Lee Rust, Owner, Florida Corporate Finance
Not long ago, I had a corporate client which was a relatively large manufacturer's representative for a narrow line of large industrial products. For over two decades that company had prospered. For its owners, it generated modest but consistent revenue growth and a nice stream of profits and personal compensation. With little warning, however, several subtle changes in technology combined with some manufacturing problems at this client’s major supplier resulted in a sales decline which quickly led to losses. Struggling to catch up, my client changed suppliers. The old supplier then engaged a competing sales organization and cut prices as a means of maintaining market share. My client’s losses increased.
A new mortgage produced enough working capital to support the continuing losses. Finally, the solution turned out to be the addition of several new product lines, an eventual increase in prices by the competition which couldn’t sustain such low margins indefinitely, and a severe reduction in my client’s overhead. That company barely avoided liquidation.
There were two lessons in this sequence of events. First, don’t let a single supplier hold the future of your company hostage to a changing marketplace and, second, don’t ever underestimate the importance of market intelligence.
As to the first of these lessons, you’ve often heard that you shouldn’t let any single customer represent more than 25 percent of your annual sales. Such a customer can hold you hostage to their control over the prosperity of your company. They can dictate prices as the big three U.S. auto makers did to their parts manufacturers during the early 2000’s driving a number of those major companies into bankruptcy.
The same is true for your suppliers. If a single source supplier represents a majority of your products, components, or raw materials, a change at that supplier might cripple your company. Why leave the financial health of your company in the hands of another company over which you have no control? Examine the importance of all suppliers to your ability to service your markets. If an interruption of deliveries from any of those suppliers would have devastating results for your company, find additional sources and reduce your dependence on any single company.
As to market intelligence, I can’t overemphasize the importance of understanding and, where possible, anticipating changes in your markets which can have an impact, either positive or negative, on your company. The client I mentioned above should have seen and reacted to the changes in technology long before they resulted in a significant decrease in sales. If their principal supplier wasn’t
maintaining a technological lead, they should have located other suppliers well before the decrease in their sales led to losses.
Another of my clients is a producer of extreme weather clothing, principally for hunters and others who might be in temperatures as low as minus 60 degrees. Because that is a narrow market with few competitors, that company had prospered for years with little change in their clothing line. With consistent sales and profits, the owners didn’t see the minor changes in designs and styles introduced by those few competitors. After all, color and style had never mattered before. As sales declined and losses mounted, I was asked to sell the company in what amounted to a liquidation.
The new owner, now a new client of mine, redesigned the line without changing the technology underlying the extreme weather protection. New bright colors in striking designs made the line attractive to snowmobilers and other sportsmen and, in particular, the women who participate in cold weather sports. The addition of several overseas suppliers reduced the dependence on what had been a single and not always reliable source for the individual outer garments. And several changes in the level of low temperature protection extended the line into the industrial markets for warehouse freezers and North Sea oil platforms, among others. Revenues and profits are now growing again.
Don’t be complacent about your markets. Make sure you not only recognize changes as they occur but also anticipate those changes to whatever extent possible. React to the changes before they cause sales and profit problems.
On a frequent basis ask yourself: What product, service, or other changes are my competitors introducing that could have an effect on my sales? What changes in the needs, demands, or buying decisions on the part of my customers might cause them to buy from my competitors? What technological changes might make my products obsolete? How are market prices likely to change over the next year and what can I do to address those changes? What are the market and business risks that could have a major adverse impact on my company?
Companies that don’t change disappear. Those companies which continually react to market forces prosper. Make sure your company is in that second group.
Lee Rust, owner of Florida Corporate Finance, specializes in Mergers & Acquisitions, Corporate Sales, Strategic Planning, Financing and Operations Audits. He can be reached by phone at 407-841-5676 or by email at hleerust@att.net. Lee will present a business practice seminar at FRSA’s Annual Convention, June 27-29 at the Gaylord Palms Resort and Convention Center in Kissimmee.
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