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Optimising your access to 'Jobkeeper' assistance, or qualifying for the 'Jobseeker' allowance is a big preoccupation. But there is also a business to run. This is just the time to remind ourselves of some business basics. Looks like quite a few had forgotten them.
While everyone else is spinning their wheels, and not coming to grips with the strange needs of business today, the smart money is planning for the recovery, and getting in 'pole position'. Think of the strategies you'll follow when the time comes to 'burst out of the blocks'.
This month we consider three examples of managers and directors losing sight of the basics. Disaster awaited all three businesses. One of them is Virgin Australia.
With Volume Like That We'll Be Made!
Australia was at the doorstep of the mining boom. Shifting mining products to ports needed lots of railway expansion. At the same time, modernisation of suburban rail needed a lot of railway rebuilding too.
Railway Track Clips
One company had long been involved in heat-treating steel, and greedily eyed the installation of concrete rail sleepers. They could see the millions of heat-treated steel rail clips that would be needed.
With the costs well established, and the prices tantalisingly lucrative, it was just too much to resist, and they went for it. In doing so, they forgot about one of the core management concerns, cash flow!
To get the new manufacturer's clips approved would take ten years of unending testing, product development, and international trips and negotiations. Ten years of accelerated expenses - and no revenue.
The outfit went broke. An historic Australian company disappeared forever! Never forget that in business, cash is king!
With Margins Like That, We Have To Have Some Of It!
A Victorian based company was manufacturing consumer decorator items, and selling them at wholesale. It was also wholesaling though a department store, and there the company had to provide customer selection and support assistance for the store. Their higher buying price, well above the normal wholesale, reflected the extra sales support costs.
A whole new team of 'corporate suits' at the parent company, saw the high margins in department store sales, and demanded that the sales mix be reconfigured to put a lot more weight on these high margin sales. The sales effort was redirected accordingly.
The 'head-office honchos' had completely failed to grasp the expense level that this class of sale generated. With profits nose diving, the local management was vindicated, the 'head-office honchos' were fired, and sanity was finally restored.
Looking at 'gross margin' is very important. But not nearly as important as looking at 'net margin'!
Look At Those Ticket Prices. We Should Be There!
A Profitable Virgin Blue
It is a matter of history that Australia really took Virgin Blue to its heart. Founding CEO, Brett Godfrey, conceived the idea, won financial support from Sir Richard Branson, and ran the airline for ten years. In those ten years, starting with seed capital of only $10 million, Virgin Blue generated a billion dollars of profits, paid dividends and returned hundreds of millions of dollars to its shareholders.
Virgin Lounges - A great expense
New directors, though, just like the 'head-office honchos' previously, looked at the higher prices charged by Qantas, and set about the 'misconceived ambition of challenging Qantas head-on as a full-service carrier', as noted recently by the well-respected finance journalist, Stephen Bartholomeusz.
In the next ten years it doubled its capital base, but generated $2 billion of losses as it transitioned from the old low-cost carrier, Virgin Blue, to Virgin Australia - now widely recognised as poorly managed. ($2bn in losses will do that!)
It is hard to believe that a company with 30% of the Australian aviation market, and delightfully profitable, could make such serious blunders. Now the airline is fighting tooth and claw to survive.
Serious players on large salaries and with extensive resources to support them, were again looking at the gross margins - and ignoring the expenses that come along in its wake.
Worse than that. They completely failed to see:
⊛ the very fundamentals of their business model
⊛ their target customer demographic
⊛ that their target customers like flying in an informal and fun environment
⊛ the offer to Virgin Blue customers that made the airline attractive, and
⊛ the cash that can be made with an appealing, but low cost service.
This was, indeed, a blunder of monumental proportions!
Good Management Avoids These Mistakes!
It's almost self-evident when looking at these examples, that serious misjudgements were made. As you work out your way forward, how will you avoid a similar fate?
Remember the core customer
Remember your core strength
Remember the winning USP that has served you well
Consider ALL the costs any new move will bring
Carefully establish the net margin your new idea will generate
Check that the new net margin exceeds the cost of capital
Clearly, Virgin Australia flummed all these points. Great learning for you!
When business gets going again, make sure your plans for profit are based on sound judgements - not just dreams!
Keep communicating again and again. Remember: Your loyal customers' normal buying patterns will be changed forever. You want them back when it's over. So communicate to the 'nth' degree. Be sure they don't forget you. We can help you do this...
The COVID-19 pandemic had not been declared at the time of our last edition, when we promised a return to our normal series. Life is not normal right now, so our normal series for 2020 will also be on hold for some time.
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Any advice, information or comment contained in this document is general in nature, and should not be relied on as the basis for any specific commercial, business, employment, or financial decision. Specific advice should always be obtained for each individual circumstance. Accordingly any advice, information or comment contained herein is for general guidance only.