Build a strong business with strong customer relationships
Have you seen a major company succeed that has customer relationships at the heart of their business model? For example, Nordstrom invests in its employees and their personal happiness which directly impacts customer loyalty. A customer service representative who smiles, keeps up with the latest trends, and is happy while they assist customers will improve retention. Customer relationships are built on strong customer service. If you have a good relationship with your customers, they will recommend your products to their friends--and that’s just not something that can be bought.
Businesses must understand this value proposition to succeed. One of the main reasons for the current economic downturn is that there are so many companies and salespeople who have created relationships with very few customers. Companies that have large customer bases have a much better chance at success. Customer relationships are a crucial piece to business revenues, and growing your customer base trumps all other things that companies try to do.
A good example is Covidian Electronics (NYSE: CVD), which has been around for over sixty years. Covidian sells components to major manufacturers of computer electronics, such as Dell (NASDAQ: DELL) and Toshiba (NYSE: TOSBF). While CVD is one of the largest producers of these components, they have trouble selling to smaller companies. In recent years, Dell has bought a majority of its components elsewhere for budgetary reasons and Toshiba is running at capacity, which means CVD won’t be a big deal for them for a while.
CVD has become aware that its focus on their customers' relationships is lagging behind competitors. It isn’t focused on direct contact with customers and it doesn't have any online advertising presence. CVD needs to inject cash into their marketing efforts because this will help regain market share from competitors as it will draw more customers to the company. CVD also needs to diversify the customer base by building strong relationships with smaller and medium sized customers.
In the past, CVD would have relied on their relationships with major clients, but they will have to shift to a more direct and personal relationship based sales model. CVD will need to cut costs and pursue resources that will help them achieve this goal because it is going to take a lot of cash for marketing, product development, and in increasing their presence on the Internet. For example, it should expedite project costing in order to lower costs of goods sold (COGS) while at the same time increasing market share through acquisition.
CVD has been stuck with a sales force that has been centered on relationship building. It is going to be very hard for CVD to change, so the company will need to create incentives for salespeople to grow their customer base.
In order for the company to succeed it will have to reject the idea that it is better to be a big fish in a small pond than a small fish in a big pond. The company needs to build relationships with medium sized customers where there are weak ties rather than competitors where there are strong ties. If you can't find these customers locally, then it's time for CVD to expand internationally.
For example, CVD can acquire a small company in China or India which will allow it to have a cost effective manufacturing presence. Then CVD can build its relationship with these customers in preparation for long-term growth. CVD should also invest in the technology necessary to make the business more efficient and to create the tools necessary for customers from all industries to easily buy their products on line.
With their recently acquired technology, such as computer-aided design (CAD) and computer-aided manufacturing (CAM), the company can easily increase its market share by lowering its costs of goods sold by four percent. This will be an immediate plus to CVD's revenue and it will also increase sales of their finished products.
CVD has a weak market share in China and India where they have been the number one supplier of the electronics industry but they don't have a presence in these countries at all. CVD needs to expand significantly in these regions before its competitors do, otherwise it will have to watch them grow before being able to catch up.
Without growth, CVD can be forced out of business by companies like Texas Instruments (NYSE: TXN), which has brought salespeople from other parts of the world with it and is growing rapidly in China. The same happens with Dell which quickly set up a small number of plants in China for the same goal.
While some people may see these moves as bad because CVD isn't local, electronics is an international business and it is impossible to compete against a company like Texas Instruments. In order to have a competitive advantage, CVD needs to diversify its customer base and expand internationally. The company will also need to be more attentive to the Internet, which has become extremely important in this business.
CVD should increase its presence on the Internet by offering products that are not sold in other countries so that they can generate more foreign sales through this channel. CVD needs to develop more products specifically for such countries by either making changes in their existing products or creating new ones.
CVD is lagging behind in developing products specifically for China and India, which will hurt the company in the long term. This country is a great example of the importance of relationships. In fact, Dell and Texas Instruments will benefit greatly from this because they are there now, while CVD is not.
Conclusion: Looking Forward
The recent economic downturn has caused many companies to rethink their strategies and rethink how they do business. It has also caused many people to examine companies like CVD and discover that the company isn't doing very well in terms of its relationship with customers. While the recession is a good time to reevaluate your current situation, it is not a good time to make drastic changes that can be disruptive and costly.
CVD will have to get its act together before the economy turns around and this should be one of its top priority goals. CVD also needs to continue growing their business by expanding their product line for foreign markets, such as China and India. The company should carefully select new customers rather than focusing on too many at once.
Long-term CVD has an excellent future ahead of itself if it continues to expand into the new overseas markets while increasing its relationship with existing customers. CVD is a very aggressive company with a good management that has shown in the past that it can do well.
However, in recent years the company has become too complacent with its position and it has passed up many opportunities that have been available. CVD is only five years old but it needs to act as if it were a much older company because this will help to transform the organization into one of the best companies in terms of relationship building and customer loyalty.
About The Company: CVD Equipment Corporation manufactures and sells machine tools, measurement equipment and instruments, computer numerical control (CNC) systems, microelectronics products, electronics components and manufacturing equipment, chemicals, plastics and resins products.
Conclusion: I'm neutral on the stock and expect it to trade between $6 and $7. However, there is a huge downside potential if the company doesn't change its behavior.
The Perfect Trade -- $6.00 Call
1 = - Risk Level = High - 2 = - Probability of Success = 2 * - A Stock Worth Watching 3 = - Probability of Threatening Failure 4 = Level of Risk 5 = Excellent Option 6 7 8 9 10
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Actionable ideas for November: BUY CALL NOV-5 $5.