In these turbulent economic times businesses are facing a myriad of issues and problems that are putting the squeezes on their financial conditions.
Maintaining and improving profitability in the increasingly price-driven markets has become quite challenging. And the matters are not helped with the growing popularity of the mantra ‘Big is Better’ which says that if you want to make improvements then it should be 10-20-30 percent or more.
However, at times thinking small does produce greater results than thinking big. One such thinking is the ‘One-Percent-Approach‘ – a fairly simplistic approach but something that gives you a big bang of a result.
What will happen if instead of planning for 10% improvement you plan to make only one percent improvement in all your activities?
One percent improvement from the previous year seems much more reasonable and achievable then 10%. How would your statement of operations look if you make such small improvements in all areas?
To see the impact of this approach we would need to make some assumptions. Let’s say you sell 25,000 units of your products with a unit price of $100. Lets also say that your cost of goods sold is 40% of sales, your marketing and promotional efforts are 20% and other overheads are 35% which gives you a before income tax profit of 5% of the sales.
Now imagine if you could make 1% improvement in all of these areas. If you run the numbers then your old and new statements of operation would look something like this.
Shocking results. Right? By improving only five areas by 1% we would achieve 59% 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%.
These are impressive numbers. Application of One-Percent-Approach on individual businesses would give different outcomes. But this demonstrates the power of taking small steps and thinking small.