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DPI Client Interview
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"If all you do is mimic your competitor's tactics, and if they're thinking clearly about their competitive advantages," says Bill Rafferty of Mestek, Inc., "you're spending all of your resources doing what they're better at. How many times have you seen that -- companies chasing their competitors when that's exactly the wrong thing to do?"
Rafferty is a Senior Vice President at Mestek, a Massachusetts-based company with over twenty-five divisions that make a variety of equipment primarily for the HVAC and metal forming markets. Among his responsibilities, he oversees Mestek's Boiler Business Unit, a three-unit division that in 2000 had reached something of an impasse in a market full of "me-too" competitors. At the time, he was in search of a new strategy to break the logjam.
"You could call us a mini-conglomerate of many businesses, with a bias towards two markets," Rafferty says of Mestek. "Our sales are about $300 million in HVAC and about $100 million in metal forming equipment. We have multiple divisions with mutually supportive franchises and channels of distribution. In most cases, we have been able to achieve a number one or number two market share in generally smaller-type niche markets where we're big fish in a lot of small ponds."
Through the 1990s, Mestek had acquired a number of companies -- Westcast, RBI and Hydrotherm -- that make a variety of commercial and residential boilers and water heaters. By early 2000 all three companies were prospering to varying degrees, with RBI growing at around 50% each year. Yet Westcast and Hydrotherm were still not performing to the levels that Rafferty believed they could. Despite having the backing of a substantial parent, these two units continued to play the game all of its rivals played—mimicking the market leader's product offerings and market tactics...a difficult game to win. The time was ripe to develop a new strategy to accelerate growth and pull away from their competitors.
"About a year ago, while I was very satisfied with the progress at RBI, I felt we were 'stuck in neutral' with the Hydrotherm and Westcast franchises. While they had achieved a certain level of success, I was searching for a 'breakout' strategy to go significantly beyond that and needed some help in thinking that through," Rafferty recalls.
"And let me tell you why 'breaking out' is particularly difficult in our industry. We have manufacturer's reps that sell our products, generally to plumbing and heating wholesalers who in turn sell the products to installing contractors. Many of those products are often specified by consulting engineers. So you have multiple, interdependent buying influences with brand preferences, and a 'mature' industry with entrenched competitors. It is very difficult to significantly change the paradigm without addressing all of the buying influences simultaneously. So it's traditionally been a battle on all fronts. We knew it would be slow going, unless we could find a different way to accelerate our progress."
Coincidentally, Rafferty was involved in a DPI Strategic Thinking session at another Mestek subsidiary and was impressed by the process. He decided to take the Boiler Group's key management through DPI's process.
"I have been involved with strategic planning since early on in my career, and have tried to read and study much on the matter," he explains. "And most practitioners in this field take you through an analysis where you identify each competitor's strengths and weaknesses, you look for your high ground and then you develop a strategy based on that. The DPI Process takes you to that point but what it then does, is to suggest a way of changing the competitive landscape.
"DPI has advanced the concept that you can make your competitors irrelevant. And I would share that view with the caveat that I would say in our case, much less relevant. The Process allows you to develop a vision and a strategy that truly puts you in greater control of your own destiny, and really allows you to spend much more time thinking about where you want to go, rather than what the competition is doing.
"The whole concept of the Driving Force was new to us," Rafferty says, "but we quickly discovered we were Product Driven -- Boilers and Water Heaters. We learned the concept of what a Product Driven company really needs to excel at, and that is both Product Development and Sales & Customer Support. That helped define, with DPI's help, the Critical Issues we need to address.
"One of the more interesting things that came out of it was a better understanding of what not to do, which is probably more important than what to do. What you can see as you go through the process is that you can be easily seduced into trying to do everything, and be all things to all people, and do everything your competitors do. To a certain extent I think we had been guilty of this.
"So to help us avoid falling into that, the process allowed us to crystallize our direction through the Strategic Filter concept. That really gave our management team an aid in decision-making they can use every day to decide what to do, and more importantly, what not to do. That has been a very good concept for us, and has helped us to stay focused."
At the top of the "more emphasis" list, of course, was an all-out commitment to developing an on-going string of unique, new-to-the-market products that would clearly differentiate Mestek from the competition. Not necessarily "Big Bang" types of products, but equipment carefully engineered to provide significant advantages that would appeal to product specifiers. The flip side, the "what not to do", is a de-emphasis of "me-too" products, a task which requires a discipline as rigorous as creating new products.
"I would say that the product lines we have been developing as a result of these decisions are unique. In our business it will be 'he who has the best product and distribution wins.' So we're very much de-emphasizing 'me-too' products. Now I will tell you that there is still a certain amount of inertia, a feeling that -- our competition has that, we need it as well. And it is a discipline that we need to adhere to, to say at the end of the day -- what does it do for us to have that 'me-too' product? While some of them need to be in the line, they're clearly not our focus. So our emphasis on which type of products to develop and nurture has clearly changed. That has actually led to us deciding to discontinue certain product lines over time. There'll be two discontinued this year. That's not to say that all these products that are de-emphasized will be discontinued but some will, and the others will get less of our product development resources," Says Rafferty.
The challenge has then been to determine specific characteristics that would, in combination, create products that offer differentiating advantages over competitive products -- no small order in an industry where no huge technological leaps are emerging.
"In an industry as mature as ours, I don't think we anticipate major changes in the basic technologies or the competitive landscape. While the basic technology doesn't change much, the way you apply the technology can. And that's where the new products stem from," Rafferty explains.
To assure that all this product development results in the increased profitability they were looking for in the first place, a heightened focus has been placed on the financial expectations from this push, and how to effectively bring these new products to market.
As Rafferty says, "Mike Robert asked us to first define our financial goals. And I told him that if we could achieve revenue growth of 15% a year and have a return on our investments of at least 30% -- pre-tax, pre-interest -- we would feel that we were being reasonably successful. Mike then challenged us to specifically put a plan together, within the Boiler Group, to achieve those objectives. And this had to be backed up with very specific targets, very specific product lines, and so forth. It's in effect saying that if you want to achieve these goals, show me how you're going to do it! So that was very good. We could look at these objectives and say, can we really achieve this or are we kidding ourselves? In our case the Critical Issue now to achieving these results is the introduction of new products, now, that create new revenue streams. If there's anything we knew, but this hit us over the head through the DPI Process, it was that new product development is absolutely critical to our success. And by developing products that are different, unique, and specifiable, we do make our competition less relevant. In that regard, we are in charge of our own destiny because we create new products that set us apart.
"So we have a stream of products under development. My greatest concern is, are we improving our effectiveness in bringing these products to market as quickly as possible? We're implementing new product development procedures on our highest priority projects. We clearly understand the objectives and the financial implications of the project. We have formed cross-functional teams that have clear ownership of the project. And they are asked to update the Boiler Group's management monthly on how the project is proceeding -- Are they on schedule? Are the financials still looking as projected? The new procedures also force marketing to be a lot more specific about the product specifications before going into a project. You know often times you can have a 'creative creep' where the objectives are a moving target as you get into product development. We're trying to provide much more discipline to that, which we hope will hasten our introduction of these new products."
The other Area of Excellence critical to the Boiler Group's Product-driven strategy is Sales and Customer Support. Mestek made an early commitment to the Internet to improve Sales and Customer Support, largely driven by Rafferty and a couple of other people.
To bring more of the organization into the latest thinking on the importance of the Internet, DPI came back to facilitate its e-Strategy Process.
"This process helped us identify a number of new Internet applications that will further help us seek supremacy of our sandbox. The demystification of the Internet through DPI's twelve e-nablers together with their concept of a 'stealth' competitor brought us two very different ways of looking at our strategy and helped us explore strategy options that we would not have considered otherwise," he says.
As for the overall strategy of the Boiler Group, it is still too early to see the hard results. But Rafferty is optimistic that the strategy will produce the results they seek.
"We went through the DPI Process in July," says Rafferty. "Everyone left feeling very excited that we now had a breakout strategy, that we had a way of making the competition much less relevant. It helped us a great deal in developing our Business Plan for 2001 and beyond. We have a stream of new products that we're working very hard to introduce. That should begin by the middle of this and continue through next year. These products have outstanding financial as well as strategic opportunities.
"In addition, we continue now to scour everywhere to learn how we can be better at product development. We're in discussions with lots of different types of people about the various tools and methods they have, so that we can become as effective as possible."
For CEOs considering using Strategic Thinking, Rafferty offers this observation: "At the end of the Process you can expect that all of your management team will share a vision and a Strategic Filter set, so decisions can be made daily at all levels that are consistent with the strategy. The shared clarity and focus of what to do and what not to do, are among the biggest benefits."
For Mestek it holds the promise of stepping ahead of a game that's been played the same way by the same rules for as long as anyone can remember.
