by Stafford Sterner, president, SJF Material Handling
With the economy on the mend, a lot of people in the material handling industry are expecting good times without having to make any changes in the way they do business. Unfortunately, that means the continuation of one particular practice that played a major role in getting the economy in trouble a few years back.
When the "dot.coms" were flying high, they experienced rapid growth by the simple method of offering impossibly low prices and constant expansion into markets about which they knew nothing. They operated at a loss for years on end, promising investors that it would all turn around when they had achieved sufficient market share. Eventually, of course, this "lose a little on each deal but make it up in volume" business model blew up in their faces. The balloons popped, one by one, and the economy followed them down the tube.
In the material handling industry, this discredited business model is still very much in evidence. Too many companies have played the merger game, getting themselves involved in markets that they know nothing about. Too many have played the numbers game, moving money from one pocket to another to make themselves look good for one more quarter (this is called managing for stockholder value), totally forgetting about long-range planning.
Worst of all, too many companies have bought into the concept of forgoing profits in pursuit of market share, with the idea of becoming profitable once the competition is eliminated. It’s called "buying a job," meaning submitting a bid that allows for little or no profit. Theoretically, this has two benefits. It gets you the job, which makes your sales figures (if not your profits) look impressive. More importantly, for some people, it prevents your competition from getting the job.
But let’s look at the downside. Without profits, you have no money to invest in research and development, capital expenditures, etc. Your growth is all on paper, and will disappear as soon as you run out of money to buy jobs with.
With minimal profit margins, you have neither the money nor the inclination to service the sale after it is made. The result is an unhappy customer, and that is never good news for the long term prospects of your company.
Finally, let’s say that your strategy of underbidding the competition works, and your nearest competitor goes bankrupt. What happens? Somebody buys his assets for 25 cents on the dollar and opens a new business. Since his initial investment was so low, he can undercut your prices. You haven’t eliminated competition, you’ve made it worse.
Profit is not a dirty word. Nobody -- least of all the customer -- benefits when profit is eliminated from the economic equation. I’m not saying we shouldn’t be looking for efficiencies that will allow us to keep prices down while maintaining a reasonable profit margin. Of course the customer benefits from lower prices, but the economy in general and the material handling industry in particular will be much healthier when we all admit to wanting our fair share. If you’re satisfied with a 3% profit, I suggest you buy a government bond. It’s safer.
Sterner can be reached at 320-485-2832.