Tony Freeman, President, A.S. Freeman Advisors LLC05.09.23
The rise of massive contract manufacturers is a challenge for smaller, more specialized CMs seeking a direct relationship with major OEMs. It often seems the “big guys” have first opportunity on the largest, longest-running, and most profitable programs solely on account of their size, whereas smaller contract manufacturers have an affordable but challenging option to compete. It involves embracing market analysis and developing a Unique Selling Proposition.
Today’s consolidated medtech supply chain reflects the preferences of its largest customers. Although OEMs embrace outsourced manufacturing, the greatest beneficiaries have been contract manufacturers meeting three criteria:
CMs under $100 million face a long-term dilemma. Is it better to compete for prime projects against larger, preferred companies by selling to the OEM or to rely on large CMs for work they choose to outsource? Both approaches are risky. Smaller CMs are at a disadvantage when competing against the larger suppliers. Relying on competitors for revenue is unsafe and unreliable. In choosing a strategy to avoid being pushed to the second rank, smaller CMs have two approaches to stand out to OEMs.
The first approach is to become a large CM by spending a massive amount of money and taking huge risks. Enormous capital expenditures for new facilities, a well-paid staff, and pricey M&A can pull smaller firms over the $100 million threshold that marks the bottom boundary for being a large CM. Besides the capital needed to assemble such an offering, a top-notch management team is required to direct the expanding assemblage. The second approach is inexpensive, often yields better results, and is an anathema to most manufacturers. It requires the development of a Unique Selling Proposition.
Supply chain companies do many things well but marketing is not high on the list. Often equated with minor promotional tasks like booking a trade show booth or sending out a press release, marketing is vastly more. It involves the systematic dissection of markets and the identification of common pockets of need (served and unserved). Properly applied, marketing is as methodical and analytic as engineering. It is not surprising the sophisticated marketing techniques are rarely found in contract manufacturers, as the people who run CMs usually come from engineering, operations, or financial backgrounds. Marketing is as familiar gourmet cooking.
A valuable result of a formal marketing program is a Unique Selling Proposition (USP)—i.e., a plain English sentence or two that accomplishes three critical tasks: it identifies the market the company wishes to serve; it speaks to a shared need for customers in that market; and it matches the company’s offerings to meeting those needs in a way no competitor can match.
One of the most effective USPs ever developed—“when it absolutely, positively, has to be there overnight”—was developed by Federal Express in the late 1970s. It clearly explained who should call FedEx, when to call FedEx, and what should be expected if they were entrusted with your package. The statement is in simple words and requires no additional explanation.
A USP should not be confused with a slogan or tag line. Slogans are often aspirational calls to buy, not explanations of when and why to buy. A contemporary of the FedEx USP was Ford Motor Company’s slogan “Quality is Job One.” Birthed in response to the perception that Ford cars of the 1980s were less reliable and durable than Japanese imports, the slogan was created to give people faith in a company that had stumbled. It did not explain who should buy a Ford or why.
Few CMs have a meaningful USP. When asked to create a USP many managers will backfit some words to describe what their firm offers. For example, an injection molder may come up with “We are medical plastic experts.” Well, they may be but so are many other molders. It is bragging rather than a clear explanation of when to call about a project.
USPs, despite their apparent simplicity, require the science of marketing for success. The first requirement is to identify a market the company wishes to serve. Markets are groups of customers with at least one common attribute. Most contract manufacturing executives believe they can identify and segment markets through anecdotal experience almost as if they possess a magic power. The result will be an incomplete or inaccurate assessment, which is a weak foundation for betting a company’s future. For example, if a target market is described as “medical device companies using fine or hypodermic tubing in their products,” it becomes possible to carefully count the market’s members and catalog their applications of tubing. Rattling off a dozen companies that happen to have narrow metal tubes in their products misses the nuance of what, how, and when the tubing is used, what constitutes a successful application, and some of the potential different sets of needs.
The second step in establishing a USP is identifying the need. Markets are of no interest if there is no need to fill. In the fine/hypo tube example, it is relatively easy to identify companies that purchase metal tubing. Of greater value is understanding the need the tubing fulfills. Why is metal used rather than plastic? Which functions require a specific tubing and why? Are these needs common across all companies that buy metal tubing? Is the tubing fine in itself or does it require fabrication services to meet the need? Which fabrication services? Knowing those needs is critical since the company serving that market will need to demonstrate their offering meets those needs.
The final step before crafting a USP is matching a supplier’s offering to the market’s needs. This seems obvious but rigorous mapping of markets and needs is likely to be surprising. A complete map of markets and needs probably will likely show gaps that no competitor fulfills completely or at all. A classic example highlighted by Malcolm Gladwell involves spaghetti sauce. Prego, attempting to better compete against market leader Ragu, commissioned a survey. It was discovered that one-third of Americans favored spaghetti sauce with large chunks of tomato. As no competitor offered a chunky sauce, Prego quickly developed a product that became a market leader. In contract manufacturing, rigorous understanding of market needs should lay bare the intersection of customer needs and the capabilities of those selling to that market. It will also likely show unharvested opportunities that a more casual approach misses.
With market, market needs, and offering in hand, a company can begin to craft a USP that sets it apart from its competitors. Sticking to the tubing example, a possible USP might be “we offer the most complete range of high-precision fabrication services on fine and hypo tubing for medical devices of any supplier.” Such a statement identifies the market, the need, and the offering.
A precise USP allows a smaller company to take on a larger competitor. Sometimes being a one-stop shop of scale wins the day, as it should. Other situations will favor a targeted approach spearheaded by a USP. The USP does not guarantee a sale but should reward its coiners with an opportunity to be heard. Additionally, knowing the market for which the USP is relevant focuses sales and promotion efforts on the customers most likely to respond. The absence of a USP can cast smaller CMs into a “me too” position, forfeiting prime opportunities.
Tony Freeman is the president of A.S. Freeman Advisors. A.S. Freeman specializes in merger and acquisition advisory and corporate valuation strategies for precision manufacturing companies in the medical device, aerospace, and general industrial supply chains. He can be reached at tfreeman@asfreeman.com.
Today’s consolidated medtech supply chain reflects the preferences of its largest customers. Although OEMs embrace outsourced manufacturing, the greatest beneficiaries have been contract manufacturers meeting three criteria:
- Offer a broad spectrum of engineering and manufacturing services
- Expert in sourcing materials and components not made under their roof
- Financially large—medtech revenues more than $100 million
CMs under $100 million face a long-term dilemma. Is it better to compete for prime projects against larger, preferred companies by selling to the OEM or to rely on large CMs for work they choose to outsource? Both approaches are risky. Smaller CMs are at a disadvantage when competing against the larger suppliers. Relying on competitors for revenue is unsafe and unreliable. In choosing a strategy to avoid being pushed to the second rank, smaller CMs have two approaches to stand out to OEMs.
The first approach is to become a large CM by spending a massive amount of money and taking huge risks. Enormous capital expenditures for new facilities, a well-paid staff, and pricey M&A can pull smaller firms over the $100 million threshold that marks the bottom boundary for being a large CM. Besides the capital needed to assemble such an offering, a top-notch management team is required to direct the expanding assemblage. The second approach is inexpensive, often yields better results, and is an anathema to most manufacturers. It requires the development of a Unique Selling Proposition.
Supply chain companies do many things well but marketing is not high on the list. Often equated with minor promotional tasks like booking a trade show booth or sending out a press release, marketing is vastly more. It involves the systematic dissection of markets and the identification of common pockets of need (served and unserved). Properly applied, marketing is as methodical and analytic as engineering. It is not surprising the sophisticated marketing techniques are rarely found in contract manufacturers, as the people who run CMs usually come from engineering, operations, or financial backgrounds. Marketing is as familiar gourmet cooking.
A valuable result of a formal marketing program is a Unique Selling Proposition (USP)—i.e., a plain English sentence or two that accomplishes three critical tasks: it identifies the market the company wishes to serve; it speaks to a shared need for customers in that market; and it matches the company’s offerings to meeting those needs in a way no competitor can match.
One of the most effective USPs ever developed—“when it absolutely, positively, has to be there overnight”—was developed by Federal Express in the late 1970s. It clearly explained who should call FedEx, when to call FedEx, and what should be expected if they were entrusted with your package. The statement is in simple words and requires no additional explanation.
A USP should not be confused with a slogan or tag line. Slogans are often aspirational calls to buy, not explanations of when and why to buy. A contemporary of the FedEx USP was Ford Motor Company’s slogan “Quality is Job One.” Birthed in response to the perception that Ford cars of the 1980s were less reliable and durable than Japanese imports, the slogan was created to give people faith in a company that had stumbled. It did not explain who should buy a Ford or why.
Few CMs have a meaningful USP. When asked to create a USP many managers will backfit some words to describe what their firm offers. For example, an injection molder may come up with “We are medical plastic experts.” Well, they may be but so are many other molders. It is bragging rather than a clear explanation of when to call about a project.
USPs, despite their apparent simplicity, require the science of marketing for success. The first requirement is to identify a market the company wishes to serve. Markets are groups of customers with at least one common attribute. Most contract manufacturing executives believe they can identify and segment markets through anecdotal experience almost as if they possess a magic power. The result will be an incomplete or inaccurate assessment, which is a weak foundation for betting a company’s future. For example, if a target market is described as “medical device companies using fine or hypodermic tubing in their products,” it becomes possible to carefully count the market’s members and catalog their applications of tubing. Rattling off a dozen companies that happen to have narrow metal tubes in their products misses the nuance of what, how, and when the tubing is used, what constitutes a successful application, and some of the potential different sets of needs.
The second step in establishing a USP is identifying the need. Markets are of no interest if there is no need to fill. In the fine/hypo tube example, it is relatively easy to identify companies that purchase metal tubing. Of greater value is understanding the need the tubing fulfills. Why is metal used rather than plastic? Which functions require a specific tubing and why? Are these needs common across all companies that buy metal tubing? Is the tubing fine in itself or does it require fabrication services to meet the need? Which fabrication services? Knowing those needs is critical since the company serving that market will need to demonstrate their offering meets those needs.
The final step before crafting a USP is matching a supplier’s offering to the market’s needs. This seems obvious but rigorous mapping of markets and needs is likely to be surprising. A complete map of markets and needs probably will likely show gaps that no competitor fulfills completely or at all. A classic example highlighted by Malcolm Gladwell involves spaghetti sauce. Prego, attempting to better compete against market leader Ragu, commissioned a survey. It was discovered that one-third of Americans favored spaghetti sauce with large chunks of tomato. As no competitor offered a chunky sauce, Prego quickly developed a product that became a market leader. In contract manufacturing, rigorous understanding of market needs should lay bare the intersection of customer needs and the capabilities of those selling to that market. It will also likely show unharvested opportunities that a more casual approach misses.
With market, market needs, and offering in hand, a company can begin to craft a USP that sets it apart from its competitors. Sticking to the tubing example, a possible USP might be “we offer the most complete range of high-precision fabrication services on fine and hypo tubing for medical devices of any supplier.” Such a statement identifies the market, the need, and the offering.
A precise USP allows a smaller company to take on a larger competitor. Sometimes being a one-stop shop of scale wins the day, as it should. Other situations will favor a targeted approach spearheaded by a USP. The USP does not guarantee a sale but should reward its coiners with an opportunity to be heard. Additionally, knowing the market for which the USP is relevant focuses sales and promotion efforts on the customers most likely to respond. The absence of a USP can cast smaller CMs into a “me too” position, forfeiting prime opportunities.
Tony Freeman is the president of A.S. Freeman Advisors. A.S. Freeman specializes in merger and acquisition advisory and corporate valuation strategies for precision manufacturing companies in the medical device, aerospace, and general industrial supply chains. He can be reached at tfreeman@asfreeman.com.
