Streetwise: Improve our Business’ Profit Design
From our friends at Eure Consulting:
Most people understand that in order to stay in business, a company needs to make more money than it spends. A simple concept. But what actually goes into making a profit is not as easily understood.
Having a clear understanding of your company’s profit design takes knowing more than just how much money is coming in the door and how much is going out. In fact, there are 12 different elements that make up a well-thought-out profit design. You need to revisit each one on a regular basis.
The 12 elements are:
- Value Proposition: What value you offer your customers.
- Customer Intelligence: Informed awareness of who your customers are and what they want.
- Scope: The range of the products or services that you offer.
- Business Development: The fusion of targeting, capturing, and caring for your customer.
- Strategic Control: The unique power of your company’s offerings.
- Strategic Allies: Specific external partners engaged to expand sales.
- Knowledge Management: The manner in which a company leverages its unique knowledge and skills.
- Culture: The landscape and focus of the human workplace community.
- Organizational Structure: Being able to organize people so that they can complete tasks.
- Operating Systems: The support structure for critical enterprise processes.
- Research and Development: The continual discovery of solutions to your customers’ needs.
- Capital Intensity: A measure of your company’s required financial resources. Both in your current state and for future opportunities.
Each of these elements play a part in how your company makes and keeps money.
As you grow, different elements take on more significance.
This is why you should reexamine each area on a regular basis, to make sure that it isn’t holding you back from higher profits.
Let’s use Operating Systems as an example. If your company has recently doubled in size, jumping from 20 employees to 40, the processes you were using will need to be completely revisited. If you ignore them and just assume that they will still work for a company of 40, you’ll end up with frustrated employees, poor performance, and a lack of productivity. All three will cause a big hit to your bottom line.
The same goes for your Organizational Structure. The reporting structure that worked for 20 employees won’t work when you have 40 employees. With the same number of managers at 40 employees as you had at 20 employees, each manager’s number of direct reports would double. And they would be completely overwhelmed!
These are just two examples of how elements of your business need to change as you grow. In order to grow sustainably, you need to be intentional about how and where you grow. You can use this list of profit design elements to help inform your decisions.
This list is especially helpful for the areas that you might not normally think about in terms of their effect on profit.
Like Knowledge Management. On the surface, it might not look like something that has any correlation to your profit margin. But when you think about it in terms of the effectiveness of sharing information across the company you can easily see how it might make your company less productive. If your sales team and your marketing team are not communicating effectively and are not sharing resources then they may be sending mixed signals to your clients. The left hand is telling customers one thing while the right is telling them something else.
Or perhaps you’ve adjusted the way you produce a widget and that change affects the way your technicians should install it. How do you plan to train your technicians on the new technique needed? If you just leave it up to them to figure out you’ll not only frustrate your employees but you’ll also frustrate your customers when the new design is inevitably installed incorrectly.
These are the types of problems that can be real margin killers. They seem like small issues at the start but their effects can quickly snowball. If you’re not thoughtful and intentional about each of these areas of profit design, you could be dooming your company to failure.
You also have to remember that these profit levers are all interconnected and interdependent.
A change in one area will create cascading changes across the other elements. Let’s examine this interconnectedness by starting with Scope. You’ve decided that it’s time to expand your offerings, but you can’t just think of an idea and push it into the marketplace. You would be remiss if you just started adding products or services that you think your customer wants without verifying that there is an actual need. Instead, you should do the Research & Development work necessary to find concrete information about what they want or need from you.
You can’t properly do that Research & Development if you don’t know who to ask, if you don’t understand who your customers are (Customer Intelligence). You also can’t research new offerings to bring to the market if you don’t understand what your customer wants from you (Value Proposition). What types of products or services do they expect or need from you? You don’t want to risk offering something that doesn’t appeal to your customer or something that they have no desire for.
Putting the time, energy, and money (Capital Intensity) into creating a product that flops is the quickest way to lose profitability.
But, let’s say you’ve done well-informed Research and Development work based on your Customer Intelligence and knowledge of your Value Proposition. And you’ve created a home-run new product. Congratulations! Now you need to determine the best way to market it and how to get it into the hands of your customers. You need a new Business Development strategy. And you probably need to rethink who the best Strategic Allies are for this new product. Creating a great new product doesn’t do your profit margin any good if no one knows about it and they don’t know how or where to buy it.
There’s so much more that goes into these decisions than just what you see on the surface.
All twelve of these profit levers are interdependent. And that’s why you need to continually revisit each one. A change in any one area can have a chain reaction effect in multiple other elements. Even if you don’t see it at first, eventually the disruption will present itself.
Make sure that you are intentional about your plans for each of the areas of profit design. Take the time to understand them and revisit them on a regular basis. Don’t leave money on the table because you weren’t detailed enough in your planning.