I know it sounds absurd in today’s environment, but I used to work for a distributor selling a word processor, and we used to make 30% margin (before you start thinking I was being greedy, I’ll say that our resellers also made that kind of margin).
The year was 1988 and the product was WordPerfect.
Then one day something disastrous happened.
WordPerfect Inc. appointed a second distributor (so our market share dropped from 100% to 50%), and that distributor drastically dropped the price, so our margin dropped to 15%. The net result was that our company’s profit dropped by around 60%.
So here’s the big question … what would you do?
See this same question is one that many businesses are facing today. Sure, not many companies are experiencing as dramatic a drop in business, but the question still remains … what’s your strategy?
So here’s what we did. We thought our expertise was in office automation, so the smartest thing to do was take on other complementary products. Spreadsheets, Databases, Graphics packages. Things that would play to our core strength and lift our profits. Smart right?
The result was that, because these products were being commoditised just as quickly, the margins and competition were no better than what we already had. Our big mistake was that we had completely misread our core strengths. Our expertise wasn’t in office automation – it was in helping resellers adopt technically complex products. And when we first started selling WordPerfect, it was a complex product.
As soon as we realized that, we took on a different range of products – IBM’s OS/2 and networking – which were technically complex, and required our value-add. And business picked up, and we survived a tumultuous phase that sent both our Canadian and British counterparts into liquidation.
The point is, when things get tough, people panic and make knee-jerk reactions. They throw out their strategy, or they cut corners, or they by-pass processes, or (as we did) they forget their core strengths.
So am I suggesting that you absolutely stick to your strategy regardless of what’s happening? Absolutely not! What I am saying is that you need to take time out (and it will take longer than you think) to review your strategy. Work out what’s working, and what isn’t. What are the opportunities, and what are the (real) costs of pursuing those opportunities? What additional investments do you need to make, or (as is the case for most companies) what will you stop doing, in order to free up resources to focus on what’s important.
I learned a valuable lesson 20 years ago. I thought our success was based on a product. And it was. But the product wasn’t WordPerfect. It was the technical support we provided to partners that enabled them to sell complex technology. That was our real product. That was our core strength.