We live in a time when "bigger is better" is a popular mantra not only in personal life but also in business. All of us want big things, big improvements in life. Businesses want large year over year improvements in operations. They look for big jumps in profitability and large cuts in costs. Nobody looks for small gains--say, 1 percent.
Usually "Think Big" is good advice and works well. But often "thinking small" pays bigger dividends. So does taking a "One-Percent Approach"--a fairly simplistic approach but something that gives you a big bang of a result. When I first read about this concept it did not seem too impressive. But after working through the numbers and visualizing the overall impact, the power of 1 percent seems to be magnified manifolds.
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Most businesses strive for 10, 20 or 30 percent improvements in their operations and financial numbers. To them going for larger improvements seems to be the only plausible way to move forward. However, in these turbulent economic times when businesses are facing a myriad of issues and problems that are putting the squeeze on their finances, such thinking may not work. Maintaining and improving profitability in increasingly price-driven markets has become quite challenging. And the bigger-is-better approach would not work.
When you are struggling even to maintain status quo and meeting last year’s number looks to be a daunting task, aiming for 30 percent gains on previous results does not appear to be possible. Heck, it might even be demoralizing to your team, as failure seems inevitable and such targets look unrealistic. On the other hand if you set a modest target--let’s say a 1 percent gain--then it would look achievable and your team would be energized to achieve it. In the current business environment ,a 1 percent improvement from the previous year seems much more reasonable and achievable than even 10 percent.
But would a 1 percent gain do the trick for you? What would happen if instead of planning for 10 percent improvement you plan to make only 1 percent improvement in all your activities? How would your statement of operations look if you make such small improvements in all areas? Pretty impressive, I say. But you do not have to take my word for it. You can let the numbers tell you the story.
To see the impact of this approach, we would need to make some assumptions. Let’s say you sell 25,000 units of a product with a unit price of $100. Let's also say that your cost of goods sold is 40 percent of sales, your marketing and promotional efforts are 20 percent and other overheads are 35 percent, which gives you a before income tax profit of 5 percent of the sales. These are average figures. Your business may have some variations, but by-and-large this paints a fairly common picture.
Now imagine if you could make 1 percent improvement in all of these areas. If you run the numbers, your old and new statements of operation would look something like this.
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Old |
New |
Improvement |
|
Total Units Sold |
25,000 |
25,250 |
1% |
|
Unit Price |
$100 |
$101 |
1% |
|
Total Sales |
$2,500,000 |
$2,550,250 |
2% |
|
|
|
|
|
|
Cost of Goods Sold |
$1,000,000 |
995,000 |
1% |
|
|
|
|
|
|
Gross Margin |
$1,500,000 |
$1,555,250 |
4% |
|
|
|
|
|
|
Marketing and Promotion |
$500,000 |
$485,000 |
1% |
|
Other Overheads |
$875,000 |
$867,000 |
1% |
|
|
|
|
|
|
EBIT |
$125,000 |
$199,000 |
61% |
By improving only five areas by 1 percent we would achieve a 61 percent increase in profits. You can imagine what would happen if you improve upon more activities. On the other hand, even if you do not increase the price but achieve other goals your EBIT goes up by 39%. And if you do not increase the sales too, then the EBIT goes up by 19%.
Shocking results, right? Of course this is a very simplistic application. Most businesses are more complicated than our example. Application of the One-Percent Approach on individual businesses would give different outcomes. But these are impressive numbers, and they do demonstrate the power of taking small steps and thinking small. So next time when you get the pressure of showing big improvements, then think small and aim for 1 percent improvement at the lowest level of operations. By the time you go through all other levels, that 1 percent improvement would deliver huge result to your bottom line.
Strategic and results-oriented, Sunil has more than fifteen years of experience in management and IT consulting. An entrepreneurial consultant, he had founded a business-to-business eCommerce company for Building & Construction Industry, Sunil has provided consulting services to large and small firms in the
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