Can Profitability Management Help You Grow? Profitability management helped PC maker Dell pull off a turnaround. Can it help you do the same?
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Today, Dell is a business behemoth,the world's largest PC maker with $35 billion in fiscal 2003 revenues, $2.1 billion in after-tax profits, and the moxie to take on Cisco Systems in network gear and Hewlett-Packard in printers. But a decade ago, Dell was coming off a string of troubles that included a misadventure into retailing, serious questions about product quality, and a net loss in fiscal 1994.
Most observers credit Dell's direct sales approach with driving the company's turnaround, but one analysis says the Round Rock, Texas, company's approach to profitability management is what really did the job. Profitability management is largely a matter of selling what you have so that you neither disappoint customers nor incur heavy inventory costs, says Massachusetts Institute of Technology lecturer Jonathan Byrnes, who studies supply chain managment. And you don't have to be Michael Dell to do it. "Most companies have tremendous increases in cash flow and profitability available for free," Byrnes says. "All it takes is good management."
Path to Profits
Profitability management starts with selecting the right customers. For Dell, the right customers were large corporations and sophisticated consumers who replaced their computers regularly and cared more about getting the latest technology than the best price. These buyers provided a more predictable revenue stream than other markets.
Next, Dell set about matching up supply and demand. The company held frequent meetings of sales, marketing, manufacturing and supply executives where they tried to match up sales forecasts of specific products and configurations with manufacturing's ability to supply them. They designed incentives to encourage customers to order more of the peripherals and systems they had, as well as incentives to encourage their salespeople to sell those same plentiful products.
Dell went further and carefully selected suppliers who could deliver products on its terms, usually on short notice and with generous payment terms. The company's pioneering forays into e-commerce proved especially well-suited to direct sales of custom-designed computers. The result was that the company wound up with essentially no carrying costs for inventory while maintaining excellent turnaround on orders, because it sold what it had on hand, collected from customers in an average of a few days, and didn't have to pay suppliers for several weeks. This approach helped it hold down prices, which built volume and allowed for further savings in a virtuous cycle that continues to this day.
Dell's business model is no secret, of course, and it's been emulated with considerably less success by many of its competitors. What Dell did differently was focus strongly on profitability management via direct sales, cutting out other distribution channels entirely, and being persistent in the face of setbacks. "They were very good at trying things, seeing if they worked and then responding," says Benson P. Shapiro, professor emeritus of marketing at Harvard Business School.
There are other ways for other companies to do what Dell did in profitability management. Byrnes describes a trucking company that boosted profitability by rewarding salespeople for considering the costs of making return trips when selling point-to-point delivery services. Other companies may find different profit levers to push. "What you want," says Shapiro, "is a system that enables you to make what your customers want, to sell what you're able to make, and to minimize inventory."
Similar profit levers exist in most firms, waiting to be pushed. "In every company I've seen, there are 40 percent or more accounts, products and orders that are grossly unprofitable," says Byrnes. "Through profitability management, companies can quickly get profitability increases of 30 to 40 percent or more."
Mark Henricks writes on business and technology for leading publications and is author of Not Just a Living.
