Many companies get mired in translating transformative strategic goals into executable action. The aspirational P&L creates a useful framework to manage projects and engage in change-management initiatives with clear measures mapped to each area of an income statement. This approach is highly relevant today, given the devolving economic conditions — including rising inflation, ongoing supply-chain disruption, and a tight labor market — that are putting pressure on profitability.
A 95-year-old industrial company had been growing at its usual low-single-digit pace when a new senior leader challenged his team to accelerate growth — specifically to raise EBITDA (earnings before interest, taxes, depreciation, and amortization) by 500 basis points, from 15% to 20%, over the next five years.
The pushback from the management team was swift and decisive. They doubted that such a goal could ever be accomplished, even with a five-year timeframe. As they saw it, history had proven that their value proposition had already maxed at what they viewed was possible for a mature legacy company, given its customer base, product lines, and markets.
Undeterred, the senior leader challenged his team to dissect the profit and loss statement (P&L) and compartmentalize how they might achieve the desired improvements. He knew from prior experience that many companies got mired in translating transformative strategic goals into executable action. So, he specifically asked the team to not be afraid to set big hairy audacious goals (BHAGs) around key areas of the financial statement — revenues, margins, operating expenses — and then set about trying to break down those goals further to make the seemingly impossible achievable.
We call this process the aspirational P&L. Everyone in an organization operates somewhere in the P&L. The aspirational P&L creates a useful framework to manage projects and engage in change-management initiatives with clear measures mapped to each area of an income statement. This approach is highly relevant today, given the devolving economic conditions — including rising inflation, ongoing supply-chain disruption, and a tight labor market — that are putting pressure on profitability. The example of the 95-year-old industrial company provides insights into how companies can optimize all aspects of the profit equation, specifically by shifting the focus away from the overall target to identifying the precise levers that could lead to the desired improvement.
The Aspirational P&L in Action
For managers at the 95-year-old industrial company, the aha moment came when they recognized that parsing out the big, hairy, audacious goals into various business segments made it seem attainable. Specifically, the company s aspirational P&L targeted three areas — revenue, gross margin, and overhead (sales, general and administrative, or SG&A). In each area, leaders asked four key questions to broaden thinking beyond the status quo and identify actionable steps:
- How can we break out of our current assumptions to identify what s possible?
- How do we translate these aspirational improvements into actionable changes?
- Can we make this a repeatable process and toolkit?
- What level of investment is necessary to deliver the change?
The goal of improving EBITDA by 500 basis points was broken down to engage functional managers across the company in determining how and where improvements could be made in the three key areas:
Revenue
To improve revenue, the company s goal was to grow at a greater rate than in recent years. Managers examined the revenue process in all its components: marketing, selling, and distribution. Rather than sticking to what the company had always done, they were empowered to challenge the end-market strategy, i.e., how specific markets were reached through different channels.
For example, the company had never really gained traction in selling into the oilfield market, despite having products that were equal to or better than competitors offerings. The senior manager asked the team to identify the top 10 global distributors in this segment, and the company bought six of them. In addition to marketing its product line through these acquisitions, the company added service and maintenance elements to the product, which resonated with customers. As a result, the oilfield business segment grew its profits tenfold.
Gross Margins
To improve gross margins, the company s goal was to systematically broaden the gross margin percentage by assigning improvement targets to all input lines of the P&L. Managers broke it down into actions such as examining pricing strategies, as well as lowering the cost of goods sold (COGS) through achieving greater efficiencies in material procurement, reducing fixed overhead footprint, and optimizing labor input (both direct and indirect).
Instead of viewing prices monolithically, the team looked at the line item (or stock keeping unit [SKU]) and customer segment, as some SKUs were more demand elastic than others, depending on competitive factors and buyer characteristics. (Sony recently took a similar approach, raising prices for the PlayStation 5 in several regions due to higher manufacturing costs, while simultaneously redesigning the internals of the system to lower costs.)
The 95-year-old industrial company also pivoted from a product/region focus for its commercial products to an applied end-market focus to deliver better margins by matching the totality of the value proposition with markets that most appreciated it. This led to double-digit growth in key markets like transportation, agriculture, construction, and energy.
Overhead and SG&A
Reductions in operating expenses are a common goal for many companies in today s challenging economy. (Intel, for example, has announced plans to reduce overhead costs, cut sales and marketing costs, and decrease third-party contractor expenses, in addition to personnel layoffs — each area an individual component that adds up to operating expense reductions.)
When challenged to achieve a fixed overhead target, operational leaders at the 95-year-old industrial company couldn t see a way to get there with current operations. The senior leader then encouraged them to start with a blank sheet of paper instead of working off of prior budget assumptions. Reframing the problem unlocked the managers creativity. They determined there were too many production sites given their revenue footprint, which allowed them to identify the best sites and rationalize the system where needed. Ultimately, six sites were closed without a loss in overall system capacity.
By breaking down the lagging indicator (the BHAG goal of 500 basis points of improvement in EBITDA) into various functional areas and then taking action steps, the industrial company accomplished its goal in two years — far faster than the original goal of five years. Along the way, they learned several key lessons that further elevated the appeal of the aspirational P&L. The company took a hard look at the macro demand drivers for the next 20 years in its industry and broke those down across different regions of emerging and mature markets. The driving question was: How are we situated to solve those end-market trends?
As a result, this nearly century-old organization transformed itself from a company that sold the products it liked to make (but did not necessarily lead to growth) into an organization that invested in key end-markets based on solid, 20-year macro trends. This is the final takeaway: When an organization sets big, overarching goals, the thought among functional managers may very well be, I hope someone else is grabbing onto it, because my department can t deliver that. With an aspirational P&L that breaks the goals down into bite-size strategies, everyone is co-invested in making improvements that cumulatively lead to success.
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