Is Your Company Producing Bad Profits?
April 24 2008 by By: Janet Boulter
Do bad profits really exist for your company to produce? There is more to profitability than just making money and companies can generate both good and bad profits.
As the economy changes and consumers priorities shift it is imperative that your company have a well defined and highly executable business strategy to adjust to the changing economic environment. To create and sustan long-term profitability your need to focus on five key areas of the organization. The first is to have an inspiring and yet (slightly) unattainable vision/mission which provides value or a tangeable benefit to consumers. When Howard Schultz was contemplating purchasing Starbucks he was inspired by what he observed visiting the coffee caffes of
Today Starbucks has migrated from their original mission to a broad based one focused on being the most recognized brand in the world. Having a vision/mission of being number one can cause more problems than it solves. How do you measure your success? You would need to continually survey the people of the world to garner their impressions of your brand awareness. Second, somebody is always waiting in the wings to take over the #1 spot. Third your customers and your employees do not buy your product because you are the biggest; they buy because they can relate to your product/service and it fills a need. In order to grow and sustain profitability you need to have a mission and a vision that provides added value to the community, fulfills a customer’s needs and desires and ideally gives back to those who have supported the business. The ability to continually measure your progress is also vital in creating a working strategy.
As the economy changes, Starbucks will be increasingly challenged to motivate customers to spend over $4 for a cup of coffee so they can be the most recognized brand in the world. A far more appealing (and profitable) vision would be to stay focused on the sense of community they originally created.
Bad profits are derived when you cut your profits to increase your customer base (but is not sustainable), you customize your products for a specific customer group (cannot sustain that level of customization), you cut quality, your business model is focused on the short-term, all of your revenue is coming from a few customers (all of your eggs in one basket concept) or you take on work or customers that are not compatible with your company’s expertise and capabilities. They are considered bad or undesirable because they do not contribute to growing and sustaining your company’s profitability for the long term and they are not value-adding business strategies.
In order to grow profitability- you have to have a business model that provides opportunities to capitalize on short-term market conditions and customers while creating an organization that adds a valuable product/service for the long-term. So if you want to create a value-driven, profitable organization where to you start?
Are your organization’s short-term (1-3 years) and long-term goals (5-10 years) aligned with the mission and vision? Are those goals flexible enough to take advantage of changing market conditions while being audacious enough to allow for growth? Do you have the capital and resources needed for the planned growth? Will your growth plan allow your company to stay compatible with its core values? Starbucks has smartly scaled back the projected number of new stores and continued to focus on what made them famous- the quality and consistency of their brew. By managing their growth they can put their resources into their current stores to reinforce their current revenue stream.
A key competent of a capitalistic society is to always stay ahead of your competition. One way to improve your profitability is to focus the spirit of competition internally rather than externally. Companies spend millions of dollars on advertising, product placement, and pricing strategies, to “beat their competition” when a more strategic approach would be to focus on exceeding your customer’s needs. For example Starbucks is testing a dollar cup of coffee in order to compete with McDonalds. They had planned to launch a line of breakfast sandwiches also to compete with the fast food restaurant but have since halted that product. For the consumer, Starbucks and McDonalds are two separate concepts providing very separate menus and restaurant experiences. I would argue that people chose one venue over the other because of the products/service, location, etc. Differentiate yourself with your customers by adding value and meeting their needs rather than competing on menu offerings, restaurant locations and pricing.
Once your have confirmed your company’s strategies are aligned with the corporate structure you need to make sure your clients (customers) are profitable. The first place to start is to do an overall assessment of your customers. Why do customers frequent your business? What value added service do you provide? What products/services do your customers want in the future? Are the demographics of your market place changing? What economic conditions are present and changing?
For example, Starbucks could increase the purchase rates with their regular customers by enhancing their reusable coffee mug program. As the green movement continues Starbuck’s enormous contribution to the waste stream will continue to be a concern for consumers. Another advantage to enticing customers to reuse their mugs is the subliminal concept of encouraging repeat business. Most customers would be reluctant (or embarrassed) to hand a Starbucks coffee mug to a McDonalds employee. As the cost of gas continues to rise there will be additional opportunities to entice customers back into the stores rather than opting for the drive thru. Customers are more apt to spend money on pastries, products, and music the longer they stay in the store. Focusing on enhancing a community meeting place will help customers remain loyal to specialty coffee drinks in an ever tightening economy
Employee turnover has a huge negative impact on profitability. On average a company will spend three times the gross salary cost of each employee in the first year on interviewing, training, productivity, and benefits. If you have to replace an employee with more than 5 years of experience with your company the amount can be even higher. Reviewing your employee empowerment programs and making adjustments accordingly can have huge impacts on the bottom line.
Being a barista could be a high turnover position but Starbucks has done an exceptional job in motivating and retaining their coffee servers. Customers like being recognized when they give their order and they like the sense of competency that comes from having experienced and professional staff. When you value your employees they in turn will value your customers. People always treat people like they are treated.
As the marketplace grows with globalization, technology, and changing economic conditions companies that are committed to their business strategies will be able to create and sustain long-term profitability. There really isn’t such a thing as bad profits, only short-term or narrow focused growth strategies which cannot support the long-term profitability and growth every company wants. When you align your organization’s goals and strategies with your vision and mission you will ensure your organization has the resources needed to outpace the competition, exceed customer expectations, and grow profitably.
Janet Boulter firstname.lastname@example.org is a principal with Center Consulting Group (www.centerconsultgroup.com) which specializes in training organizational effectiveness and improvement.