This is a million dollar question for most companies – start-ups or conglomerates. A lot of time and money is wasted either because the companies do not bother to ask this question in time, or try to answer it in the wrong way.
“What Comes First – Make, or Sell?” – this is a conundrum from
Here is my answer to a similar sounding question on a popular forum.
Let me tell you a story from my book The 5-Star Business Network – Vivek Sood | Global Supply Chain Group :
One of our large corporate clients faced exactly this dilemma when investing in the renewable energies sector.
In simple words, the dilemma was whether or not an entrepreneur with a good idea should go looking for customers or go looking for the ability to build the product/deliver the service.
Depending on the choice made at this point in time, the two models of innovation will look very different as shown in the figure below:
Alternate models of innovation
There are enough proponents for both types of models. In our work with clients, this conundrum has frequently surfaced and is always argued quite passionately by different senior executives in either of the two camps.
On one hand, there are the proponents of the Reaganomics supply-side theory – arguing ‘if you build it, they will come’. On the other hand are the more traditional thinkers arguing unless we have the customers and services pre-defined, how can we build anything?
In this story, as a way out of this dilemma, we listed the factors on which the decision was dependent. Among the factors were questions related to the certainty of the customer demand, such as:
• Are the real customers properly identified?
• Do the real customers know exactly what they want?
• Have the real customers communicated their demand to the market explicitly?
• How likely are real customers to change their minds?
• How easy is it for real customers to change their preferences?
On the other hand, there were several factors related to the level of innovation itself – whether it was just an incremental innovation or a giant leap. Key questions in this realm were:
• By what factor (multiplier) does this product/service improve the customer life?
• What are the existing means of getting the same value in use?
• What makes the new product better than the existing product?
• What tangible measures can be used to measure the superiority of the new offering?
• Do the real customer really value the new offering as superior as the provider does?
Based on these factors we developed the following matrix to enable answering the question:
Figure: Innovation Drivers and Supply Networks
In box 1 (red colour) – in a situation where the level of innovation is only incremental and the certainty of customer demand is very low – massive investments are required for customer education as well as for building a viable supply network.
This is because most potential supplier will see the situation as high risk and will only respond to monetary inducements to buy co-operation. A very high percentage of innovative efforts are in this square and, as a result, fail because of lack of deep enough pockets and difficulty of fighting the battle on two fronts simultaneously.
A basic supply chain would be the only possibility in this instance – where the organization has to move on two different fronts to build demand and supply simultaneously. This is shown in figure 8.3 (of the book mentioned above).
The key lesson for the players in the red box is that you need very deep pockets to fight the battle on both fronts – demand and supply.
If you lack that financing ability, try and move up or right – either find a niche of customers with pent-up demand looking for the right product/service by moving up, or move right in the matrix by creating a step change in the users’ lives by creating a product that far surpasses anything else available in the market place in terms of the customer experience.
If you cannot do either of these two things, keep looking for ways to make one of these two moves; or, consider scrapping the idea altogether.
Recall our client case study; the company, in this case, was in box 2 (light green colour) – with massive innovation but uncertain customer demand due to competing technologies promising similar magnitude of innovations.
In such a case, the business suffers from a chicken and egg situation. The customers do not buy because of some uncertainty, perhaps regarding which technology will ultimately win the battle; after all, no one wants to be stuck with a Betamax VCR and find that VHS standard has won the battle.
At the same time, the company is not in a position to invest too much in production capacity unless the customer demand is certain. Most businesses in this type of situation try and work with customers on a conditional basis – promising to build capacity if the orders are placed.
However, customers are not inclined to place orders because of the factors driving uncertainty in their own world. A way out of this situation then is to work with the supply network on a conditional basis – promising and delivering massive returns as the demand materializes.
The key is to find the right suppliers with the superior world-class capability and flexible capacity who are willing and able to understand the situation and work in it.
At the same time, flexible product design and investment in customer education to reduce demand uncertainty and increase buy-in also yield good results.
The need for flexibility, adaptability, ability to hold supply in readiness for the demand that builds up through education, clarity and events results in an adaptive supply chain that looks like alternative number 2 in the round figure above.
The key strategy is to make sure that suppliers and co-developers of technology and production capacity are fully on board with the plan and work alongside your business – as part of your 5 STAR Network.
If you have any doubts about any of the co-developers or suppliers, it is better to continue looking, negotiating and influencing till all the members of the 5 STAR Network are fully on board with you.
Consultants, think tanks, industry organizations, academia, research laboratories, brokers play a critical role in bringing together businesses that could form part of the same 5 STAR Network.
They play an even more important role in keeping the network humming smoothly, ironing out any wrinkles in the relationships. Such an adaptive supply chain is shown in Figure 8.4 of the book.
We have already seen how, in such an adaptive model, several organizations work together in an adaptive network to think and solve problems of their common customer/s.
Our client, an entrepreneur with massive innovation, used this model to work alongside some of the largest and best heavy machinery and engineering corporations in the world in order to bring their technology to the market successfully.
This was also a good example of the Fire-Aim-Ready (FAR) Innovation, but we will use yet another case example – of a much more ubiquitous product, an iPhone – later in this chapter to illustrate that effect.
In box 3 (dark green) above the situation is exactly the reverse. Imagine a pharmaceutical company trying to find a cure for cancer or a number of other old age infirmities.
As the population ages, the demand is already present and growing. However, on the supply side of the equation, the research and development are being carried out in the laboratories of large pharmaceutical companies and their collaborating partners in academia, scientific establishments, consultancies and other organizations.
The patent system, to some extent, restricts the collaboration – barring this anomaly every company would be keen to collaborate much more openly to gain part of the returns of a first mover advantage in a blockbuster product.
However, in any scenario, an adaptive supply chain similar to the figure above will result in far quicker and more effective innovation at a much lower cost. In fact, that is the reason for collaboration, despite the patent laws.
Successful strategies in this scenario will hold demand in Supply Chains till supply eventuates. At the same time, the business will make massive R & D investments to build further product innovation and sell limited quantities to early adopters under limited conditions – which is indeed the case in the pharmaceutical industries.
We will not discuss the box 4 (yellow box) in this article because such a scenario, where demand is highly certain and the level of innovation is mammoth, is rarely encountered in real life. Such opportunities are snapped up in a jiffy.
We have seen how the super-networked businesses use their 5 STAR Business networks to build adaptive supply chains and gain a massive advantage in the field of innovation. But this does not happen only in the fields of pharmaceuticals or high technology.
Apple, Amazon, Inditex and many other case studies dispersed throughout this book demonstrate clearly how super-networked businesses innovate better than the rest of the businesses in their industry.
Consider the case of Apple once more. Whether it is iPads or Apple TV, the company has never shied from firing first and then taking aim towards the target.
For example, the much maligned and a total flop Apple Newton, released around 1995, served as the key platform for the eventual success of iPads. Just because the technology or the public was not ready for the product, Apple did not shy away from testing, learning, improving, testing again, learning more and eventually succeeding.
As it succeeded with other products and learned the lessons (get the iTunes and iPod ready before launching iPhone) it has had less number of flops along the way.
Eventually, Apple will be ready with a unique, highly personalized and anticipated experience for each customer – which is the holy grail of the modern era. Most successful companies have followed similar Fire-Aim-Ready (FAR) trajectory to innovation, and examples abound.
If you have questions about your own company’s innovation strategy, send me an email on email@example.com or take our diagnostic survey. The results are always enlightening for senior executives, as they always bring up some blind spots. Covering these spots will save you a lot of heartache, time and money.
I write about The Supply Chain CEOs, The 5-STAR Business Networks and Unchain Your Corporations. My website is at http://viveksood.com
Business Network is now the engine of the society and it will need newer models of commerce to fast track the recovery.
Hollowing out of skills out of entire societies without replacing them with another set of useful skills, very high level of youth unemployment (frequently disguised by serious looking play on iPads and tablets), growing economic imbalances risking implosions of unrest, civil commotion or even a great war have all combined to create a very alarming set of circumstances.
Whatever transpires in the short term, eventually the business people will have to lead the way to recovery around the world. It is evident that I am passionate about newer models that work better. In my projects and work around the world, I have noticed that in almost all circumstances there is always some way to make things better. We only have to look around and see where the guidelines are, what the trends are and which models will suit the trends.
Eleanor Roosevelt (1884-1962) famously said – Great minds discuss ideas, Average minds discuss events, Small minds discuss people.
While it is very tempting to discuss just one of the three key ingredients of life – either ideas, or events or even people, I prefer to discuss all three because all three of these are inextricably linked. People make events and create ideas. Ideas create events and help people become successful. And events shape people and give impetus to ideas. A book full of concepts and ideas but with no stories about people or events would be extremely boring and dry.
On the other hand, a book with just chronicles of events or people would hardly be worth bothering to read unless its authors possessed immensely entertaining style of writing (which I do not) and even then would be of little practical value besides entertainment. I mostly use events and people to illustrate ideas and concepts to make them more tangible for the readers.
Primarily, then, this book is about ideas and concepts – yet you will see enough discussion about people and events to be able to use the concepts. Most of the people and events discussed are relatively well known so that background contextual information is already present in the readers’ domain and I do not have to supply it. Occasionally I had to use events from case studies based on our work – only because we could not find a well known event illustrating the concept.
I do not make apologies for that or for disguising some data or names of the entities for obvious reasons of confidentiality. Every couple of decades powerful juxtaposition of the trends leads to unique and revolutionary way of commerce. Contrary to the portrayal by the gushing accounts and adulation of the commentators, most pioneers merely stumble on the these trends by a process of trial and error. Other companies, the more nimble and hungry ones, follow the pioneers closely and build strong businesses in their lead.
More established companies then follow suit and try and recover lost ground using their financial muscle and market power sometimes succeeding and sometimes failing in this. Many other companies are so caught up in hubris of their past success or internal politics or some other such attention sapping device that they fail to move at all, or move too late, often with disastrous consequences. Chronicles of such disasters would perhaps be more instructive than the starry eyed accounts of success. As Daniel Coyle points out in his book The Talent Code, the only way to succeed massively is by failing repeatedly at progressively more complex smaller tasks till you master them.
However, most writers and authors persist with the formula that has succeeded since the first bard told stories of the victories in war, and I have no doubt that we will continue to see many starry-eyed accounts of success for centuries to come. It is difficult not to get caught up in the current of adulation that surrounds a particular company at a point in time.
Any such apparent adulation in this book is despite my effort to be objective and cognizant of the cyclical nature of success. As defined earlier, the aim of this book is rather more solemn. It is to take a wide and deep perspective on business trends, define the useful trends as seen from user perspectives, and come up with useful information for the business executives and managers.
The biggest trend sweeping the world – business and non-business – today is networking. Just last week Facebook has announced its IPO filing, valuing the company at $100 Billion. Analysts, pundits and business school professors are still debating what entitles it to that kind of valuation when many others with similar business model – Orkut, MySpace and a plethora of wannabes – have failed to monetize the eyeballs to any great extent. It is not even validated how many of those numerous Facebook accounts are authentic.
— Excerpted from the introduction of THE 5-STAR BUSINESS NETWORK
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It is generally accepted that environmental consciousness is now changing to environmental pro-activeness as organizations are discovering that it makes good commercial sense. Boards are asking the management to review their policies related to environmental norms, not only to bolster their corporate social responsibility aims, but also because consumers are asking for it. It is widely agreed that consumers will increasingly prefer to buy more and even pay more, for products or services provided in environmentally sound manner.
Our recent analysis has however revealed four key additional points:
So it is clear that a move to Green Supply Chains is not only necessary for sound environmental management, but it is also profitable and provides sound financial management.
How can companies start making the move? From our research and practical work in this area, we believe the following five fundamental questions really help to focus the discussion and crystallize action plans:
In our experience these benefits are frequently neither fully explored, nor adequately quantified. Even where a robust analysis is carried out, analysts tend to either ignore some of the potential benefits, or find it hard to analyze their full impact on the business. As a result, the overall benefits do not get adequate attention at the board level and therefore do not generate enough interest to release the necessary finance to create the transformation.
In one company we know (a large global industrial and building products company with revenues in excess of $5 Billion) the task of exploring opportunities in Green Supply Chains was handed over a senior executive as an additional job over and above his regular job, without any funding, clear direction or expectations. In a situation like this (which is very common), all the potential benefits cannot be fully understood and agreed by the key stakeholders, resulting in understaffed projects, and poor implementation.
Our analysis has also found that without any new technologies being utilized, just a move to a Green Supply Chain can reduce costs by 5-20%. The adoption of new technologies, however, can take cost reductions to a whole new level.
In addition, by raising their Green credentials amongst customers, employees, government authorities and other stakeholders, companies also move rapidly towards ensuring a sustainable and successful future.
This is the flip side of the question above. For the same reasons, while companies have vague ideas of the costs, these are rarely fully explored and analyzed. In our experience, these are also frequently exaggerated because of uncertainty surrounding many of the costs. While all future costs have a certain amount of uncertainty, and there is general tendency to allow a buffer; our analysis finds that costs of going green are generally more uncertain, but the buffers allowed are disproportionately higher.
The indirect costs are generally the source of most complications. It is really hard to estimate costs of process changes, disassembly lines planning and set up, waste collection and recycling modeling, additional research and development, inventory reduction and green supply chain modeling etc. Once each one of these systems are fully functional, the costs will follow a predictable experience or learning curve pattern, but it is difficult to predict the transitional costs, and these make the analysis complicated and perhaps insurmountable for many project teams.
Our research indicates that direct and indirect costs associated with Green Supply Chains are substantial but can be fully funded and more than offset by the benefits they generate.
This question is easier to answer as most pragmatic managers have a good idea of the relative power balance in their customer supplier relationships. While occasionally the influence is under estimated or over estimated, in general we found that just asking this question helps to focus action in the right direction. Some organizations have broken the intra-organizational silos and started thinking in terms of end-to-end supply chains. However there are still many more organizations that need to do this. Thinking holistically outside the boundaries of the organization, when applied to Green Supply Chain methodology, can yield some outstanding results. Under this primary question, a few additional secondary questions will help sharpen the focus even further to create the clarity, impetus and momentum towards positive plan and action.
Clearly, the organization which has the most influence over an end-to-end supply chain is best positioned to create the clarity and impetus towards the Green Supply Chains. For example in the retail supply chains, most retailers such as Tesco (UK) or Wal-Mart (USA) are best positioned to exercise this type of influence. However with the automobile supply chains, retailers have far less influence than the manufacturers.
In each supply chain, the entity which has the most influence needs to be encouraged to think holistically, in the interest of all parties that form part of that supply chain. It is perhaps also clear why this crucial third question can only be answered after we answer the first two questions. Once the benefits, costs and influences are clearly expressed, defined and analyzed, then it much easier to have an informed discussion with the party that ‘controls’ the supply chain.
A corollary to this discussion is then going to be just how to distribute the costs and benefits of movements towards Green Supply Chains. Unless all the incentives are properly aligned, some parts of the supply chain may well end up sabotaging the overall Green Supply Chain project.
A new road needs new milestones. Traditional supply chain or financial measurements will not suffice in this case. We found several organizations who have started to make some progress towards vague environmental goals, have defined this in terms of carbon impact reduction but without any clear definition of 4 or 5 key measurements that relate to supply chains at all levels. Not only were the measurements not clearly defined, but even the traditional KPI’s adapted for the purpose, could not be uniformly and easily accessed by the key personnel who needed the information.
A typical Green Supply Chain project has far more stakeholders than any other transformational projects inside an organization. Besides internal staff, key suppliers, customers, and even the public; media, regulators and government are also stakeholders in a green supply chain transformation. Therefore, a well thought out stakeholder engagement strategy, diligently executed, that includes clear and regular communication; is essential to success.
There several categories of barriers to Green Supply Chains and these include legislation conflicts, inadequate or misaligned stakeholder incentives, lack of environmental norms and tools, lack of resources, and high costs of implementation and technology.
Within each of these categories, are several specific components making the total number of potential barriers quite formidable and daunting.
Like in any other change initiative, barriers can be overcome through a properly structured, comprehensive and phased migration strategy. A “Big-Bang” approach is not to be recommended.
Rather, each major project stream is dealt with by a series of phases that cover detailed analysis, design and implementation, and organization change management. Time and care should be taken on the first phase to ensure its success and the ability to leverage subsequent phases.
In summary, all of the leading organizations that have started Green Supply Chain projects ask some fundamental questions.
The answers are then found to be illuminating their way towards innovation, profitability and sustainability. As is the case in all ground breaking endeavors, the first mover advantage is enormous, as are the challenges.
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