Tradeoffs and sacrifices
We are making too many products,” says Tom (not his real name), 32, the third-generation finance head of a family business, which manufactures bolts, screws and the like.
“When my grandfather started the business in the 1950s, he focused on just a few items, and with the construction boom, we prospered. But when my father took over in the 1990s, he went all out. He bought a lot of machines and hired a lot of technicians, because he wanted to corner the market.” “What’s wrong with increasing market share?” I ask.
“My father went overboard,” Tom says. “At first we focused on the lower-end market, and then the middle. Afterwards, we also decided to cater to the high-end, which meant we had to make specialized rivets and other things, which do not sell as well.”
“But when these items sell, they command higher prices,” I say.
“Of course, but we are stretched too thin,” Tom says. “We have to drastically cut back on our thousands of SKUs.” An SKU, which stands for stock keeping unit, is a distinct item or product for sale, typically used to track inventory.“Can’t you outsource some and concentrate on the main ones?” I ask.
“We import some SKUs from other Asian countries, but my father prides himself on doing as much as we can locally,” Tom says.
“A noble sentiment, but not always a sound one,” I say. “What does your consultant say?” “He agrees with me, but he cannot argue against my father,” Tom says.
“I am in no position to judge what is best to do, but your situation reminds me of the famous story of Sun Bin and the horses, which we took up in grade school,” I say.
Tom smiles. He knows the story.
In ancient China, the Qi general was fond of betting on horses. Races were classified into three tiers: fast, middle, slow. The general would enter his fastest horses in the fast category, his slowest in the slow, the others in the middle.
To claim victory, horses would have to win at least two of the three tiers. The general was constantly frustrated. None of his horses would win, but most of them would lose by just a bit.Sun Bin, his wise adviser, told the general to switch horses. Pit the slowest horses against the fast ones in the
fast tier, but then race the
fastest horses in the middle tier and the middle horses in the slow tier.The general’s slowest horses of course would lose in the fast category, but the other horses would triumph in their groups. Sacrifice one tier to get two, and become grand champion.Tradeoffs and sacrifices must often be made for the greater good.
“It is often not possible to pursue a strategy of market penetration (pricing a product cheaply to sell many) together with a strategy of market skimming (pricing a product to cream the top end of the market),” say National University of Singapore management professors Wee Chow Hou and Lan Luh Luh in their book, “The 36 Strategies of the Chinese.”
“The former implies a pursuit of market share, while the latter implies the pursuit of profit margins. Each strategy entails different marketing skills and resources. It is difficult for a company to use both strategies at the same time.
“Similarly, a strategy of product diversification requires very different resources than a market expansion strategy. The company has to decide which strategy to pursue. One will be a tradeoff against the other.
“A company has to decide how best it wants to excel. This could be done by positioning its products and services and focusing on areas where it
has the competitive advantage. Unfortunately, some companies fail to realize this. Instead, they choose to defend ‘dying’ products and services, or to support too many products and services, thereby wasting resources.”
Queena N. Lee-Chua is with the board of directors of Ateneo’s Family Business Center. Get her book “All in the Family Business” at www.lazada.com.ph or call National’s Jennie Garcia at 0915-421-2276. Contact the author at [email protected]
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