Why the profit-margin is eroded?
Dec 11, 2020
The Covid-19 crisis has unexpectedly thrown most organisations into a new situation and many are now “forced” to downsize. Resilience has become the new mantra for business owners and leaders around the globe.
Long before the pandemic we saw that profit margin for some companies started to erode. Today that is valid for most companies.
Figure 1: All business are faced with a challenge and there is an erosion of profit margin.
Mega-trends that are changing the business landscape can be summarised in these three drivers:
- Technology - all major changes has been driven out from a technology push. Today we see digitalisation as a major driver for change.
- Globalisation - connectivity between countries, cities and people has never been larger than it is today. Globalisation 1.0, 2.0, 3.0 etc it will just continue as we humans must explore new horizons.
- Shock(s) - the magnitude of different types of shocks are escalating from just a flu to pandemic of different sorts, from rains to flooding etc. Shocks needs to be taken into the business models.
The Washington Post had an article on 19th of August 2019 where they wrote about a group of very influential CEO’s decided that maximizing shareholder profits no longer can be the primary goal of corporations. This was prior to the COVID-19, the questions remains to be answered will this still be valid?
Before the pandemic we saw signs that the profit margins started to be eroded because of the following changes:
Figure 2: All of the above trends are connected and creates a huge force.
Declining customer loyalty - Customers looks at price more than they value to be loyal. Price and performance are not longer important. Low price and customer that performance as basic.
Changing customer requirements - due to the fact that low cost has been an every customers lips requirements has been shifted towards scaling down on services and offerings.
New competitors - Due to globalisation and digitalisation many new competitors has entered the global business landscape, especially from Asia.
Standard products as commodities - Everything that is basic has become a commodity. Differentiation is not valid anymore. Cheap copies are valid higher than originals.
Increasing price sensitivity - due to many more alternatives customer are very sensitive when it comes to price and increase of the price. The trend is clear that price cut is a come-give advantaged.
Ever more complexity - producers are trying to convince their customers that the complexed a products are the better but simplicity has today become a value word.
Cooperation/ out-sourcing - new relationships are being created almost every day. Companies that used to be competitors are now cooperating especially in product development. Core functions are being out-sourced.
Bread-down of the value chain - the traditional value chain are being replaced by value networks that focus on sustainability and circularity. This new approach will be challenging many business models.
All these trends described above are connected so the force from them are so strong that they will have a huge effect on all companies.
Companies needs to RE-think and RE-start their activities and use the time now to create stronger and more sustainable solutions. See our blog: https://www.growise.se/blog/it-is-time-to-re-think-and-re-start
If you need more info or what to start a RE-think and RE-start workshop contact us today.
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