Customer Profitability Analysis: Lanyin Zhang and Malcolm Smith Describe Trelleborg's Progress in Trying to Crack the Chinese Market by Conducting a Systematic Evaluation of Potential Customers
Zhang, Lanyin, Smith, Malcolm, Financial Management (UK)
Trelleborg is a multinational group specialising in polymer technologies. It employs more than 22,000 people in 40 countries, with annual sales in the region of 2.1 bn [pounds sterling]. Trelleborg Industrial Anti-Vibration Solutions (TIAVS), part of its automotive business division, manufactures mountings and suspension components for rail, off-highway, marine and industrial applications.
While TIAVS's traditional markets of Europe, Scandinavia and North America remain important, the firm has changed strategy significantly in recent years. Products with marine and industrial applications are still aimed at customers in Europe, but the marketing effort for its rail products has shifted to India, while that for its off-highway products has shifted to China, Korea and Japan.
TIAVS believes it's crucial to penetrate China's off-highway market, so the firm has been devising ways to find, win and keep profitable customers there. With one-fifth of the world's population, China is a natural target market for foreign companies, but it is very different from western countries in terms of business etiquette. Confucianism continues to influence attitudes in China. Its deep-rooted values characterise business culture as collectivist, with a strong emphasis on personal connections (guanxi), in contrast with the market-based system more commonly found in the west. The panel on the opposite page, based on the China-Britain Business Council's rules of etiquette, provides a useful general guide for foreign companies seeking a foothold in this market.
Although product profitability calculations are well established, other forms of analysis--notably, customer or channel profitability have not been widely adopted. But TIAVS wanted to identify its key potential customers in China and determine what aspects would help it to win and keep them. It needed to know the following facts: The number of prospective customers in the market.
* Their product ranges.
* Their annual production levels.
* Their existing expenditure on Trelleborg-made products.
* Their major concerns when choosing a supplier.
A traditional customer profitability analysis can be performed properly only on existing customers--ie, where the revenues they generate are known and where an activity-based approach to customer costs is feasible. Companies might use this as an excuse to avoid profitability calculations and become obsessed with attracting new customers, whether these are profitable or not. But more customers don't necessarily mean more profits, so a new and different approach to profitability analysis is needed when it comes to acquiring new business. It requires the following steps:
* Establish guidelines for accepting new customers, based on short-term profitability and the likelihood of a long-term relationship resulting in profitability or network associations.
* Forecast the likely profitability of each firm based on current knowledge.
* Analyse all potential customers and specify those likely to be unprofitable.
* Eliminate from consideration those deemed unprofitable and unlikely to provide non-financial benefits, unless they are viewed as potential turnaround situations.
* Specify the top ten per cent of profitable customers and look for shared characteristics among them. Focus your marketing effort on satisfying their needs.
* Look more closely at the profitable customers to gain a realistic impression of the resources it would take to service them.
* Identify factors that are likely to breed disloyalty among profitable customers.
Every major company in China's off-highway sector was examined to determine their likely profitability, with revenues forecast on the basis of annual production estimates. The field was narrowed down further to those that were manufacturers or known to be customers in the off-highway market. …