What makes your business tick? A simple strategy for economic success.
by J. Peter Duncan
As the tour completed and we made our way back to the president's office I ventured a compliment. "What a great facility! You must really love it." "I do, except for one thing," he replied. "It is a bit antiseptic."
That seemed like an odd comment to conclude a tour of the shiny new facility one of my clients had finally opened after years of operating in a building it had out grown for some time. Of course the first thing the proud owner did was offer to take me on a tour of his new facility. Built from the ground up to their specification every thing was in perfect order. We wandered from the hush of crisp offices with new carpet through a heavy soundproof door to the manufacturing floor with the drone of gleaming machinery and the bustle of workers churning out product at a steady pace.
The puzzled look on my face urged him to explain his comment. "In the old building things were crowded and a lot noisier, but I could feel us making money. When the plant got cranked up the floor in my office would vibrate with a steady 'cha-chunk, cha-chunk, cha-chunk.' With each beat I knew there was about 50 cents flowing to the bottom line. It may have been crude, but it helped me sense the pulse of the business. Now I've got much more sophisticated tools to monitor everything, but I fear I will lose my understanding for what makes the business tick."
In crafting strategy it is all too easy to get caught up in complexity and lose the simple essence of what makes a business tick. Too many feel that if a strategy is not clever and somewhat complex, that it must not be good. But, quite to the contrary, the best strategies tend to be "boiled down" or simplified to their essence Ð the simpler the better. Why? Because this sort of strategy is easy to communicate, easy for all to understand, and therefore easy to put into action. The owner of the new plant had lead his company to a strategy that was focused around marketing, selling and cost-effectively producing a single family of plastic products. Optimizing the profit per part (or profit per 'cha-chunk') allowed this company to steadily grow from start-up to a $10 million business.
When the strategy is simple and clear, the company leaders can deliver and reinforce the message in a passing hallway conversation, dozens of times each day. A strategy distilled to this level becomes a beacon that lights a path through the clutter of conflicting priorities. Everyone in the company learns the strategy and can align their efforts to support it. The more simple and tangible the understanding of what it takes to make profit (or cash flow in a not-for-profit organization), the easier it is to manage and communicate. Creating such a simple, boiled down strategy is not easy to do. It often takes several years of thoughtful discussions about focus and competencies to bring a team to consensus as to a model that will profitably drive a business forward in their unique competitive environment.
One of the simplest expressions of a company's strategy is to identify the single most important "profit ratio" for the business. For the owner of the new plant, he knew that each item produced had a healthy gross margin and that cranking out parts was the simple path to profits. He intuitively monitored his strategy by tracking profits per machine cycle. Each time his machines went "cha-chunk" his mind went "cha-ching" as another half dollar fell to the bottom line.
What drives profits in your business? There are many ways to answer this question, and each has subtle implications for the strategy of a business. For example, if you are running a gasoline service station with a convenience store, you could look at profit per employee. Such a model would imply a strategy of getting the most out of each employee by focusing on efficiency and cost management, minimizing the number of employees needed to serve the demand. This might be an operations or capabilities focused business.
On the other hand you might have a customer focused strategy. In this case you might look at profit per customer which would encourage employees to try to do as much as they could to delight a customer and get them to buy not only gasoline, but other products and services offered by the business. Under this model "overstaffing" might be the right strategy to drive the profits higher.
A third possibility would be to take a product focus and look at profit per gallon, which would tend to make the employees work to sell the most profitable grade of gasoline. If your strategy were to use the business to acquire real estate, then profit per square foot would lead you to try to optimize the use of the land. There are many possibilities. Not one idea is "right", but each does tend to push the business in a different direction. It is important that you select a denominator of your profit ratio that is consistent with your strategy, because you will grow profits by doing more of whatever is in the denominator of your profit ratio.
The other side of the ratio, the numerator, raises the question of how you make profits in your business. In the simplest sense, profits are just the difference between revenues and costs (Profit = revenue - cost). Examine the biggest factor that drives your revenue and drives your cost and make sure all employees understand how they can influence these key aspects of the business.
When this challenge was given to a team that was in the business of providing temporary professionals to staff the health care facilities, it helped them understand their strategy and what made their business tick. We considered several metrics to describe what drove their business, but settled on "profits per professional placed".
Several insights came from looking at this model of the business. First, they recognized that denominator, the number of technicians they could place, determined (or limited) the overall size of their business and profits. While they had known this intuitively, creating this fundamental metric spurred the organization to think creatively about many ways they could attract and retain a larger pool of qualified technicians to be placed with their clients.
Second, they began to examine what drove the numerator, the profits. More profits per transaction come from increasing the spread between revenue and margin. Revenue was dependent on the quality of the professionals they placed. If they consistently had the "best" professional, their clients would be delighted, use them more often and be willing to pay a bit of a premium for their services. As for costs, the biggest factor was identified as the cost of recruiting and sustaining a temporary worker in an assignment. The more they could become known as the company that was the "best" to work for, the lower the cost of recruiting as word would spread and prospects would find them with less expensive advertising. Doing things right the first time not only delighted the temporary workers, but also lowered the cost of operations for sustaining them in the field.
These insights reaffirmed their commitment to total quality and encouraged them to develop a strategy founded on being "the best" in temporary staffing. This simple, easy to communicate, strategy is the basis for extensive internal and external communication and has propelled them to rapid growth in their industry.
When creating strategy, don't make it too complex. Distill it down to the essence of what drives profits in your business. A crystal clear understanding of how you make money, allows you to communicate strategy easily and effectively. Work to identify a simple model that captures how you repeatedly generate profits in your business. Avoid getting caught up in dozens of metrics and all kinds of reports. While these have their place and may be useful for analysis, the ability for the management team to focus on a simple model that drives profit is critical. Businesses that have a good understanding of "what makes them tick" are usually the most profitable and successful businesses.
What makes your business tick?
Profits per:
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