Why do you need profitability analysis? (Part - 1)
With focus on revenue and market share, top management has been undertaking various initiatives like starting a new product line, acquiring new customers and offering through new channels. But how many companies really have a fair idea, if they are just growing their business or really increasing shareholder value.
The recent recession has forced many companies to look for ways to optimize their operations. Many companies have undertaken a strategic initiative (one of six sigma/BPR/TOC/JIT/lean management etc) for doing this. How many companies have an objective way to measure the true business impact of these initiative on various business processes across the value chain and finally to the bottom line of the company?
There seems to be a definite need for a methodology that enables a company to identify its best customers and offerings; help them growing their business profitably and provide them a baseline for measuring their initiatives.
I think, Profitability Analysis can help us answer some of these questions. Let’s discuss how in the next part of this blog.
Comments
A very appropriate topic to blog about, Vivek.
It would be interesting to understand various dimensions of profitability. Specifically, profitability at a customer level, at a product level, at a location level, etc. And more importantly, at a customer-product-location- channel level. It might be profitable to sell a product to one customer segment (or individual customer) but not to another, because the cost of servicing and delivery. How do companies get this information?
Another area that I believe which needs attention on an ongoing basis is store profitability. I believe companies need to continuously (every 6 months or yearly) validate or revise their plans for the right number of stores. Many companies opened just too many stores when things were good, and are probably not even aware that many of those are not profitable, even while they generate topline growth.
Posted by: Aditya Mittal | September 21, 2009 05:55 PM
Thanks Aditya for bringing in the retail context. I absolutely agree that knowledge of profitability at right level (customer-product-location-channel) is of utmost importance for the retail companies. This information will enable them to make right decisions on store density, pricing mode, discounts etc and thus will help in improving the bottom line.
Let’s look at the methodologies and tools for doing such analysis in the subsequent part of the blog. In the meantime, please let the comments come in.
Posted by: Vivek Madhav | September 22, 2009 10:17 AM
Thanks Vivek, this is a good topic. It will also be good to see how this kind of a profitability analysis can be done for organizations in the service industry. Cheers.
Posted by: Rakhi Makad | October 12, 2009 07:43 AM