Islands Of Profit In A Sea Of Red Ink
By Jonathan Byrnes
Portfolio, 289 pages, $35
Red seems to bring out pungent metaphors for business strategy. W. Chan Kim and Renée Mauborgne, in their 2005 best seller Blue Ocean Strategy, warned us to stay out of red oceans, coloured with the blood of an increasing number of companies vying for the same customers, and instead pioneer in placid blue markets with no competitors.
Now Jonathan Byrne, a senior lecturer at Massachusetts Institute of Technology, uses the metaphor of profitable islands in a sea of red ink not only in the title of his book but as a repeated narrative tool, to warn that a large chunk of our business is unprofitable and that we need to address the shortfall.
He argues that 35 per cent to 40 per cent of every company's business by accounts, products, transactions, or any other measure, is unprofitable. That is offset - disguised, really - by the fact that 20 per cent to 30 per cent of the business is so profitable it provides all the reported earnings and cross-subsidizes the losses.
"This sounds amazing, but it's true. In each case, a few islands of high profitability offset the damage done by all the red ink," he notes.
It may not be all that amazing to readers, given that other consultants have highlighted this anomaly over the years, although not necessarily with the same precise formula as he suggests. But the issue - once you accept his philosophical premise, and stark red image - is what to do about it. That's the strength of his book.
Mr. Byrne pushes for business leaders to concern themselves with profitability management. In every company, of course, everyone supposedly pays attention to profits. But he argues that few companies have a process to systematically manage profitability on a day-to-day basis. Nobody is responsible for studying the interaction between all the various elements in the company, spotting ways to increase profits.
That profit management starts with profit mapping. Establish a team that will attempt, at 70 per cent accuracy (you don't need to analyze it any better than that), to develop a picture of where you are making money, and where you are losing it.
They will probe your transactions, developing a database that illuminates which transactions are worth having and which are a waste. "When you do this, you can create a very powerful, detailed analysis of your company. You can see your company's profitability, customer by customer, and product by product. ... Importantly, you can easily project the impact of changing your mix of customers and products, and you can see the impact of changing your costs in a set of highly targeted initiatives," he writes.
That's a more nuanced approach than the "fire unprofitable customers" blasts we hear from time to time. Instead, he urges you to initially move to secure the high-profit segment of your business, to see if you can expand it. Only then do you focus on the sea of red, developing a process to improve the profitability of the marginal parts of your business.
He points to a major service company that, before exiting unprofitable business segments, gave customers a chance to pay higher prices or help modify the existing business arrangements so that they could be more profitable for their supplier. "We told our customers what we needed in order to continue servicing them. To our pleasure, they agreed to make the changes, and we saw a quantum improvement in profitability in six months!" the unnamed CEO of that company tells Mr. Byrne.
Often, regaining your footing requires applying best practices. But Mr. Byrne stresses that doesn't mean scouring other companies to locate ideal business approaches. Instead, it usually means simply finding the best practice somewhere within your own firm, and spreading the idea, be it best inventory practices or the techniques of your best salespeople. "If you took a video of everything your sales force did last year, edited it carefully, and played the best parts, I'll bet that you would have an absolutely stellar, world-class performance," he says.
The book emerged from a series of columns Mr. Byrne wrote for the Harvard Working Knowledge e-newsletter, and unfortunately they read like an interconnected series of columns, slower and more disjointed and more repetitive than I would have preferred. But his analysis is solid and he has many good, detailed ideas that you can ponder to find, and accentuate, the islands of profit in your sea of red ink.
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IN ADDITION
Many newspapers have experienced red ink without apparent islands of profit as the accumulation of freely available competitors grows and tastes change.
In Newsonomics: Twelve New Trends That Will Shape The News You Get (St. Martin's Press, 219 pages, $31) Ken Doctor, a long-time veteran of the Knight Ridder chain in the United States, looks at how those profound changes are affecting income streams in the media. He offers some insights on what might be ahead for larger metropolitan papers, national papers, and local dailies as well as interviews with some of the pioneers offering interesting alternatives today.
He avoids the gee-whiz Internet enthusiasm of some other commentators and, with his background in newsrooms, offers a level-headed approach to the transition that lies ahead. Interesting reading for the general public and those with a greater stake in the media.
Special to The Globe and Mail