Background
Long run profitability should be the most important goal of all enterprises, as it ensures continued viability and return to all stakeholders. Obviously within this all encompassing goal there are a multitude of potential trade-offs, and inter-connections. The development of a profitable enterprise will require a mosaic approach with each component integrated into an improving overall picture.
These notes are designed to identify what the main components are in the creation and maintenance of a profitable enterprise, and provide an overview of the Ibis profit optimization two day training course.
Building and maintaining the profitable enterprise
Balanced scorecard. The key contribution that the creation and maintenance of the balanced scorecard will make to profit optimization is creating a clear set of limited and focused goals that drive investment and return over the enterprise planning horizon.
Business model. The key contribution of the creation and maintenance of the business model to profit optimization will be to focus the enterprise on how to exploit strengths and eliminate weaknesses. The most important components will be an assessment of barriers to entry, how the enterprise builds and maintains competitive advantage, how it achieves pricing power, the level of alignment with market drivers, and how it builds and maintains core competence.
Leadership. The key contribution of leadership will be to provide support and direction within the enterprise. The most important components will be MBWA, KFR, vision statement, management style, shared values, and the maintenance of the disciplinary system dealing with moral hazard.
Design for operating efficiency. Getting the operating environment right will significantly enhance profit optimization. The key components will include location, clustering, access, layout (external, internal), working conditions, plant flexibility, plant capacity, plant sophistication, virtual office systems.
Production and service delivery. Ensuring that the correct type of plant and premises are available to meet the demands of the plan will be crucial. Key components will include capacity utilization, production/service delivery sophistication, flexibility, productivity.
KISS. The key contribution that KISS (keep it short, simple) can make to profit optimization is the fact that individuals work best with a limited set of objectives, and receive focused information. The most important component will be the rule of eight.
Golden circle strategic focus. The key contribution that the golden circle provides is the identification of the impact on cash flow and profitability of overall investment decisions. The main components will be the balancing of strategic and implementation options.
Value chain. The key contribution that an analysis of the value chain will provide is to identify what percentage of the business is positioned in what area of the chain, thereby creating the potential to move parts of the business upwards, thereby generating higher added value products or services.
Planning and monitoring. The key contribution of the planning and monitoring system to overall profit optimization will be the creation of a methodology within the enterprise which will systematically review opportunities and threats while continuously reviewing the success or otherwise of implementation. The most important components will be the planning team, the planning horizon, plan update, portfolio analysis, portfolio theory, sensitivity analysis, trade-offs, forecast case, forecast grid, successes, failures, lessons learnt, budgeting, administration strategy and plan, finance strategy and plan, marketing and sales strategy and plan, personnel strategy and plan, production/service delivery strategy and plan, IT strategy and plan, new product/ service development strategy and plan, cash flow, reality check.
MIS. An effective management information system will be central to rapidly seizing opportunities while dealing with problems. The key components will be SATURNS, software alignment, information flow map, networking.
Investment appraisal. The key contribution that a focused investment appraisal system can make to profit optimization is to understand the returns from each project. The key components will be IRR, NPV hurdle rate, cascade investment.
Project management. Formal project management systems which incorporate most of the enterprise activity will substantially add to profit optimization. The main components will be project risk management, SOP.
Corporate governance. Better corporate governance leads to higher returns through better corporate valuation. The key components will be record keeping, accounting choices, transparency, formal approval systems, audit, legal review, certification, security plan, industrial relations, stakeholder relations, checks and balances, health and safety, due diligence, code of conduct, disciplinary code and grievance procedure.
Communication. Effective communication is essential for long term profit optimization. The key components will include communication channels, KFR, informal networks.
SBU. The division of the organization into smaller operating units will significantly enhance profitability through improved customer responsiveness. Key components will be the decentralization of authority and responsibility, organizational spine, the creation and maintenance of knowledge centers, the introduction and maintenance of SOP’s, internal satisfaction, time based competition, employee suggestion, random inspection, intrapreneurialism.
Key performance indicators. The management of the enterprise by the use of key performance indicators, coupled with benchmarks and rolling achievement targets will greatly improve focus and operational direction.
Decision making. Better decision making improves profitability. The most important components will be creativity, inclusive decision making techniques such as the Socratic approach, reviewing techniques such as the Devil’s disciple, and the range of creativity approaches.
Key employees. An application of Pareto’s Law will make a substantial contribution to profit optimization by focusing attention onto key employees. The key elements will be team building, quality circles, appraisal, joint planning, training, job rotation, succession, internal competition, mentoring, PDP, employee satisfaction, exit interviews, stress.
Systems. The more effectively the enterprise attracts, retains and develops its employees the greater the contribution to long run profitability. The key components will be recruitment appraisal, diversity index, recruitment, mentoring, training, motivating, discipline, well designed bonus systems.
Key customers. An application of Pareto’s Law will make a substantial contribution to profit optimization by focusing on the returns from key customers. The main components will be joint planning, customer investment review, negotiation, ADR.
Customer care. Retaining customers through better customer care will be a central theme of profit optimization. The key components will be quality control, EFG, customer satisfaction, complaints management, credit management, warranties, exit interviews, warranties, mystery shopper, e-enablement, order processing.
Price modeling. Most enterprises fail to continually review their pricing policies, missing out on valuable profit opportunities. The key components will include volume discounts, loyalty systems, price elasticity, competitive bidding, marginal profitability, customer finance, TDA, service contracts, pricing power, advertising sales, TQM effects.
Key products. An application of Pareto’s Law will make a substantial contribution to profit optimization through focusing on key products and their contribution. The main components will be branding, product investment review, design, halo effects.
Key regions. An application of Pareto’s Law will make a substantial contribution to profit optimization. The key component will be the region investment review.
Key suppliers. An application of Pareto’s Law will make a substantial contribution to profit optimization. The main components will be joint planning, purchasing policy, SCM, negotiation, ADR, vendor ranking.
Tax. Better tax management will reduce cash outflows and therefore contribute to profit optimization.
Testing. Better testing will improve both product and systems acceptability and effectiveness leading to greater long run profitability. The main components will be customer panel, employee satisfaction, trial, role play, simulations, TEWT.
Risk management. The way in which the enterprise identifies risk and manages it will make a substantial contribution to profit optimization. The main components will be the risk profile, primary and secondary research, external major project supervision, expert operational audit, assumptions, barrier conditions, contingency planning, impact analysis, security plan, graduated response, project risk management.