Separating green from red

“Who’s managing profitability?” is a key question MIT lecturer Jonathan Byrnes asks, and in nearly all companies, the answer is that no one, according to the author.

A surprise, until you look closer

As bankers, we are all familiar with profitability models and profitability analysis, so that statement seems hard to believe. But I’ve found that if you spend time discussing this with your clients, even your profitable ones, you might be surprised to learn that many companies’ main focus is not on profitability. Profitability almost seems like a by-product of their other activities.

How is that possible?  The book’s title Islands of Profit in a Sea of Red Ink alludes to the answer. Companies maintain islands of activity that make money, subsidizing the cost of  the rest of the firm.

The key premise, stated in the book’s first chapter: Nearly 30%-40% of every company is unprofitable and that, typically, 20%-30% of their business is highly profitable—in other words, the minority of highly profitable sectors are subsidizing the businesses. Islands of Profit also discusses how current metrics (like budgets) don’t reveal the problems at hand.

However, there is hope, the author maintains. Most unprofitable businesses can be turned around using three key elements, which the author describes as profit mapping, profit levers, and a profitability management process.

Voyaging among the islands

The book is broken into four sections with an introduction for each section and a very handy “Things to Think About” at end of each chapter. The reading tends to feel academic at times, so these features really help the “Type As” among us.

Before the author explains the positive steps to take,  he goes into the flaws behind some bad business mythology. The title of this chapter is straightforward: “ ‘Revenues are Good, Costs are Bad’ and Other Business Myths.”

According to the author, a 30%-40% profit improvement opportunity can be attained simply by understanding and making changes to practices that were based on these myths.

Two examples: “We should give our customers what they want” and “Don’t change a good thing.”

As bankers, we know, or should know, that these are erroneous beliefs. How often do our own customers come in wanting one product when what they need—and what we know they need and can guide them to—is another? 

And we all know the only constant is change, and that if we don’t adapt to our clients’ ever-changing needs, we will not stay as relevant to our customers as we should be. This will inhibit our growth, and, in time, our banks’ profits.

Profits then and profits now

The book then gives a historical perspective. It speaks of the prior business period being “The Age of Mass Markets.” Byrnes describes our own period as “The Age of Precision Markets.” A business economy based on serving very precise niches implies different behavior for success than a mass-market philosophy.

Byrnes follows with three chapters on what a manager can do. The book gives three pillars of strategy:

    • It’s all about customer value.

    • Strategy is defined by what you say “no” to.

    • You have to be the best at something.

Profit mapping, which is one of the key elements the author described that can be used to turn around a business, is discussed. There are multiple steps to devising profit maps. In brief, they are a means to way to obtain an overall, conceptual view of the relationships among a company’s customers, products, services, and transactions.

Practical application is key to getting Byrnes’ concepts off the page and into a business. The book discusses companies that effectively managed to improve their profitability. The first company discussed is Dell, which created a tightly aligned business model using the key principles of profitability management to formulate their process. This section also explains the CFO’s role in the process. It also outlines why difficult times present some of the best opportunities to act aggressively, or “Recession Opportunities” as Chapter 10 is aptly named.

The next section of the book is “Selling for Profit” and begins with a discussion on account management followed by profit-focused selling. The profit-focused selling chapter relates the story of a general manager’s three-year program to increase sales force productivity and enhance company profitability. This is followed by how-tos for firing up your sales team and sales forecasting.

Where in the “zoo” do you fit?

The book then takes a turn for the weird by asking if your company is a “reptile” or a “mammal” and explaining the difference between snakes and rats with a section on the platypus, which seemingly walks the line between the two. (Personally, I thought Byrnes could have found a better the analogy.)

Things pick up with a chapter on “Out-of-the-Box Customer Service”. The author states that your ability to create innovations will determine whether you stay or go and that the benefits in profitability are huge. This is a chapter to really pay attention to.

The next case example involves a hospital supply company and solutions in the way of customer operating partnerships. The author then moves to focusing on product companies and their major opportunities to build value and trust by not underselling their services.

The third section, “Operating for Profit,” starts with Wal-Mart as an example of supply chain management and an illustration of the dangers in having limited supply chains. It also asks and answers “How can supply chain and operations management lower costs and raise revenues?” and “How can supply chain managers have the most impact?”

Making change happen along the lines of Byrnes’ concepts isn’t simple. Changing a company’s culture is one of the most difficult challenges a manager can face and it is wrapped up in the final section “Leading for Profit.” There, Byrnes discusses leading and creating change and concludes with advice on how to become a great manager and leader.

 

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