Niche Marketing Strategy – Going against conventional wisdom

As with all industries, the Aerospace and Defense market has its cycles, whether it be sales growth and contraction or operating philosophies and business strategies. During the early part of the decade, the Aerospace market trend seemed to be pointing in the direction of Customers desiring more integrated subsystems and systems vs. products. Not unlike that which I experienced earlier within the Automotive industry, this was somewhat different depending upon market segment. The Commercial Aerospace market was requesting more than the Defense segment, and the Regional and Business Jet segment more than the large Commercial Transport market.

In order to successfully compete, the general belief, or the strategy being proposed by leading Management Consulting firms, was to move from being a product level supplier up the value chain to a system integrator. This looked to be a plausible strategy, and large global competitors, some with greater product breadth and depth, were employing it. However, one fact was somewhat unclear –  could you prosper and make money at it? Studies done within the Automotive market had shown that the higher firms moved up the value chain in serving the Automotive OEM’s, they actually became less, not more, profitable. Broad-line system integrator or focused niche product firm, which way to go?

TransDigm Group is a good example of an Aerospace & Defense market participant who has followed a disciplined and quite successful niche marketing strategy. As the industry goes, the products, which include ignition systems, pumps, valves, motors, actuators and controls, batteries and power conditioning, cockpit security, audio systems, lighting and displays, are not that visible or on the leading edge. However, the strategy is more about products that are proprietary and sole source in nature that create barriers to entry and stable recurring revenue, can be used across all market segments and aircraft types, and that not only create an Original Equipment (OE) position, but also a large Aftermarket. Transdigm states that 60% of sales come from the Aftermarket which can be quite profitable. For Transdigm, Aftermarket revenues can generate 20-50 times, or more, OE revenue.

This niche market strategy has also been utilized in its acquisition strategy as Transdigm has built its business through a series of almost 30 acquisitions since its inception in 1993. Once acquired, the organization works to quickly focus Product Management on profitable new business development, implement value-based pricing, productivity and cost improvements. While typically paying 6-10 X EBITDA, the recent acquisition of McKechnie Aerospace Holdings was purchased for $1.27 B and 12 X EBITDA.

Employing its niche business strategy has enabled Transdigm to grow through all phases of the market cycle within the Aerospace industry. It has grown from $48 M in 1993, to over $1 B in 2010, with an average sales and EBITDA growth rate of 19% and 25% per year, respectively.

It turned out in the Automotive market, as it does in the Aerospace market, that a strong proprietary technical position and differentiated product offering that creates high levels of Customer Value helps drive sales growth and profitability. And while many firms believe that the only path to market, and route to success, is to be a system integrator, it might be instructive to take a look at one who played to a different drummer.

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© Rich Kohler 2010. All rights reserved. For copies, please contact Rich at rich@rich-kohler.com.

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