In praise of profit
Businesses generally exist to make a profit. It may not be the sole reason they exist, but it is a fundamental precondition. To see the pursuit of profit as the sole purpose of the enterprise, though, is to mistake means with ends. Many businesses have loftier goals – to cure disease, to feed the world, to fight climate change and so on. Most simply see themselves as a community with a shared vision and common purpose. A collective effort to make their customers’ lives a little better.
Obviously, this isn’t universally true. Some businesses and the people who run them are solely driven by avarice and material gain. In a sense, this is a collective failing. The systems we have created are an inviting opportunity for the psychopathic, rapacious, and greedy to fill their boots. Fortunately for society, these villains are a rare breed.
The pursuit of profit by creating and delivering something of value within a regulated and generally free market remains the best way to improve the lot of humanity. It is also our best opportunity to solve some of our biggest challenges.
Where was I? oh yes, creating profits is not greed. It is a necessary condition of a successful business, just not a sufficient one. This article is about how to align your principal profit-generating functions under one integrated and powerful commercial execution plan.
So, who makes the profit?
Profit is the excess of revenue over costs. In that sense, everybody involved in a company impacts the profit. Costs and expenses are typically managed by focusing on efficiency – or denominator management if you like. Revenues and pricing are typically managed by focussing on commercial execution – or numerator management.
Both are critically important, but I argue that commercial execution is primus inter pares or first among equals. Without a sustained and often increasing source of revenue, there is nothing to be efficient with. For a company to enjoy a long and prosperous life it needs to continuously add revenue through increasing its customer base or increasing the frequency and quantity of sales to existing customers.
Profit is a collective responsibility of efficiency and effectiveness but generating high-quality revenue is (arguably) the first step in the business world’s version of the chicken and egg causality dilemma.
Ok then, who generates the revenue?
There are four broad areas of business activity that drive revenues. Sales, marketing, product development and pricing.
For many businesses, sales are the direct link between a company’s product or service and its customers. They are responsible for building relationships, uncovering customer needs, effectively presenting the company’s offer, negotiating and closing deals, and building a sufficient pipeline of prospects to meet sales targets. In addition, they are an intelligence source on what competitors are up to and how our offer could evolve to meet future customer needs.
Marketing wears many hats. They may be responsible for generating leads, running promotions and advertising, developing positioning, improving the brand, increasing awareness, generating visual identity, producing collateral, and generally owning the value proposition. Typically, their time is split between short term sales activation and longer-term brand building.
Not every business has a dedicated product development function. They may have research and development, or other innovation focussed departments. Sometimes design engineering is responsible for creating new products. It often forms part of the marketing function. Wherever it sits, product development or new product introduction is a critical factor for competing for the future.
Once a company has established the value it will offer to its customers it needs to charge an appropriate price and capture some of that value for itself. Ideally, that price should be relative to two principal components. The price relative to the value the customer perceives they are receiving and the price relative to the alternatives offered by the direct and indirect competition. This is frequently not how it works though. Often the price is developed and owned by the finance function based on some targeted return on investment or margin over costs.
So, the fantastic four work seamlessly together then?
If only that were the case. It happens in some high performing companies but the reality for the majority is that each function tends to act with a degree of autonomy. This fact alone means the results will be sub-optimal. In the worse cases, this independence leads to outright conflict.
Sales accuse marketing of not understanding the customers and the reality of the competitive environment. Marketing accuses sales of being too short-term and transactional-focused and not interested in developing the business for the future. Pricing thinks everybody is actively trying to erode margins and can’t be trusted with the keys to the safe. Everybody thinks pricing are blind to anything not on a spreadsheet. Sales and marketing think product development is too focussed on novelty rather than applicability. Product development can’t understand why sales and marketing don’t share their enthusiasm for the latest technological breakthrough.
This dysfunction is one of the reasons commercial execution is seen as a problem area or at least unreliable and why executives naturally gravitate to putting their efforts into efficiency measures. You are more likely to succeed in telling department heads to cut expenses by 5% than you are relying on the commercial functions to grow revenues and margins.
Ok, hotshot, identifying problems is the easy part – you got a solution?
I do. It is the integrated commercial execution framework. It is a collaborative technique that ensures those efforts and activities are aligned and all subsequent tactical actions are managed using an OKR system. OKR stands for objectives and key results and is the method credited with Google’s stellar success.
It starts with a foundation document. All relevant departments, the more diverse the better, come together, virtually these days, to document their current competitive reality. Their current and targeted customers and markets, whom they compete with, a forensic analysis of the factors that drive the current level of competitiveness. Some price analysis, initial ideas of what elements need improvement, competitor activity overview, maybe some segmentation. The result is a founding document that is agreed to represent the current commercial reality.
This feeds the idea pipeline, and, after a process of prioritization, specific actions are agreed upon, ownership is taken, objectives and measurements are confirmed and execution proceeds transparently and clearly. Frequent reviews are scheduled and, where necessary, course corrections are agreed upon. This is not a yearly exercise in completing a strategic plan but a living document that will evolve and strengthen as experience is gained and new information comes to light.
The outcome could be a sales playbook, a new product development project, a new communication focus, new positioning, or any of the 24 pathways the system can push you towards. What matters is that it is collectively owned and transparently executed.
Wow, I bet everybody will want to implement this in their business now.
You do realise that anybody reading this knows that I am writing the whole article? This ‘voices off’ faux dialogue approach doesn’t fool anyone. But yes, now you come to mention it a lot of businesses will want to implement an integrated commercial execution framework once they see exactly how it works. If they want to see some of the tools and frameworks or examples of how the output looks, they should definitely get in touch.