Article Contributed by Bill Bachrach
The management team cannot believe that their company’s profitability continues to decline at a consistent rate, quarter after quarter. “How can this be?” says the Chief Marketing Officer. “Five of our customers have named the company supplier of the year! The crystal bowls and the plaques with our name on it are displayed in the front lobby.”
Most C-Suite executives are very proud of their awards, yet they have difficulty understanding why profitability continues to decrease. As a consequence, the executive team focuses its efforts on minimizing their internal cost structure. But these efforts do not seem to be enough to turn the company’s profitability around.
Instead, executives need to know how to break a spiraling downward financial situation and forge a new path that will accelerate growth and profitability. To do this you need to understand:
- The forces affecting the profitability of the product line
- Your true profitability drivers
- How to create a pathway to accelerating growth
What Forces Affect Your Product Line Profitability?
The ability to make money comes down to what the customer is willing to pay for your product relative to their needs and competing products. One method to determine the value of the product is to use a Product Line Profitability model, which looks at the difference between the product sales and the production and operating costs. In this model, the product sales are dependent on the markets and regions where the products are sold including their past and future sales projections. The product production costs and operating expenses are comprised of a number of costs including material costs, labor costs, support costs, and capital equipment costs.
The Product Line Profitability model provides the building blocks for identifying the business’s strengths and weaknesses as it relates to the profitability drivers. A product line check-up is good practice to understand how the internal and external forces are changing your business.
Now, the Product Line Profitability model provides the executives with the tools to analyze the organization’s cost structure today and to begin developing a landscape for profitability. But the model itself is not enough to truly get at what are the underlying drivers to accelerate profitability and to understand what needs to be leverages for growth
What Are Your True Profitability Drivers?
Identifying and understanding the influence of the internal and external forces that drive the acceleration of growth must include the analysis of these five areas:
1) Sales channel profitability
2) Product line price fluctuation
3) Product line material and labor cost
4) Organizational efficiency
5) Product line development time and traction.
A typical development during a product’s life cycle is the entry of a competitor’s product line in the market with similar form, fit, and function that now competes against your product. What happens now? Everything is decreased – your product line price and profitability, your sales channel profitability and your organizational efficiency. The product line material costs may need to be decreased and the product line may need to be re-designed.
Your profitability drivers vary depending on the product, market, and industry. But once you uncover these driver, you will be able to pinpoint the business and organizational issues that need to be dealt with first as you develop a business growth acceleration game plan for your product lines.
How to create a Pathway to Accelerating Growth
As your executives reviews the profitability drivers as well as the internal and external forces for each product line, a picture will emerge on the strengths and weaknesses of the business and organization. Analysis should also include changes that concentrate on making money for the business as opposed to whether or not a product or customer will be eliminated. This picture, then, becomes the basis for unifying the company’s business strategy and the day-to-day game plan for execution to make money.
A map then needs to be drawn step-by-step to ensure the company’s growth is on an accelerated path to growth. However, this pathway to accelerating growth does not happen instantaneously. It evolves over a period of time with direction, leadership, focus, dedication, and discipline. Most importantly, everyone (from the CEO on down) must embrace the chosen pathway, as they will need to execute it.
Follow these tips and you will accelerate the growth of your company’s wealth and value. This is the same approach that I took as a C-level executive to guide companies in electronics, manufacturing and high-technology industries to higher profits and significant returns for owners and investors.
About the Author:
Revenue and Profit Growth Expert, Bill Bachrach, has led numerous companies in various C-Level positions and works with Boards of Directors and Investors who want to accelerate their company’s wealth and market value. His firm has developed a 5 Step Model for Profitability that quickly creates a pathway for improved revenues and rapid market expansion. To learn more about this model and uncover the #1 secret to building momentum for growth and profitability, check out Bill’s free articles at: http://www.linkedin.com/in/billbachrach01
