufacturing or scheduling group. And then when we heard a complaint a customer, the people in the manufacturing or scheduling group would correctly say ‘This is the first I’ve heard of it’.”

This executive went on to discuss some of the changes that have been made:

“Now, we’ve build some bridges between our operations people and our customers. So at least for the major accounts, communication can go directly to operations if the customer thinks that is necessary or if they feel stymied. And our customer service people now believe that at the same time they have to be an efficient source of answers and problem solving, part of their job is keeping the operations people in the loop. No one will ever get fired for calling up someone in operations and saying ‘You need to hear this’.”

Individuals throughout this organization reflect on the sea-change that has taken place. They now believe that are part of a firm that connects to its customers.

Second, ensure that some interactions with customers focus on the future. Again, all too often, the natural agenda for a discussion involves either ongoing operations or a past problem. The former interactions are important and necessary to ensure that transactions take place smoothly. Past problems have to be resolved so that they don’t recur, but if all that is accomplished is some combination of finger-pointing and apologizing, all parties are usually quite eager to get the meeting over and get out of the building. When the agenda includes topics that focus on the future, not only does it create a sense of excitement and interest, but it also creates the foundation for a future success story if the individuals involved generate some creative sparks. This won’t happen every time, but it happens often enough when the right people are thinking about the right topics … and when the opportunity to do something is still in front of them.

The focus on the future also enables the most important contributions that can emerge from a customer-facing culture, namely those that result in the many different types of “innovation” that will generate future success stories. Good ideas are often the product of insights about the market, and direct interactions with customers by experts across any company’s many specialties and disciplines creates the most fertile field possible from which new ideas can spring. In the chronicle of success stories, the diversity of the origins of the ideas that spawned the success underscores this point.

Third, bring clarity, energy, and an active cadence to these interactions. Among the firms that were part of the horror stories, we often heard laments like “we tried that once, but it didn’t really work” and “we do have an annual executive meeting with [some customer], but it’s largely ceremonial”. It takes a real commitment – and usually a very proactive champion – to jump start an effective relationship with a customer organization. And it’s very easy to back slide and return to a low energy, infrequent mode of interacting. If your organization is going to make a commitment to a customer relationship, make it real and make it work.

Best practice organizations have a plan for their interactions with customers, and ensure that someone is responsible for making that plan happen. One executive that several years ago was quoted as saying that he intended to make his company more customer-facing described his thinking as follows:

“Soon after I got onto the customer-facing bandwagon, I asked myself ‘Why do you believe in this?’ That question started off a process, which we implemented for each of our most important customer relationships. I got a team together, from all parts of the company. And we sat together and tried to answer the question ‘What could we accomplish if we had a better relationship with this customer?’ Some of the people in the room had never met anyone in that customer organization, but everyone had ideas and opinions. What came out of this process was a blueprint for what it meant, customer by customer, to be customer-facing. And we then knew what to do and who to involve.”

Finally, we’ve all heard some version of the statement “if it’s not measured, it doesn’t matter”. That truth applies here as well. If your organization is going to be committed to customer relationships, there should be meaningful measurements in place reflecting the goals of the program, including What, Who, and When dimensions. The best firms not only have such measurements in place in the form of dashboards and scorecards, but they also share them with their customers (and in many cases gain the benefit of customer buy-in to the goals). It’s not just having measurements in place that is important. A significant part of the value comes from the process of deciding what the goals should be, a great way of getting others throughout the organization to think about how they can best contribute to strong collaborative customer relationships.

No one can guarantee a future success story or that future horror stories can be completely avoided, but the evidence is strong that those companies that connect effectively with their customers will make the former roster and avoid the latter one. Taking the steps needed to make your entire company customer-facing is a key first step towards a future in which the stories told about your firm will be ones that you’ll be delighted to repeat.


[1] See CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs, by Atlee Valentine Pope and George F. Brown, Jr., Austin, TX: Greenleaf Book Group Press, © 2010

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Creative Resolutions: Is Your 2011 Aerospace and Defense Innovation Plan Really Innovative?

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Creative Resolutions: Is Your 2011 Aerospace and Defense Innovation Plan Really Innovative?

In a recent meeting with an executive responsible for her company’s product development activities, she made the comment, “I’ve never seen so little creativity in a three-year plan that’s supposed to define our company’s technology roadmap. You’d think an innovation plan would be innovative. What I’m looking at is just plain boring – a product extension here, adding a feature there. Absolutely nothing that anyone should call a creative thought.”

Her comment is one that we hear all too frequently. Lack of creativity – at a time when most firms depend on creativity to avoid falling into a commodity product trap where price is the only the distinction among firms – is one of the two most frequent issues we hear from executives responsible for their company’s innovation centers and product development initiatives [1]. As firms move to finalize their plans for 2011 and beyond, a fresh perspective on the ways in which they can bring creativity into their innovation plans can yield real dividends.

Thinking about your customers – not just your direct customer, but customers at every stage of the customer chains in which your firm participates – provides the inputs for creative planning. InCoDestiny [2], we outline three ways in which a firm can bring value to its customers: helping them to grow volume, helping them to achieve a higher price point, and helping them to “take costs out” and strengthen their bottom-line margins. These three routes to success always work, and they work when it comes to identifying innovations and new product strategies. Beyond the obvious ways of contributing (which customers are often imploring their suppliers to address), the following paragraphs describe some interesting variations through which companies have achieved significant successes.

The obvious way that firms look to increase volume is by taking market share. This opportunity should never be overlooked. If a supplier can help its customers win sales, both firms benefit from higher volume. But another way of helping a customer increase volume is by helping them to identify new markets in which they can participate.

Sometimes these new markets involve new geographies – entering fast-growth markets like China, India, or Brazil, for example. It is remarkable how much of a contribution a supplier can make in this area, particularly if their customer’s entry strategy depends on understanding the peculiarities of the new country market, or if it has local-content requirements, or if new sales channels are required to reach end customers.

One supplier of capital goods went through an exercise for its twenty largest customers, assessing for each which emerging markets offered the greatest potential of success. It then classified for each of these large customers the markets that it identified as having strong potential into three categories: (1) customer is already active; (2) customer has plans in place, but not yet implemented; and (3) customer is not yet known to have focused on that market. This firm then developed a discussion strategy, again customer by customer, emphasizing the latter two categories. For discussions involving emerging markets in the second category, it emphasized the “ways we can help”. For those in the third category, it developed a short presentation explaining why it thought that market offered opportunities and how they as a supplier could work with their customer to explore those opportunities. Not quite three years later, this firm can identify fourteen explicit business successes that grew from those discussions. In a majority of these instances, the success required some investment in product development or other types of new innovations, coupled with a strong collaboration in other areas important to their customer’s entry into the new country market.

New geographic markets are but one option through which a supplier can work with its customers to find new sources of volume. Adjacent markets offer a similar possibility, but often require more creativity in terms of thinking. If the options were easy, the customer would probably have thought of them and already implemented them. Successful suppliers have come up with ideas in this realm by thinking of how their own products and services contribute across the customers and markets in which they are active, and then trying to spotlight lessons that can be taken to specific customers that build upon those broader lessons. One firm, for example, had numerous customers that served the aftermarket environments in their industry with replacement parts and services. It identified other firms that only sold original equipment, and went to them with ideas about how to expand to a more complete life-cycle offering. In several instances, this idea resonated with the customer, and the two firms defined product development strategies to allow entry into the customer’s aftermarket environment. In another instance, a firm that developed a new sensor for use in high-challenge environments involving extreme weather conditions subsequently did a systematic examination of other instances in which sensors might be subjected to demanding conditions. The project involved a combination of market research and brainstorming, resulting in the identification of nearly two dozen possibilities. They then did outreach to prospective customers, learned the issues that kept those firms awake at night, and commissioned several development efforts to evolve the sensor’s capabilities into those application environments. Today, over 70 percent of the firm’s sales are in these additional markets.

The second opportunity for value creation, helping customers to reach a higher price point, is probably the one which is most confusing and challenging. It is rare to speak with any company that doesn’t cite the challenge of developing new capabilities that differentiate their product and respond to the challenge we cited in the title of the first chapter of CoDestiny: Your Customers Want More and They Will Pay You for It. At the same time, it is equally hard to find any supplier that doesn’t respond to an idea to gain customer support for a higher-priced product with some version of the new ESPN Monday Night Football feature: “C’mon, Man”. As one supplier’s sales manager noted, “It just about ends discussions when we start a conversation by saying that we have a great new product, but it will cost more.”

One approach that has generated some success stories involves thinking about defining options through which customers can offer a standard product at their current price point and a new, high-end option at a higher price point. This approach allows the supplier to provide customers with a “no downside, real upside option”. If the option is selected, the supplier and the customer can share the rewards of reaching a higher price point, and if the option takes off and gains market acceptance, it can in fact move the market to the higher price point preferred by customers.

A substantial number of the options that we take for granted on our cars and trucks followed this path. In many instances, the automotive suppliers first introduced innovations in the aftermarket, getting motivated buyers to have their vehicles refitted with these options. Small items like cup holders, most of the consumer electronics used in vehicles (e.g., CD players, DVD players, navigation systems, security systems, etc.), performance options like those associated with The Fast and Furious movies, and products like sunroofs that required actual alterations to the vehicle began as aftermarket products. The next step was convincing the carmakers to offer these as options on their vehicles. Many of us can remember making the decision to buy the car with the CD-6 player and the sunroof, even though it had a higher sticker price. Today, most cars offer those options as standard equipment. The automotive industry is not the only one where this strategy has proven successful. Examples abound in diverse industries and across geographic markets.

What it required to make this option successful is insight about the factors that drive purchase decisions several stages down the customer chain. The automotive parts manufacturers that were used as an example in the previous paragraph understood that there were emerging niche groups of buyers that were interested in these capabilities and that would buy them for their vehicles. They also developed channels through which these products could be sold and installed in the aftermarket, often very different from the car dealerships where the actual vehicles were purchased.

Focusing on trade-up options, rather than trying to convince customers to make a wholesale change to a higher-priced product is a solution to the conflict between the need for differentiation and the skepticism about the wisdom of raising prices. Firms that take this perspective can translate new product innovations that got the “C’mon, Man” rejection into success stories for their customers and their shareholders.

The final opportunity for creating value for customers, identifying how to take costs out of the system, requires that firms take a new perspective on innovation. Most frequently, the perspective about innovation and improvement involve better performance or more features. These are, of course, valuable contributions, and the source of many of the success stories associated with growth in sales volume or reaching higher price points. But they are not the only possible contributions from innovation initiatives.

“It reduced our costs of manufacturing.” “It eliminated two steps in the installation process.” “It cut our warranty claims in half.” “It allowed us to increasing our efficiency in managing our shelf space by 25 percent.” “It didn’t require protective packaging.” “It allowed us to use the same component on three generations of our equipment, reducing inventory levels by more than half.” “It was self-diagnosing, reducing the number of trips required to fix a broken unit in half.”

Every one of these statements was included in a supplier success story told by a customer about a highly-cherished supplier that had brought value to the customer. In none of these instances did the success story involve improved performance along the basic metrics relevant in the industry, nor did any involve new features of importance to end customers. But all of them helped the supplier take costs out of the system and improve their bottom lines. In a few cases, the end customer was never aware of the contribution, while in a few others, there was awareness that allowed the end customer to applaud their supplier’s improved productivity.

Every firm has such options, and innovation planning should focus on identifying them and determining whether it is possible to respond to such options for value creation. The best firms become aware of these options by building strong touch point relationships at all levels of their interactions with their customers. It’s highly unlikely that interactions between the sales and purchasing organizations are going to focus on discussions about shelf space economics, manufacturing process improvements, or packaging. But other departments within both the supplier and customer organization are acutely aware of problems and opportunities in these areas. And if those departments interact and share information effectively, it will often be the case that the supplier organization can identify innovations that respond to real customer needs. It takes investment in relationships to get to the point where such innovation opportunities surface naturally, but such investments can have a huge payoff and significantly increase the number of instances in which innovations will be applauded by a supplier’s customers.

To conclude, return to the challenge implicit in the comments of the product development executive introduced at the start of this article. The plain boring plans that she was reviewing failed to listen to the voice of the customer. When this firm refocused its efforts to think about what options would create value for customers, it found exciting options within all three categories. The outcome was a celebrated success in this organization. Within a two year period, it had doubled the percentage of sales associated with new product introductions, and there was widespread agreement within the firm that the best was still to come. The same potential exists through which you can get help from your customers to bring creativity into your innovation plans.

Author: George F. Brown, Jr.


[1] The second high-frequency problem that we hear is that the project recommendations involve “me too” initiatives, ones that are reactive instead of proactive, only designed to respond to some initiative already taken by a competitor – even in instances in which the competitor’s initiative hasn’t really gained any traction in the market. One executive commented that “sales team members love to cite a competitor’s better mousetrap and too often focus their attention on the rear view mirror rather than on the road ahead.”

[2] CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs, by Atlee Valentine Pope and George F. Brown, Jr., Austin, TX: Greenleaf Book Group Press, © 2010. See especially Chapter 5.h strategy.

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Be A Good Customer – Let Your Suppliers Help You Grow

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Be A Good Customer – Let Your Suppliers Help You Grow

Most firms have learned that their customers can be a valuable source of insight, providing ideas as to how they can create and capture value. Fewer firms, however, have learned that similar contributions can come from their suppliers. In today’s challenging business environment, tapping every available source of information can be a factor that sets top-performing firms apart from their competition. There are several key lessons that have emerged from those best practice firms that have transformed their suppliers into key business partners with whom they enjoy shared successes. These lessons are ones that can enable a firm to become a good customer, one that lets their suppliers help them grow.

A number of years ago, as part of a project, I interviewed a supplier about several of their largest customers. In the context of the discussion, I asked the executive for her firm’s definition of a good customer. The response started off humorously, but evolved to provide some sharp insights[1]:

“Big orders, reasonable prices, quick payments – those things are obvious, I guess. But in a broader context, I think of three things. First is the information flow, the communications between the two firms. My best customers tell me what I need to know in order to be successful. They share their forecasts, their plans, their headaches, etc. They don’t keep us guessing and, as a result, we have a chance to be successful.

“Second is that they accept us as part of the team, as opposed to keeping us at arm’s length. What this lets us do is come to them with new ideas, sometimes new ways to do things. We went to our customers with what we thought was a novel idea, one that required that they let us take over some responsibilities that they previously did in house. With some customers, this would have been rejected out of hand. We wouldn’t get to the second slide in the presentation. With a good customer, we’ll get a hearing, and if the idea has merit, they will work with us to deal with whatever issues there are.

“Third is that there’s an openness to the relationship, with quite a few people involved. Again, in contrast, in some relationships, everything goes through purchasing; there’s a gatekeeper involved who usually doesn’t have our best interests in mind. They will justify that on the basis of competitive fair play or company secrets or some other rationale. But the end result is that there’s a choke point in the relationship, and the right people and departments never connect with one another. Look, a materials expert needs to talk to another materials expert, not a purchasing person. All the purchasing person is going to know is that the spec’s are a, b, and c. So the people that might be able to spot an opportunity or a problem and get ahead of it never connect with one another.”

The insights from this executive about the characteristics of a best-in-class customer are important, as it’s increasingly true in today’s complex business environment that in order to grow, a firm must attract the best suppliers and motivate their strongest contributions. With such a high share of the value added of most businesses linked to supplier contributions, C-level executives across the board are realizing that suppliers can contribute far more than just lower prices and security of supply. Their firms must rely on their suppliers for innovation, for contributions that improve manufacturing and other processes, for ingredients and equipment that yield energy efficiency and environmental gains, and for easing the challenges of entering new global markets. And that list is just a short extract from the roster of contributions that strong suppliers can make to their customers, as long as the channels are open for the right information to flow and the critical discussions to take place.

To realize the advantages of attracting the best suppliers and motivating their strongest contributions, there are several lessons that go beyond the three solid pieces of advice provided by the executive in the interview above. These lessons don’t replace the three fundamentals that she cited – good information flow, effective partnering, and a network of touch point relationships – but rather help to make them operational and to make being a best-in-class customer part of a company’s culture.

The first lesson is that being a best-in-class customer must be applied selectively. Not all suppliers are in a position to make a strategic contribution to a customer.  Not all of them have insights that are critical to future growth and profitability.  Each customer must identify the suppliers that can make a difference, and then concentrate their attention on them. This doesn’t mean that the firm should be a bad customer with other suppliers, just that certain best customer practices should be reserved and emphasized for those suppliers that are in a position to make significant contributions. In CoDestiny[2], a process is defined for identifying those truly significant suppliers, those that are important to the implementation of core elements of the customer’s strategy, that are important in the eyes of end customers further down the customer chain, or both. Identify those suppliers, and focus best practices on them. They are the ones from which insights can emerge.

The second lesson is that a different approach is required for managing strategic supplier relationships. Many firms serving business markets have long ago implemented a strategic accounts team, with a dedicated account team and a distinct cadence and focus to those large, highly important customer relationships. Almost every element of relationship management for those strategic accounts is different from what is used to manage the firm’s other customers, often starting with executive-level sponsorship and involvement in the relationship. The same philosophy applies to strategic supplier relationships. A best-in-class customer will bring a very different approach to these relationships.

One important difference in this regard is that a best-in-class customer will actively involve strategic suppliers in end customer relationships. The norm in many industries is for firms to keep their suppliers away from their end customers, with messages of the form “we’ll tell you what you need to know” and “don’t muck around with our customers”. While common, it’s often a bad practice, and it’s exactly the opposite of what should be done with a strategic supplier. The supplier’s ability to deliver value along many of the dimensions cited earlier depends on their understanding of opportunities for contributions that will make a difference. Many times, suppliers that have been involved in end customer relationship see analogies to challenges they’ve faced – and overcome – with other customers in other business environments. Ensuring that suppliers are aware of your firm’s customer challenges is prerequisite to their ability to help you solve them.

The third lesson is that in strategic supplier ó strategic customer relationships, the two firms need to take a “systems perspective” when thinking about strategy. They need to be open to changes in the roles and boundaries between the two firms. It’s a simple principle of optimization that the when you focus on the whole system instead of its components in isolation, you have more options for improvement. This applies when suppliers and customers are confronting problems. Sometimes the solution requires a new way of doing things, shifting responsibilities from one firm to the other or making changes in processes in one firm that open the route to savings in the other. The gains from such collaborative efforts at problem solving can be substantial, and create a value pool that can be shared between the two companies.

The business environment of 2012 and beyond will continue to challenge most businesses. Not only are some segments of the economy still only slowly recovering, but new challenges from global competitors and raised expectations across dimensions ranging from product quality to environmental friendliness to service responsiveness will keep company leaders awake at night. The firms that are able to bring all of the resources available to bear on these challenges will be those that prosper and reward their shareholders. Supplier insights and contributions are among those resources that must be tapped. Identify those suppliers that can be a part of your firm’s success stories and implement the practices that will enable them to do so. The payoff will be enormous.

Author: George F. Brown, Jr.


[1] This and other case studies are presented in Best-in-Class Behaviors in Business-to-Business Relationships, by George F. Brown, Jr. and Atlee Valentine Pope, Blue Canyon Partners, Inc., © 2006. This article can be downloaded in .PDF format from the Publications page of www.bluecanyonpartners.com.

[2] CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs, by Atlee Valentine Pope and George F. Brown, Jr., Austin, TX: Greenleaf Book Group Press, © 2010. See especially Chapter 16.

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Courting China – Very Carefully

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Courting China – Very Carefully

Just over a decade ago, businesses became aware of the magnitude of challenges related to doing business in China and other emerging markets. However, for the most part, the customers they would be doing business with were still the “usual suspects.” Thus, the challenge mainly revolved around operations and logistics.

One firm’s experiences suggested a strategy for reaching new global markets relevant to that period. “Some time ago,” the firm recalled, “one of our clients with responsibilities for his firm’s major customers showed us his ‘Nightmare Room.’”

The walls in this scary room were festooned with a series of 11 world maps, one for the present year and one for each of the next 10 years. “Pins showed the locations where major customer support was occurring today and where it was forecast to occur into the future,” the firm described. “From a sparse pin collection concentrated mostly in North America, the sequence evolved to resemble a pincushion.”

We advised that firm to focus on existing customer relationships and identify how collaboration with those customers could facilitate entry into new country markets. We emphasized that the pincushion represented not just a challenge but also an opportunity to deliver increasing value to their customers, helping them to deal with the complexities of new global markets. The advice emphasized CoDestiny strategies through which suppliers could create value for their customers and capture value for their shareholders.

We think this is still quite good advice for firms that serve global customers whose own plans involve continued growth in emerging markets. A senior executive in the customer organization that was the focus of the “Nightmare Room” story recently concurred with our assessment. He noted that his firm now did almost 40 percent of their sales to customers in markets that accounted for less than 5 percent of their volume a decade ago. But he also noted, “In 1999, we should have bought an additional box of pins and just stuck them into random locations in China. It’s now our largest single market, surpassing the United States last year.”

This firm’s experience is not unusual. China continues experiencing extraordinary growth. Each year reveals double-digit increases. Chinese consumers how have an appetite for products they could only dream about a decade ago. This has important implications for most businesses. Executives who underestimated China’s potential in 1999 most likely won’t repeat that mistake in 2011. China resides on everyone’s radar.

But 1999 was “then”; 2011 is “now.” Major changes have occurred. These must be considered when developing 2011 plans to grow in China’s markets. In 1999, customers of interest were global firms who entered China to take advantage of low-cost manufacturing potential. While they sourced and manufactured in China, their markets largely resided in western countries, and the cultures and processes these global firms placed in China were familiar ones transplanted from North America, Japan, and Europe.

Those nightmares were relatively tame. Today, the growth plans of many companies focus on the China market itself, including consumer markets with fast-growing disposable income and business markets that now include Chinese companies gaining position on the roster of global firms. It is no longer enough that the China growth strategy address the needs of western firms operating in China. Now, strategy must respond to the needs of the China market itself. This requires a massive transformation in strategy and thinking.

One thing that businesses will learn as they go through this transformation is that the concept of aCoDestiny relationship soars to new levels in China. We often offer this comparison: In western markets, firms win business on the basis of product, service, and price advantages. To sustain that business, they focus on building a strong customer relationship. But in China, firms will win business on the basis of relationship. Then they’ll focus on the product, service, and price challenges that are on the minds of their customers to sustain that business.

We’ve often been told that this contrast is a good hyperbole to illustrate the importance of relationships in China. Our response is that there is no hyperbole to the comparison. Relationship is a fact of life for businesses operating in China’s markets.

We have identified four lessons that firms must recognize and include if their 2011 growth plans that target China’s markets are to succeed. All require a willingness to embrace new ways of doing business to achieve success in an exciting new market:

  • First, success won’t come quickly. That’s a bit discouraging. Even though growth gallops in China, relationship building in that nation won’t occur overnight. While it takes little time to sign a meaningless joint venture agreement, it takes much longer to build a relationship in China that delivers on sales and profits. Far too many firms have failed to stay the course. If your plans involve new starts in China in 2011, the results will come in later years.
  • Next, recognize that business relationships have a significant personal dimension. One firm we worked with sent a succession of senior executives to China to court a Chinese firm. But there was no significant follow up. The result: the Chinese firm felt its courters were far less than serious, as no one returned for a second visit. Another firm involved in discussions with a Chinese firm completed an acquisition that, from western perspectives, could have been considered a solid asset to the proposed relationship. The Chinese firm considered this a distraction and found the new people in the room totally confusing. To develop relationships in China, continuity and consistency are quite important. Executives involved in developing these relationships must stay the course.
  • Third, China’s economy, while changing rapidly, is inherently local. The supplier or distributor that will be the best partner in Beijing is unlikely to be the one most likely to be successful in Chengdu, and vice versa. Because relationship is everything, the concept of a strong national firm is at most an emerging one, more likely to be a widespread reality in 2021 than 2011. Thus, finding partners is a task that must be implemented on a local basis—and many times over—to reach all of China’s markets. This doesn’t mean that each prospective partner won’t argue for a national, exclusive relationship. They will want that. But they are unlikely to be able to deliver successes beyond the local markets in which they are strongly positioned, in terms of relationships.
  • Finally, western businesses need to be prepared for the other parties that will inevitably be at the table in relationships with Chinese firms. Some years ago, we hosted a Chinese delegation to the United States. During the visit, several days were devoted to meetings with a U.S. firm. These meetings focused on a significant joint venture initiative that seemed to be solid for both firms. On the meeting’s final day, we watched with great pleasure as the discussions moved forward, and saw solid interactions over dinner. Signs seemed totally encouraging. But after dinner, much to our dismay, we heard the senior delegate lament about the waste of time. We asked why he felt that way. He responded, “The mayor didn’t come to dinner.” In China, key government official involvement is prerequisite to anything of consequence being done. Conversely, in the United States, we rarely think of that as relevant. The lesson from this example is one that must be remembered in developing relationships with China. Critical third parties must be included if the relationship is to flourish. Government is the most obvious example, including both national and regional branches. However, in many instances, key third parties can also include universities, design institutes, and similar organizations.

Relationship issues are not the only way in which doing business in China will pose new challenges, but it is one that must be understood and addressed by those firms that see their growth in future years including a significant level of success in China. The opportunity is clearly there, but many firms will be challenged in coming to this realization. Focusing on the realities of CoDestiny relationships in China will be a key step in the process by which that challenge is met.

Authors: David Hartman and George F. Brown, Jr.

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Avoiding Distress in Key Business Relationships

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Avoiding Distress in Key Business Relationships

It takes a significant effort on the part of supplier companies as well as their customers to ensure that strains on key supplier-customer relationships are avoided, and that there is a common focus on each one’s value-creating contributions. If your firm is involved in a “CoDestiny” relationship — one that has yielded value through shared successes and one you want to have survive and thrive — you need to be proactive in planning for the possibility of future distress that could derail a key business relationship.

Interviews with the two companies involved in a CoDestiny arrangement described the deterioration of their key business relationship. First, we heard from executives involved in the supplier side of the arrangement:

“Even though we have a great working relationship with all of the engineers and product development teams, a new purchasing executive arrived, introduced a totally new culture to his department, and began to run Internet auctions.

“We managed to get our bid to the point where we were confident that it would be the lowest, so our internal celebration began because we thought that there was no way we could lose given our aggressive bid and the superior quality of our product. But then, we got a call saying that we had lost to another supplier. We later learned that the winning supplier had put in a bid that was only about 1.5% lower than our bid.

“At this point, we concluded that this was no longer a customer that valued us or that we could be successful with, if they were willing to pass us over with a process like this. From our perspective, they were willing to make a horrible long-term decision, trading off all the contributions we had made to their success in order to gain a very small price concession up front.”

To the suppliers involved in such situations, it may seem like a game being played with loaded dice. Moreover, from the supplier’s perspective, the customer that ignores everything other than price often ends up worse off, failing to sustain leadership along dimensions such as product quality and innovation.

Like most stories, however, this one has two sides to it. Executives in the customer organization gave us a different view of the situation.

“Our business was changing, and even though we were the industry leader, we had tremendous concerns about our competitive position.

“Some of the things that were important to our customers in the past are now ‘unnecessary bells and whistles’ … There were a lot of things we had to change, often to the great disappointment of our own engineers who were used to being rewarded for upgrades rather than for cost savings.

“This supplier did have a long history with us, but they somehow stopped listening to us. Maybe the history got in the way. We had a bidder meeting that they attended and we were very clear about the direction we were heading, about why getting to a lower cost point was the focus of our procurement. We said over and over that our world had changed. Most of the bidders heard that message. I don’t think [this supplier] heard it very well… .”

Two recommendations emerge directly from this case study. The first recommendation is to recognize that it is essential for the principals in a CoDestiny supplier-customer relationship get together regularly and ask the following questions: In terms of your expectations and priorities, what has changed since we last met? Looking forward, what changes do we have to anticipate and address? What new nightmares are keeping you up at night?

The second recommendation reflects the fact that in any significant supplier-customer relationship, there are going to be many “touch points” between the two organizations. That’s almost always a very good thing, as the insights necessary to spark value contributions often emerge from unexpected connections across the two organizations’ departments and staff.

But sometimes there can be a downside to such unconnected exchanges of information. Therefore, the second recommendation is that the principals in the relationship must regularly say to each other: “This is what we’re hearing from your organization and how we plan to react to it. Are we all on the same page?”

The “two sides to the story” that are so sharply illustrated in this case study are especially dramatic in supplier-customer relationships that involve products with long lifecycles, in which total cost of ownership calculation is complex. In such circumstances, the focus on purchase price or “first cost” is often the basis of tension and the root cause of the differences between the perspectives of the supplier and the customer.

This fact leads to the third key recommendation. Within significant supplier-customer relationships, best practice organizations implement processes to ensure that there is a common understanding of what creates value — and what doesn’t. This process involves formal meetings, information sharing, and interaction about what should and shouldn’t be included in the valuation calculation. Each participant in an important supplier-customer relationship, at every stage of the customer chain, should carefully examine the value contribution calculation being made by the other participants in the customer chain. Furthermore, when an inconsistency is observed, participants should accept as an action plan the need to work through and create a fact-based resolution to that inconsistency. If there is any value to a solid relationship of the type that was described here between this supplier and their customer, it should have allowed for such a discussion to take place.

A final recommendation reflects the fact that in strong relationships, many of the most important contributions aren’t explicitly connected to the products and services sold by the supplier to the customer, and therefore aren’t formally embedded in the prices of such products and services. Therefore, it is essential that the principals managing an important CoDestiny relationship discuss these “adjacent” contributions and explicitly address the issue that the value associated with them isn’t reflected in product and service prices.

That discussion must be explicit: “Both of our organizations know that such contributions are a key ingredient in our shared successes, and both of our organizations want to ensure that they continue into the future. How do we jointly recognize such contributions and ensure that the value created is translated into rewards for both of our firms’ shareholders?”

This is not a step that is appropriate in every supplier-customer relationship, but it certainly is appropriate if the supplier’s contributions go beyond simply delivering a product that meets spec’s on time. Suppliers and customers both fail if they do not invest in processes and discussions to ensure that strategic contributions are jointly recognized and appropriately reflected in decisions about the relationship.

Formally engaging in supplier-customer discussions about what creates value is not an easy process, especially when everything seems to be going well, but it is far easier than losing a valued customer or a valued supplier because the discussion didn’t take place. Best-in-class organizations, both suppliers and customers, must take the steps to create a dialogue to ensure that each firm understands the other, and to form the basis for an effective flow of information and communications that establishes the foundation for shared successes. The firms that do so are well-positioned for success, with outcomes far more likely to be translated into bottom-line rewards for their shareholders.

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Webinars

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Webinars

Pricing Trends and Tools How Companies Set Prices to Optimize Business Outcomes (MAPI, June 2014)

Got Growth? Growing Business in a Changing World (SAMA, March 2014)

Doing Business in a Changing China (Journal of Commerce, October 2013)

Crush Price Objections: Effectively Managing Negotiations Along the Customer Chain (Industrial Distribution, December 2012)

The Ten Key Roles of a B-to-B Corporate Marketing Function (ISBM, November 2012)

Creating Strong Relationships Between Manufacturers and Distributors (APICS, August 2012)

Achieving Bottom-Line Gains Through Pricing (February 2012)

The Changing Competitive Environment (December 2011)

Fifty Ways to Win in China: China’s Auto Market and The Challenges Facing the Industry (GlobalAutoIndustry.com, September 2011)

How Real Are Those Price Pressures (Workplace Training Center, August 2011)

Best Practices in Strategy Implementation (Institute for the Study of Business Markets, June 2011)

Leading Successful Mergers and Acquisitions (Workplace Training Center, May 2011)

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