Business is based on relationships.
It doesn't sound very profound, but we are
all in business to sell our products or
service, and many of us invest considerable
amounts of ingenuity, time, effort and
money to make our offer better than our
competitors. As important, if not more so,
is the human factor, the relationship
between customers and suppliers.
It's a mix of chemistry and trust, and an
acknowledgement & respect for the other.

Get them out of balance; get too much
me-me-me on one side of the relationship
and its days are numbered. The history
of the market, any market, is littered with
examples of dominant firms who forget that
a relationship consists of two consenting
businesses. All sustainable business
relationships, whatever the differences in
size and fortune, are based on fairness
and profitable trading. Get it wrong and the
hard done by or put upon will reassert the
interests of their firms. They'll insist on a
fairer division of the benefits and margins,
or find an alternative supplier.

We enter into business relationships to make money and grow.
Not every business does make money or grow all the time, but if one side, customer
or supplier, consistently get the worst of the deal the relationship won't last.

Who is swimming naked?

Well, of course, I can hear you say. That's obvious, and it is, but it goes to the heart
of the different business models and strategies different systems companies have
adopted. All strategies and business models incorporate certain assumptions about
the market, and when markets change they expose those assumptions.
As the great American investor, Warren Buffett quipped: "only when the tide goes
out do you discover who has been swimming naked". And the tide has gone out.
Markets are changing, and what worked well when the market was growing strongly,
isn't working so well in more difficult markets.

Never mind the spin, think about the assumptions

A hidden assumption in systems companies' strategies is about growth and how
best to exploit it. In a fast growth market, the more fabricators a systems company
has the more likely it is to grow fast. Of course, there is always the question of
balance. Set up, say, 20 fabricators in greater Birmingham and they won't be able to
move without bumping into each other. Their sales people will spend time competing
against others with essentially the same product, and it won't be long before all 20
are cutting each other up to win the volume they need to cover their costs.

Set up too few, and your brand and your fabricators will lack critical mass, and risk
missing out on the growth. It's all a matter of proportion, the Golden Mean, making
sure the interests of both parties are exactly in balance.

A cheap and cheerful, high-density, mass market strategy

When the market was growing fast some systems companies adopted a cheap and
cheerful, high-density, mass market strategy, which maximised the return and growth
opportunities for the systems company. Because the market was growing fabricators
did not feel constrained. They could grow without taking too much volume from each
other. The benefits of a low cost system helped them to win business easily & grow,
although not as fast or profitably as the systems company. But when the market fell
back at the end of 2004, having, say up to 20 hungry fabricators operating within your
area, competing with the same low cost product for a reduced level of volume drives
down prices and margins much faster than other systems.

Fabricators of lower density, premium systems companies are affected by the
reduced market volume but are less troubled by same brand competition so they
are better able to compete at sensible margins. In this case, the interests of the
system company and its customers are in balance. Both have to work harder
to compete in a more difficult market, but the interests of one are not subservient
to the interests of the other.

They get used to having a bigger slice of the pie It takes time to change strategy, and giving up your advantage isn't easy, particularly for a mass market budget company. You get used to the advantage, and perhap think that's how it should be. The sums are easy. Take out 100 fabricators buying at £X a metre to improve the relationship and give the other 300 a

chance of making more money, or whack up your prices and get hit by other systems companies? The calculation is not very persuasive. You can imagine them thinking: 'Hmmm, I think we'll stick with things as they are and persuade the fabricators to stick with it too. In the meantime, that strategy is shot, so we'd better think up something different for the new market, with or without those complaining fabricators.'

It is good for them, but is it good for you?

Strategy is a two sided coin. Years ago, when General Motors was a force to be reckoned with they boasted famously that what was good for General Motors was also good for US foreign policy. It was a good line, but having the US Government make policy to suit General Motors did more for GM in the later years than it did for the US.

Is your supplier's low priced, high-density, mass market strategy benefiting you both?
If your sales and profits are not what you need, or what you think they should be,
measure the balance of benefits between you and your supplier. Is cheap no longer
cheerful? If you need a fairer relationship don't wait for the Misery Index to cripple
your company before you find a business partner with a better sense of balance.

More information: Duncan Douglas, Spectus Window Systems: 01625 420400