Business strategies for tough times

Electrical Apparatus, Jun 2008 by Wiersema, William H

Tough markets present opportunities as well as challenges

THE U.S. ECONOMIC DOWNturn dominates the headlines. While the technical definition of recession has not been met, it is widely acknowledged that the U.S. is in one. The residential housing market, consumer spending, retail sales, and manufacturing activity are down, as unemployment climbs.

How does a service company relying on manufacturing companies cope with the situation?

Random, desperate cost cutting is not the solution to a slowdown. Most companies have already scrutinized their expenses. Rather, it takes planning and strategy. It is important to keep in mind that what applies today is quite different from even a few years ago.

Have a hedging strategy

Companies in the repair business often enjoy a built-in hedge against downturns in the economy. While data backing it up are difficult to assemble, repair business being counter-cyclical relative to the economy seems to make sense in that customers will avoid replacing equipment in bad times. However, the effect of an overall decrease in equipment utilization may cause an offsetting decrease in repair services.

There are other ways to hedge economic conditions. Unlike the recent past, U.S. manufacturing no longer drives the domestic or world economy. Outside of manufacturing, commercial construction and export markets are up. Opportunities in such areas as healthcare and alternative energy continue. From a global standpoint, economies in areas outside the U.S., such as Asia, can thrive.

Electrical apparatus service companies should position themselves beyond local market conditions and concentrations with particular customers and industries. Service shops that over-specialize in markets, such as automotive or energy, are more likely to be troubled currently than those that don't. Likewise, those that depend too much on few customers are more susceptible. Shops that are the best prepared for slowdown, on the other hand, already have diversification strategies in place. For example, acquisition of specialized equipment can enable shops to gain national stature, as with servomotors.

Expanding to markets beyond domestic boundaries offers another way of hedging local conditions. With a particular niche involved, products or services can become global. It's a matter of developing something that a shop excels at doing.

However, shops can seldom afford to establish their own overseas operations. An indirect approach to entering foreign markets is far less costly and carries much less risk. Going indirect means the exporter would engage distributors, sales representatives, or other intermediaries in entering foreign markets. The risks relating to infrastructure, collection, and foreign exchange are all borne by the intermediary. It is a means for U.S. companies to enter markets with minimal investment.

The least costly approach is to engage foreign sales representatives. For some U.S. companies, such arrangements may not go far enough. Joint ventures with overseas companies in the same industry may also be considered. The risk, however, is in entering into an exclusive relationship with the wrong company. The exporter must scrutinize the intermediary enough to assure it can perform. Ideally, the company would already be successful and enjoy a strong reputation locally. It should be financially secure and independent. It should also have a record of accomplishment in dealing with foreign partners.

An unfortunate example is of one U.S. company, a molder of proprietary plastic products, which entered a joint venture relationship with a Chinese molding company, in hopes of opening new markets. After years of minimal sales, the company terminated the relationship at a significant loss of capital. As it turned out, the Chinese company was actually a contract manufacturer and did not market proprietary products.

Offer a no-frills alternative

In addition to developing premium niches or entering markets that provide diversification, the lessons of business show that ignoring low-end competitors can lead to failure. The decline of big steel began with the encroachment of mini-mills on such products as rebar. Particularly in tough times, customers are drawn to save money by seeking low-priced items.

A problem that many companies have is in attempting to do everything they can to service customers, such as customize or expedite, without recovering the costs through higher prices. As margins decline over time, these companies raise prices, only to lose the routine portion of their business. Eventually, the companies find themselves in a high-cost niche without having established appropriate pricing.

Ultimately, customers find their own service level. When offered free of charge, customers are willing to take advantage of all services offered. If they are charged at cost plus a reasonable markup, on the other hand, customers may choose not to have the service. In those circumstances, the service should be dropped. This saves the company from generating losses.