Better strategic planning drives bottom line results

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I’m reading an interesting book titled “How Toyota Became Number One” Leadership Lessons From the World’s Greatest Car Company by David Magee.  It discusses the Toyota strategy process in detail from their first introduction into the United Sates until the present time. It also talks about how their strategic thinking and customer understanding differs from the U.S car companies.

It points out that Toyota isn’t perfect and have made some market and strategy mistakes, but they recognized them quickly and corrected them just as quickly.

There are several major differences between domestic manufactures and even the other Japanese manufacturers and Toyota, but they all start with better strategic planning.

Toyota develops strategies based on recognizing what the customer needs and wants, and then executes to that strategy. How do they know what the customer wants? They ask them. They don’t guess and build large quantities of what they think will sell and push the units into the dealer network they study the customer. The book talks about the development of the Lexus brand in the U.S. Toyota sent a team to Laguna Beach, CA in 1985 to “live a life of luxury” and study the habits of luxury car buyers. They learned what the customer wanted and the shortfalls of the other luxury cars on the market. The result is Lexus, the largest luxury car brand in the United States selling over 300,000 cars per year.

Toyota’s strategy isn’t to be the number one car company in sales, it is to build the best car on the market and give the customer more value than he or she pays for. They believe that holding to this strategy and keeping a long-term focus rather than short-term results will drive sales.

The book talks about how Detroit automakers rode the SUV wave throughout the last decade. They were the highest margin cars ever built and they built them bigger and bigger up to and including the Excursion, the Suburban and the Hummer. Toyota offer SUV’s as well in the Highlander and the Land Cruiser, they didn’t go after the SUV market in a big way. They instead spent nearly $1 billion on development of the hybrid Prius. GM put nearly as much money into development of the Hummer Because SUV’s were the current fad and they were very profitable. One doesn’t have to look hard to see which company planned for the future and which one went for short-term profits.

The messages I got from reading this book complemented nicely with what I had written in my book, “Bottom Line focus”.

1.  Understand your customer’s needs and wants.
2.   Deliver value.
3.  Develop a strategy that drives your vision
4.  Execute to that strategy.

This isn’t intended to be a commercial for Toyota cars and trucks, it’s a roadmap for long-term viability and profitability from a company that seems to have done it right.

There are other examples of excellent quality, customer service and best value for the customer’s money you just have to look for them.

I will say they are more rare than companies that don’t have a clear vision, and strong execution.

Better strategic planning and vision provides better bottom line results because the best marketing strategy is word-of-mouth from loyal customers.

Create value to “fight China price”

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I read an article in our local paper entitled Furniture Industry fights China Price”. Northeast Mississippi is a furniture manufacturing hub and is being hit hard by low cost imports. The article covered a workshop developed by the Mississippi State Franklin Furniture Institute and really provided few answers to the problem.

Having grown up in a steel mill town and seeing what happens to an industry that cannot compete with low cost competition I have some historical knowledge of what happens to a region when the key industry is decimated. My hometown has never recovered.

I’ve done some research on the subject of competing with low cost manufactures and competing on price simply doesn’t work. The average burdened labor rate in China in 2007 was between .70 cents and .92 cents per hour depending on where you get the data. The corresponding rate per hour in the United States for manufacturing jobs is about $25.27 fully burdened with benefits.

In addition the Chinese companies don’t have the regulations and environmental rules to follow and we can all agree it isn’t a level playing field.

But come companies are competing and doing well against low cost competition. Those companies are identifying and developing niches to operate within that take advantage of problems with Chinese production:

• Freight costs
• Increases inventory and safety stock necessitated by potential supply interruptions or poor quality
• Lost sales due to stock out and poor quality
•  Poor logistics support within China
•  Duties, fees and taxes.

The reality of the situation in furniture or in any industry if you allow the product to become a commodity, low price will win every time. In high volume production of the same product with no service or customization, low price is the only differentiator.

What are the companies doing that compete?

• Performance improvements alone such as automation or lean will not allow U.S. companies to compete on price. Certainly U.S. manufacturers must get lean and be as productive as possible, but they will never automate to .90 cent and hour.
•  They take advantage of the close proximity to markets and stay close to their customers, quickly turning customer requirements into opportunities.
• They develop the capability to run low volume and high quality products based on customer orders, allowing retailers and distributors to save money on inventory levels. This can be accomplished through Lean Manufacturing.
• They market their competitive advantages such as some level of customization, build to order, or features based on regional preference.
• They provide excellent customer service and warranty policies that offset the Chinese manufacturers distance from the market.
• Identify and market to consumers that are looking for a higher quality, higher tolerance product that can’t be easily produced in China.
• Use logistics and information to develop a competitive advantage within the supply chain.
• Allow the consumer or end user to have some input to the design and selection of the final product.

There are numerous things that U.S. manufacturers can look at strategically to offset some of China’s weaknesses. Allowing a market to be driven by low price is allowing a market to become at risk and expendable, and once a product becomes a commodity it seldom returns, electronics is a great example.

Better strategic planning, better marketing, and better communications with the customer can all be used as a competitive advantage by U.S. Manufacturers, and directly exploit weaknesses of Chinese manufacturers. Allowing them to dictate the market in our regions and establish low prices as the only selling point is giving up on an industry. Government tariffs and tax credits will never be enough to bridge the gap in labor costs. We must find a different way to do business.

Back to northeast Mississippi the furniture industry seems to be more concerned about each other than trying to form a cohesive marketing strategy to change the market.

Do you get a return on investment on your sales dollars?

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Do you even measure return on investment for sales or other normal business functions?  Many companies only look at ROI on capital expenditures and other large dollar investments. The bulk of the money companies spend are spent on normal daily activities, but few look at justifying ROI on anything other than one-time major investments.

Why should you worry about ROI on normal expenses, doesn’t your P & L cover that? The real answer is the P & L will tell you many things but it’s telling you about them after they occur. In my recent book I gave the example of using the P & L as a problem solving tool is like steering a huge ship by looking at the wake. What you see has already happened, and corrections take time.

So how do you measure ROI on sales, and why bother?

Let’s take a hypothetical company as an example. You run a $10MM dollar manufacturing company, sales are flat and margins are declining. You have a current net margin of 2% and high fixed costs. You feel you need additional sales to offset the high fixed costs, and improve margins.

You are currently making $200,000 annually, (2% of $10MM), and you want to double your net margin to 4% in order to attract new capital. How much do you need to increase sales and how much can you afford to invest to get those sales?

Well first you need to understand what return you get from a $1.00 sales increase. At 2% net margin you are only getting .02 cents. That is before any additional costs are added to increase sales.  Based on an assumption that you can’t grow sales at your present level since they are declining, let’s assume you need to invest $100,000 dollars to increase grow the business and margins to where you want to be. How much new business would you need to get in order to accomplish your goal?

Adding 100K in new cost has effectively cut your current margin in half to 1%, so you are already starting in the hole.

Let’s further assume fixed cost are $2.8MM annually. The chart below shows if all support and production functions remained the same you would need to grow sales by $1.1MM in order to achieve your goal of a 300K net profit increase.

So an investment of 100K in sales would get you an increase of 319K in net profit assuming you were able to execute.

You would need to increase sales by about 400K just to cover the cost of the additional sales expenses.

Initially the return looks great, invest 100k and get 319K back in profits, the question becomes one of time and execution. The longer it takes to develop the needed sales increase the lower the ROI.

Understanding the numbers makes it easier to make a decision initially, but it also makes it easier to understand the costs of delay and nonperformance.

Do trade organizations create value?

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I spent the better part of this week in Oakland, CA at a logistics conference on behalf of a client. It was a three day event, bookended by two long travel days), and had numerous very well prepared presentations.

There were numerous companies and trade organizations represented and a lot of work and information was shared. What became apparent to me after the first day was that a lot of people were spending a lot of time and effort but were delivering very little results or value.

The conference dealt with cold chain logistics, which is essentially monitoring and certifying shipments worldwide of products that must be maintained at specific temperatures. There are numerous federal agencies monitoring movement of these as well as hazardous shipments, but there are very few standards documented as to how to meet the guidelines.

One trade group had been working for three years to document best practices for packaging, shipping, storing and monitoring these critical shipments. The results of three years worth of work was an incomplete set of guidelines, for companies to look at and decide if they wanted to use them.

There are very few published standards or even audits for things like pharmaceuticals and biomedical products being shipped. The FDA will fine a manufacturer for violations of label temperature requirements but there is no real monitoring format. They leave it up to the manufacturers to monitor their shipments and report excursions, unless they happen to trip over an obvious violation.

The issue here is the manufactures create value through their core business, which is research and development of pharmaceutical products. I’m absolutely certain their manufacturing processes are closely monitored and are state of the art. All that is left to chance however when a product leaves the door.

The shippers use whatever packaging the manufacturer recommends. If the package is verified to maintain 0 to 8 degree Celsius for 96 hours, they make every effort to deliver the product within 96 hours. The shipping process however is not within anyone’s control. The package can be bumped off a flight because the dry ice quota has been exceeded, it can be held in customs, delayed die to equipment failures, left on a tarmac or in an uncontrolled warehouse. There is little ownership of the process once the product leaves the manufacturer, and little or no monitoring or escalation of exceptions.

It just appeared to me the whole industry is focused on providing pockets of information but not focused on how to create value.

How do you improve sales results?

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In nearly all of the companies I talk with the need to improve sales results is one of the top three issues. Either sales results are lagging behind plan, or sales are being made for the wrong reasons. I know, how could there be a wrong reason to close a sale, right? There are actually many:

• Selling too low and cutting into margins
• Selling with unreasonable delivery times driving up production costs.
•  Selling using rebates or “freebies” to get the sale

Those are just a few of the reasons I can think of.

Why then do companies allow these sales to happen if they aren’t a win / win for the company and the client?

The main reason I see is the sales force isn’t performing as well as it should and the company has few options. Bad sales are better than no sales, and “at least they cover overhead”. While that may be a good argument for the short term, you are setting expectations with your customers that are hard to break.

The real answer is increase overall sales effectiveness to have options to take or leave business that may not be desirable.

To do that you need to understand why the sales organization isn’t performing as needed. It’s easy to blame the sales reps, and many companies cycle through numerous people and get the same poor results. In my book, Bottom Line Focus I used the term “everybody sells”, and that concept must be understood and accepted to solve the problem.

The chart below illustrates the concept well.

The organization must have a clearly defined and documented strategy that everyone understands and buys into. If your sales force doesn’t get it, or doesn’t own it, they will invariably let it show to the prospect.

The organizational culture must visibly support sales. All functions have to be aligned to focus on delivering customer value.

The organizational infrastructure must support the sales goals and be aligned to be effective in delivering the product or service.

The sales rep must have the knowledge to sell the product or service. Have they been trained on the benefits to the customer of buying your product or service of do they simply sell features and price? Do they understand the axiom find the problem and sell the solution?

The sales person’s attitude must be positive toward the company, the product, the and the market. Are they a reflection of the organizational culture? (good or bad)

The sales person must have the skills to relate to the prospect in an articulate manner that fits the market. Can they deliver the message clearly why your product or service is the best value for your prospects money?

Sales effectiveness is an organizational responsibility. Management must develop a product that meets the customer’s needs at a price that fits the market and allows a fair profit to the company.  Manufacturing must provide a quality product and deliver it undamaged and on-time. Administrative support must make the buying process seamless and hassle free. Customer service must treat every customer problem as an opportunity to show the company cares about the business.

Only when you understand the term everybody sells can you develop better sales results.

Do airline mergers alone produce better bottom line results?

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The news today reports a pending merger between United Airlines and Continental to be completed with a 3 billion dollar stock swap. The combined company will result in the world’s largest airline. The pending deal will surpass the recent Delta/ Northwest merger that  I believe, then created the world’s largest airline.

The real question is do airline mergers add value and increase bottom line profits?

The intent is to merge routes, cut redundant flights and service providers, and reduce costs. The real world result is often different.

Cost reduction gained by reducing headcount is often eliminated by higher wages and benefits given to labor to support the merger the subsequent loss of jobs and changes in work rules. About a year ago I wrote an article for an investment banking newsletter about mergers and acquisitions. The article was entitled “Can Acquisitions Work”?

Research for that article cited a study done by KPMG in 1999 that showed that “83% of mergers were unsuccessful in producing any business benefits regarding shareholder value” (Feldman & Pratt 1999).

The reasons given were loss of productivity of up to 50% for 4 to 8 months following a deal, as well as difficulty in merging systems, cultures, and work rules.

If we apply those findings to any airline merger the potential of adding value and providing better bottom line results is even more questionable.

Is any industry more tied up in regulations and work rules than the airline industry? Government regulations, union agreements, agreements with lenders all put pressure on airline profits. Not to mention fuel costs, inability to quickly reduce unprofitable flights, difficulty reducing workers, or the difficulty in merging reservations systems, call centers, and ticket outlets.

The hope of both companies behind a deal like this is to combine services, cut costs, and keep all of the revenue that both companies have today. The thinking is that passengers at a given city are captive since many cities are only served by one or two airlines.

I think what makes this strategy risky today is the willingness of the flying public to accept more service interruptions and inconveniences is greatly deteriorating. Looking at it from a passenger standpoint and not as an airline industry analyst flying just isn’t a great experience.

Speaking for myself as a former frequent flyer with over 2 million miles on two major airlines, I’d rather do nearly anything than take a commercial flight. Increased security and long lines at airports, poor customer service, flight consolidations and delays, tighter seating, smaller planes make what used to be a tolerable experience a dreaded chore.

I think until airlines realize that they are a customer service provider that provides transportation, not a freight carrier dealing in numbers the public will continue to look for ways to minimize air travel. The recent recession has caused companies to reduce travel due to cost concerns. New technology such as affordable teleconferencing has made some non-critical travel easier to eliminate.

There will always be a need to have face to face contact with customers, but companies are looking for ways to minimize the frequency.

Smaller more nimble carriers such as Jet Blue and Southwest are working hard to gain market share. That market share has to come from somewhere and that somewhere is the large carriers. Bigger is not automatically better, unless the combined entity can increase performance, develop a loyal customer base and maintain sales at current levels or better, this merger will join a long list of those losing value for the shareholders.