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Tough times

Tough times
Image courtesy of Paul FreeDigitalPhotos.net

Image courtesy of Paul FreeDigitalPhotos.net

How to negotiate difficult market conditions

“It’s tough out there” a veteran entrepreneur said to me recently, “this is the worst I have seen in 30 years of trading in this market”. Many businesses are really feeling the pinch as the long lasting effects of the global economic downturn slash budgets and postpone new developments. The phrase about tough conditions is heard frequently.

In the local marketplace labour unrest which often turns violent, energy cost and availability concerns, high inflation, increasing red tape and low labour productivity add to the problem. During the good times competition increased with more companies being launched or expanded. This means a shrunken market is being contested by too many suppliers with high and increasing costs. Buyers become more demanding because they can – there is always someone who will shave the margins to the bone just to keep the factory ticking over and some staff employed.

Effective action

Good entrepreneurs react to situations like this; they do not simply accept that times are tough and that their businesses will underperform. The business needs to win more of the scarce business, effectively denying this slice to competitors, and it needs to compensate for increased costs by increasing efficiencies.

To increasing competitiveness in order to win business away from others, the entrepreneur has to become better or the best at delivering exactly what the customers want. Unthinking entrepreneurs assume that competitiveness is only about who has the lowest price, but extensive studies have shown that price, important though it is, usually ranks below factors like reliability of delivery date, product quality and trustworthy after sales service for almost all buyers. These factors are under the control of the entrepreneur and he or she should embark on a vigorous campaign to cut delivery and quality lapses and increase after sales service, along with better information for customers, increasing value through aspects like better documentation, end user training, making it easier for the customer to buy, scheduled customer needs reviews and other similar initiatives.

Quality and price

Improving quality should pay a double dividend. Great quality relative to the price improves competitiveness substantially. At the same time providing great quality means less warranty claims, less scrap and rework, fewer returns and re-deliveries and saves management time and focus, all of which reduce costs. Quality is non-negotiable in bad times; it must be controlled rigidly by everyone in the company. Quality failures must be intensely investigated and appropriate corrective action / preventative action applied so the business does not repeat its mistakes.  Bizarre though it may seem this may be a good time to look at the methods used in implementing standards like ISO 9001 to measure and improve quality and standardise business processes, or buying an appropriate software system to process and control more effectively.

Price will always remain as an important consideration so the entrepreneur should do all in his or her power to cut the costs of the goods sold and so make the price more competitive. This can be done by more effective buying, optimising stock holding, increasing factory yield if a manufacturer, reducing delivery costs, offering price incentives for larger orders or loyalty rewards and making the sales process more efficient. But the price the customer pays is not only the price tag, the cost to the user can be reduced by included delivery cost, better warranty terms, included services, buy-one-get-another-at-cost or last minute prices, and again these are under the control of the entrepreneur.

Cost management

Cost management is often associated with slashing the marketing or training budgets, but there are much better ways of forcing costs down while not handicapping the business. Take a simple example. For every error on an invoice the business must incur the cost of reversing the wrong invoice and preparing a correct one. The buyer will usually seize on the tiniest error to refuse payment if it is not corrected, and larger organisations like government departments will not tell the entrepreneur this – they will simply not pay. The business incurs the cost of unpaid bills, interest, follow-up, endless phone calls and finally a revision of the invoice. Far better to do it right initially and save all those unnecessary costs.

Another example is orders that should have been delivered but have been delayed. This may stem from transport issues, missing items needed to complete the order, or simple neglect of duties. This is a surprisingly frequent problem, and a very costly one. An angry purchaser whose expected delivery date was not met will need pacifying and may buy from a competitor next time. Delivery date reliability ranks as one of the highest buying criteria in many studies. In the meanwhile the undelivered order is taking up space, will now have to be delivered as an emergency load which mean more costs from inefficient transport loading and routing, and the goods have not been paid for, with the attendant cash flow costs. The buyer may deliberately hold back payment as a tit for tat punishment for letting him down.

These are only two situations which should never happen. An entrepreneur who cuts these and other silly errors from his business will show substantial savings – with improved customer service as a by-product.

Tough times can be overcome, bit this needs careful thought, intelligent implementation of new ideas, the drive to make them succeed and sound judgement. Fortunately entrepreneurs are usually good at all of these.

©copyright  Ed Hatton. All rights reserved. You may republish this article or extracts from it provided you state I am the author, acknowledge my copyright and provide a link to my blog or my e-mail address.

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