Increase Your Profits

White Paper: How to Increase Your Profits

Increasing your profits is a simple goal.

But how best to increase your profits is actually the source of much debate with many organizations.

There are in fact three basic schools of thought on the subject:

The “Top Line” School

This type of manager, typically someone from the marketing or sales side of the organization tends to believe in pursuing volume strategies. Along with this strategy normally goes a decision to drop prices.

More sophisticated managers tend to believe in market segmentation and investigate the match between the resources put against each segment and the opportunity that each segment represents.

The “Cost Cutting” School

Generally an accounting or financially oriented manager, the approach here is to reduce costs. The trade-off is pretty much always trading off short term improvement for long term damage by cutting back on items presumed to have no value in the short term, e.g. advertising, training, having good people, R&D.

More sophisticated cost cutters address the issues of whether to do an activity internally or outsource it.

The “Strategic” School

A more strategic approach to the problem is to look at the mix of activities that an organization performs. The essential assumption here is that Pareto's Law applies to most areas of the business. Pareto's Law might result in the following conclusions about a business:

20% of the customers account for 80-130% of the profitability in the enterprise;

20% of the products account for 80% of the profitability;

20% of the activities in the business are strategically key and need to be focused upon;

20% of the product features are the most critical to customers.

A particular problem in strategy is managing the balance between old and new. Many companies get the balance wrong. They stifle a new product and their source of revenue growth by burdening the new product with the overhead of a larger and more successful product.

Others kill off their main business by being too optimistic about the new product and by underestimating the opportunity in the traditional product or business.

How To Determine the Right Approach

Clearly, there is merit in all three approaches. The important thing is to make sure that your organization is in agreement on its situation and its priorities. This consensus is often hard to achieve without the use of an outside facilitator of high credibility.

You could think of companies as having seven basic situations:

1. A successful company, where there is little pressure to change.

2. A successful company, facing the possible threat of a change to its market.

3. An unsuccessful company, needing to change its strategy but with a reasonable level of resources available to finance the change

4. An unsuccessful company on the edge of bankruptcy.

5. A startup, pursuing a me-too strategy.

6. A startup, where the problem is developing a new market.

7. An expansion into an international market.

Company Situation	A: Revenue Focus	B: Cost Focus	C: Strategic Focus
Successful, no pressure	Product line extensions.	Elimination of non-value creating overhead.	Acquisitions, new product development, activity based cost and customer profitability modeling.
Successful with possible threat appearing	Need to build consensus in organization in order to anticipate and act decisively before problems become severe.	Elimination of non-value creating overhead.	Need to defend core areas of business, increase cost of entry, change investments to increase value proposition of company and its products and services.
Unsuccessful with resources	Creation of a vision and plan that the organization can buy into. Need for quick and early wins that demonstrate early success.	Change structure of value chain radically.	Focus on profitable customers, products and segments.
Practically bankrupt	Radical change to value proposition is required immediately.	Quick and deep cuts to cost structure.	Focus upon customers with fast sales cycles and high profitability.
Me-too startup	Riding the capital and marketing expenditures of the market leader. Offering a superior and differentiated value proposition and building brand to match leader.	Benchmarking costs against market leader.	Opportunity to pick off more profitable customers or to build a value chain that makes less valuable customers more profitable.
Startup, new market	Tight focus upon those with key needs. Emphasis upon servicing and learning from narrow segment.	Avoiding costs structures of mass marketing approach.	Focus upon customer learning and rapid learning. Timing of decision to move from leading edge adopters to mass market.
Int'l expansion	Rapid acquisition of customer knowledge in order to set pricing, establish value proposition, develop marketing materials.	Hiring of excellent locals with superb track record and business knowledge to avoid excessive launch costs.	Testing of assumptions at all stages. Rapid focus on most successful segments. Sequence segment and product roll out based upon success not intuitions.