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Profit profiling: a strategic planning tool.

Article Excerpt
EXECUTIVE SUMMARY

Identify opportunities for improvement by graphically analyzing the relative profitability of various segments of your business, The side-by-side comparison makes it easier to identify the most attractive areas for improvement, And the spreadsheet used to illustrate the analysis contains macros that make it possible to reflect what-if alternatives quickly.

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Companies continually try to improve their financial performance. Often, this takes the form of reviewing the relative contribution of product families, customer groups, market segments, or geographic areas. While the absolute contribution of each element of the business is important, more often the analysis involves a comparison of the relative contribution of each member of the group (i.e. the relative profit contribution of each product as compared with other products).

This analysis usually involves a first step of taking a macro view of the area to study, such as products or families of products. This first pass often identifies possibilities for improvement. Analyzing each possibility more closely helps to determine its true profit improvement potential. While there is no quick and easy answer to this type of analysis, some tools make the analysis faster and more systematic.

Analyzing the relative profit contribution for each product line or line of service is common practice among many companies. It is not always possible to allocate enough resources to make improvements in every product line; therefore, a practical approach is to allocate those resources in the areas of greatest need or opportunity. This article proposes a way to identify those areas of need or opportunity quickly.

One of the authors used the approach described below when he was the chief industrial engineer with a New York Stock Exchange electronics company He provided the comparative graphs to the vice president of manufacturing, who used this information in his review of annual plans with the division managers. While the example is for product line analysis, the same approach applies to an analysis of customer groups, market segments, or some other grouping. Figure 1 shows how the cost categories could change for different types of...

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