StrategyStreet and the Board of Directors
SEGMENTS
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3. What portion of our current and future sales goes to our Core customers?
High proportions of sales to Core customers lead to happy shareholders. Sales to all other customers will not produce attractive returns. Few companies in established markets reach the level where all of the company's sales go to Core customers. Some companies must sell excess capacity at what they can get when their markets are in overcapacity. This situation is characteristic of process industries, where the cost of idling capacity for a period of time is prohibitive. In market conditions other than overcapacity, companies may choose to sell to customers who do not yet qualify as Core customers in the expectation that they will be able to convert these customers to core status in the future. Before the company invests to expand its capacity in the market, the board would prefer to see it use the current capacity supplying Non-core customers to support the growth of Core customers.
Non-core customers depress returns on investment. One company in a very competitive marketplace found that nearly 40% of its total sales went to Non-core customers. The company suffered from chronic low returns and eventually was forced from the market.
For further discussion of this question, see:
Basic Strategy Guide Step 26: Identify the profit increase from the improvement in the mix of customers that the Company serves.
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