Understanding why your profits aren’t growing is crucial for any business striving for long-term success. While each business situation is unique, there are typically three main areas to explore that could be affecting profitability: market conditions, capacity constraints, and cost or quality issues. To diagnose these, a Profit Drivers Tree is an effective tool to break down these factors and get to the root causes.

Let’s explore each area in detail:

1.1 Market Conditions: Not Enough Sales, but Sufficient Capacity

One of the primary reasons your profits might not be growing is due to insufficient sales. This can happen even when you have enough production capacity. Essentially, you're ready to deliver more, but the market demand isn’t high enough to absorb that capacity. This could be due to factors like:

• Poor Marketing Strategies: Are you reaching your target audience effectively? Perhaps your marketing campaigns are not resonating with potential customers.
• Market Saturation: Is your product or service oversupplied in the market, making it difficult to stand out?
• Changing Consumer Preferences: If you’re not evolving with market trends, you may find that consumer demand for your product is decreasing.

For example, Kodak missed out on the digital photography revolution. Despite being a leader in film-based cameras, Kodak didn’t adapt to the digital shift in time. As a result, despite having the capacity to produce more cameras, the company couldn’t capitalize on the market demand for digital alternatives, ultimately losing its market leadership.

We would not develop this type of issue further in this course.

1.2 Capacity Constraints: Lost Sales Due to Insufficient Capacity

In contrast, your business might be losing out on profits because you simply can’t meet the demand for your products. This happens when your production capacity is too low to fulfill customer orders, leading to:

• Missed Opportunities: Customers go elsewhere because you can’t deliver on time or in the volume they need.
• Overburdened Resources: Production systems and employees might be stretched too thin, affecting quality and speed.

For instance, Apple faced supply chain constraints during the launch of some of its products, such as the iPhone. Demand was so high that production couldn’t keep up, leading to product shortages. Even though they had a high-quality product, their inability to meet demand during peak times resulted in lost sales.

This obstacle would be researched further in the chapter Value stream mapping.

1.3 Cost Issues: Are Your Costs Too High?

Another reason your profits might not be growing could be excessive operational costs. High costs eat into profit margins, even if you’re generating solid sales. Cost inefficiencies can be caused by:

• Excessive Waste: Poor resource management, excess inventory, or overproduction leads to waste that unnecessarily drives up costs.
• Inefficient Processes: Outdated equipment, long changeover times, or poor workflow designs can result in high operational costs.
• Rising Material Costs: If raw material prices are increasing, this can significantly impact production costs.

Example: Nokia, once a dominant force in mobile phones, failed to control its costs effectively while competitors such as Apple and Samsung optimized their processes. As Nokia’s costs grew due to inefficient production processes and an inability to innovate with changing market demands, it lost its competitive edge, leading to a sharp decline in market share.

This obstacle would be researched further in the chapter Value stream mapping.

1.4 Quality Issues: Is Your Product or Service Falling Short?

Lastly, if your product or service doesn’t meet customer expectations, it could be a significant factor in stagnant profits. Quality problems might lead to:

• Customer Complaints: Negative feedback can damage your brand reputation and lead to customer churn.
• Returns and Rework: If products are defective, you’re not only losing out on the sale but also incurring additional costs to correct the issue.

For instance, Volkswagen’s diesel emissions scandal damaged the company’s reputation and bottom line. Although the cars were selling well, the failure to meet environmental quality standards led to billions in fines, recalls, and a loss of trust from consumers. The cost of this quality failure outweighed the sales they were generating.

Conclusion: A Balanced Focus on Market, Capacity, Cost, and Quality

To effectively diagnose the root causes of stagnant profits, it’s essential to systematically explore all three main drivers—market conditions, capacity constraints, and cost or quality issues. Once you identify where the problem lies, you can implement targeted solutions such as:

• Revamping marketing strategies (not part of the course)
• Expanding capacity or optimizing existing resources
• Identifying cost-saving opportunities or eliminating waste
• Improving quality control and aligning product offerings with customer expectations.

In summary, understanding the interplay between these drivers and tackling the most pressing issues will set your business on a path to profitability and sustainable growth.

Practical task

Review your production using profit driver tree and define key issue to be solved:

• Increase sales by removing capacity constraints
• Increase sales by removing quality issues
• Decrease variable costs to improve margin
• Decrease fixed costs to improve profit

Define the goal for the following chapter, ie decrease variable cost of product (the one we asked customers about) by ...% to reach client demand and/or to improve profit by ... % by ... (date).

As a measure for decrease costs or improve quality use CTQs or your aspiration as a manager based on the technically possible minimum.