It is the first day of 2009, and I wonder if this will be the worst year that I will see in my adult life. To sustain themselves, companies have to make more money – or at least as much money, as they spend. What strategies can they try out?
Conventional wisdom tells us that there are two ways to go about this – increase sales, and reduce costs. Cost reduction is usually the first option that most companies look at – since it is more or less under their control. Examples include reducing workforce, closing down some part of operations, restricting travel, perks etc, declaring bankruptcy and getting themselves re-organized etc. However, this has a definite limit in how far a company can go. Once you go beyond the limit, cost reduction cuts into the bone, and becomes counter productive.
Although it is more difficult, and more risky – some companies do try to spend their efforts on increasing sales in bad times. It is often counter-intuitive. Why would you try to increase sales when you know that nobody wants to buy? duh
Well, for one – there is no limit to the upside. Unlike cost reduction, increase in sales do not have an upper limit (assuming capacity increases etc are possible). Nevertheless, it is a bumpy road and much more painful to achieve than cost reduction.
Why do people not buy in bad times? It is not that they don’t buy – they just won’t buy at the same terms as in good times. For example, a widget that costed $100 in good times does not appear attractive at $100 in bad times to the same buyer. Sellers know this too well – and the biggest lever in bad times is PRICE. If you lower price, you could generate more demand for your products. This is a complex topic – optimizing price is a very difficult activity, and needs analysis of several variables. Good news is that there are some extremely sphisticated software suites that specializes in price optimization – including one that SAP re-sells. The not so good news, is that you need an equally sophisticated business process to make best use of such software.
Price optimization has not captured the imagination of every company for a couple of reasons . Some companies are in monopolistic markets, and have huge margins. They don’t need a computer program to tell them how much lower they can price. They will use semi-automated processes to do so, and will generally be succesful. Some other companies are not in monopoly markets, but they realize the necessity for price optimization rather late. By then, the cost of implementing it, and time to market will usually make it look like a daunting task. As a consultant, I have seen plenty of examples of both behavior. I believe that this situation will change for the better in 2009, and more companies will spend on price optimization this year.
Price optimization is not the only lever for sellers to generate demand. The other big demand generator is marketing. Marketing involves incurring a cost, and hence some companies do shy away from spending on it. Who do you think will lose their job first if things get bad for a company – the sales guy or the marketing guy? The two main objectives for marketing are to increase demand, and to increase awareness(which indirectly will increase demand again). Increased marketing spend is also a powerful lever for a company to sell more widgets in a bad period of time. This would also help prevent accelerated price erosion . Depending on your customer base, some times a lot of marketing is needed just to make customers aware that prices have been reduced.
Direct marketing is not the only option – Indirect marketing can also be a great aid in increasing demand and improving awareness. The general idea is that company A makes widget A, and sells to company B which uses widget A in making widget B. Now A and B companies will share the marketing of widget B. The rationale is that more sales of Widget B will lead to more demand and awareness for widget A. Some times, the advertisement for widget B will explicitly mention widget A, to qualify for such cost sharing. There are a few companies that do it succesfully today. I believe that more and more companies in a given supply chain will join hands in 2009 to pool their funds for marketing.
Price optimization and marketing spend optimization will lead to better inventory optimization. After all, you don’t want widgets piling up in your warehouses with no body to buy them. ( As an aside, inventory was the most complex area that I had to design in my BW developer days – for whatever reason, I had to pledge my first born before the store managers trusted the data and its implications in my reports. ).
It is also a good time to learn best practices from other industries. For example, retail companies regularly use an alogorithm called market basket analysis. This is what tells them that most people who buy bread, also buys milk and hence you should keep them nearby in a store, and that you can build succesful promotional campaigns by combining them. This algorithm can be adapted to a lot of non-retail scenarios too.
To round off the discussion – I cannot over emphasise the need for integrated planning. Nobody has infinite resources, and planning is all the more important in lean times. Apart from financial and cost planning, most good companies have a good S&OP (Sales and Operations Planning) system in place – usually semi-automated. I would say that they are missing an important piece to complete the planning picture – and that is Marketing. Unless you integrate and make it SM&OP (Sales,Marketing and Operations Planning), you are limiting yourself from having a powerful tool in your planning toolkit.
So there you are – this is not a ’10 things to do to win the war’ , but just some thoughts that have been occupying my mind. I do intend to crystalize this some more in my mind, debate it with the community and learn from the process. I am looking forward to discussing this with all of you.
Have a great 2009, folks – Hey, it might not be as bad a year after all as I fear !