Why is it so difficult to reorient yourself?
In some companies, margins are creeping away.
When major customers load their product or component suppliers with large order volumes, they tend to gradually reduce procurement prices to a level that allows you to survive as a supplier but no longer develop. Particularly in the food and automotive industries, cost transparency is expected to make it difficult for suppliers to reorient themselves. As the ability to act decreases, the dependence on individual large buyers continues to increase.
As a product or component manufacturer, you would like to move quickly beyond your existing business into attractive new submarkets, but often fail due to typical barriers that become more severe:
- In addition to the orders from the main customer, there is hardly any free capacity for the production of other items.
- The processes are completely geared to the major customer. It becomes difficult to plan for smaller batch sizes in addition to the large orders.
- There is a lack of imagination and creativity for other high-potential business areas.
- There is a lack of data on sizes, price levels, and active suppliers and buyers in potentially attractive submarkets. There is also a lack of research competence within the company.
- There is a lack of sales competence, especially acquisition competence, because the major customer has kept the company well occupied for a long time. The company has focused on its production excellence and minimized sales.
- In addition, there is often a lack of tight product management and an end-to-end innovation management process, including a product development process. Frictional losses and lack of decision-making in the development process trigger costs and prevent success.
- In addition, there is often a lack of technical product development expertise for other submarkets and other applications. Don’t expect anything from your development team that you shouldn’t.
How can these difficulties be overcome in business development?
A systematic approach that fosters creativity and matches existing needs with the company’s current opportunities and capabilities promises the greatest short-term success.
Strategic orientation and product development
- Abstract the functions that your articles can basically perform. Knowing these functions will help you to see the full range of uses for the articles and to infer specific use cases in target markets and find solutions to problems. For example, if you produce textile belts, consider how the functions “connecting”, “holding”, “securing”, “pulling”, “lifting”, “intercepting”, “supporting”, “tensioning”, “redirecting force”, “enabling movement”, “limiting movement”, “separating”, etc. are otherwise realised and which products (perhaps chains or ropes) could be replaced by belts.
- Crystallise in a structured way the company’s current capabilities and those that can realistically be acquired in the short term. These capabilities include all product specifications that the company can implement (dimensions, materials, properties). It also includes all operational sub-processes, technologies and manufacturing steps that are required for implementation. The closer your search for items stays to the company’s technical capabilities, the lower the barriers and costs and risks of entry will be. Beyond the technical capabilities, however, also look at your company’s sales competence and innovation skills. If you find deficits here, eliminate them as quickly as possible so that you can successfully manage the expansion.
- Research available information about competitors’ activities. Look for characteristics that distinguish successful competitors from less successful ones.
The financial figures can be useful here. You can find annual financial statements of all companies in the Federal Gazette: https://www.bundesanzeiger.de/pub/de/start?2. Smaller companies often publish only minimally. In many cases, P&Ls are not available, or P&Ls start at gross profit. Don’t let this put you off. Balance sheets also reveal a lot about P&L figures. For example, you can infer sales revenue from trade receivables or trade payables and/or from inventories. The liabilities side of the balance sheet shows the retained earnings. Comparing the balance sheet profit to the previous year gives you the profit of the company. In the notes to the financial statements you will often find information on the number of employees, the strategic orientation and activities of the company and valuation approaches for inventories, etc.
Involve your professionals and sales staff in compiling this information as well.
- Finally, it is necessary to research the available information on attractive submarkets, item groups and customer segments. For this, it is best to use a professional information broker, whose experience can provide very valuable insights in a manageable amount of time.
For many submarkets, no market studies are available. Market sizes, customers and market prices can only be derived from observations, expert discussions and business activity in the target sectors. It is therefore often necessary to concretise and refine market and product strategies in intensive interplay between operative sales and strategic work. This agile, iterative approach ensures and further sharpens both the relevance and the enforceability of your strategic approach.
- Consider how you can derive value and uniqueness from the combination of skills and different manufacturing steps. The more cleverly you couple manufacturing steps in a competitive comparison, the less interchangeable your company becomes.
- The often unavoidable shift from high production lot sizes to more differentiated lot sizes for individualised market services will require a change in operational processes from large-scale production (seat belt material) to modularly designed special articles, which must be managed. You can keep the associated complexity manageable by only allowing the individualisation of the goods in a process step that is as late as possible.
Sales
- In many companies, product development activities can be observed, but they are not based on market or even customer needs. As a result, many an initiative and effort go to waste – and that with scarce resources anyway. Always start from the outside, from the market. Acquire lead customers with whom you work on concrete development projects. Get contractual assurances of the conditions under which you will deliver after a successful development phase.
- Product development projects should be based on the philosophy of “follow the customer”, in which your company creates innovative solutions to existing customer challenges. Such a focus on innovation leadership and development partnerships with high-potential customers will help reduce the company’s substitutability as a supplier and secure its market position.
- The challenge is usually to find and develop suitable submarkets in which sufficiently large order volumes can be achieved. This requires special skills not only in sales, but also in product management, business development, product development and distribution. You should develop these skills and capacities in a consistent and targeted manner. Do not skimp on qualified and committed employees who, if possible, already know their way around the target sectors.
- In most cases, your company will have to assert itself in occupied markets in cut-throat competition. For this, it is particularly important not only to work out the capabilities and advantages of your company in comparison to competitors, but also to communicate them to target customers in a comprehensible way.
- Just as importantly, your company will work to gain the trust of target customers by building and developing personal relationships in order to then win business. To do this, you will sufficiently develop your sales team.
- You are aware that you have to take into account the usual market sales cycles in your sales and turnover planning. Plan with the usual market phases, but start the projects now (sowing phase) in order to be able to deliver after the sales cycle (harvesting phase). Financing this investment during the necessary transition period will pay off. Talk to your bank about your strategic reorientation.