One of my favorite episodes of “Seinfeld” is where George Costanza talks about lacking power in a relationship. “Once in my life I would like the upper hand,” he complains to Jerry. “I have no hand, no hand at all. She has the hand. How do I get the hand?” Jerry sagely replies, “We all want the hand. Hand is tough to get.”
Similarly, business leaders need to be careful about the “hand” when it comes to their relationships with buyers and suppliers. The power that buyers and suppliers are able to exert over your company, and vice versa, has significant impact on your ability to compete and be profitable — something we take a close look at during our Performance Accelerator program.
Many second-stage companies get into trouble because a single buyer generates the majority of their revenue. It may be that one big customer you won during startup days or a “whale” that comes your way in second stage. If that buyer has negotiating power and asks for a lower price, you pretty much have to knuckle over and say OK. Likewise, if you’re dependent on a couple of major suppliers who provide valuable inputs (raw materials, component parts — even employees can be considered suppliers), they can pass price increases on to you.
The worst scenario is having no power over suppliers or buyers. If that’s the case, it’s not a question of if you’re going out of business, but when.
To prevent that from happening, spread out your risk. As a general rule, I recommend having no single customer generate more than 10 percent of your revenue. Also, give yourself some options with suppliers. (One of the advantages of globalization is being able to source from around the world.)
Yet before taking action, be sure you know how you compete for the market — something referred to as business-level strategy. In most cases, companies are either a cost leader (offering customers low prices) or a product differentiator (offering a unique product or service, usually at a premium price).
Because product differentiators want to set themselves apart on attributes other than cost (e.g. top quality, superb customer service, innovation or advanced technology), they want to get to know customers very well. This enables them to cater to buyers’ needs and ease pain points through their products and services.
Product differentiators also want the best suppliers they can find, so they can gain knowledge from them, be it industry insights, technical savvy or operating efficiencies. I know one company that had a key supplier who helped with market research and even participated in creating the firm’s strategy.
In contrast, a cost leader has a far less intimate relationship with customers because they already know what those buyers want: a low price. To achieve that, cost leaders are maniacally focused on internal efficiencies and selling large volume. Relationships with their suppliers are typically antagonistic as they try to squeeze suppliers for the lowest cost so they can pass the savings on to customers and still maintain profit margins
A couple of key points:
- Be clear on your strategy. It’s important for everyone in your organization to understand your business-level strategy because it affects how they interact with buyers and suppliers. For example, if you’re a product differentiator, make sure your staff is listening carefully to customers’ needs and problems — and sharing that information throughout the company.
- Beware of strategic drift. Most second-stage companies I work with started out as product differentiators. Yet sometimes their behavior is contradictory, and they act more like cost leaders. They may start chasing new deals on price, or their salespeople may begin to offer lower prices to keep customers coming back. This is where strategic drift happens. Granted, there are certain degrees along the continuum, but you shouldn’t straddle. Know what lane you’re in and stick to it. If you do change strategies, then you’ll need to change your approach to buyers and suppliers.
Whether you’re a cost leader or product differentiator, one of the best ways to gain more influence with buyers and supplier is to have some kind of core competency so you become very rare in their eyes. Strive to become irreplaceable so they can’t find what you do anywhere else.
Granted, there are many aspects of the external environment that business owners can’t control, such as the economy, politics and government shutdowns. Yet when it comes to your relationships with buyers and suppliers, there are steps you can take. Even though Jerry Seinfeld admits that “hand is tough to get,” it’s still possible.
(Published Feb. 20, 2019)