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Dynamic Revenue and Expenses with Trains and Planes
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Transcript of Dynamic Revenue and Expenses with Trains and Planes
Copyright 2009change is good
The Dynamic Evaluation, Modeling and Reinvention of the underlying profitability and cash flow of existing organizations
Patrick M. O’Shei
Strategy | ExecutionChange that Matters. Results that Count.™
Making Money with Planes & Trains
2Copyright 2009AIProcessRevis021805v2
change is good
In existing organization’s the revenues and expenses seem to flow from one another…..
profitability (or margins) appear to be a simple function of :
• volume and product mix
• the costs associated with operating the organization
But….
revenues and the costs are two extremely different animals (mechanisms) when examined dynamically
The Mental Models
3Copyright 2009AIProcessRevis021805v2
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Revenue is best modeled by an airplane in flight.
Cost is best modeled by a train rolling full steam down the tracks.
Neither the Plane nor the Train can ever land or stop in an ongoing business.
A Dynamic Model for Profit
4Copyright 2009AIProcessRevis021805v2
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Revenue can:
rapidly change and end immediately!
Revenue can:
come from anywhere
as long as the plane
can deliver goods and services.
Revenue and Flight
5Copyright 2009AIProcessRevis021805v2
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Cost is
driven by design and structure
can only follow the tracks.
Trains slowly build up speed
when moving, momentum makes it incredibly hard to stop.
Cost and the Rails
6Copyright 2009AIProcessRevis021805v2
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Demand is fuel
Sales are forward thrust
Revenue generation is lift
Net revenue is altitude
Price changes are flap adjustments,
Increase to gain altitude
Lower to gain speed
Dynamic View of Revenue
7Copyright 2009AIProcessRevis021805v2
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Profitability or Market share?
In this model,
the leverage comes from understanding where demand is, how to satisfy it
and then
fine tuning pricing to optimize between growth (air speed) and profitability (altitude)
Neither creating a stall nor lowering altitude too low.
Revenue Strategy
8Copyright 2009AIProcessRevis021805v2
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Investment and Operating Expense determine the length of the train.
(credit/cash are coal cars, facilities are freight cars & employees are passenger cars)
Chosen markets determine where the train goes.
The technology employed and product design determine where the tracks are laid.
Structural View of Cost
9Copyright 2009AIProcessRevis021805v2
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Cash/Credit is fuel
Spending is forward movement
Forward momentum is debt
Long trains are harder to start and stop
A train that lacks forward thrust loses sales.
Putting on the brakes plies up debt.
A Dynamic View of Expense
10Copyright 2009AIProcessRevis021805v2
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Pursue Growth or Efficiency?
In this model, the leverage comes from understanding the market
potential and sales pipelinefine tuning between investing for future sales versus carrying just enough resources to meet current sales
Neither underfunding your capacity to move forward nor building-up wasted forward momentum.
Expense Strategy