Prime profits

Editor’s Note: This column is based upon the author’s takeaways from Jonathan Byrnes’ book Islands of Profit in a Sea of Red Ink.

If you are looking to increase your profitability, there are three simple principles to remember and to apply to how you run and think about your business:

Principle #1
It’s all about customer value
Wayne Gretzky said “I skate to where the puck is going to be, not where it has been.”  I love this quote, and I think it holds true in business. If we want to be preferred vendors--true business partners with our clients -- we need to maximize customer value. Our customers’ needs are not static, they are a moving target.

Companies can almost always improve profitability by shifting from meeting existing needs to understanding and partnering with customers to identify and fulfill new needs.

Think about when you’re the customer. Who gets your business? Do you choose a vendor that makes it hard for you or one that makes it easy and brings you new ideas and solutions? Your customers behave the same way.

Consider Rolls Royce and GE, they stopped selling “A la Carte” products and services like aircraft engines, parts, and labor. They now sell “power by the hour,” an all-in offering at a single price.

This helps their clients – the airlines - budget more effectively and align costs with revenues. It also gives the manufacturers increased user and product knowledge. They can use this internally for product improvement or sell it back to the airlines as part of a consulting agreement. This model also makes it harder for the airlines to shift to new suppliers.

Principle #2
What you say no to defines your strategy
Successful, profitable companies have two things in common: focus and alignment.

For focus, organizations need to define a sweet spot. For alignment, leaders need to make sure all the functional areas are aligned to meet and own that part of the market.

You cannot achieve focus and alignment by diverting from your company’s goals to satisfy all your client’s needs. Sadly, many companies are afraid to say no to new business opportunities. Ironically, it’s this attitude that often keeps them distracted and prevents them from growing.

You must be the best at something. If not, someone else will always beat you. If you don’t focus your effort and align your systems and people to a specific objective, you will waste your resources on a slew of things, which may not fall into your sweet spot. You will find yourself constantly defending each of your market positions against competitors that are better at that one thing than you are.

Think about these two delivery companies - UPS and FedEx.
First UPS – a long-established delivery company with reliable, friendly drivers and reasonable pricing. They offered decent service time. It would take about a week to deliver your package, and no matter how much you were willing to pay UPS, they wouldn’t deliver it any faster.

Then came FedEx, and promised when it absolutely, positively had to be there overnight. Sure it cost more, and the drivers weren’t known for being as friendly, but you could get it delivered tomorrow. If you didn’t need it there until next week, well you still got to pay the same high price and then get it delivered there overnight.

These companies both knew when to say no. FedEx was unwilling to take a reduced price even if you were willing to wait, and UPS was unwilling to deliver it overnight, even if you paid more. Both companies were able to focus and align their people, and their processes and their technology on what they said yes to so they could be the best at it.

They each found focus and alignment and grew.

Principle #3
You must evolve
In the previous example, both companies realized the need to evolve. Once they became the best at something, they looked beyond that. They figured out how to help improve their key customers’ businesses, thereby increasing their own profitability. Both companies segmented their customer base so they could service each type in an appropriate, cost effective way:

• Some clients would go to a retail storefront
• Some clients had to go to a drop box in or near their building
• Some clients had daily pick-up
• And for some customers – their best customers, they became more than a delivery company.

They become logistic services companies. Remember UPS’ slogan, “What can Brown do for you?”

Both UPS and FedEx changed how they serviced their customers. They became more integrated. They identified ways to solve their customer’s problems and slowly grew from a delivery company to a supply chain management provider; and that is how you create value.