The good news is that your latest cost reduction program has been successfully completed. Now your business operates with a lower, more efficient cost structure. The bad news is that all of your competitors have probably gone through a similar effort to reduce their costs as well. As a result, the relative advantage for each competitor likely remains about the same as it was before each player conducted its cost program. How can the pitfalls of relying entirely on cost reduction be avoided? By using a proven path for creating competitive advantage by implementing a “Demand-Based Business System.”
This new business model focuses on growth opportunities grounded in actionable new insights into customer demand while generating the competitive advantages that cost reduction efforts may not have yielded. The right approach to growth not only increases revenues but also optimizes costs in ways that benchmark-driven cost efforts never will. The key to gaining competitive advantage from both successful, systematic growth and from eliminating wasted spending is to understand customer demand at a level that allows you to anticipate where demand is heading, how to identify the most attractive segments of customers in the market and how best to fulfill their needs.
A fitting example which can be used to highlight how to utilize this business model for your own advantage would be a client in the food industry which had exceeded the goals for its cost reduction program but then struggled to move the needle on revenue, causing them to miss their overall business goals. We worked with them to develop a new “Demand-Based Business Model” to drive growth and identify additional cost savings and found that they had missed significant shifts in demand driven by demographic changes, dietary shifts, new competitors, economic conditions and other changes that made their traditional offers less attractive and their marketing and sales approaches far less impactful. The two most significant changes that were identified were emerging customer segments that now represented most of the industry “profit pool” and new desire for more convenient, better-for-you offers. Not surprisingly, the old cost reduction program had not identified any of these changes in demand.
Most importantly, by looking at this demand profit model, this client could take action on these new insights. For example, the old forecasting system was replaced due to the fact that it had missed the emergence of these important customers with a new approach that tracked the underlying drivers of demand (demographics, food preferences, economics, etc.) in order to anticipate changes in demand going forward. Then the new customer groups were sized and their economic value was estimated using a new segmentation approach, the “Enhanced Demand Landscape.” This approach results in a deeper understanding of the key consumer segments that help trigger demand. In turn, this highlighted the fact that the client’s current portfolio of offers and brands was becoming less relevant because it was missing several critical offers that these consumers were seeking.
This underscores the importance of spending more time with the most valuable new segments of consumers to understand their needs and their decision-making processes in greater depth. Armed with these insights, the client was able to tailor its value proposition and messaging to the “better-for-you” promise the most valuable customer segments were seeking. The client’s offers had always delivered on better-for-you, but since completing their cost reduction effort they had focused their value proposition and messaging on lower prices which had the unintended impact of attracting the most price sensitive, least profitable segments of the market. Reaching the right customers with the right message drove an almost immediate increase in sales while also eliminating spend wasted on reaching the wrong consumers.
As sales of the existing offers increased, the profits helped fund the innovation team’s work by filling the key gaps in the portfolio. By understanding the needs of the most attractive consumer segments in greater detail than ever before, the innovation team developed the most successful new offers they had introduced in decades. These new offers filled the major gaps in their portfolio, increased sales even further and generated new news and excitement for the brand.
By transitioning to a new “Demand-Based Business System” after completing its traditional cost reduction program, this company also found significant new cost savings that would not have been possible within its old business model. Savings beyond the original cost reduction program were generated from marketing spend, distribution channel costs and investments in innovation. All of these areas were made more efficient and more effective by identifying the most attractive segments of customers that had emerged in a changing market and by fulfilling a critical demand in new and better ways.
Based on this approach, managers don’t need to choose between cost reduction programs or growth initiatives when a “Demand-Based Business System” allows them to have both.