Monday, February 04, 2008
Most people believe that having goals is good.
Is it?
I was approached to coach divisional CEOs of an international organization. The purpose of the coaching is to prepare them to deal with the financial aspects of an aggressive revenue growth goal. While I'm a fan of aggressive goals, this goal generated some concern. Why?
It is unbalanced. The goal, as stated, is to increase revenues from "x" to "3x" (a 200% increase) within 5 years. Nothing was said about how profits are to grow along with these revenues. Let's take a quick look at how divisional CEOs are likely achieve the revenue growth goal.
Assume for a moment that the company possesses 30% of the market (their ideal customers) in their industry. Let's say that they are able to garner another 40% of their ideal customers before the market begins to fear monopoly status. When markets see a monopoly developing they traditionally shift business to competing firms to assure that they'll have choices in the future.
Based on the assumptions, the divisional CEOs have generated 133% (40%/30%) of the 200% revenue growth they need to meet their goal. That means that the remaining 67% growth must come from somewhere else. The typical strategy employed by CEOs is to target the second tier customer - those who don't value what they offer as much as their ideal customers do.
In order to attract this group, the company typically has to offer an incentive - financial concessions in the way of lower prices, more favorable delivery or payment terms, etc. These incentives, in essence, reduce the company's profit margins.
At the same time, these companies are expanding their infrastructure to serve these new customers, which drive overhead costs higher. Whenever you have declining profit margins and increasing costs you're not only working harder for lower margins, you dramatically increase the company's risk during economic downturns. That's the fiscal reality of any unbalanced goal.
There are ways to generate greater revenues from ideal customers, but they are often overlooked when the profit portion of the goal is implied rather than stated. So what's the message?
Setting goals is a worthwhile activity. It's counter-intuitive to make sure that the "stated" goal is balanced.
If there are topics you'd like me to address, please let me know by posting a comment or emailing me at dale@furtwengler.com.
Is it?
I was approached to coach divisional CEOs of an international organization. The purpose of the coaching is to prepare them to deal with the financial aspects of an aggressive revenue growth goal. While I'm a fan of aggressive goals, this goal generated some concern. Why?
It is unbalanced. The goal, as stated, is to increase revenues from "x" to "3x" (a 200% increase) within 5 years. Nothing was said about how profits are to grow along with these revenues. Let's take a quick look at how divisional CEOs are likely achieve the revenue growth goal.
Assume for a moment that the company possesses 30% of the market (their ideal customers) in their industry. Let's say that they are able to garner another 40% of their ideal customers before the market begins to fear monopoly status. When markets see a monopoly developing they traditionally shift business to competing firms to assure that they'll have choices in the future.
Based on the assumptions, the divisional CEOs have generated 133% (40%/30%) of the 200% revenue growth they need to meet their goal. That means that the remaining 67% growth must come from somewhere else. The typical strategy employed by CEOs is to target the second tier customer - those who don't value what they offer as much as their ideal customers do.
In order to attract this group, the company typically has to offer an incentive - financial concessions in the way of lower prices, more favorable delivery or payment terms, etc. These incentives, in essence, reduce the company's profit margins.
At the same time, these companies are expanding their infrastructure to serve these new customers, which drive overhead costs higher. Whenever you have declining profit margins and increasing costs you're not only working harder for lower margins, you dramatically increase the company's risk during economic downturns. That's the fiscal reality of any unbalanced goal.
There are ways to generate greater revenues from ideal customers, but they are often overlooked when the profit portion of the goal is implied rather than stated. So what's the message?
Setting goals is a worthwhile activity. It's counter-intuitive to make sure that the "stated" goal is balanced.
If there are topics you'd like me to address, please let me know by posting a comment or emailing me at dale@furtwengler.com.
