Vol. LXXXV

Dear Manager,

To be bigger – better yet, the dominator in our profession – has clearly been the mantra of American business. We must be competitive if we’re to retain our current position in the marketplace; just look at the remnants of failing businesses scattered around us. Were these failures caused by the inability to become the biggest and most visible – the dominator – in the field? Or was it because they couldn’t sustain profitability within their current model? In the vast majority of cases, I’d bet on the latter rather than the former.

I believe more and more businesses fail as a result of their desire to be “something they are not.” What they are not is profitable; otherwise they’d be “succeeding at something they are!” Take a moment to ponder this thought. Bigger is better, crush the competition, dominate your field, reap the eventual rewards; perhaps Enron would like to comment…

American business is getting another history lesson as it witnesses these mighty falls. Question is, will we learn anything? Big egos always have and always will compromise solid business practices. Businesses will continue to fail or underperform, not from market conditions, a poor economy or steamy competition. They will continue to underachieve by pretending to be something they are not in these very difficult times.

Sales growth is the venerated measure of performance in American business. In working with dozens (if not hundreds) of companies over the years, I’ve observed the phenomenon of management’s obsession with, and commitment to, sales growth. Expansion most certainly will increase market share! New funding will allow us to attain our “rightful position” in the marketplace! Many of us, this author included, have bought into this rationale in the past.

The truth is that sales growth hasn’t an ounce of influence relating to success if, in fact, we can’t sustain profitability. How many companies are you aware of that failed because they sustained profitability and a reasonable return on investment? Should profits not be the primary, perhaps the only, benchmark in evaluating the success of our own business? When profits are addressed, it’s commonly assumed that they’ll simply “take care of themselves.” There’s less excitement in profits, we can’t quantify profits in open discussion, so let’s talk about sales growth; it’s much more glamorous! The pretending continues.

The following scenario has reared its head more than once in my consulting efforts, the conversation often beginning with: “Keenan, you’re a sales guy. What can you do to increase my sales?” A major red flag, telling me to step back and review the profitability of the entity, has just been waved. Invariably, the client has convinced him or herself that by increasing sales, profitability issues will be “worked out” along the way. They are banking on the economies of scale to either soothe or entice the investors, banks, and vendors scrutinizing them.

Having been a “sales guy” for over thirty years, I can tell you that increasing sales is the easiest aspect of the equation! Who gives a damn how many more widgets we can sell if the current profit model is leaking like a sieve? I often ask clients if they’d be willing to work elsewhere, essentially for free or a nominal wage. And, if they think their own employees would be willing to re-invest their emotional commitment in a “less-than-profitable entity.” If manufactured and fixed costs can’t sustain current (let alone increased) capacity, let’s do ourselves a favor, stop the pretending, and invest in certificates of deposit.

Profits: Friend or Foe?

My role with clients has evolved from evaluator of sales performance to analyzer of profit performance. I want Google’s scale of profitability! You bet I’m in search of excessive profits that sustain competitively priced goods and services in the marketplace. Not possible in today’s business climate, you say? I say you just might be wrong. If we give up the search, the outcome is inevitable. I further suggest that this is American business’ only assurance for sustained livelihood in the years to come. At the very least, we must raise the bar.

Profits Aren’t Obscene … But the Alternative Certainly Is

Years ago, I knew of a prominent overseas manufacturing company with the reputation of being the largest supplier of their product category in the industry. In order to maintain that status, and attract increasing numbers of contracts, deeper and deeper discounts were given. In the end, profitability hit bottom, and the company that “sold the most” went bankrupt.

Let’s return to the widgets. Similar to several of the companies I’ve worked with (and the unfortunate folks in the example above), the owner of the widget factory is proud of the fact that they sell more widgets than anyone in the industry. Sales may be booming, but in analyzing their profitability my recommendation (as it has been with similar clients), would be to discontinue up to 50% of their current product presentation, areas subject to poor profitability, and/or poor performance. You might think that I’d just asked them to sacrifice their first-born!

Once the discontinued widgets were evaluated, their actual contribution to the bottom line represented between 10% and 20% of current sales. The support of these products, however, represented 30% to 50% of existing fixed costs. Additionally, in order to sustain the larger product presentation, capacity and financial resources had diminished the ability to cost-effectively sustain the balance of the most productive aspects of the line presentation. Essentially, a company can hold their best products hostage in order to shore up their more-widgets-than-anyone-dream-world.

In each case where this “less is more” strategy has been implemented, sales and profitability in the following year increased, often substantially. Focus is now established on best selling
products, economies of scale are activated, and management finds much greater fulfillment in the company’s performance. It may not be as glamorous as selling the most widgets, but wouldn’t you rather be the most profitable widget company?

This is a model that can work in many business environments. The dynamics of profitability was always open for review in my own sales agency; our product performance and its relationship to capacity and profitability was evaluated on an ongoing basis. It was common for our sales agency to “tactfully resign” a significant number of manufacturers on an annual basis. While providing one of the smallest (in number of manufacturers represented) presentations, our agency became one of the largest agencies in The Northwest.

I recently heard the lyrics of a song that made a strong impression on me. The song, written by David Wilcox, tells a story of a relationship that failed because tough issues were avoided in order to maintain outward appearances. It wasn’t until the relationship ended that the first meaningful conversations were shared. Mr. Wilcox’s lyrics ring true: When the pretending is over, the truth is safe to say.

Personal Regards,

Keenan

Next month’s issue will continue this theme as we look in further detail at avenues of increasing profitability.

INTERPERSONAL© is published by INTERPERSONALBIZ.COM, Keenan Longcor, Editor, ©2012. Duplication of this publication is permitted for both personal and business use. Excerpts may only be quoted with acknowledgment of INTERPERSONAL/INTERPERSONALBIZ.COM as the source. For re-publication rights, please contact the editor at KEENAN@INTERPERSONALBIZ.COM