Solutions for
Profitability
How it works...
The basic steps include:
1. Completing a business analysis with representation from key areas of the company.
2. Planning and actions required to implement the strategy.
3. Identifying key performance measures and relationships between the outcomes and behaviors.
4. Establishing a measurement program that continually measures the behavior indicators and outcomes so that cause and effect relationships will be recognized and proactive management can occur.
What benefits should we expect from a successful Profitability Program?
The expectations are highest for companies that are experiencing high growth, competition, lack of skilled resources and significant changes in organization, process, and technology. Quite simply, a Business Profitability program should facilitate success in these areas. A commitment to an ongoing Profitability program will yield results in the long term consistently. These results include improved revenues, market share, and profits. However, these results may take years to surface and the reason for the improvement could be occluded by other influences, making it difficult to point to IT as the contributor. Other, more immediate, although less-tangible benefits not only address these issues but may be used as an early warning measure of what the bottom-line benefits will be. To ensure that these benefits are realized, the management team must support an ongoing program of Business Profitability and see to it that the necessary enablers are in place.
Consider some possible uses & benefits of Profitability Improvement
What is the value we are trying to measure and improve?
Traditionally, measures of success have been economic like revenue or market share, for example. The problem with using these metrics to indicate value is that they fail to measure the less tangible benefits and only reflect a “delayed snapshot” of business performance, thus making it too late to avoid a problem once detected. This is true with more and more industries where the accelerating rate of change requires even quicker decision making and reaction. Managing a business proactively and effectively in these times requires that we balance the “lagging indicator” measurements with other measures that forecast economic results through early warnings. To this end, recent measures have become recognized as “leading indicators” (early warnings) of whether a company will achieve its business goals. A well documented example includes Customer Satisfaction as a “leading indicator” of a company’s future market share and revenue. However, there are other internal processes and values that drive success as well. Measuring these (e.g. staff training, internal processes, service metrics, etc.) will provide early warnings and a more accurate measure of the internal business or contribution. Optionally, these internal metrics may be used to measure and manage the operational aspects of the specific internal business or function. This helps managers to forecast, diagnose and optimize their operation and the contribution it makes to the business.
Once we have identified the business goals we need to identify the “behaviors” within the areas that are identified as contributors to business benefits. Correctly mapping the behaviors back to strategic goals is crucial and requires not only a good understanding of each function or process, but the interaction between them. Only through this mapping can we define “lead indicators” that forecast a company’s success, thereby allowing us to be proactive in managing to achieve the business goals. Many of these lead indicators (behavior metrics) are applied within the standardized high level categories of; capability, customer satisfaction, performance, learning/knowledge, process, quality and contributing factors.
Many of these measures are already in use at both layers but may not be mapped back to business benefits or consolidated in a way that makes trends and relationships easy to detect. A measurement program is a critical component of the overall Profitability program and while many existing metrics are available, the degree to which they are suitable for any one implementation is dependent on many factors.
How do we Implement it ?
In order to succeed with a Business Profitability we must consider implementation from the outset. Technical implementation may be the least of our concerns if we consider that many of the success drivers are subtle and easily overlooked. Dealing with the dynamics that exist at various levels within an organization’s value chain is an imperative.
The following points highlight some of the issues that we need to consider:
Awareness and commitment are crucial at all participating levels within the organization, especially at the senior executive level.
Involving stakeholders in early workshops broadens the collective experience and perspective and is the first step toward changing the attitudes and behaviors that help to achieve business objectives.
An automated and integrated program that is embedded in existing or specialized technologies improves the chance of continuous Profitability.
We must measure and map correctly and dynamically from a business value perspective.
Profitability is not an "add-on", but is simply a measurement of the existing processes and systems already in place. "The measures are the system"
Critical to the success of the Profitability's measurement program is the need for a simple solution that will take hold at a grass-roots level- one that is easy to adapt for each business or function.
Analyzing Your Profitability - Putting the Pieces Together
"Most CEOs are on the hook to deliver shareholder value, which is different from customer value.”
Shareholder value is driven by profitability, driven by market share, and driven by customer value.
Overall quality (non-price) and price (total cost to customer) drive customer value.
Customer loyalty is the link between customer value and market share.
Measuring Value
Maximizing value for the most desirable customers accelerates share growth. But companies must know how to measure value in each segment, in order to select the best segments.
Reengineering the organization requires removing non‑value‑added costs, and non‑value‑added people. “How do you know what the non‑value‑added costs are if you do not have a system measuring what customers value?”
Selecting the right list of factors can be difficult. Within any organization, there will be differences of opinion about the key buying factors, their importance, and how well the company performs on each factor. However, organizations need to have a consistent set of weights and performance ratings on which everyone on the business unit team agrees.
The evaluation is divided into seven sections, with each section corresponding to a critical phase of the acquisition analysis process. In general terms, the seven sections address the following:
Creation of a database of historic financial information
Analysis and review of the historic financial information
Generation of projected financial statements based upon current ownership assumptions
Estimation of the Company's market value
Selection of purchase price, structure, and terms
Generation of projected financial statements based upon new ownership assumptions including purchase price and funded terms
Review of the projected earnings and anticipated values including analysis of returns to investors and financial statement performance
Benchmarking today
In the future organizations are going to spend even more time following up their performance. The organization should at least try to set goals and follow the performance within the following areas:
Profitability: How will the profit, revenue, and costs develop?
Business Achievements: When it comes to revenues, productivity, number of customers
Business Processes: In this area goals are set to support the completion of mapping activities of each process or it that is done to support developments for the improvements of their operations and efficiency
Strategic Planning: Here it is important to measure the distribution and search for information , both internally and externally. For example: rate, staff knowledge of main business goals (%) or rate, staff participating to achieve goals (%)
Customer Satisfaction: You should have targets for improvement in different area, which will support the business objectives and develop customer relations for example corporate image, corporate profile, customer satisfaction, etc.
Leadership and human resource development: Examples of indicators are: Staff have confidence in management; My manager is here when wanted; My manager is competent; My manager manages our unit; My manager develops his/her staff; My manager listens and supports his/her staff.
Information processing: Data-processing and support consume a lot of resources and it is not wise to leave it without control. Examples of indicators could be: rate, user friendly (%); rate, accessibility (%).
Quality: Quality is a business tool that may be used to provide against quality problems, reduction of costs for defective output and improvement of the business processes.
We provide business assessment information and services ranging from concise executive summary overviews, to a detailed comprehensive treatment. Our expertise includes the following:
Operational & financial analysis. It's one thing to report revenues and the bottom line, and variances against prior periods; it's quite another to determine what's driving the trends, and what can be done to influence the situation going forward. Together with providing valued products or services, doing effective marketing, and keeping the costs down, this analytical skill should be at the heart of any ambitious business. If you've only had mediocre analysis in the past, you really need to experience the good stuff.
Business performance indicators. The development and tracking of key measurements, including financial, operational, customer, and market, are absolutely critical to the successful management of any sophisticated business. All too often this is limited strictly to accounting information, and/or is "buried" in a vast amount of data. We can help determine which metrics are really key, and then make them easily understandable, including trends and performance against goals and prior history. Simple (yet sophisticated) graphical presentation can often be a real time-saver for top management.
Product line profitability. Determining the true incremental costs and resultant contribution to the business of individual product lines and / or distribution channels can be a key component in pricing strategy, capacity expansion evaluations, the setting of cost-containment priorities, analysis of possible divestitures, and other key management decisions. Too often, traditional allocations of overhead can distort the real impact of product lines significantly.
Improving
profitability can be addressed from a number of different aspects. Is
your overhead out of line? Will layoffs help, or will they actually hurt
you in the long run? Are your cost allocations being done in a manner
that distorts which product lines are helping and which are hurting? Are
there certain products or services that should have their price
increased even if that means losing a substantial volume of business?
Can you develop new channels of distribution?
Are there opportunities for a strategic alliance with a non-competitor,
where you could each benefit from cross-selling? What about exports? Are
there perhaps ways to improve productivity? If you enhanced the service
associated with a particular product, could you raise prices even more
than the incremental costs? What about expanding into a new territory,
or franchising your concept? Would you be better off out-sourcing some
of your cost structure? Is your sales and marketing effort structured
appropriately?
Too often, attempts to increase profitability are largely limited to
three areas: raising prices, if possible; cutting costs; and, several
ways to try to increase sales volumes. These areas are indeed important;
no doubt you have tried them all. We can bring in experiences gained
from many businesses, to help you think creatively and strategically
about increasing your bottom line. We can also perform assessments,
help you with new
business
development,
and perhaps come up with non-obvious ways to cut costs.
The Patrick J. Cordon Company
590 Barrett Road, Berea, Ohio 44017-1055
Phone: 440-816-9081 E-mail: patrickcordon@aol.com
Privacy Policy site designed by Steven Nowicki