In business, what is focus? The objective or goal of most businesses is to make money – as much as possible now and even more in the future. Every manager and every employee is (or should be) focused in a way that achieves that. My question is: Are all managers correctly focused to make as much money as possible now and in the future?
If I where to ask almost any manager in any business I believe the answer I would get is an incredulous look for such a silly question. Of course that is their focus.
Nevertheless I am quite sure that the majority of managers, while focused, have the wrong focus (sometimes what is called focus is something like focus on everything). Their company’s bottom line is damaged.
(I owe the 5 Focusing Steps to Dr. Eliyahu M. Goldratt)
The Limiting Factor is the Market – What then?
If the limiting factor is the market then the business will not have an internal bottleneck – although there will still be one resource that has the least amount of capacity – just as every chain or section of a chain must have a weakest link.
To exploit the market a business should extract both the greatest volume and the highest prices from it. To do so the business must cause clients to buy more and to buy at higher prices. What are the actions a business can take to produce such a result?
1. Price
Price is a dangerous tool! Every competitor has a "copy" of this tool and can use his price tool as easily as you in your business. To lower price usually will not increase Throughput. One might expect the sales volume gained will offset the lost margin. Unfortunately competitors are almost always unwilling to give up market share and simply adjust their price accordingly. Both you and your competitors lose Throughput and profit. Price is generally and ineffective tool to exploit the market.
2. Market Segmentation
Clients have different perceived values for the products they buy from you. Their perception may be correct – your product delivers the value they perceive. Alternatively they may have a faulty perception of values – such clients will either over- or undervalue your product. For the moment lets assume clients’ perceptions are correct.
The perceived value for your product will still cover a significant range of prices from lower than your price to (significantly) higher. Those potential clients that see your price as too high will not buy and you lose contribution to your bottom line. Those that put a much higher value (than your price) on the product get it for a discount relative to what they would be willing to pay.
To maximize Throughput and profit, your sales and marketing must somehow capture the potential clients not willing to pay the full price and they must realize the (much) higher prices other clients are willing to pay. The concept to do this is market segmentation. A market is segmented if, and only if, the price applied in one segment has no impact in any of the other segments.
The airline industry is the prime example given for segmentation. It is possible to sit next to someone that has paid half the price – just by meeting certain conditions like the duration of his stay at the destination. Another example is a material, made in exactly the same way for all prices, but guaranteed for various levels of performance. The price for this material ranges from the simple to double. The market is segmented because clients are buying the guarantee of performance.
Good segmentation can increase volume and realize higher prices – both can have a powerful positive effect on the bottom line, as segmentation can often be achieved without adding resources. To segment correctly does take some serious thinking.
3. Value in Use
Clients, particularly buyers, do not always understand the value of your offering. Unfortunately a buyer’s focus is on the objective against which he is measured – how much money he has saved for the company. Improvements realised through your product are benefits to his company that he cannot claim. In any case, a lower price seems easier to achieve, requires less effort to understand than the overall benefits of the supplier’s offer and the monetary benefit of a lower proce is entirely due to the buyer.
Value in use is a simple concept, but not always easy to define and calculate for the customer. Often the right question to ask is, ‘what is the damage if your company does not get this benefit?’ You (the supplier) should have a very good idea of all the benefits your offer brings to clients. There is the product itself; reliable supply eliminates the need for high stock levels; short lead-times can get clients out of a difficult emergency situation; etc.
Marketing’s job includes gaining a very good understanding of the value of your offering in all market segments. A clear understanding of all the benefits (values) and the ability to present these to clients effectively is of huge value to the bottom line and ensures better exploitation of the market constraint.
Understanding and effectively communicating value in use can maintain something like a 5% price premium that can easily transform a 10% margin into 15% through better prices and/or added volume.
4. Capturing new Customers and/or more Contracts
To make a sale or to capture a new customer is a process that can be likened to production. In most industrial sales there are many steps before a contract is signed. In sales and marketing we speak about the sales funnel – it starts with a large number of potential customers and ends, at the bottom of the funnel, with a much smaller number of orders or new customers. The question is, ‘What is blocking us from capturing more orders or from gaining more new clients?’
Analyse your sales process and you are likely to find many steps that must be successfully passed before your potential client signs up with an order. These steps are qualification steps the client goes through with you. Often enough one or two of the sales process steps take too long or are too complex causing potential clients to give up and stick with their current supplier. If you check further, these long and/or complex steps have many potential customers waiting to be "processed". This pile of work waiting in the queue is a sign that the following step is the constraint or bottleneck - of the sales process.
If such a constraint exists in your process, then the decision how to exploit that step becomes very important. Even more important will be the rules of behaviour so that the limiting step can produce at its capacity.
Analyse the situation at the sales process constraint and you should be able to find simple ways to get more potential clients through this bottleneck and enhance your chances of gaining more clients faster. Use these 5 Focusing Steps in sales and marketing! (See ‘The Cash Machine’ by Klapholz and Klarman.)
5. Availability and Delivery Reliability
Which baker gets your business – the one that makes sure he has croissants available for you – or the one that often has run out?
Which builder is more likely to get your business – the one with an excellent record of (real) on time delivery – or the one that is known to deliver late?
Near perfect reliability is key to gaining and keeping business. Isn’t it true that an unreliable supplier is likely to lose more clients than he gains and slowly lose market share. Isn’t it true that the truly reliable supplier will gain business more rapidly than he loses it?
In most industries and markets competitors are more or less equal in the products and services they supply. If this is the case, then gains and loses offset each other – market shares don’t move. However, what if one competitor can make a step change in his availability or delivery reliability? If the value of reliability is high enough and the market realizes the difference, then market shares will shift. By delivering reliability this supplier is exploiting the market – giving clients what they need to improve their business.
To understand the value of reliability, understand the damage caused to clients by (your) unreliability. A missing component might make your client late to his customer. To compensate for your unreliability your client may have to hold significantly higher stock levels than he can really afford. Apart rom the cash tied up there is a real risk of loss with high stocks. Many of the items might become obsolete or overage.
How can a business exploit the market through reliability without causing high cost and investment in their own business? You target is near perfect availability and reliability without adding cost and investment (in fact both should decline)
6. Speed
Reliability is a great tool to gain business. Add speed – shorter than competitors’ lead-times and a reliability guarantee (penalties for late delivery) and you may well have an even more powerful offering to gain sales. If your competitors cannot or do not dare to copy your offering, then you are truly on a winning run.
The offer exploits the market – it causes more and more customers to buy from you. Your task is to make it possible without breaking your company’s financial back. Short lead-times and near 100% reliability could together with a penalty be a recipe for disaster if you have not acquired the right capabilities in your production and distribution.
7. Flexibility (Urgent Demand)
In many industries suppliers experience urgent demand. Customers sometimes forget to order, ordered too little or have run into some sort of problem with their production. Whatever the reason they need materials or components urgently to meet their commitments. Lets assume you are 20% of your market and you experience about 5% urgent demand.
If urgent demand is a sign that clients need real help to meet their own commitments then these clients will be willing to pay a significant premium for a fast or super fast delivery. If you represent 20% of the market and the 5% level of urgent demand you experience, then the urgent demand market represents a quarter of your business.
To exploit this rather special part of your market a very short (say ½ to ¼) of the normal lead-time would be ideal for urgent demand. Can you do it? If the touch time (the actual transformation time for one unit in your factory) is say 10% of the lead-time, then your products wait in a queue 90% of the time. If you are able to cut lead-time in half – then the queue is still 80% of the lead-time. ¼ the lead-means queue time is still 60% of the new lead-time. It should be possible to achieve short and super-short lead-times! If you can implement short and super short lead-times reliably and consistently you will gain the majority of the urgent and super-urgent business – at a premium and with little or no added production cost.
Look at the value for your clients and to your business – in the right environments it can be enormous.
To exploit in this way again means getting the most from your market and clients!
8. Sales
To truly exploit the market your sales organization must learn how to sell. The must learn how to sell the complete offering - not 'just the product.
What happens now? Our sales volume and market share will grow – probably quickly!
If sales volumes start to grow quickly there will be a high risk of overloading the production system. If production is overloaded chaos will eventually take over. The higher the load the greater is the risk of chaos and a sudden deterioration of service. All the gains made earlier are at risk. The business must have some form of load control to accept only business it can safely commit to (lead-times, availability etc.) and to expand capacity in whatever form before operations descend into chaos.
Do not be greedy! Superb profits yes, but do not put them at risk!
Technorati Tags: Availability, Continual Improvement, Distribution, Efficiency, Execution Management, Focus, Goldratt, Make to Stock, Management, Production, Risk Management, Sales, Shareholder Value Add, Strategy and Tactics, Supply Chain, SVA, Theory of Constraints, TOC, Value Chain
No comments:
Post a Comment