Escaping the Price Trap

  “MAPPING your way to greater profits”

 Today, companies are under increasing pressure to provide a low-cost, affordable product and still make a profit. Since this situation implies that lowering prices is the key to marketplace success, companies are driven into an un-winnable rat race to become the lowest-cost-producer. Although counter-intuitive, a far more winnable option is to maintain or even enhance margins by competing based on offering differentiable, value-added features that justify higher prices and margins.  

Companies modernize their facilities, minimize the number of employees, and implement various operational improvements in their ongoing drive to become the “low cost producer”.  This strategy is ultimately doomed, because there will always be lower-cost producers in the global market with much lower overhead costs.

Global competition will be with us for a long time to come, so the problem of cost-competition has no solution… But it can be sidestepped.  This report describes an approach which has proven successful in aiding manufacturers achieve a sustainable competitive advantage.

 

Quality in a product or service is not what the supplier puts in. It is what the customer gets out and is willing to pay for. A product is not quality because it is hard to make and costs a lot of money, as manufacturers typically believe. This is incompetence. Customers pay only for what is of use to them and gives them value. Nothing else constitutes quality.

-Peter Drucker

 Customers Buy Value

Low price is generally considered to be the most critical buying criterion - yet, in a room full of people, it is very difficult to pick out the individual who drives the cheapest car, wears the lowest priced clothes or eats at the cheapest restaurants.  Customers buy products and services based on their perception of value, not on price.  Manufacturers must compete in the marketplace by providing the best value for their customers – from the customer’s perspective.

Value is made up of two components, price and perceived benefits the customer receives from the total transaction. The manufacturer who is the most competitive is the one that provides his/her customer with what the customer perceives as the greatest difference between the price paid and the benefits they receive.

 

The MAPPING Process

 

The mapping process (MAP) is a tool which gives a manufacturer the opportunity to develop a unique competitive value for their product, product family, or services. 

 MAP is a logical process that identifies those areas your customers view as important.

There is a sequential progression from the business strategy to: 

1. Assessment of your market position.

2. Assessment of your current manufacturing capability.

3. Identification of the differences between the market needs and your firm’s current capabilities to meet it.

4. Assessment of your company’s capabilities to change.

5. Definition and prioritization of the activities to achieve any improvements needed.

   The Six Fundamental Criteria for Competitive Differentiation

Market research studies have shown that there are six decision criteria that buyers use in making a purchasing decision:

1.      PRICE - Because of the nature of competition, price has usually outweighed all of the other factors. Competing on price obviously implies becoming the lowest cost manufacturer.  Price differentiation in most cases is not achievable for most manufacturers, especially those with a high level of physical value added in their products or services.  

2.      DELIVERY – When competing on delivery, consideration should be given to the absolute delivery time as well as delivery time reliability. The objective is to improve the time from order to order-fulfillment and receipt by the customer - i.e., using the speed of manufacturing throughout and the accuracy of a commitment as the basis of competition. An important by-product is the attendant reduction in cost due to reduced inventory carrying cost and high material turnover. 

3.      QUALITY - Competing on quality (meeting the customer’s specifications). The major challenge here is to narrow the frequency distribution of product variability (rejects and rework). This results in significant dividends by reducing the cost of rejects and rework. Superior quality must not only be pursued in the products manufactured but also in the services a company provides. Superior quality, if recognized as such by the customer, contributes substantially to adding value. 

4.      PERFORMANCE - Competing on performance (best level of service) tends to be the second most important differentiator selected by customers, after price. In addition, bundled-in support services can also enhance a company’s value to a customer. 

5.      INNOVATIVENESS – Aside from the obvious, i.e. new product introduction, development of a new manufacturing process or the use of a new technology or material can also be included in this category. In manufacturing, this kind of innovation has often been used as a differentiator to create a new market or to subdivide an existing one. 

6.      FLEXIBILITY - Using flexibility as an order-winning characteristic can be a major advantage in the sense that it allows for the incorporation of Just-in-Time (JIT) manufacturing systems with the inherent benefits of reducing Work-in-Process and finished goods inventory. Organizational flexibility should also be investigated as a value-added differentiator. By that we mean the ability to very quickly form a special team or process to address a customer need.

Once all of these factors have been evaluated in light of the market’s expectations, it is a simple step to define the Competitive Value (differentiator) from the customer’s point of view.

Can Your Company Deliver on it?

The second step, after the Competitive Value has been established, is to assess your company’s capability to deliver the desired characteristics at the order-winning and market-qualifying levels.

Key Questions - How Much Can We Change?

What will require more management attention is the decision about what compromises are necessary to achieve optimum positioning in the market. Management will develop a complete list of changes to be considered. 

The next step is to evaluate your company’s ability and willingness to change! To manage the change needed to achieve world-class competitiveness, there are six "levers" (degrees of freedom) which may be controlled. In increasing order of difficulty to change, they are:

           1.      People  

           2.      Company structure  

          3.      Production planning and control 

          4.      Process technology 

          5.      Operations

         6.      Facilities

 

The lever is "set" in a certain position (below or above industry average, world class, etc.) depending upon the company’s current situation relative to its competitors. A lever can be "reset" through the implementation of appropriate actions.

 Experience has shown that focusing on the "soft" technologies (people and organizational issues) first has resulted in greater success and has allowed achievement of a fuller measure of the potential benefits promised by the implementation of hard technologies. 

The primary method for implementation is an action plan which allows for project prioritization, an allocation of people and a time horizon adequate for the changes to be assimilated. In other words, long enough for the "levers" to adjust to their new positions and stay reset after the project is complete. 

The MAP process is a framework which provides the necessary discipline to achieve market-driven competitive advantage first through the establishment of a unique competitive position for your company and second through the implementation of appropriate changes specifically designed to assure it.  

Conclusions

To create and maintain sustainable competitive differentiation, you must understand your customer’s needs, and you must tailor your products and services to meet those needs as precisely as possible. This requires your company to become more responsive and adaptable to your customers’ needs. This transition is much easier to manage if management is first able to cultivate an atmosphere in which adaptation, creativity and change is encouraged.  Firms that do not address this issue will be continuing to face on-going customer erosion and a relentless squeeze on profit. 

 Don't become caught in the continuing battle to be the "low-price leader." You may win that battle but lose the war.   

 

About the Author

 

 Ken Wilson, founder and CEO of Wilson Marketing Group Inc., has over 31 years of practical consulting experience in business-to-business management and marketing. A member of the Institute Management Consultants, Ken has been awarded the designation of Certified Management Consultant (CMC), a globally recognized certification of professional achievement. 

Prior to founding the firm, Ken held executive positions with Honeywell, IBM and Nortel. He has also been a member of the adjunct faculty at the Graduate School of Business at the University of St. Thomas for over two decades, teaching courses in strategy, product management, and marketing, and has lectured on planning and strategy at the University of Minnesota, Carlson School of Management.   

Ken has written numerous articles on planning, strategy and marketing and has authored two books: Strategic Marketing Planning and Product Marketing Management.  

Ken has a Bachelor of Science degree in business from the University of Minnesota and an M.B.A. from Queens University.

About the Wilson Marketing Group, Inc. 

Since 1986 the Wilson Marketing Group, Inc. has provided strategic, marketing and sales advisory services to manufacturing firms.   

Wilson Marketing Group’s services include strategic and marketing planning, market research, competitive analysis, new business development, sales process improvement and training. 

The company counts many leading global businesses such as Cargill Inc., Conwed Plastics, FSI International, Graco, Inc., H.B. Fuller, The Mosaic Company, MTS Systems, Tulsa Tube Bending, Turck, Inc. and Xcel Energy among its numerous satisfied clients that have benefited form Ken’s expertise.