191-A Tale of Colorblindness
The farm equipment industry is well known for the colors on the equipment of its major suppliers. Deere’s equipment is green, Caterpillar’s is yellow, and New Holland sports a blue color. Normally, customers are very loyal to the “colors” in the industry. This year, however, some customers are developing green colorblindness. This loss of customer loyalty is coming as a result of a difficult trade-off Deere had to make. This loss of colorblindness also illustrates the way market share moves in many markets.
As the economy collapsed, taking the farm equipment industry with it, Deere had to make some tough choices. Its forecast for the industry’s losses called for it to shrink its inventories radically, and it has done that exceedingly well. Its inventories, as a percentage of the last twelve months of sales, are, by far, the lowest among the industry’s largest suppliers. This inventory reduction, in part, came as Deere borrowed a page from Dell’s success in the personal computer market. Deere is attempting to become a build-to-order company in order to keep working capital investments low and manufacturing economies high.
However, a bump in the road has arisen. The market for farm equipment came back stronger than Deere’s forecasts. As a result, customers who order today will not receive their farm equipment in time for their harvest seasons. In fact, equipment will not arrive for a few months after the harvest. So, some erstwhile “true green” loyal customers are migrating to competing suppliers. Caterpillar, New Holland and others are the beneficiaries of this market share movement.
This illustrates one of the two ways that market share moves in a market. (See “Audio Tip #29: Positive vs. Negative Volatility” on StrategyStreet.com.) In one way, which we call a “win”, a supplier in the industry does something that most of the other industry competitors either will not, or cannot do, and wins market share at the expense of its competitors. (See “Audio Tip #34: How Does a Company “Win” in a Market?”) In the second mode of market share movement, which we call a “failure”, a supplier who is an incumbent in a customer relationship either cannot, or will not, do something that at least half the other competitors in the market can, and will, do. (See “Audio Tip 35: How Does a Company “Fail” in a Market?”)
In most markets, failures move more market share than do wins. Competitor offerings are close enough to one another that most customers will not change suppliers readily. It is difficult to “win.” On the other hand, it is much easier to “fail” in a customer relationship. You can fail to offer a new Function; allow your Reliability reputation to erode; you can stretch out the order cycle time on the customer and fail in Convenience; or you can hold prices high and fail in Price.
Deere has a two-fold “failure” in this marketplace. It is failing its end users because it stretched out its order cycle time. Deere failed on Convenience for the end users. A more important failure, though, has occurred with its channels of distribution. Deere is failing its channels in Reliability. It does not have product when they have a market. Of the two failures, the Reliability failure is the more important. Over the years, we have seen many markets where customers will take on a secondary role supplier in order to ensure that they never are short of product when they need it. (See “Audio Tip #12: Supplier Roles and the Customer Buying Hierarchy” on StrategyStreet.com.)
Deere succeeded in beating its major competitors in managing the profit decline over the last year. Their better profit management was the result of its aggressive cost management. On the other hand, its cost management is now causing it to lose market share due to failures of Convenience and Reliability. In the long run, Deere’s profit calculus is likely to work against them. They have cut costs at the customers’ expense.
Deere more than righted its ship. At $28 billion in sales, John Deere holds 53% of the US tractor market and 60% of the combine market. Its cost structure, measured by gross, operating and net margins is lower than its competition. This cost advantage increases in recessions. The company also enjoys the highest brand loyalty in the US market. CNH at about $14 billion in sales, and Caterpillar at $10 billion in sales remain as worthwhile but distant competitors. The company has parlayed its unique reliability reputation into superb convenience and the industry’s best economies of scale. See HERE, and HERE
and HERE for more perspective.
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If you face a competitive marketplace, read these blogs. We wrote them to help you make better decisions on segments, products, prices and costs based on the experience of companies in over 85 competitive industries. Much of the world suffered a severe recession from 2008 to 2011. During that time, we wrote more than 270 blogs using publicly available information and our Strategystreet system to project what would happen in various companies and industries who were living in those hostile environments. In 2022, we updated each of these blogs to describe what later took place. You can use these updated blogs to see how the Strategystreet system works and how it can lead you to better decisions.