by Donald V. Potter

The fable of the grasshopper and the ant begins on a perfect summer day. The grasshopper fiddles and frolics – and why not? It was a long, hard winter, and he deserves some fun! The grasshopper has only scorn for the hardworking little ant who spends his summer making repairs and storing up supplies. But of course, winter returns. Then it is the ant who is snug and safe while the shivering grasshopper is outside looking in.

Leaders of industries coming out of hostility would do well to remember the grasshopper and the ant. Hostility, like winter, always returns – and often much more quickly than expected. When hostility “ends” because of outside factors, such as changes in trade barriers, currency valuations, or the supply of crucial components in the production process, the respite from hostility may last a few years at best.

How Companies Can Squander Their Summer

“Grieved customers have long memories.”

The great danger is a temptation simply to take the profits. Managers may not exactly say “We deserve it,” but they may reason that periods of greater profitability offset the lower profits earned in tough times so that, on balance, the high profits are deserved and needed.

Or, they may justify taking the profits so that they can invest in themselves by buying back their stock or reducing debt levels. But when hostility is only in remission rather than ended, the company is likely to need this capital again.

Worst of all, companies may become self-satisfied, even arrogant. At least for the moment, customers appear to need them more than they need customers. Supply to some customers might be restricted, delayed, or even denied. The sales force may reduce services and support. But sellers’ power does not last and customers have very long memories. Stories are heard of customer grievances which occurred when times were good for suppliers – stories told five to fifteen years after the events took place.

Storing Up Customer Goodwill

Wise companies use the respite from hostility to improve their relative competitive position when hostility returns. That usually means investing profits, or foregoing some of them, to insure strong, secure customer relationships.

What might a company do?

  • Negotiate a longer term supply arrangement in return for somewhat lower or more stable prices.
  • Help customers who are short of supply find additional sources, even if that supply comes from a competitor.
  • Invest in programs to help the customer to penetrate his own markets or to reduce the cost of doing business with the company. These programs might have been viewed as too costly during hostility.
  • Invest in software and automation to reduce the manpower content, and eventually the long-term price, of the company’s products.

Doing What Comes (Un)Naturally

“Savvy leaders ask why their company has high profits.”

Foregoing profits goes against a business leader’s instincts. If one is lucky enough to be in a key management position when profits rise, it is natural to think, “Why give up profits that come on my watch?”

The honest answer is that good times are usually short-shorter than the careers of most managers in any company or industry. And business history is filled with examples of formerly strong companies that refused to risk short-term profits for a better long-term position.

Savvy leaders ask themselves why their company is enjoying high profits. Are these profits really “earned from the customer” because the company has positioned itself especially well to serve customer needs? Or are they the result of external events that have lifted the entire industry? If so, they are likely to disappear soon. A wise leader will emulate the ant and use those profits to prepare for hostility’s eventual return.

Closing Thought

The low-cost position is the ownership of a satisfied customer relationship. No market affords a supplier the opportunity to create this kind of a relationship as well as does a very high profit period for suppliers.

(Note: This Perspective was written in the context of the economy in 1994. While some of the companies may have changed their policies or indeed no longer exist, the patterns they exhibit still hold today.)

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Symptoms and Implications: Symptoms developing in the market that would suggest the need for this analysis.