Note: This review was originally published in The Hamilton Spectator.
Islands of Profit in a Sea of Red Ink
Portfolio / Penguin ($35 Cdn)
The next time all your managers get together for a meeting, here’s something worth adding to the agenda.
Get each manager to list the five customers you shouldn’t do business with. The five products you shouldn’t sell. And the five services you shouldn’t offer.
Now, compare lists. If everyone’s top five is different, you’ve got yourself a serious problem with profitability.
And odds are your problem goes like this.
Forty per cent of your business is unprofitable.
Thirty per cent of your business is so profitable that it keeps you in the black and subsidizes your losses.
And the remaining 30 per cent makes no more than marginal contribution to your bottom line.
In other words, you’ve got islands of profit in a sea of red ink.
Author Jonathan Byrnes, a senior lecturer at MIT, first discovered these tiny islands and the red, red sea while working with a lab supply company 20 years ago. Every department was making their numbers but that wasn’t translating to a healthy bottom line.
And the pattern has kept repeating itself in Byrnes’ consulting work with more than 50 of the highest-performing firms across business and industry.
Turning the islands into continents and draining the sea starts with a smart and sound business strategy. “Strategy is the foundation on which all profitability initiatives are built,” says Byrnes, who believes that three core principles capture the essence of a good strategy.
One, it’s all about customer value.
Two, strategy is defined by what you say no to.
And three, you have to be best at something.
“If you get these right, chances are strong that you’ll succeed.”
Too many organizations take their customers for granted. They assume that already know what their customers want. And they believe those wants never change.
“The starting point in strategy development must be the creation of value for customers by deeply understanding their real underlying business needs and developing innovative ways to meet them,” says Byrnes. “Customer needs are a moving target.”
Trying to be everything to everyone guarantees unprofitability. “A manager can develop a winning strategy only if he or she is willing and able to define crisply and clearly what is out of bounds. In this way, strategy acts like a laser, bringing the whole company into phase, and enabling the company to burn a hole right through its target market.” Strategy is all about focus and alignment. You need to know which customers, products and services aren’t a right fit for your organization.
And your organization must absolutely be the best at something. If you’re not the best, someone better will always beat you. “Companies that fall into the trap of trying to be everything to everyone almost by definition cannot be best at something,” says Byrnes. “This leads to a vicious cycle.”
The good news is that hunt for profitability can start in your own backyard. “There is an enormous amount of money to be made by improving the business you already have in hand,” says Byrnes. “For some managers, it’s easier to spend money on glossy new initiatives than to systematically improve the business. But when your business is tuned up to its full potential, you can drive it like a Ferrari. It’s hugely fun and immensely satisfying to manage. It’s also very rewarding.”
Byrnes lays out a gameplan for doubling down on the 30 per cent of your business that makes money, improving on the 30 per cent that’s marginal and phasing out the unprofitable 40 per cent.
Pulling this off requires what Byrnes calls paradigmatic change. To break through the inevitable wall of “the way we have and the way we will always do business”, you need to build a strong, clear and convincing case that there’s no choice but to change. The platform may not be burning but the clock’s ticking.
And the most important thing any president or CEO can do to maximize profitability? “Creatively, systematically and relentlessly build the capabilities of the company’s middle management team,” says Byrnes. “Middle management performance is the single most important element in corporate performance.”
The key to excellent performance is to manage at the right level. “As managers progress up the business hierarchy, their focus must increasingly shift from managing the company as it is (or as it was) to building the company for the future.”
So, the next time your managers are all in a room, get them making a list, check it twice and find the 30 per cent of your business that’s keeping you in business.