Sixty-one companies on the 2017 Fortune 500 list actually lost money last year (interestingly, Fortune’s list is based on revenue, not profitability). USA Today reported last year that just 28 corporations generated half of the S&P 500’s net income. For business leaders those facts underscore just how difficult it can be to deliver profitable results, especially when so many traditional measures of success emphasize growth.
We’ve seen that challenge up close. One of our manufacturing clients had consistently grown revenues, but profitability was slipping due to pricing and margin erosion. Another client’s sales force wasn’t making its numbers and while leadership asked the team to “sell harder,” it just wasn’t delivering results. At another organization, sales professionals were hitting their targets, but they were selling products that actually lost money for the company.
What’s the difference between the leaders and laggards in increasing net income and operating profit margins? How can leaders transform their teams to put the focus on profitability?
1. What pathways to profitable growth should we focus on?
When Alice, lost in Wonderland, told the Cheshire Cat she wasn’t sure where she was going, he wisely replied, “Then it doesn’t matter which way you go.”
But executives can’t take the risk of not being sure of their destinations. While there are many routes to profitability, two paths stand out as the most effective: business model innovation and go-to-market effectiveness.
Business model innovation is all about exploring, creating and marketing an effective portfolio of new and relevant products, services, experiences, or business concepts for current and future market conditions. Facing digital disruption and disintermediation from more agile competitors, incumbents may have to rethink their core business model. If the new product pipeline is drying up, successful organizations define new product/service strategies. When traditional markets are saturated, new data analytics to assess and segment the market can uncover different and more profitable opportunities.
Greater profitability can also be achieved by increasing go-to-market effectiveness within the context of an organization’s current sales strategy. Bad “business as usual” habits can lead to holding onto less profitable sales channels, devoting too many sales and customer service resources to the wrong accounts, or selling the wrong mix of products. Let data guide the strategy: profitability by account, by territory, by product or service; market data such as demographics, population trends, competitive penetration, growth potential and the cost-to-serve. It may be time for a new strategy for developing and deploying customer-facing resources — and measuring their performance — in ways that drive more profitable behavior.
2. What two or three things could we do differently to increase profitability?
Perhaps your R&D team has been coming up with some great ideas but they aren’t making it to market. Or your salespeople see significant profit potential in an unmet need that your company could address if it were more nimble. In cases like these, it takes a deep dive into the drivers of value to understand if the organization has the elements of commercialization capability necessary for success. If it doesn’t, some limiting factors might include:
3. What must we do on the path to greater profitability?
Leaders need an objective perspective on what is truly attainable within their organizations. While every organization is different, with its own culture and capabilities, increasing operational effectiveness – an issue for most organizations – is an important place to look for opportunities. Failing to execute efficiently across-the-board will undoubtedly impact an organization’s ability to grow.
Profitability suffers when different parts of the organization are working at cross purposes, when inefficient processes persist or when critical initiatives suck up resources but are not fully implemented. It is leadership’s responsibility to ensure that all of the organization’s work is integrated and aligned with its mission, vision, and strategy. My Axiom colleagues have written extensively about what’s required to drive successful transformation. The phrase “align, equip and sustain” describes successful strategic transformations, and can and should be applied in driving the changes required to improve profitability.
Profitability increases when organizations are more agile, able to anticipate shifting market conditions and adjust accordingly. For example, many organizations can benefit by adopting a more effective formal and informal organization design. Break the bottlenecks that keep decisions from being made and executed. Build the capability to leverage a solid fact base and business intelligence as the basis for implementing new ways of working.
Another opportunity to increase operational excellence and profitability lies in building a more capable and engaged workforce. The costs of employee turnover and disengaged employees put a tremendous strain on profitability. Gaps in organizational capabilities often impede the execution of critical work. More effective, well-informed workforce planning can ensure that the right size and mix of capabilities are in place.
A compelling, authentic and distinctive employee value proposition can make talent acquisition more effective by enabling employment candidates and employees to affirmatively self-select into your organization. This has the effect of increasing overall commitment and engagement while reducing turnover and recruitment expenses and ultimately improving profitability.
With 2017 quickly coming to a close, most leaders should be able to forecast with some certainty how likely they are to meet their profitability goals. If you’re not satisfied with the answer, start asking new questions. Which path to profitability is right for your organization? What could you and your team do to increase profitability? And what must you do?
Alice was very uncomfortable in Wonderland. But you don’t have to be.