Integration strategy key to margin management: new methodologies allow companies to take a systematic approach to improving profitability without having to undertake a massive transformation.

• Author: Stasz, John F.
• Position: Profitability - Gross margin management

There is an old New England saying, "What a tea bag and management have in common is that you don't know if they are any good until you put them in hot water." In today's business climate, there is sufficient "hot water" for both tea bags and management. The "build market share and someday profits will come" philosophy of the dot-coin era is being challenged by shareholders who are demanding profitable growth, with the emphasis on profitable.

A very useful approach to improving a company's profit performance is to use new gross margin management methodology. MarginMax[C], for instance, is a cohesive, systematic approach that provides a way to generate significant profits by focusing on the existing value-creating activities of the core business, without embarking on a major transformation that could take years to implement.

Improved gross margins are one of the most powerful levers of financial performance. A $500 million company that can increase its gross margin rate by 3 percent will add $9 million to the bottom line and $225 million in shareholder value (Figure 1).

Key Drivers

Many companies do not fully understand or utilize the powerful leverage of a system like MarginMax, which focuses on gross margin as the leverage point and integrates all the key drivers of gross margin into a comprehensive improvement program that aligns from strategy to daily execution. The key word is integrated. Companies that employ this integrated methodology will be more successful in delivering sales growth, bottom-line results and shareholder value. Added bonuses of MarginMax are improved customer satisfaction and the removal of internal barriers that separate departments and disciplines.

Gross margins are defined as both gross profit dollars and gross margin percentage. MarginMax aligns the organization to facilitate understanding and management of all the key drivers that maximize gross margin. These critical drivers are:

Operational performance

Pricing strategy and process

Product management process

Customer management process

Sales effectiveness

Each of these drivers must have concrete, margin-related objectives; concise, margin-related measurements; and clear ownership in the organization. Each has a substantial process element, which requires a strong cross-functional team effort for successful implementation and continuous improvement.

This process-aligned team approach may require changes for a company with a traditional functional organizational structure and mentality. Maximizing gross margins requires focus on the right drivers and alignment of these objectives by the senior management team to the front-line people closest to the action. Integration, focus, alignment and teamwork sound simple conceptually, but few companies do it. The good news is that all can.

Synergy Among the Key Drivers

The synergy that results from understanding the interdependence of these key drivers -- and executing an integrated approach -- will produce results greater than the simple sum of the parts. Each key margin driver improvement will have a direct, positive...