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The four profit drivers’ matrix

Successful profit-generating business development means creating not just one barnstorming idea, but instigating, developing and following through on many practical and realistic ideas simultaneously and throughout the company. Integrating and implementing such a diverse range of improvements all at the same time is the role of TBD's Hoshin Kanri rapid business transformation programme.

Typically, when we introduce Hoshin Kanri into a company, the planning team instigates thirty or forty methodically implemented, short-term improvement plans. These action plans all emerge as a response to a range of detailed feedback from staff and other stakeholders. The accumulative impact is to literally transform a company’s productivity and profitability in a matter of weeks.

How is this possible?

The reason is that, improvement projects are often closely interrelated and interdependent and this complex interconnection needs to be coordinated to avoid waste, delays, unintended consequences, duplication of effort and conflict.  We accomplish this coordination and alignment with overall strategy in the forum of the Hoshin Kanri planning team workshops and progress reviews.

Thus the successful implementation of one idea has a positive knock on effect on the development and operation of other aspects of the company and other projects. With Hoshin Kanri, there is a ripple effect throughout the company, as all the integrated improvements tend to compound improvements elsewhere and vice versa.

One way of demonstrating this unique planning feature is to use the four profit drivers’ matrix as a model.

There are only four fundamental ways to increase your profit

Arithmetically speaking there are only four fundamental ways to increase your profit. What that means is that, of all the possible strategies, tactics, devices, new technologies and products that you can devise to increase profits, they all fall into one of four drivers of profitability. In essence if you want to increase your profit you have to work on all four “profit drivers” AT THE SAME TIME, and this means your team has to plan to:

1.    Increase your sales volume,
2.    Increase your sales price,
3.    Reduce your unit costs, and
4.    Reduce your overheads per unit of sale.

Of course the key success factor here is that any changes you might make to any one of the above drivers has to be carried out without an adverse change being experienced in one of the others as a result. Let’s look at an example.

You might manage to lower your variable costs but then find that as a result you have damaged your quality. As a result of the quality problems you then find that this cost saving has had a detrimental impact on either price or sales volume or even worse  - both of them. So in this case a lowered variable or direct costs might actually reduce your profits.

Or another example; you may have raised your sales volume but at the expense of increasing fixed costs with an extra sales salary and reduced sales prices due to discounting. So again your actual profit might go down.

Obviously then, you have to watch that the benefits are not cancelled out by the disadvantages, or that any extra costs are more than compensated by extra benefits. However, this model demonstrates that the larger the improvement of one driver, then the more this might create a strain on one or more of the other three drivers.

There are two tricks to pull off here.

The first trick is to generate a large number of apparently small improvements within each profit driver that combine to improve that particular driver significantly without detrimentally impacting the other three.

The second trick is to aim to improve all four of the profit drivers at the same time. What happens then is that you achieve the multiplier effect where even small increases in each driver have an incremental effect and accumulate to become a huge increase in net profit.

The four profit driver quadrant

Sales Volume
1,000 units                   

…. % increase +
Sales price
£2,000                         


…. % increase +
Unit Costs
40% of sales           

….. % down   +   
Fixed Costs
£1,100,000

…. % down

=   IMPROVED PROFIT

The matrix helps to demonstrate the compound effect of each improvement

The Challenge

The challenge here, as you will see, is how can you possibly identify, plan, coordinate and implement all the large number of improvements needed to make a real overall difference. This is where TBD’s Hoshin Kanri team planning can help. 

The outcome of the first TBD planning workshop is the instigation of a Management Action Plan (MAP). This MAP comprises a schedule of anything between twenty or fifty prioritized and delegated semi-autonomous “improvement projects” or “action plans”. Each of these projects improves the profitability of at least one or more of the four profit drivers.

TBD’s ten key profit-generating features

A number of TBD’s key features enhance the ability of the MAP to have a real and sustainable impact. These features include:

  1. The team planning workshops enable the CEO to delegate more effectively and coordinate a wide range of different projects without expending too much of their own personal time.
  2. The company wide SWOT assessment uncovers many hidden problems (constraints) that are otherwise an obstacle to efficiency and effectiveness. When rectified these hidden problems can then benefit a particular driver without impacting another adversely.
  3. The “bottom-up” SWOT assessment creates a more thorough understanding of the company’s real circumstances among the management team. This helps the team get to the root of existing problems and allows them to align genuine opportunities with the reality on the ground. As such, the bottom-up assessment process reduces the institutional naivety of “blue-sky” thinking.
  4. The bottom-up SWOT assessment and TBD's 12 step process of decision-making also reduces the unintended consequences and the inevitable operational distortions inherent in target setting.
  5. Widespread involvement in the decision-making process has a significant motivating effect on staff members. SRI research indicates that the consequent culture of “trust and fair play” is likely to generate a 50% improvement in employee energy levels and enthusiasm. This effect lasts for about three months after a TBD assignment. However you can sustain this level of motivation if you maintain a more collaborative management structure and style for the future.
  6. The collaborative planning process not only motivates people but also provokes early “buy in” from stakeholders. This commitment to change reduces resistance to new ideas and allows for the rapid deployment of new improvements.
  7. Group participation in the decision-making process dismantles bureaucratic thinking and enables problem solving across a much broader spectrum of the company. There is a tendency towards “self-management” and “double-loop learning”. Importantly, this means that the appropriateness of standard operating procedures and other routine aspects of functioning can be questioned at much lower levels and actions are modified to suit new feedback from the environment. This way immediate improvements can be decided upon at the lowest level possible without having to refer to a “higher authority”.
  8. Appropriate training for the relevant decision makers in financial understanding, planning, project management and strategy greatly improves the quality of decision-making and the robustness of estimating the cost-benefit of improvements.
  9. The cross-disciplinary planning mechanisms and other factors greatly increases the flow of information between departments and functions. This interconnectivity reduces isolated decision-making that so often adversely impacts other areas of responsibility by creating unintended consequences.
  10. The collaborative and structured approach to planning and decision-making is proven to reduce the stress inherent in such situations. The lower stress levels improve the decision-makers access to their full creative, analytical and problem-solving faculties. The whole process reduces the opportunity to activate the ten mistake drivers.

Profit acceleration example:

A typical example could be a small manufacturing company with the following basic statistics:

Average sales price: £2,000
Average sales volume: 1,000 units
Turnover:     £2,000,000
Unit costs:     40% of sales
Overheads:     £1,100,000
Net profit:     £100,000

Lets assume the TBD planning workshops create a MAP that introduces thirty or forty improvement projects. These projects then have an impact across the four profit drivers as follows:

Sales volume driver: Several projects increase sales volume by 10% yielding £200,000 extra turnover to create a new turnover of £2,200,000. Examples of low cost improvements to this particular driver might include:

Sales price driver: Numerous projects combine to create an additional 5% increase in price. This increases the new level of turnover by a further £110,000 to a turnover of £2,310,000. Examples of improvements here include:

Unit cost driver: Various improvement projects generate a 5% reduction in unit costs and this creates a new gross profit of £1,501,500. Low cost improvements achieved for this driver might involve:

Overhead rate driver: A range of different improvement projects might reduce overheads by 5% and this would produce overhead costs of £1,045,000. Improvements generated here typically involve:

The overall effect of these small improvements taking place in each profit driver is a new net profit of £456,500 or 4.5 times the current net profit of £100,000.

Increase in capital value

Generating such a steep rise in profitability creates a commensurate and dramatic increase in the capital value of the business. Assuming an average multiplier of five times the net profit, this business will see a rise in value from £500,000 to £2,282,500 providing an extra £1,782,500 of value to the owner.

“We’ve achieved more changes in six weeks with
these team planning workshops
Hoshin Kanri than I’ve seen in twenty years of my time here.” Dave Medhurst Projects Coordinator Steelfields Concrete Batching Plant Manufacturer.

Find out more about how Hoshin Kanri can be used to generate and integrate a mass of new improvement projects that collectively transform your profitability and performance:

Download our free white paper on 'Hoshin Kanri and the art of rapid business transformation'

 

For more information on how Hoshin Kanri can get you better results faster, contact Jeremy Old on:
0845 0945 819
or email.

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