Developing into alliances part 2

Are medium-sized companies threatened by structural changes in the marketplace? I am convinced they are. But which are their threats?

Let's start with the manufacturing-discipline; the lifeline for most of the medium-sized suppliers. Can they continue with further cost-reduction and increase their manufacturing-efficiencies? Probably not, unless prepared to pass these efficiency-gains on to the market; the result is increased volumes sold without the financial reward of doing so. This is a strategic paradox.

To keep up with the big competitors, investments in state of the art equipment for manufacturing and packing is required. Investments that have a weak return, because capacities will be underutilised. And, these investments put a strain on the company's financial stretch.

Also let's not underestimate the power of the retail-trade. Certainly in grocery/mass markets, international groups continue to develop, if not through M&A, through international buying alliances. Maybe of no strategic relevance for the suppliers today, but I have no doubt that those alliances will grow into powerhouses in the near future.

Does this apply to grocery only? Definitely not! Also in the specialty-trade the importance of chains and buying-groups increases dayly. Not in all regions at the same speed; yet an irreversible development you are wise to monitor closely.

The implications of a changing retail-trade for the medium-sized companies are the ways in which selling and marketing take place; they need to be redesigned. But even more importantly, the brands the company sells possibly stop to be part of the evoked set of the retail-trade partners. The result is an eroded value of the company whose brand falls by the way-side..

We can safely assume that regulations become even more stringent than they are today. Certainly on the food-side disasters such as BSE, FMD, dioxin (what's next?) incite authorities to be increasingly sceptical regarding some ingredients and their applications. The likely consequence is additional investments to comply with these regulations. Will these investments ever pay themselves back?

The above constitutes a bleak prospect. Is there anything the medium-sized companies can do to turn the tide? I believe there is! Seriously consider alligning with peers!

The handicap to do so is not rational; i.e.understanding that something needs to be done. Emotion is often the true barrier. Medium-sized companies – often family-owned/privately held –enjoyed a healthy, but above all a very independent life during the past few decades. Why give up this "freedom"?

The fear of management is to relinquish (part of) their independance. How much independance needs to be given up in alligning with your peer? This peer having the same need to allign. And facing the same emotional uncertainties?

Alliances start with the readiness to do something together. Looking at synergies to be created, while retaining the operational versatilities the big boys sometimes lack. And appreciating each others strengths and weaknesses. Co-packing and R&D can be considered, as can joint logistics and sales; to name but a few examples of where economies of scale can be achieved while maintaining the control of your own destiny.

And, why not think outside the framework of your own product-category?. Seeking peers that are no direct competitors, but face similar problems, can be very suitable alliance-partners indeed.

Arguably alliances are seen to be a threat by the management of medium-sized companies. A threat they would wish to avoid. But what if the alternative is to slowly go under?

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20 years' experience in the European pet industry in top management positions and as an independent consultant to the industry since 1995.

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