Management in a time of crisis: applying all three profit drivers

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Management in a time of crisis: applying all three profit drivers

  1. 1. Management in a Time of Crisis:Applying All Three Profit Drivers15 Quick Wins Bonn Office Haydnstraße 36, D-53115 Bonn, GermanyProf. Dr. Hermann Simon Tel. +49 228 9843-115, fax +49 228 9843-380 e-mail: hermann.simon@simon-kucher.comBonn, December 2008 Internet: www.simon-kucher.com
  2. 2. Think about this sentence “When the storm comes, some build walls, the others build windmills.”(8H01X068) -2-
  3. 3. Do we understand this crisis? Devoting some thought to the crisis is worthwhile. Only then will one be able to react appropriately. What was it like in the past “boom years” (schematically)? Sales/Demand Production/Capacity 110 100 Consequences: Supply/capacity bottlenecks/price increases of raw materials and supply/increase of raw materials. What should have been done? Increase prices even more strongly!!(8H01X068) -3-
  4. 4. The ideal situation: Balance One never experiences this situation! One either has too many or too few people. Sales/Demand Production/Capacity 100 100(8H01X068) -4-
  5. 5. And now the crisis… This crisis is a revenue/sales crisis, not a cost crisis. Most affected are “postponables”, i.e. products and services whose demand can be postponed. Sales/Demand Production/Capacity 100 75 2. 1. What should one do? 1. Reduce production/capacity 2. Fight hard against volume and price declines(8H01X068) -5-
  6. 6. This crisis is too serious, …to counter simply by cutting costs.  If sales tumble by 25%, even a 10% cost reduction will not rescue the company.  The effect of cost reductions sets in too slowly  In times of crisis, all three profit drivers (price x volume – costs) must be applied to the fullest extent.  The primary goal must be to avoid a further decline in volume and prices – not necessarily to achieve improvements.  The speed of the effect is at least as important as the magnitude of the effect.(8H01X068) -6-
  7. 7. Quick win 1: Accept volume cuts before price cuts A crisis means a drop in volume and/or price. A volume cut is less damaging to profits than a price cut Calculation: Price 100, volume 1 million, costs 60  Profit margin =€40 million 10% price reduction to 90  Profit margin =€30 million =-25% 10% volume reduction to 0.9 million  Profit margin =€36 million =-10% Case: ArcelorMittal “to drastically cut monthly production around the world”. Effect will “soon become evident in the spot market prices” (FAZ, November 17, 2008) Lesson 1: In times of crisis, actively reduce volume and aim to keep prices stable – never the other way round.(8H01X068) -7-
  8. 8. Quick win 2: Bring about an industry capacity reductionThe same applies to the industry as a whole. Reduce supply across the industry/relieve market pressure to keep prices as stable as possible. The (common) misconception: Prices are lowered in the hope that volumes will remain stable or market share will grow. The inevitable result: The competitors follow suit. Price war, tumbling margins – and the overall volume does not increase. Quick wins: Clearly signal the supply reduction – and stick to it. Also state clearly that market share is being defended. Case: TUI and Thomas Cook, the largest tour operators, have sharply decreased their capacities across Europe. Lesson 2: In times of crisis, make every effort to avoid price aggression and price wars; they are entirely counterproductive. Instead, work to achieve an industry-wide supply reduction.(8H01X068) -8-
  9. 9. Quick win 3: Fight against falling pricesFighting against price declines makes a difference!Simon-Kucher study Successful suppliers Successful suppliers Less successful Less successful suppliers suppliers Price cuts demanded by 4.7% 5.1% manufacturers Actual price cut 1.4% 3.8%Compared to -3.8%, -1.4% is a huge success!Lesson 3: In times of crisis, price increases are often illusory. Defending prices more effectively than the competition is a success.(8H01X068) -9-
  10. 10. Quick win 4: Give discounts in kind, not price discountsDiscounts in kind have several advantages: Price level remains (nominally) stable. Larger volume and more employment instead of lower prices. Generally better in profit terms if percentage remains unchanged. Case 1: Boat builder - Offer for retailers: buy five boats, get one free - Actual price discount: price 100, 500 paid instead of 600, 100/600 =16.7% - Volume =6, revenue =500, profit margin =140; with a direct discount of 16.7%, volume =5, revenue =420, profit margin =120 Case 2: Manufacturer of designer furniture additionally offers a sofa. Very positive experience. Lesson 4: “Actual” price cuts may be unavoidable in a crisis situation. Wherever possible, they should be viewed as discounts in kind, not as price discounts.(8H01X068) - 10 -
  11. 11. Quick win 5: Boost service Service has been neglected in the last three to five years due to capacity bottlenecks in production. Step up service selling activities. Crane manufacturer: 40% existing service contracts; aim to increase to 50%. Redeploy production redundancies in service (dual effect: relieves pressure on production, strengthens service). Case: Media-Saturn previously offered no service. New: Powerservice 24. Technicians deliver and install goods for a fixed fee. Lesson 5: Service often harbors short-term potential. At least some of this potential can be mobilized by increasing resources.(8H01X068) - 11 -
  12. 12. Quick win 6: Redeploy office staff to sales force Common view: Office staff are not ideal salespeople. But: Even small sales successes are better than idling in the office and a further drop in morale. Case 1: In the 1993 crisis, Würth sent 10% of its office staff into the sales force – with successful results. Case 2: Boat builder organizes sales shows in the Middle East, primarily with office staff. Lesson 6: More people achieve more sales and more revenue. The right people with the right sales tricks can be successful on the sales front.(8H01X068) - 12 -
  13. 13. Quick win 7: Reduce risk for the customers Customer problems during a crisis: fear, risk aversion, insecurity Objectives: Redistribute risk, reduce insecurity Case: Enercon service prices are linked to the profitability of the wind turbine for a 12-year period. Over 85% of customers opt for the 12-year contract. Lesson 7: Understand the customers’ insecurity and risk perception, and offer appropriate solutions.(8H01X068) - 13 -
  14. 14. Quick win 8: Offer new business models Every problem is an opportunity. A new business model can help you to grasp it. Case: Kofler Energies covers the energy-saving investments. The customer pays nothing. A 10% cost saving is guaranteed to the customer. Kofler receives all savings above this level for 10 to 15 years. Lesson 8: A poorly solved problem is an opportunity. Consider whether it can lead to new business for you.(8H01X068) - 14 -
  15. 15. Quick win 9: Exploit financial power for sales The credit crunch is deterring many customers from spending. Being able to grant/finance credit is a huge competitive advantage. Case 1: Enercon covers 50% of the service price for six years when a 12-year contract is signed. Case 2: German machinery and engineering firms in Russia. Very positive effect regarding financing. Lesson 9: When capital is scarce, financial power is a tremendous sales advantage. But weigh up the risks carefully.(8H01X068) - 15 -
  16. 16. Quick win 10: Increase little-noticed price parameters Almost every company has numerous price parameters. Many of them receive little attention from customers and can potentially be increased. Optional extras, special equipment, services, replacement parts, etc. Case: Private banking with approximately 250 price parameters. About 50 of these could be increased, some by switching from annual to monthly fees. Caution: Do not overuse this tactic! Lesson 10: Understand customers’ price perception in order to raise prices in a targeted manner. This is not observed often enough.(8H01X068) - 16 -
  17. 17. Quick win 11: Expand sales portfolio In times of crisis, the sales force is not fully occupied, while other (non- competitor) companies need additional sales capacity. Case: A confectionery manufacturer with a strong but under-utilized sales force swaps with a chocolate manufacturer. Each now also sells the products of the other (a win-win situation). Lesson 11: Under-utilized sales capacity can be usefully employed by expanding the portfolio. Swapping under-utilized capacity is even better, because sales of your own product increase as well.(8H01X068) - 17 -
  18. 18. Quick win 12: Step up bundling and cross-selling In times of crisis it is especially important to use strong customer relations for bundling and cross-selling. Bundling and cross-selling allow price concessions that are not possible for single products. Many companies cut the number of suppliers when crisis strikes. Case: Norton Anti-Virus Software makes widespread use of bundling for all of its products. When three licenses are purchased, a license for another product (Norton Ghost) is added. Lesson 12: Bundling and cross-selling should be used to better harness the potential of existing customer relations.(8H01X068) - 18 -
  19. 19. Quick win 13: Draw customers from weakened competitors The crisis has a widely varying impact on different companies. It is easier to win customers away from companies that are weakened. Case: A bank that is largely unaffected by the crisis calls customers of banks that are having difficulties. A very effective campaign with an immediate impact. Lesson 13: Markets are redistributed in bad times, not good times. Opportunities will not fall into your lap, however; you need to fight for them. The chances of winning customers from competitors are especially high in times of crisis.(8H01X068) - 19 -
  20. 20. Quick Win 14: Change over from new business to renovations/aftermarketIf the new/OEM-market no longer runs, one must apply resources tothe aftermarket/replacement market/renovations market.Case 1: Manufacturer of insulation material. Sales activities are completely re-grouped to focus on the renovation market.Case 2: Automotive supplier (consumables), OEM-market shrinks. Increased efforts in the aftermarket/replacement market trade, user.Lesson 14: A quick regrouping of sales and marketing from original equipment/OEM to refurbishment/renovation is indicated.(8H01X068) - 20 -
  21. 21. Quick Win 15: Top-sales people – excellence to mobilize everybodyWhich sales people manage to sell even during a crisis? What makesthem different? How can one use their tactics for all sales staff?Case: Auto supplier (€5 billion turnover). Quick analysis – What makes the top-sales people different? Systematization. Sharing tactics with all sales people (in the project 6 tactics that make top-sales people different were identified).Lesson 15: Even in the crisis there are winners. Their knowledge must be utilized to mobilize the entire sales force.(8H01X068) - 21 -
  22. 22. How to proceedThe following questions must be answered in each case:  What exactly must be done?  How should the measures be implemented?  Who will be responsible?  What will the impact be on sales, revenue, costs and ultimately profit? Comparison with basic scenario  What impact will result, and how quickly?(8H01X068) - 22 -
  23. 23. How to proceedQuick win What to do? How to do it? Who is What will be How quickly? responsible? the impact? (profit)Reduce volume, not priceIndustry-wide supply reductionContest falling pricesDiscounts in kind, not price discountsBoost serviceRedeploy office staff to sales forceReduce risk for customersOffer new business modelsExploit financial powerRaise price parameterExpand sales portfolioBundling and cross-sellingWin customers from competitorsSwitch from OEM to aftermarketMobilize top seller tactics(8H01X068) - 23 -
  24. 24. Project exampleTo do: 100 office staff will be redeployed to the sales force. Existing sales force of 300 staff will therefore be increased by 33%.When? ImmediatelyHow? 1 day of training, 1 day shadowing sales reps. Compile a target list at the same time. To sales force on the third day.Who is Sales managers in cooperation with office managers,responsible? group leadersExpected 10% sales increase compared to basic scenarioimpact: -Office staff achieve approx. 1/3 of sales force staff -Sales elasticity approx. 0.3 (empirical value)When? Within three months(8H01X068) - 24 -
  25. 25. The Simon-Kucher Offer Quick and dirty – Analysis with immediately effective measures Duration: 1-2 weeks Costs: €25,000-€50,000 Immediate measures – Workshop Duration: with preparation, preliminary talks, final report, 1 week Costs: €25,000-€30,000 Sales and marketing excellence program Duration: 1 month Costs: €80,000-€100,000 Comprehensive analysis and strategy in sales and marketing excellence Duration: 3-6 months Costs: dependent on size of team(8H01X068) - 25 -

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