Will Rogers once said, “Even if you are on the right track, you’ll get run over if you just sit there.”
That’s what Rick Funston thinks when he looks at the heavy-duty aftermarket. Funston, managing partner of Funston Advisory Services, believes that major shifts are happening very quickly in the HD aftermarket ecosystem.
“Some industries I go to, well, the writing is starting to emerge,” he said. “Here, it’s kind of written in neon. You’ve got the opportunity now to look at your business models and you’ve got time to change. But the opportunity is fleeting. Will you actually have the tools and leadership to actually make those changes?”
In his presentation, “Shift Happens! How to Think Like Steve Jobs and Be a Shift Disturber in the HD Aftermarket,” Funston said executives in this industry need a proactive strategy about how to create better value, products, profit, and leadership. They will have to react very fast to shifts because velocity matters.
“There’s an old Japanese saying that when you’re dying of thirst, it’s too late to start digging a well,” he said. “So the kinds of changes you need to start thinking about for your business model, you need to start thinking about them and start planting the seeds for the business model to be successful. It’s going to take some risks. There will be failures. But the question is, how quickly can you recognize that it’s not working and move to something else?”
So what signals a shift? What’s real? What’s not real? He said one of the characteristics of intelligence is having recognition.
“So how fast can you see the shift emerging?” he said. “There are requisite conditions. If you think about, for example, HD TVs, when they first came out, they had the technical capability but there wasn’t programming and broadcast capability. Once you had the combination of a product capable of displaying it, the ability to broadcast, and the programming to go with it, then it would take off. So you have to be thinking about what needs to be in place in order for this shift to really start to be commercially viable.
“So be a shift disturber. When industry life or death assumptions change, who will be the first to know? Who will be the first to develop and execute a superior business model? It requires exceptional leadership and vision. Most people, when they look at their business model, look for signs that confirm what they believe to be the case. Who will be the first among you to develop and execute a superior business model? How do you attack the weakness in the market? That’s going to require exceptional leadership and vision.”
His shift disturbers’ motto: Do unto others before they do it to you!
You’re probably not going to turn out to be a clone of Steve Jobs. But it’s not impossible to at least think like he did. Funston said Jobs was probably the key shift disturber at Apple.
He said Jobs returned to Apple in 1997, the year that signaled the end of Microsoft’s dominance in the market. Apple had lost $1 billion in 1996, its market share had fallen from 16% to 4% and its stock price had fallen from $70 to $14 90 days from bankruptcy. By 2012, Apple had become the #1 market cap.
So what happened? What did Jobs do?
Do the opposite
Funston said Job’s philosophy was to “think different” and view his workers as pirates, even going so far as to actually fly a pirate flag over headquarters. They were hippies who would change the world. They would control the entire experience—it was about integrated devices and software (not PCs), and by 2007 Apple dropped computer from its name. It was all about being mobile, touch rather than type, a closed system. It featured a concentric hierarchy where everything about the organization was decided by Jobs.
“He did the exact opposite of whatever the alpha business model was at that time,” Funston said. “Forces of ‘creative destruction’ are always at work. Sooner or later, the industry-leading business model will be replaced—and typically by its exact opposite. Will you see it coming? Will you be prepared? Will you survive and thrive in that environment? Will you have your shift together? Will you be a shift disturber? Will you be the Steve Jobs of the HD aftermarket?”
Funston quoted Sun Tzu, a Chinese general and philosopher who is credited with writing The Art of War: “The acme of military strategy is to attack the enemy’s plans, next is to disrupt their alliances, third is to attack their army, and worst of all is to attack their fortified cities.”
Funston said that when waging business model warfare:
• An alpha leader’s business model is known. Attack the weakness of sameness with something different.
• Think the unthinkable—out of the box.
• Be simple, but not simplistic.
• If you are the alpha, do it yourself or have others do it to you.
What distributors expect
To get an idea of what people in the industry are thinking, he conducted a survey last year involving 77 companies in the HD aftermarket: 38 distributors, 16% of them with more than $100 million in sales, 47% with more than 100 employees; and 39 suppliers, 56% with more than $100 million in sales, 68% with more than 100 employees.
Here’s what the survey found:
• On shifts in the competitive ecosystem: 97% of suppliers believe that customers will merge and consolidate, compared to just 65% of distributors. Other than that, they were in near agreement that: smaller distributors will continue to be rolled up into larger groups; continuing regulatory change (emissions/autonomous vehicles) will increase costs; vehicle-to-vehicle and vehicle-to-infrastructure technologies will bring new competitors to the aftermarket; competition between suppliers and customers will increase; channel competition will increase as OEMs and their dealers increasingly emphasize parts and service; telematics will create a big change in the future; and most suppliers will go direct to customer and bypass distributors.
“Distributors are saying that traditional distribution channels are blurring, that technology is at the OEM now, and not an aftermarket item, that OEMs already are gaining market share, telematics is the next OEM-dominant position, some suppliers will sell direct, which opens the floodgates. The Internet is offering reduced service at a lower cost and tech-savvy distribution channels will be an alternate source of components.
“Suppliers are saying that all participants will have to prove their value—it just can’t be a commodity. There is efficiency in the supply chain that will be an ongoing focus. Keep up with technology or you lose. ‘White box’ high-tech products will change the market structure. ‘All Makes’ programs will compete in the aftermarket. Telematics require humans to interpret and act upon the resulting data. At the current time, the HD industry doesn’t have the human brain power to make use of telematics on a wide basis.”
Do we need e-commerce?
• On shifts in products and services: 66% of distributors believe that to deal with change, distributors must be willing to acquire and invest in tooling, compared to just 34% of suppliers. There was near agreement on the need for eCommerce and inventory management.
“There is increased durability and longer replacement cycles,” he said. “There are imported knock-offs, with quality improving or equal, and channel conflicts, with distributor consolidation, direct supplier to customer—bypassing distribution—and online sales. You’ve got rising costs of inventory and asset management, obsolescence, and the need to have inventory to quickly satisfy fleet needs.”
• On shifts in the profit system: Both were vehement that success in the HD aftermarket will require that they provide the highest value added (97% of distributors and 92% of suppliers); 89% of distributors and 73% of suppliers say it will require that they prevent margin erosion.
“There is margin erosion, especially if you’re competing on price only, and supply chain/inventory management challenges with parts proliferation,” he said. “You’ve got the cost of keeping up with technology and obsolescence. In pricing, there are battles with the Internet, dealers, and overseas knockoffs.
What difference does price make?
“Distributors are saying they need the inventory—price doesn’t matter if you don’t have it. Accounts where only pricing matters are typically not very profitable. They’re saying they make their biggest profit on obsolete parts and need to be more proactive promoting the value of parts availability and service they provide. They must push technology boundaries—be part of it, not a bystander.
“Suppliers are saying price is a consideration, but technology is the goal for their products. Depending on the product line, some will command a premium, and others will become increasingly commoditized. Uptime and cost per mile drives the fleets. If you don’t contribute to improvement in that, you are going to be replaced. Lower cost is dependent upon the area and the number of competitors. There is also online ordering.”
• On the value proposition: Only 48% of distributors and 41% of suppliers believe they will increasingly have to compete primarily on the basis of price; 92% of distributors and suppliers say they need to develop a group of customers who see the value of doing business with them.
Who is more important?
“Suppliers are valuing the OEM dealerships over the aftermarket,” he said. “Distributors need an aggressive market strategy and value-added programs. They have to modernize the industry, make it more relevant, sell the benefits they bring to a customer, build brand equity. They must expand their product portfolio beyond commodity products.
“There’s always going to be a tradeoff between value and quality and price. The challenge is, where are you going to position yourself? If you’re simply positioned base on price, that’s a losing proposition. That’s going to result in margin erosion.”
• On shifts in leadership, vision and strategy organization: 100% of suppliers and 95% of distributors believe distributors will need to develop their leadership capacity to respond to the rate and magnitude of change.
“They’ll have to train and develop people and the next generation. How do you do that? How do you transfer the knowledge from the existing aging staff to the next generation? One is standard operating procedures. The other one is proximity to a local college for training and retraining. Then you’re also going to need succession planning. Who’s going to take your place? How are they going to carry it on and what kind of business model do you need to be successful?” ♦
Heavy Duty Aftermarket Week 2018 will be held January 22-25 at The Mirage in Las Vegas.
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