Hyenas Everywhere At Large Systems (HEALS) was a transnational enterprise that operated across borders, influenced governments, and made immense amounts of money. It operated with multiple business models including vertical integration, global distribution, and local production.
HEALS was long established and had been putting up vertical production capacity to avoid overseas shipping of products for its largest markets. Supply chain costs and currency issues had caused multi-billion dollar investments into new capacity under direct HEALS control. In a year or two it would come fully online and improve margins, product availability, and simplify product line extensions.
Plans by Amalgamated Sharks Integrated Action Networks (ASIAN) had been rumored for years and weren’t taken seriously. ASIAN had a strong presence over the water and wasn’t viewed as capable of operating in HEALS key markets.
The Chief Execution Officer (CEO) spoke to the direct reports,
“Plans put in motion by my predecessor as CEO will come into full production next year and exceed our present capacity in the year after. Is there any news that can affect our increased margins, market share, or problem reductions?”
The Chief Meat Officer (CMO) was unhappy to be the bringer of spoiled carcass to the table.
“Asian competitors are beginning to ship new product into our market. The Asian product is cheaper to ship, can be adapted easily in local markets, and is competitive to customers. The competition allows local carnivores to realize even better margins than we get. HEALS is losing distributors. The buzz on the street is that the new Asian product has fewer compliance steps and few unhappy customers.”
The Chief of Local Distribution (COLD) confirmed this.
“There are some reports of unhappy customers, and we’re trying to understand the reports. Distributors have not increased orders this year, and in some cases stopped buying from HEALS altogether.”
The CEO was coldly furious.
“Fix it. We have spent huge amounts of money, development, and time on moving to integrate production. We need the distribution to move more products into the market and begin generating returns.”
The CMO tried to cast a hopeful tone.
“We’ll push for burdensome compliance rules. Use discounts in the market. And lean on COLD’s reports to improve our position while planning against more bad news. This will bring us hard data in time for the review in 6 months.”
To be continued next week in Friday Fables
The HEALS team met 6 months later over a sumptuous banquet featuring wild game. After a little savage feasting the CEO pulled the team into a cozy corner.
“I’m hearing about problems in our second domestic market. After our last meeting I thought that we all understood there were to be steps taken to slow our competition and improve our distribution network. What news?”
There was a COLD sweat.
“We continue to lose small to mid-size distributors. One of our largest distributors has imploded for local reasons. We have picked up some new players and are rebuilding our market.”
The CMO knew that bad news was best served COLD.
“Our steps against the competition have slowed down their distribution share growth. We have instituted discount structures and better delivery terms to encourage our large distributors to take more product. Our share is sound in large markets although somewhat softer in smaller one. We are stepping up programs to build loyalty amongst distributors and blunt compliance issues. We are lobbying hard against more rules applied to us and for more rules and steps against our competition.”
The CEO was out for blood.
“We are only months from bringing major production deliveries in and need to expand quotas. We agreed not to tell distributors so they couldn’t react. Are our channels ready to take a surge of product? What else will you do to reduce competitive impact?”
COLD shared more news.
“Distributors tell us that even discounts on our products aren’t stopping demand for the Asian product. The distributors have the capability to extend their profits locally and see more margin from the same population of buyers. They will expand that margin before we can sell them more HEALS product.”
The CMO added an unwelcome perspective]
“We are seen as “old product”. The Asian product is ”new and improved”. The plan to extend our reach with packaging and availability with new production will raise compliance and delivery costs. The Asians don’t care about impacting our margin as their margins are still very good at our expense.”
The CEO was visibly upset now.
“Deal with the competition now! Take the costs we’ll have at new production launch and force the competition away from distributors! Demand loyalty from our distributors in return for bettering their margins now and we’ll get it back later. We are committed to the new production must make it work. To move more volume, we must keep share and expand our market.”
COLD gave voice to the bad news and clarified the choices.
“I’m not sure that we can command loyalty even by giving up margin. We are likely to be seen as weak in the market and the Asians can cut equally or more leaving us weaker while they claim they are the product of choice. The market is slow to change. Even if we act now the market won’t reflect those efforts until after we urgently need to be shipping that additional product. What are we willing to give up?”
The CEO didn’t have a clear answer.
“If we can’t buy, demand, or command distributor loyalty; and if we can’t reduce Asian product import volumes; then can we convince buyers to favor us?”
The CMO had an answer.
“We are already taking steps to influence buyers and present a better product image. This will take at least a year to change anything in the market. The Asians are steadily taking market from adjacent products and so increasing their ability to cut prices. If we are too aggressive Asians will force changes in our compliance costs that will affect them equally while preventing our expansion.”
The CEO didn’t answer the posed question, nor back down.
‘We’re committed to the new production plan! Don’t stop at one counter against the Asians – do them all.”
In the next 6 months many steps were taken – and reacted to with reports to the CEO.
“We’ve dropped prices and improved deliveries.” “The Asians have cut prices and flattened delivery costs.”
“We’ve caused the Asians to be stopped at the port of entry.” “The Asians had enough stock to continue deliveries until the next shipment cleared.”
“We’ve used money to buy distributor loyalty.”
“The Asians started up a new distribution operation that is growing rapidly.”
“We’ve extended branding and incented buyers.”
“The Asians entered four more of our markets.”
And then things got worse.
“The Asians have taken over three of our distributors.”
“The Asians have caused shipments to be late in 10 markets.”
“The Asians have stopped two of our shipments at the port of entry.”
“The Asians have started distributing an extended product.”
The next HEALS CEO meeting was somber and focused.
“We’ve begun production from our huge investment in plant. We’re going to produce products faster, at better quality, and less cost than ever before. We will have volumes replacing all of our supply chain within a year at the outside. This huge investment over more than 10 years is still less than 4 months of our historical margin. The new production capabilities come with risks and external factors we can’t control while showing 25% improvements in production costs and paying back investment within 2 years with permanent improvements in margin thereafter.
As CEO I’ve been listening to all the reports the last few quarters of our vigorous competition and having to work hard to keep and expand our markets. We’ve had some unfortunate declines and our margins are down from their historic peaks.
We still are dominant in our markets, especially our 2nd domestic market, and have very good if not extraordinary margins for our products. The Gnomes of Money and Sharks of Trading still come to see what we will give them to generate even more global funds.
What operations are going on and what progress has been made?”
COLD went first with mixed news.
“HEALS’ distributors are running on less inventory using ASIAN product that sells replacing our volumes. The simplified inventory and logistics have led to declines even from our most loyal distributors. In response to the competition we have increased distributor margins 4 different times. We’ve brought in 4 new or replacement distributors for losses. We continue to work hard to expand business.”
The CMO covered more indicators.
“The Asians have improved their deals to distributors 5 times. We’re responding as quickly as we can and have had difficulties getting distributors to put us first. Efforts to rebrand and drive buyer demand have had modest success in some key markets and efforts to broaden the geography of that success are ongoing. Our strengths and reliability are still advantages. The Asians are literally buying market share with product promotions, distributing below our prices, and satisfying buyers who consume and return. The trends are clear. We must provide more products buyers want at prices distributors margins will improve.
We have started moving different product categories knowing that our margins will improve when the new production comes online. For now this is keeping our volumes up while our margins are reduced up to 50%. Even when the new production comes up to full rates our margins will be smaller even on the same product volumes.”
The CEO asked questions making the team uneasy.
“What about steps to slow down the Asians? We’ve spent 10% of our margin just on those! What about extending into more outlying markets? You’ve been at that for most of a year! What about demanding loyalty from our distributors? They know we’re reliable!”
COLD and CMO shared looks and COLD began answering.
“We temporarily halted Asian shipments. They temporarily halted ours. We suffered more losses due to reliability problems than their newer products did.
We are spending to go into outlying markets. Now we know that the Asians started even earlier than we did on those geographies. Those markets have smaller volumes and tough growth conditions. We are having some success and so are the Asians. Simply put there’s less revenue to had for anyone and we are only to get part of it.
Our distributors are loyal to their margins. We have tried tried-and-true tactics and new plans. Losing and rebuilding distributors turns out to reduce margins for 2-3 quarters. The Asians are gaining every time we or they disrupt distribution as they start from lower ongoing costs and we have consistent high costs that we’re finding don’t go down. “
The CMO supported their teammate.
“The population demographics of our buyers may have peaked. Each time we identify and extend into a new market the Asians soon arrive or are already there.
If we reduce prices to their levels we will erode distributors steadily. The new production capabilities will help and we will be able to compete. If we do that we will permanently reduce margins.”
“What became of attempts to go into the Asian domestic market.”
The CEO showed no emotion.
“Those attempts have all been terminated. A lot of resources and effort has been spent for no sustainable gains.
Even with a lot of preparation and starting up new distribution networks those efforts are discontinued.”
I see one more way to the future. We must make the Asian product ourselves at a low cost and then distribute it at low cost to destroy the Asian entry into our markets. I started a project in case this was needed 6 months ago and it will be ready soon. What plans will you execute?”
COLD and CMO had considered this possibility.
“We will be but a ‘copy’ of Asian efforts. We will lose much of our strengths in our existing products. Distributors will be emboldened to ask for even better deals and play us and Asians off against each other.”
The CMO continued the thoughts.
“The buyers will be happy. Continued price cuts will expand some demand although not enough to pay the same total margin as before. We will know when buyer demand peaks as there will be more product going into the markets than gets consistently pulled thru.”
The CEO reflected.
“The new production comes with costs that keep on whether we sell the production or not. If we can’t go back to our previous margins the new production will have to shut down in a year or two.
The Asians’ fixed costs will continue to increase while they compete. Their distributor costs might not increase and their revenues not grow as ours won’t. We must not fail as all our other costs except investments are growing too. “
A few years later, the CMO was now the CEO.
The team met in a quiet session with a small catered buffet to follow.
“My predecessor was unlucky that their signature effort to revolutionize our enterprise with new production methods was a success at the wrong moment. We have now shut all of those efforts and now focus on dispersed production of Asian-style products. The long-time supply chains and high costs have been abandoned. Our costs in all markets have been reduced.
Our revenues are enough that our margins are stable. What new conclusions across our enterprise?”
The same COLD, looking strained, found voice.
“Abandoning high continuing costs and keeping only the most loyal distributors has disrupted many buyers and reduced product supplies. We are more resilient to losing dispersed production centers, distributors, or temporary changes in demand. Distributors have been reduced to the most ruthless, the most focused, and the most loyal.”
The new CMO, former field manager in the 2nd domestic market had come up rapidly in difficult times.
“We split the buyer markets with the Asians. Sometimes we get more. Sometimes they get more. We always get our share and continue to compete.
The Asians were shocked when their growth stopped. They thought their growth would continue until we were gone. Now they use us to build loyalty and their margins. They are concentrating on the best markets and we are still trying to be everywhere. We are working hard and competing. “
The CEO had a new set of rules for this team.
“I won’t go the same route as my predecessor. We have learned when to stop even good ideas that aren’t good enough. We have learned that we can’t command distributor or buyer loyalty. We have learned that better cost levels aren’t always good enough for the future. Most of all we have learned that commitment isn’t enough – the right knowledge is still needed.”
The Moral of the story is that even the best process, the best tactics, and great execution don’t ensure success if they fail to focus on the right actions.
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