Bonn, December 2008Prof. Dr. Hermann Simon

Bonn OfficeHaydnstraße 36, D-53115 Bonn, GermanyTel. +49 228 9843-115, fax +49 228 9843-380e-mail: hermann.simon@simon-kucher.comInternet: www.simon-kucher.com

Management in a Time of Crisis:Applying All Three Profit Drivers

15 Quick Wins

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Think about this sentence

“When the storm comes,

some build walls,

the others build windmills.”

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Do we understand this crisis?Devoting some thought to the crisis is worthwhile. Only then will one be able to react appropriately.

Sales/Demand110

Production/Capacity

100

Consequences: Supply/capacity bottlenecks/price increases of rawmaterials and supply/increase of raw materials.What should have been done? Increase prices even more strongly!!

What was it like in the past “boom years” (schematically)?

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The ideal situation: BalanceOne never experiences this situation! One either has too many or too few people.

Sales/Demand

100

Production/Capacity

100

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And now the crisis…This crisis is a revenue/sales crisis, not a cost crisis. Most affected are “postponables”, i.e. products and services whose demand can be postponed.

What should one do? 1. Reduce production/capacity2. Fight hard against volume and price declines

Sales/Demand

75

Production/Capacity

100

1.2.

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This crisis is too serious,

…to counter simply by cutting costs.

If sales tumble by 25%, even a 10% cost reduction will not rescue the company.

The effect of cost reductions sets in too slowly

In times of crisis, all three profit drivers (price x volume – costs) must be applied to the fullest extent.

The primary goal must be to avoid a further decline in volume and prices – not necessarily to achieve improvements.

The speed of the effect is at least as important as the magnitude of the effect.

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A crisis means a drop in volume and/or price. A volume cut is less damaging to profits than a price cut

Calculation: Price 100, volume 1 million, costs 60 Profit margin =€40 million10% price reduction to 90 Profit margin =€30 million =-25%10% volume reduction to 0.9 million Profit margin =€36 million =-10%

Case: ArcelorMittal “to drastically cut monthly productionaround the world”. Effect will “soon become evident in thespot market prices” (FAZ, November 17, 2008)

Lesson 1: In times of crisis, actively reduce volume and aim to keepprices stable – never the other way round.

Quick win 1: Accept volume cuts before price cuts

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Quick win 2: Bring about an industry capacity reductionThe same applies to the industry as a whole. Reduce supply across the industry/relieve market pressure to keep prices

as stable as possible. The (common) misconception: Prices are lowered in the hope that volumes

will remain stable or market share will grow. The inevitable result: The competitors follow suit. Price war, tumbling

margins – and the overall volume does not increase. Quick wins: Clearly signal the supply reduction – and stick to it. Also state

clearly that market share is being defended. Case: TUI and Thomas Cook, the largest tour operators, have

sharply decreased their capacities across Europe. Lesson 2: In times of crisis, make every effort to avoid price aggression

and price wars; they are entirely counterproductive. Instead,work to achieve an industry-wide supply reduction.

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Quick win 3: Fight against falling prices

Simon-Kucher study

Compared to -3.8%, -1.4% is a huge success!

Lesson 3: In times of crisis, price increases are often illusory.Defending prices more effectively than the competition is a success.

5.1%

3.8%

Successful suppliersSuccessful suppliers Less successful suppliers

Less successful suppliers

4.7%

1.4%

Price cuts demanded by manufacturers

Actual price cut

Fighting against price declines makes a difference!

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Quick win 4: Give discounts in kind, not price discounts Discounts in kind have several advantages: Price level remains (nominally) stable. Larger volume and more employment instead of lower prices. Generally better in profit terms if percentage remains unchanged. Case 1: Boat builder

- Offer for retailers: buy five boats, get one free- Actual price discount: price 100, 500 paid instead of 600,

100/600 =16.7%- Volume =6, revenue =500, profit margin =140;

with a direct discount of 16.7%, volume =5, revenue =420,profit margin =120

Case 2: Manufacturer of designer furniture additionally offers a sofa. Very positive experience.

Lesson 4: “Actual” price cuts may be unavoidable in a crisissituation. Wherever possible, they should be viewed asdiscounts in kind, not as price discounts.

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Service has been neglected in the last three to five years due to capacity bottlenecks in production.

Step up service selling activities.Crane manufacturer: 40% existing service contracts; aim to increase to 50%.

Redeploy production redundancies in service (dual effect: relieves pressure on production, strengthens service).

Case: Media-Saturn previously offered no service. New:Powerservice 24. Technicians deliver and install goods for afixed fee.

Lesson 5: Service often harbors short-term potential. At least some ofthis potential can be mobilized by increasing resources.

Quick win 5: Boost service

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Quick win 6: Redeploy office staff to sales force

Common view: Office staff are not ideal salespeople.

But: Even small sales successes are better than idling in theoffice and a further drop in morale.

Case 1: In the 1993 crisis, Würth sent 10% of its office staff intothe sales force – with successful results.

Case 2: Boat builder organizes sales shows in the Middle East,primarily with office staff.

Lesson 6: More people achieve more sales and more revenue. Theright people with the right sales tricks can be successfulon the sales front.

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Customer problems during a crisis: fear, risk aversion, insecurity

Objectives: Redistribute risk, reduce insecurity

Case: Enercon service prices are linked to the profitability of the wind turbine for a 12-year period. Over 85% of customers opt for the 12-year contract.

Lesson 7: Understand the customers’ insecurity and risk perception,and offer appropriate solutions.

Quick win 7: Reduce risk for the customers

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Quick win 8: Offer new business models

Every problem is an opportunity. A new business model can help you to grasp it.

Case: Kofler Energies covers the energy-saving investments. The customer pays nothing. A 10% cost saving is guaranteed to the customer. Kofler receives all savings above this level for 10 to 15 years.

Lesson 8: A poorly solved problem is an opportunity. Considerwhether it can lead to new business for you.

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Quick win 9: Exploit financial power for sales

The credit crunch is deterring many customers from spending. Being able to grant/finance credit is a huge competitive advantage.

Case 1: Enercon covers 50% of the service price for six yearswhen a 12-year contract is signed.

Case 2: German machinery and engineering firms in Russia. Very positive effect regarding financing.

Lesson 9: When capital is scarce, financial power is a tremendoussales advantage. But weigh up the risks carefully.

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Quick win 10: Increase little-noticed price parameters

Almost every company has numerous price parameters. Many of themreceive little attention from customers and can potentially be increased.

Optional extras, special equipment, services, replacement parts, etc.

Case: Private banking with approximately 250 price parameters.About 50 of these could be increased, some by switchingfrom annual to monthly fees.

Caution: Do not overuse this tactic!

Lesson 10: Understand customers’ price perception in order to raiseprices in a targeted manner. This is not observed often enough.

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Quick win 11: Expand sales portfolio

In times of crisis, the sales force is not fully occupied, while other (non-competitor) companies need additional sales capacity.

Case: A confectionery manufacturer with a strong butunder-utilized sales force swaps with a chocolatemanufacturer. Each now also sells the products of theother (a win-win situation).

Lesson 11: Under-utilized sales capacity can be usefully employed byexpanding the portfolio. Swapping under-utilized capacityis even better, because sales of your own productincrease as well.

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Quick win 12: Step up bundling and cross-selling

In times of crisis it is especially important to use strong customer relations for bundling and cross-selling.

Bundling and cross-selling allow price concessions that are not possible for single products.

Many companies cut the number of suppliers when crisis strikes.

Case: Norton Anti-Virus Software makes widespread use ofbundling for all of its products. When three licenses arepurchased, a license for another product (Norton Ghost) isadded.

Lesson 12: Bundling and cross-selling should be used to betterharness the potential of existing customer relations.

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The crisis has a widely varying impact on different companies. It is easier to win customers away from companies that are weakened.

Case: A bank that is largely unaffected by the crisis callscustomers of banks that are having difficulties. A veryeffective campaign with an immediate impact.

Lesson 13: Markets are redistributed in bad times, not good times.Opportunities will not fall into your lap, however; you needto fight for them. The chances of winning customers fromcompetitors are especially high in times of crisis.

Quick win 13: Draw customers from weakened competitors

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If the new/OEM-market no longer runs, one must apply resources to the aftermarket/replacement market/renovations market.

Quick Win 14: Change over from new business to renovations/aftermarket

Case 1: Manufacturer of insulation material. Sales activities are completely re-grouped to focus on the renovation market.

Case 2: Automotive supplier (consumables), OEM-market shrinks. Increased efforts in the aftermarket/replacement market trade, user.

Lesson 14: A quick regrouping of sales and marketing from original equipment/OEM to refurbishment/renovation is indicated.

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Which sales people manage to sell even during a crisis? What makes them different? How can one use their tactics for all sales staff?

Quick Win 15: Top-sales people – excellence to mobilize everybody

Case: Auto supplier (€5 billion turnover). Quick analysis –What makes the top-sales people different? Systematization. Sharing tactics with all sales people (in the project 6 tactics that make top-sales people different were identified).

Lesson 15: Even in the crisis there are winners. Their knowledge must be utilized to mobilize the entire sales force.

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How to proceed

What exactly must be done?

How should the measures be implemented?

Who will be responsible?

What will the impact be on sales, revenue, costs and ultimately profit?Comparison with basic scenario

What impact will result, and how quickly?

The following questions must be answered in each case:

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How to proceedQuick win What to do? How to do it? Who is What will be How quickly?

responsible? the impact?(profit)

Reduce volume, not price

Industry-wide supply reduction

Contest falling prices

Discounts in kind, not price discounts

Boost service

Redeploy office staff to sales force

Reduce risk for customers

Offer new business models

Exploit financial power

Raise price parameter

Expand sales portfolio

Bundling and cross-selling

Win customers from competitors

Switch from OEM to aftermarket

Mobilize top seller tactics

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Project exampleTo do: 100 office staff will be redeployed to the sales force.

Existing sales force of 300 staff will therefore be increasedby 33%.

When? Immediately

How? 1 day of training, 1 day shadowing sales reps. Compile atarget list at the same time. To sales force on the third day.

Who is Sales managers in cooperation with office managers,responsible? group leaders

Expected 10% sales increase compared to basic scenarioimpact: -Office staff achieve approx. 1/3 of sales force staff

-Sales elasticity approx. 0.3 (empirical value)

When? Within three months

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The Simon-Kucher Offer

Quick and dirty – Analysis with immediately effective measures Duration: 1-2 weeksCosts: €25,000-€50,000

Immediate measures – WorkshopDuration: with preparation, preliminary talks, final report, 1 weekCosts: €25,000-€30,000

Sales and marketing excellence program Duration: 1 monthCosts: €80,000-€100,000

Comprehensive analysis and strategy in sales and marketing excellenceDuration: 3-6 monthsCosts: dependent on size of team