Differentiation – Part Two

Part Two: Globalization and Consolidation

This is the second article in continuing series about how equipment and service suppliers differentiate themselves in the eyes of the cement producers. In the previous article, “One big happy family” we examined the time period where cement producers, equipment suppliers and manufacturers were generally well mixed and experience was widely shared. Today we will look at the period of Globalization and Consolidation and discuss how this changed working relationships and how differentiation was defined.

Large cement producers have always been part of the landscape, but beginning in the 1980′s and accelerating through the 1990′s and 2000′s, the industry underwent a fundamental consolidation and a shift toward a relatively few dominant players, surrounded by strong independents.

The trend started off predictably by stronger producers buying weaker ones in their local markets. These mergers and acquisitions had an impact on the entire industry as the benefit of concentrated purchasing power came into play. Generally however, business remained the same between the producers and their suppliers and these merged plants continued (at least from the outside) to operate as independent business entities.

When the multinationals began to snap up producers outside their “traditional” territories is when the game really changed. These mammoth companies were not simply purchasing additional capacity, but were strongly focused on deriving additional business “synergy and value” from their new acquisitions. Synergy typically translated into cost reductions through elimination of duplicate functionality and resources.

Quite quickly the local plants became obvious parts of a bigger organism and were no longer individual decision makers. Centralized purchasing became a new norm, and design began to be coordinated through “corporate technical”. Efforts were made to duplicate equipment and thereby reduce spare parts inventories and make the facilities more consistent. Management teams from HQ and showcase plants were dispatched to the newly acquired properties to institute new processes and ways of thinking, and on and on.

This ‘acquisition and merger’ behavior had a profound impact on the relationships between the cement producers and the network of equipment suppliers. Suddenly, a few producers had the ability to make a market. Decisions processes had always been strongly technically and economically driven, even among the independents, but this period moved the business dramatically and aggressively toward technical uniformity and cost optimization viewed from a higher level Some might argue that the higher levels were less concerned about local cause and effects and far more focused on financial optimization.

The relationship between equipment suppliers and producers changed for another reason as well, the way in which personnel moved through the industry changed. Certainly exchanges were still relatively common, but the large producers now had a vast array of new opportunities available for up and coming employees. Many vertical and horizontal career paths were available inside the producers’ organizations, therefore employees were somewhat less likely to leave to work for suppliers or competitors.

The producers also began to take more and more design responsibility, at least from a point of view of prescribing specifications. These specifications were built from their “collective wisdom”, tended to be quite conservative, and may or may not have been developed in cooperation with any of the suppliers. Producers began to grow their own experts, no longer relying on people coming from outside. This in turn raised higher walls between the various large producers and a fierce defense of talent. No small part of this was accomplished by centralizing the pool of experts around the “mother” region of the producer. National pride and local connection are strong loyalty drivers. This may have looked like globalization from a balance sheet standpoint, but if fact corporate cultures were moving backward and becoming more closed. Suddenly, instead of plants being run by people with connections to the local area, they were run by people from far off lands and different experiences.

Suppliers changed during the period as well. Not immune to the same global economic pressures and in no small part driven by the consolidation among producers, suppliers looked to grow through merger and acquisition and to maintain some reasonable relationship of scale to these large producers. Large suppliers grew larger, and many small suppliers simply ceased to exist.

Also not coincidentally, equipment suppliers began to become much less differentiated technically. If a design succeeded in winning a few key projects with a major producer, it would soon be part of the corporate design specification and a similar design was absolutely necessary if a supplier wanted to have any chance at being selected. This could be accomplished by reverse engineering and/or raiding talent and copying, or by acquisition.

The suppliers also had to change in order to deal with the design influence of the producers in house teams. Design freedom and the influence of the suppliers expertise on the layout and the equipment were increasingly restricted. This presented different challenges for the limited equipment suppliers than it did for those who provide a full scope of equipment and services, but effected all profoundly.

Globalization came as a wave over many of the suppliers as well. Multinational companies expanded their portfolios through acquisitions, influencing corporate culture and management structure in much the same way as occurred for the producers. The largest suppliers were compelled into a strategy of “right sourcing” to low cost centers for certain technical activities in response to cost pressures. Virtually ALL the major suppliers gave up the bulk of their manufacturing capabilities during this time period.

Outsourcing of manufacturing was seen as a necessity to reduce costs and remain competitive. Eastern Europe opened up with a “familiar” labor force but much lower costs. Heavy manufacturing in the US continued on a downward path that had begun many years earlier. Engineers in both the equipment suppliers and cement producers houses lost touch with manufacturing. Much as the producers believed they could specify a cement facility to such a level that anyone could provide it, the suppliers believed that so long as their manufacturing specifications were sound, they could have their equipment made anywhere without consequence.

Differentiation became increasingly difficult through this period. On one hand, cement producers believed themselves qualified to prescribe the complete design of the plant, and believed as well that if they specified the plant correctly, any supplier should provide the same solution. Differentiation was then a simple matter of the lowest cost that met the specification! On the other hand, they still wanted the accountability for the success or failure of the design to lie with the suppliers. The suppliers, meanwhile, were desperately working to hold their own influence over the design of the equipment and the layout of the facility as a way to differentiate themselves from their competitors.

Manufacturing and related quality and delivery was no longer a card they could play since virtually all of them were using the same or very similar sources. Suppliers still relied heavily on a local presence of expertise as a key differentiators, even though they were already working on outsourcing significant portions of the work and even though the producers put less and less weight on the suppliers experts and more and more on their own.

Somewhat of an adversarial relationship developed between the largest, most technically focused suppliers and the largest, most technically focused producers during this period. At a corporate level both sides felt they had experience and skill sets to define the best solutions and saw the other as a threat at worst and an annoyance at best.

Next time – Part Three: Enter The Dragon