As faint signs of a pulse are detected in our economy many companies are reassessing their markets and re-building their strategies. But just how in touch are executives with the realities of their own markets? When asked to do an assessment of their own products most executives rated themselves as being better than their competitors’ products. However, the reality is that only 4% of their customers agreed with this assessment! Worse yet, research shows that when competitive threats loom on the horizon many business leaders acknowledge them but dismiss them as anomalies. Building a competitive strategy on flawed beliefs can have catastrophic consequences as Pillowtex shows us!
Pillowtex was a Dallas based company which dominated the pillow industry. They established a hub and spoke system of manufacturing and distribution and invested heavily in automation. Overall corporate sales in the mid 1990’s reached 1.7 billion dollars but the future wasn’t looking soft and fluffy! By the late 1990’s the threat from cheap overseas competition was clear and Pillowtex needed to establish an outsourcing strategy for its traditional products. However, instead of outsourcing production, Pillowtex further invested in automation the strategy being that machinery lowered the cost or created more value than an outsourced product. It didn’t.
Suffering financially and with rising inventory levels the company finally decided to outsource – right? Wrong, they tried to further increase efficiency. The company’s rationale for not outsourcing was that they were trying to protect American jobs. However laudable the reasoning, American customers just wanted more value and in 2003 when the company declared bankruptcy almost 6500 jobs were lost.
Simply recognizing a change in an industry or a new competitive threat isn’t the same as responding to it. If Pillowtex had looked at an outsourcing strategy they would have been able to compare their assumptions against their profit projections from manufacturing domestically. They would have seen how increasingly unrealistic was their business model in an industry that was being deregulated and where labor (more than shipping) was a high percentage of the final cost of goods.
Ask yourself – what creates value in my industry? Then ask could more value be created by doing this or making this in a different way or in a different place? When developing new business strategies stay focused on creating customer value – cover your blind side!
Story from “Billion Dollar Lessons” by Paul Carroll