|By Dr. Sharon Gotteiner
Low-margin business areas and segments need to be fixed as soon as possible. Here are a few ideas of how to approach such a challenge.
Now it is scientifically supported. The proactive and routine search for low-margin business areas and segments, and early response to such situations – is a best managerial practice. The logic behind such a practice is that it helps identifying declining operations early enough. The signals of early-stage decline are weak, and can be easily overlooked. Down the road, decline may exacerbate, and require tougher decisions. Why wait? Embrace the healthy routine of proactively searching for such low-margin cases, and address them while they are still small.
Practically, early identification of low-margin areas can be achieved by using managerial reports of higher resolution. Commonly-used managerial reports may not reflect high-resolution margins, and prevent suffering areas from being addressed in a timely manner. Routine, high-resolution monitoring of margins can help pinpointing low-margin areas as they evolve, and taking action sooner.
After identifying a low-margin segment we can diagnose the type of challenges it suffers from. We essentially need to distinguish strategic challenges from operational ones. Strategic challenges refer to the identity of your customers, their demand for your offering, and the competitive advantage of your offering. It’s not a textbook definition, just my freestyle of serving it. If your sales are consistently dropping, due to either lower quantities or prices, you may be facing a strategic challenge. That’s a really rough rule of thumb. Operational challenges refer to the way you run your endless business processes, such as your R&D, marketing, sales, production, delivery, finance, and other support processes. If things are not working as they should, you may be facing operational challenges.
The purpose of diagnosing the types of challenges you may be facing is to avoid mistaken courses of action. Different types of challenges should be addressed with different courses of action, and mistaken courses of action can be expensive. For example, some strategic challenges can be addressed by acquiring other businesses, or developing new products or markets. On the other hand, operational challenges, can be addressed by improving your business processes, making certain managerial data available, outsourcing certain functions, insourcing other functions, right-sizing the workforce, and alike. If you address strategic challenges with operational fixes – your strategic challenge will not disappear. Profit improvement on a single quarter may turn out to be temporary, and the numbers you may see in the next quarter may get much worse. Similarly, addressing operational challenges with strategic courses of action may bring you to the edge of a cash crisis.
Once you diagnose the type of challenge a given business area is facing, you should develop your course of action based on the data. The range of possible actions you can take, and the types of data that can support such courses of action – cannot be covered here. There are some generic types of action that you can consider, though. Please take a look at Gotteiner, Mas, & Marimon, 2019. To keep it refined, however, keep the following in mind:
So… can you find any specific area of the business that we better fix now, rather than later? Good luck!
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The opinions expressed through this website do not suit all business circumstances.