It’s only natural for a business to seek revenue growth through adding to its portfolio of services and products. But would you believe that as much as 40 percent of a business’s offerings could be considered unprofitable? Senior MIT lecturer Jonathan Byrnes believes addressing that profitability gap can have a better payoff than taking the risk of introducing a new product or service.
Byrnes’ new book, Islands of Profit in a Sea of Red Ink: Why 40% of Your Business Is Unprofitable and How to Fix It, provides an excellent financial overview to help small business owners identify the profit drains within a product lineup. I received a preview copy from the publisher, and was enlightened by its analytical tone. It reveals in straightforward language how to align suppliers, departments and customers to fill the profit gap for everyone’s financial benefit.
Revenues are good, costs are bad ….what a myth!
Yup, you read that correctly. The above is just one of 10 myths Byrnes addresses. For this one, “the truth is that some revenues are profitable, and some are very unprofitable.” The myths covered in Chapter 2 are general statements that have become truths by default, “vague generalities” born from mass-market practices instead of from an understanding of the core drivers of one’s business. The core concept of this book is profit management–learning about the profit levers within the business. In Chapter 3, Byrnes summarizes the logic behind this new way to approach profitability:
“We are entering a new era in business — shifting from a mass-market based business system to one in which managers carefully craft specific sets of customer relationships and precisely match them with specific sets of customers.”
This is not radically new science, but the focus on profit is different than activity base costing and revenue management. Byrnes asserts that there are means today to determine the leverage on profit. Chapter 6 shows how to develop a profit map–a means to identify unprofitability. The first step elaborates on how to create a profitability database; the second step is creating profit profiles based on customer examples. The profiles help to determine the profit levers as well as other benefits:
“Modeling the effects of key profit levers on representative customers is especially effective for three reasons: (1) It will be intuitively clear which elements of the business model can be changed and what the effect will be; (2) you can actually call the customers to see what their reactions to potential changes would be; and (3) it will be easier to explain the changes using concrete examples when you present the initiative to your colleagues.”
Profit map creation is similar to the business intelligence processes suggested in books like Analytics At Work (review here). Yet Island is not too scholastic; small firms will be able to implement the suggestions with the resources at hand.
First you find the profit lever, then you lead the change
The last several chapters elaborate on the “fixing” part — how to elicit change by the corporation, its suppliers and its customers to prioritize the profit improvement opportunities you have discovered. The managers are the champions who must bring forth change. The concept of managers leading organizational change reminded me of many analytics books that emphasize the need to be an analytics champion or ninja. Island offers a broader scope with more systematic remedies. The analogies previously mentioned help the reader frame the challenges a manager will encounter.
Segments that allow readers to match analogous imagery to their company — Chapter 15 is titled “Is Your Organization Reptile or Mammal?” — are almost identical to Chip and Dan Heath’s elephant/driver theme in Switch (review here). The images of a garden, sand castle, mountain and a plate of spaghetti offer unique takes on change.
Refreshingly good is the segment that encourages supplier involvement in implementing profitable practices. The chapter on changing customers is also good and ambitious – I had wished this was longer — but it also highlighted how innovation can be a hard sell to customers and that working with customers on the solution benefits must be executed as a win-win game. It is within these approaches that Island complements books like Find Your Zebra (review here) in which understanding your customer segment leads to excellent service of a profitable segment.
I also felt Islands of Profit in a Sea of Red Ink offers a potential complement to Service Innovation (review here) to see what it takes to examine the financial barriers to creating a new service, and to 1% Windfall (review here) to help determine the operation’s need to be profitable in the alternative segments suggested.
Brief chapter summaries provide a wonderful overview and jog readers’ recollection in case the book has had to be put aside for a while. Nice.
I wished there were more chart examples like the profit map and service differentiation chart. This would illustrate the processes even more. But the commentary is lucid enough that a reader can understand and imagine the value of the author’s points.
Better profits and operations await readers who arrive at this Island
Some of the most successful companies grew by figuring out how to draw upon their strengths rather than seeking revenue growth unmoored from reasonable strategy and economic reality. This book will benefit a number of managers. Small businesses and retailers with supply chain and service centers will have new insights on how to best work together. Even businesses with very small departments will take away useful advice on how adding any ol’ service — be it through an affiliate or created in-house — should be closely examined instead of hastily encouraged.
I liked the comprehensive overview Islands of Profit in a Sea of Red Ink brings to how a profit is made, and how firms must carefully consider introductions, not just adding offerings in a willy-nilly panic. It’s a terrific reminder that financial discipline and realistic profitability management are achievable and essential for success.