Converting Productivity to Profitability

Our economy’s last two major growth eras – the Clinton prosperity of the 1990s and the current expansion – followed the same pattern. Rather than investing in human resources, business people invested in technology that yielded unprecedented growth in productivity. So, while the economy was surging ahead, employment growth lagged. Finally, when the envelope of productivity could be pushed no further, the economy started recording impressive gains in employment.

In fact, during the Clinton Administration human resource demands created such things as “signing bonuses” for college and MBA graduates. This pattern will soon be repeating itself in the present economy with an added twist. The Baby Boomers are entering retirement age. This means that not only will the economy be demanding more people, there will be a significant decline in the labor pool.

This productivity surge now moves into a different domain – profitability. The new challenge is how to use strategic marketing initiatives to convert these productivity gains into profits. The pressure for profits has never been greater as the competitive environment has gone global.

Not the Time to Cut Corners

Before looking at things a marketer might want to do, let’s first looks at things that a marketer shouldn’t do. Namely, it’s not the time to start shaving budgets and cutting corners. Harvard’s Loren Gary, writing in Harvard Business School Working Knowledge (It’s Time to Grow the Right Way ) writes “It is time for business to start paying more attention to top-line growth and less to cost savings.”

He adds: “Today’s growth initiatives must be ever-mindful of the hard-won efficiency lessons of the past several years. Strategies in vogue during the last growth cycle – boosting revenues through mergers and acquisitions, even if they lacked strategic rationale, or using pricing cuts to gain market share without creating corresponding savings in operating costs – will no longer suffice.”

“Impatient for Profits”

Top-line growth must be impatient for profits, according to Gary. It requires “muscles that many firms haven’t exercised for decades. The companies that do it best,” he writes, “are those that understand growth requires a different orientation from cost cutting but a similar zeal; that base their strategies on strong value leadership; and that simultaneously pursue a diversified mix of growth initiatives.:

Gary provides the following examples of the revenue productivity mindset:

• Investing in sales training and personnel to improve productivity.
• Spending to improve ordering and replenishment systems.
• Be sure to have a solid value proposition.
• Moving into adjacent markets.
• Investing in new lines of business unrelated to your core competency.

Profiting from Existing Business

Jonathan Byrnes, senior lecturer at Massachusetts Institute of Technology and president of Jonathan Byrnes & Co., a focused consulting company, also addresses the challenges of a more productive business climate. “The most important issue facing most managers in this difficult economy is making more money from the existing business without costly new initiatives.”

In “Who’s Managing Profitability?” Byrnes observes the dynamics of companies he has consulted with in a variety of fields from distribution to telecom. He points out that he has become “fascinated” to discover that 30 percent of each company’s business by any measure (accounts, products, transactions) is unprofitable, “but this is offset by a few islands of high profitability.”

He uses as an example a lab supplier distributor where he has observed that 33 percent of the firm’s accounts were unprofitable; 35 percent of all transactions were unprofitable; 40 percent of the product lines clustered by vendor were unprofitable. On the other hand, telesales achieved higher margins as did fast-moving stocked products as opposed to no-stock special and custom orders.

30 Percent Profit Opportunity

“The picture that emerged: The overall profit improvement opportunity exceeded 30 percent. These potential gains stemmed from management adjustments to the current business mix, and could be rapidly implemented. Capital expenditures were not required. And this tracked with findings in other industries,” he writes.

Byrnes added “Believe it or not, this company had been viewed as a solid performer in its industry – on budget and just as good as its competitors. This is the core of the problem – on budget and just as good as its competitors is simply not good enough.”

He further points out that while most companies say everybody pays attention to profits, few companies in reality have a process to “systematically manage profits on a day-to-day basis.”

In analyzing the subject of return on marketing investment, the bottom line is crucial – not the top line. Trading marketing dollars for sales gains is a losing proposition. The smart organization will look at the gains from productivity and create a marketing strategy that smartly takes advantages of those gains through its product development, distribution, sales channels, advertising and pricing strategies.