Competitive Challenges; Four Things You’ve Got to Do Better

In the August 1999 issue of SKATE Biz (Volume 11 Number 1), I wrote about two hypothetical skateboard factory owners, Dr. Jekyll and Mr. Hyde. Dr. Jekyll’s production was strictly OEM. Mr. Hyde had a successful brand and built his product at his own factory. They both made a bunch of perfectly logical and rational business decisions, but things kept getting worse financially. I suggested that their business models just didn’t work under emerging competitive conditions, then ended the article with the promise to suggest some fixes next issue.

            It didn’t happen “next issue,” but better late than never.
            The skateboard industry (including apparel and shoes) is highly competitive, with many competitors and little meaningful product differentiation. In this kind of environment, margins tend to drop while advertising and promotional costs stay high or increase. It can be hard times for many participants, even as the industry grows
            Well, you didn’t need me to tell you that, so I’ll get on with it. Sorry, I can be a little pedantic at times.
            You’re stuck with the business model. No individual company can influence significantly how the industry evolves because there is no dominant company. What can you do to succeed given the model? I want to suggest four things.
1. Growth Management
            The set of skills required to run a company with revenue of two-million dollars is completely different from what’s required to run a twenty-million-dollar company. When the company is smaller, you do everything. As it gets larger, you set the direction and supervise people who are doing everything. Those are two completely different skill sets. The faster the growth occurs, the harder it is to make the successful transition. Even if you do make it, there won’t be enough hours in the day to get it all done. You may be the best person at your company to do everything, but there isn’t time.
            You can become a huge bottleneck in the way the business operates. Everybody will be waiting for you to make decisions. I’ve seen it happen too many times.
            Some of the most successful entrepreneurs  hire their own bosses—if their egos will allow them to, that is. Usually, they aren’t willing to take that step until things are tough, and at that point, it’s hard to find people willing to step in.
            The person running a successful skate-industry company with over twenty-million dollars in revenue should ideally have fifteen-plus years’ experience in brand management and marketing (not just advertising and promotion). He or she should have managed growth and run a company larger than your company. It would be nice of they can read a balance sheet.
            There’s no reason management structure has to reflect ownership. If you’re an entrepreneur who has started and built your business, and you’ve made the transition to management, congratulations. If you’re not there yet, remember that a higher net worth and a business card that says “Founder” or “Creative Genius” seems preferable to a lower net worth and a business card that says “President.”
2. Systems
            Computer-system upgrades are a hassle, but do it now. Build it for what you want the company to become, not for what it is now. Get the latest (but not the bleeding edge) technology. Staff the function properly. Plan, plan, plan. Spend, spend, spend.
            What, all this for an accounting system? No. To control inventory. To put the right stuff in shipments. To manage cash efficiently. To make life easier for your customers. To make good advertising and promotion decisions. To gather critical marketing information.
            To spend money efficiently.
            Oh, and I guess you will end up with timely, accurate, detailed financial statements as a result.
            Recently, I got a close look at one skate-shoe company’s computer system. They’ve spent two years installing it—so far. The upgrades, customizations, and improvements never really end. It cost six figures already, and it’s still growing. Hardware is upgraded regularly. They’ve got around 10,000 SKUs (stocking units) available and are actively utilizing around half of that. If the size of the company doubled tomorrow, the system wouldn’t even be stressed.
            They didn’t need to spend all that, at least not right now. What a waste of money!?
            Not hardly. It’s almost physically impossible for them to ship the wrong stuff to a customer. They know immediately what sizes and styles are selling or not selling. Management can get almost any permutation of any report they need almost as soon as they ask for it. The reps know exactly what’s available to sell. Backorders are handled seamlessly as are calculation of discounts. Retailers get a packing list that tells them what’s in each box. The system is almost never down.
            What are the hard costs, not to mention the costs of customer and employee aggravation, of dealing with one pair of shoes shipped in the wrong size or color?
            How valuable is making it painless for your customer to buy from you and receive the inventory when every month the real differences between your product and that of your competitor are declining?
            The hard costs of buying and implementing a computer system show up as an expense on the income statement; the soft benefits of problems avoided and customers made happy don’t, but I’ll bet you they are more than the costs.

3. Brand And Distribution Management

            If there are competitors out there with a product that’s comparable to your product in quality and price, or is perceived to be comparable, then your success is ultimately going to depend on where you sell your product and how you protect and promote your brand name. Growth tops out if your only customers are ’core skate shops. But the market legitimacy of your brand goes to hell if it shows up at Costco, and ’core retailers will desert you.
            Between obvious ’core shops and Costco are all the shades of gray that make deciding whom to sell to such a critical management and marketing challenge. The challenge is made tougher by the fact that the industry financial model (more on that later) requires at least enough growth to get you to critical mass.
            How do you determine what are and are not appropriate product and distribution channel extensions?
            You’ll know them when you see them. I know that sounds like B.S., but it’s that simple and that complicated. It comes from good marketing, which I remind you not to confuse with advertising and promotion.
            Who are your customers and why do they buy your products? In a branded consumer-products business, the president and all the senior executives should be striving to improve their answers to those two questions all the time. Then it’s clear, as a result of your hard work and focus on the issue, that it may be okay, for example, to sell to Pacific Sunwear, but it’s not necessarily time for Garts. If you’ve done your marketing, you will literally know your customers when you see them.
            A good example of a product and brand extension in the skate-shoe business is DC’s all-terrain shoes. I have no idea how they came up with it, but it just makes sense. It has the following characteristics, which you might want to keep in mind when managing your own brand:
          · It capitalizes on the brand name.
          · It doesn’t require a change in distribution channels, but it may position them for some expansion in the future.
          · It puts them in a new category, but it shouldn’t cause any confusion among existing customers.
4. Managing Financial Reality
            As industries mature, larger companies tend to be the more successful ones. Why? If gross margins fall, but you have to spend the same or more dollars on advertising and promotion, you have to be larger. Otherwise, there just won’t be enough gross margin dollars around to adequately support the brand.
            I don’t look at that as my opinion. I don’t see it as a subject for discussion. It just is. How do you mold your company to conform to this fundamental financial law?
            At the risk of repeating myself, you make sure you have management personnel who know consumer-product brand management, have been through growth, and understand marketing. It costs money to do it wrong, and it could threaten the company’s survival.
            Utilize good marketing because it helps you spend your advertising and promotional dollars more efficiently and gives you a factual basis with which to make distribution and brand-extension decisions.
            You have the best systems you can get, and you lavish resources on them. They will give you some of the critical marketing data you need, and they will save you money because they will make your customers dependent on your systems and provide a point of differentiation when products aren’t all that different.
            Dr. Jekyll and Mr. Hyde can both be successful. They just have to change the basis on which they compete to conform to existing market conditions and financial laws.