Spending More, Carefully
When it comes to spending, CFOs are — again — focusing on making such decisions smartly. They aren’t reflexively cutting back on spending, though; 45% of respondents said that their companies would spend and invest more over the next year than they did last year, with only 19% planning to spend less (see Figure 3 below).
“[We] need to fully evaluate every penny to ensure it will get the return necessary for our future, both in the long run and in the short run,” said the treasurer at a food/beverages/consumer packaged goods company.
Cost control, survey respondents stressed, remains critical. A solid majority of respondents, 82%, said that their companies’ focus on financial discipline would increase in the next two years. The reason: in an unforgiving market environment, they want to make sure that their companies are competing from a position of strength. Failing to implement such a rigorous approach would increase their vulnerability, leaving them constrained and stifled — and allowing others to move ahead.
Larger companies have the scale to endure — and emerge triumphant — from most price wars. For smaller companies, competing as a low-cost provider is almost always self-defeating. Slicing prices means cutting into profit margins, reducing operating capital available for such functions as R&D or quality control. Also, customers are unlikely to develop any loyalty to a low-cost provider; they’ll leave when a cheaper upstart comes along.
Avoiding that fate means providing better quality and service than your competitors, no matter their size. “Price only goes so far,” said the CFO of a wholesale/retail trade company, adding that “the ability to maintain local inventories; ship accurately and timely; and provide simple, clear invoices while servicing customer needs will win out in the long run.”
Smaller enterprises need to take advantage of their own inherent capabilities. That means not just articulating what sets their products or services apart, but also understanding why it’s a good deal for their customers. The form their competitive strategy takes needs to emerge, and shift, based on an in-depth understanding of their customers.
By paying attention, these companies may, for example, decide it’s prudent to segment their customers, creating a lower-cost version (or offering an entry-level service) for their more transactional, price-sensitive customers. Successful market segmentation requires executives to understand not only the relative size of the different segments, but also how each segment defines and measures quality. Sometimes all it takes is a small adjustment to strengthen a company’s appeal and improve customers’ perception of value.
“Because I am smaller, I need to have both — better quality and better price,” said a finance executive at a business/professional services firm. That’s possible, it seems, as long as management stays clearly focused on why it belongs in the market (or markets) it’s in. A well-founded sense of purpose may be the most enduring competitive advantage of all.