July 3, 2022

Article 2.1


A few firms have grown their profits right through the 1990-91, U.S. recession, and fewer yet have grown their profits for years in declining industries. What is the source of their sustainable profit power? How do they defy the economic currents that carry most firms down in a recession?

Because profits and all financial numbers are symptoms of underlying causes, we must first determine what drives profits and in what priority sequence they must be developed. Managing by the numbers can: help to downsize a business; free cash in tough times for survival purposes; remind us to try harder, but not tell us how; and make profits look good briefly before a firm is harvested or sold. But, financial management can not create long-term profit power.

Consider my sequential chain of profit drivers below:

In this model it all starts with and rests upon the quality of management/leadership. "Management" includes the scientific aspects of business such as good analysis, decision-making, and planning. "Leadership" deals with the human side of the business. A good leader can get ordinary folks to emotionally bond with the purposes of the firm which allows them to work at an extraordinary level in harmony with others.

Because 80% of us are not top 20% managers, and because top 20 percentile firms in a given industry make two times the profits of the average firm, we should pause and ask: what are we doing to define what it takes to be a tenth degree, black belt management performer?; and what are we doing to move ourselves steadily along the path to management mastery?

Out of the minds of managers comes Step #2, "strategy," for which there are at least four sub-components. We must first be environmental strategists. If we do not change in tune with the environment, we will lose customers to and be cost inefficient with our competitors. Next we must precisely target segments of customers and design our firm to give them exactly what they want for goods and services plus-some: or, one of our too many competitors will out-perform us. Third, we must pursue cost-effectiveness again in comparison to the competition.

A fourth challenge is to articulate what we are strategically doing to all employees to get them moving in the same direction with a unified pace; call this strategic alignment. It is an unfortunate guess that a majority of U.S. employees could not: name the top ten most important customers of their firm; explain what the firm is trying to do distinctively better for those customers; and describe how they might make a difference in serving those customers or capabilities.

From a set of articulated strategies, the "systems" (Step #3) can be developed. Systems are the involuntary part of the corporate body. Like our immunological or reflex systems, systems are unconscious, and vital to organizational success. Systems must be consciously designed to do many things including organizing, prompting, and informing people as well as goof-proofing activities. Well designed, they can help ordinary people do extraordinarily good and consistent work.

Systems can, however, be poorly designed or taught; user unfriendly to customers and employees; or become dated or cluttered. Service firms can be especially dependent upon the quality and inter-linkage of their systems - McDonald's , Marriott Hotels, and American Airlines have achieved significant competitive advantages with their systems.

Many are surprised to see that "Good People" comes fourth in the model, unless we are considering top managers who are Step #1. People who: are aptitudinally correct for a position; have a good work ethic; and are responsive to a high performance environment- are in short supply and great demand. They cost plenty initially and they will leave or fall short of their potential if any of the first three prerequisite steps are deficient.

With the right people, "education", Step #5, will pay off with enhanced skills. If we, alternatively, trained a donkey perfectly for the Kentucky Derby, we would still never win.

Step #6, "assets" or tools, will not be utilized to their maximum potential if prerequisites are missing. Don't invest in assets that do not strategically add critical value for target customers; outsource those investments. Systematically and preventatively maintain assets. And if we don't have strategically aligned, skilled and motivated employees, then asset/tools will be underutilized.

If we gave world class tools to six-year olds, we would not have world class carpenters. Give the best carpenter poor tools, and they might still do the best job. But, only the most skilled could appreciate and realize the potential of the best tools.

Many firms have invested in hi-tech assets only to find that they were weak in some downstream prerequisites. Let technology inspire, but not strategically lead or precede the first five steps.

"Incentives" are the last step in this model- the icing on the cake. The best incentive plans can not make up for deficiencies in Steps 1 to 6. If the first six steps were in place, a company would already be experiencing spontaneous initiative from the troops assuming slightly better than average, guaranteed compensation. After all, great coaches, teachers, and business leaders can also motivate followers with high expectations, measurable discipline, promoting the intrinsic joys of a job well done, praise, recognition and more.

Incentives do have their place once all prerequisites exist. Incentives are the match that can light the bonfire, but first we must build better bonfires with Steps 1-6 as our guide.


The seven steps for profit power model can be used several ways:

  1. It can be a longer-term organizational tool. Build strength into all steps in a balanced manner, but steps 1 and 2 may be about 50% of the weighted importance.
  2. Use the model as an implementation checklist. If, for example, a firm pursues an educational opportunity(#5): who will lead it; is it strategically relevant and designed; what are the educational delivery and follow-up systems to insure results; are the people aptitudinally right and ready?
  3. Use the model as a scorecard for deciding which suppliers and customers will be the best long-term partners.
  4. Invent a second set of measurement systems to go with the financials which are good for cash-flow budgeting and paying taxes. No where in the financials will we find a measure of the quality of any of the seven steps except for consistently high and growing productivity and profit numbers, the ultimate symptoms of the seven steps.
  5. Use it as a catalyst for determining how to grow steadily into a better manager/leader. Steps 2-7 all depend upon it.


Ó Merrifield Consulting Group, Inc.. Article 2.1