The Need for an Improved Profit Design is Challenge #2 and it shows up first in Stage 3, then repeatedly in Stages 5, 6 and 7? Why so often?
While business plans are well known, discussions around a company’s profit design are few and far between. According to Adrian Slywotsky, author of The Art of Profitability, to succeed in business you have to have a genuine, honest-to-goodness interest in profitability. Understanding the underlying profit design of a company is critical to creating and sustaining a thriving business, and it’s not just about the financial aspects.
So many people rely on data from a financial statement to evaluate their profitability, but they’re missing the big picture. Profit design is the result of managing and tracking a complex, interdependent set of components that contribute to the company’s financial performance. Leaders must test all assumptions about different aspects of the business on a regular basis. The ability for a company to generate profit isn’t just about making more money than it keeps.
Starting in Stage 3, this concept puts even more stress on a CEO who will struggle to delegate authority and responsibility as well as recognize that the company is now enterprise-centric and the CEO has to start letting go in order to help the company grow.
In their landmark book, Growing Pains: Transitioning from an Entrepreneurship to a Professionally Managed Firm, Eric Flamholtz and Yyonne Randle outlined how a small organization navigates a tricky transition. Over time, the word “entrepreneurship” has come to be associated with an informal approach to management, or in some extreme cases, a total lack of management altogether. This doesn’t help entrepreneurs believe or buy into in the concept of twelve components that make up a company’s profit zone. Many entrepreneurs think, “Hey, we got started without formal systems and processes, and we’re successful, so we clearly do not need them.”
As a company moves into Stage 5, this concept of profit design should have evolved into a more formal commitment to focus on those twelve components in order to ensure sustainability. Ignore these in Stage 6 and 7 and profitability will become even harder to capture.
These discussion points may be potential areas of focus to help a CEO improve profitability, identify where the company is doing well and find ways to capitalize on those strengths. Also, identify areas of concern. It’s important for that CEO to utilize all stakeholders to uncover activities within those components that will improve profitability.
Grasping and utilizing the profit design components to a company’s advantage does not imply that the leader has to hold all twelve of these components in their control like a wizened chess master playing twelve chess matches blind folded. Quite the contrary: intentionally managing the twelve components of Profit Design is based on one word. FOCUS. The talented business operators I’ve worked with over the years use the twelve components to focus their efforts where they are needed most. They do this by first understanding the impact each component has on their operations and second, by intentionally setting in place strategic and tactical plans to address them.
Profit design creates the profit architecture of a company. If a CEO is not probing into what is driving profits, revenue groups and motivating employees, he/she risk instability and going out of business.
By focusing on the company’s profit design, the CEO will stay ahead of challenges such as economic recessions or a major customer leaving. Building a solid base ensures stability even when the company faces issues that threaten its very existence.
The Twelve Components of a Company’s Profit Design
- Value Exchange: The examination of the profitable organization and exchange of value for money.
- Customer Intelligence: The informed awareness of who the customer is and what they want.
- Scope: The range and influence of products and services offered.
- Business Development: The fusion of targeting, capturing and caring for the customer.
- Strategic Control: The unique power of your offerings.
- Strategic Allies: The specific external partners engaged to expand sales.
- Knowledge Management: The manner and extent to which a company accesses and leverages its unique knowledge.
- Culture: The landscape and focus of the human workplace community.
- Organizational Structure: The organizing of people to successfully complete tasks.
- Operating Systems: The support structure for critical enterprise processes.
- Research & Development: The continual discovery of solutions to your customers’ needs.
- Capital Intensity: The measurement of required financial resources.
By helping a CEO pay attention to how profit is created and being intentional about creating his/her own profit design, it will not only improve profitability, but increase a business’s value.
Running a successful business relies on a leader to be very clear about where the business is doing well and where it isn’t. By looking at the twelve aspects of a company’s profit design, a CEO is forced to evaluate each one and not assume things are okay. A company needs to prove things are okay—not just to the CEO but to their managers, their bankers, and their investors. Having a twelve-point checklist that provides everyone with clarity about what is working and what isn’t working is a great start.
I cover all aspects of the Profit Design, give detailed descriptions and suggest questions to help a CEO identify how well they are implementing all twelve components in my Stage 3, Stage 5, and Stage 6 books.
Your success. My passion.
Laurie Taylor, FlashPoint!