Today’s article is a demonstration on how to determine which markets to compete in and which markets to avoid. As a guide, download our 10th annual workbook, How to Make Your Number in 2017. Turn to the Markets phase on pages 60 – 64 of the PDF.
I recently interviewed Jim Briles, the Chief Operating Officer of American Global Logistics. AGL is one of the fastest growing international freight forwarders in the United States, providing logistics services anytime, anywhere in the world. Jim is uniquely qualified to demonstrate how he guides AGL to the right markets.
Not all revenue is created equal. Hitting the quarterly EBITDA target requires a careful examination of markets. Avoid markets that are dominated by low-value transaction relationships with a low switching cost. Instead gravitate to markets that are better suited for value-based relationships with high switching costs.
Why this topic? Many executive teams tend to focus most of their attention on gaining share in their existing markets. While it is necessary to maintain and sometimes increase market share, changing your company’s exposure to growing and shrinking market segments should be a major focus.
Leverage this article to help balance the short-term requirements of top-line revenue with long-term strategic initiatives. Below you will find the questions and answers from our discussion using AGL’s business as a use case.
My first question for you Jim is how did you determine the sweet spot of your addressable market?
I’d say honestly a lot of it was just trial and error. We made a lot of mistakes early on in our days. Ultimately it came down to really determining where we were making money and where we weren’t and just adjusting accordingly. Over time it was easy to see where we should focus our attention, and more importantly where we should not.
When you say where we were making money, was there a financial analysis that was done behind that or was it more trial knowledge that said it seems like this is where we’re winning and this is where we’re losing?
Early on we used our internal knowledge, but when we did a deep dive with more of a financial focus is where we saw that typically most of our bigger customers we had the better returns on each of them, so we really started to focus on going after large customers, high volume shippers where again the return was much higher than our smaller or lower volume customers.
Were there any markets that you deliberately avoided? If so, how come?
Again, most of our customers are shipping ocean freight containers from Asia to the US. The first thing that we looked at was looking at high volume versus low volume. If you’re shipping one container a month versus 100 containers a month. What we found were the high-volume shippers, the ones doing 100 containers a month were a lot more profitable for us and honestly a lot easier to work with on the operations side.
Additionally, it really depended on what they were shipping. If they were shipping a lower value product, let’s stay finished furniture versus a higher volume product, let’s say wearing apparel, it really made a difference in how they viewed the partnership. We really have focused on high volume and high value customers.
I would imagine these high-volume shippers that ship high quality and high value products, all your competitors are going after that same space because it sounds like that’s where the profit pool is. How do you compete in that space?
Great questions. Those are the customers that we have found are very hard to get into. We do operate in a very crowded space and our competitors are calling our customers all the time. What we found were again these high volume, high value shippers aren’t the ones that are likely to change every day. They don’t approach what we do as a transactional relationship. They really approach it from a relationship based. Even if we’re getting solicited daily, which probably a lot of them are, they’re not apt to change very quickly. We ingrain ourselves within our customers, we have IT solutions, we put people in house, we’re really a part of their team. Again, if you look at the low volume, low value shippers, they approach it from a more transactional based approach so it’s much easier to lose those accounts which again is not what we want.
Jim, when you think about demand in your industry what are the demand drivers in your target market, and how did you learn about them?
It is really two main drivers, it’s price and service, which is probably like most service based industries. Ultimately can I do what I told you I can do, and can I do it for a market competitive price?
When you think about demand drivers maybe kind of further up the value chain from that, for example you guys are focused on shipping containers via ocean freight coming in from Asia, as an example. Do the trade agreements or the global trade volume between continent to continent, does that drive demand in your industry or is it a space where there’s just so much demand that you really don’t have to worry about this?
It’s such a huge industry. I believe there was about 20 million containers imported into the US last year. AGL is one of the top 10 largest NVOCCs out there. We’re probably 0.001% of that. The market is a massive market.
Greg Response: In a scenario like that, for the audience members since this is a learning call, you probably don’t need to think about demand drivers as much. However, if you’re not in an industry like that, this concept of a demand driver is something you really want to pay attention to because it will help you select markets, which markets to compete in, which markets to avoid.
For example, right now I have my glasses on. Why am I wearing glasses? I’m 46 years old, my eyes are failing me, and I look at monitors all day long. If you’re a manufacturer of monitors, making bigger monitors, making high definition monitors, you’re in a good spot because we have an aging population in the United States and as people get older their eyes fail and I might have a need now for a new monitor. That’s an example of a demand driver. Really ask yourself the question, what are my demand drivers? Does that help me narrow my market segments and help me choose which markets to compete in and which ones aren’t? Obviously, you want to compete in the markets with strong, healthy demand drivers that have a lot left in their lifecycle.
Let’s move on to the next question, and this takes a little bit of a set up. It’s a three-part question. There are three types of growth strategies. Let me explain, the first one is what’s known as market expansion. In this area growth is going to come from your current market expanding rapidly. The second type of growth strategy is called market exposure. In this space your growth is going to come from exposing your company to a new market. The third type of growth strategy is called market share, and it is what it sounds like. Here, growth is going to come from taking share from competitors.
Depending on which of these three you choose, if it’s one or if it’s more than one, which one is primary? Which one is secondary? Etc. this is a key input into choosing which markets to compete in and which markets to avoid. Jim, as it relates to AGL in your business, is your growth strategy based on one of those, all three of those? What’s your commentary on that concept?
Ours is really a hybrid. The primary is market share. As I just mentioned our market is so large and vast. If we do nothing else but go after market share we can grow exponentially. Really, it’s a hybrid of growing the market share, but also market exposure. In the past, we went after some of the lower value commodity shippers. As we look to grow and we’re focused on the higher value commodity shippers, it’s a whole new market for us. This is going from a basic commodity of furniture and tires into electronics and garments. The market share will still always be the focus, but going into a new market and exposure to a new market is how we think we’ll grow and what our plan is to grow.
Greg Response: Very good. If you think about Jim’s answer there, he has a dual prong growth strategy, his core business is market share gain so he’s going to beat the bad guys, and another part of his growth business is he’s exposing himself to new markets for the first time and that’s going to be a source of growth. If you pull that all the way through, sales execution as an example, the types of sales people that you need in those two different growth strategies are very different. In a market share situation, the type of sales people that you need there are those that can get into a street fight and that can beat the bad guys.
There you might have things like very strong sales methodology to increase win rates. You might do you have a really tight win/loss review process after every deal. You might have a deal desk where all the big deals must come through a deal desk to be inspected to make sure that we win our fair share of those deals. Those are the types of things that might happen in a market share environment. A market exposure environment is a very different type of sale. There you need a sales team that could evangelize on your behalf. They’re calling people for the first time who might not even know who you are. They must educate these new buyers about your company, your product offering, your price, your service, what you might be able to do for them. Very different type of sales person.
Let’s try and summarize what we learned today by giving the audience an action plan. Jim, I’m going to put you on the spot here. If you were to advise the audience on three things to do right now to determine which markets to compete in and which ones to avoid, what would they be?
Greg, that’s a great question. We just went through an internal strategic plan over the last few months.
First, we looked at our current base of business. We looked where we were making money, where we were not, and what were the drivers of that? I would say my first step is just evaluating where you are right now.
The second thing is we identified where we wanted to be. I’m not saying a pie in the sky projection, but a realistic five-year goal of where we wanted our company to be.
The last step was we really created concrete customer targets and a concrete sales plan and organization to get us to that five-year goal. It’s about going after, acquiring, and successfully onboarding the right accounts. Those would be my three steps, which is again look at your current base of business, identify where you want to be, and create a concrete action plan to get there.
Greg Response: Very good advice. Fantastic, particularly in that concrete plan you’ve got customer targets, and you’ve built a sales plan and an organizational chart to go after it. Love the action plan against the five-year strategic plan, which is great. Jim, that was a great demonstration, thanks for being on the show today.
If you need more help with determining which markets to compete, download our 10th annual workbook, How to Make Your Number in 2017. Turn to pages 60 – 64 of the PDF. To request a workshop with an expert simply sign up for a MySBI account and check the box in your preferences to request a workshop.