As we saw in the prior lesson, for the most part, your customers also have customers. In fact, companies can be arrayed along an industry value chain (see chart below). Bauxite mines sell their minerals to aluminum companies, which smelt the minerals into ingots. The ingots are sent to fabricators, who turn it into very thin sheets sent to beer and soda bottling plants or into shapes sold to automotive and aerospace factories. The beer and soda cans are filled and shipped to wholesale distributors who then send them to retail stores, vending machines, restaurants, and bars. Meanwhile, the planes are flown to airline carriers, and the cars are sent to dealers. Ultimately, all of these products become available to the buying retail customers.
So, if you are an aluminum company, you should know the whole industry value chain and the part you play in it. When you view yourself along this chain, you see that your revenue is actually a cost to your customers, the fabricators. If your revenues increase at the fabricator’s expense, then their costs go up. In turn, they either:
Refuse to accept your higher prices. You, then, might back down and allow them to keep the past pricing. If you refuse, they might seek out your competitors for more favorable pricing;
Accept your higher costs and opt not to pass them on to their customers, likely leading to lower profits; or,
Accept your higher costs and, in order to maintain their profits at prior levels, pass the costs onto their customers in the beer, soda, airline, or automotive chains of business. Your customers will need to know if they will get pushback from their customers and so on down the entire chain.
Even organizations that sell to retail customers might also find that those customers have customers, of one sort or another. Grocery stores might look like they sell to the people in the store. But, many of those shoppers are not the people who decide what goes on the shopping list or which brand is selected. Next time you are in your grocery store, notice how many people are on the phone asking, “Which brand of soup do you want and what size?” Similarly, children’s food preferences shape many customers’ shopping lists. This is why so many cereal, cookie, and other food makers spend so much on advertising aimed at kids.
It’s easier to think of just your customers. But thinking about ALL the customers along the industry value chain—and their issues, constraints, costs, and revenues—will help you identify more profit opportunities.
Consider the history of pantyhose. Traditionally, makers of the product sold it to department stores, who then sold it to women. Manufacturers, like Hanes, packaged it in plastic envelopes which department stores kept in drawers in the Women’s Clothing section of the store.
However, women had a problem. The trip to downtown or to the shopping mall to restore their supply only occurred about once a month. When they snagged their pantyhose, and needed a new pair in a hurry, running to the department store was a hassle. To solve this problem for their ultimate customers, Hanes decided to sell their products in grocery stores, which were much more convenient for their customers. Hanes came to dominate the market because they looked down the entire critical path, thinking not of their immediate customers—department stores—but their ultimate ones, the women who were going to use their product.
Critical Path Action Items
What is the value chain for you industry and how does your company fit in it?
What problem are your downstream customers trying to solve?
What problems can you help solve for your customers’ customers?
How does your critical path help your customers’ customers critical path?