Changing Direction In The Best Way Possible
Its engineers couldn’t keep pace with the design requirements of its customers and, as a job shop, it couldn’t exploit any process or cost efficiencies. In fact, customization was putting the Dale, Ind.-based manufacturer out of business.
To turn itself around, Thermwood cloned the advertising techniques of leading PC makers and adopted a radical – for it – marketing approach that flies in the face of what many gurus are preaching today: Thermwood shifted to a standardized product line.
Thermwood’s top-to-bottom marketing overhaul has pulled the company back from the brink after fundamental changes in its business had pushed the company close to extinction.
Custom product, low profit
“Business was slow. It was highly competitive and price discounting was running rampant,” says Ken Susnjara, Thermwood’s chairman-CEO. “We’d lost over $2 million in the previous 18 months.”
Things were so bad in 1994, Mr. Susnjara says, that Thermwood, a public company, couldn’t afford to hire consultants to help it find a way out of its situation.
Instead, the company adopted what Mr. Susnjara calls a lifeboat mentality.
All of the company’s 140 workers were invited to attend daily meetings to hammer out a solution.
“When you’re sitting in a lifeboat in the middle of the ocean, it doesn’t matter who’s the captain and who’s the crew,” Mr. Susnjara says. “What matters is how fast and how well you can bail.”
After only five days, the company set a new course with a radical shift in philosophy: No more customized product.
“We looked at 95% of what we built and made the decision not to build it anymore,” Mr. Susnjara says.
“The standardized approach allowed us to automate and simplify the production processes, which resulted in lower costs,” Mr. Susnjara says.
Customization is the rage in marketing circles these days, the theory being that companies can cement relationships – and get higher margins – by working with customers to give them the exact product they want.
Standardization works better
But, as Thermwood discovered, that’s not always the right strategy.
“Companies take one of two approaches,” says George Stalk, senior VP with the Boston Consulting Group, Los Angeles.
“Either they emphasize low cost or they emphasize high value. High value typically leads to high profit margins, while low cost usually leads to lower margins. Most companies that pursue high margins customize because it allows them to charge a higher price.”
But because of competitors offering standard product at lower prices, Thermwood wasn’t getting the big margins.
“Instead, they were seeing higher costs,” Mr. Stalk says.
“Standardizing the product line allows these companies to get better prices from suppliers for two reasons: One, they now begin to buy in volume. And two, they’re not buying different items every time out.”
Thermwood’s resolve was tested early on.
Within a week of establishing the new strategy, it won a $2.5 million contract from the U.S. Navy for custom routers – computer-controlled machines that cut wood and plastic into predefined shapes. Thermwood had been trying to win the business for months. But it refused the order.
“One of the key skills today’s managers must acquire is the ability to say no,” says James Narus, an associate professor of management at Wake Forest University, Winston-Salem, N.C. “Not all business is good business.”
Thermwood’s sales force had the most trouble adapting to the new strategy.
As a hedge against the sales force’s ingrained thinking, management suspended the sales operation’s ability to make independent decisions.
Daily meetings were held in which the activity of each account was reviewed.
The sales force was instructed to offer a machine that could perform the majority of the customer’s required job at considerable savings, sometimes as high as 30%.
They discovered a majority of customers were willing to work with them, but it took almost four months before the new strategy took hold.
A large part of Thermwood’s effort to educate customers about its switch came from its advertising, which changed dramatically after the company moved to standardization.
In the router business, companies run ads touting why their products are better than the competition, Mr. Susnjara says.
When Thermwood moved to the standardized product line, it spent time determining what minimum technical requirements a router must have to meet the needs of a majority of its potential customer base.
It then built those requirements into its products at the lowest possible cost.
Thermwood ran ads, created inhouse, listing the technical requirements of its new routers as well as its new, lower prices.
Because the company’s ads looked different from its competition, Mr. Susnjara says, Therm-wood achieved a high level of recognition and differentiation within the market.
The advertising strategy was a direct result of the company’s analysis of the PC market.
“We began to look at other markets featuring products with those same characteristics: Minimum technical requirements and price as the deciding factor,” says Mr. Susnjara.
“We realized the personal computing market was identical to ours in that respect. From there, we looked at who had succeeded. We copied the look and feel of their advertising to suit our products and market.”
Dell, Gateway are models
Mr. Susnjara says advertising from Dell Computer Corp., Round Rock, Texas, and Gateway 2000, Sioux Falls, S.D., provided Therm wood with its model.
The company advertises in trade magazines and exhibits at trade shows.
So far, the change has worked. Thermwood had sales of $14.3 million in 1996 with net income of $2.3 million. That’s up from sales of $11 million in 1994 with net income of $208,161.
It has recently opened an office in the UK and plans another European office in Germany.