profit improvement analysis toolkit

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PROFIT IMPROVEMENT ANALYSIS David Goldstein President, Mekko Graphics [email protected] om

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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.

TRANSCRIPT

Page 1: Profit improvement analysis toolkit

PROFIT IMPROVEMENT ANALYSIS

David GoldsteinPresident, Mekko [email protected]

Page 2: Profit improvement analysis toolkit

2

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

Page 3: Profit improvement analysis toolkit

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

Page 4: Profit improvement analysis toolkit

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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

Page 5: Profit improvement analysis toolkit

5

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

Page 6: Profit improvement analysis toolkit

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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

Page 7: Profit improvement analysis toolkit

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.

Page 8: Profit improvement analysis toolkit

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)

Page 9: Profit improvement analysis toolkit

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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.

Page 10: Profit improvement analysis toolkit

10

100% Stacked Bar to Compare Sales and Profits

0

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.

Page 11: Profit improvement analysis toolkit

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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.

Page 12: Profit improvement analysis toolkit

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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

Page 13: Profit improvement analysis toolkit

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Customer Segment Profitabilityand GrowthLarge consulting and private equity firms represent the highest growth and high profit customer segments.

0

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.

Page 14: Profit improvement analysis toolkit

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Bubble Chart for Customer Segmentation

0

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.

Page 15: Profit improvement analysis toolkit

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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

Page 16: Profit improvement analysis toolkit

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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.

Page 17: Profit improvement analysis toolkit

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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.