Why Credit Doesn’t Matter to Maintain Competitive Advantage

Realizing I would be without a wireless connection on my train ride to NYC, I stopped to grab some light reading material at a kiosk in Union Station, where I found a plethora of headlines devoted to capital spending. I know that the loss of $50 Trillion in wealth in the last 18 months led to a severe credit crunch, but wasn’t that old news? Aren’t businesses starting to rebound with the distribution of the $700 Billion in TARP funds that helped prop up banks and car companies, along with another $2.5 Trillion spent to support the struggling financial system? I take a quick look through the daily business headlines, and they continue to reflect a particularly bleak outlook for businesses that are still struggling with low expectations for growth and profits, costly and scarce credit, weak consumer demand and a glut of production capacity. To compound matters, the current administration and Treasury Department will implement extensive financial regulations to curb future financial crises, and banks continue tightening their lending standards for all types of business loans. I hope these measures reduce the risk of another bubble market, but at what cost will these measures reduce the opportunity for many businesses to effectively compete in this economy? One thing is obvious: credit will no longer be a cheap commodity for businesses in the near future, period. But then again, is credit really necessary for businesses to stay competitive?

The problem many corporations frequently suffer from is fractured pricing policies where disparate departments within the organization have conflicting rules regarding pricing strategy. This is often a result of unimpeded change within each department, where every manager relies on their own gut instincts at pricing based on their limited view of the ever-changing picture of customer demand. In addition to this proliferation of pricing policies with the potential to impact the market’s demand, other departments in the organization are also making demand-impact decisions, such as advertising and product mix. These practices are often left to chance because most leaders A) don’t realize the problem exists, B) are currently surviving this economy with a meager profit that is most often derived from a “survivalist” measure like cost cutting, layoffs, and running tighter operations, etc., C) are consumed by the sheer volume and complexity surrounding marketing decisions due to the proliferation of advertising channels, products, customers, and supplier networks, or D) if they realize there is a problem, they aren’t aware of what solutions may exist. What these business leaders don’t realize is that they’re leaving enormous profits on the table all the while giving competitors the opportunity to lure their customers away with the “right” price.

To help shed light on the problems these business leaders are facing, I reflect on a quote from John Wooden – one of the most respected college basketball coaches of all-time with 10 NCAA basketball championships during his tenure at UCLA – where he said, “Before you can lead others, you must be able to lead yourself.” This brilliant insight by a legendary sports icon can also serve as an invaluable business axiom: you can’t lead your market until you lead your organization. Simply put, companies – especially those struggling in this economy – should turn their attention inward. Doing so will require new thinking, advanced technology and a change of focus towards effectively generating growth organically (as opposed to via manic serial mergers and acquisitions) for your firm. Forget about the credit crunch (i.e. insufficient investment capital, the dried up commercial-paper market, etc.), falling consumer demand and other external factors that you can’t control.

I believe that in order for companies to be profitable in this economy, they need to adopt both an enabling technology and decision-making infrastructure to help them determine the optimal prices, marketing mix, and product assortments that will maximize revenue and profitability. Successful implementation requires leadership from the executive suite and bottom-up support from the people who work in all functions throughout the organization. Technology is a necessary component and must be able to serve the firm across its organizational silos in ways that allow each part of the organization to achieve optimal productivity and profitability, taking into account both departmental and firmwide objectives. Visibility throughout the organization is also essential, where the stewards of each of the demand and supply levers in effect have the ability to discover previously unknown or misunderstood elasticities – this can lead to a virtuous loop of discovery and profit.

Times like these require business leaders to move past temporary measures to be successful in both the short and long-term – to not only help their companies survive this downturn, but also to be visionary and lead their market! The insight a company requires to effectively manage their marketing decisions should be robust and holistic – not only do they need optimal prices, but also recommendations on products for customer penetration (cross-selling), optimal deals and promotions and guidance to curtail customer churn. These organizations that are able to not only manage, but also execute their ever-growing array of marketing decisions will have the ability to drive their markets, rather than being driven by them, and will be better positioned to continue leading their markets when the economy returns with vigor, as they will be more adept to discover, view, analyze and act upon the opportunities present in their demand environment. I can only assume that the shrinking credit supply, weak consumer demand and other external factors will likely be with us for some time, but they are of little relevance to any business leader looking to grow their firm organically, and seek to embody John Wooden’s principles in the process.

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