Improving profitability

Now that ABC has a plan to collect and join its data into a company-wide knowledge management (KM) system, it must begin answering the all-important question regarding improving profitability. Improved profitability can be achieved by utilizing the tools of the KM system. ABC can use the personal data of its customers to form a general description of its customer base. It can look at the products and services bought by the customer to answer questions regarding marketing and promotions. It can look at the internal notes on issues, complaints and resolutions to determine the best course of action when problems arise.

ABC can also improve its profitability by acting on the answers to its external environmental questions. It can improve its technologies to stay ahead of the competition. It can also utilize the technology and industry information to increase barriers to entry and effectively hold off competition for an extended period on time. The longer ABC can keep competition away from its customers, the longer it has to develop stronger relationships through increased customer service and to build up the customer’s loyalty to the company. Increased customer service and increased loyalty by the customer is a powerful barrier to entry in and of itself.

ABC can also act off the knowledge gained regarding its distributors and supplier’s power in the distribution chain. ABC can work to integrate systems and build stronger, mutually agreeable relationships with strategic alliances in order to minimize their power and increase ABC’s power in the chain. Because of the trends that can be seen from a KM system, ABC should be in a position to make educated guesses regarding its supplies and product substitutions. ABC should make it clear to its suppliers that if they cannot meet the demands of ABC’s customer to get the products delivered in a timely manner, ABC will seek out a comparable substitute from another supplier. The answers gained from the KM system will allow ABC to plan, create and implement an effective operations plan. An effective operations plan is only effective if there is also an effective financial plan. The financial plan of an organization takes into account many aspects of the business including viability, predictive accounting, operational costs and future goals, to name just a few.

In order to take a brick and mortar business and transfer its products and services online, the most important aspect to consider is the financial viability of the project. Just because a company is successful off-line does not necessarily mean that it will be a successful company on-line. Companies must live by the same business rules that traditional brick and mortar business live by. That is to say, once a traditional company expects more capital, then it should spend more money. This ‘traditional’ way of thinking, was not the direction that many early Internet retailers took. When one company, eToys, saw trouble ahead, and should have been looking to cut expenses, it still spent tremendous amounts of money on advertising.    This example is used quite often in the e-business arena to underscore the fact that a company cannot continue to show losses quarter after quarter and expect to stay in business. A solid financial plan is the first step a company must take before it takes the plunge into e-business.

Staying on this topic, we will next discuss how predictive accounting plays a major role in e-business success.

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ABC’s Goals

ABC’s main goals with its e-commerce website are to:

• Increase value to the customer
• Increase customer loyalty as a result of this value
•  Increase sales as a result of increased customer value and loyalty
•  Enter new markets and industries by utilizing end user informational data gathered from increased website usage
•  Increase the barriers to entry to competition
  

ABC’s hope is that by offering this increased level of customer service, it will create a loyalty from its customers that will translate into an increased number of sales. Further, ABC will utilize the end user information gathered from the website usage and tracking reports to better understand current and new markets. This information will help in entering new markets and will also serve as a barrier to entry from would-be competitors. One other key factor that ABC must take into consideration is the need for increased inventory. If an increase in business is achieved, the user will demand quick delivery. This can only be achieved through tighter inventory control. 

But many companies are tentative when it comes to increasing their inventory levels. This opens the door to higher costs and inventory waste. But the real problem is not the threat of increased inventory levels; the real problem is a lack of knowledge when it comes to the true costs to buy raw materials, process the goods and inventory the goods until shipment. Now hold on. This is not where an attempt to place blame on any one individual is going to happen. This is where we revisit the idea that true e-business involves system integration and information dissemination. Here is a live example: Company ABC gets a call from client XYZ. Client XYZ wants a 10% reduction in their overall cost on widget123. Now, can Company ABC tell Client XYZ ok, or will this send them into deficit on this item? Only a true e-business enabled company can give accurate results because it knows its true markup price for that item. And believe me, in a manufacturing environment, the true markup price does fluctuate quite a bit. 

For instance, if you calculate the cost of the job, that is the labor cost plus the machine time and the machine’s floor space value, and add this cost to the cost of material and add that to the proposed markup percentage, then you have the true markup price…for the moment. You see, variables within this equation change. For instance, the time it takes an employee to run a job may be less and less because of the learning curve associated with the job. If this is true, then the profit percentage actually increases as the employee becomes more proficient at running the job. E-business allows us to track work time through the scanning in and out of jobs. A work order kicks out, and it’s scanned in. The job gets ran, and it’s scanned out. The total time of that job run is saved and stored in the centralized database and awaits a manager to come along and discover that, indeed, what used to take two hours to run now takes only an hour and a half. So, yes, Client XYZ, we can meet your request and keep your business. 

So you are hopefully starting to see that e-business managers have to understand the many departments of a company in order to be successful.  The information that is gathered via e-business is used by good managers to run a more efficient and profitable business.  E-business professionals don't have to be operations managers, or IT managers, but they do have to understand how communication and data collection can help these other managers survey the business landscape.  E-business managers have to be very aware that the technology they help to institute within the organization actually touches every department.  Working with those departments to gather and disseminate that information is a big part of being a successful e-business manager. 

Next, we will discuss the fictional company, ABC, and its critical steps for success.