Whenever I analysis a business to find ways to improve it or am developing an idea for a new business, I always think about the business through the lens of supply and demand. Though the term supply and demand are similar what is taught in microeconomics, for the purpose of this blogpost they take on a very different meaning. Instead of thinking about supply and demand as market forces (microeconomic perspective), I think about supply and demand as forces internal to the business (the things that you can influence). Similar the microeconomic perspective, our goal is balance the forces of the supply and demand side.
Traditional business books may break organizations into such components as: marketing, product, sales, HR, accounting, finance, etc. For large organizations (e.g., Coca Cola) this type of organizational structure makes sense and is often required to manage a multi-national multi-billion dollar operation. However, I see that such a breakdown of the organization may actually make it difficult to understand how these disparate components come together to form a holistic business. And although there is nothing wrong with this perspective of a business, I believe that if we look at a business from an alternative perspective we may gain some new insights. I propose that every organization (even non-profits and government organizations) can be broken into three components and by looking at the organization through these components new strategies and insights can emerge. These three components include: (1) supply, (2) demand, and (3) overhead.
Overhead is the simplest concept out of the three and includes all the work necessary to maintain the business (e.g., taxes, accounting, insurance, HR, office). Since you can read about overhead in almost any business book, I will not discuss it further here.
The supply side includes the business activities (or functional group in the organization) that delivers the product or service to the customer. Supply has to do with the organization's capacity to produce or deliver the product or service. For example, a manufacturing company may only produce 5 widgets per day and therefore their total supply is 5 widgets. A medical doctor may only be able to see 10 patients per day, which is her supply limit. A consultant may only be able to work 40 hours per week.
Overall, the supply side of a business is fairly straightforward and is a function the organization's production capacity. If we change the production system of the organization, we can also change its capacity. Seeing a business only in terms of the supply side can lead to problems as this an incomplete view of a business. The final and missing component in this framework is the demand side.
The demand side is the measure of the number of customers who are willing to pay for your product or service. In the business world, the demand side is often analogous to the market potential which is a calculation of the total number of potential customer for a given product or service. For service companies, I tend to measure the demand as the number of customers who want your service each week. For SAAS companies, the demand is measured by the current number of subscriber of the software.
To grow your business, your goal is to: (1) match supply with demand, (2) simultaneously increase supply and demand, and (3) reduce your overhead costs supply and demand increases. Firstly, it is important to match supply with demand because if you have extra capacity but no customers then there is waste in your production system. Additionally, if you have more customers than you can handle then you are leaving money on the table.
Every business is different, however the fundamental forces that govern all businesses are the same. The first question that you should ask about your business is: do I have a supply problem or a demand problem? Knowing which of these problems that you have will allow you to focus your attention on solving the constraint that is keeping your business from growing. For example, an engineering firm may have 10 clients approach them a week (which is their demand) but only has enough staff to service 5 clients (their supply). Under this condition, the firm needs to work on increasing their supply by either increasing their staff or outsource the work to another firm. They may choose a combination of the two in order keep a higher margin from having some of the work done internally and to keep a capacity buffer in the form of an outsourced company just in case the demand decreases in the future.
To increase supply, you will need to analysis your business' operations. There are several wonderful resources in the Lean Manufacturing, Lean Construction, and Lean Start-up world to help you in this process. The most prominent tools are: (1) value stream mapping, (2) A3s, (4) Set-based Design, and (5) Choosing By Advantages. I will list some reference books at the end of this post as this topic is beyond the scope (and length) of this blog post.
To increase demand, you need to think about who your potential customers are, how to reach them, and how to fine tune your marketing message. This will be a continuous process as the market evolves over time and you will want to change your marketing message as you learn more about your customers. The key to success on increasing demand is to know your customers better than they know themselves. You should keep track of analytics on all your marketing channels and occasionally get out of the building to talk to your customers face-to-face. The interesting thing about business is that people always want something. It's your job to find out what it is and how to deliver it to them.
And finally, as your business grows; you need to keep an eye out on your overhead costs. Remember that overhead costs do not directly contribute to your core business (the supply or demand side) and therefore you should try to keep your overhead as a percentage of profit as low as possible.
By looking at your business through the framework of supply, demand, and overhead; you can now quickly diagnose the problems of your company and be able to devise a strategy to grow and improve it.
Some Lean resources:
http://www.amazon.com/Value-Stream-Mapping-Organizational-Transformation/dp/0071828915
http://www.amazon.com/Machine-That-Changed-World-Revolutionizing/dp/0743299795/ref=sr_1_1?s=books&ie=UTF8&qid=1427883137&sr=1-1&keywords=the+machine+that+changed+the+world
http://www.amazon.com/Lean-Startup-Entrepreneurs-Continuous-Innovation/dp/0307887898/ref=sr_1_1?s=books&ie=UTF8&qid=1427883159&sr=1-1&keywords=the+lean+startup+eric+ries
http://sloanreview.mit.edu/article/toyotas-principles-of-setbased-concurrent-engineering/
https://www.paramountdecisions.com/
