WHEN CHANGE IS IN THE AIR

Building differentiation into products and services – Dr. Muneer Muhamed

In the global post-pandemic economy and Sri Lanka’s crisis affected milieu, price competition has become intense with hardly any meaningful differentiation in product features or service offerings. And it is even more complex in B2B markets.

While supplying to customers, purchase departments exert so much pressure on you that you’ll simply want to make a sale and forget about your premium – and in some cases, the margin too!

The influence of purchasing managers runs fairly high in most industries, and can threaten you with blockades and sometimes even denial to market access.

This situation stems from a wider transformation of how businesses and end users buy products and services, which affects all brands. This is more so for the second tier brands that have fewer resources and weaker market positions. The current market is driven by the following four changes – and they’re all working together.

Buyers are becoming more concentrated in each industry; purchasing functions are growing more centralised in orga­nisations; buyers are reducing the number of suppliers they purchase from in order to improve supply chain efficiency; and the internet is increasing purchasing managers’ sourcing options by making it easier to find suppliers and compare prices worldwide.

In addition, some retailers have turned to new merchandising strategies including house branding and category killers that put more pressure on suppliers.

The ‘everyday cheap price’ retailers are leading the way. They rely on contract manu­facturers to produce for store brands – rather than pay premium prices for major brands.

Meanwhile, category killers such as hypermarkets try to dominate one segment of the market. These are more sophisticated buyers than the smaller, more fragmented operators they’ve displaced.

Suppliers can no longer control the channels through which customers buy. Customers have more options and the prices for these are known. As a result, many suppliers are seeing their margins decline. These changes have occurred with a rapidity that is unprecedented and businesses must make major strategic course corrections.

Diverse enterprises have already deployed various strategies; some have even addressed the cost side of the business by reducing headcounts and inventories, and cutting expenses. But massaging the numbers through financial engineering is only a temporary fix – at best.

For most businesses, the greatest potential lies in changing the supply chains and distribution channels for their products and services. The supply chain means more than interaction with the suppliers; it starts with processing raw materials through sourcing, manufacturing, packaging, selling and distribution, and ends with the finished product or service that’s delivered to the end user.

Experts recommend the following proven ways by which enterprises can change their supply chains or channels: revise the supply chain to better serve the end user; reallocate value services in the supply chain; eliminate layers in the existing channel as some fast-moving consumer goods (FMCG) businesses have done with wholesalers; and focus on narrow segments of the existing channel and create a new pathway.

To find opportunities such as these in your own supply chain, prepare a relevant value analysis for your products and services beginning with the end user and working backwards. Determine the value that your buyers are trying to offer their customers and end users. And remember that value is often measured in intangibles such as ease of purchasing, on time delivery, insurance and information.

Look for ways in which your business can provide more value, or different values, to your customers or their end users.

Revising the supply chain requires both operational and organisational changes, as well as working with suitable partners to find efficiencies. Your strategy will depend in part on relationships in the supply chain and the relative power of each partner. If each partner is dependent, it’s more likely that there will be a balance of power in the supply chain.

While these ideas are straightforward, their execution and implementation are not. Consultants are usually called in when board members grow frustrated at senior management’s failure to deal with these issues.

In turn, we find that senior management generally has a set of excuses that sound legitimate to them. For example, saying they can’t compete because competitors have lower cost structures or it has been tried before and doesn’t work.

The speed of change will only increase over time. So the question is not whether an organisation should change but how it must go about doing so.

To minimise price competition, senior management must continually redefine how it creates value for customers and end users. Thereafter, adding value calls for close collaboration between all organisational functions and employees.