Size matters ...

It seems a long time since the holiday break…  We’re already more than half way through the first month, and in the UK there are Easter eggs in the shops.  The first couple weeks back have been pretty action-packed with a mix of research and consultancy activity, but across all of that one of the common themes that has emerged is that scale in downstream distribution (sales and aftersales) matters.  That is not to say that being big automatically makes your business better, or that you can’t run a successful small business, but there are now more benefits from scale than were available say fifteen years ago, when the ICDP view with respect to dealer groups at least was that beyond a certain point, there were diseconomies of scale.

There are some traditional sources of economies of scale such as purchasing of consumables, but the topics that have come up in recent days are perhaps less obvious.  I am thinking more around integration with OEMs and other key suppliers, being process-driven, deriving value from data, and recruiting and retaining key staff.  That is not to say that there are not (at a general level) some areas where you might expect smaller businesses to have an advantage such as closer customer relationships, but I want to focus today on where scale helps. 

Whether looking at sales or aftersales, dealers’ relationships with OEMs or repairers’ relationships with parts suppliers, there are a number of areas where closer integration is a positive.  Supply chain management – having the right products or parts in the right place at the right time is much easier, with reduced operating costs and capital, if information is transparent and the number of inventory holding points minimised.  At a time when everyone recognises the need to make significant changes in the business model to address changing customer behaviour and technology, being able to work with a smaller number of larger partners speeds up the change process.  The discussions may be more challenging, but with larger stakes on the table, it is in everyone’s interests to reach a mutually acceptable plan as quickly as possible. 

Larger organisations almost by default have to be more process-driven.  Whilst I respect the huge efforts made by senior managers of large dealer groups to get out and visit their sites, they can never have the same degree of hands-on management as an owner-operator.  Without that proximity to the operational business, they rely on delegated authority, good business management systems and robust processes.  That delivers more predictable results, but also makes it easier to manage the interface between the business and their trading partners.  This is one of the core elements of lean thinking and the Toyota Production System.  Parts can come from external suppliers, but the internal assembly processes can be optimised as the result of the parts always arriving on time, presented in an entirely consistent way.

The third area which I believe will become dramatically more important is deriving value from data.  We scratch the surface of this today, but data science or ‘big data’ will become increasingly important and has the potential to improve revenues and reduce costs in many different areas.  More targeted marketing, improved supply chain management, more effective used car operations and predictive maintenance will all be possible by taking the huge volumes of data that are generated by customer buying journeys and connected cars, analysing that and using it to improve planning and marketing.  The clue to that is the word ‘big’.  In order to apply data science – and increasingly artificial intelligence as part of that – you need large volumes of data.  The higher the volume, and the more consistently it is structured, the more value can be derived.  Individual businesses will benefit from scale, and the integration of data from a number of large businesses will make that even better. 

Finally, it is not all about processes and technology.  They can help to automate certain tasks and provide decision support, but we remain a people business, and I am sure this will be the case in the future.  Highly skilled people – whether they are digital marketeers, data scientists or master technicians – take a lot of training, and they understandably expect to be paid well for that effort.  If the training is provided by a retailer or repairer then they want to reap the rewards of that training investment, so retention becomes key.  It is easier for larger businesses to fund the training, have the demand across the business that leverages the skills of the people to get a return on that investment and be able to offer attractive employment packages, than it is for a smaller business. 

Together, these all indicate that size matters.  Smaller businesses – whether that is an owner-operator dealer in a rural area or an independent repairer who has developed a trust-based relationship with their customers will still be able to survive.  However, even they will still need to address these needs in order to be part of the new car supply system, to carry out complex diagnostics, or improve their marketing in their local area.  I believe that this is an opportunity for both larger players to build an extended eco-system around them that covers the areas that will not yield a high enough return for them to play in directly (two tier distribution systems and soft franchise repair networks for example), and for service providers to offer added value to their customers by not only supplying goods and services, but also operational and decision support.

 We may not be able to measure these scale advantages simply in terms of outlets, turnover or headcount, but they will become increasingly important in the next few years.