The Equation

Just yesterday I was in a conversation with some folks at a very innovative automation company in the material handling industry. This company has been growing at a rapid clip since their founding in 2006 and they believe they are on the cusp of a breakout period of expansion. The product and system seem to be truly revolutionary to me and as we discussed their impending need to scale and continue to serve customers in the nature they have in the past but also grow their aftermarket business in a profitable manner I continued to reflect on “The Equation."

I have created and led multiple business units serving high tech manufacturing industries over the last decade. Those businesses have had constant growth, typically averaging around 15% revenue growth annually with profitability always growing at a higher percentage. I attribute the success of those businesses, at least in part, to the adherence and application of what I refer to as “The Equation."

Simply stated:

This is not a direct mathematical equation, but more of a business philosophy describing a proven approach to differentiating an enterprise in the marketplace.

What “The Equation” says is that delivery of both Material and Labor required to secure a customer's business, but it is not sufficient to defend that business against the competition.

Sustainable competitive advantage is attained by the application of both Speed and Knowledge by the enterprise such that the result saves the customer Time and/or increases his Yield.

The good news about the discussions yesterday is that I did not need to emphasize the first point with the folks I was with. They got it! But surprisingly enough I have worked with a great number of executives in the past who just don’t “get it.”

Comments like “spares sell themselves” or “I get good enough margins on my labor business” highlight their lack of understanding of establishing sustainable competitive advantage.

Spares (or delivery of Material) can sell itself…but is very susceptible to competitive threats and commoditized pricing pressure. Just using Spares as an example, imagine the difference in your business model and resultant customer satisfaction level when you are able to deliver the Material support with more Speed and save the customer Time.

Every hour of Time for a customer has both an opportunity cost as well as a production loss cost associated with it. Take this a step further: your Material delivery is truly differentiated when your company holds the Knowledge to apply the Material or the Material itself is high in Intellectual Property. With the application of your Knowledge, you have either created a barrier to entry for other entities or you have created a situation of trust and reliance with your customer by increasing his Yield (which of course can be even more fruitful).

How about that Labor business? Imagine a supplier that can provide Labor to support a customer and another that supplies Knowledgeable Labor. The Knowledgeable Labor differentiates itself by having more technical capability as well the ability to solve more complex problems which allows for both Time savings and Yield increases for the customer.

Not only does the second supplier typically win the business and hold on to it longer, but this kind of supplier is also are able to achieve a much more favorable pricing scenario for their service.

This is the kind of scenario that has been the foundation behind the business growth programs I have led via relationship based business models in the past.

Average companies and businesses typically orient their thinking around the concept of delivering products and services to a market and a customer base. Most of them understand that an application of intellectual property is a differentiator, but very few comprehend the totality of integrating Speed with this Knowledge and its effect on their customers.

The higher level of abstraction thought here is that a business should be oriented on solving a customer’s problems as opposed to providing a product or service. When a business focuses on saving a customer Time and increasing his Yield, they start to realize that simply supplying Material and/or Labor is not enough. The differentiators are always Speed and Knowledge applied to the delivery of the Material and Labor.

It was very refreshing to have in-depth conversations with a management team that truly grasps these concepts and has been building a fast growing enterprise around with the same approaches that I have described in “The Equation.”