The new economy has put a fresh lens on how we fundamentally view our business models. There is no longer lots of margin for error – we now live in an environment of tremendous pressure. Pressure on operation margins, pressure on innovation, pressure on sales growth, and pressure on all expense items – pressure on every aspect of our business. What can we do? Where should we turn?
It is time to reexamine our basic assumptions and see if we can make radical transformations in how we convert concepts to cash. Let’s see how this can work.
First, create timeline line of how you convert an idea to revenue. Where are the touch points, where are the steps where value is added? What part of the process can be sourced externally – for lower cost or greater innovation? Many companies do it all – so no parts of the concept to cash is done externally. In the former years, all meant everything in a vertically integrated organization. However, many organizations now outsource some of this process, typically in the generation of the product itself such as – manufacturing or coding.
But is this sufficient?
It may be for some organizations with the luxury of highly differentiated products and gross margins in the 50% range. However, for most organizations there is a huge opportunity to improve their lot by increasing the range of outsourcing elements – and having this chain of outsourcing elements linked together. For example, product definition and industrial design are kept internal. However, product engineering, manufacturing engineering, production, distribution and warehousing are all outsourced by one or more firms. Then, at the end of the process of concept to cash, the sales and customer service are kept internal. This is shown in the diagram below in the “New Brand Paradigm” graphic element.
Customer input, at the left hand side of the diagram is critical. Sales at the right hand side is also critical. So how much between those handoff points must be done internally? The new lean brand paradigm outsources, using integrated partners, as much as possible. The result of doing this can be to take as much as 10% reduction in overhead, 5% improvement in cost of goods sold, and by using some related strategies to leverage distribution to other geographies, 5% increase in sales. The net is an improvement in operating profit (OP) by as 15% as a percentage of sales without accounting for the lift in revenues. This is huge as it turns a business with an OP in the 5% range to something north of 20%.
The company focuses on customers and the DNA of their brand – and leaves the rest to others who can do a better job for less.