There's more to trading in tough conditions than slashing costs. Identifying the most profitable activities could help your business to thrive, as Simon Croft reports
When faced with challenging market conditions, many businesses are prone to adopt a 'batten down the hatches', or 'mean and lean' stance. However, slashing the marketing budget, laying off staff and deferring capital investment can cause considerable damage to an enterprise without addressing some fundamental issues regarding profitability.
SMEs (small and medium-sized enterprises) is a term used to describe around 99% of the world's businesses, which collectively account for as much as 50% of any one country's GDP. Individually, however, they are often poor at identifying the opportunities in the market and are equally bad at monitoring the profitability of their activities.
To bring this topic closer to home, many integrators recognise that, with budgets on hold, the emphasis has moved from capital projects to refurbishment and maintenance. How many of those companies have considered carefully how best to present those services to the market and made a rational assessment of the profitability of these areas of activity?
Manufacturers, in contrast, tend to be considerably better at these disciplines. Partly, this is because they are larger and therefore better resourced.
But the underlying truth is that any manufacturer that develops products no one wants to buy - or costs more to make than it allowed for - goes out of business very quickly.
Villads Thomsen is vice president EMEA at lighting and controller manufacturer Martin Professional. Thomsen has been in the post since the start of the year, when the company announced that it was integrating its European subsidiaries into a single operation based at its headquarters in Denmark.
"Creating a unified European organisation is a structure commonly used as industries mature. We felt the time was right to implement the process with the goal of optimising the company's infrastructure," he says. "We saw a lot of doubling of resources and replication of tasks in the organisation, which could be better handled from one source."
The changes at Martin Professional will apparently include regionalisation of some back-office functions, along with a new e-commerce platform. This, Thomsen says, "will help to support our aim of serving our customers more professionally". He adds that as well as creating "a stronger and more uniform approach to the market" the changes in the structure of the company allow it to better serve the increasing number of integrators working across borders.
A desire to make a company more profitable is a good starting point, but how do you accurately monitor the profitability of each activity? Thomsen has some answers.
"Through a dedicated and comprehensive performance management system coupled with a new ERP [enterprise resource planning] and business intelligence system, we achieve transparency through the entire company. This allows us to monitor processes and our performance in general."
The company-wide ERP computer software system is used to manage and co-ordinate all the resources, information and functions of a business. ERP systems - the term was coined by research and analysis firm Gartner in 1990 - were first used in manufacturing but their use has since spread into other sectors.
David Ambrose is MD of Electrosonic, a manufacturer of video and graphics products, as well as an integrator active in Europe, North America and Asia. "We think it's important to understand the different profit profile of each part of our business," he offers. "In the absence of this information we would have a real lack of visibility when taking decisions on the day-to-day running of our business or developing longer-term strategic plans.
"Our products, integration and service activities are very different models and require different treatment in how we account for each activity," Ambrose adds. "Measuring profitability in each component part of our business enables us to understand where we need to focus our attention."
Ambrose gives as an example the detailed proposal that must be completed even before starting development of a new product. This has to include information on the market, potential sales volumes and product cost, along with a full development assessment covering specification, development cost, time to market and key 'milestones' along that timeline.
"Electrosonic measures its business by recording sales, costs and overheads, and then allocating these to each part of our business," Ambrose adds. "This enables each business to be monitored individually. The systems we have in place are well established and enable us to drill down to a specific item, such as a project, contract or development activity - as well as being able to draw back and take a helicopter view."
Move with the times
Although maximising efficiency and identifying the most profitable parts of the business are key activities in increasing profit, they cannot secure a business in the longer term. We live and trade in rapidly changing times, so it is essential to be able to identify new areas of opportunity, as well as the ones that are falling away.
To use an example from the past, you may have had the best typewriter manufacturing or repair business around but you'd still have gone out of business if you'd failed to spot that they would be made obsolete by word processors (which would in turn be made obsolete by first desktop, then laptop, computers).
"With a core of very competent product managers and a strong R&D department, we are able to locate and bring to market extremely quickly very cost-efficient products," says Thomsen. "Take the LC Series LED panels, for instance, which have really taken the industry by storm. It exemplifies one of our main advantages as far as innovation, which is our ability to spot new trends and bring new technology to market in a user-friendly form that is affordable to the greater market.
"A global perspective and worldwide network of subsidiaries and distributors provide constant information on market trends. It allows us to spot trends, differentiate good trends from bad, the relevant from the non-relevant. If you see the same trend popping up across several geographic markets, you have a good indicator of a market need."
Thomsen also recognises that cost is an important factor, saying that the manufacturer's "state-of-the-art production facility in Denmark gives cost efficiencies, so that we can bring new technologies to market at a competitive price". He also cites Martin Professional's ISO-certified factory in China, economies of scale and its buying power as strategic advantages that translate into benefits for its customers.
Ambrose says that Electrosonic's activities across sectors have created advantages. "Our experience as an integrator has brought knowledge of the importance of being able to meet tight deadlines," he offers. "We understand the need for products to work out of the box without requiring a team of engineers to provide support for every installation. We have a thorough testing lab, separate from our development team, and here we assess our products in what we aim to be as close to the 'real world' as possible.
"We've been able to recognise where we've been successful or where markets have changed and we need to invest or make a change," says Ambrose. "Information on profitability is an essential tool that can provide confidence and support or challenge decisions."
"A good example is in product manufacture," Ambrose adds, explaining how each development builds Electrosonic's knowledge for the future. "Our product development plans are created prior to a development starting [and so] have enabled us to look back after a product has been launched and judge whether we were right in our assumptions.
"This is an important part of the continuous improvement process and enables us to learn and hopefully improve when we next create a new set of assumptions."
"The ability to sell complete solutions is increasingly important in all areas of the lighting market, with a growing potential in services that surround our core products," says Thomsen of future developments. "Included with that are after-sales service contracts, which are relatively new in this industry although they are commonplace in larger industries.
"In the near future, part of that service will be remote device management, which offers several benefits - improved data communication that enables faster, more efficient service, a reduction in repairs and downtime with a bottom line of substantial savings in time and costs," Thomsen predicts. "It is a service that adds value to the product with added value for the customer, and it is a profit-maker for the integrator as they can charge for the service."