BASIC STRATEGY GUIDE: STEP 11

Activity One (Steps 1-12):
Segment customers, both by size and by need, to identify targets for the Company.

Step 11: Classify and assign a Company objective to each current and potential customer

• Audio Tip #48: Introduction to Step 11 of the Basic Strategy Guide

What:

Place each current and potential customer into one of three categories:

• Audio Tip #49: The Three Profitability Categories of Customers

• Core customers: customers with whom the Company will earn its cost of capital through the business cycle

• Near-core customers: customers with whom the Company will maintain or establish a relationship in the expectation that the customer can be turned into a Core customer. These customers earn a positive return on investment but a return below the Company’s cost of capital.

• Non-core customers: customers with whom the Company would do business only during periods of overcapacity. Sales to Non-core customers produce cash for the Company but do not produce any return on investment on the sale. The Company would not add capacity to support these customers. As its industry emerges from overcapacity, the Company would use the volume sold to these non-core customers to support the growth of its core customer requirements.

The Company should set specific objectives for each customer in these customer categories. The objectives are:

• Stay In the relationship, with the same proportions of the customer’s purchases that the Company currently serves.

• Increase Use, where the Company would like a current customer to purchase a higher proportion of its needs from the Company

• Get In, where the Company would like to enter a customer relationship it does not have today

• Opportunistic service, where the Company will serve the customer only if it has excess available capacity for a period of time

• Get Out, where the Company plans to withdraw from the customer relationship.

  • Audio Tip #50: Company Objectives with the Three Profitability Categories of Customers

  • Audio Tip #51: Customer Profitability and Company Objectives

  • Audio Tip #53: Setting Specific Company Objectives for Many Customers

Why:

This classification becomes the framework around which the Company develops its sales and marketing programs, its responses to customer requests and its program for product and service innovation.

What to Watch For:

• If a company is already a Primary Supplier of a major customer, delivering more than 80% of that customer’s purchases, it may choose to treat that customer with a “Stay In” objective. The company must consider whether it really wants to own 100 percent of the purchases of a significant customer. In the case of 100 percent ownership, customers, especially Intermediary Customers, may blame their sole supplier for many of their own failures and poor profits and demand even lower prices.

  • Audio Tip #56: The Risks of Being a Sole Supplier

• Opportunistic customers may generate contribution from the use of capacity the company otherwise would hold, unused, for anticipated and unanticipated growth among its Core customers. This happens in Hostile markets.

  • In a Hostile marketplace, a company may choose to serve Non-Core customers in order to use capacity that otherwise would generate cash but no contribution to returns. However, the company would not add to its existing capacity without first using all the capacity supporting Non-Core and perhaps even Near-Core customers.

    • Audio Tip #57: Adding Capacity for Near and Non-Core

  • In a Hostile market, specific customers of each size (i.e., Very Large, Large, Medium and Small) may be Non-Core Opportunistic customers, even if the size/role segment would normally be a Core customer segment, because their individual pricing is low. Often, the pricing differences to customers within a size category will have a greater variation than the differences in average prices across the customer size categories.

• The industry’s leading customers may create an industry leader effect. This effect makes the apparent low profitability on some of these big customers into Core customer relationships.

  • Audio Tip #54: Treat the Largest Customers Gingerly

• A price-based relationship is usually an indication of a Non-core customer. The low prices in these relationships may radiate to other customers and result in a loss of cash on the relationship.

  • Audio Tip #55: Warning on Price-Based Relationship Customers

• In an ideal situation, Core customer volume would make up 100% of the company’s sales. Percentages below 67% may signal impending trouble.

  • Audio Tip #58: Core Customer Volume as a Percentage of Total Industry Sales

• The Core customers with the lowest costs of Get-In or Increase Use are those served by weak competitors.

Action:

The Company would focus its resources on developing, first, a superb value proposition for the Core customers and, second, programs to convert Near-core customers into Core customers. The Company would serve some Near-core and Non-core customers, but only if it had unused capacity available for a period of time and if the sales to the customer would produce cash for the Company.

• Self Test #11: Customer Objectives and Categories

• Worksheet #11: Customer Objectives and Categories

More Information on Final Targets on the Advanced Site >>

For helpful context on this step:

Videos:

• Video #54: Cost Reduction By Winners vs. Losers in Hostility

• Video #65: Core Customers Part 3: Developing Plans for Core Customers

• Video #68: Overview of Segments Part 3: What to Do

Perspectives:

• “The Commoditization of Scale”

• “The Real Reason Market Share Matters”

• “Staying Alive in a Hostile Marketplace”

• “Hostility in a Differentiated Market”

• “The Rust Belt Revival”

• “Success Under Fire: Policies to Prosper in Hostile Times”

• “Turmoil Below: Confronting Low-End Competition”

• “Use Subtle Strategy in Tough Markets”

Symptoms and Implications:

• Large customers are getting higher discounts

• Customers are taking on more suppliers because shortages have appeared

• Fast growing competitors focus on the industry’s large customers

• Customers are consolidating their purchases

• While still growing some competitors are losing share

Guide Index

NEXT: Basic Strategy Guide Step 12