Editor’s Note: This column is the third in a series about managing profitability and is based upon the author’s takeaways from Jonathan Byrnes’ book, Islands of Profitability in a Sea of Red Ink.
American businesses have always had to figure out how to best serve their customers and adapt to changes in the marketplace. Today is no different. We are at another turning point in the development of American business where organizations need to pivot using new methods to increase profitability.
Historically, if you think back to the Old West, everything was custom made locally. Then we saw the rise of retailers like Sears and Montgomery Ward. These organizations aggregated demand, standardized supply and lowered production and distribution costs.
After World War II, we saw the rise of mass markets and even sub-markets. Companies increased their market share and profitability by differentiating themselves and innovating, creating new categories. At first there was breakfast cereal, now there is a whole aisle of different types of breakfast cereals at the supermarket (healthy, kids, all-natural, etc.).
Markets are shifting again thanks to technology and labor constraints. We now see the development of precision markets where value creation shifts from product innovation to customer relationship innovation. In the latter scenario, account management becomes the differentiator.
Smart companies seek ways to simplify doing business with other organizations. We see this every day in business to consumer (B2C) companies where there’s an app for that; suggested pairings; free delivery; auto reorder, etc. But the same is occurring in the Business to Business (B2B) world
Walmart and P&G may be the first and best examples of this. These organizations worked together to develop systems and processes, where P&G managed Walmart’s inventory of P&G products. P&G reordered product and timed deliveries based on shared real-time point of sale (POS) data avoiding lost sales due to product stock-outs. P&G also stopped selling on a local basis for shelf space – it was all negotiated at the corporate level.
Walmart increased its revenue and reduced its inventory management costs and P&G increased its revenue and reduced its sales and marketing costs. Because other vendors were not as integrated, Walmart kept giving P&G more shelf space and inventory to manage, and P&G eliminated their competition from Walmart’s shelves.
The increased sales and expanded presence in Walmart also allowed P&G to realign its distribution system to better handle smaller customers as well.
So, to increase our profitability we need to make a fundamental shift.
We need to move from selling relatively standardized products and services to our customers in pretty much the same way to truly thinking about what our customers’ problems are that we can solve. We need to stop looking at our business as silo-ed functional departments like sales, operations, and purchasing to an integrated company that is working together toward one common goal – increased profitability.
Instead of collecting performance information just along departmental lines such as job revenue, new sales, time to completion, or production costs and hours we need to look at the total cost of a job or of a client on an annual basis to see what really makes sense.
When we make this shift, when we start selecting accounts that fit our operating capabilities, start differentiating ourselves by how we can help clients solve their problems and help them reduce costs and increase sales we will start to see increases in our profitability and market share.
If we don’t, if we keep looking at our business the old way and fail to understand overall account profitability or service profitability then we will keep doing a lot of things that don’t make us money.
And I don’t know about you, but I can stay home and not make money and have a lot fewer headaches in the process.
Industry veteran, speaker and consultant Joe Kujawa is the former president of KEI. He is 2016 Leadership Award recipient and a frequent Snow Magazine contributor.