07 July, 2015

Buying cheap versus buying results

Why do corporate (and especially government) buyers keep confusing cheapness with value? Time and again I’ve seen the best vendors lose on price because the buyer could “get it much cheaper elsewhere”. The classic example is professional services charged by the hour. Any good manager of people knows that you pay your better staff more because they are more than worth it to you. For example, a good IT designer/developer will work out many times cheaper in the long run. They understand the business need quicker, design quicker, design better, write code quicker, write better code with faster performance and fewer bugs, and their software is cheaper to maintain. That can equate to a 10-30 fold lifetime cost difference - the saving more than outweighing any hourly rate difference. And that’s before you factor in the risk of non-delivery - much lower with better suppliers.

But many corporate buyers persist in penny-wise, pound-foolish buying practices. I have interests in several firms who sell products and services to other businesses, and my attitude is clear. I put a lot of emphasis on getting the price/value/cost proposition right, but if I can’t persuade you of the value for our prices, I’ll walk away before discounting. I’m not in business to subsidise anyone else’s business.

As a board member, I often see proposals for approval brought forward by managers proudly telling me that they’ve got the lowest input costs. All too often, I send them away to redo the basis of purchase and decision. Get me the best price and the best people to deliver the best outcome, not just the lowest cost of the inputs. If it has to be input-based, hire the best you can (while avoiding bloated suppliers and being sensible on price). It may cost more theoretically on paper, but I’ve rarely seen it cost more in actuality. On the contrary, the lowest input cost approach usually blows out on time, cost, reliability and efficacy.

Managers and buying teams - take note: top executives and boards much prefer effectiveness over cheapness.  But that's not a reason to buy only from big-name suppliers.  A small agile supplier can often be an innovative, effective and low-cost option.

First posted 29 July 2009

03 June, 2015

Exports are not enough!

Here's an article I wrote for the Dominion Post newspaper in August 2001, but I think it's still relevant today.

“Export or die!” We have heard that message so often - and for many companies, it is the right message. Getting the world to buy a New Zealand product or service is an important milestone for a developing business. Lots of successful exporters are needed for a healthy economy - but they are not enough. The world’s most successful companies do not just export globally - they operate globally. That means having sales, service, logistics, production and development operating around the world. Look at the world’s greatest companies. How many do things only at home to ship out to the rest of the world? I can only think of one - Boeing. The others made the leap from exporting to international operations. Our own Dairy Board/GlobalCo [Fonterra] has substantial and growing offshore development, procurement, manufacturing and logistics. More Kiwi companies need to recognise when to make that change.

Why? To minimise the cost of distance - freight, duties, foreign exchange risk and in-transit inventory; to reduce production costs, through greater volumes, lower material costs and lower manufacturing wages (an unpleasant reality); to get closer to customers for more efficient service and faster reaction to changing needs; to build critical mass for future investment; and to build credibility with large global customers.

I speak from personal experience. Deltec developed an advanced antenna technology for mobile phone networks - Teletilt - that enables network operators to adjust their cell coverage remotely and with improved signal quality. We began in New Zealand and Australia, explored SE Asia, and then expanded sales rapidly in China. Our products were key components of large infrastructure projects. We were the world leader in our niche. But as we grew and started to explore Europe and the Americas, our larger customers demanded the cost and service benefits of in-market operations. By mid-2000, we were getting a consistent message from global customers like Motorola and Nokia: “Set up full-scale sales, service, manufacturing and logistics in North America, Europe, China and Brazil. Do it now. Or don’t expect to get our business in future.”

The time had come to switch from a Kiwi exporter to a global business.

The capital requirements and the risks were large. Then the tech sector went into meltdown, and technology investors took fright. So we decided to sell. Andrew Corporation, a global competitor with complementary products and a similar vision for the future, recognised the value of Teletilt and our expertise. Our Wellington development facility will become their worldwide centre for developing advanced antenna systems. New Zealand will continue to play a key role in the technology. It won’t save the mainstream manufacturing, which would have gone to China eventually anyway, but we can reinvest in new opportunities.

My point is that New Zealand should not wistfully expect its companies to export everything from home. Global companies like Nokia, Vodafone, and Nestlé operate in many countries. The interesting thing is that large numbers of their high-value jobs are still at home - in development, marketing, and corporate administration. They are surrounded at home by a plethora of supporting organisations in banking, IT, law, accounting, advertising, travel, short-run early-stage manufacturing, research, education, etc. Together, they bring home huge revenue and profit streams.

If New Zealand wants a high-value economy, it needs more than just exporters. It needs global businesses that operate offshore in all facets of their business. New Zealand should encourage its businesses to invest offshore, not deride them for it. Without global operations, we won’t get a Kiwi Nokia or Vodafone. With global operations, we look like getting a Kiwi NestlĂ©. We could sure do with some more.

PS. At the HiTech2000 Awards, Deltec won the High Growth Company of the Year Award, the Investing in People Award and the Supreme Award. When the tech-wreck got even worse in 2002, Andrew’s NZ R&D centre went too, but that could happen under any owner, and only validates my argument that we need our own global players based here. The home R&D is usually the last to go.

First published 13 August 2001 in the Dominion Post.

19 May, 2015

Dimensions of change

You’re probably familiar with the old Boston Consulting Group 4-quadrant grid of business extension strategies:

Develop new markets
Very difficult
Develop current markets
Invest in current product areas
Invest in new product areas

You can compare any two attributes of your business, e.g. products, technologies, geographies, customer segments, skills, operational processes, channels, etc. The message is usually the same - it’s easiest to deepen your current position, but if you are going to extend your business, the more dimensions you change, the bigger the challenge.

It doesn’t matter whether you’re extending organically (i.e. doing it yourself) or by acquisition. However, if you’ve got a sound reason to grow in one or more dimensions, then acquisition can be a faster and lower risk route than trying to do it all yourself, if you can plan well, buy well, and execute well.

Of course, you could acquire a business you don’t really want, in order to divest it and acquire other businesses that you do, but that’s a whole different game. I still shake my head when I think of how brick and crockery maker Ceramco was acquired and turned into underwear maker Bendon. That changed just about every dimension possible.

First posted March 11, 2008