Competition in the 21st Century
This blog has often endorsed Adam Werbach’s definition, “… being a sustainable business means thriving in perpetuity”.[i] Clearly, for any business, reliably earning a sufficient profit is a necessary condition to surviving, let alone thriving. For manufacturers in the globalized 21st century, competition is more intense than ever. And competition can be expected to continue to increase as manufacturing sophistication continues to increase, especially in developing nations hungry for international markets.
As competition increases, pressure on margins increases. It follows as a condition of Sustainability that an on-going program of actions to support and improve margins in an absolute necessity. Obviously, margins can be enhanced by reducing costs, increasing revenues or, better yet, both. The Great Recession has schooled just about everybody in the cost side of production. So, this post looks at ways to improve margins on the revenues side, without expanding the factory.
Theory of Constraints (TOC) points out that throughput can be increased without obvious upper bound, while costs can, at best, only approach zero. TOC, especially in combination with Lean manufacturing concepts, provides insights for improving production capacity utilization, hence increasing Throughput (measured as quantity of product produced in a given period).
Number of widgets produced, however, is only part of the picture. For present purposes, it is more useful to measure Throughput as net margin dollars – dollars invoiced in a given period, less the direct variable cost of the corresponding products. So, measured this way, Throughput can also be increased by increasing the average value added to each widget, hence the revenue associated with each widget. Here are three ways to do that:
>> Redefine “product”: In fact, your product is that which your customer chooses to buy. Buying decisions are based on a complex of tangible and intangible (mostly intangible) elements, including price, availability, packaging, personal relationships, impressions, past experiences, and on and on. Differentiate by adding value through intangible elements, such as financing, or installation services.
As examples: Solar City bundles system design, liaison with power utilities, building code approvals, installation and financing with solar energy panels for residences like mine. Consulting now exceeds computer hardware and software in IBM’s product mix. DuPont’s industrial safety expertise both protects DuPont employees and generates revenues by providing safety training to other companies. New technologies like 3D printing can lead to services such as prototyping and tangible product customization. Incidentally, there is a 3D printer on the International Space Station that produces specialized repair parts as needed – just upload the drawing and specs!
>> Build a Pyramid: Some customers will choose value – added alternatives. For decades, Sears offered Good / Better / Best alternatives in nearly all of its catalog offerings. Automobile manufacturers offer a pyramid of brands (like Chevrolet, Buick, Cadillac) and a pyramid of finish styles (such as L, LE, XLE) within each brand
>> Co-marketing: Leverage resources by partnering with other firms. Expand your tangible product offerings by offering related products. As examples: A manufacturer of pipes might purchase and resell related pipe fittings. Amazon, as a company, excels at leveraging resources to expand revenues (think Kindle, fulfillment services, renting internet server capacity, Amazon Prime and Zappos).
Net margin dollars pay the bills and provide a profit. Increases in net margin dollars go almost entirely to the bottom line. This post offers some ideas for doing that. Of course, each manufacturer’s situation is unique, so the examples shown may not apply. The general approach of leveraging resources to increase net margin dollars does apply, one way or another.
Get your crowd together, dream up some creative ideas on how to leverage the resources you already have, generate more net margin dollars and tell me about your success!
… Chuck Harrington
P.S: Contact me when your organization is serious about pursuing Sustainability … CH
This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published on weekly.
[i] Adam Werbach, Strategy for Sustainability, Harvard Business Press (2009), page 9.