The focus for most managers is concentrated on the sales figures. They spend most of their time to increase the company sales so that they meet the financial targets. Hence, they can satisfy top management, the board, and shareholders.
On the other hands, the fact is financial statements do not reflect the complete picture of the company for two reasons:
- Even if the company achieved the targeted revenues and profits, that does not mean the company is on the right track.
- Financial statements do not translate company’s capabilities. Sometimes, the company may have the capabilities to achieve better revenues and profits than those stated as target.
The two stories below will explain how.
Story one: Blockbuster
Before the internet age, when people wanted to have a movie night, they would visit a video-rent store and pick a movie for few days. Then, they return the movie tape back to the store.
At the beginning of this century, there was a large company named Blockbuster that was leading the video-rent market. The company founded in 1985 and grew continuously. In 2002, the company witnesses an increase in revenues to reach $5.57 Billion. The stores expanded to about 8500 stores in USA, Europe, Asia and Australia. In USA, majority of population were living within a 10 minute drive of a Blockbuster store. Meanwhile, the market showed potential growth, as more people are willing to rent movies… in brief, that looks like a perfect present and a bright future for a company.
Surprisingly, in the following 4 years, the company lost more than 75% of its market value. In 2010, Blockbuster went bankrupt!
Why did that happened?
Short answer is: failing to respond in time.
Actually, Blockbuster followed the traditional way. To increase the sales, let us open new stores, sell more video-rents to more customers. For the next year? Let us do the same and open even more stores. While the environment changes, the business model stayed the same for many years without major changes.
On the other hand, a new company named Netflix appeared in 1997 with a new business model. Netflix noticed that more and more people started to use internet. Therefore, Instead on the huge costs of physical store, Netflix built their store online. Customers can browse their website for thousands titles. They can find more titles than displayed over the shelf in physical stores. Moreover, Netflix added rating and recommendation system to help customer reach the movies matching their taste. Then, they used the mail service to deliver the selected movies to customer location. Then in 2007, they started to provide Video on Demand (VOD) though internet.
How did Blockbuster respond?
Although Netflix appeared in 1997, Blockbuster continued for many years to acknowledge the new trend in market, they even declined an opportunity to buy Netflix at only $50 million. Instead, they continued using their old traditional model based on the good revenues (as we saw earlier in 2002).
Later on, Netflix started to win the game and acquire larger market share. Blockbuster started to imitate Netflix but they were late.
Winning the race
Competition is like a race. Even if you are at the leading position, you have to keep running. If you stopped for a while, competitors will come from the behind and take your position.
Similarly, in business you have to run all the time. If you are the industry leader with excellent revenues and no serious competition, then start competing with yourself. You have to continuously improve the way you do business, and keep an eye on the market changes so that you can respond in time.
If you can innovate, you can flip the game and set your own rules. Netflix did so with a new business model, and they kept updating and enhancing it until they succeeded. Using Innovation, apple invaded the market of smartphone, Tesla invaded the market of automotive & solar power, and that is how Google became Google we know.
Story two: Fabick Cat
Fabick Cat is a dealer of Caterpillar equipment, power systems, parts and service, and rental equipment. The company is a family business. In 1999, Doug Fabick took over from his father. At that time, Fabick performance was ok, but it needs to be better. The company was one among other 50 plus dealers covering USA, and Fabick was not in the top 25% list.
Fact is all dealers are in the same business. They all provide same products, same services and in the same country. Therefore, Doug looked for reasons behind the variance in the performance. Finally, he pointed at the employee engagement (it is a term reflecting the commitment of employees and their passion about the job). Therefore, He hired a consultancy firm that made an initial survey. The results showed that employee engagement at Fabick was only 16%.
Fabick started a program to increase the employee engagement. In the beginning, some managers were not buying the idea. They were not getting the value of focusing on raising employee engagement. However, Fabick moved on. They worked on shaping a new culture where communication with employee is a key point.
After 2 years, employee engagement was doubled to 33%. In the third years, it went up to 43%. For the financial results, according to Doug Fabick, the company achieved 600% return on investment. They invested $500,000 and made $3 million back. During the same time, the revenues increased by 15% while the profits increased 100%.
Employees make a difference
Some statistics show that unhappy workers cost the U.S. between $450 and $550 billion in lost productivity each year. Therefore, employees are the first customers. Once a company increases the employee engagement level, they got the capability of increasing the whole performance. And that is what Fabick did. Instead of applying pressure on sales teams, they achieved 100% increase in profitability using the increase of employee engagement levels.