Mining Your Unexploited Value - Part I
By Thomas E. Ambler
Earlier CSSP articles with titles like "Outsourcing: Menace or Gold Mine?" by Robert Bradford and "Competing with China: Finding the Right Customers" have done an excellent job of introducing and grappling with the thorniest question in the minds of most leaders of mid-sized U. S. businesses today. Is China a threat or an opportunity for our company and how should we respond?
Let's first recognize that use of the term "China" is really shorthand for a highly complex and extreme example of multiple disruptive forces coinciding in a single economic region at a time when a society is ripe to embrace it. Free market forces combined with a positive national will and advanced, available technology make it possible for China to compress over 100 years of Western economic development into a period less than 20 years. Major areas of China are well into that process. These are not new forces that American companies have never dealt with successfully before. What is new is the rate and magnitude of change that accompanies this confluence of forces and the heightened penalty for procrastinating in dealing with it.
China must not be viewed as just a source of low labor cost with all of its ramifications. It is an entire economic system with its own unique supply chains and national agenda. Plus, China is itself emerging as a huge consumer market with its 1.2 billion people. This means that considering doing business with China or responding to a competitor who is doing business with China is not just about dealing with a competitive issue in the domestic U.S. market, but also inevitably wraps in the opportunistic issue of becoming a global player to serve a global market.
Your answer to the big question above obviously depends upon what kind of business you intend to become. Some businesses are totally indifferent about off-shore, low cost labor and global business in general. Others see only opportunity with no threat. Still others at the far end of the spectrum see only threat and no opportunity. For example:
- If you are a non-information-based service that uses purchased supplies and gains little economies from scale or scope (e.g., health care provider, auto service, restaurant, infrastructure service provider), you are likely indifferent to global markets and sources of out-of-market, low cost labor.
- If you are strictly a marketing company either designing your own products with no manufacturing (a Nike) or strictly a reseller (a Wal-mart), your success largely rises or falls on how well you merchandise and design and manage your supply chain. As long as you retain flexibility in your supply relationships, you are either indifferent or see China as an opportunity either to make more profit and/or compete in broader markets.
- If you manufacture low tech, high volume, standardized products or components with at least moderate labor intensity in the total upstream supply chain, low freight cost, multi-year product life cycle and little strategic interest in you by your customer (e.g., standard hardware like steel washers and hand tools, small household appliances), you have probably already out-sourced or are a strong candidate for moving your entire physical operation to China or another Low Cost Country.
Do you fit one of these extremes? Probably not. That places you in a nebulous area with lots of uncomfortable company, because most mid-sized companies find themselves faced with a lack of clarity as to how to reposition themselves.
We can broaden the term "China" to recognize that there are other disruptive forces that can alter a winning business model overnight as well. For example, what if a major customer decides to become truly global and demands that suppliers who want to survive do likewise? Or what if a new technology turns out to be a "killer app" and wipes out the value of your traditional "sweet spot"? Many companies, perhaps yours, have been disrupted into the position of having to scramble to defend their markets.
Are there any easy answers for disrupted companies? Of course not. Even framing the right questions is difficult. Unfortunately, sometimes it takes a "2x4 to the head" to force companies to take a fresh look at themselves and their markets. Hopefully, your company is one that recognizes the painfully obvious need to understand yourself, your customers and your competitors more fully than ever before. Why? Because you must understand your future competitive advantages and disadvantages better than ever before in order to address the "China" issue and formulate winning strategy.
Developing this understanding requires a conceptual framework and a process.
Conceptual Framework for Understanding Your Customers and Competitors
Competitive advantage is about the value you create for your customers relative to that of your competitors. Every product or service offering represents a collection of value building blocks we will call "value attributes". These attributes would include all customer needs and preferences, both satisfied and unsatisfied.
A "China" upsets the historical structure and balance of the key value attributes in a market. This forces companies to take a fresh look at themselves and their markets to identify unexploited attributes of value to customers that they already possess or could develop easily to reestablish their competitive position. Mining for unexploited value in your company is just like mining for gold--it involves prospecting, drilling, extracting, separating and refining.
You can start by simply looking internally at your strengths and competencies for unexploited value attributes and identify some market opportunities that are low-hanging fruit. Most companies are very good at looking internally and deciding what the market should want. However, the major thrust of your mining process must be directed externally at your customers. If they are themselves businesses, your mining must result in a deep understanding of their business, well beyond the immediate impact of your products and services. This is the realm of Strategic Marketing (not Sales) Management, a function to which too few mid-sized companies have committed the resources to develop much expertise.
Marketing guru, Philip Kotler, describes Strategic Marketing Management as a process:
R->STP->MM->I->C2 (see Fig. 1).
This is the process that needs to be pursued, with greatest emphasis on Market Research. Determine what attributes are of greatest future value to those immediate and downstream customers who are most likely to define your future markets. As hockey great Wayne Gretsky says, "A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be." Understanding your customers this way will itself require a systematic process of gaining access to the people who know what you need to learn. For a business-to-business customer this process needs to promote dialogue with their knowledgeable strategic thinkers. Typically these people are not found on the tactical side of the Purchasing Department where most sales people normally spend their time. In OEMs these key people are more likely found in Design Engineering and Strategic Supply Chain Management. Research will deeply involve your higher-level management as well.
When dealing with business-to-business customers, difficulty in gaining access to the right people may result from (a) using the wrong process or (b) not being perceived as a strategic supplier. You can most easily deal with the process issue by seeking help and learning from a professional market research firm and/or utilizing processes that focus on selling buyer/seller fit.3 Being viewed as a strategic supplier requires that you convince the customer that you play a substantial part in your customer's future success. You may have to "bulk up" by offering a more complete product/service (e.g., offer an assembly rather than a component part or establish a strategic alliance with another supplier) or concentrate on gaining a greater share of the customer's wallet. If you have no hope of becoming a strategic supplier, you are well on your way to being commoditized, similar to the extreme customer category3 described above.
Evaluating Your Value Proposition
You probably have some very strong opinions about the value you think your customers should place on your Value Proposition. Unfortunately, your evaluation is largely irrelevant. Only the customer's assessment of value counts. It is imperative to know where there are sharp differences between you and your customer as to the value of your attributes. The same is true for an attribute your competitor offers but you don't. If the customer places high value on it, you should be ready to counter by (a) offering compensating competitive differences on other attributes, (b) modifying the customer's perception of the difference or (c) adding that attribute to your offering.
To aid you in assessing these value differences and identifying value attributes you can exploit, you will be provided a set of detailed worksheets with instructions in follow-on article "Mining Your Unexploited Value-Part II," appearing in the May, 2005 issue of Course and Direction, the monthly CSSP e-zine. This article will also become available to you through our website www.cssp.com (click on Tools and Resources).
Without needing worksheets, if you sell to other businesses, you can be fairly certain that "Location" with all of its dimensions is one of those attribute categories with high value to your customer.
Value from Location
"Location" has real possibilities for dealing with the "China" issue. For retailers "location, location, location" is touted as paramount. Even though that is not nearly as clear if you are a manufacturer or service provider, the physical location of your facilities and operations may well be a major value attribute your company can optimize to offset labor cost disadvantages.
Location strongly influences the structure and economics of the supply chain. The quoted price FOB a plant or port facility may be just the beginning of the total delivered price your customer is going to use for comparing competitors' prices. Off-shore supply will inevitably require some storage/handling costs and trans-shipping expense that must be charged to a customer in some form. Be sure you consider those expenses when you do an "apples-to-apples" analysis of your costs vs. those of a competitor.
Depending on the nature and geometry of your material and finished product flows, inbound plus outbound truck or rail freight itself can easily be as high as 25 per cent of your FOB price. Logistical systems with costs of this magnitude that are optimized in terms of both their strategic configuration and tactical management will result in sustainable competitive advantage.
Manufacturers go to great pains on the layout of their plant operations to eliminate waste in the form of useless inventory and material transfers. The same principles apply to the layout of your physical logistical system. New facilities can be located and old facilities can be relocated to optimize delivered material costs from suppliers and logistical costs of distribution to your customers and their customers. For small to mid-sized companies, often privately-held, one of the greatest stumbling blocks of even considering relocation, despite an obvious economic justification for it, is the possibility of having to move key people, who are "quite happy where they are, thank you". If that shoe fits you, do the analysis anyway and then, if relocation is clearly indicated, you are likely to find innovative ways of dealing with the people issue in ways that do not seriously jeopardize your human capital.
One of the vital pieces of information you must have from your customers is their location plan involving major points of contact with you/their operations, their design centers and their buying decision-makers. If they are committed to being fully global with operations in other countries, you need to decide whether you want to be invited to go with them and, if so, then go after the invitation. Willingness to support their global aspirations is likely to be viewed as another major added value you offer.
Having a "presence" in markets is another locational attribute that can have huge value to help offset labor cost disadvantages. But, just what is "presence"? Historically, it connotes the physical location of your major facilities. The underlying paradigm of integration of everything under one roof is a conception that must be challenged. Does presence require bricks and mortar, symbolizing permanence and commitment? Must it involve fabrication? Can presence simply be a sales office or even be virtual with the product/service coming from anywhere, as long as responsive service expectations are met? What constitutes presence may be different for each of the major points of contact you have with a customer. So "presence" is a term that begs for clear definition as you research your customers' intentions. Like the airlines, you may find that your need for presence in other markets leads you to seek strategic alliances.
These are some of the more obvious, but too often under-considered aspects of location. There are also many other less obvious, value attributes that stem from location. For example, if your products are high tech, then locating your research/engineering department in an attractive metropolitan area where you can attract and retain the "brightest and the best" may determine how successfully you insulate yourself from commodity buying by being the product innovator. Or perhaps you have a core competency in logistics that can be extended to include the logistics of your customer, who just happens to want to outsource it. We live in a world of such happy coincidences-look for them.
If solution-selling requiring design-phase intimacy is your marketing approach, then geographic proximity can truly have high value to a customer and be perceived as having even higher value, even though current technology permits remote collaboration. The speed and responsiveness of after-sale service is also often equated to geographic accessibility. No doubt you can think of other location-related attributes that have both a real and a perceived value. Just remain aware that this "bigger-than-life" perception is a double-edged sword-it can work to your competitor's advantage as well as yours.
Clearly, LOCATION, with all of its almost infinite permutations, offers you huge potential for adding both tangible and intangible value to you customers. But it is just one such attribute. As you dig in, you will unearth other attributes that create significant value for your future markets as well. Once you've completed your initial round of market research, move through the rest of the Strategic Marketing Process and proactively market your newly positioned offering more aggressively than ever before. Although you may feel like you are in a defensive position, and perhaps you truly are, you must go on the offense. And do it now!
So what's your answer to the original question, "Is 'China' a threat or an opportunity for our company and how should we respond?" Hopefully you choose to accept the challenge to launch a Strategic Marketing Process. You just might turn a "China" threat into a winning opportunity!
1 Robert Bradford, "Outsourcing: Menace or Gold Mine?" and "Competing with China: Finding the Right Customers" have appeared in Compass Points/Course and Direction and are available free of charge in the Article Archives at www.strategyletter.com/article_archive.php?cssp
2 Philip Kotler, Kotler On Marketing: How To Create, Win, And Dominate Markets, (New York: The Free Press, 1999), p. 30
3 Mark Shonka and Dan Kosch, Beyond Selling Value: A Proven Process to Avoid the Vendor Trap, (Chicago: Dearborn Trade Publishing, 2002)
Tom Ambler is a Senior Consultant with Center for Simplified Strategic Planning, Inc. He can be reached via e-mail at