The Chemistry of Strategy tm Newsletter October 30, 2013

Be careful what you ask for

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"It was hard, but we hit this month's target." Jake, the director of operations, was bragging. The directors of sales and finance were not impressed, and asked why customers didn't get their products on time, and why the company didn't make a profit. Why, indeed! Jake's response was classic.

"Those problems were because of the product mix. In order to make our target, we needed to prioritize the high-volume jobs which happened to have lower profit. In fact, some of them even lost money. This job mix was the only way to meet our monthly production quota."

To paraphrase Shakespeare, "the fault, dear Jake, is not in our stars, but in ourselves." The fault lies in the definition of the target rather than its execution. After the company changed targets to prioritize achieving profit while maintaining on-time delivery, it increased both profit and sales. Sales went up because on-time delivery led to higher sales, and meeting the profit target led to sales that improved the job mix so as to maximize profitability rather than volume.

You know the old management maxim, "what gets measured, gets done." Ask yourself what employees are being asked to do with these three common targets.

Setting a target to focus on revenue per full-time employee can lead to counterproductive hiring strategies. Managers will hire more expensive temps rather than full-time employees that would reduce their revenue/employee target. A better target is revenue per compensation dollar. Optimizing that metric leads managers to get the most productivity from their overall labor costs.   

Setting a target to maintain a minimum profit per product can lead to ignoring sales opportunities that would increase cash flow. As Eliyahu Goldratt discusses in his classic The Goal: A Process of Ongoing Improvement, accountants define profit as variable cost plus an allocation of your fixed costs charged to all your products. In fact, once you have enough revenue to cover your fixed costs, every dollar of incremental revenue, minus the cost to produce it, drops to the bottom line. If overhead accounts for 20% of a product's "cost," then selling excess capacity at a 15% discount can actually make a larger contribution to profit than your regular high-margin business.

The conventional sales commission plan can lead to an unhealthy focus on selling exclusively to existing customers, to the detriment of acquiring new ones. It also tempts salesmen to maximize their compensation by offering discounts to pull in next year's sales. This often leads to a lower margin on year-end sales and a flat to negative next quarter.

Create a strategic plan with your team

"Management is doing things right,
leadership is doing the right things." -Peter Drucker

A well facilitated strategic planning process is a proven way to build a team with mutual understanding of the company-wide consequences of decisions such as setting targets.

How long have you been saying that you are going to develop your strategic plan, but you haven't yet done so? Why? Perhaps it remains on your to-do list because it feels like a huge, laborious process and you haven't the time to spare to do it. Peak-performing companies have a clearly defined strategic plan…and it doesn't have to take long to create an effective one.

Your executive team costs you over a million dollars a year. Are you fully utilizing them? It's a waste of time and money to create a plan that they don't own and implement.

John W. Myrna

is co-founder of
Myrna Associates Inc


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John Recommends

The Goal
by Eliyahu Goldratt

This classic  introduces Goldratt's Theory of Constraints in an entertaining way. You can't help but learn fresh ways to improve your business.

The book focuses on how to increase profit by increasing throughput, reducing inventory, and reducing operating expense.

It leads you to ask what to change, and how to cause the change.


Speaking Gigs

John loves to share his insights. Email him if you'd like to have him speak at your next meeting.
success@myrna.com


Published Articles

"Platinum or Lead? Check Your Passion, Alignment, and Competence" published by The Conference Board
Read it Here


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