Published on January 3, 2014
OPERATIONS EATS SALES FOR BREAKFAST! DIRTY LITTLE START-UP SECRET #7 http://www.flickr.com/photos/matthew_norris/
too many entrepreneurs get hypnotized by growth (volume or revenue)
when what really matters is margin
a million in revenue for a million units sold doesn’t look so sexy now, does it? BUSINESS MODEL 1 Units Sold 1,000,000 Price per unit $1 Monthly Revenue 1,000,000 Monthly Cost 990,000 Monthly Profit 10,000 Profit Margin 1% BUSINESS MODEL 2 Units Sold 100,000 Price per unit $1 Monthly Revenue 100,000 Monthly Cost 50,000 Monthly Profit 50,000 Profit Margin 50%
so how do we maximize margin
well it starts with some very basic math
let's start with the formula for profit margin
profit margin = profit revenue
now let's do some simple algebraic substitution
Expand out profit to (r - c) profit margin = revenue = = = revenue – cost revenue Expand out revenue to (v x p) (volume x price) – cost volume x price Expand out cost to (v x c) (volume x price) – (volume x unit cost) volume x price
(volume x price) – (volume x unit cost) margin = volume x price = = = volume x (price – unit cost) From the last slide volume x price price – unit cost Simplify! price price price - unit cost price
margin = = price price 1 - unit cost - price From last slide unit cost price holy cr@p!
unit cost profit margin =~ 1 price
in other words
selling more units (volume), does not in itself mean your business is healthier
what moves the dial is… 1) raise price 2) lower costs
in most competitive markets, raising price (especially significantly) is not an option
which means that
the magic of margin
is all done with cost per unit
that’s why sales & marketing is basically illusion and hypnosis
while operational management is the dirty little secret of success
so how do you reduce unit cost?
and how do you get excellent with your processes?
you map out where your processes are weak or inefficient
and you fix them
one at a time
i’d now like to share with you a tool that would be used by you and your management team
to identify areas to target
due to the limitations of slideshare, you must download this deck to make the tool work
please download and then view the next two slides in native power point. it’s free.
here is a tiny version of what you’ll find on the next slide WARNING: you must manually use the scroll bars in order to use it
Operational Activities are defined as a set of business processes required to execute business strategy. Not all firms will have the same activities but they probably all have the same core of 4 and most start-ups and small companies will not be all that far off. Scroll to see processes! As a small company, you won’t have time to fix everything, but you should 1) know where you stand in terms of operational maturity (by mapping out processes as is the case here, and assigning maturity ratings) and 2) have a plan as to what things you will invest in improving. For example, you might target the “red” items in the map. Or you might find that you’ll get better ROI by focusing on 4 of the yellow processes. Whatever the case, this is an example map (scroll left, right, up and down to explore) of operational processes that seem generic enough to me that they might be useful as a baseline for whatever company you are running. Produce Produce Product // Product Service Service Cultivate Cultivate Productive Productive Assets Assets Distribute Distribute Product // Product Service Service Administrate Administrate Firm Firm Activities mature and working smoothly Activities are being performed, but there are opportunities to improve efficiency and/or effectiveness Activities are not being performed, but should be Activities are not being performed, but are not relevant for our business at this time Scroll to see more!
what you need to do now
is duplicate this map with processes specific to your business (I bet I nailed 86% of them though)
and, as a management group activity, use color post-it notes
to map out your own maturity levels
then, start actioning change
focus on change that moves the dial on cost per unit
don’t geek out on every opportunity….
and make it fun!
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