I was in a strategy session with a client, and we were trying to figure out which areas of the business should be the focus for growth. The management team ended up in a heated debate about an underperforming product. Someone mentioned it was expensive to manufacture because the company’s production scheduling process was not well suited to this particular product. Someone else believed the real problem was that a component was finicky to work with, which caused delays. The third person said the problem was actually low unit sales rather than lack of gross margin, and demand was low because they had been pricing the product higher than most customers could afford.
Three people could not agree on the root cause of the product’s underperformance. Without clarity, it can be difficult to make strategic decisions. Should this company stop selling the product, or attempt to lower production costs? Is the company damaging its brand by intentionally pricing the product higher than market rate?
Information drives strategy
The most significant strategic decisions will define a company’s competitive fit in the marketplace (i.e., target market, brand image, distribution structure). Initiatives will then stem from strategic decisions. For example, if your brand strategy involves creating a reputation for innovation, can you structure your research and development program in a way that will support such a claim? Each decision is different, and varied information may be required to support crucial decisions, such as whether to expand a division of your business. At times, you may need external information, such as input from customers on their views of products in the marketplace. You may also need internal information such as the profitability of your products or the utilization rate of your billable staff. Hopefully your internal information system can provide what you need, but if not, you may need to analyze “sample” data pulled from a variety of sources, such as sales logs, accounting records, and production records.
Information at our fingertips
Pulling information from internal systems can be difficult – it will always be incomplete. But we still need the best information possible. Systems and processes break during periods of growth. Companies expand in phases, and managers will try to put systems in place to support future growth. But inevitably some part of the system falls down. Keep an eye open for areas of your business where information you need is not being collected or analyzed.
Improvements within the business are always based on insight that stems from new information. Company culture influences the information you have available. If your employees are encouraged to ask questions and challenge the status quo, they will naturally watch for changes that can be made to the business.
Some information is hidden. It takes effort to see it. Visibility into your operations can be a competitive advantage. Imagine one homebuilder that understands which of last year’s projects made a profit, and a second builder that does not. Which of them will be able to build on their success? You need more than just financial statements. You need to draw insight from them, but it can be difficult to know what numbers to watch. Review all the information, from the sale, through production of the product or service, to after-sale support. Then examine which key performance indicators you need to watch throughout that will help you understand the health of your business and support decision-making. Sometimes, our systems are simply not built in a way that supports our decision-making. For example, when a company is growing, well-meaning employees often just create their own systems in a spreadsheet or on paper. I see this often when salespeople track customer information on sticky notes or a consumer-grade contact relationship manager (CRM) software application. The accounting and CRM information is not integrated, and we often cannot pull the insight we need related to factors such as customer profitability.
Using information to design strategy
Companies need two types of information to make decisions. It is reasonably common to have key performance indicators that provide a window into the ongoing health of the business. This window is highly valuable and can often predict fluctuations in revenue, profit, and cash flow. Daily management decisions can be made around these indicators.
In other situations, you will need to make a strategic decision that is unique to a specific point in time. For example, if a company is considering whether to invest in expanding a certain product line, it might need information on the profitability of various market segments related to that product. The regular key performance indicators can be helpful, but it is likely that management needs additional information that has not been previously monitored. As with daily management decisions, you need accurate information to support point-in-time decisions. I have seen companies try to make decisions on which products to invest in, but all revenue and cost information for multiple products is simply grouped into a single Profit/Loss statement.
If you could understand which products are more profitable, you would have a better chance of reducing costs directly related to producing and selling those products, such as the sales process or inventory management. You would also be able to set prices and be more confident you are generating contribution margin with every sale.
When we have knowledge of a customer’s purchase history, we can adjust the sales and marketing process around the lifecycle of the customer. Doing this could mean promoting “trial” transactions to new customers or nurturing more established customers with potential to undertake larger-margin transactions.
Circling back to the client I mentioned earlier, after some analysis of internal information they realized there was some truth to all three managers’ insights. The company had allowed its selling price to increase in step with production costs. But production costs had surged. A long-time employee was scheduling production by intuition and lacked the project management structure required for this complex product. And although the finicky component was not the only reason for underperformance, it threw the schedule off and reduced profitability. The management team can use this insight into the sources of underperformance to reduce production costs and adjust the selling price.
You need a good management information system in your business, but you also need to extract useful information from it. Asking why things are happening will provide the insight you need to make good decisions.