Don’t Manage for Profit – Manage for Value!
by Andrew Cooke, Growth & Profit Solutions
Managing for profit can be detrimental to your business in the longer-term. Discover the 4 guidelines to help your business thrive, not just survive.
We are in uncomfortable times. Europe is facing a myriad of difficulties, China’s growth is looking to slow-down (albeit continuing), competition is more intense and customers are more demanding and better-informed. Yet amongst these difficulties there are companies who are not just surviving but thriving.
How are they managing to do this and what can we learn and apply from them? Here are four guidelines for thriving, not surviving.
1. Manage for Value, Not For Profit.
You can’t manage profit – profit is an outcome of your revenues and costs. You can manage your revenues and your costs, but you cannot directly manage your profit..
Successful companies look at managing value – they ascertain whether what they do creates and provides value both to them and their customers, or not. You need to create value for both parties in order to be able to capture value for yourself. Too many companies look at their relationship with their customers as a zero-sum game or as a win-lose opportunity i.e. we are dealing with a pie of a set size, so if I want a larger slice of the pie then the other has to have less and vice-versa. This is a weak mind-set which immediately puts you in conflict with your customer.
Rather, look at your customer relationships as a win-win opportunity – the opportunity to create and grow value with each other. This mindset allows the size of the pie to be increased, allowing you to capture more value, even if the split remains the same. This enables you to collaborate with your customers and create long-term opportunities and relationships, rather than short-term gains at the cost of your customer relationships.
As such value is a driver of profit – the greater the value, the greater the opportunity to drive profitable outcomes.
2. Manage for the Long-Term
Too many businesses are driven by short-term considerations and take actions which, although they may provide relief in the short-term, destroy value in the long-term. For example, investment in R&D may be cut now to save money and improve short-term profit – but it destroys value in the mid-to long-term as those assets which can create future value in the years to come are weakened, undermined or even destroyed.
3. Manage the Development of Your People
Every company claims that “people are our most important asset,” but few mean it. Frequently business’ investment in leadership development is cut during hard times – at exactly the time when it is needed most to enable and empower high-potential managers to lead the business to success and through these hard times.
In a recent survey of leadership globally, it was found that many of those countries with strong supplies of leaders today are facing a shortfall in the future – this includes countries such as the UK, Australia and Canada. As such, business leadership is an important issue not only now but in the future (for further information see the blog “The Ticking Talent Timebomb”).
4. Manage your Focus – Be Customer-Centric
Business needs to understand their customers in terms of what they need, what the business can offer, and how this translates into value for both parties. As such you need to be able to properly address and craft your offerings to meet their needs.
Furthermore, you need to know not only what business you are in – but what business you are not in. I have seen many companies grow and expand their offerings beyond what is their core business in response to meet their customers’ demands. However, this has come at a cost. As a result, management focus and attention is dispersed, scarce resources are allocated ineffectively and inefficiently, the business lacks the necessary skills to operate in these new areas, costs increase and margins reduce, and the business grows in an unstructured and ad hoc manner which is difficult or impossible to consolidate. All of which increases the level and range of risks to which the business is exposed, often beyond the gain that they might realise from this unstructured growth.
Don’t focus on profit – focus on value and you will achieve profit. However, this requires discipline, courage and the willingness to invest in the long-term and in developing your people to ensure that you deliver what the customer needs and values.
What are you doing to grow your ability to create, share and realise value? What has been stopping you and how have you overcome these barriers?
Share your thoughts and comments here.
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Click here to find out more about Andrew Cooke and Growth & Profit Solutions.