Assessing your business

Building and maintaining market share requires that you examine your company the way a customer would

IT'S NOT AN EASY THING TO do. It is very hard to maintain objectivity. Nevertheless, every business can benefit from taking a hard look at itself. Too many companies have failed to ask the hard questions and find themselves, whether quickly or over time, losing market share and margin, some ultimately to a point of ceasing to operate at all. The approach to self-evaluation described here is to look at your business in the way that an outside buyer would.

Niches

A basic issue is to understand one's own niches. What advantages, from a customer's perspective, does your business offer over its competitors? Which ones are most important? Could the company truncate the less important niches to reduce costs of providing the service? Or could they be outsourced to others who might perform better?

One company started up in hopes of capturing profits from its innovations in the design of medical equipment that required specialized installation. The owner was a brilliant engineer but not much of a manager. It turned out that every project generated a loss, before even considering the company's overhead costs.

The problem in part was attributable to the lack of project management in installation. Rather than manage contracts according to unexpected conditions and change orders, as a contractor would, the company charged a fixed fee and bore all the losses when problems occurred.

Even with better contract management, however, a basic pricing problem remained: Although the product innovations were undeniably unique, the price point for the improved technology was simply too high to induce customers to buy. The changes addressed concerns that actually were not significant enough issues in the industry to justify the higher price.

The problem is not unique to startups, but rather is an ongoing concern for companies. Several examples of inadvertent niches come to mind. A company that produced jewelry items for members of organizations maintained substantial inventories to be able to fulfill demand instantly. It was hurt by a competitor who could supply items at lower cost by maintaining a leaner company that produced only after receipt of orders. Customers in this market could wait four to six weeks for the item in return for the lower price. Quick delivery simply was not a significant issue.

Another instance involved a distributor of fuel and heating oil. The company faced declining margins. It lost more ground in profitability with each year that passed. Yet, based on the cost of product delivered, its margins should have been at their highest level ever. What had happened to the company, however, is that its operating costs become more and more excessive.

As it turned out, the company was the only one in the area that allowed its customers emergency deliveries. The customers would call after running out, and the company would disrupt its routing efficiencies by accommodating them with same-day service. As the company increased prices to cover costs, it lost the lower-service customers that had consistent delivery schedules. Because it charged nothing extra for the service, customers took advantage of it, without having to bear the associated costs.

A distributor of nuts and bolts, on the other hand, developed quick delivery into a significant niche. It sold its products at a substantial premium in return for same-day delivery. In their market, the niche was meaningful. Faced with the prospect of an idle production line for lack of a relatively inexpensive item, production managers were willing to pay more for quick replenishment.

Similarly, many companies offer additional services to certain customers without charging for them. Orders may be customized, to varying degrees. Unless pricing appropriately reflects it, the problem becomes one of losing more routine work as prices increase to offset higher costs.

One example was a company that manufactured awards. It found that it was losing market share to competitors that mimicked its products but charged less. The basic problem was that certain items it carried as stock were actually custom, in that sales amounted to less than ten units per year.

The overhead associated with customization led the company to price all of its products higher, including massproduced items. Once the company started charging for the customization it previously had given away, some customers chose to bear the cost, while others switched to mass-produced designs. Standard, mass-produced items could be priced lower, at a level that was competitive. Just as in the case of the fuel distributor, the problem arose from a failure to identify and charge for the costs of extra services.

Operations

An external buyer would also review the management team and its style. Open communication is important. The atmosphere must be conducive to change. A proactive vision, based on planning and current conditions, is much preferred to a reactive style of fighting fires. A poor management style is often easy to spot. The manager never seems to have time, being pre-occupied with tasks that would better be delegated. Strategic reflection is sadly lacking.