Out of the recession — top line or bottom line approach?

I have been watching the news and listening to the pundits, and, apparently, we are steaming out of the great recession and the manufacturing flywheel is nearing full speed.

As we all know, that’s a bunch of crap.  Many manufactures are still in survival mode where cost cutting has crossed into the ridiculous; where the best talent has been cut; and where the product development flywheel is motionless.  We are far from coming out of this thing, and the bad stuff we had to do to survive will take time to undo.

However, some companies are considering options to accelerate themselves out of the soup.  They are asking the big question – what is the fastest way out?

To me, the fastest way out is all about three things: product, product, product — do you have the right products coming to market?  Or, if not, how can you get your product development flywheel moving so the right products hit the market as quickly as possible?  But, what are the attributes of the “right product”?

I think there are two components of the right product: the top line component and the bottom line component.  The top line component (which drives top line growth) is all about function and features.  More function equals increased sales through market share and price.  The bottom line component (bottom line growth) is all about cost.  Pretty basic.  But, if your resources are limited (like most of us) and can improve only one, which should you improve?

Bottom line cost reduction is not glamorous, but the balance sheet improvment is surprisingly good.  Let me give an example.  Product A is an existing product that sells for $1000 and it costs you $800 to produce, providing $200 profit per unit.  You spend your product development resources on a bottom line effort and reduce product cost by 20%.  Still selling for $1000 but with a cost of $640 (0.8 * $800), profit dollars increase by 80% ($360 vs. $200).  Not bad especially since sales have not increased.

Top line growth has a strong emotional component which energizes people, and the upside potential is huge.  Here is an example using the same product as above.  Product A still sells for $1000, costs you $800, and you make $200 per unit.  You spend your product development resources on a top line project to add better functionality and more features.  Because you don’t have time to address the bottom line component, your costs go up 10% (to $880).  But, you do get the function and features you wanted, and the market can support a 10% price increase to $1100.  Profit per unit is up 10% t0 $220 ($1100 – $880).  Your engineering really came through and the market likes your new product and sales increase by 20%.  With all that, profit dollars increase by 32% ($220*1.2 = $264 vs. $200).

Clearly the examples are contrived to illustrate a point: bottom line cost reduction is powerful and so are top line sales growth and price increase.  And the best answer is not to choose between top line and bottom line components.  It makes a lot of sense to do a little of both, because it’s the fastest way out of the soup.

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Mike Shipulski Mike Shipulski
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