The Guiding Principle of Business Economics Is the Avoidance of Loss

“The first duty of an organization is to survive and the guiding principle of business economics is NOT the maximization of profit, it is the avoidance of loss."      - Peter Drucker

Every business faces the same challenge—to stay in business.  After all the bottom line is—the bottom line.  If there is no profit margin, there is no business.  The question many companies face is how to grow the margin to either stay in business or to grow the business?  I chose to lead this article with the quote by Peter Drucker because often times the goal of the C-suite is to maximize profit by increasing revenue by primarily focusing on growing their customer base with lesser attention given to avoiding loss.  In my work with companies I frequently see opportunities to decrease loss and thereby increase revenue, sometimes by greater than 25% but they fail to “see” and realize the opportunity because they are so used to the way things are that they can’t imagine how much better things (revenue, productivity, efficiencies, employee health & satisfaction) would be if they only improved on their current processes.  The cliché “can’t see the forest for the trees” is so true and the mindset “we’ve always done it this way” is so engrained that opportunities for improvement are passed over or missed entirely.  The cost of being comfortable with how things are run, not changing and improving can lead to a business becoming stagnated and inevitably closing.  How much is your company losing because you are “blind”?

Impact of LOSS on Profits

Loss is one of the most overlooked opportunities for contributing to margin.  I’ve defined LOSS to mean “Lack of Systems Strategy”.  This is having the right systems in place throughout the company so that each business system is operating at is optimum level.  Below is an example of the impact that LOSS can have on the profit of a company.  I chose a company that had sales revenues of $50M.  I estimated the LOSS costs at .5% of sales.  As you can see, the effect of LOSS on margin can be quite significant.

Areas of LOSS

Ok, now that I’ve got your attention let’s look at some of the areas in which LOSS (Lack of Systems Strategy) can occur.  The list is in no particular order. 

1.      Organizational structure—Does the current organization’s structure (positions, titles, work groups, people, etc.) fit the company goals, mission, and values?  Do you have the right people in the right positions?

2.      Leadership (C-suite on down to front line supervisors)—Do the current leaders possess the knowledge, skills and talents to lead effectively?  Has every leader taken leadership training, initial and ongoing? 

3.      Interaction/Interdependence between business units/departments—Does the company run best when business units/departments are “siloed” or combined/coordinated to run as one?

4.      Policies/Procedures—Do the policies match what is practiced?  Are they up-to-date?  Do they allow your front line employees to do the job efficiently and safely?

5.      Sales—How is sales affecting production?  Does the job order accurately reflect the work (quality control)? 

6.      Safety—What are your injury numbers? Work comp costs? Have changes been made to minimize injuries?  If yes, then why are you still having injuries?

7.      Process Improvement—Is every system analyzed and assessed for improvement continually?  Does your culture assign responsibility for the success of the company to each employee to bring improvement ideas forward?  Do you have a system to bring those ideas forward?  To act on them?

For each of the above areas you must answer the initial questions but then you can’t stop there.  For every answer it is vital to follow it up by asking “Why?” On what basis did you come to that conclusion?  Another follow up question is, “What changes should be done?”  This is followed again by asking Why?, On what basis?, What is the ROI?

Obviously there are several more areas/business systems within a company.  All of them have to work together like the gears in Big Ben in London.  If they don’t work together then Big Ben would lose time or stop altogether.   Similarly, if the “gears” in the company don’t work together then the company will experience lost revenue. 

Let’s take safety as an example of LOSS.  The goal is to have a safety system in which zero injuries occur, the lowest workers’ compensation premium is paid and everyone within the company is engaged.  A common reality is that a company’s modification rate is 1.0 (plus or minus).  Possible critical questions to ask are:

·        Why do we spend x amount of money on “safety programs and training” and still have the same accidents?

·        Why do we spend x amount of money on “safety programs and training” and still have unsafe behaviors?

·        Why do our workers’ compensation costs continue to go up despite no change in (or slight reduction in) accident rates?

·        What are we still missing?

What I’ve found and firmly believe is that deficiencies in safety have the similar genesis as deficiencies in sales, marketing, operations, business unit coordination, etc.  These are the function of a Lack of Systems Strategy in organizational structure and management/leadership systems and process deficiencies.  “People” issues are a function of leadership, usually with poorly defined roles and responsibility and lack of accountability.  Rarely are “people” issues the result of intentional bad behavior on the part of employees.  Companies can buy the latest, greatest, “ergonomically” correct equipment, tools and machines and invest in the best programs and trainings; however, if it doesn’t match the employees’ abilities (physical and mental), fit into the policies & procedures, and workflow & organizational structure it will fail to achieve the desired results.  In other words, it will result in LOSS.

The Bottom Line is The Bottom Line

What is your organization trying to achieve?  Is it growth?  Is it to maintain what you have?  Is it to downsize and stay in the game?  Whatever the goal, the primary focus should be on reducing LOSS and then focus on profits through more customers.  Doubling in size may sound great but if you double without getting rid of LOSS you are only building in more lost revenue—making growing your business even harder.  The economy and business climate are hard enough without you continuing to add to the difficulty. 

So, let me close with a statement and series of questions:

A dollar earned (revenue) is with less than a dollar saved (prevent LOSS) when valued at margin.

·        How much is your company losing because you are “blind”? 

o   Or, if you’re not in the C-suite, how much is your department losing or not being effective because you are blind?

·        If you don’t know, can you afford not to find out?  

·        What are you going to do about? 

·        When? 

·        How? 

·        Who?

If you’re at a LOSS for how to start, contact us for a free initial consultation.  We’d appreciate the opportunity to help you increase your bottom line.