How to balance growth and cost efficiency in a tepid economy

Brent Meyers, partner, practice leader,  Manufacturing & Consumer Products Consulting, Moss Adams

A unique opportunity exists to grow market share and profitability when competitors take a passive and “survival mode” approach to doing business. In addition, many manufacturers may be focusing solely inward on increasing profits through production efficiency.
“You need to make sure you keep looking out the window, so you can see what’s happening with the marketplace, competitors and customers,” says Brent Meyers, partner and the practice leader for Manufacturing & Consumer Products Consulting at Moss Adams. “If you just focus on production efficiency, you’ll find ultimately that you are the best and lowest cost producer of something that no one wants to buy.”
Smart Business spoke with Meyers about how to successfully use lean manufacturing processes to position your company for future growth.
What keeps manufacturers from seizing opportunity during tepid growth and uncertainty?
During a recession, slow growth or economic uncertainty, there’s a strong desire to contain costs and hoard cash in a ‘bunker mentality,’ waiting for market recovery or more rapid macroeconomic growth. It can be a viable survival strategy but doesn’t position a company for increased growth or profitability once the market recovers or uncertainty diminishes. It’s passive and essentially puts a company in stasis.
Additionally, the present recovery hasn’t been hockey stick-style where there’s strong post-recession growth. Gross Domestic Product growth is at a modest 2 percent and looks to stay there for the next few years. The bunker approach may not be sustainable for that length of time, and does not provide a platform for increased growth when the market’s trajectory improves.
What are the risks associated with focusing solely on internal cost reductions?
There are significant risks to long-term enterprise value and competitiveness. No company is going to shrink itself to success and increased enterprise value. An internally focused cost containment approach also carries the assumption that competitors are doing the same thing, or less. Despite internal improvements, this passive strategy can result in a relatively lower performing organization consigned to following in the marketplace.
This is a critical area for traditional manufacturing, as well as some in food and beverage and consumer package goods. These companies often tend to focus or are pulled into producing at the lowest possible price, forgetting about potential premiums for value added products and services, new and unique products, and innovation. For example, a food and beverage company lands a grocery store customer with a private label, which triples volume and brings in needed revenue, but pulls them toward a production focus rather than continued  growth, branding or innovation. Technology companies and aerospace and medical device manufacturers tend to invest more heavily in new product development and innovation but could move too far away from production efficiency.
How can companies improve current performance and position themselves for future growth?
The most successful adopt a growth-focused mindset and strike a balance between capitalizing on existing resources to pursue internal cost reduction and efficiency improvements, while making intelligent investments to enable top-line growth. Most find the low-hanging fruit fairly quickly, before turning to lean manufacturing tools and techniques to eliminate or re-engineer activities that don’t add value. That’s the right direction to start, but there are some potential landmines to be avoided:

  • Companies may leverage lean tools and techniques but don’t implement the most critical component — continuous improvement. They approach process improvement as a discrete event, or series of events, rather than as a cultural shift that seeks sustained performance.
  • Probably most overlooked is remembering that lean is designed to eliminate waste — non-value added activities — beginning with the ‘pull of the customer.’ That value, or lack thereof, is by definition something only the customer can define and determine. Knowing what has value or does not, therefore, requires outward visibility rather than internal focus. There’s also an underlying presumption that there actually is demand, which isn’t necessarily true.

In an economic environment absent the ‘rising tide that lifts all boats,’ a company needs to increase outward visibility, understand the market environment and position itself to take advantage of it. Lean manufacturing can create scalable, flexible and cost-effective operations that enable improved market and financial performance, but it cannot create core demand by itself.
How can a company create demand and leverage lean manufacturing?
Creating demand requires an overarching business strategy driven by market, customer and competitor realities. Once you have that information and synthesize it, develop a strategy by starting with where you want and need to be, rather than with where you are. This forces a market-driven strategy rather than an incremental approach to performance improvement that’s anchored in the present and, therefore, inward-facing.
Next, determine points of differentiation in the marketplace. Remember that differentiation and competitive advantage can be attained in ways other than being the low-cost provider — product superiority and service superiority chief among them.
Companies also need to mitigate market and customer concentration risk by avoiding the temptation to focus exclusively on just one or two large customers.
How can you create a diversified portfolio, especially when market demand isn’t growing rapidly?
Companies sometimes forget that growth can be generated internally or through acquisition. Actively consider organic and acquisitive growth strategies, including identifying value-added products and services and points of differentiation beyond cost; entering adjacent markets; developing complementary products; acquiring intellectual property, technologies, products and distribution channels; and leveraging efficiencies in rollups and combinations.
In this economy, you cannot make money by accident and mistakes can put you out of business. When approached, implemented and managed well, the parallel revenue and lean initiatives are highly complementary and can generate short-term return on investment to free up cash and capital to invest in further growth and innovation. This in turn creates a sustainable competitive advantage, market leadership, profitability, and enterprise and shareholder value.
Brent Meyers is a partner and the practice leader for Manufacturing & Consumer Products Consulting at Moss Adams. Reach him at (415) 677-8366 or [email protected].
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