Benchmark with other industries

A letter dated Dec. 31, 2001 was sent in by a reader and started multiple e-mail exchanges. I’d like to share the first letter and my reply.

I’ve been reading your column and it has given me a lot of new ideas that I could use in our own business. But after reading the article in yesterday’s issue of the Philippine Star, I decided to write you to ask if you will be able to help me by giving some suggestions on our family business, which I am helping my parents with.

We have a hardware store and an LPG dealership.

In our hardware business, we are currently only no. 3 even if our prices are competitive. One of the weaknesses of the other store, who is probably no. 2, is the slow delivery of goods to its customers. This is one of the things we do very well. We make sure that after the customer has paid, we deliver immediately to the terminal or port.

What would you suggest I do to overtake the two other stores who are ranked ahead of us?

One of the other stores sells cheaper plywood but the quality is not as good as those that we sell. And, of course, the plywood we are selling are much more expensive. Should we also get a product that might disappoint the customer just to be able to compete?

With regards to LPG, we decided to look for sub-dealers to sell our brand in other areas. We give special discounts to our sub-dealers so customers do not need to go far. What would you suggest we could still do to be on top?

Here is my reply.

You are involved in two business entities: the hardware business and the LPG game.

First, let us look at the hardware. You are no. 3 and would like to become no. 1. The no. 2 is slow in delivery and your plan to out-deliver the competition is good. But delivery is an advantage only if there is parity in quality. Your desire to give customers a low quality product that may disappoint them is good but who defined quality?

What does plywood have to do with palm oil and cars?

Just like palm oil and cars, keep the principles of quality, delivery and productivity or QDP in mind. Quality is defined by the customer who pays for costs and profits. Nobody else. If the customer wants plywood that is not durable but lower in value, then that is the quality wanted.

But one must not accept that reality. Go deeper! Why is the customer willing to buy an inferior product? All customers want to have superior products except that, most of the time, they do not know how to compare and/or their cash flow cannot fund it.

There are two ways to attack this issue. One was used by one of our master entrepreneurs in the palm oil game. In his case, it was clear that, on a kilo for kilo basis, palm oil was more expensive than coconut oil. The customer said that palm oil was more expensive. But one needs less palm oil (compared to coconut oil) to produce the same quantity of bakery products. On a per output basis, it is really cheaper to use palm oil. When this was explained, the customer shifted to palm oil.

You can explain to your customer the cost per unit time. For example, the lower costing product will last three years but your more expensive product will last for five years. Show that you are really cheaper on a per year basis.

The other approach is to allow the customer to access the more expensive product and allow their cash flow to take it. In the good days of the automotive game, many would not have been able to buy cars if there were no financing. The deferred payment scheme allowed people not only to buy cars but also to move to higher models. Some people will never be able to afford a new top-of-the-line car. But if it were on a five-year deferred payment plan, many will be able to afford to buy one.

Consider the possibility of offering your better quality plywood this way: Pay a down payment equal to the price of the lower quality plywood plus a 60-day postdated check for the balance. Do this after you have explained that your product will last longer and is really cheaper on a per unit time basis. This will work if the customer wants the quality of the product and only has a cash flow problem.

If, however, the customer only wants the lower quality product, simply go for the quality the market wants. No more, no less.

Another principle of QDP is: Faster delivery of a product the customer does not want will not result in sales. Delivery only becomes a strategic advantage if there is parity in quality.

What does LPG have in common with fast foods?

First, I’d like to know more about your customers. Can you put together a breakdown of your customers? Who are they? What are they? I’ll be of greater help to you with more knowledge of the market.

What struck me about your LPG operations is the use of sub-dealers. This is a great way of bringing you closer to the customer. You are right. Your sub-dealers would be closer to the customers and there will no need to travel far. This is a delivery strategy. You applied QDP correctly here.

There is very little quality differentiation in LPG. Therefore, delivery advantage can be a source of competitiveness.

But there are potential issues I want to warn you about. A mistake of the sub-dealer will have an impact on you. If a customer of a sub-dealer is dissatisfied, this customer may no longer buy from your sub-dealer. Your sub-dealer will also reduce the volume of purchases from you by the same amount. The key is how to make your sub-dealers act, think and deliver as though they were your main office.

How do you get the sub-dealers to satisfy the customers the way the main office does? These issues are the seeds of franchising. Do not just sell LPG to your sub-dealers. Treat them like a franchisee and you will stay no. 1.

Provide a manual of operations. This will include items on how to greet customers, how to handle the product, what to do when there is a complaint and how to test the system of the customer for safety.

Train your sub-dealers on the manual. Use the sub-dealers to get customer feedback (so you can improve your system). This is the same way fast food franchises operate. Benchmark with this business and I’m sure you will not only stay no. 1 but will leave no. 2 far behind.

Benchmarking with other industries is often used by master entrepreneurs to innovate and improve themselves. This leaves the others behind and keeps them wondering what happened. By the time others are able to copy the innovation of the master entrepreneur, there is a new innovation being introduced.

(Alejandrino Ferreria is the associate dean of the Asian Center for Entrepreneurship of the Asian Institute of Management. For further information/comments, you may mail him at: HYPERLINK "mailto:[email protected]" [email protected]. Published "Enterpreneur’s Helpline" columns can be viewed on the AIM website at http//: www. aim.edu.ph).