Business owners run their business to make money, right? Then why do so many owners make unprofitable decisions?
There was a great article in the Wall Street Journal on June 5, 2006, titled "Major Airlines Fuel a Recovery by Grounding Unprofitable Flights." The article talked about the progress U.S. airlines are making to become profitable and provides several valuable lessons for business owners.
In one part of the piece, writers Evan Perez and Melanie Trottman noted:
"The big carriers, which for decades have doggedly pursued market share at any cost, now are focusing just as aggressively on the profitability of each route and flight. The so-called legacy carriers... have abandoned many of the tactics that have contributed to their cyclical weakness. They are increasingly unwilling to fly half-empty aircraft to stay competitive on a given route just for the sake of feeding their nationwide networks.
Though their recovery is still in its early stages... the airlines' new emphasis on profitability appears to be paying off."
Running the business in order to make money appears to be paying off. A brilliant strategy, indeed.
There are several fascinating points here that I would like you to carefully consider.
Be a Lover of Reality
If you ask a business owner whether he runs his company to make money, the answer will always be "Yes." The reality is, he doesn't. At the risk of sounding a bit blunt, you don't either. This is an important reality to recognize and accept.
Try this little test for the next 30 days. Listen for anyone in your company (including yourself) using words like "brand," "market share," or "shelf space." When you hear those words, you can be sure that you've just found an opportunity to make some money.
Why? Because those words always are used to justify unprofitable decisions. They are big red flags that you are not making decisions based on a common-sense approach to profitability. When you hear those words, ask yourself this simple question, "Are we making this decision based on profitability or for some other (possibly hidden) reason?"
You have to clear away the smokescreen in order to put your focus on profitability and common-sense decision making.
Is Market Share Your Mantra?
For example, when you hear an executive justifying a decision based on its supposed impact on market share, he's really saying "I want to look good versus the competition, but it's a lot easier to give our products away than have to sell them at a profitable price."
Here's what happens when market share becomes your mantra. The sales force gets the okay to start selling on price. Your salespeople cut prices in order to generate volume. The volume comes and the company ramps up quickly to meet the new demand. That ramp up always drives costs up. In a manufacturing company, for example, the increased production creates capacity issues, and it begins to see requests for capital expenditures to solve the problem.
Meanwhile, the competition has lowered its prices to try to get some of the business back. The sales force has gotten used to selling on price, so it comes back to you with a plan to foil the competition by lowering the price--again.
Profitability continues to be driven lower and lower while the need for cash to support the higher revenue goes up. That's a recipe for disaster.
This happens to company after company despite how illogical it sounds. You have to battle it by sticking to your guns. You have to be maniacal in your focus on profitability.
Start by removing market share from your company's vocabulary and see how fast you can improve profitability. Remember, one of the fastest ways to make more money is to stop doing things that lose money.