Developing a world class strategy

INTRODUCTION

It may seem obvious that before starting on any major improvement programme an organisation should first should first decide what products or services it wants to sell, and to whom it want to sell . And yet, over the years, it must have seen hundreds of sophisticated manufacturing installations, many of them costing a great deal of money, which had turned into white elephants soon after going into production. True, the new equipment had enabled unit production costs to be cut significantly, but only on the basis of past demand levels. In so many instances the new facilities had taken so long to develop that, by the time they came on line, circumstances in the market-place had changed, or competitors had developed alternative products; as a result the levels of output now required to meet demand were too low to carry the greatly increased overheads resulting from the capital investment.

So what went wrong? In most cases it was simply that management hadn’t planned its strategy properly. It hadn’t looked hard enough at likely changes in the market place and as a result, the Manufacturing department, through lack of communication isolated from the outside world in which its products were being sold, had just been left to get on with the task of improving its efficiency in whatever way seemed best from the manufacturing point of view.

No company that wants to be world class can afford to make that sort of mistake. So, before looking at how to make an organisation’s manufacturing more efficient, it needs to concentrate more on what it is more efficient at making.

This is, simply, putting the customer first, which is a fundamental principle of being world-class. We need to start by looking at the demand side; only when we have decided what customers are likely to want in the future and what factors are likely to influence their purchasing decisions, can we move on to looking at how well the supply side (our own and our competitors’) satisfies these wants at present. That should make it clear where we need to improve in order to come out on top.

A word of warning: most companies of any size these days have some sort of business plan, and many will claim that they review their future strategy annually, when preparing budgets for the next financial year. Unfortunately, although the resulting budgets are widely circulated, it’s unusual for the underlying strategy for the future development of the company to be communicated effectively beyond the Boardroom. Even among the Board members, individual directors are liable to put their own interpretations on what has been ‘agreed’, and this can all too easily lead to different parts of the company having different priorities. Before deciding on world-class action plan, therefore, it needs to find out what each of the directors thinks the strategy is, and identify any differences in emphasis so that these can be resolved by the Chief Executive; otherwise it can end up with them all fighting different battles – not a good start for a company that wants to be world-class!

Some people might say that it’s the Chief Executive’s job to decide the future development of the company: it’s not a job for a committee. Is it the Chief Executive’s job to decide on the strategy, but in a world-class company the Chief Executive needs to involve all of the top management team in the detailed consideration of alternative strategies so that they both understand and have been involved in the logical process which has led to that decision.

The remaining parts of this section give a brief summary of what an organisation might need to consider when developing its world-class strategy.

UNDERSTANDING AN ORGANISATION’S MARKET POSITION

The process of developing a world-class strategy involves deciding:

Companies often make the mistake of answering these questions in terms that are too general, over looking the fact that different answers often apply depending on who the customer is and which markets are being considered. For example, a European-based industrial garment manufacturer might expect to sell the whole range of its products in the home market, including for example ordinary boiler suits at quite low margins; but when exporting to a country such as China, which has a heavily protected local garment industry, it might only aim to sell specialised garments (such as protection suits for use in radioactive environments) – and for these it might expect to achieve a high profit margin.

These sort of differences need to be recognised when analysing your existing products and markets, but only if they are a significant part of your business. The best way of doing this is to draw up a spreadsheet; with the entire main product groups listed down the left-hand side, and all the market types across the top. Then ask its ‘experts’ (usually Marketing and Accounts departments) to make an estimate of the percentage contribution of annual sales to total company turnover for each combination of product and market type and enter it in the grid, ignoring any combinati9on that is less than, say 5 percent of turnover. With the completed spreadsheet in front of them by applying the Pareto Principle the Board can usually select without difficulty the combinations, which are worth analysing in more detail.

This approach also helps to get home to people an important point that is often overlooked: its basis for competing in different markets may need to be different, even if the product is the same. This means that for each of the product/market combinations selected for detailed analysis, it needs to decide which of the three classic ways of competing apply (or, perhaps, which it would like to apply to achieve its improvement objectives):

In the case of cost leadership one or more of the following are likely to apply to an organisation:

HOW TO SUSTAIN A DIFFERENTIATION STRATEGY?

Sustaining a differentiation strategy is likely to involve having a widely recognised and respected brand name, or products perceived as having technological or design advantages compared with its competitors’ products, or providing a level of customer service that is second to none. This implies that an organisation should have an above average product design and development team, that its marketing and advertising is successful in getting its message across to potential customers, and that its staff are very customer conscious: fall down on nay of these and may well find its differentiation policy unsustainable as customers start deserting it in favour of lower priced competitors. The warning sign to look out for is creased pressure on prices: if it is following a differentiation policy and find that it is losing more and more orders on price, then its customers are, effectively, telling it that they no longer see it as a ‘superior’ supplier. The correct response in most cases, surely, is not to slide into a price-cutting mode, but to do something to restore its image as a superior supplier.

A niche strategy tends to be followed by smaller companies, which don’t have the resources to attack the full potential markets for their products. The niche may be selected by type of customer (e.g. a software house that develops computer systems specifically for, say, solicitors and so becomes expert in understanding their requirements), or a specific geographical area may be selected (taking advantage, for example, of the preference many people have for dealing with their local supplier). Strictly speaking, a niche strategy can be either cost – or differentiation-based, within a constrained product/market area. In practice, however, it tends to be differentiation biased, in that customers buy from its company because they think you are the best in its field. If a company is not in fact the best but if it just where it is through some historical association, it may well be very vulnerable to a new competitor arriving on the scene who really is the best. For these reasons, if the company decides that much of its business falls into the niche category, an advice to it is to make sure that it can live up to the differentiation criteria outlined above, or it could be in for a nasty surprise!

Here is an interesting example recently of how it pays to consider which of these three ways of competing is appropriate. The company concerned manufactured various ‘standard’ products for the electrical contracting industry, competing within the UK on a cost leader basis. Since their products were made to the appropriate British Standard specification, there was little to choose between their products and those of their competitors and this was reflected in the comparatively low margins achieved. However, when they came to do the product/market analysis, they realised that their catalogue included all the less popular sizes that their competitors no longer offered, having rationalised them out of their catalogue. They decided to reclassify these as differentiation products, and pay particular attention to ensuring that they were always available from stock, advertising them as specialities. They could now increase their prices for these items to give a level of profit, which changed them from nuisance products to useful contributors.

Once it has decided what products and services it is currently selling, and who its customers are for each product, it needs to assess how these are likely to change. Such changes could be a result its decision to take some action to change the current products/markets mix, or they could be the result of external changes, such as changing customer requirements or competitor activities. Its Sales and Marketing team may be well enough informed on what external changes are likely to occur to rely on their assessment, but it’s usually safer to invest in some market research, particularly in those areas which are particularly important.

Traditional market research will usually help to establish how the overall market for its products and services is likely to change, but it’s not so good at establishing what the key factors are which cause a potential customer to buy from a competitor rather than one’s company. Recognising the increasing emphasis that is being placed these days on total quality and customer care, some market research consultancies are now offering a form of research that concentrates on what the customers think are the sort of improvements most likely to influence their purchasing decisions. An example of this approach is the ‘Problem Ranking Process’ (PRP).

PROBLEM RANKING PROCESS

As a first step, a PRP consultant talks with company staff and with a representative sample of customers, and from these discussions produces a list of a hundred or so ‘problem statements’, covering all the sorts of complaints or shortcomings that have been mentioned: the concept is that, while its difficult to get customers to tell what improvements would be important to them (they’ll usually just say ‘price’!), An organisation can get a very much better response if it asks them questions such as “What goes wrong?” and ‘What irritates you?’. This list of problem statements is then sent to a large sample of customers, asking them to rank the importance of each on a 3,2,1,0 scale. The points allocated by each respondent to each problem statement are added up, and the problems are then listed in descending order of importance in the PRP Report. Typically, because of interaction and overlap, the most important 20 to 30 problem statements will have between 5 and 10 different causes: if it can take action to resolve these causes it should be well placed to increase its market share (or, perhaps, increase its prices without losing customers).

COMPETITIVE BENCHMARKING

Competitive benchmarking is another tool that can be used. The Xerox Corporation pioneered this technique a few years ago, when their traditional supremacy in the photocopier market was challenged very successfully by Japanese manufacturers. Xerox first analysed what factors potential customers might take into account when assessing competing products: for example, price, delivery, quality of reproduction, speed of reproduction, ease of use, reliability and availability of spares. They then did their own assessment of how the products of Xerox and each of the major competitors rated against each of these factors. From this analysis they drew up a theoretical ‘bench-mark’ product which consisted of the best rating for each of the competitive factors: they made this the target for improving their own products. Their success can best be judged by how well they have recovered their market position from what at one time had looked to be very dismal future prospects. A case study in Chapter 10 describes how another company, Cincinnati Milacron, used the competitive benchmarking process as the basis for developing a completely new range of world-class products and the Bibliography includes details of further reading on the subject of competitive benchmarking.

In recent years the competitive benchmarking technique has spread far beyond its original application as a market research tool and become increasingly popular as the focal point of many companies’ world-class initiatives. The benchmarking technique is used initially to identify those performance ratios that are most appropriate and meaningful to the company in its particular market situation. These ratios are then used firstly to establish and quantify the specific performance improvements the company must achieve if it is to compete on a world-class basis, secondly to provide the basis for monitoring progress towards achieving those goals. Some users of the technique prefer the alternative name of ‘comparative benchmarking’, particularly when it is used in this ongoing monitoring mode.

Whatever the original reason for undertaking a competitive benchmarking study, do remember that the world, and one’ competitors, don’t stand still. The relative importance of the various competitive factors will inevitably change over the years, either as a result of changes in its customers’ views of what matters most, or as a result of competitor’s activities (probably both). Therefore, like most world-class improvement activities, competitive benchmarking needs to be viewed as a continuous process. This means it needs to regularly update the benchmarks originally established and then reconsider whether the comparative ratios or other measures used to monitor its own performance against these benchmarks are still operative.

CONCLUSION

Finally, no review of ‘where are we now’ can be considered complete without an assessment being made of where each product is in its life cycle. Looking at existing products is all very well, but they won’t last forever. It also needs to decide when to launch their successors if it wants to protect the future of your company, If it is not familiar with the ‘product life cycle’ concept, refer to Fig. 2.1. This shows how the rate of sales for virtually all products goes through an initial ‘market entry’ stage, followed by a period of rapid growth, which typically starts to fall off when competitors increase in number and/or the initial market demand is satisfied. The product life cycle then moves into a period of ‘matruity’, in which competition will probably affect margins, Finally, the product moves into a period of ‘decay’, during which market capacity may well exceed demand and pressure on prices increases accordingly (although opportunities for higher margins sometimes come back as some manufacturers withdraw from the market).

Figure 2.2 shows how monitoring information on factors such as percentage contribution, the size of the market for all suppliers, and its share of that total market can help to identify its progress through the product’s life cycle. The diagram illustrates how monitoring just your own sales could be misleading: in this instance the total market is actually declining – your own sales level may not have changed, because it has increased your market share (possibly through price discounting, as indicated by the reduction in product contribution). Because of its increasing market share it might eventually be able to improve your margins again, when its competitors finally give up, but clearly there’s no long-term future unless some new products coming on stream to replace Product A.

Figure 2.3 shows what can happen if the life cycles of key products are not monitored. This company may well have been quite profitable in the past, but now its two main products are in terminal decline: by the time it realised what was happening it was too late for new products to be introduced in time to maintain past performance. The company illustrated in Fig. 2.4, in contrast, realised when sales of existing products had peaked, and in order both to replace them and to enable over all profit margins to be maintained, they’ve planned the introduction of two new products C and D, in good time; As a result, they have a future to look forward to.

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