Systems and processes can actually work against you if you scale up your supply without corresponding demand.
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If systems, processes and automation produced a profit, airlines would be the most profitable businesses. You can decide to travel at a whim, buy a ticket online, check in at a kiosk, go through security machines with almost no human interaction and even the flight itself mostly runs on autopilot! Yet, most airlines make a 4-6% profit margin at the best of times.
Contrast this with a Rolex watch. If you want one, you can’t order it online or easily buy it in a shop. You have to join a waiting list, the Authorized Dealer will treat advise you it will take 12 months, when it arrives you’ll be given a few days to buy it or you’ll miss out. The product is handed to you in a simple, plastic green box containing a product that has hardly been innovated on in 30 years. The product is easily and cheaply copied. The product only does one thing! Rolex makes at least 40% profit margins on every watch sold – about 10x more profit than airlines make selling flights.
The key to profitability is not systems, processes and automation. The key to profitability is the imbalance between demand and supply. If more people want something beyond what supply allows for, it gets sold at a price that is profitable.
Here’s the rub; most systems create an additional supply of something. If you create an online digital course, you have just created an infinite supply of courses! If you put an online customer portal in place, you just increased the amount of service you can give to customers. If you automate and systemize your process of client delivery, you just increased your supply.
Imagine a guitar factory that can make 100 guitars per day. They hire a team of technologists and consultants to make them more efficient and they can now make 110 guitars per day. After 10 days, they will have 100 unsold guitars in their warehouse and they will have to start discounting their entire range to clear them.
Unless you simultaneously increase the demand for what you do, you will actually have a negative impact on your profitability in the long run.
I know this sounds like heresy. All the gurus have been telling you for years to systemize, automate and put processes in place. They aren’t telling you the full story though.
It works a treat if you can systemize and scale the “demand generation” side of your business while simultaneously limiting the supply side.
If we look at Rolex, they have scaled up the demand generation side of the business using every technique in the book. They have an Instagram account with almost 12Million followers, they sponsor major sporting events that are watched by millions of people, they take out the back page advertisements on countless luxury magazines and they set up retail stores wherever high-end shoppers are found. What they have not done is scale up their manufacturing at the same speed.
Airlines have spent decades in a race to automate and scale their operations with very little thought to scaling their demand generation. Most major Airlines have fewer than 1M followers on Instagram despite having amazing images of shiny planes, beautiful destinations and friends crew to share.
The key to profitability is taught on the first day of a high-school economics class – demand must exceed supply. If you are going to embark on a quest to systemise and automate your business, be sure to ramp up the demand generation side before you pay any attention to scaling up your supply.