Read the case study below and answer all the questions that follow.
Outperforming the market in a recession
Company X is regarded as a world leader in industrial packaging products and services, thus creating a competitive advantage for their customers by providing the packaging and packaging services they need, when they need it in the highest quality and service levels, using the state of the art technology, materials and dedicated staff. Their mission is to provide the packaging that gives ultimate value to their customers. They deliver supply security through a superior, reliable and flexible service, backed up by relevant and professional expertise. Company X offers complete end-to-end packaging solutions tailored to deliver an effective and efficient supply chain for their customers at the most competitive prices, with customers’ satisfaction being most important to them, they provide the best value added services to their customers.
Our people are our past, present and future.
Our customers are our reason for being.
Our products are our livelihood.
Our shareholders are our support. Our stage is the world.
Our communities and the environment are our backdrop.
It is this dedication to their core values; ability to innovate and strategize that has allowed Company X to survive the torrent changes in the market over the years.
To gain competitive advantage and ultimate survival, Company X has grown its markets from Fuels and Lubricants to Agricultural Chemicals, Industrial Chemicals, Food & Beverage, Mining, Pharmaceutical, Specialty Chemicals, Paints & Adhesives, Cleaners & Sanitizers and the Fruit Industry. To serve their customers more efficiently and grow market share, they have plants and warehouses in four regions in South Africa, namely: KwaZulu Natal, Gauteng, Port Elizabeth and Cape Town and in key Northern African countries.
Company X operates in an oligopolistic market with its competitors, producing similar types of products and serving the same customers. Not much differentiation and innovation is possible among Company X and its competitors due to the specialised nature of the product, a product produced for only specific industrial customers. The market is driven by a high demand of price elastic customers who also are motivated by service, quality and performance of the products and company.
How was Company X able to outperform the market during the recession?
The year 2008 saw the price of steel and resin increase to its all-time high and the global markets slipping into a recession put further pressure on volumes and market share retention. Competitors were scrambling for market share at any cost. Company X had to decide: does it attain volume at the expense of profits or maintain profits at a slightly reduced volume?
In an effort to maintain sustainability to the business from a financial view point, Company X took the approach to maintain prices at the highest material costs. Instructions were issued to the sales force not to decrease prices even though the market saw prices coming down from about November 2008 to August 2009 by a total of 40%. The rationale was to ensure that reasonable maintenance of the profitability of the database of customers was maintained, as volumes saw a rapid decline. As the recession gained momentum, slowing down
the economy, there were pockets of opportunity that surfaced which indicated some hope of possible “kick starters” to some industry segments.
Through good customer relationships and knowledge of the market, Company X selectively reduced prices to selective customers projecting high volumes or once off high volume deals, with an effort to prevent entrance of alternative packaging, maintain bottom line, prevent a price war in the market and also offer some assistance to the revival of the suppressed economy.
Having seen a rapid slowdown in the market with regards to volumes, the above strategy demonstrated some comfort, as Company X saw sales revenue mirroring previous year’s budget and pocket margin percentages showed a 1% increase to the previous year’s budgets.
The Approach Taken
A tight fisted approach was adopted with customers where relationships were very strong by not allowing any of the margins to reduce. Taking to what can be considered the “Russian Rolette” approach in these difficult economic times could see the business crumble.
The art of developing Competitive Sustainable Advantage to a business should not exist on one strategy only or one point of approach, but at least two or more, based on the variables at play, and this is what Company X employed: A Rolling Strategy dictated by the market and customer changes. A one size fits all approach was abandoned, and that of customization and segmentation was adopted for each customer segment. At this stage, the Field Sales Team and Internal Sales Team were rounded up. Efforts to engage the sales team were employed and it was time to ensure that maximum coverage of the market and customer service was exercised, to ensure that the competitor made no contact with the customers. Some minimum requirements were put in place to ensure that the back office and supporting management was in the loop so that the necessary support could be provided.
Back to basics would be a good start, call cycles, daily visit reports, buy-in deal, price volume opportunities and most off all good market and competitor intelligence was vital. At this stage, every customer was vital and no stone was left unturned, namely: all customers (existing and lost) in their databases were contacted, all existing and new market segments were explored and stocks and raw materials properly maintained (kept to bare minimum) and moved as quick as properly. Alternative drum designs and configurations that were cost effective were explored. Partnering with customers in terms of setting up satellite operations/warehouses in untapped markets was employed, thereby reducing overhead costs.
Based on the actual versus budget tracking by customer and product line, it was established that numerous customers were in negative variances. A deep dive was undertaken into all customers with negative variances and those who had not purchased. Upon further investigation, by the relevant account manager and the marketing analyst via customer satisfaction surveys, it was ascertained that volume was being lost due to price, low sales by the customer’s customers, financial difficulties experienced by the customers and their customers, slowdown in various industry segments and closure of various customers. Customers were looking at various avenues to save as companies were consolidating.
A detail customer – product analysis was undertaken to ascertain the product profitability and whether a price decrease was viable. It was established that all customers had products with Value Adds of greater than 45% and their pocket margins drastically above the targeted levels. The relevant customers (potential of volume growth) with high variances were explored. A discussion with the relevant account managers were undertaken and were price was an issue, these prices were reviewed and various price options were presented to the National Sales & Marketing Manager to make a decision. Certain customers had given the prices their
competitors were charging and it was ascertained that Company X had a price differential between R5-R30. Based on profitability and increase in volume, if the prices could be matched, they were. Unprofitable customers and products were dropped.
Price deals were undertaken, thus gaining close to 90% of certain customers business as opposed to the previous 40%. Customer prices that were matched, based on competitor prices, began to increase their off takes. However, competitors began to undercut prices prevailing in the market which was a potential for a price war. Company X, did not want to erode profits for potential volume as increasing prices to the desired level once again would be very hard to achieve. Prices were matched based on profitability, volume and debtor’s age analysis. Penetration pricing and price deals was used in new markets.
Finished stocks and raw material stocks were reduced to the minimum; logistics and production were planned and routed more efficiently. Cheaper, but quality alternative raw materials were sourced which decreased the production cost of the product further. Constant monitoring and evaluation of the products, stocks, costs and prices were undertaken. Quality and service was paramount. Getting it right the first time and in the quickest time was the name of the game.
When the selling price was decreased, volume began to increase. The important factor was that Company X’s profit line was not eroded. Customers still maintained a positive pocket margin. Customer service and value added services ensured customer retention even though prices were still high.
Problems encountered ranged from:
2. How low do we go to gain the volume?
3. Lack of customer ethics
Customer Relationship Management and Life Time Value of a customer are of vital importance to the sustainability of an organisation and people are often vague as to their position in this regard, whereby unnecessarily exposing the organisation to its competitors and creating a breakdown in trust between the customer and supplier. This is not an easy call to make and sometimes people take the easy road and say as little as possible. Customer relationship management and trust was the back bone to developing this sustainable competitive advantage.
Based on the series of events, strategic pricing and with-holding of price decreases was done with caution to prevent the customer conceiving Company X as being unethical and not transparent, as in two customer cases. Thus, constant communication with the customer on their pricing strategy (to an extent), their value adding opportunities to him is vital. This would prevent room for entry by the competitor and create the impression to the customer that they care and value his business. Company X did not act after the fact but before they started to loose volume.
Constant ear to the ground approach, cross-functional team work within the organisation, an efficient marketing information system and on the ball skills of the account managers with subsequent constantly revising their approach to benefit the company and the customer, helped Company X attain substantial profits and market share in a shrinking market.
Due to the strong strategically focused sales team, Company X was the most profitable business unit in Company X EMEA in 2009-2010.
QUESTION 2 (30)
Discuss in detail how Company X outperformed similar industries in the recession of 2008/2009.
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