How Productive is Your Demand Chain?
I was recently thinking about Harvard economist Michael Porter’s Competitive Advantage: Creating and Sustaining Superior Performance, and in particular, his idea of the Value Chain. Porter’s Value Chain concept is a way to assess a company by separating it into “strategically relevant activities” in order to better understand how well processes function and perform across business units and how that impacts costs and revenue.
Fundamentally, the supply side includes the operational activities of purchasing, manufacturing and distribution, which constitute the vast majority of an organization’s expenditures to create value. For the demand side, it is marketing, sales and service, which are responsible to generate revenue. Note how I label marketing and service as revenue sustainers and generators rather than cost centers.
It’s hard not to argue that in the past 30-plus years there has been a significant transformation in supply chain operations. Businesses have been able to make them quicker, cheaper and more predictable, mainly due to advances in technology, Six Sigma and other quality improvement (QI) programs that strip inefficiencies out of the system. As a result, lean businesses overall have increased productivity and, as a result, saved trillions of dollars through just-in-time inventories, speed-to-market processes, etc.
On the other hand, progress to improve productivity in the demand chain has been almost glacier-like. The reason is many sales, marketing and service operations continue to use the same antiquated strategies and processes in a marketplace that has changed dramatically due to the Internet. The forces of digitalization and globalization, as Larry Downes points out in his book Unleashing the Killer App: Digital Strategies for Market Dominance and this Beyond Porter article, are creating more control (and options) for buyers to research and purchase more offerings than ever before. As a result, organizations that haven’t adapted and improved their ways are undoubtedly missing revenue as their competitors speed by and pick up their potential buyers.
It’s About Continuous Improvement
As I wrote a couple of weeks ago, Revenue Performance Management is the strategy of changing the way sales and marketing work – and work together – to accelerate revenue performance. This can only be achieved through a discipline of continuous improvement. Over the years, business leaders have moved from a simple production orientation in operations to supply chain management and other approaches. The demand chain, now receiving the same continuous improvement focus as other operations, is promising a whole new generation of improvements. To do this, best practice companies are measuring performance indicators in order to continuously improve their revenue-producing processes in the same ways in which they once looked only at the cost side.
To continuously improve revenue performance, organizations must measure and analyze the operational and financial impact of each sales and marketing activity across the revenue cycle. For instance, with lead generation campaigns, measurements would include the speed and volume of leads gained, nurtured and converted via multi-marketing platforms with varying calls-to-action as well as calculating the costs and revenue impact of each activity. By understanding the results of these disparate activities by channel, product and buyer, organizations can identify and remove defects and improve upon those efforts that have the greatest positive revenue impacts.
Need proof? Consider these two data points from Accenture’s global survey of 400 senior marketing executives at companies with annual revenues exceeding $1 billion:
- 47 percent of companies that grew revenue last year invested in marketing ROI and productivity compared to 32 percent of companies that lost revenues.
- 68 percent of growth companies say they have achieved above-average performance in analytics compared to 58 percent reported by companies that lost revenues.
The last frontier of productivity is how companies choose to manage and generate revenue. In today’s budget constrained environment, this commitment to measurement and operational excellence is more needed than ever before. By measuring and instilling process to continuously improve the demand chain, companies can increase sales and marketing effectiveness (revenue capture) and efficiency (cost reductions) in ways that are quicker, cheaper and more predictable across the revenue cycle.