Executives in the trucking business often ponder how to avoid being caught up in a low rate 'commodity business' where their customers simply view all competitors as interchangeable, and price becomes...
Executives in the trucking business often ponder how to avoid being caught up in a low rate ‘commodity business’ where their customers simply view all competitors as interchangeable, and price becomes their sole purchase criteria. The recent downturn in the North American economy has once again brought this issue home. Freight volumes have decreased and pricing is under even more pressure. Can fleets escape these pricing pressures entirely?
The short answer is no. The reality is that every industry has a specific ‘price/value range’ where all business is done. Macroeconomic factors do dictate the outer edges of that pricing range, as price and demand are inverse functions. So, to effectively compete fleets need to operate within the value/price range in the hauling segment in which they compete.
The fundamental issue is how does a trucking company create a sustainable strategic position for itself that allows it to operate at the higher end of the value/price range where profitability should be maximized?
Marketing pundits have long promoted the notions of segmentation and brand positioning as the fundamental cornerstones of strategy. In reality these factors have little to do with creating a sustainable strategic position, and focusing on them has led to unrealistic expectations of advertising.
Advertising can create customer dissatisfaction
When advertising promises customers new service levels or particular kinds of treatment that are not delivered on the front-line, dissatisfaction results. This not only wastes advertising dollars, it digs a hole for the fleet in the minds of its customers.
Sales incentive risks
For many fleets stimulating short-term sales and growing market share can become an obsession that often leads to reduced contribution margins, and lower financial performance in terms of return-on-sales. Many fleets have learned a hard lesson that more sales do not necessarily mean more profitability. Small losses in average contribution margin often require very large sales increases to make up the difference on the bottom line. This is especially difficult given the capital investments needed to increase capacity in the trucking industry.
Revenue quality is a key determinant of profitability. Overly aggressive pricing also teaches customers to expect price inducements to win their business and is obviously not the way to create a sustainable strategic position.
Cost cutting is not strategy
As margins erode due to macroeconomic factors a dogmatic focus on broad-based cost cutting can consume fleets and become a surrogate for strategy. A zero-sum game can often result in initial savings for all, but no improvement in competitive position or profitability for anyone, as the savings are simply passed on to increasingly price-conscious customers in the form of price concessions.
Running a cost-efficient fleet is not a strategic initiative but rather a simple competitive necessity. Under declining economic conditions there is a real danger that unless fleet executives understand the foundations of their strategic position they may take cost cutting decisions that are counterproductive to both the short and longer-term health of their business.
Mergers do not create a strategic position
Defining and implementing strategy is not an easy task. As many senior executives struggle with this challenge, somehow being bigger can be equated with being automatically more cost efficient and profitable. And, since cost cutting is often misinterpreted as a strategic initiative, these notions can put fleets on the acquisition and merger trail.
In North America, many merger marriages ‘made in heaven’ hit the rocks of conflicting corporate cultures, incompatible systems and methodologies, and the failure of cost savings to fully materialize from the presumed synergies. Mergers may massage many an executive ego, and deliver stock option and capital gains windfalls, but they do not, in themselves, create a strategic position.
Cost advantage creates competitiveness
Without question those companies that do enjoy a cost advantage over their rivals have a sustainable competitive position. From a strategic standpoint the issue isn’t simply having a cost advantage, but rather how the cost advantage is created.
Activities create costs
The activities a fleet chooses to do, or not to do, creates its cost base and forms the essence of its strategic position. Advertising campaigns, attempting to re-position a company while not accompanied by any real changes in business practices and processes, front-line service delivery, and the actual experiences of customers, are doomed to failure from a strategic perspective.
Creating a sustainable strategic position is all about the kind of customer reality that your fleet wants to build and maintain. And, it is all about allocating the fleet’s resources in a focused, disciplined and integrated manner.
Activities should flow from core competencies
Fleets that create a sustainable strategic position do so by developing a select number of core competencies and performing activities that flow from these competencies, enabling them to meet the needs of customers.
What are the four or five key competencies for your fleet? How does your organization deal with the typical challenges faced in the trucking industry such as driver retention, on-time delivery performance, use of technology, front-line sales strategies and business development approaches, cash management, capital investments, human resource practices, and so on. There are obviously numerous ways that each can be addressed. No fleet has exactly the same practices on all issues. Yet each of the decisions made in these different areas can have an effect on a fleet’s strategic position, and any activities that are in conflict with each other can weaken this position.
Fleets that truly understand strategic positioning are well versed in activity mapping. They identify their core competencies and regularly map out their entire activity network as well as those of their competitors (as best they can) in order to assess the sustainability of their own strategic position. They examine each and every activity performed by its four strategic functions (operations, finance, marketing, and human resources) to ensure congruency.
Strategic position is created by inter-relatedness of activities
Any fleet can copy any single, specific activity done by a competitor, so individual activities, in themselves, do not create a strategic position. It is the combination of activities that a company chooses to do throughout all its strategic functions, and the way that these activities are inter-related and supported by business systems and processes, that creates a strategic position. The more integrated and inter-related these activities are, the more sustainable the strategic position is.
Business system support
The operations, human resource, marketing, and finance strategies of an organization are supported by its business system, a complex mixture of software, hardware, policies, procedures, budgeting, control mechanisms, etc., that allow for the optimal flow of information throughout the organization. When a company lacks a clear strategic position it will be readily apparent with breakdowns, backlogs, and omissions in its business system support. Conflicts and misalignments between various functional departments will be evident and often competition over resources will be severe.
Fleets that build a sustainable strategic position do so by integrating their operations, human resource, marketing, and finance planning functions. They carefully review all of the activities performed by each functional area to ensure maximum integration and they focus on how their core competencies will help them meet customer needs. In this way they leverage all of their available resources on their customers’ needs, build a unique activity network, eliminate waste throughout the organization, minimize their costs, and maximize av
ailable profitability in both good times and bad.
Tom Stirr is one of the founding partners of Rules of Engagement Inc., a company that specializes in strategy facilitation, marketing consultation, and customized business development training solutions for its clients. He has over fifteen years experience in the heavy truck industry. He can be reached at: firstname.lastname@example.org