by Julie M. LaNasa
 One of the major issues across all industries today is a cultural focus
on volume gains without proper attention given to the impact on profitability.
Time and again we see companies achieve volume gains only to find themselves
blindsided by erosion of profitability. For example, promotion or marketing
costs to achieve volume gains are not adequately considered and evaluated
before launching new initiatives to achieve growth. Or executives may
try to use price as a lever to grow the topline, but do not adequately
think about volume declines which could easily erode incremental gains
made in sales.
Even worse, we see companies repeat these mistakes,
which led us to question why this cycle repeats itself. We interviewed
several companies and discovered that a lack of profitability understanding
is like the elephant in the boardroom that no one wants to mention. This
is the common refrain we heard. "You'd be amazed at the lack of P&L knowledge
in the executive levels of my company. It is difficult for some to admit
that they don't have these skills and out of embarrassment they avoid
P&L impact analysis or fail to ask the important questions when evaluating
everyday business decisions."
Discomfort and embarrassment over a lack of P&L understanding
is a sensitive and ultimately dangerous issue for many companies. But
it doesn't need to be. The reality is there are many different routes
and succession models that lead individuals to climb the corporate ladder
and not all of them require a detailed knowledge on the mechanics of the
P&L. This diversity makes sense and is a great contribution to the collective
skill base of the management team. So there is no reason to stigmatize
individuals who get to higher executive positions without P&L skills.
If the corporate culture did not provide this training, there is no reason
why executives should be expected to have acquired it.
But neither should you ignore this disparity in skill
level. A shared understanding of how to test profitability impact by the
entire executive team is critical to avoid the pitfalls discussed above.
Avoiding this critical business analysis out of fear will consistently
produce a volume focus without a balanced perspective on profitability.
You need to address this variation in skill level head on and get the
management team as a whole to understand how to test P&L impact of strategic
initiatives and take collective responsibility for it.
So how do you do this when people are predisposed to
be embarrassed or unwilling to admit that they don't have these skills?
Cultural changes to support this work should begin
by de-stigmatizing the lack of skills. Management should acknowledge that
everyone has come from different backgrounds and strengths and admit that
profitability understanding varies among the team for natural reasons
and is not the by-product of individual weakness.
Next, the management team needs to build a burning
platform for a greater focus on profitability analysis. A look at recent
volume gains that have caused losses in profitability would help focus
the need to balance volume and share goals with profitability analysis.
Once the need for profitability analysis is recognized
a training program is necessary to help everyone get on the same page.
Although there may be varying levels of understanding, there are always
new and provoking issues that come out of scenario analysis from which
all team members can benefit.
One way to initiate training would be to launch a company
wide initiative that focuses on changing the culture to take P&L responsibility.
As part of the process, the management team would be required to review
some basics so that they can understand the training that will be initiated
with their functional teams. This way you can schedule a basic review
of profitability without isolating certain individuals or calling attention
to perceived weaknesses.
On an ongoing basis, executives should be encouraged
to ask questions about how to measure P&L impact, especially when they
are having difficulty understanding or identifying the impact of current
decisions. Also, do not let those with superior P&L knowledge use it as
a weapon to win arguments or inhibit fundamental questions about driving
assumptions. P&L analysis should always be done with an eye to educating
everyone about the implications of decisions, not to intimidate executives
who have fewer competences in that area.
Finally, changes in behavior and willingness to acquire
P&L skills must be tied to performance measures and compensation. The
best way to incent people to understand and conduct the new analysis is
to make sure they are accountable to the desired outcomes.
De-stigmatizing the profitability knowledge gap, providing
skill training to understand profitability trade-offs and rewarding for
successful achievement of profitability targets can turn your companies
volume focus around. By balancing volume with profitability, your company
will create a more stable foundation for sustainable long-term growth.
Julie LaNasa is the founder and principal of Collaborative Consulting.
In addition to helping drive profitability, understanding, and accountability
throughout organizations, Julie works with a broad range of clients on
strategy development, marketing and sales planning, and development of
cross-functional customer teams. For further information contact Julie
at ccjmlanasa@aol.com
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