One more time: strategy, not operations, is key for rest-of-decade performance

Automotive Industries, March, 2005 by Jason C. Brewer

Multiple studies we have conducted over the last decade have shown that profitability among automotive suppliers does not correlate to operational excellence. In a recent benchmarking study, we once again found that the highly profitable companies as a group were just average performers in utilization, quality, delivery and inventory turnover. Our studies have found it's the strength and execution of a business model, appropriate for the times, that separates the highly profitable from the rest. The trends in place today suggest a few key strategies for automotive suppliers to consider for the remainder of the decade.

Strategy, not operations alone

We have tested several operational metrics over the years to determine if any have strong, consistent correlation to profitability. We have studied different groups of companies: metal forming, plastic molding and lower tier automotive suppliers. Analyzing the companies with greater than twice the average operating income as a group, we found they had average performance, or in some cases worse than average performance in each of these metrics. Figure 1 provides a summary of these findings from our studies since 1999. Based on these studies and years of consulting with automotive suppliers, we concluded that profitability was clearly an outcome of the strength of the business model appropriate for the conditions of the market, and a diligent execution of that model throughout all facets of the business.

Strategies for the rest of the decade

The best business model is largely dependant upon the core competencies of the individual company. However, the conditions of the domestic automotive industry do suggest several key strategies that are consistent for all suppliers, regardless of their respective business models. Those key strategies are:

* Focused alignment of resources and performance metrics throughout the organization with the chosen business model

* Targeted sales and marketing focused on capturing profitable business

* Extreme attention to cost and capital management

* Improving the robustness of business processes to scale the business.

An explanation for each of these key strategies follows.

Alignment with the business model

The business model presents how the company is different from its competitors in the eyes of the customer, and what the company must do well that matters to the customer to capture a portion of the value it delivers for itself. In other words, how is the company going to capture profit?

This focus on how the company makes money must then be driven through all processes and activities within the company. Activities and investments outside of this focus are simply waste. In this competitive environment great technical talent is too hard to find, management attention is too diffuse, and capital is in short supply. Therefore, the best talent should be working on those activities that drive the company's profit, management's attention should be focused on metrics pertaining to those activities, and investments in those activities will be significantly higher.

Targeted sales and marketing

Global platforms, standardization and carry-over components are all trends reducing the number of commercial opportunities available to suppliers. As these trends take hold it is very important that suppliers take a proactive approach to capturing business. Under price-down pressures and rising input costs, it is even more important that the suppliers proactively capture business that fits their business and provides greater opportunity to be profitable.

Figure 2 presents a simplified concept of a targeted sales process. First, translate the business model into a value proposition describing what's in it for the customer. This is the flight of the arrow that guides the sales and marketing activities. Next, research the customers and further segment the markets to identify those customers that will have the greatest need and appreciation for the value proposition. This is the shaft of the arrow that keeps the sales and marketing straight on course. Finally, demonstrate that value proposition to the customer that wants and needs what you have to offer. This is the head of the arrow that strikes the target. Pursuing business that is a poor fit for the company, and therefore will likely provide inadequate or negative returns, is a waste of the sales, management and technical resources used in its pursuit.

[FIGURE 2 OMITTED]

Extreme attention to cost and capital management

Obviously under increasing price giveback pressure, rising input costs, and falling sales to traditional domestic vehicle manufacturers, driving down cost is everyone's focus. But few are managing the whole financial picture, including commercial issues with customers, managing receivables to limit exposure to bankruptcies, and working capital needs. Fewer still are focused on strengthening their balance sheets. The financially strong have kept their powder dry, and are able to capitalize on growth in profitable segments during the anticipated supply base consolidation.