It can be a hard choice, but successful companies often have to make strategic decisions to "fix it or exit." In other words, every element of a business must earn its keep, be fixed or let go.
Companies must have a growth and profitability mentality that prompts them to maintain their winning profit centers and dump the marginal earners and losers.
Many businesses tend to avoid taking the time to identify their key profit centers and eliminate marginal products or services. During good economic times when sales are booming, problems tend to go unnoticed. But when business turns sour, earnings start to lag, or the economy takes a turn for the worst, weeding out the under-performers can be the key to a company's success and even survival.
The solution doesn't necessarily mean selling off operations. Sometimes simple adjustments can do the trick.
Here's how the owner of a large chain of Italian restaurants developed and put the profit mentality to work.
The restaurant's menu was extensive, the food was delicious and the service excellent. But an analysis of the business showed that the menu prices weren't always profitable. Some dishes were priced at or below the cost of their ingredients, while others were so complicated that their profits were wiped out by the cost of the time-consuming labor it took to execute them.
The fixes were fairly simple:
In the end, the menu offered a variety of choices and prices that ensured the business received a fair return no matter what the patrons ordered. But the turnaround required taking an objective look at the business, and making some changes after isolating the sources of profits and losses.
In order to ensure that your company's bottom line is enhanced by profitable sales, and not hurt by marginal or non-profitable sales, you must know your organization's focus. This is where the Pareto Principle can help.
Also known as the 80/20 Rule, the Pareto Principle succinctly states that for many events, 80% of the effects come from 20% of the causes. So, for example, 80% of your company's profitable sales come from 20% of your business's customers, products or services.
Once you understand the principle, you can start to determine the areas of your business that:
As a first step toward identifying profit opportunities, set up a sales and customer profit matrix. Using the 80/20 Rule, sort your products, services and customers into a four quadrant matrix after asking:
The goal is to then develop a strategy that:
To a certain degree, this is the easy part. The hard part comes if you are unable to lay out a strategy to move sales and customers up to quadrants two or three from quadrant four. At that point, you must decide whether to continue selling low margin products and services to low volume customers -- who may have been with your company for years. But bear in mind that in the end, fewer sales could mean greater profitability.
Part of the success of your business depends on whether it has profit-driven management and employees who know the road to greater financial performance. To assess the profit mentality at your company, answer the following:
If you and your management team answer "No" to any of these questions, the chances are your company's profit mentality is not fully developed. Take steps to change all answers to "Yes."
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