DIRTY LITTLE START-UP

SECRET #7

OPERATIONS EATS SALES FOR

BREAKFAST!

http://www.flickr.com/photos/matthew_norris/

too many entrepreneurs get hypnotized by growth

(volume or revenue)

when what really matters is margin

BUSINESS MODEL 1

Units Sold 1,000,000

Price per unit $1

Monthly Revenue

1,000,000

Monthly Cost 990,000

Monthly Profit 10,000

Profit Margin 1%

BUSINESS MODEL 2

Units Sold 100,000

Price per unit $1

Monthly Revenue

100,000

Monthly Cost 50,000

Monthly Profit 50,000

Profit Margin 50%

a million in revenue for a million units sold doesn’t look so sexy now, does it?

so how do we maximize margin

well it starts with some very basic math

let's start with the formula for profit margin

profit margin = profit

revenue

now let's do some simple algebraic substitution

margin =

profit

revenue

= (volume x price) – costvolume x price

= revenue – cost

revenue

= (volume x price) – (volume x unit cost)

volume x price

Expand out profit to (r - c)

Expand out revenue to (v x p)

Expand out cost to (v x c)

margin =

=

=

=

(volume x price) – (volume x unit cost)

volume x price

volume x (price – unit cost)

volume x price

price – unit cost

price

From the last slide

Simplify!

price

price

unit cost

price-

margin =

=

From last slide

price

price

unit cost

price-

unit cost

price1 -

holy cr@p!

profit margin =~

unit costprice1 -

in other words

selling more units (volume), does not in

itself mean your business is healthier

what moves the dial is…

1) raise price2) lower costs

but….

in most competitive markets, raising price

(especially significantly) is not an option

which means that

the magic of margin

is all done with cost per unit

that’s why sales & marketing is basically illusion and hypnosis

while operational management is the dirty little secret of success

so how do you reduce unit cost?

simple

process excellence

and how do you get excellent with your

processes?

you map out where your processes are weak or

inefficient

and you fix them

one at a time

i’d now like to share with you a tool that would be

used by you and your management team

to identify areas to target

but

due to the limitations of slideshare, you must download this deck to

make the tool work

please download and then view the next two slides in native power point.

it’s free.

here is a tiny version of what you’ll find on the

next slide

WARNING: you must manually use the scroll bars in order to use it

Cultivate Productive

Assets

Cultivate Productive

Assets

Produce Product / Service

Produce Product / Service

Distribute Product / Service

Distribute Product / Service

Administrate Firm

Administrate Firm

Operational Activities are defined as a set of business processes required to execute business strategy. Not all firms will have the same activities but they probably all have the same core of 4 and most start-ups and small companies will not be all that far off.

As a small company, you won’t have time to fix everything, but you should 1) know where you stand in terms of operational maturity (by mapping out processes as is the case here, and assigning maturity ratings) and 2) have a plan as to what things you will invest in improving. For example, you might target the “red” items in the map. Or you might find that you’ll get better ROI by focusing on 4 of the yellow processes.

Whatever the case, this is an example map (scroll left, right, up and down to explore) of operational processes that seem generic enough to me that they might be useful as a baseline for whatever company you are running.

Operational Activities are defined as a set of business processes required to execute business strategy. Not all firms will have the same activities but they probably all have the same core of 4 and most start-ups and small companies will not be all that far off.

As a small company, you won’t have time to fix everything, but you should 1) know where you stand in terms of operational maturity (by mapping out processes as is the case here, and assigning maturity ratings) and 2) have a plan as to what things you will invest in improving. For example, you might target the “red” items in the map. Or you might find that you’ll get better ROI by focusing on 4 of the yellow processes.

Whatever the case, this is an example map (scroll left, right, up and down to explore) of operational processes that seem generic enough to me that they might be useful as a baseline for whatever company you are running.

Activities mature and working smoothlyActivities mature and working smoothly

Activities are being performed, but there are opportunities to improve efficiency and/or effectivenessActivities are being performed, but there are opportunities to improve efficiency and/or effectiveness

Activities are not being performed, but should beActivities are not being performed, but should be

Activities are not being performed, but are not relevant for our business at this timeActivities are not being performed, but are not relevant for our business at this time

Scroll to see processes!

Scroll to see more!

what you need to do now

is duplicate this map with processes specific to your

business

(I bet I nailed 86% of them though)

and, as a management group activity, use color

post-it notes

to map out your own maturity levels

then, start actioning change

but remember…

focus on change that moves the dial on cost

per unit

don’t geek out on every opportunity….

good luck!

and make it fun!

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