Matt Lewis is head of national markets for London at KPMG.
I was speaking to a CEO I know last week. He said something interesting: “The one thing I drive into all of my team is that if they think they can sell the same product to the same customers at the same price next year, then we’re history.”
He’s not in an industry that’s known for its capability for change and innovation, but nevertheless, he thought that was what he had to do to stay competitive.
He’s not the only one. A lot of people I know are thinking about how they are going to improve their products.
We at KPMG did a survey of manufacturers recently. It found:
“One noticeable shift from the last two years versus the next two years is the added attention that firms will devote to new products. Over the next two years those planning to rely on existing products in existing markets will more than halve (from 44 percent to 19 percent), whereas those planning to sell new wares in existing and new markets will increase from 37 percent to 56 percent, putting a premium on innovation. The survey shows that innovation/R&D will be the second-highest priority for investment/expansion, after cost management.”
Yet at the same time as companies are feeling the need to innovate, many are also struggling with cost increases.
You hardly need me to remind you about the price increases in energy, metals, cotton, food, industry, and so on, that are hitting businesses. Inflation in the UK doesn’t help.
If your costs are up four per cent, how are you going to protect the value of your product to convince your customer they’re getting more value, despite your cost increases?
CEOs can challenge their teams to find that value while still innovating. The team are at the sharp end of things. The team are most likely to have a lot of customer interaction, or a lot of interaction with the supplier. This gives them unique insight.
Your team are also at close quarters with your internal processes. You can find cost savings by findings efficiencies there too.
But you need to think carefully about how you find those efficiencies. There’s no point implementing new systems just for the sake of it. First, you must unearth the underlying problems of existing inefficiencies.
For example, I knew a company that was struggling with its cashflow. It reckoned that its outdated IT system was slowing down its invoicing process and delaying payments. So it replaced the IT system.
Unfortunately, while resolving other issues for the company, this did nothing to remedy its cashflow problems.
So the company managers went back to basics to try to figure out the root of their invoicing inefficiencies. It turns out the issue wasn’t with the IT system at all, but with the way staff were inputting data into it.
The invoicing process involved a lot of data, all of which had to be absolutely correct for invoices to be paid promptly by the system.
But the company employees didn’t regard this as important data. They were slapdash, not really caring about triple-checking every last figure. This was a cultural problem, not an infrastructure one.
Having discovered the real problem, the company had a behavioural review. They explained to staff why proper data inputting was important to the system, and how to do it properly.
After that, the staff and the company made massive improvements. Invoices got paid, cash came in much quicker, and the business effectively halved the amount of assets it had sitting on its balance sheet.
This seems like basic stuff, but if you get it wrong there are dire effects. In this company’s case, the IT system was hiding what the real problem was. The business didn’t actually need to make such a major change as replacing its IT system, just fix a processing issue.
So, yes, companies must innovate while finding value to stay competitive. But to do that, they first need to look hard at the root cause of any inefficiencies. That way, they can cut costs and improve processes, without necessarily having to spend huge amounts on dramatic changes.
Matt Lewis is head of national markets for London at KPMG.
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