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Adapt or die

01 Feb 09

The current plight of the US car industry is a cautionary tale for any industry that isn’t alert to changes in the way its consumers perceive its products. GM, Ford and Chrysler are not victims of the global recession. They are victims of their own stubborn refusal to remake their industry, their business practices, their manufacturing processes and their marketing philosophies in light of clear trends in user consumption. They have made the mistake of assuming that the American car buyer was an unchanging stereotype, in love with his muscle car and confident that low petrol prices were almost a constitutional right, like the right to bear arms. Instead the US car buyer has proven to be much more pragmatic, placing increasing value on the environment, technology and the superior design available from Japanese and European imports.

Not long ago, I noticed a high-performance 6.1 litre Chrysler SRT8 on the lot marked down circa $20,000 and next to it the diesel version with a higher sticker price! This was the reverse just 12 months ago.

It’s not that one car uses nearly twice the fuel of the other that has caused this change. It’s more that people don’t want to be seen consuming the world’s resources so conspicuously.

The US car market is a great example of how public sentiment has shifted, most likely permanently, and yet, a whole industry has got caught out because it didn’t appreciate the seriousness of the trend. The current financial storm just brought forward what was always going to happen.

There are plenty of businesses right now that will point to the global recession as the source of their woes, when in fact they have sown the seeds of their own demise. Another industry that is suffering in the same way is high-end audio and AV distribution. Right now it’s a story of receiverships, store shutdowns, capital raising and warehouses overflowing with stock that has no takers. Is this a result of the recession? No. The box-shifting retailers and the marketing budgets of their high-volume franchises have over time convinced consumers to buy on brand perception. That means a huge percentage of sales now happen without customers actually hearing or seeing what they are buying. Meanwhile the high-end brands have been content, like the US car industry, to think their niche audience is unchanging. They’ve not changed their approach, their marketing, or their cost structures and instead have happily abdicated a huge part of their potential customer base to brands that have been willing to push marketing dollars into securing that audience.

Both these industries are strategically challenged and, frankly, for similar reasons. If I was the new US president I would force the merger of Ford, Chrysler and GM, keep the best brands and plants and scrap the rest along with their 401(k) plans. Then they should seriously invest in new models and manufacturing capability and retain a US manufacturing base. The same approach would work for the high-end audio industry.

The BCG graph on the right very accurately shows what happens when businesses go head to head with multiple but similar offerings. It’s called the  ‘fragmented’ model and represents 90% of the channel businesses I see and results in inferior return on investment. A more effective model, as I proposed above, is the ‘specialised’ model and while it has high up-front costs, it brings superior returns as market share builds.

For both the car industry and the high-end audio business, the fundamental facts are the same: what they’ve been doing clearly isn’t working, so they need to change. Market conditions, like the current recession, only highlight more clearly the failings of those business models. Those businesses that survive the fallout will be the ones that analyse the real nature of change in their industry, find the opportunities and develop new business models to successfully exploit them.

No matter what is happening in the market, new opportunities will pop up. 2009 will belong to those with a clear vision and the determination to execute that vision in a methodical and well structured way. Taking a long, hard look at areas in your industry that are not working will uncover opportunities for taking advantage of changing consumer behaviour and ensure your business not only rides out the downturn but emerges stronger.

Selwyn Pellett is the Co-founder and CEO of Imarda Ltd, Co-founder, Chairman and Former CEO of Endace Ltd, Co-founder and Director of Swaytech Ltd, Founder and Director of Storm Distribution Ltd and the Founder and Director of NorthStar Logistics Ltd.


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