Summary: In May of this year, the trade war between the U.S. and China threw a curve ball to many U.S. business operations with the U.S. Administration’s decision to impose 25 percent tariffs on $267 billion worth of Chinese goods and then China’s retaliation announcement effective June 1st.
For a number of reasons, many companies have been proactively diversifying their manufacturing and sourcing activities away from China. However, it is fair to say that the June 1st tariff increases created havoc for most companies that import products from China. How did they handle this cost increase?
Beyond additional alternative sourcing strategies, most companies relied on generalized policies focused on ways to absorb the costs or applying overall price increases (Strike 1).
Now, just as the start of the Holiday inventory build-up season, a second curve ball has been thrown; adding a 10% tariff on the remaining $300 Billion on additional products being imported into the U.S. from China. Adding more fuel to the fire, China allowed the value of its currency to fall. What are companies doing?
Many are making an intense effort to expedite their product shipments prior to the September 1st deadline. Beyond that, most likely more of the same default strategies used for Strike 1 will be applied (Strike 2).
So what about Strike 3? Why do some batters keep striking out while others seem to always be on base? The winners come into the game knowing what adjustments they would make when the count is ‘against’ them.
What happens to your market position and profit margins if the President raises the tariffs to 25%?
The short-term strategies employed for Strike 1 and 2 above offer no guarantee of survival:
- Alternative country sourcing is smart but does not necessarily provide long term protection (e.g., tariffs levied on those countries)
- Doing nothing is not an option unless you like fire drills
- Creating generalized changes in pricing and discount strategies burdens all customers regardless of their value (profit contribution) to your company.
Continuing to follow these types of strategies will result in the market saying, “You Are Out” as your competitors poach your most profitable clients while protecting the relationships with their most valued customers. (Strike 3).
Points of Focus: What is essential in developing effective tariff related strategies is to have a clear understanding of the financial importance of each customer that you serve. This means going beyond measuring net revenues to precisely understand the specific profits generated by the products they are purchasing. For exact examples of creating these insights please refer to my earlier blog posting: Tariffs and Intelligently Protecting Profits
So why don’t companies aggressively pursue having actionable insights to effectively manage issues like tariff increases? The excuses are all too common:
- Not everyone in the organization believes this is possible
- We are too busy and don’t have the time or resources to go after this
- Our data is siloed and not as accurate or trusted for this type of analysis
- We don’t know how to do this and are not ready to make a large outside investment to obtain this information
- We are focused on this quarter’s results and will worry about long term strategies later
Said another way, we are doing good enough to get through this problem. But just like baseball, you might last a few seasons with this approach but ultimately, your company’s market and financial position will suffer. The winners worked out the best approaches before they season began. Long before they face problems, they are putting the pieces in place so they are ready, not matter what “the count”.
The winners in handling tariff increases will have customer-centric strategies that drive desired customer behavior. Applied strategies that smartly focus on absorbing the costs, increasing selling prices, adjusting discounting strategies or creating product substitution strategies to protect profitable performance and market share.
Takeaway: The mindset that “we’re doing well enough’ is a sure formula for Strike 3. As the well respected business author and speaker Jim Collins states “Good is the enemy of Great”.
It is important to understand the financial performance of the products that customers are buying and then select the right strategies to drive the behavior needed to intelligently protect corporate earnings. These strategies must take into account specific customer and product profit performance insights and their specific current and future financial performance drivers (e.g. tariff increases); drivers that can have a significant long-term impact. Companies that overcome the typical excuses listed above will be the companies that win in their respective markets.
I would love to know your thoughts on this. Please comment on this posting or email me at [email protected] .
All the best,
Richard Sharpe
