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A Strategy for Winning the Trade Game

A Strategy for Winning the Trade Game. Bob Graham Managing Partner Ridge Partners Sept 16 th 2004 North Carolina World Trade Association. Ridge Partners. Consults in the Storage, Networking, and Outsourcing markets. Bob Graham 30 years of experience in the technology business.

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A Strategy for Winning the Trade Game

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  1. A Strategy for Winning the Trade Game Bob Graham Managing Partner Ridge Partners Sept 16th 2004 North Carolina World Trade Association Ridge Partners, LLC.

  2. Ridge Partners • Consults in the Storage, Networking, and Outsourcing markets. • Bob Graham • 30 years of experience in the technology business. • Many years as an IT professional. • Managed manufacturing and engineering operations in Europe the US and Asia. • Built a $1b plus outsourcing company focused on international business. • Industry leader in storage, networking and server technology. • Manages investing in technology companies for major investors. Ridge Partners, LLC.

  3. A Strategy for Winning the Trade Game • OK… Roger assigned me this task. • It made me think…. • Should I talk strategy again.. Boring.. • Maybe I should focus on a real situation. • Hope this is interesting.. Ridge Partners, LLC.

  4. A Strategy for Winning the Trade Game • What do we mean “Winning the Trade Game” • Growing your business globally. • Reducing your costs by accessing global sources • Following your customers as they grow. • Being Profitable Survival!! Ridge Partners, LLC.

  5. A Strategy for Winning the Trade Game • What’s an easy way to formulate global trade strategy: Follow the supply chain from your supplier to your customer and manage it differently for each market and product source around the Globe. Ridge Partners, LLC.

  6. A Strategy for Winning the Trade Game Our Storage Systems Company. A semi-fictitious enterprise level storage subsystem product company. ASP is $5k to $100k. Ridge Partners, LLC.

  7. The Global Supply ChainA Storage System Customer Ridge Partners, LLC.

  8. Our Storage Company • Company’s 2001 US based model: • 100% US based. • Direct delivery to a VAR or a customer. • Demand generation is accomplished directly by the company or indirectly through selected OEM’s. • Sales may be direct or indirect. • Some sales are through OEMs, but no customization. • After sales service from the company. • Liberal use of in house engineering and manufacturing to support the customer. Ridge Partners, LLC.

  9. Our Storage Company • 2001 Global Approach • Sell to selected OEMs that have global reach. • Some off shore demand generation. • Some off shore after sales support. • 2001 Global Performance • Lack of global reach was limiting global sales, which should be 50% of sales and where only 5%. Ridge Partners, LLC.

  10. Our Storage Company • Financial Model: • Sales 2001 $200m Growth @ 10-40% • OEM 15-30% Gross Margin • Channel 25-40% • Direct 40-50% • R&D 8-12% • Profit Margin 10-15% Ridge Partners, LLC.

  11. Our Storage Company The first step The Customer and Market Strategy to go Global Ridge Partners, LLC.

  12. Our Storage Company • Going Global: Potential Markets • Europe, mostly western. • Japan, plus re-export • Costal China • Southeast Asia (Including Korea, HK, and Taiwan), • Other areas. Ridge Partners, LLC.

  13. Our Storage Company • Europe • + Ease of entry, especially if the company starts with the UK, Ireland and Scandinavia. • - But, poor economic growth in Europe, and this is reflected in the technology sector demand. • + Lack of technology companies, means little or no local competition. • - Every one is already there. • + Pricing is slightly higher than the US. • + Infrastructure is generally distributors and Vars. • - After sales support is key. • - Demand generation is key. • - Could add 5-10% to the company’s sales expenses. Ridge Partners, LLC.

  14. Our Storage Company • The Solution for Europe: • Europe is a good place to start the going global process, ease of entry and language. • Indirect Channel using Var's and Distributors. • Start in the UK and move out from there. • Focus on the mid size market and certain applications. • OEM partnerships (There are not a lot) • Tier 2 OEM’s for specific markets with no customization. • Use US Tier 1 access using customization and product differentiation. • Demand Generation and Support • Sales and marketing office with no direct sales. • Back line support and training only. • Gross Margin will be 20-40%, Sales and support costs increase 5-10% Ridge Partners, LLC.

  15. Our Storage Company • Japan • - Entry complicated. • - Low growth but major technology market • + Big re-exporter, leads to channel conflict outside Japan • + Good infrastructure • + Japan OEM’s know US companies • + Distributors and OEM’s can do demand generation • - Lot’s of competition including second tier locals. • + Sophisticated support organizations exist Ridge Partners, LLC.

  16. Our Storage Company • Japan Strategy: • Exclusive agreements with one or two OEMs. • Decide strategy on re-export by markets. • Allow back line support from OEM. • One or two distribution agreements for specific markets, perhaps in conjunction with the OEM. • Demand generation office. • Customization • Gross Margin target 20-25% Sales and Support Costs additional 5-10% • Added R&D 1-5% Ridge Partners, LLC.

  17. Our Storage Company • China, Southeast Asia, India • + Growing Market • - Lack of sophistication in user base leading to limited initial market. • - Lots of competition from Taiwan and others, mostly at the low end product area. • + Not sophisticated in the SW area, potential to complete with locals. • - Your Japan and US OEM’s may be competing with you. • - Lot’s of trade barriers still in place. • - Corruption is everywhere Ridge Partners, LLC.

  18. Our Storage Company • China & Other Strategy • China: • Establish marketing partnerships with distribution. • Use your OEM’s. • Support OEM deals from other geographies. • Use outsourcing to gain leverage and experience. • India • Distribution only. Little demand generation. • Watch out for redistribution. • Taiwan & Korea • Do not enter these markets except with OEM partners or distribution. Ridge Partners, LLC.

  19. Our Storage Company • So what does the Strategy look like. • Demand generation in all markets. • Several Tier 1 OEM’s providing customized product to their markets. • Tier 2 OEM’s supporting regional and specialty markets. • Distribution in selected markets • Some Direct Sales in selected markets Ridge Partners, LLC.

  20. Our Storage Company • But, There are some problems: • Channel conflict is hard to manage, especially the OEM’s crossing market boundaries. • Management and sales expenses have increased faster than margins. • Logistics is a nightmare when being operated from the existing assembly plant in the US. • US taxes are making the company uncompetitive. • Profit is down and if the company ever IPO’s the value will be horrible. • Customized solutions have driven up product costs and R&D expenses. • Management expenses are up substantially. Ridge Partners, LLC.

  21. Our Storage Company So, We have done a nice job of Developing a Global Marketing and Sales Strategy But, Our Storage Company is missing it’s financial goals. Ridge Partners, LLC.

  22. Our Storage Company • The Solution: Go Global • Our core competency is the system and our understanding of the customer requirements, not the supply chain. • Focus on the non core supply and design to fix the financials. • Outsource Manufacturing and Logistics • Utilize ODM (Original Design Manufacturers) • Force subsystem component providers to do more design • Move to India for software and customer support • Move the company out of the US to fix the tax problems. Ridge Partners, LLC.

  23. The Global Supply ChainA Storage System Customer Ridge Partners, LLC.

  24. Our Storage Company • Outsource Manufacturing • Your components are or should be coming from Asia to your US facility and then being redistributed to your global customer base. • Move Manufacturing to Malaysia or China to be close to your suppliers. • Look for a supplier that can manage your logistics on a global basis. • Use consignment models with large OEM’s to reduce Cogs by eliminating low margin drives from your income statement. • Potential cost savings 5-15% of COGS. Management costs rise by 2-5% of Cogs. • Tax savings could be 30-50% on 35% rate, if our storage company is willing to reincorporate offshore, use other fiscal structures, and move R&D offshore. Ridge Partners, LLC.

  25. Our Storage Company • Use ODM Capabilities • Sub systems and components can be completely designed by an ODM. • Restrict this to commoditized portions of the product not core competencies. • Encourage the ODM to resell the design across the industry to lower component costs. • Best ODM’s are located in Taiwan and Malaysia. • Good use of an ODM will reduce R&D costs and if also the ODM is the manufacturer, it should reduce COGS by rationalizing components. • Potential cost savings: 1-3% of R&D, some COGS savings. Ridge Partners, LLC.

  26. Our Storage Company • Force sub system component providers to do more design and implementation. • Incorporate into their specs additional testing, qualification, and functionality. • Have them deliver the components directly to your out sourcing supplier in an offshore location. Use NRE to reduce taxes. • Pre-load software and customer product both in the component or the system at the outsourcing or vendor location. • A classic example is pre-qualified disk product. • Potential cost savings 5-20% of R&D. Some COGS savings. Minimal Management costs. Ridge Partners, LLC.

  27. Our Storage Company • Move to India for Software and Support • Move non core software development to India. (An alternative might be Ireland or Russia.) • Potential cost savings are 60% per head. • Management costs will be increased by 10-20% per head. • Will support tax strategy by having off shore R&D, especially if the company is moved off shore. Ridge Partners, LLC.

  28. Our Storage Company • So where have we ended up: • Sales are now global and we have accessed the available market. In 2005 the sales are $400m, part growth, part acquisition. • Cogs has been reduced substantially. • R&D has increased due to customization, but reduced through ODM and off shore strategies. • SG&A has been reduced through the channel and OEM strategy, but increased due to management complexity. • Taxes have been reduced substantially. • Go public and get rich. Ridge Partners, LLC.

  29. A Strategy for Winning the Trade Game Thanks for listening. Questions? Ridge Partners, LLC.

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