May 2005 - WAY OF THINKING DRIVES PROFITABILITY
By Abe WalkingBear Sanchez

Business Managers not focused on improvement become administrators at best and bureaucrats at worst. We tend to think of Sales as being the only competitive area of business, but that's only the beginning; competition continues beyond Sales through the entire business process.

Improvement Equals Profit Enhancement

There are 4 basic ways to improve the bottom line:

Cook the books.
Long before the guys at Enron there was another Texan who bamboozled for profit. Billie Sol Estes made the cover of Time Magazine in the early 1960s as the "Texas Wiz Kid". An inquisitive child, Billie Sol grew to be an inquisitive man; he figured out that liquid fertilizer was lighter than water and was worth a whole lot more. Huge storage tanks filled with water, except for the top 2 or 3 inches of liquid fertilizer, provided the security for loan after loan. He also once borrowed money on his neighbor's cattle.

Billie Sol built a financial empire on one shady deal after another. He had all the politicians in his pocket, including LBJ. There's a down side to "cooking the books", you may end up with a room mate named Bruno who insists you wear a little apron. . . Don't do it!

Raise Prices.
An increase in prices should increase profitability; unless you end up being noncompetitive and lose customers. Raising prices works best when you're a sole source provider or when you have more business than you can handle. Remember the 90s?

Better still is raising prices when the quality of your product / service and business processes is higher / better than anyone elses. It's the customers' total cost of doing business, not price that keeps them buying. "Buying cheap to save money can be like stopping a clock to save time." To compete, you must have quality both in your product / service and in your business processes.

Sell More.
If you sell more and control the costs of those sales you'll make more money. The most profitable sales are most often the repeat sales to the same customers. Customer retention and repeat sales are tied to more than price.

Decrease Costs.
Any reduction in cost of doing business without loss of income will have a dramatic impact on profitability.

Improved productivity rules.

Ronald Coase and Friction in Business

An English economist, Coase wrote that there is friction or costs involved with business entities. There's the friction/cost of "searching" for customers and suppliers. There's the "coordination friction/cost" of on-going business processes. The last and most expensive friction/cost, is that of "failure", of something going wrong and having to be redone.

The CEO of a chain of white table linen restaurants estimated that for every meal sent back, 32 new meals had to be sold to make up the loss.

Smart customers understand about the "total cost" of doing business. Your competitor's prices may be lower, the quality of their product/service may be equal to yours; but if their business processes are screwy and drive up the customer's cost. . . you have no competitors. You don't have to be twice as good as the next guy, be just a little better and you stand head and shoulders above competitors.

Fewer Doing More

Unemployment is up, and so is productivity. Those companies that constantly work on improving the quality of their product/services and of their business processes will be the survivors. The future holds more of the same.

Document Knowledge / Expectations

All human endeavor is predicated on knowledge, on what you know. Business knowledge is more than facts or data; it's the "orderly collection of information needed to get things done."

The verbal communication of policies (goal driven guidelines) and procedures (steps needed to achieve goals) expands on training time and creates errors. Word of mouth business operations are like a sailor's promises while on shore leave, they're not worth the paper they're not written on.

Every manager's job description should start with a commitment to improvement; "Focus on improvement, on how things can be done better for the same costs or less." If people aren't told in black and white what's expected of them, they get busy and forget.

Track the source of screw ups and reward customers / employees / vendors who tell you of a failing, of an opportunity for improvement.

Write down the goal(s) of each business function and then ask the experts, the employees, how the goal(s) can best be reached. Write down the steps necessary and ask new employees for new knowledge; how they'd do things differently.

In Closing

Don't worry about industry averages when gauging the KPIs for different business areas; it's much more important to focus on improvement, on how things can be done better. It takes a lot less effort to keep an old customer satisfied than to get a new customer interested.

And remember, "The bitterness of poor quality lingers long after the sweetness of cheap price is forgotten."

 

About the author:

For more information about Abe WalkingBear Sanchez, log-on to www.armg-usa.com.

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