The 2nd in a series of blogs on: “Rethinking Business Assumptions and Models”
The Origins of Financial (Beliefs) Management
Financial reporting for business has been complexifying (and increasing in cost) since 1494 when: double-entry-accounting and the balance sheet were invented. Since we swim in financial numbers, it’s the language of business and blinds us to believing in and using other insightful analytics.
The History of the 1%-Optimization Model:
- The “DuPont Profit Model” was invented in 1912. Wikipedia it! The model asked: “What would happen to Return on Equity by improving one or more of the model’s input variables by 1%?”
- By 1970, distributors had boiled 1% thinking to these mantras: buy Low, sell high; hire cheap, work hard; collect early, pay late; and SELL MORE. “Sell More” aside, these rules are all zero-sum, shareholder-wins, “partners” lose propositions. Ambitious Chiselers don’t see or count the costs of: mistrust, retaliation and being distracted from innovating to expand the pie for all-stakeholders to win.
- By 1976, Management Foresight, Inc. with front-man Ron Foster sold many distributor trade associations on: financial surveys; new-ratio reports; and seminars to deploy next-level financial insights. Terms like: turn-earn; GMROI; velocity pricing; Personnel Productivity Ratio (PPR); etc. – all had their day.
- The (DuPont) 1%-model still underlay the smoke back then and is preached today. Yet, after 45 years of surveys, 90% of regular participants get unchanging survival returns. But, best 5% perennially get 4-6 times the ROI. What additional, profit-power, analytic models are they using?
Complementary Models to 1% Optimization
In the early ‘70’s, the 11 elements of Total Procurement Cost (TPC) emerged. This model looks at buying as a system with “price” being the only readily measured element. Evolving TPC-thinking has shaped the world’s best, evergreen replenishment systems. But, most distributors don’t buy or sell TPC benefits.
In the early ‘80’s, service-quality math emerged. “Zero Errors” got traction. But, pursuing the economics of the “Service Process Chain” fizzled. Product centricity (pushing commodity-channel-loading promotions with rebate bribes) ruled then and now.
Another early ‘80’s model was “order-size economics” for doing “customer profitability analytics” (CPA). CPA got a second cheer in the early ‘90’s with (too complicated) “activity-based-costing”. And, then a breakthrough from Waypoint Analytics starting in ’09. But, MORE customers and margin dollars – whether profitable or not – still rule. Quantity with lower profits beats more profitable, targeted quality.
Next Week? Take “buy low” to a better level.