Wednesday, August 24, 2005

How would a small company prevent a larger company from squeezing it out..??

I had a chat with a guy working in the biometrics field yesterday in Belgium. He had a problem that I'll illustrate below..

He was contracted by an American sensor company to develop business in biometrics.

He worked hard to understand how the sensor would fit in this market and then developed a few relationships with some large IT companies. Once these IT companies had validated these sensors, and were ready to talk of supplies, he set up a sourcing relationship with the sensor company at a certain rate and sold it to the IT company at a slightly higher rate. The IT company on its own sold it to end user customers at an even higher rate.

Once this was established the IT company went online to see if it could get the sensor cheaper, and found that this sensor was being sold by a large electronics retailer online for half the price. They switched suppliers.

Does this story sound familiar? It should. It's all too common - Parallel stories are told by small supermarkets and grocers when Walmart came to their neighbourhood. Special stores go out of business when category killers go after their customers.

How would you solve this issue of disintermediation (a fancy word for getting squeezed out)?

The answer - unbundle your solutions into distinct services and the product.

When you are getting into a relationship with a customer, sell the customer the service where you will help the customer figure out how to use the product and provide more value/features/... to their customers. You also provide a service where you will source the product at the lowest cost, and simply add a tiny markup to the product and sell it on to the customer. Effectively you are saying that you will take care of the supply chain of the product to the customer. If the product can be sourced cheaper, the savings will be passed on to the customer.

At one point the services will end, and the customer only needs the product. He then continues to buy from you, since you do all the work of finding cheaper sources for the product, and the customer gets all the credit/most of the cost savings.

As you go forward with this relationship with the customer, you will find new products to help the customer, and the cycle continues

paid 'development' services + new product ->
paid 'maintenance' services + old product ->
old product ->

paid 'development' services + new product
paid 'maintenance' services + old product ->
old product ->

...


The pricing you should do based on the value that your services bring to the customer, and cover your costs of finding new cheaper sources for existing products and new high value products.

Should you invade a new market in search of growth?

I chanced upon an article on the Fast Company blog, and happen to have strong feelings on how companies should get into business development opportunities in new markets.. Here's a copy of the rant that I posted on that website.. :-)

You in your company need to FOCUS, FOCUS, FOCUS

But on what?

To answer that, ask yourself
Is there a basic problem that you can solve for your current customers?
Would your customers expect "YOU" to solve that problem?

To do that, you have to figure out what your brand is all about! Once you have that done, you'll know how to extend your brand.

If you are selling a product, you could sell services around that product and solve customer problems. If you're selling services, you could package some of them together to productise your services. Perhaps there is an activity pretty near your activity - in the client's mind. You could try and explore that activity, start with services and then products.

Chasing new industries in the hope of growth is usually unsuccessful, if your brand does not travel to that industry. I doubt Boeing would try to make cars, or even car components. The brand doesn't travel to automobiles. But it may travel to a select niche - high performance racing cars.

Let brand extension and customer value & perception analysis principles guide your decisions on expansion into new industries.

Hope this helps

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