With the advent of this new business world, the big question for you to answer is how, and how quickly, to make your transition from the old one. Right now you have customers living in two worlds, so they buy in two completely different ways. As a result, you have two conflicting systems to balance, and managing cash flow is a major challenge. Selling to old world customers provides cash today, while investing in the new world requires cash. Unfortunately, though, once the transition from old to new begins for specific industries, it moves like a tsunami.
The first, and most important, step for you to take is to change your mindset in the follow areas:
1) Accept commoditization on a transactional basis.
Like it or not, the world is rapidly changing. Like it or not, almost any product or service can be commoditized when customers are educated about them and have choices in their providers. Customers and clients will commoditize yours as soon as they can, and the process is only going to accelerate. To survive, accept the following:
a) You no longer need to be the “Best”. Your goal is to make your prospects’ lists as one of three or four equally good providers. Embrace the idea of “good enough”. If you are good enough, you get to bid. If you are better than good enough, your costs will probably be too high and you might not get the chance. Once the word “bid” comes up, accept that you are a commodity.
b) The secret to success is to continually move your “Kenny Rogers line” farther to the left so that you can continually lower your costs. Innovation provides a competitive advantage by allowing you to do things better than you used to at a lower cost. This is very different than the old model where innovation allowed you to charge higher prices.
c) You have to become excellent at developing electronic relationships with many customers. One-on-one, face-to-face selling is quickly becoming obsolete. Customers just don’t want to, or expect to, talk to you anymore.
d) The old world model of selling is a death spiral: you send in a salesperson (i.e. someone that your customer doesn’t want, or need, to see) to sell them something that they probably don’t want. Old world selling is expensive and slow. Doubling down on your selling efforts raises your costs, slows your results and prices you out of business.
For many CEOs, especially those from the old school, accepting the notion of inevitable commoditization can be very difficult. It’s also hard to accept that with the internet, knowledge transfer which used to take months or years, now happens almost immediately. Adapting to that rate of change is difficult for those who cling to the old model. It eliminates the comfortable old ways of doing things slowly and carefully and valuing personal relationships.
2) You are no longer selling. Customers are buying, and they are becoming VERY educated.
Selling only increases cost in a price-driven and buyer-controlled market.
3) Your current employees are effective and good people, but many will not have the skills to help in your transition.
While employees young enough to have been born using technology understand the new business world, many of your older employees may not have the skills necessary to lead you into the new world. Also, employees who only understand the old world often resist change and fight to keep the familiar status quo.
4) Employees must increase productive output or be replaced either by technology or cheaper labor.
Competing on price means that everyone in your company is working on finding better and cheaper ways to do things so that you can keep your price low and maintain profit.
5) Branding and marketing are key skills going forward.
They get you on the customer’s short list. Productivity, efficiency and innovation will move you up the list.
6) Social networks will control your image.
Online groups/apps such as “Yelp” will form for specific industries and products. Potential customers will research these groups to create their short list of companies from which to buy.
7) Your customers are getting bigger.
As your customers consolidate, the number of customers that you serve is shrinking, but each one is getting bigger. They likely combined to improve buying power and are sophisticated buyers.
8) Use innovation in your processes to reduce costs in order to keep lowering your price.
Use innovation to improve your processes and make your products and services better and cheaper.
9) Eliminate value-added pricing.
Turn value-added options into profit centers! Net profit rules and gross margin is meaningless.
10) Negotiate with your suppliers to eliminate their fixed costs (SG&A) from your pricing.
The company that changed the world with logistics and buying was Walmart. They perfected logistics and buying skills in order to provide their customers with the lowest price possible. Each year they expect their vendors to provide better products and service at a lower price. They now dominate the world with efficiency and buying power, and (usually) they offer the best price. Most companies haven’t embraced this philosophy: you need better buying skills to keep your costs and prices low.
Checklist for your Transition Plan.
What steps do you need to take to make the change from the old business world to the new one? Here are some specific steps to consider.
Determine your time line.
Each industry is in a different phase of transition. For example, construction and technology have already moved significantly into the new world.
First, determine how quickly the shift will happen to you. Consider these questions:
Quality and Operations
Buying, Supply Chain
The good news is that you can generate higher quality and better profits even as you lower your prices. To succeed in the new economy, stop trying to add value, and, instead, focus on lowering your costs using innovation and technology. Like it or not, you need to get used to doing business a lot differently than you have in the past. The necessary skills for the future are buying, logistics and marketing. Some companies are struggling to come to terms with this fundamental shift. Don’t let yours be one of them. How prepared are you for the new economy?