A Firm’s Demand Side Comes First

It strikes me that firms seem overly preoccupied with working the supply side of their businesses. Most operational improvement methods and programs are focused on making the supply side function more efficiently and at lower cost. For example, Lean manufacturing allows a firm to supply more output with the same resources, or the same output with fewer resources. What’s really important, though, is how a firm plays the demand side of its business – how it creates, and keeps, customers.

The problem with supply-side only thinking is that ultimately it becomes mainly about price. Improving efficiencies and reducing costs will certainly improve margins and will allow a firm the flexibility to pass some of the cost savings through to customers in the form of lower prices. The problem is that operational improvements can be imitated by rivals and that a firm that Leans its way to lower prices may find itself with lower profits when rivals follow the same path.

What I am really interested in is how operational improvements can be used to influence a firm’s demand curve – to help shift it rightwards, if possible. This can only be done with a strategic approach – where the firm identifies and selects its preferred target customers, identifies the needs they will serve with unique value, and then determines how it will tailor its value chain to create relative price differences from rivals.

Under such an approach, initiatives like Lean begin to take on a new life – they are being used to create and keep customers, rather than reducing costs.

By themselves, operational improvements are not likely to shift a firm’s demand curve. Unless the improvements result in unique value being offered, the firm can only move along its demand curve – by offering a lower price to secure more demand and increase output. Unique value by definition provides a barrier to imitation and entry, unlike operational improvements which are vulnerable to imitation by rivals.



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