A QUESTION … AND AN ANSWER
Should this industry be dismantled, then redefined and restructured?
It is an interesting business: highly fragmented, with well over a thousand entities selling similar products. Marketing to prospective customers is rather unique. It is primarily not done by industry participants; rather it is society in general which has strongly suggested, in multiple ways, that all people of a certain age must, for their own well-being, buy this industry’s product.
Pricing power is triggered initially by this unique demand characteristic; equally important is the ready availability of government monies to assist buyers (through access to considerable amounts of debt) to pay the on- going price of the product.
This combination of favorable induced demand and external funding characteristics means there is minimal need for the industry to care about its cost structure. Moreover, there is little self-analysis because there is a virtual absence of price competition.
Many of the individuals working in the industry are more like independent entrepreneurs than true employees as they have wide leeway in how they provide their services to the customers. Industry personnel often exhibit the soft arrogance of power — slow to return communication from the customer (or no response at all), and an ability to be unembarrassed at not showing up for a meeting with a customer. There is no apparent fear of being reprimanded by a superior.
To be fair, customers have access to those on staff who may recommend different designs within the overall product framework; unfortunately, they do not score highly when customers are asked about their usefulness.
Industry participants almost universally look for add-on revenues, which they obtain either by aggressive direct pricing on ancillary components related to the product or through profitable outsourcing relationships with suppliers of said components.
A large percentage of the industry’s customers apparently are dissatisfied with the product judging from the rate at which there is a complete consummation of the relationship. Meanwhile, the governing boards of these businesses are comprised of extremely important and busy people who are seemingly too self-occupied to hold management accountable for the shortfalls. In addition, those responsible for the flow of public monies to these businesses have been under little pressure to ascertain the effectiveness of this support.
One constant is that the industry’s pricing power facilitates consistent above-average inflation in product cost irrespective of general economic conditions or the number of disappointed customers.
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With respect to the future of this industry, it is believed that the number of customer prospects for its product is rapidly approaching a peak. In a normal industry, this might be expected to bring a shakeout, with weaker vendors calling it quits, maybe turning over their book of business to a stronger entrant, perhaps converting their vacated buildings into mini-museums or employment retraining centers or community multimedia libraries.
Downsizing is resisted in part because it would require the aforementioned individual entrepreneurs and staffers alike to transfer their talents, undoubtedly at lower levels of wages and benefits, to other, more competitive, types of businesses. Simply cutting published prices to gain market share and drive competition to the sidelines is of questionable utility given the fact that most purchases are not based on list price considerations. Even if some entities were to completely quit, those actions by themselves might do nothing to the modus operandi of those players remaining in the industry.
Given the unexciting outlook for the customer prospect count, it is stunning that many of the players in this industry are adding to their physical plant (often through government endorsed bond issues), either to increase capacity (which can only be profitable through greater market share) or to modernize components which need not be directly connected to the product being sold.
Like every industry, this collection of businesses is also spending significant money to enhance their high-tech capability, without any real evidence that technology per se is key to the product becoming more of a success in the marketplace.
On the brighter side, those industry participants who have accurately sensed an important shift in the composition of their customer prospect base are altering some of their traditional strategies. Their primary initial step is nonetheless conventional: they vigorously reinforce to newbies the societal message that what they sell is something the prospective rookie customers must have.
What they have found in the beginning phase of the unfolding changes in customer composition is that it is difficult to sell a Lincoln Continental and a Honda in the same showroom. Remembering Economics 101, they unsurprisingly would rather promote the high-priced Lincoln, which means space and support for the different needs of the Honda prospect/customer receive less attention. This leads to increased dissatisfaction among the discount buyers and, inevitably, a high percentage of incomplete transactions.
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Considering all the aspects of this industry as described above, it seems that any objective observer would conclude the industry needs to be …
Dismantled, then Redefined and Restructured.