The other day I showed a simple P&L for two businesses – one more profitable while the other provided greater value for customers – and posed the question, ‘which was better managed?’ EE readers never fail to get to the heart of critical issues and the comments that came in were, as expected, insightful and force all of us to think deeper.
Billy’s comment – that the second business was spending money on customers and thereby “setting themselves up for long term stability” was the fundamental lean response. As Prashant Navalkar commented, adding superior value for customers “has to pay off in the long run”.
The rub, as Ed pointed out, is whether “the customer agrees with the ‘value-added’ definition over time.” Joe Molesky commented that knowing how much was spent adding value and how much was spent on other things is more than can be said for any company he worked for – and I suspect more than can be said for most companies.
If Billy and Prashant are correct, that creating superior value for customers is the key to long term sustainability and success; and Ed and Joe are correct, that most companies don’t know how much of their resources are going to creating superior value, then the problem is apparent: Lean success is dependent on sales, marketing and accounting playing essential roles. Sales has to be the voice of the customer making sure everyone knows what is valuable to customers and what is not; and accounting has to help track that.
As Jeff’s comments indicate, defining value adding and non-value adding is not that straightforward. I have taken a number of companies through this exercise and know from such first hand experience that there are lots of gray areas where the classification is the product of company values and strategy, rather than from some universally accepted list.
As Mike Bremer commented, numbers don’t tell the whole story. He is absolutely correct and, as much as anything, that point was the objective of my post, and the underlying basis for my comment to Billy that “99 guys out of a 100 on Wall Street would come to the wrong conclusion.” far too many business people make decisions based too heavily – often entirely – on the numbers. Because, as Ed and Joe pointed out, most companies don’t know what spending improves the value proposition and what doesn’t, the comparison of these two businesses would typically be limited to which is more profitable – period. As the entire discussion points out, how the company reduced costs and makes a higher profit has some profound implications.
While the commenters did not agree that either #1 or #2 was better managed, the discussion demonstrated that simply measuring businesses by profit snapshots with an assumption that more is universally better (a la Wall Street) wrong conclusions are often drawn. As Danie pointed out, simply improving profits by reducing costs can send companies down a “slippery slope” if the costs being reduced are those that create value and drive prices.
The bottom line on all of this is that success – lean success – is an integrated, company-wide endeavor. Company #2 is only better if their superior value proposition is (1) correct and (2) ultimately drives higher sales and profits. Lean accounting, by itself, is just another means of managing by the numbers and can never tell the whole story – but traditional accounting is even worse. Sales has to be part of the team if the rest of the business is going to focus on customer value. It takes all hands on deck to succeed and using a standard accounting P&L as the primary measuring stick won’t get you there.