There are few senior managers who would say that it’s getting easier to protect and increase profits and margin in today’s rapidly changing markets. Yet, as winning and keeping quality customers becomes ever more challenging, the traditional profit levers are also losing their power.
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TRADITIONAL PROFIT LEVERS |
WHY THEY ARE LOSING THEIR POWER… |
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Ride a growth wave |
Waves are getting ever shorter |
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Build economies of scale |
High fixed costs make profit sensitive to small market changes |
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Create barriers to entry |
New competitors coming quicker and from new places |
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Manage costs |
Has its limits, cutting too far risks increasing customer churn |
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Drive efficiency |
Most effective in stable markets |
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Use financial engineering |
More of a temporary manoeuvre than a durable solution |
We would argue that there a need for some fundamentally new business thinking such as customer economics, that is fit for purpose. We are not alone.
Acclaimed business commentator Steve Denning, the guy behind Agile Management, said (Nov 2018):
The key to the future may lie in… taking seriously… the simple core idea of Peter Drucker: the only valid purpose of a firm is to create a customer [which means creating value]… shifts in the marketplace – the accelerating pace of change, the increasing complexity, and the shift in power from seller to buyer – firms that deliver increasing value to customers are now flourishing… an idea whose time has finally arrived
An idea still at odds with the conventional wisdom taught in business schools…and the guards of the financial world… They are still convinced that that the purpose of a firm is to make money. What these upholders of the status quo are missing is that making money is the result, not the goal, of business.
… the beautiful thing is that when firms take seriously the idea of creating value for customers, they find that they are able to generate instant, intimate, friction-less, incremental, risk-free value at scale.
In the Harvard Business Review (June 2020), Gianpiero Petriglieri a professor of organizational behaviour at INSEAD.
“Where are the new management theories?” an acute observer of management trends asked me at a gathering… in times of change, when the future becomes unpredictable… managers need theories to provide clarity and reassurance.
I should know about new theories since I am a management professor. But they seem to be nowhere in sight. Even management academics are distraught, doubting that old management theories still apply… and wondering whether anyone is up to developing new ones.
The [other] challenge facing management is… the strength of the old ones [theories]. It is impossible to build the future using the blueprints of the past…
https://hbr.org/2020/06/are-our-management-theories-outdated
Management thinker Roger Martin of Harvard also blames business schools for encouraging an approach based on efficiency-focus and “spewing out people who believe that data-analytics is a solution to all kinds of problems.” (Sept 2020)
https://www.ft.com/content/170fc53e-a2d2-4ddc-89d6-fb491d8be104