Forget about your costs and focus on your margins for continued growth in a declining market

During the two last decades, and especially in the turbulent times we have today, cost reduction has been on top of any board-room agenda. Companies are obsessed with the cost focus, but not because they want to be; they know its wrong!

The reason why they continue to over-focus on cost is that manufacturing today grows too complex, and cost is a very visible enemy. Prof. Kasra Ferdows at Georgetown University refers to this erroneous strategy as “being penny-wise and pound-foolish”. For example ha argues that too many sourcing decisions are based on the wrong criteria; companies are focusing on cost where they should be paying more attention to the suppliers’ reliability and flexibility capabilities. Definitely it would be better to focus on higher margins than lower costs. The rational for this is obvious, the realization is the challenge. Some companies, however, succeed by following deliberate and unique strategies…

Task orientation instead of product orientation

Prof. Ferdows often refers to the Li & Fung Group as a prime example of a footloose company seeking margins where other are stuck in a quicksand of costs. Li & Fung is a global trading group supplying high-volume, time-sensitive consumer goods. With the vision of “the machete in one hand and the laptop in the other” they constantly adapt to the realities by changing the component suppliers of their products. Instead of a traditional focus on supply chain management of complete products, Li & Fung focuses on the tasks that constitute a product. Component supply, assembly and logistics can all be altered and mixed to a better fit with new product introductions. By shifting task and component suppliers as products and markets change they keep a low-risk, agile network and most importantly; they optimize their margins.

Combine mass-customization with an extended product-service offering

Another strategy for improving both agility and margins is to pursuit a combination of mass customization and extended product-service offering. The future market is by Joe Pine and Jim Gilmore characterized as “market of one”, meaning that in the future companies will supply more goods and services to each of its customers because having the link to the customer is too valuable to only exploit for an occasional sale. Already today we see examples of this development; if you buy a bicycle in a specialized shop today, you will be offered a tailored bike with all necessary equipment from clothing to tools. Moreover you might sign up for a subscription to maintenance, sports nutrition and even bicycle events. The best companies are able to extract more value from each customer by moving up the ladder and offer commodities, services and even experiences. Lars Skjelstad, who holds a PhD in Mass Customization from NTNU, Trondheim, Norway, underlines the importance of offering the customer a feeling of more value than he pays for. As long as the value experience exceeds the price the customer pays, the company can increase the price to levels of insanity.

These are all reasons why some of us believe that cost focus is the strategy of yesterday! The key to success in the future high-dynamic markets lies in a focus on margins, i.e. the twosided relationship in revenue minus cost.

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