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Corporate management in times of uncertainty

Munich, August 2024

Quo vadis, supplier industry – challenging times require bold action

Munich, August 2024
H

ow do we keep the company manageable as it becomes larger and more complex?

How can we navigate effectively in times of changing customer requirements, new technologies, and business models alongside the numerous geopolitical crises? The German supplier industry is working intensively on these issues. The quality of the company’s internal control system has become the new top management task.

A joint study by Berylls and pims.ai¹ shows that over 56% of the selected strategic business units of automotive suppliers are unable to leverage their full return potential of 9%² on average. As a result, more than half of these companies are giving away money, unlike top companies that have a comparable competitive position and a similar level of market attractiveness.

The affected companies frequently react by exerting more control, but run the risk of overstepping the mark. They introduce a large number of key figures, some of which obscure the essentials of the business. Moreover, they often focus on the operational management of day-to-day business and less on the expansion and management of the company’s long-term strategic success potential.

It is therefore important to bring the key aspects of the business back into the focus of corporate management and to ensure the continuous planning and management of the strategic potential for success. To achieve this aim, the concept of six key factors³ can serve as a promising navigation system for top management. According to empirical long-term studies, these six key factors explain over 70% of a company’s success. The concept does not directly show decision-makers what the right course is for them, but it does provide them with guidance for determining and navigating the best course. We would like to briefly present these six key factors below.

6 Key variables – navigation system in stormy times

Bildschirmfoto 2024-08-28 um 10.21.08

Market position – driver of long-term business success

One of the strongest drivers of long-term business success is the market position, often expressed in terms of market share. However, market share is not an end in itself – a superior market position is a prerequisite for gaining additional market share. However, many companies do not know the ideal market positioning for their product, which results from its positioning along the axes “price compared to the competition” and “customer-perceived product quality”, thus placing the relative customer benefit at the center of the analysis. The value map is an effective tool here, which decision-makers can use to derive valuable recommendations for a more advantageous market position or to define corrective measures in order to achieve the desired positioning. This is also illustrated in the value map below: while the competitor “This business” and competitors 1 and 3 all offer an above-average price, “This business” scores with its product quality, which is perceived as the best. Competitors 1 and 3, on the other hand, must expect to lose further market share due to their perceived below-average quality.

 

pims.ai Customer Value Map for a competitive market position

Bildschirmfoto 2024-08-28 um 10.21.24

Innovation performance – risk of “innovating past” market requirements

It is not sufficient to simply measure innovation performance via a key factor. It is much more about recognizing the respective substitution dynamics on the market, i.e., the way in which new products satisfy market demand and thus replace old products. Supplier strategies are often still strongly driven by their own research and development activities, according to the principle: If I have a good product, there must also be a customer problem that needs solving. Forward-looking corporate management must therefore steer new product development in such a way that it takes into account the speed at which substitution processes take place on the market. It also needs to be able to respond to these processes with the right new products. Developing a management capability of this nature is absolutely critical to success, especially during this period of transformation in the automotive industry.

Productivity – implementing productivity gains

Productivity is another key factor. Supplier companies in particular are exposed to considerable productivity pressure. People often talk about cost pressure, but this is only one aspect of productivity. Rather, the aim is to provide either the same level of service at lower cost (input) or significantly more services (output) at the same cost. The Berylls-pims.ai study shows that suppliers with lower expected returns compared to top companies have productivity potential particularly in the areas of manufacturing and distribution. These companies frequently find it difficult to implement the effects of accumulated experience curves and continuous improvement measures in such a way that a genuine increase in productivity is achieved. If companies manage to leverage their productivity potential, they can strengthen their competitive position and use it to gain additional market share. Consequently, it is once again important to consistently focus corporate management on the key factor of productivity in terms of labor, capital, and time.

Attracting good people – more than ever a challenge for the sector

The shortage of skilled workers among manufacturers and suppliers in the automotive sector is a well-known problem. If you look at the development of junior staff, it becomes even more serious, as today, a supply chain graduate already has six vacancies to choose from, and this number is set to rise over the next few years.⁴ It is therefore hardly surprising that attractiveness as an employer is another key strategic factor when it comes to recruiting good people. Supplier companies are now required to revise their HR strategy. Which skills will be needed going forward? Can we generate the necessary expertise ourselves or do we have to buy it in externally on the market? How good are we at recruiting, retaining, and developing talented people? In many cases, companies do not lack the knowledge of what they need to improve or the financial resources, but rather managers who are effective at implementation. Strategies are therefore needed that provide answers with regard to the right basic and advanced training and the recruitment of good people in order to avert potential risks to companies.

Liquidity and profitability – sufficient financial power for tomorrow’s business

Key factors five and six are presented in a summarized form. This is because liquidity and profitability are not taxable variables for future success potential, but rather the result of implementing the strategic plan. The higher the potential for success, the greater the probability of having sufficient liquidity and long-term profitability. The frequently used phrase “We have to maximize our profits” falls short here. To be able to finance the business in the long term, it is crucial to gain clarity about what the profit minimum is. After all, it is easy to maximize profits in the short term by postponing investments – but the actual task of top management is to manage the six key factors in a balanced manner in both the short and the long term.

Conclusion

Navigating the transformation of the automotive industry, which is currently in full swing, is sometimes a difficult matter. Against this backdrop, the logic of the six key factors gives decision-makers the required orientation. These six key factors considerably speed up the discussion and the decision-making process within strategic planning and management and protect against the distractions caused by peripheral issues and personal management perceptions. At the same time, they also set out the requirements for a good strategy and compel the management teams of supplier companies to provide or find the necessary answers. These key factors can also be used as a basis for reporting and target cascading within the organizations. The further operationalization of these key factors into operational indicators even makes it possible to align the value-adding processes and thus closely interlink what is strategically planned with what is actually implemented. Thus, strategy work becomes productive through clearly aligned corporate management, making it a critical task for decision-makers in the automotive industry.

¹ PIMS stands for “Profit Impact of Market Strategies” and is still the world's largest empirical research program in the field of strategic management, dating back to the 1970s. PIMS uses data from over 4,500 corporate units to determine the most important drivers for the sustainable success of companies.

² 9% describes the return on sales and therefore the average expected return of a supplier company.

³ The concept of six key factors goes back to Malik.

⁴ Supply Chain Management Center der University of Maryland (2015).

Authors
Dr. Alexander Timmer

Partner

Laura Kronen

Partner

Dr. Christopher Brüggemann

Associate Partner

Felix Riebel

Consultant

Dr. Alexander Timmer

Dr. Alexander Timmer (1981) joined Berylls by AlixPartners (formerly Berylls Strategy Advisors), an international strategy consultancy specializing in the automotive industry, as a partner in May 2021. He is an expert in market entry and growth strategies, M&A and can look back on many years of experience in the operations environment. Dr. Alexander Timmer has been advising automotive manufacturers and suppliers in a global context since 2012. He has in-depth expert knowledge in the areas of portfolio planning, development and production. His other areas of expertise include digitalization and the complex of topics surrounding electromobility.
Prior to joining Berylls Strategy Advisors, he worked for Booz & Company and PwC Strategy&, among others, as a member of the management team in North America, Asia and Europe.
After studying mechanical engineering at RWTH Aachen University and Chalmers University in Gothenburg, he earned his doctorate in manufacturing technologies at the Machine Tool Laboratory of RWTH Aachen University.

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Laura Kronen

Laura Kronen (1980) is a partner at Berylls by AlixPartners (formerly Berylls Strategy Advisors) with a focus on transformation. She is passionate about moving people and organizations forward. With over 18 years of industry and consulting experience, her focus is on transformative challenges in the operations context – from executives to individual employees, at manufacturers and suppliers. She helps her clients align strategy, structure, and culture in their respective market environments to build resilience.

Prior to joining Berylls, Laura Kronen worked at PwC Strategy&, Volkswagen AG and Audi. She holds a diploma degree in industrial engineering from the Karlsruhe Institute of Technology (KIT).

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Dr. Christopher Brüggemann

Dr. Christopher Brüggemann (1983) is a Project Manager with focus on transforming organizations to improve performance, speed and agility. He is also an expert in strategy deployment, organizational design, and transformational change. Christopher has advised numerous companies through multiyear organizational transformations, often focused on operating model development and putting new ways of working, structures, processes, decision making mechanism in place.

Before joining Berylls, Christopher worked at Sixt SE, several other consultancies, and served as a research associate in cooperation with Deutsche Telekom. He has a PhD in economics and a diploma degree in business administration of Bayreuth University.

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