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| Sunday, 13 March 2005 |
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Business |  |
| News Business Features Editorial
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Lucrative customer centric business trends by Lloyd F Yapa Most economists advocate venturing into manufactured exports to achieve a rate of growth, that are comparable to those of the high performing economies of East and South East Asia. The economies of these countries have been able to set this pace due to heavy investments in infrastructure, manufacturing capacity and on (tertiary) education amounting to as much as 40% in terms of GDP. Sri Lanka, which also entertains ambitions of realising such growth rates, especially to reduce poverty, may have problems with this approach. The government is unable to find sufficient funds for upgrading the dilapidated infrastructure of the country. The private sector, especially foreign direct investors, who have been prolific investors in infrastructure and production capacities in the Asian high performing economies have largely bypassed this country due to the prevalence of political instability. Downstream services Fortunately for our country conditions in the world are changing. Manufacturing is becoming less profitable due to the stagnant demand for products made worse by the entry of more countries into the field. The more lucrative area is further downstream involving services required to maintain products. This is the reason, that the services sector has been expanding fast, while the share of manufacturing has been shrinking, especially in the developed world. Unlike in the case of manufacturing, development of the services sector may not need so much investment by way of securing supplies, production itself, research to differentiate products and gaining a dominant market position to increase economies of scale. If any capital intensive assets are required at all, there is now a possibility of acquiring them through alliances and contracts. Exploiting new trends What should manufacturers and those desiring to invest in ventures in our country do to position themselves to exploit downstream earning opportunities? They should first study in depth, what the customer does with a product after he purchases it and what requires to be done to fulfilling his/ her needs. In the first instance, manufacturers will learn how to improve the quality of the product itself or differentiate it from those produced by competitors and earn premium prices, if customer needs are heeded. What is more important is that, they will be amazed at the wide range of sales and after sales services, that the customer needs to use the product and their ability to provide them with little or no additional investment. A good example of such products is the (ink dot) printer, which is sold at giveaway prices, while the money is spun from selling ink and ink cartridges. Harassed consumers in this country will agree that most manufacturers , especially the SMEs hardly think of the customer and the way he uses a product after a purchase. By ignoring the needs of the customer, these manufacturers forsake the opportunity of earning much more than they do now. Even in the field of exports, this is true, as much of the added value, in the case of Sri Lankan products, is earned by foreign importers and distributors. In studying the needs of customers, it has to be borne in mind, that they are rarely homogeneous among all buyers. Different groups or segments of buyers may need different products and services. Segmentation of markets on demographic, socio economic and geographic variables will enable suppliers and manufacturers to develop customer allegiance. After studying customer needs in this manner, manufacturers take special care to deliver combinations of services, which are tailor-made to satisfy these specific needs and to reduce the total cost of maintaining and using their products. By doing so they become the preferred suppliers of these services throughout the life span of products. Venturing into distribution Moving downstream also involves venturing into distribution, where returns can be very high too. Manufacturers, in the developed world and in the newly industrialised countries, who have so far avoided forward integration in this manner have been doing so lately, as their profit margins have eroded by super chain stores such as Wal-Mart and internet companies such as Amazon which are winning customers by offering a superior service at a lower cost. Coca Cola is the best example of this new trend, where a manufacturer builds a dominant position in distribution to halt the erosion of profitability. Another is the Spanish garment manufacturer Inditex, which has established its Zara chain of over 650 stores in some 50 countries. Manufacturers and prospective investors in manufacturing enterprises in this country could do well to study this latest trend of moving down the value chain, nearer the customer to increase their profit margins several fold. The customers too will gain not only price- wise but also quality and service-wise. This decision of course has to be taken after checking the demand for the services in the various segments of the market and the profitability of the downstream activities vis a vis the current product margins in manufacture. In the case of distribution, entering that business will be tough, if the channels are controlled by established giant entities such as Coca cola or Wal-Mart. Even such a move, however, would not be impossible, if there is close co-operation among enterprises eg. by formation of joint stock companies of SMEs strengthened by geographic clusters producing similar products. State support State support for such ventures is essential, as political consensus on issues for creating a stable business environment such as improvement of labour relations as well as investment in infrastructure facilities and services, introduction of relevant policies and government to government contacts are also essential ingredients. One area of infrastructure, which businesses cannot do without in this connection consists of facilities for ICT development. Another prerequisite for entrepreneurs to move downstream (or to enter the robust globalised world of business) is education, especially in the management and marketing disciplines as well as proficiency in international languages. Our country unfortunately has a long way to go in this respect. Whether the heavily indebted and cash strapped State alone can tackle these heavy responsibilities, without harnessing the energies of the private sector, is a moot point. It is a pity that we have yet to move beyond mere talk and street protests in this respect. |
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