Key Skills to Win Against Giants

Transcription

1 Competing in the Midst of Giants by: Ken Wong Queen s School of Business

2 Key Skills to Win Against Giants TO DETECT TO DESTROY TO AVOID MARGIN-SUCKING MAGGOTS 2

3 The Real Goal Price Return On Investment Net Income Divided By Assets Managed Unit Margins Times Unit Volumes Minus Cost Market Share Times Market Size 3

4 The Real Questions To Ask For Profitability 1. How can we defend and improve my prices? 2. How can we contain and reduce my costs? 3. Where are the best sources of volume? How do we penetrate those targets? 4. Should we focus more on price impacts, cost impacts or volume impacts? 4

5 What matters most A 1% change in... Creates a change in operating profit of... Price 11.1% Variable Cost 7.8% Fixed Cost 2.3% Volume 3.3% (Average economics of 2,463 businesses in Compustat) 5 KW-210

6 Price Realization MUST Be Priority One You cannot survive in a world of falling prices Costs can t fall fast enough to keep pace Avoid cutting costs if quality is impaired Avoid cutting costs that depersonalize the relationship There s rarely enough volume to offset lost margin 6

7 An Even Larger Concern Is Lower Price the Giant s ONLY Advantage? Are Price Buyers Their Only Target? 7

8 Economies of Scale You Can t Coach Size 100 Unit cost 50 The Small Firm s LOSS The Large Firm s PROFIT Vol 8

9 HOW GREAT BUSINESSES USE SCALE MORE SCALE Via experience effects, economies of scale, market power, etc. LOWER PRICES LOWER COSTS Via business planning 9

10 HOW GREAT BUSINESSES USE SCALE MORE SCALE Via experience effects, economies of scale, market power, etc. LOWER COSTS BETTER QUALITY Via business planning 10

11 HOW GREAT BUSINESSES USE SCALE Via sales and marketing HIGHER SALES MORE SCALE SUPERIOR VALUE Via experience effects, economies of scale, market power, etc. Via execution and implementation LOWER PRICES AND/OR BETTER QUALITY Via business planning LOWER COSTS 11

12 Fighting Back Don t Sell Your Product 12

13 What is your REAL Product? Viagra Rule People p don t buy products or services they buy SOLUTIONS to problems Price ceilings vary with the importance and complexity of the problem you solve What is the real problem that you help to solve? How complete a solution are you? 13

14 Problem-solving businesses also have lower costs How to Improve the Retail Experience (Sample Advice) Personalize the experience Help the customer find their way Explain product differences Show them you care Show them why they get what they pay for (i.e. up sell) EDI, E-tailing, etc. etc. 14

15 Connect to the Ultimate Business Customer Need Margin Price Strategies Cost Strategies Product Innovation Product Quality Marketing Effort Process Innovation Functional Efficiencies Discretionary Spending Net Income Integration Marketing Effort Market Share Strategies Customer Value Barriers to Entry Volume New Products Market Size Strategies New Markets More Usage Occasions More Usage Per Occasion

16 Fighting Back Sell on Value 16

17 VALUE = Quality / Price Four Ways to Increase Value 1. Maintain i Quality, REDUCE PRICE 17

18 VALUE = Quality / Price Four Ways to Increase Value 1. Maintain i Quality, REDUCE PRICE 2. REDUCE QUALITY Insignificantly REDUCE PRICE Significantly 18

19 Diminishing Returns REWARD EFFORT

20 VALUE = Quality / Price Four Ways to Increase Value 1. Maintain i Quality, REDUCE PRICE 2. REDUCE QUALITY Insignificantly REDUCE PRICE Significantly 3. RAISE QUALITY, Maintain Price 20

21 VALUE-ADDED MARKETING Identify the Components of "Cost-in-Use" Cost-in-Use Acquisition Costs + = Possession Costs + Usage Costs Price Interest expenses Paperwork Opportunity costs Shipping time Storage/handling Expediting orders Installation Cost of errors Quality control in ordering (of your product on installation) Pre-purchase activities Tax and insurance Purchase Shrinkage evaluation Obsolescence Kenneth B. Wong (2005) Training User's labour costs (especially if re-engineered) Longevity Replacement/ repair costs Disposal costs Regulatory

22 Know Which Costs Create Value and For Whom Total Costs Add "Good" Costs Reduce "Bad" Costs Increase "Value" Reduce "Waste" Higher Prices and Sales Lower Costs Higher Profits 22

23 VALUE = Quality / Price Four Ways to Increase Value 1. Maintain i Quality, REDUCE PRICE 2. REDUCE QUALITY Insignificantly REDUCE PRICE Significantly 3. RAISE QUALITY, Maintain Price 4. RAISE QUALITY Significantly RAISE PRICE Insignificantly 23

24 The Meaning of Value-Add Varies with the Nature of the Consumption Problem 1. DEFINE THE EXECUTION STEP: What are the MOST CENTRAL TASKS that must be accomplished in getting the job done? 2. DEFINE PRE-EXECUTION EXECUTION STEPS: What must happen BEFORE the core execution step to ensure the job is successfully carried out? 1. What must be defined d or planned? 2. What must be located or gathered? 3. What must be prepared or set up? 4. What must be confirmed BEFORE execution? 3. DEFINE POST-EXECUTION STEPS: What must happen AFTER the core execution step to ensure the job is successfully carried out? 1. What must be monitored or verified? 2. What must be modified or adjusted? 3. What must be done to prepare for the next job cycle? 24 (Bettencourt & Ulwick, The Customer Centered Innovation Map, HBR 2008)

25 BUNDLING : Creating a "Seamless" Total Solution ARE THESE GOOD COSTS?

26 VALUE = Quality / Price Four Ways to Increase Value 1. Maintain i Quality, REDUCE PRICE 2. REDUCE QUALITY Insignificantly REDUCE PRICE Significantly 3. RAISE QUALITY, Maintain Price 4. RAISE QUALITY Significantly RAISE PRICE Insignificantly The Advantages of Quality-Driven i Value Longer Strategic Window Greater Economic Efficiency 26

27 Fighting Back You Can Be Bigger Than You Are

28 The BRAUN Rule FILTER FILTER FILTER STAND STAND STAND CARAFE CARAFE CARAFE BASE - On/off BASE - On/off -Timer BASE - On/off - Timer - Flavour controls Kenneth B. Wong (2005) 28

29 How Common Components and Modules Create Value 100 Unit cost ADDED PROFIT FOR MODEL A MODEL A ADDED PROFIT MODELB FOR MODEL B MODEL A SALES ADDED PROFIT MODEL FOR C MODEL C COST IF COMMON COMPONETS USED IN MODELS A+B+C 1 Vol MODEL B SALES MODEL C SALES Kenneth B. Wong (2005) COMBINED SALES OF A+B+C 29

30 Fighting Back Know Who Matters Most

31 The Profitability of a Transaction Focus Profit contributed by: Profit Base profit Cost of new customer 31 Time Source: Bain & Company (Frederick Reicheld) KW-153

32 The Value of Customer Loyalty Profit contributed by: Price premium Profit Referrals Lower costs Increased volum Base profit Cost of new customer 32 Year Source: Bain & Company (Frederick Reicheld)

33 Profit Impact of a One-Percent Increase in Customer Loyalty Advertising agency Volume 3.3% Cost 7.8% Price 11.1% 19 Bank branch deposits 17 Publishing Auto/Home insurance Auto service Credit cards 15 Industrial distribution 9 Software Percentage Increase in Profits per Customer Source: Bain & Company (Frederick Reicheld)

34 Fighting Back M k S Y St ff Make Sure Your Staff Know Who Matters Most

35 What Matters Most The Five-Step "Profit Chain Profits grow from satisfied customers who receive value due to satisfied and loyal l employees who had proper training, i coaching, and support COMPANY Internal Marketing External Marketing EMPLOYEES Interactive Marketing CUSTOMERS 35 Kenneth B. Wong (2005)

36 Putting It All Together If you have to compete against someone bigger than you don t sell the same thing they do (and expect margins to stay healthy) Solve problems over selling products/services Communicate REAL AND SPECIFIC VALUE over price SME s Unite! Prioritize Accounts Build Your Firm to Keep Its Promises 36

37 THE FINAL RULE : Focus On "Execution" The EXECUTION of the MARGIN-SUCKING MAGGOTS

38 Kenneth B. (Ken) Wong The Distinguished Professor of Marketing & Business Strategy S.J. Smith School of Business Goodes Hall Room 366 Queen s University KINGSTON, Ontario K7L 3N6 kwong@business.queensu.ca Phone: Fax: