Don’t reinforce failure – its throwing good money after bad.

don't thow good money after bad

Many of the world’s major economies are in a poor state, and the economy of the Eurozone  appears to be in a worse state than most. Demand is down, bank loans are more difficult to obtain especially for small and medium sized enterprises (SMEs), and poor credit ratings of countries with excessive debts mean that trade comes to a standstill as suppliers have concerns about receiving payment.

It is a Chinese saying that we live in “interesting times”.  For those responsible for producing business income, these are certainly “interesting times”, but with ingenuity, lateral thinking, and hard work businesses can prosper despite economic and market difficulties.   To prove the point one only has to look at companies like JCB and Landrover to see that even in difficult times, companies can prosper. When the banking crisis erupted , demand for  construction equipment fell, and JCB was forced into cutbacks and redundancies as their order book fell sharply. Now, some thee years later, that company has increased its production, launched new products and announced substantial new orders. How has it done it? By looking at the changing requirements of existing and potential new markets and investing where there will be the best opportunity to maximize the return.

In any business the executive who  is the Head of Corporate Income (HCI) will be  responsible for developing and maintaining the business revenue. Faced with stagnation in existing markets, with perhaps falling orders and decreased income what strategic actions should the HCI take?  At such times, the demand from the financial officer and the chief executive  may often be  to cut or maintain costs, but while a general order to cut costs may be  understandable, it is not exactly the right answer.

The objective of every HCI is to maximize profitable income while minimizing costs and investment. Thus the success of the HCI will be measured on the amount of profitable income produced, together with the efficiency of its production measured as the amount of profitable income produced per currency unit invested

For every HCI, the initial requirement is to fully understand how costs are incurred, how and where investment are being used and what return is being achieved. Randomly cutting the budget of activities which directly or indirectly produce the business income, is hardly likely to improve the level of profitable income. But that is not to say that economies should not be made, especially where efficiencies may be improved. Radical management and organisational change to meet changing circumstances should be avoided as it is disruptive and demoralising at a time when difficult trading conditions require leadership and motivation. Effective management should be continually monitoring performance  and by flexible evolutionary development, adjust actions to the changing business environment.

Understanding   which markets and products produce profitable income is essential knowledge  for every  executive responsible for developing and maintaining profitable cash flow. There also needs to be a clear understanding of those costs and investments which although they do not in themselves produce income, are important contributors to its production such as advertising and promotions. Performance measurement across all aspects of income development is essential, and should cover all the sectors of business that relate to anticipating and satisfying customer demand profitably, e.g. sales, distribution, research, product development, advertising and credit control.

The HCI should :
* Establish the strongest and weakest customers, products and markets.
* Maintain control of all costs related to getting and retaining levels of income.
* Seek and investigate new market opportunities especially overseas
* Undertake a risk analysis of all future investment in existing and potential markets and products.

All businesses have local and  home markets. In order to grow, businesses need to increase their share of those markets or look for market opportunities beyond their existing sphere of operations. Trying to increase market share in an existing market area makes initial sense, but analysis may show that increasing investment in that market may not produce the desired returns. The law of diminishing returns suggests that trying to increase an existing large market share may entail a disproportionate amount of time and investment that may not be justified by the level of profitable income produced.

It was a maxim of Napoleon never to reinforce failure, which in business means not throwing good money after bad. Only by full understanding where investment is profitable , and where costs are incurred can informed judgement be made to maintain existing markets or to enter new ones. For many businesses, the current economic situation may limit their opportunities with  their existing markets and customers, especially in Europe. However, new opportunities exist in the rest of the world , where there are new markets in the emerging economies., Success will come to those companies which are bold enough to seize the initiative to seek and exploit opportunities.

© N.C.Watkis, Contract Marketing Service 28 Jun 12
Contract Marketing Service, (Profit Development Specialists)

July 3, 2012  Tags:   Posted in: business development, business efficiency, Business Marketing, business performance improvement, business performance indicators, business performance management, business performance measurement, marketing development, marketing metrics, marketing performance measurement, marketing ROI, performance measurement indicators, Uncategorized

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