Going Commercial – When Government Contractors Move into the Commercial Market

Last month we discussed the looming Sequestration as both a challenge and an opportunity for Government Contractors.  This month we explore the landscape facing firms considering moving from a predominately Federal Government focus into the Commercial Market space. 

Selling to the Federal Government and the Commercial Market are two very different prospects.  There are some similarities – e.g. both are enormous, both have predictable cycles, and have multiple sub-segments made up of unique consumers. However, the Federal Market Space as a whole operates entirely different from any Commercial Market. Let’s consider the following:

Federal GovernmentAttributeCommercial Market
Demand Pull – Gov’t initiates transactions based on firm requirements, substantial pre-planning and in-depth analysisMarket DriversDemand Push – either Seller or Buyer may initiate transactions; often consumers are compelled to purchase
Highly Regulated with defined methods and timelines for making contactConsumer InteractionPrimarily Unregulated and subject to a wide range of contact mechanisms
Common set of government-wide complex purchasing rules that are strictly followed by each AgencyPurchasing RulesMuch less regulated; rules, formal and informal, vary by market segment
Most deals are convened in public settingsTransparencyMost deals are convened in private
Open Competition where all participants know the rulesPurchase MethodologyOpen or Private Competition where the rules can vary between transactions and among participants
Government Consumers are fairly homogenousConsumersConsumers vary from large Conglomerates to individual Consumers
Selection decisions accomplished primarily by CommitteeSelectionSelection decisions often made by Individuals

Making the Move

Given the differences between these markets, how can a traditionally Government Contractor effectively move to the commercial market space?

Our experience is that before any Market transition is undertaken, it’s crucial to understand how the Government Contractor will fit into the new Commercial Market. A first consideration is to make some assumptions about the two Markets:

  1. Ultimately, Customers pay for what they perceive as value
  2. The perception of value between government and commercial customers may not be the same

Therefore, if your business is based on government contracting for services and/or products, and you desire to move into the commercial market sector, you must resolve both the similarities and differences in how each market perceives value in your firm. To accomplish that, there are several steps to prepare for transitioning to a commercial market.

  1. Prepare a detailed inventory of your firm’s Value Attributes (e.g. quality, understanding requirements, etc.) which you believe are perceived as critically important by your government customers.
  2. Conduct a small and highly focused market survey to confirm if the Value Attributes you have identified are indeed the same attributes your government customer values. (This is often done in a blind survey manner which does not identify your firm as the sponsor).
  3. If they are not, repeat Step 1. In many cases, we perceive our delivered value differently than our customers perceive it. In this situation, it is imperative that we understand the perception of value of our current customers.
  4. Define your target commercial market – this can be based on your current products and/or services or based on your current capabilities applied to different products/services (see ClientView Conversations Volume 5.0).
  5. Conduct a small and very focused target market survey to determine the Value Attributes your prospective commercial customers value.
  6. Determine which Value Attributes are the same and which are different between the two markets.
  7. Develop a strategy for delivering the Value Attributes that matter to your prospective commercial customers – taking special note of those that are different from the Value Attributes of your government customers.

The following example for a hypothetical military truck manufacturer demonstrates implementation of these seven steps.

Example – Military Truck Manufacturer (MTM)

The following table demonstrates the (hypothetical) results of the first and second steps in the process we outlined for MTM:   

Step 1 – Value Attributes MTM identified as critically important:Step 2 – Value Attributes government customers identified as critically important:
1.    Unique manufacturing process that enables different types of trucks to be produced on the same assembly line satisfying schedule, budget and quality requirements1.    Proven ability to work collaboratively with customer to resolve problems in a timely manner with minimal negative impacts
2.    Demonstrated history of successfully producing military trucks2.    Proven ability to design and manufacture field solutions to unique military tactical logistic challenges and threats
3.    Continuous improvement process that is based on field experience and feedback

These first two steps brought to light the differences in perception of value between the firm and the customer. While MTM thought their multi-functional production line and long history were highly rated Value Attributes, the market study showed different results. Therefore, Step 1 must be repeated and a new list of self-attributes must be defined.

MTM might now have the following set of Value Attributes:

  • Unique design and manufacturing process that enable different types of mobile work platform solutions satisfying our client’s unique application, schedule, budget and quality requirements
  • Continuous improvement process that is based on field experience and consumer feedback

These new attributes now need to be tested against the targeted Commercial Market Segment and again refined based on the survey results. Once competed, a strategy can be developed to provide trucks or other product solutions suited to the client’s needs.

Let’s assumes that MTM identifies two potential commercial markets:

  • Business to Business (B2B) – MTM looks at performing contract manufacturing of an established commercial truck brand
  • Business to Consumer (B2C) – MTM looks at producing their own brand to sell to consumers (consumers here are not yet defined)

In the B2B case, MTM might learn that the two most important values of the truck brand owner are:

  1. Price Point – Manufacturing trucks of the truck brand’s design that are at, or below, the target price point
  2. Production Volume – Delivering the number of quality inspected and certified trucks required on, or before, the market due date

In the B2C case the two most important values of the consumer might be:

  1. Accessibility – potential customer’s personal inspection and test drive of the truck and readily available reliable comparative technical information regarding competing brands
  2. Financing – Financing plans readily available at the place of purchase
  3. Service – Truck servicing requirements are conventional and readily available via the seller and/or independent service facilities

These two target commercial markets have very different value attributes, and are also very different from those of the government market. And, in this case – neither have value attributes similar to those of the government market.

To be sure, many Value Attributes of a good Government Contractor can be leveraged for success in the commercial market space.  There may be some “common ground” between the military and commercial markets for MTM to assess.  However, these might need to be incorporated in a refined mission approach to selling into the new Commercial Market and not become the centerpiece of a new market strategy.

In this example, the challenge of moving from the Government Market to the Commercial is less about manufacturing capability than around cost control, production schedules, consumer relationships and service. Thus, the planned market entry requires cultural changes within MTM, systemic changes in cost control and production scheduling and/or possibly the creation of a dealer and service network.

Please look for upcoming Clientview Conversations that will discuss additional emerging market strategic issues and changes in the Government’s procurement practices.

Leave a Reply