The New Profit Imperative.

Essay by lakeUniversity, Master'sA+, January 2006

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Go Downstream: The New Profit Imperative in Manufacturing.

Why Go Downstream?

Smart manufacturers are creating new business models to capture profits at the customer's end of the value chain. Despite the long economic expansion-and despite their own rigorous focus on improving productivity and quality-most large manufacturers have struggled during the past decade. Smart manufacturers are moving downstream for a very simple reason: that's where the money is. U.S. economic growth has slowed dramatically over the past 30 years. At the same time, the installed base of products has been expanding steadily in many industries.

Weak product demand and the growing installed base have pushed value downstream from manufacturing. The combination of stagnant product demand and an expanding installed base has pushed economic value downstream, away from manufacturing and toward providing services required to operate and maintain products. Downstream markets offer important benefits besides large new sources of revenue. They tend to have higher margins and to require fewer assets than product manufacturing.

And because they tend to provide steady service revenue streams, they're often countercyclical.

Foundations in Manufacturing Strategy

1. The vertical integration of supply and production activities to control and cost and maintain the predictability of raw materials and other inputs.

2. Disciplined research to create superior products

3. A dominant market position to provide economies of scale.

With these foundations, manufacturers could have cost advantage, steady revenue growth, and scale barriers to competition.

Rethinking Manufacturing Strategy

However, to capture value downstream, manufacturers need to expand their definition of the value chain, shift their focus from operational excellence to customer allegiance, and rethink the meaning of vertical integration.

1) Redefining the Value Chain: The manufacturer has to look at the value chain through the customer's eyes, examining all the activities the customer performs in using and maintaining a product...