Profit and Profitability

Many incidences we have faced in our strategy workshops, where we have to explain the difference between profit and profitability. Yogesh Jain of Niche Quality Systems Pvt Ltd, who is partnering for the DNA development service in Indore region has witnessed most of the confrontations related to profitability.

The question, what is the aim of doing business? Elicits an immediate and instinctive answer… ‘to make profits’ from most of our workshop participants.  Anything other than profit seems to be unthinkable for both business owners and managers.  This is the point where we struggle most to make the key players of the business think beyond profit.  One aspect that we push them to go beyond profit is ‘profitability’.

When we say that ‘profitability is healthier measure of business than profit’ is not welcome by most of the business owners, partially because they do not understand the difference between these two and due to the sentimental attachment they have towards the term ‘profit’.  

Why this strong sentiment?  We feel …….because everyone in the company pays attention to profits. Most of the key business teams have a revenue / budget / profit plan, each department / functional head owns an important element of that plan and progress is watched closely by them in the review meetings.  All managers work strenuously to meet these targets. Yet, even if each manager meets the budget targets, the company seems to be a lot less profitable.   

I remember sitting in a review meeting of a distribution company several years ago. The business owner of the company sat at the head of the table and looked at the four to five managers sitting on both sides of the table. Each manager, in turns began..’ here are my numbers’……. After presentation, they had discussions on implications of the numbers presented and finally all adjusted their numbers and a consensus was reached. This was the half yearly plan.   

In the following quarter the Sales manager grew the top line and met his quota. An additional sale came from new customers who ordered frequently in small amounts. The gross margin on these orders did not cover the distribution cost. Other customer ordered products that were out of stock locally and had to be couriered from other regions.

Two things were noticed in this situation. First both the Sales manager and the Logistic manager were on target; the sales manager grew revenues and the Logistics manager met his target because his budget was based on an average cost that allowed these inefficiencies with a hope on future business. Even though these managers met their numbers they failed in managing the profitability.

Second, these uncommon sales and orders could have been made much more profitable through some very simple business oriented twists, which would have benefited the customers as well as the company. These twists require only a business acumen and execution - not extra financial capital. Our strategy workshop highlights this point to a large extent.

As a discipline, we need to see Profit and Money as two different things. It is certainly possible for a firm to make a huge profit and have no money. It is equally possible that company is flush with funds but is suffering from losses.  What happens when an organization shows a profit?  There will be a line of people standing in a queue waiting for a share of profit.  Some organizations get into trouble because they don’t make profit. And others get into trouble because they make profit.

But successful businesses stand on two pillars. One: the ability to generate profit. Two: the ability to manage cash flow. Managing cash flow is very much related profitability. But this is missing in most of the companies… profitability is unseen and unmanaged!

 Contributed by Sasikanth Prabhu

Entry Barriers

When I was a MDP consultant at IBS Kochi, I had a chance to visit premises of more than 50 small, medium and large businesses. My job was to develop businesses for the intellectual capital of the faculty at IBS. My experiences during the visits to the prospective customers' premises made me feel that intellectual capital is the least wanted capital by them, but mostly needed. We found two situations in the customer’s premises: one is " business is doing well" and the other " business is not doing well". After visiting a score of prospects we found a pattern in their responses, mostly unfavourable ones.

Places where business is doing well the following behavior is found.....

 They....

·   Do not allow the new service providers to access the business leaders

·   Show ‘we-know-it-all’ attitude

·   are busy Expanding the organisation at a faster pace

·   Revenue growth and profit generation is equated with business growth

·   Give high priority to prestigious certifications and image building activities

·   Focus mostly on customers with high purchase power

·   Engage in creating entry barriers to the new comers / competitors

·   Look for business diversifications

·   Command and demand services from the vendors (supply chain)

 Places where business is not doing well the following behavior is found.....

 They....

·         engage in cost cutting measures

      ·         sell the products at thin margins

·         arrange programs to change the peoples’ behavior. The programs will be conducted by in house experts or by an outside agency that quotes the least.

·         take disconcerted marketing initiatives

·         spend more time in urgent and managerial issues

·         Search for certifications that will give them credibility in the market.

·         are hesitant to discontinue the unprofitable / failed product lines

contributed by Sasikanth Prabhu

Killing Business Innovation

Innovation happens in most organisations on daily basis, but most of it is revolving around cost reduction or pricing tactics. Very very rarely do Business Innovation happens.

Business Innovation isn’t just a strategy – it’s a mind-set founded on the belief that a win for customers and employees is a win for the company. Unfortunately, most companies are unwilling to make the transformation from being product, geography, or function centric to becoming truly Business centric. With a decade of experience with many businesses, we have found six mind-sets that block business innovation.

1. Spends without focus. Firms pour money into traditional pockets.... training, sales promotions, advertisements, product / service development, but research shows that the market refuses to give them credit for this. Business owners make all kinds of excuses for this state of affairs –“We’re in a tough industry” or “All the Street cares about is short-term results”– but customers just aren’t buying it.

2. Makes budgets an entitlement. Senior managers who negotiate for funding typically make their decisions on the basis of the prior year’s budget or the company’s general cost concerns. At the same time, department staff view the budget funds as an entitlement (we ought to get this... attitude) rather than as a investment focused on the business. The result?  Business as usual, and the same (boring / off the shelf ) customer offerings.

3. Assumes people in the field know nothing. Most firms treat departments as seperate entities /functions run by people with respective special backgrounds. A typical business owner / CEO thinks, “Our technical people are in charge of product development – they have to develop and educate the sales people about the new product. Sales persons will never understand the complexities of engineering.” This mindset almost guarantees that products and services don’t properly connect within the organisation.

4. Puts Marketing, Finance, Administration etc. in different cubicles. These distinctly different functions are more or less autonomous. They rarely communicate, except to consider cutting budgets when overall business performance lags. Such disunity ensures that no one pays attention to business of what the customer needs and wants from the company as a whole.

5. Detaches Marketing from the customers. Marketing people can’t do much for customers beyond feeding them propaganda. For eaxample when premium resort customers often lack a decent meal or even a pillow, the poor folks in Marketing can only report on customer rage.

6. Don’t rock the boat ..attitude. Harmony is given priority than doing more business. Business leaders / top management shy away from organizing their businesses around customers' needs , arguing that doing so is “too complicated” or “too disruptive” for them. But for the organic growth of the business, shaking up is needed. Only then the sustainable benefits will flow to the customers, employees, shareholders and the economy as a whole.

We are exposed this kind of mindsets in our retainer engagements (DNA Crafting) and it frequently challenges us in various forms. With a balance of approaches we have begun to grapple with the situations. But we hold on to our methodology of 'Merciless provocation" though it is interpersonally risky, yet the only known effective method. Changing mindsets emerging to be our specialisation.

contributed by Sasikanth prabhu

Business Definition

We have been using the question “What is your business” in our strategy workshops. We have been feeling that this is a very important question to be answered before we make strategy. But many times we have experienced that our clients wish to hurry to look for ways to improve their current operations than spend some time reflecting on this question and answering it genuinely. We feel in our heart that this is an important question to be answered before we renew the strategy. When clients show hurriedness in looking for ways to generate profits, we mercilessly try to bring them back to this question and do not allow taking forward our interaction to other business issues. Of course, our client seemingly feels irritated and sometimes we doubt ourselves having obsessed with this question.

But we feel now consoled when we read the breakthrough article by Theodore Levitt “Marketing Myopia” (1960). The main theme of this article was the question we ask our clients. The question introduced by Theodore Levitt was ‘What business are you really in?’. He says in the article those who define their business incorrectly are bound to stagnate in the market until they correct it. Also he suggests in the article a shift from product orientation to customer orientation will determine the winning position.

We feel encouraged that we belong to the school of this great thought leader. The importance of our question”what is your business?” is strengthened in our scheme.

What customer service means?

In most of the organisations, there is now a customer care department. It is a good news that all have begun to recognise the importance of customer service. But bad news is that many do not yet implemented the true customer care.

For many employees working in these organisation, customer care is mostly handling complaints or following a rigid set of processes. The customer care element is lost the moment a seperate department is created for caring the customer, other departments may feel that customer care is not their responsibility. Instead customer care must be a enterprise wide policy.

What I feel every organisation must simply do is.......

• ....... before beginning action always find out what the customer wants
• ...... always respond to the customer cordially irrespective of the customer issue
• ....... as quickly as possible provide answers to the querries and problems (not to complaints alone)
• ....... make it easy for the customer to do business with
• ....... give personalised service wherever possible
• ....... be honest, responsible and reliable with the customer
• ....... put an effort to deliver more than what is promised

Making a commitment to customer service is a company wide initiative. It begins with the top leadership. Top level executives must not only verbalise the customer care policies but lso must build systems and resources to carry out customer care.

In the long run the company that keeps the customer satisfied has the greatest chance of survival.

Slowdown in economic growth is only a slowdown of the psyche!

Before discussing the relation between the economic phenomenon and the Psyche, let us just brush some aspects of the economic system in our society. Every society has a system that regulates the economic activities. There are certain major entities that play key roles in the system. In modern times four major entities play a role in regulating the economic system.

 They are …

• The government : The government collect taxes and spends the resources for the welfare of the society
• The financial institutions (Banks, Capital Markets etc): The financial institutions gather the savings of the households and use it for the developmental purposes through loans etc.
• The Producing organizations (Products / services): The producing organizations produce products and services required by the household.
• The households: Households work as a unit contributing to the society and develop their own members.

Each of these components has to play their respective roles to keep the economy alive and vibrant.   If any of these members collectively change their behavior it may result in slowdown of the economy, for example if Government introduces taxes, it will affect the households decisions, If the Producing organizations change their products it will affect the system.

 All of us know that recession has hit all parts of the world.

 Recession means any one of the above mentioned entities has taken steps contrary to the developmental pattern and others are affected by it in some negative way.

Conventionally it is held that recession happens when people lose their ‘purchasing power’.  When household’s ability to buy is lost, it will lead to lack of sales for the producing organizations. The goods produced have to be sold. But how can they be sold when people have lost their purchasing power?

 If manufacturers cannot sell, they cannot generate enough revenue to repay loans and the creditors. The business eventually goes bankrupt and the banks will be full of non-performing assets. In such situations the banks will lend less. This becomes a vicious cycle. Depositors panic because some banks would have collapsed. They withdraw their money, and more banks collapse.

In order survive the recession the Companies will lay off some of its employees and the people who have lost jobs will have lesser money to spend. The people who are have not lost their job will tend to control their expenses and try to save more to survive during the uncertain times. These decisions of the people will result in slower turnover of money and the money supply will get stuck.

However the current is recession is caused by the Financial Institutions in the West, who were exposed to exorbitant risks in the derivatives market.  The banks were burst and millions of people lost their savings and large number people lost their jobs.

But one thing we must understand is that in recession times, we have lost only money (financial capital), but not the ability to make money. The ability to make money is a psychological phenomenon. With proper mindset and psychological capital the lost prosperity can be regained. 

 The people may have lost their purchasing power.  But their needs, dreams, goals are still there. For example a person may not be able to own a car but the need to travel is still there.  The economy drives on the latent desires of the households and the governments.  We become really poor only when we cannot dream, desire or do not take calculated risks.  The existence of dreams, ideas and desires ensures a good business for producing organizations. When the producing organizations are complaining about the lack of sales, it also means that they are not caring much about the customers.  The needs / wants are always present, only that we are not finding ways to satisfy them.

 Also we have to be open to the opportunities around us than to distant places / countries. The near-care focus will yield better results than far-care focus in the long run. Even though we are living in a globalised world we still need to pay attention to the nearest environment we live. 

 In this sense recession is an opportunity to accelerate our psychological slowdown. Recession is the effect of our mental retardation.

 If the organizations and the households, aim for better life standards, the economic prosperity sure to come.

 Some of the solutions to beat recession and make way for prosperity are …

 For Business organization

• Become customer oriented
• Develop innovative products / services
• Help the smaller organizations
• If the service provider / vendor cannot be paid in cash, offer shares in the company
• Do Barter

 For Individuals

Keep the dreams and goals alive | Invest in social capital | Express the needs and seek help | Help others’ profusely | Be a value creator

Economic slowdown is a temperory phenomenon

 This is the summary of the talk given by Sasikanth Prabhu (business consultant)

 At Chintavedi, Thuravoor (31.05.09)

 

 

Simplicity gets results

A couple of months back I saw a small trader in the Ernakulam market place (kochi - India), who has started a new business there. He was so excited that he was able to acquire a breathing space in this part of the city to run a business. He feels elated that he has about 40 sq.ft at his disposal. A casual glance at his kiosk made me feel that his merchandise is not matching with the excitement he has. All sort of things are there. Children's toys, hangers, strings, torches, mosquito bats, battery, etc. In one glance I could view at least 20 items. The items are displayed in nauseatingly cluttered way.I just asked him how is the business? He said it is OK. On further interview it was found that he is not able to 'break even'. He was of the belief that one has to keep all the items a customer asks. It may be good to keep all the items under one roof, but the trader has only about 40 sq.ft.

When a walk-in customer come to the kiosk and asks for a particular product, often it seems that the item demanded by the customer is not available or that the available product does not suit the customer's choice. At the departure of the unsatisfied customer, the trader immediately updates his stock as per the required of the flown customer. Thus day by day the inventory increased but the sale dwindled. I felt sad at the plight of the trader and entered into a conversation with trader and suggested to specialize in one or two products / product clusters because of the paucity of space and also the confusion it creates in the minds of the customer. The trader seem to have got some flashes as result of this coversation and consoled me he will do the needful.

Last week when I saw him at his kiosk, he has somehow liquidated his earlier inventory and right now has lesser number of products. I again asked him how the business is? he said the sale is less but some customers are doing repeat buys from the kiosk. He looks very optimistic about his business. Now the kiosk looks more tidy. And intuitively one could understand that this shop sells perfumes and related products. There is a range of perfumery products available in the kiosk. It has a welcome look now.

Mark Gottfredson and Steve Schaubert in their book "The breakthrough imperative" asserts simplicity as the one of the fundamental laws of business. This is beacuse human beings can't effectively focus on more than three or four things at once. The simplicity attribute must pervade the whole business; be it product issues, organisational issues or process issues. An organisation with too many products and options drives up costs and confuses its customers. Similarly, an organization with too many layers of management will probably be unable to take quick action, even when the need for action is obvious.

Great business persons always keep it simple.

All businesses inherently are simple and straight forward. Complexities arises when we deviate from our business or when we are ignorant of it. When there is joy, ease and lightness in what we do, we are minding our business. The moment we lose any one of these, take it that we are away from our business.The prospective customer must be able to do business with your organization as simple as possible. If it is not, the chances are that even the most loyal customer might one day leave you. Hence it is important to make the business dealings as simple as possible and as cheerful as possible.
Simplicity gets better results than complexity.

Driving simplicity in the organization:

• Study the customers' needs in detail

• Find three things the customer really cares about and do something about it intensely

• Develop products and services that would solve the needs of the customer

• Set no more than three to five critical imperatives for your organization, and communicate them so that everybody in the organization can remember, recite, and buy into what the company is trying to accomplish.

• Adapt your organizational structure, decision-making responsibilities, and critical business processes to ensure clarity, speed, and efficiency in meeting customer needs better than anybody else

Here is a site that tells more about simplicity in action http://rpc.blogrolling.com/redirect.php?r=16496b548dee948366e5c33591d13962&url=http://simplicityitk.blogspot.com

contributed by : Sasikanth Prabhu