4/1/2007 | 5 MINUTE READ

Insight: Leaving Commodityville

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Too many suppliers are trapped in a place where their offerings are seen as nothing more than commodities.


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In the ever-changing and complex world of automotive suppliers, many are attempting to re-invent their business models not just to overcome global competitive threats, but most are looking to give themselves a chance to take the next bus out of “Commodityville.” Most are seeking to build and offer a more uniquely differentiated product that generates better profits with customers. But how do you do it? And whom do you sell to…new customers? Different markets? Or can you re-position yourself with a new offering to the same customers and get the profit you expect
and deserve?

As suppliers wrestle with the question of “What do I want to be when I grow up?”, it is natural to examine past performance and future opportunities. Investments in people, process, and technology, as well as deployment of strategic assets in areas such as sales, engineering, product development, and marketing are all affected when making tough choices about the future state. In the end, with the right amounts of empirical data, research, and entrepreneurial gut instinct, you make business decisions, move ahead, and hope that you have a great product to bring to market. Of course you want to serve the needs of your customer, but you want them to be unable, or less likely, to view your product as a commodity and more likely to see it as unique, branded, or differentiated. But how do you get to that point with complex global market conditions often working against you?

To begin with, it is imperative to have the engineering bandwidth to create, test and launch products that customers and end-consumers really want. But just as important, it is equally crucial to have a successful business design that supports these commitments. And while you must be able to first conceptualize in-demand products, you must also deliver them, and then have the marketing and distribution savvy to put these products in the right queues to obtain
the right profit.

Of course, only one automaker and few suppliers have what we call the “Lutz factor.” We believe that the main reason that Ford has suffered so badly over the past several years is a result of having little or no product that the buying public “really has to have.” This was only made worse by their abandonment of the full-size and luxury segments, and their unwillingness to take any design risks. Reversing this trend and getting product into the market that consumers want and will pay for could restore Ford’s fortunes, as well as those of its suppliers, if those suppliers are able to articulate their value proposition and avoid commoditization.

So what specific things are holding back many automotive suppliers from achieving the success and profitability they are seeking? Here are some of the factors:

Most suppliers are not clear about their overall strategic positioning and the fact that strategic positioning has a shelf life.
Effective strategic positioning requires continuous feedback from the marketplace. Many companies lose direct contact with their customers and markets and its knowledge is filtered. It requires economic and business tradeoffs, so strategy makes choices about what not to do, which is as important as choices about what to do. At its most fundamental level, strategy is about being different.

Successful suppliers have fairly simple business designs focused on markets and customers, not functions.

Many suppliers tend to add unnecessary complexity—layers of bureaucracy—to their organizations. This happens when they grow organically or after they complete an acquisition. Organizationally, the relationship of departments and functions may not be as clear as it should be as the company moves into new markets or regions with customers. Also, just as their customers are doing for their own gain, successful suppliers are actively leveraging their supply base as they grow, and their business designs are scalable to match that growth.

Many great ideas fail or take years to be adopted because of a non-existent or poorly designed and executed business development process.

Dollars can always be found to do another prototype, but it is difficult to get funding for market tests, competitive pricing studies, or sales support materials. A true, robust business development process incorporates product
development and simultaneously creates the successful new product launch process. If the two are not symbiotic, the chances of strategy failure are greater.

Operational and customer-directed issues distract suppliers from determining their biggest sources of performance loss.

Many times, the issue is as simple as inadequate or unavailable resources, a poorly communicated strategy, or actions required to execute not clearly defined. Often we see that nobody is clearly accountable for execution in the program pre-launch stage or in the overall program management. This is often due to inflexible organizational silos and even a dysfunctional company culture. Another common oversight is inadequate consequences or rewards for failure or success, a particularly hard-to-manage but crucial element faced by companies trying to become truly global.


The End Destination

Consider a continuum with “Job Shop” at one end and “Branded” at the other. By moving toward “Branded,” suppliers have more control in setting and keeping the desired price point with OEMs because their product is usually widely accepted as a standard or viewed as unique and less able to be commoditized. Therefore, the supplier can exert leverage with the customer and better control its own profit destiny. Conversely, the supplier moving toward the “Job Shop” category has less control over the pricing discussion and more chances of being viewed as a pure commodity. Clearly, there are suppliers in the “Job Shop” category who are making money. They have a clear vision of where they want to take their product or service, they are able to articulate the value they bring to their customers, and the customers acknowledge it and pay for that value. But too often we find job shops and process-oriented suppliers who cannot clearly state their value proposition. They have not learned when to say “No,” and thus trap themselves in situations where they continually take on more and more unprofitable work. In today’s complex and hyper-competitive global automotive market, this is the road to oblivion. The keys to avoiding that wrong turn, besides developing unique and exciting products, is to find a good roadmap to where you want to get to. Ultimately, the right business design and effective strategies will help lead you out of Commodityville and put you on the road to success and profits.