| The Profit Perspective |
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The Profit Perspective Our experience suggests few firms invest the time and resources needed to understand where profit is and is not produced in their businesses. As a result, they concede what could otherwise be an important source of competitive advantage. Many managers, following conventional wisdom, use revenue as the primary measure of performance. They may only consider profit at the company or business unit level and stop short of gaining a perspective of where profit originates in their businesses. While issues of market share and sales growth should remain near the top of management’s agenda, a firm’s understanding of its profit structure can unlock powerful insights. These insights can generate new strategies to maximize the performance of businesses and inform future plans for growth. We have developed a management tool called The Profit Perspective that any size organization can use to analyze its profit structure and to optimize its position to generate profit. Driven by a transaction-level profitability analysis, the profit perspective traces profit back to the business assets that created or destroyed it. We find the most useful insights tend to surface when the profit is disaggregated across the firm’s products or services, distribution channels, and customers. The profitability analysis becomes the basis for business initiatives to refocus revenue volume towards the firm’s profitable business assets and to find the best way to manage the break-even and unprofitable business assets. A very useful follow-up activity is conducting a profitability analysis at the industry level. This analysis reveals how profit is distributed between industry players and other areas of the industry value chain. While the profit perspective concept is relatively straightforward, assessing the profit structure of a firm’s business and its industry requires substantial analytical rigor. Nonetheless, we believe these insights are of critical importance. Competitive pressures to get the most from a firm’s profit structure will likely leave firms that do not understand the profit structure of their businesses and industries at a significant competitive disadvantage.
Download our report on profit-driven management to read more about how a fresh look at your firm’s profit structure can reveal which assets are profitable, which ones aren’t, and what you can do to enhance your firm’s overall profitability. |