How to Deal With Declining Margins Within Your Organization
“Too many companies only focus on top-line growth. Savvy business owners know that often the easiest path to grow their profits is to focus on their margins.”- Inc Magazine, 2017.
How many times have you heard your leadership scream, “Our margins are declining and we need to do something!” Probably every quarter, if not every day! This is the mantra disguised as a cry for help within organizations that do not know how to prevent this from happening nor have a means to fix it.
Improving the profit margin means increasing the amount of profit made from the sale of a product. If costs rise and the dollar amount of sales remains the same, the margin will decrease; if costs remain the same and sales rise, the margin goes up. A low-cost business will have a larger margin than a high-cost business producing the same product at the same price. To improve its profit margin, a high-cost business could reduce its costs. It could also raise the unit price on its product, and in turn, risk losing sales to the competition that charges less.
In my experience (30+ years working globally) I have seen two opposing responses to this cry for help. The first is the most common: an organization needs to improve the margin — they have two choices. They can increase the price or decrease the cost. Most of the time they go after cost. This usually ends up making things worse because the cost reductions may impact the most important service or product features the customers want. This ends up reducing sales because customers defect.
The other organization attacks this in a different way. It is often not a reactive approach but a preventive approach. They have anticipated that margins erode due to normal changes in the business work cycle. Customer needs change, competitive prices change, costs go up, etc. This organization has a roadmap they are following. A roadmap that has led them to the prevention of slipping margins. A roadmap based on customer delight, business success and employee satisfaction. They have a quality culture. One that they acquired by methodically over time improving the culture of the organization. An effective roadmap is one that places a long-term approach to assuring the products and services meet both customer needs and business needs. In the event of a sudden change, these organizations can often adapt quickly through thoughtful analysis of what has changed. This leads to understanding what customers want and do not want. A thoughtful analysis of the current situation in the context of a roadmap leads to positive customer response and business success — margin improvement.
What is a Roadmap? We refer to the roadmap of change or transformation. It typically consists of 5 phases an organization will move through to develop a culture of high performance. The five phases of our roadmap are: Define, Prepare, Launch, Expand and Sustain. Carrying out each phase and the elements of each enable an organization to have the products, process, and people all working together to assure the profits (margins) are met.
Once the roadmap is in the sustain phase an organization is agile. It can adapt to changing influences quickly, often at the expense of the competitor.
Want more information on our Roadmap or looking to improve your organization? Get in touch with one of our coaches, today.
- Dr. Joseph A. DeFeo, Chairman & CEO, Juran
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