Competing in the Midst of GiantsCompeting in the Midst of Giants

by: Ken Wongby: Ken Wongby: Ken Wongby: Ken WongQueen’s School of BusinessQueen’s School of Business

Key Skills to Win Against Giants

TO DETECT…TO DETECT…

TO DESTROY…TO DESTROY…

TO AVOID…TO AVOID…

MARGINMARGIN--SUCKINGSUCKINGMARGINMARGIN SUCKINGSUCKING

MAGGOTSMAGGOTS2

MAGGOTSMAGGOTS

The Real Goal

Price

C

MinusUnitMargins

CostNet

Income

g

TimesIncome

DividedBy

MarketShareUnit

Return OnInvestment

AssetsManaged Market

Size

TimesVolumes

3

Size

The Real Questions To Ask For Profitability

1. How can we defend and improve my prices?

2. How can we contain and reduce my costs?

Wh th b t f l ? H d3. Where are the best sources of volume? How do we penetrate those targets?

4. Should we focus more on price impacts, cost impacts or volume impacts?

4

What matters most

A 1% change in...

Creates a change in operating profit of ...

Price 11.1%

Variable Cost 7.8%

Fixed CostFixed Cost 2.3%2.3%

Volume 3.3%

5KW-210

(Average economics of 2,463 businesses in Compustat)

Price Realization MUST Be Priority One

You You cannot survive in a world of falling cannot survive in a world of falling pricesprices

Costs can’t fall fast enough to keep Costs can’t fall fast enough to keep pacepace Avoid cutting costs if quality is impairedAvoid cutting costs if quality is impaired Avoid cutting costs that depersonalize the relationshipAvoid cutting costs that depersonalize the relationshipAvoid cutting costs that depersonalize the relationshipAvoid cutting costs that depersonalize the relationship There’s rarely enough volume to offset lost There’s rarely enough volume to offset lost marginmargin

6

An Even Larger Concern

Is Lower Price the Giant’s ONLY Advantage?

A “P i B ” Th i O l T t?Are “Price Buyers” Their Only Target?

7

Economies of Scale Economies of Scale –– You Can’t Coach SizeYou Can’t Coach Size

100100

Unit costUnit cost

100100

ThTh

5050

TheTheSmallSmallFirm’sFirm’sLOSSLOSS

12 5012 502525

The Large Firm’s PROFITThe Large Firm’s PROFIT

11 22

12.5012.50

8844 VolVol

8

HOW GREAT BUSINESSES USE SCALEHOW GREAT BUSINESSES USE SCALE

MOREMORESCALESCALE

Via experience effects,economies of scale,market power, etc.

LOWERLOWERCOSTSCOSTSCOSTSCOSTS

Via businessplanning

LOWERLOWERPRICESPRICES

9

HOW GREAT BUSINESSES USE SCALEHOW GREAT BUSINESSES USE SCALE

MOREMORESCALESCALE

Via experience effects,economies of scale,market power, etc.

LOWERLOWERCOSTSCOSTSCOSTSCOSTS

Via businessplanning

BETTERBETTERBETTERBETTERQUALITYQUALITY

10

HOW GREAT BUSINESSES USE SCALEHOW GREAT BUSINESSES USE SCALE

HIGHERHIGHERSALESSALESVia sales and

marketing MOREMORESCALESCALE

Via experience effects,economies of scale,market power, etc.

SUPERIORSUPERIORVALUEVALUE

LOWERLOWERCOSTSCOSTS

Via execution andimplementation

COSTSCOSTS

Via businessplanning

LOWERLOWERPRICESPRICES

BETTERBETTER

AND/ORBETTERBETTERQUALITYQUALITY

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Fi hti B kFighting Back

Don’t Sell Your ProductDon t Sell Your Product

12

What is your REAL Product?

Viagra RuleViagra Rule Viagra RuleViagra Rule

••People don’t buy products or services People don’t buy products or services –– they buy they buy p y pp y p y yy ySOLUTIONS to problemsSOLUTIONS to problems

Price ceilings vary with the importancePrice ceilings vary with the importance and••Price ceilings vary with the importance Price ceilings vary with the importance and complexity of the of the problemproblem you solveyou solve

“What is the real problem that you help to solve?”“What is the real problem that you help to solve?”“How complete a solution are you?”“How complete a solution are you?”

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Problem-solving businesses also have lower costs

How to Improve the Retail Experience (Sample Advice)How to Improve the Retail Experience (Sample Advice)

Personalize the experiencePersonalize the experience

Help the customer find their wayHelp the customer find their waye p t e custo e d t e aye p t e custo e d t e ay

Explain product differencesExplain product differences

Show them you careShow them you care

Show them why they “get what they pay for” (i e up sell)Show them why they “get what they pay for” (i e up sell) Show them why they get what they pay for (i.e. up sell)Show them why they get what they pay for (i.e. up sell)

EDI, EEDI, E--tailing, etc. etc.tailing, etc. etc.

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Connect to the Ultimate Business Customer NeedProduct Innovation

Product Quality

Marketing Effort

Price Strategies

g

Process Innovation

Functional EfficienciesCost Strategies

Margin

Marketing Effort

Discretionary Spending

Integration

Cost Strategies

Net IncomeMarketing Effort

Customer Value

Barriers to Entry

Market Share Strategies

Volume New Products

New MarketsMarket Size Strategies

More Usage Occasions

More Usage Per Occasion

Strategies

Fi hti B kFighting Back

Sell on ValueSell on Value

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VALUE = Quality / Price

Four Ways to Increase ValueM i t i Q lit REDUCE PRICE1. Maintain Quality, REDUCE PRICE

17

VALUE = Quality / Price

Four Ways to Increase ValueM i t i Q lit REDUCE PRICE1. Maintain Quality, REDUCE PRICE

2. REDUCE QUALITY InsignificantlyREDUCE PRICE Significantlyg y

18

Diminishing Returns Diminishing Returns

REWARDREWARD

EFFORTEFFORT

VALUE = Quality / Price

Four Ways to Increase ValueM i t i Q lit REDUCE PRICE1. Maintain Quality, REDUCE PRICE

2. REDUCE QUALITY InsignificantlyREDUCE PRICE Significantlyg y

3. RAISE QUALITY, Maintain Price

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VALUE-ADDED MARKETINGIdentify the Components of "Cost-in-Use"

Cost-in-Use

==Acquisition

Costs + PossessionCosts + Usage

Costs

Interest expenses Opportunity costs

Training User's labour

Price Paperwork

Storage/handling Installation Quality control

costs (especially if re-engineered)

Longevity

p Shipping time Expediting orders Cost of errors Quality control

(of your product on installation)

Tax and insurance

Replacement/repair costs

Disposal

Cost of errorsin ordering

Pre-purchaseactivities Tax and insurance

Shrinkage Obsolescence

pcosts

Regulatory

activities Purchase

evaluation© Kenneth B. Wong (2005)

Know Which Costs Create Value … and For Whom

Total Costs

Add "Good"Costs

Reduce "Bad"Costs

I R d

Costs Costs

Increase"Value"

Reduce"Waste"

LowerCosts

Higher Pricesand Sales

22Higher Profits

VALUE = Quality / Price

Four Ways to Increase ValueM i t i Q lit REDUCE PRICE1. Maintain Quality, REDUCE PRICE

2. REDUCE QUALITY InsignificantlyREDUCE PRICE Significantlyg y

3. RAISE QUALITY, Maintain Price

4 RAISE QUALITY Significantly4. RAISE QUALITY SignificantlyRAISE PRICE Insignificantly

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The Meaning of Value-Add Varies with the Nature of the Consumption Problem

1.1. DEFINE THE EXECUTION STEP: DEFINE THE EXECUTION STEP: What are the MOST CENTRAL What are the MOST CENTRAL TASKS that must be accomplished in getting the job done?TASKS that must be accomplished in getting the job done?

2.2. DEFINE PREDEFINE PRE--EXECUTION STEPSEXECUTION STEPS: : What must happen BEFORE the What must happen BEFORE the core execution step to ensure the job is successfully carried out?core execution step to ensure the job is successfully carried out?

Wh b d fi d l d?Wh b d fi d l d?1.1. What must be defined or planned?What must be defined or planned?2.2. What must be located or gathered?What must be located or gathered?3.3. What must be prepared or set up?What must be prepared or set up?4.4. What must be confirmed BEFORE execution?What must be confirmed BEFORE execution?

3.3. DEFINE POSTDEFINE POST--EXECUTION STEPS: EXECUTION STEPS: What must happen AFTER the What must happen AFTER the core execution step to ensure the job is successfully carried out?core execution step to ensure the job is successfully carried out?core execution step to ensure the job is successfully carried out?core execution step to ensure the job is successfully carried out?

1.1. What must be monitored or verified?What must be monitored or verified?22 What must be modified or adjusted?What must be modified or adjusted?2.2. What must be modified or adjusted?What must be modified or adjusted?3.3. What must be done to prepare for the next job cycle?What must be done to prepare for the next job cycle?

24(Bettencourt & (Bettencourt & UlwickUlwick, “The Customer Centered Innovation Map, HBR 2008), “The Customer Centered Innovation Map, HBR 2008)

BUNDLING : Creating a "Seamless" Total Solution

ARE THESE ‘GOOD’ COSTS?ARE THESE ‘GOOD’ COSTS?

VALUE = Quality / Price

Four Ways to Increase ValueM i t i Q lit REDUCE PRICE1. Maintain Quality, REDUCE PRICE

2. REDUCE QUALITY InsignificantlyREDUCE PRICE Significantlyg y

3. RAISE QUALITY, Maintain Price

4 RAISE QUALITY Significantly4. RAISE QUALITY SignificantlyRAISE PRICE Insignificantly

Th Ad t f Q lit D i V l The Advantages of Quality-Driven Value• Longer Strategic Window• Greater Economic Efficiency• Greater Economic Efficiency

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Fighting Back

You Can Be Bigger Than You Are

The BRAUN Rule

FILTER FILTER FILTER

CARAFE

STAND

CARAFE

STAND

CARAFE

STAND

CARAFE CARAFE CARAFE

BASE- On/off

BASE- On/off- Timer

BASE- On/off- Timer

28

- Timer- Flavour controls

© Kenneth B. Wong (2005)

How Common Components andModules Create Value

100

Unit cost

ADDEDPROFIT

FORMODEL A

MODELA

MODEL A

MODELB

MODEL C

COST IF COMMON COMPONETS USED IN MODELS A+B+C

ADDED PROFIT FOR MODEL B

ADDED PROFIT FOR MODEL C

MODEL ASALES

MODEL B SALES

11 Vol

COST IF COMMON COMPONETS USED IN MODELS A+B+C

29

MODEL C SALES

COMBINED SALES OF A+B+C© Kenneth B. Wong (2005)

Fighting Back

Know Who Matters Most

The Profitability of a Transaction Focus

ProfitProfitcontributed by:contributed by:

ProfitProfit

Base profitBase profit

Cost of newCost of newcustomercustomer

31

TimeTime

Source: Bain & Company (Frederick Reicheld)Source: Bain & Company (Frederick Reicheld) KWKW--153153

The Value of Customer Loyalty

ProfitProfitcontributed by:contributed by:

Price premiumPrice premium

ReferralsReferralsReferralsReferrals

Lower costsLower costs

ProfitProfit

Increased volumIncreased volum

Base profitBase profit

00 11 22 33 44 55 66 77

Base profitBase profit

Cost of newCost of newcustomercustomer

32

YearYear

Source: Bain & Company (Frederick Reicheld)Source: Bain & Company (Frederick Reicheld)

Profit Impact of a One-PercentIncrease in Customer Loyalty

1919Advertising agencyAdvertising agency

VolumeVolume3.3%3.3%

CostCost7.8%7.8%

PricePrice11.1%11.1%

1717

1717

PublishingPublishing

Bank branch depositsBank branch deposits

g g yg g y

1616

1717

Auto serviceAuto service

Auto/Home insuranceAuto/Home insurance

gg

99

1515

Industrial distributionIndustrial distribution

Credit cardsCredit cards

00 44 88 1212 1616 2200

77SoftwareSoftware

33

00 44 88 1212 1616 2200

Percentage Increase in Profits per CustomerPercentage Increase in Profits per Customer

Source: Bain & Company (Frederick Reicheld)Source: Bain & Company (Frederick Reicheld)

Fighting Back

M k S Y St ffMake Sure Your StaffKnow Who Matters Most

What Matters Most

The Five-Step "Profit Chain“The Five Step Profit Chain

Profits grow from satisfied customers who receive value due toti fi d d l l l h h d t i i hisatisfied and loyal employees who had proper training, coaching,

and support

COMPANY

ExternalMarketing

InternalMarketing

35EMPLOYEES CUSTOMERSInteractive Marketing© Kenneth B. Wong (2005)

Putting It All Together

If you have to compete against someone bigger than you…don’t sell the same thing they do (and expect margins to stay healthy)

Solve problems over selling products/services Solve problems over selling products/services

Communicate REAL AND SPECIFIC VALUE over pricep

SME’s Unite!

Prioritize Accounts

Build Your Firm to Keep Its Promises36

THE FINAL RULE : Focus On "Execution"

The EXECUTION of the

MARGIN-SUCKING

MAGGOTSMAGGOTS

Kenneth B. (Ken) WongThe Distinguished Professor of Marketing & Business StrategyS.J. Smith School of BusinessGoodes Hall Room 366Goodes Hall Room 366Queen’s UniversityKINGSTON, Ontario K7L 3N6

Email: kwong@business.queensu.caPhone: 613‐533‐2367Fax: 613‐533‐2321

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