Part II - The Business Builders
Will the protracted crisis affect strategic thinking in corporate board rooms? If so, how? It stands to reason that the strategic thinkers of the corporate world might even benefit from the crisis, while the strategic laggards may face heightened risks of failure. Before analyzing the new sets of strategic challenges that companies are facing, a brief discussion of the concept of USP may be in order. USPs (unique selling propositions) are characteristics that give companies competitive advantages over its peers. The concept of USP can comprise any or more of the following qualities: brand name, superior product characteristics, leading-edge technology, superior design, worldwide locations, access to difficult markets and others. Typically, USPs are reflected in high gross margins and above average price elasticity of the company’s products: if a company can manage to maintain high margins and to raise its prices in times of inflationary material costs it clearly has competitive advantages over its peers. If a company cannot maintain its margins in times of rising material costs, it does not have USPs. If a company’s products feature all kinds of bells and whistles while the margins are falling in times of rising costs, the company does not have a USP, because the market does not perceive all those wonderful new things on the products as useful or needed. As we enter the new era of uncertain economic times it is important that companies understand what their competitive position is: drawing the wrong conclusions or ignoring the subject may result in dire consequences.
Generally speaking, companies with strong USPs will be the winners of the new market-share/survival game. Companies with a mixed bag of products (some have USPs, others not) may need to weed out the less attractive products or find ways to add special characteristics to the latter. Companies with no or little USPs will see their margins and profitability nosedive, unless they take decisive action. Why is that? As the economy will remain flat or even shrink many market segments will be faced with production overcapacity – there will be too many players; margins will drop, manufacturers of products without any desired characteristics will get pushed to the side-lines.
What types of companies will emerge as winners or losers from the reshuffled Deck?
- “Natural winners ” will be companies with product/market USPs and strong market access in the major industrial and BRIC countries. They may accelerate their growth by picking up competitors that help them fill some product/market gaps or push more products through the same channels etc. This group of companies will continue to be a strong force on the M&A market. If they do it right these companies will be the new kings of market-share.
- Companies boasting some, but not all of these elements will have to scramble to complement their line-up of advantages so as to keep up with the Natural Winners.
- Strong niche players will continue to prosper as long as they remain within their narrowly defined niches and can successfully defend their advantages. However, niches tend to disappear after some time.
- Companies with multiple product lines may want to focus on their strengths and divest themselves of some of their less successful products so as not to dilute their overall performance.
Is everybody else bound to disappear? Of course, not. There will always be small suppliers (and even large contract manufacturers) that benefit form their proximity to their customers or from economies of scale of mass-producing.
The remaining companies, a rather large group, consists of manufacturers without significant USPs, which in recent good times would have had single-digit EBITs, will see their profitability drop sometimes way into negative territory. Main reason: if the pie does not grow any more, but remains flat or if it even shrinks, pressures on prices increase. While it is painful for companies with double-digit EBITs to cut their prices and profitability they can survive with single-digit EBITs. But if you are already in the single-digits you do not have any room for flexibility any more. You can cut prices and absorb the losses – but how long can you do that? Quick action is needed. The sensible thing could be to find a (larger) partner company as long as it is not too late.