Profitability (the percent of profit out of sales) is one of the key performance indicators for any management team (of for-profit companies). Improving it is a major concern. Sadly, most effort and focus on improving profitability is directed at reducing costs. This focus has the following interesting aspects, one should recognize:
- It indicates that management does not believe it can (in a meaningful, sustainable and rapid way) increase the company’s revenues using the same cost infrastructure, and
- It focuses management attention at an area that has limited potential impact (it is safe to assume that the focus on cost is not new, that managers have been working to control and reduce cost for long and thus the opportunities are not too large. More than that, the maximum potential cost savings equal to 100% of the company’s costs. Sadly reaching this target will indicate the company no longer exists).
As management attention is limited shouldn’t it be focused at efforts that have a meaningful potential impact on performance rather than efforts with, at best, very limited effect? And if so, why is it that management so rarely focuses on increasing revenues rather than decreasing cost?
The focus on cost is a result of the convictions (and as strong a conviction is, it is still only a conviction and no more. It does not make it a reality, only the perception of it). The conviction is already mentioned above – management does not believe it can rapidly, meaningfully and continuously increase sales without increasing cost and/ or investment. Further more, this conviction is fortified by the convictions that customers only care about price and that the only way to overcome that is through a unique new product. Looking around should reveal that these convictions are far from reality; there is almost no leading company that is there because it has a unique differentiating product, or because it is the cheapest. Most managers, when they by, will not consider only cost as the determining factor in making the choice. Nevertheless, these convictions are so rooted that almost no one challenges them.
As long as these convictions guide our actions, most companies will focus management attention at new product development and cost reduction. Even though, at best, these efforts result with performance that is continuously remaining pretty much the same (the same as previous periods and the same as competition).
What will happen if we stop, recognize that possibly these convictions are erroneous, and try a new set of convictions – Customer have at least one need which is more important than price and it is possible to increase revenues much faster than increasing cost and investment (which will unavoidably improve profitability). Acknowledging these two convictions opens the door towards a world of new opportunities.
The one change that is required, is actually an attitude change – from the common convictions that mostly fail in having a lasting positive effect on performance the the alternative ones that not only stand a much better chance to result with positive and lasting effect on the company’s performance but also have another huge positive effect; the common convictions, psychologically place the responsibility for the company’s results on external, out of control circumstances while the alternative convictions place the responsibility back where it should be – with management. Whether you believe you can, or you believe you cannot – you are right. So why not believe you can? Management team that changes the attitude, focuses on initiatives that result from this alternative conviction, normally realize big jumps in performance in a matter of a few months and can sustain this for as long as they continue to act based on these convictions.