Download - Profit improvement analysis toolkit
PROFIT IMPROVEMENT ANALYSIS
David GoldsteinPresident, Mekko [email protected]
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Introduction• Strategy consultants are often engaged to analyze company profit and find ways to improve it
• This slide deck (presentation) contains data-driven charts that help to explain company profit and to present approaches for profit improvement
• The slides in this solution toolkit will provide charting and data presentation ideas you can adopt for your own work
• Each chart is presented on two slides• The first contains an example of how the chart is used• The second contains an explanation of the chart and information on
how to create it• All charts are created using Mekko Graphics; and you can copy, edit, and reuse them in your own presentations
Value Chain Profit PoolThe vast majority of coffee profits go to the parts of the value chain with the greatest revenue—coffee processing and coffee shops.
U.S. Coffee Industry
0
5
10
15
20%
Profit Margin
Retailer Coffee Shop
Sales (Total=$31B)
Farm Production Traders
Exporters Processing Home Machinery
Commercial Machinery
Source: Gottfredson and Schaubert, The Breakthrough Imperative, Collins, 2008
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Bar Mekko Charts for Profit Pool Analysis
U.S. Coffee Industry
• Bar mekko charts can be used to compare profit margin with market size.• The area of each segment is proportional to its profit
• Profit pools divide up profits across the industry’s value chain from raw materials to consumption.
• This bar mekko allows you to quickly identify the highest margin and highest total profit segments of the value chain.
• Extra credit: Using two bar mekkos allows you to compare profits over time.
0
5
10
15
20%
Profit Margin
Retailer Coffee Shop
Sales (Total=$31B)
Farm Production Traders
Exporters Processing Home Machinery
Commercial Machinery
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Comparing Profitability with CompetitorsThe largest competitors in the cellular market have profit in-line with their market share. The three niche competitors have relatively higher profit for their size and share.
0
20
30
40%
0.01 0.02 0.05 0.1 0.2 0.5 1 2 5
$1.5B Revenue
Relative Market Share
2003 Profits (EBIT/Revenue)
VerizonCingular
AT&TSprint
Nextel
T-Mobile
Alltel
$1.5B Revenue
Western
Source: Gottfredson and Schaubert, The Breakthrough Imperative, Collins
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ROS/RMS Chart Compares Profitability with Competitors
• The ROS/RMS (Return on Assets/Relative market Share) chart compares competitor profitability with market share. The normative band highlights the fact that increased share typically leads to higher profit.
• You can spot competitors that have profits that are relatively high when compared to their market share by looking at bubbles that are above and to the left of the normative band.
• For more information on calculating RMS see: http://en.wikipedia.org/wiki/Relative_market_share
0
20
30
40%
0.01 0.02 0.05 0.1 0.2 0.5 1 2 5
$1.5B Revenue
Relative Market Share
ROS (EBIT/Revenue)
AT&T$1.5B
Revenue
Western
Product Line ProfitabilityThe highest margins come from hot coffee and iced drinks. Food and brewed coffee are reducing company profits.
-5
0
5
10
15%
Profit Margin
Hot Coffee Drinks
11%
Iced Drinks
9%
Hot Tea Drinks
4%
Brewed Coffee
-2%
Food-4%
Sales (Total=$15B)
Source: Fabricated data presented to illustrate the chart type.
Bar-Mekko Charts for Product Line Profitability
• Bar-mekkos can show profitability by product line, plant, channel or region.• The bar-width are sales, heights are profit margin and areas of each bar
correspond to operating profit.• Bar-mekkos can show product lines that have either profits or losses
-5
0
5
10
15%
Profit Margin
Hot Coffee Drinks
11%
Iced Drinks
9%
Hot Tea Drinks
4%
Brewed Coffee
-2%
Food-4%
Sales (Total=$15B)
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Sales Versus ProfitsIced and hot coffee drinks are the largest product lines and account for a disproportionately large share of total profits.
0
20
40
60
80
100%
Sales
$4.2B
$3.2B
$2.7B
$2.1B
$1.4B$0.6B
$14.1B
Profit
$0.4B
$0.3B
$0.1B$0.0B
$0.1B$0.1B
$0.9B
Iced Drinks
Hot Coffee Drinks
Brewed CoffeeFoodHot Tea DrinksMerchandise
Source: Fabricated data presented to illustrate the chart type.
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100% Stacked Bar to Compare Sales and Profits
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20
40
60
80
100%
Sales
$4.2B
$3.2B
$2.7B
$2.1B
$1.4B
$14.1B
Profit
$0.4B
$0.3B
$0.1B$0.0B
$0.1B$0.1B$0.9B
Iced Drinks
Hot Coffee Drinks
Brewed CoffeeFood
Hot Tea Drinks
Merchandise
• Use a 100% stacked bar with a column for revenue and one for profits to compare the profitability of different product lines, regions, or channels
• You can identify which product lines contribute a relatively larger percentage to profits than to revenue (e.g., iced drinks, hot coffee drinks and merchandise).
• Note: all product lines must have positive profits to use this chart.
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Profit by Product Line and CompetitorMy Company and its 4 largest competitors account for over 80% of the profits in each major personal insurance product line.
0
20
40
60
80
100%
Personal Insurance Industry Profits
Life
$1.3B
$1.8B
$0.6B
$0.4B$0.2B
$0.8B
$5.1B
Home
$0.9B
$0.6B
$1.5B
$0.5B$0.3B$0.4B$4.2B
Auto
$0.5B
$0.2B
$0.8B
$0.3B
$0.7B
$0.6B
$3.1B Total = $12.4B
My CompanyCompetitor1Competitor2Competitor3Competitor4Others
Source: Fabricated data presented to illustrate the chart type.
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Profit by Product Line and Competitor
• Use a Marimekko chart to show how industry profits are distributed by competitor and product line (or customer segment or channel).
• The chart highlights the level of profit concentration and the relative profit by product line of the major competitors.
• Note: all competitor by product line profits must be positive to create the chart.
0
20
40
60
80
100%
Personal Insurance Industry Profits
Life
$1.3B
$1.8B
$0.6B
$0.4B$0.2B
$0.8B
$5.1B
Home
$0.9B
$0.6B
$1.5B
$0.5B$0.3B$0.4B$4.2B
Auto
$0.5B
$0.2B
$0.8B
$0.3B
$0.7B
$0.6B
$3.1B Total = $12.4B
My CompanyCompetitor1Competitor2Competitor3Competitor4Others
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Customer Segment Profitabilityand GrowthLarge consulting and private equity firms represent the highest growth and high profit customer segments.
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10
20
30%
0 10 20 30 40%
500 Units
Segment Profitability
Fortune 1000Private Equity
SMB500
Units
Segment Growth
Large Consulting
Boutique Consulting
Source: Fabricated data presented to illustrate the chart type.
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Bubble Chart for Customer Segmentation
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10
20
30%
0 10 20 30 40%
500 Units
Segment Profitability
Fortune 1000
SMB500
Units
Segment Growth
Large Consulting
Private Equity
Boutique Consulting
• Use an XY linear bubble chart to segment your customers based on profitability and growth.
• This will help you target the customer segments that will be the most profitable for you currently and in the future.
• Use the horizontal and vertical segment lines to divide your charts in high and low growth and profit quadrants.
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Profit Improvement PlanImplementing the profit improvement plan will double profits in three years.
0
1
2
$3B
2013 Profits
$1.50B
Complexity Management
$0.50B
Manufacturing Footprint
$0.35B
Salesforce Productivity
$0.25B
Purchasing Savings
$0.20B
Pricing Optmization
$0.15B
Marketing Effectiveness
$0.05B
2016 Profits
$3.00B
● ◑ ● ● ◑ ○Prioirity ● ◑ ● ● ◑ ○Prioirity
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Cascade Chart for Presenting Profit Improvement
0
1
2
$3B
2013 Profits
$1.50B
Complexity Management
$0.50B
Manufacturing Footprint
$0.35B
Salesforce Productivity
$0.25B
Purchasing Savings
$0.20B
Pricing Optmization
$0.15B
Marketing Effectiveness
$0.05B
2016 Profits
$3.00B
● ◑ ● ● ◑ ○Prioirity ● ◑ ● ● ◑ ○Prioirity
• Add a cascade chart to show the potential impact of the profit improvement plan you have developed.
• Start with current year profit, add a bar for each proposed improvement, and conclude with projected future profit
• Add a data row to note the priority of each proposed improvement.
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Learn More• Many of the ideas in this presentation are taken
from: The Breakthrough Imperative by Mark Gottfredson and Steve Schaubert, Collins, 2008.
• Profit pools are also discussed in: How to Map Your Industry’s Profit Pool, by Orit Gadiesh and James L. Gilbert, Harvard Business Review, May 1998.
• Visit www.mekkographics.com for other presentations and videos or to download the Strategy Consultants’ Toolkit.