October 16, 2016

How Do You Know If A Business Is Winning?

Early in my career, I worked for an accountant responsible for running a direct marketing department. Anytime I performed an analysis of customer behavior, the individual asked me a simple question.
  • "How much profit do we generate because of the behavior?"
After saying "I don't know" three or four times, I figured out that I was an idiot, and I'd go get the information that allowed me to calculate profit. Then, I'd present my numbers, and the accountant would ask me a simple question.
  • "Are you sure that Finance gave you the right metrics, because something doesn't look right?"
Eight times in ten, Finance made a mistake, or I made a mistake interpreting what the Finance team gave me.

People would come out of these meetings in tears. I recall a circulation analyst being yelled at because the gross margin percentage was something like 45% when it should have been 45.5% ("don't you get it, we can mail more catalogs and generate more profit with a half-point of gross margin in our pocket, now go back and re-work everything and have it on my desk in two hours").

Some at Lands' End were obsessed with achieving 10% pre-tax profit. That was our holy grail. You might only achieve this level of profit once every five years, but that was what was considered "championship-level" performance. Bonus payouts maxed-out if we hit 10% pre-tax profit ... and garden-variety analysts earning $28,000 per year (hint - me) earned a bonus. Does your lowest paid salaried employee earn a bonus if your company achieves a decent level of pre-tax profit? Do you?

For five years, every analysis and every discussion ultimately came back to profitability ... were our decisions causing customers to generate more profit? And we knew what "winning" was ... we were "winning" when we hit 10% pre-tax profit.

Then I went to Eddie Bauer - "winning" at Eddie Bauer was a term called "Drive Sales Profitably". Our decisions had to increase sales, and had to increase profit. You had to do both. My SVP always said "you don't take profit percentage to the bank". While the CEO always harped on "Driving Sales Profitably", the rest of the culture liked to grow sales regardless of profit. Out came the discounts and promotions! Winning centered around growing the top line. And nobody could define what "winning" was ... every employee had a different interpretation of "winning". Not surprisingly, that business had a harder time achieving success.

At Nordstrom, we were supposed to take care of the customer. For Management, bonus payouts clearly communicated what "winning" was ... grow sales, and grow profit as a percentage of sales. As long as customers could handle paying more at comparable gross margins, both metrics improved and everybody was happy.

My consulting business is nearly ten years old. Can you believe that?

And during that time, it has become more and more common for Analysts, Managers, Directors, Vice Presidents, CEOs and Owners to stare blankly when asked what "winning" means to them. Few people can tell me the percentage of sales that flow through to profit, and few people know how profitable their business is. In the half-generation I've been running my own business, it is obvious that our focus on metrics caused us to stop focusing on the metrics that matter - metrics that define what "winning" is.

Tomorrow, we'll go deeper into this topic.

Today, please think for a moment ... what does "winning" mean to your company? Is your company "winning", and how would you know if your company is "winning"? Discuss.

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