Companies today are under intense pressure to deliver growth. As internal functions mobilize to respond to this challenge, they may end up making the business worse.
The enthusiasm to drive revenue growth can introduce a costly and unmanageable level of complexity, which obscures pieces of the business and drags down overall profitability.
For example, sales, marketing, and design staff often are driven to introduce new products, acquire new customers, and enter new markets. Managers add products, brands, channels, and customers one at a time without regard to the cumulative impact on the business as a whole.
Each one of the following initiatives incorporates an awareness of the economic implications of various strategies across activities from the front end to the back end.
Transforming a revenue culture into a profit culture is no small task, to be sure. But basing the firm’s processes and metrics on an integrated perspective is the first step toward a more simple and profitable business.
Initiative 1: Analyze profitability by component
The first requirement is to gain a better understanding of where the company makes and loses money. This task can be difficult because complex companies often lack consistent information and systems across their many businesses and geographies, and because their ‘‘shared costs’’ – those which could not be directly attributed to individual components – represent a large share of the total cost structure. A profitability analysis typically will reveal large profit disparities in lines of business, brands, products, and customers.
Initiative 2: Rationalize brands and SKUs
Most complex companies will find that they have many brands or SKUs that contribute little to revenues or gross margin. Such components need to be evaluated along several dimensions including the additional customer reach relative to base brands or SKUs; customer loyalty, satisfaction, and relevance; and the added burden on manufacturing and distribution productivity and asset efficiency.
Initiative 3: Realign customers and networks.
Complex companies have the opportunity to improve the mix of low-cost and high-cost production capacity. Eliminating or cutting back on a single account to reduce overhead absorption is just the first step. Addressing sufficiently large groups of accounts allows a firm to consolidate facilities and close the highest-cost production lines or service centres.
Initiative 4: Embed this process into the long-term strategy.
An integrated perspective is a prerequisite for senior executives to establish and communicate their strategic priorities.
