Customer relationship and account management as basis for differentiation

Can our competitors make the same things we are making? Absolutely!

They can, they have the capability of doing it, but they have not done it during the last 5-6 years. We have differentiated ourselves from com-petition in quality, service and around other areas of account manage-ment and the customer’s view of stability, and consistency in relation-ships. In all of these things we have managed to create a differentiation that is not really on product in the sense that we have products that only we can make, absolutely not. (General manager, Gamma)

When SCAP’s local operations merged with another packaging com-pany in 1998 two somewhat different strategies conjoined. The ac-quired company had been applying a strategy focused on specific high value-added niches, which meant that they did not approach large cus-tomers. According to the general manager, this focus changed some-what when it was incorporated into SCAP. Gamma retained some ele-ments of the more niche-oriented and differentiated approach, but in a more moderate form. Another consequence of the merger was, accord-ing to the general manager, that Gamma adopted SCAP’s more cost-oriented focus and was able to significantly reduce costs.

As indicated above, Gamma has an explicit focus on the high ends of the local market where price competition is less significant. In this re-spect, Gamma differs from the majority of firms in the UK corrugated industry that to large extent apply a more commodity oriented ap-proach to corrugated packaging. Rather than selling “just a box”, the strategic position of Gamma is built on having a close relationship to customers, while delivering a level of service and quality, which enables them a premium over competitor. According to the financial manager,

this involves approaching the market in a customer by customer fash-ion, constantly judging the potential of the incoming orders.

The differentiation of Gamma is not mainly built on unique product characteristics in the sense that Gamma is able to produce products that their competitors cannot. Hence, the current differentiation of Gamma is not dependent on restrictions in competitors’ production capability, but rather a result of a strong relationship to important companies in the local spirits industry that was built following a strategic choice to develop attributes related to service level, account management and cus-tomer relationships. These are attributes that, according to the general manager, did not fit the whole range of customers in the market, but allowed Gamma to capture important and profitable accounts. Hence, Gamma’s differentiation seems to be less dependent on tangible ele-ments of the product offer.

According to the commercial manager, it is extremely important for customers to avoid delays or problems in their packaging line as this could potentially force them to stop production. These packaging prob-lems come in two forms, timing of deliveries (so the customer has the packaging at the right time) and quality problem (so that the packaging line runs as planned at the production line). This is the basic nature of what is referred to above as being able to differentiate on service and long-term stability. Thus, a quick response, flexibility and the ability to coordinate performed activities are crucial elements of Gamma differen-tiated position.

The financial manager characterizes Gamma pricing policy as market oriented “opportunity pricing”. The pricing policy is based on a notion of customers being different with regard to their willingness-to-pay, which in turn creates pricing opportunities when approaching a new customer or renegotiating contracts with old customers. Following this line of reasoning, the commercial manager is careful not to portray the costing system or any of the costing practices at Gamma as strategically important for pricing purposes. Instead, the commercial manager em-phasizes experience (and the fact that he has been in the company for over 30 years), and the organization (allowing communication between departments and the development of one common policy), as impor-tant pricing resources. Hence, systems are generally not thought to be of great importance to the pricing of Gamma. The reason for this is,

according to the commercial manager, the assertion that “everybody’s got a system”. The prime benefits in pricing of having a properly work-ing costwork-ing system are, accordwork-ing to the commercial manager, more in-direct in that the system helps the decision maker when turning down unprofitable customer. Moreover, it increases the confidence in the de-cisions being made, thus strengthening the commitment to a certain pricing policy.

Decisions regarding pricing policy are made in conjunction with the yearly budgeting- and forecasting process so that forecasted volume and average price match profit objectives. According to the commercial di-rector, the pricing policy tends to be directed towards advancing prices on a slow and steady rate as opportunities arise while focusing on spe-cific strategic accounts. The overall objectives for the coming period are decided by the general manager who sets specific objectives for the sales and commercial sides of the organization. The overall objective with regard to price, which is the responsibility of the commercial director, is set as an average price per thousand square meters of corrugated board (KSM). According to the commercial director, Gamma uses a price per KSM as a benchmark for this trade-off between volume and price, which means that prices below this point are normally rejected (if there are no strategic reasons for accepting a particular order). Although the commercial director describes the process addressed above as containing different steps and financial benchmarks, he also emphasizes the sus-tained endeavor to find new opportunities for improving margins. This kind of rather informal attitude (without significant formal control mechanisms) towards issues of pricing policy is, according to the com-mercial director, possible because of the small number of people in-volved in these decisions and the fact that they are all located at the same site. This is also the logic by which the pricing policy of Gamma is communicated down the organization to the pricing department, meaning that the persons setting the day-to-day prices are schooled in acknowledging and taking advantage of market-opportunities when new products occur or when the specification of old products are changed. In this way, a high level of commercial flexibility and respon-siveness to market signals is utilized.

According to the commercial director, there are two basic principles for carrying out price changes at Gamma. First, average prices are indirectly

managed through changes in the product mix, so, for example, less value-added products are replaced by more value-added products, which is basically the same as drawing a line at a certain amount per KSM and then trying to raise prices that are below this amount or try-ing to get rid of the product (i.e. correspondtry-ing to the price per KSM benchmark described above). The second principle relies on changing the price index (PI)⁴⁷ that is applied to orders so that, for example, a current price index of 105 is changed to 110. However, the approach of directly and explicitly changing a price through the PI is seen as organi-zationally controversial and would likely result in objections among the sales force (in the case of price increase). This has led to a practice of not communicating price changes directly, but rather just implement-ing changes without informimplement-ing the organization, for example by drop-ping particular customers or changing the price cut-off point.