GE Plastics took just such a proactive approach a few years ago when it asked customers for their product wish lists and told them to include items that they believed were nothing but fantasies. Car manufacturers responded that they needed more plastic body parts to lighten vehicle weight and achieve lower fuel consumption. So GE Plastics designed a solution that involved setting up partnerships with injection molding companies to develop the equipment and manufacturing capabilities to build automobile doors, and then other plastic car parts like hoods, back panels, and now even windows out of plastic. For the molding companies, the solution resulted in an additional product line and new skills that they could use to make other finished items. GE Plastics ended up with a market share coup. It became the first supplier to a customer base to which it didn’t have access before.
Risks and Rewards
Of all the benefits of customer symbiosis, mitigating customer risk is the most uncertain, but also boasts some of the greatest profit potential for suppliers. Most commonly, solutions that promise to limit customer financial exposure are tied to supplying essential commodities, like electricity or even broadband access, whose prices can rise or fall. Suppliers that offer these solutions can generate ever-increasing revenue from customers as these customers expand into new factories and new business lines; in effect, the suppliers edge so close to customer operations — because they’re handling an indispensable commodity — that they become irreplaceable.
But the potential dangers of financial risk mitigation are equally apparent. The Enron Corporation is a very visible symbol of how easy it is to fail at them. Indeed, one of Enron’s biggest mistakes was its lack of fear, as it took on so much of its customers’ financial stake in future energy and other commodity prices that any bad bet could topple the whole company. In light of the Enron disaster, most solutions-oriented companies that promise risk mitigation are now weighing such contracts very carefully against numerous “what-if” scenarios and also offsetting the gamble with financial derivatives or organizational restructuring to cover them in worst-case scenarios.
The solutions relationship forged recently between Reliant Energy Inc. and semiconductor maker Texas Instruments Inc. is particularly robust. Under this two-year contract, Reliant will supply power to 24 Texas Instruments sites, including the company’s Dallas headquarters. TI is paying $100 million for the electricity, about 20 percent below current rates. But it’s also a big win for Reliant: The TI power sales contract is one of the largest in Texas. And the discount may be conservative, because some experts believe the price of electricity will drop as much as 30 percent in Texas in the next few years. Reliant is splitting into two companies: One is a traditional regulated utility, which is a relatively safe investment; the other is a competitive energy trader that will offer more arrangements like the TI solution, trade in derivatives markets, and be a somewhat riskier investment that also carries more potential upside.
The powerful economic forces that make customer symbiosis such a formidable business strategy now will be with us for a long time. Companies can expect an almost perpetual onslaught of deflation, commoditization, and searing competition, as well as the struggle to somehow stand out among rivals. Becoming a solutions provider and a champion of customer symbiosis may be the only choice for many suppliers to flourish in such an inhospitable business environment.
Reprint No. 02205
Chuck Lucier, firstname.lastname@example.org
Chuck Lucier is senior vice president emeritus of Booz Allen Hamilton. He is currently writing a book and consulting on strategy and knowledge issues with selected clients. For Mr. Lucier’s latest publications, see www.chucklucier.com.
Richard Molloy, email@example.com
Richard Molloy is a former principal with Booz Allen Hamilton, where he developed customer facing capabilities for consumer products and health-care companies. He is currently starting an LBO/MBO fund.