Are you as a business leader questioning that your Value Proposition will ever be successfully executed? 

Are you struggling to profitably implement your strategic vision?  

How can you discover and fix the deficiencies that are hurting your business?

Struggling to Perform

Effective business leaders spend a lot of time evaluating customer’s needs and then work to position their organization to effectively fill that need with products or services. If their approach is effective, they can create a unique value proposition with pricing or key features that provide a competitive advantage in the market.

In order to develop the business strategies and tactics that must follow, leaders need to successfully define their value proposition so the entire organization can understand it. This understanding will include the specific organizational activities to be performed as well as how to insure the customer’s expected value is being delivered to them.

Assuming these processes and deliverables are defined and actionable then the real work begins. In this regard, the organization must insure they can effectively and profitably implement the delivery of the goods or services through all of their operational processes and this is where breakdowns most often occur. From the product perspective these breakdowns affect performance and create quality-related failures. To correct these problems, resources from the engineering, service and warranty departments will then be tasked at considerable cost. If unchecked, these unplanned costs can completely eat up the gross margins from revenues and put the business at risk.

At this point, this is often where business leaders seek outside help. Unfortunately, the fixes incorporated do not always correct the real underlying problems and the business will continue to struggle. However, shown next is a proven method to identify the cost drivers and support fixing the troubling issues.

Assessing Real Causes

Where businesses often struggle is that the leadership group cannot define the true causes of the problems but only the costs incurred. In those instances, our consulting group have been able to bring some unique analysis skills into play in order to tie those two together so effective actions can be taken.

The first analysis step we take is to restate the financial statements using a Segmented Financial Statement approach around their major product lines or services. Once these groups are defined, then all revenues, direct materials, labor, overhead, capital (depreciation), quality, variances, and sales and administrative costs are allocated to each segment using an Activity-Based Costing approach.

Depending on the financial reports available and detail required, some of the overhead and administrative costs will be allocated as estimated percentages. These percentage allocations usually include management and top leadership costs as well as some sales and administrative costs where details are not easily tied to a segment or cause.

Finally, a high level balance sheet assessment can also follow with similar allocations of the major cash-intensive accounts such as inventory, capital assets, and AP/AR, etc. that have impacts that are better or worse than the average shown in the balance sheet statement. This assessment can also add significant perspective as to weighing the value of possible alternatives in future solutions.

Once the Segmented Financial Analysis is performed, it is much clearer to the leadership team as to the real causes of the problems as well as the scale of effects from each on the total business. It has been our experience that this analysis process often drives a significant refocus of improvement efforts on key products as well as strategic restructuring to the point of selling off whole business segments or discontinuing product lines.

Listed below are two examples of the real outcomes of this type of assessment:

We performed activity-based costing and segmented financial analysis for a $15M chemical manufacturing business. The resulting actions created a new strategic vision for the business that led to a $4.0M gain in sale of a low-margin product line. The strategic realignment and new capital availability supported significant profitable growth for the business in the years since.

We performed activity-based costing and segmented financial analysis for a $30M sales and service company. The business strategy realignment efforts directed the sale of a struggling $10M business segment and reinvestment in a new $5M business that doubled the levels of profits of the segment it replaced.

Of course, any improvement or realignment efforts will take time and resources, but once action is taken, it is often just a few months before measurable performance gains are achieved.

Moving Forward

The worst thing a business leader can do is not take action. While the loss of profits can often be corrected the opportunity window in the market can be lost forever and thereby seal the fate of the business. Once a problem is discovered, if it cannot be immediately identified or remedied then we encourage you to bring in our experts to help. Implementing a problem discovery process requires not only unique assessment skills but also the perspective of experienced change leaders who have successfully charted these waters many times before. Give us a call if you need a skilled hand.

The author of this article, Kenneth W. Mikesell, is the President of Lean Enterprise Solutions, LLC, a turnaround consulting business that specializes in leading companies through operational and organizational changes. Articles on this and other topics can be found on their website at https://www.bottomlinefix.com .