Category Archives: Operations

Product Line Analysis or Knowing Where the Profits Are

Posted on by

An important step for every business manager is to understand where profits are coming from. Too many managers are relying on  the basic Profit and Loss statement that comes to them from their accountant. This is not always a useful management tool.

Lets take a look at a situation where a web-based services company is experiencing good growth and reasonable profits. They have four lines of business addressing their single basic service to four different markets. Based on their market analysis, they decide that they will focus their marketing dollars and development resources on one of the four for the next year.

Six months into the mission, sales have continued upwards, but profits are not tracking along at the same rate, the quality of earnings is suffering. Why is this happening?

First they muscled their way through some spreadsheet work sorting out their COGS (Cost Of Goods Sold) and reassigning previously Fixed Expenses in marketing that really could be assigned to each of their four market areas. Then they discovered that the the market segment that they had focused their efforts on had never been very profitable and they had made the situation worse by increasing the sales volume through it.

On closer analysis it became evident that the lack of profitability came from two sources. First, the marketing costs of acquiring customers in  this market channel had been 60% higher than in  the others. Second, the vendor providing the back office services supporting this channel was 30% more expensive than vendors supporting the other market segments. In the short run, the managers decided to shift their focus to another one of their markets. In the long run they decided to search for a better vendor and conduct some research on why the marketing costs were so high.

So, if you have a business where you are selling more than one product or service to more than a lone customer, think about developing the financial management tools that will tell you where your sales and profits are actually coming from.

“Moments of Truth” and Service Operations

Posted on by

We have recently added a new feature to our operations improvement work for services firms.

To improve the productivity, responsiveness, and quality of services, a common and very valuable approach is to organize a cross-functional team and value stream map the activities. This quickly produces many opportunities to improve flow, simplify tasks, and shrink response times. One frustration with this technique is that it provides no approach to how to model the “moments of truth” that are really the focal points for all service production.

Moments of truth are those interactions with customers (these can be in person, over the telephone, and via a web interface amongst others) during which a service is created and delivered. It is the moment when a question is asked and an answer provided. Or, it is the more complex environment in which the service provider and the customer collaborate, even if briefly, to solve some problem with a product.

In the end, even if you get all of the other aspects of your service production right, if the moment of truth goes awry, the customer leaves feeling less than satisfied. The customer perceives the service to be inadequate.

So, building on work by Christian Gronroos and others, we have started working with a service model that we call “MT” to capture all of the key elements required for a successful service event. This is adding significantly to the richness of our value stream mapping and filling this gap in performance improvement.

For a challenging introduction to moments of truth, see Christian Gronroos, Service Management and Marketing: managing the moments of truth in service competitition (Lexington Books, Boston 1988).