It is now time to look at an example matrix and the coding of each of The “5 Things” (the best way to understand the analysis phase). First things first, there is a lot of red and management should be concerned. Even worse, Net Profit / Sales is red. You never want to see that.
Hold on one second. The Net Profit / Sales is red but the expenses and % of budget is purple. How can this be? Look at the Sales / Marketing core business function. There is a ton of red on The “5 Things”. This means they are not providing the Gross Profit value that is needed to increase the Return on Sales. Low sales activity ends up turning inventory turns to red for the operations team. (1)
So, who is at fault: the business plan or the execution on the business plan? Let's assume the business plan is right. The expense structure that the company is built on is purple meaning everything is going to according to plan, if only the sales department would just start working harder to bring in more Gross Profit.
Let's now assume the sales department is doing everything they possibly can under the circumstances. The problem now lies in the fact that the expense structure that the company was built upon is too high. In this case, the Sales / Marketing core business function should be set to green or purple and the expenses should be set to red and everything must be done to reduce expenses to an acceptable level. The Operations core business function must also “right size” their operations to the new sales reality by lowering their hard work output figures.
So, which one is right? It could be either but there is a valuable clue in The “5 Things” matrix that leads us to the most likely answer. Take a look at the Human Resources core business function. See the red in the Quality and Efficiency metrics. This tells us that there are no long term employees and the training program is inadequate. Since the Human Resources core business function is the cause of a company’s success or failure, this is resulting in the sales force’s sales problems.
This leads us to believe that the business model is fine, it is the execution of the sales team that is the problem. By working to reduce employee turnover and creating a better training program there is a good chance many problems will solve themselve. If, after solving retention and training the other metrics still stay read you will need to consider the viability of the business model.
(1) What would the company have to do to increase inventory turns back to an acceptable level? They would have to decrease output, which would reduce efficiencies and the value achieved. This would set the hard work, efficiency and value metric to red instead of the current green and purple. This is how the The “5 Things” metrics shows the integration across all the core business functions.