by Denise Harrison, Executive Vice President & COO
Follow the leader – or dare to be different – which works better? The Center for Simplified Strategic Planning challenges client teams to dare to be different – based on our experience of working with many companies, this approach works best. We have found that teams that try to follow the industry leaders or simply try to emulate GE or other successful corporations often fall short of their long term goals. Why? Your company’s strategy should be based on your strengths and weaknesses and your differentiation in the market, rather than follow a “copycat” strategy.
Cummins Engine and Caterpillar, Different Companies, Different Strategies
Faced with tough North American environmental regulations for heavy truck engines, companies who made engines had to make some tough decisions: Caterpillar decided to exit the market, while Cummins decided to remain. How can two companies look at the same external environment and come up with completely different strategies?
- Caterpillar’s strengths lie in heavy equipment development and production for construction, agriculture and other markets; their expertise did not lie specifically in engine development
- Cummins’ strengths lie in engine development and production
The key takeaway: Good strategy is based on recognizing a market opportunity and having the skills to take advantage of it. Caterpillar felt that their skill-set did not match the requirements for designing engines to meet the lower emissions standards and that their resources would be better focused on designing equipment for specific applications for growth. Cummins, however, strictly focused on engines, believed that their skillset made them uniquely qualified to capitalize on the increasingly regulated environment. Both companies can be correct – good strategies are based on selecting markets that value your unique competencies. Cummins’ competencies around heavy truck engines allowed it to significantly increase market share when Caterpillar left the heavy truck engine market.
Growth in Emerging Markets
Just when engine manufacturers thought it couldn’t get any more difficult, the global game changed with the imposition of more stringent emissions requirements. Tough – yes, but made even more difficult because each region around the world has raised its standards, and each one has a different set of requirements. So, should they produce one engine to meet most of the requirements, sub-optimizing in trying to meet multiple requirements? Or should they develop a customized approach for each region? Cummins chose the latter even though, on the surface, it seemed less efficient. This strategy has allowed Cummins to penetrate foreign markets faster than its competition.
Now let’s take a closer look at how Cummins Engine dared to be different, and how they are being rewarded for their efforts.
How Cummins Chose this Strategy?
Emerging markets are often criticized for being able to compete on lower costs, due to a less stringent regulatory environment. As these markets develop, they not only see the financial benefits of industrialization, but also see the cost, primarily increased pollution. But as pollution becomes unbearable, countries are adopting increasingly strict environmental regulations. Will these regulations follow the regulatory standards that are set in North America? Of course not, that would be too easy! Emerging trends include:
- Increased industrialization
- Increased pollution
- Increased regulations (but different for each region)
Heavy truck manufacturers located in these regions had to decide:
- Should we develop the technology to meet the regulations?
- Should we buy the technology and focus on production as demand continues to increase?
For many heavy truck manufacturers, the second option was more attractive because the skill-set required for more environmentally-friendly engines was not something that the manufacturers excelled at. Why not outsource the engine design?
Cummins saw these trends and assessed ways to meet the demand–one way they could have met the demand was by providing the North American technology. However, Cummins had the foresight to understand that with the varying regulations, different solutions would be best for each region. So rather then proceed with “one size fits all,” they chose to pursue a “fit-for-market” approach. The regional truck manufacturers embraced the Cummins approach because this meant that they would not have to change their truck design in order to fit the Cummins engine requirements. Instead, Cummins would design an engine to meet their region’s environmental requirements. Their competitors were chagrined at this approach, as they had taken the “one size fits all” approach and this strategy slowed their engines’ acceptance in emerging markets.
Keys to Strategy Development
- Understand your strengths and competencies; leverage these to your advantage
- Know your markets; different markets have different requirements
- Evaluate long-term trends (e.g., pollution acceptable moving to unacceptable)
- Position your company to succeed by focusing on markets that value your unique skill-set
Cummins’ Results – Dare to Be Different
Cummins, Inc. results have been outstanding in the current economic environment. Profits were up 78% in 2011 over 2010. By truly understanding the different market requirements, Cummins was able to capitalize on their customization advantage and use these regulatory changes as a way to gain market share. When your company is faced by a market change similar to the regulatory threat faced by Cummins, try to evaluate the threat as an opportunity, rather than just a threat. To learn more about designing your company’s unique strategy please read: Sometimes a Road Less Traveled Is Best.
Denise Harrison is Executive Vice President and COO of the Center for Simplified Strategic Planning, Inc. She can be reached at harrison@cssp.com.
© Copyright 2012 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.