Business

Friday October 2, 2009

Boards’ role in managing competition

Whose Business Is It Anyway - By John Zinkin


They must understand their competitors’ operations to deal with the risks posed by them

MOST boards have a good idea of who their head-to-head competitors are and how they compare with their company – at least in terms of the products they offer.

That is good as far as it goes, but it does not go far enough.

Boards must understand the strategic competitive advantage of companies they compete with and the wider context of Michael Porter’s “Five Forces” framework.

Today, I will deal with strategic competitive advantage, leaving the “Five Forces” to next time.

Not all companies in a market segment have the same commitment even though they appear to be furious head-to-head competitors.

For example, a conglomerate for whom a given product market is only one line of business in its portfolio will be less committed to defending every percentage of market share than a company for whom the segment is its entire business.

In assessing whether a competitor has strategic staying power, it is therefore essential to understand how important the product market is to its bottom line.

It is also critical to understand whether the competitor has deep-enough pockets to do whatever it takes to keep up with changes in taste and technology to defend its position.

This requires a deep knowledge of the competitor’s value chain and where in that value chain are its sources of competitive advantage. Do they come from its:

● Capability in R&D: Not just its track record for research, design and innovation, but also its ability to bring products to market quickly and commercialise its ideas?

● Skills in purchasing: How good is it at buying better and cheaper than its rivals and ensuring continuity of supply?

● Approach to sourcing: Does it get its products from domestic suppliers, even though they might be more expensive because they are closer to home and therefore more flexible; or do they come from some complex global supply chain that could pose a reputation risk if something goes wrong over which they have no control?

● Manufacturing philosophy: Does it make or buy what it sells and if it makes, how good is it at producing quality products at competitive prices? Has it achieved economies of scale at the expense of flexible production, or has it focused on flexibility above all?

● Logistics: How good is it at turning around an order and getting it to its customers within a competitive time frame?

● Distribution: Does it have exclusive arrangements and how committed are its distributors to its products or does it use intensive distribution where its products are offered to all and the lowest cost route to market wins? How well does it manage channel conflict?

● Marketing: How good is it at managing the nine elements of the marketing mix (product, price, promotion, place, people, physical presence, policies, processes and procedures)? Does it have a good portfolio of brands that are distinctive, relevant and loved?

Does it understand which of its customers are profitable and which are cross-subsidised?

● Sales: Does it have enough sales people to cover the decision makers in each segment? Are they well trained and disciplined (with proper journey plans and call reports)? How good are they at assessing prospective client needs and at suggesting appropriate solutions?

Are the sales people “box sellers” or solution sellers? Do they understand systems thinking? Are they highly specialised, focused on a limited range or are they generalists covering a wide portfolio without understanding the key selling differentiators in depth?

Are there relationship managers whose job is to coordinate multiple sales approaches to a single client from different product divisions?

● Service: If after-sales service is involved, how good is it? Are the products reliable (they do not break down often); are they serviceable (they are easy to repair when they do break down)? How quick are the service response times and can equipment that has broken down be repaired in one call or does it take several visits by engineers to get equipment functioning properly again? How long is average “downtime”?

● Finance: How is it financed? How fast can it grow without having problems of funding? Does it have access to credit lines and is it good at managing its working capital? How much does it have to pay for its credit lines?

What is its risk-adjusted cost of capital and does that give it an advantage in setting hurdle rates of return, so that it can afford to invest in projects that would otherwise be unattractive?

What are the margins overall and by-product line and how important is any key product line to the profitability of the business as a whole?

This list is not exhaustive, but it does indicate how much boards must understand about their competitors to deal with the risks posed by them.

● The writer is CEO of Securities Industry Development Corp, the training and development arm of the Securities Commission. Readers’ feedback is welcome. Please email starbiz@thestar.com.my

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