Listen to any earnings call or executive presentation and you will likely hear the terms “top line” and “bottom line.” These are words used to describe a business’s performance. According to Investopedia, the words are defined as follows:
Top line refers to the gross figure reported by a company, which is primarily revenue or sales; it’s the first item on an income statement.
Bottom line is net income or profits after all costs, taxes, and other items have been deducted from the top line; it’s the last line on an income statement.
While these terms on the surface reflect numbers, there are many layers of additional context that go into each outside of what is shown on the income sheet. For the next ~1,000 words (4-minute read), we will peel back those layers in a fake consumer products case study that takes the two well-known terms and relates them to both sales and operations. “Good performance” drivers for sales and operations are different, but together they are essential units within a business. To illustrate this, we are going to examine Fake Company, Inc.
Fake Company, Inc.
Welcome to Fake Company, Inc.! Here at Fake Company, Inc. we produce widgets in our plant and sell them for Monopoly Dollars. As a company, we have grown steadily since our company’s inception and want to look back in order to see how we can optimize our current performance as well as look forward at how to best strategize for future growth.
Our issue is that our top line growth is being outpaced by increasing costs, resulting in a bottom line that is lower than we would have hoped.
The company launched in 2015 with a standalone product — the i-Widget. Upon entering the market, the i-Widget made a quick splash among consumers with sales increasing year over year. But, in the most recent all-hands meeting we became aware of a disconnect between our sales and operations departments.
Sales (Top Line):
The sales team sold the i-Widget at a good clip during the first couple of years. Already seeing growth year over year, the team was excited to hear interest from customers in creating a suite of products. In 2020 (a year of change for Fake Company), four additional products were rolled out. The sales trail was hot, as the team was able to double their yearly incremental revenue increase by offering all five Fake Company products. However, it was clear that the new products acted as competitors with the i-Widget resulting in a decrease in sales units of that item (product cannibalization). That said, revenue is growing, so all is good. Right?
Operations (Bottom Line):
Fake Company’s plant opened its doors in 2014 as the company worked towards a 2015 launch. The space was designed to produce i-Widgets at high speed as projections showed that the product was going to sell fast. One important note about Fake Company is that there is a constraint that prevents them from expanding or opening any additional plants. The operations team was aware of this and strived to maximize throughput in the given four walls. As orders increased in the first couple of years, the team was able to produce the required i-Widgets, but conversation began about how they could produce even more as sales expectations increased. Things became exponentially complex when the four additional products launched in 2020. Operations had to allocate resources away from the product it was designed to build to also produce the new products. As a result, the cost per good sold increased while overall throughput decreased.
Connecting the Disconnect:
While you may have identified the “correct” course of action for Fake Company, there is not a one-size fits all approach. The list below captures some considerations when working toward a path forward.
Power SKUs: Which items drive the most revenue / profit? A variety of items may be nice, but typically a select few comprise a large portion of a company’s sales.
Sales Price: What is the supply and demand (dictated by the market)?
Operational Synergies: Are the manufacturing processes for products entirely distinct? Can they overlap to share operators and equipment?
Market Share: What kind of player does the company want to be in the market? How does that change by perfecting one product vs. offering a suite of products?
Consumer trends: Consumers may prefer more products, but what do you risk by only offering one?
Competitors: Are the products designed to fill a utility gap compared to competitors’ products, or are they designed to match their capability at a better price point?
Operational Capability: What is the maximum throughput for any item or combination of items?
Capital: What investments can be made to improve operations (limited in the scenario above)?
While the “Fake Study” above is meant to be an oversimplified illustrative scenario about a simple consumer products company, this flavor of scenario and discussion take place within a wide array of organizations every day. There is constant tension between the sales benefits and operational inefficiencies related to offering more products. Obviously, this is seen in the creation of physical products, but also applies to software, services, and any other type of business where offering more could mean sacrificing certain capabilities compared to offering less.
Increasing both top and bottom line is a good thing that every business is striving to achieve. It may make sense for a company to focus more on a) increasing revenue (top line) or b) increasing profitability / lowering costs (bottom line). There is no right answer between the two and the answer will not only vary business to business but also within an individual business at different points in time.
Real-Life Example:
Let’s take a look at two players in the fast-food space — McDonald’s and Chick-fil-a.
Note that these are the observations from me the author (consumer and self-acclaimed fast-food connoisseur), actual strategies of both brands may have been intended differently than described.
McDonald’s has locations across the world with menus tailored to specific regions. McDonald’s also has the largest market share of any fast-food chain. As McDonald’s looked to establish itself as the leader in fast food, it took a top line approach, spending a fortune to quickly stand-up new locations. Originally built upon burgers, fries, and shakes — McDonald’s routinely added new items to its ever-growing menu. Today, McDonald’s offers just about any item you can think of. As McDonald’s built up the infrastructure to support its global supply chain, it has transitioned into a phase more dedicated to increasing profitability (bottom line).
Chick-fil-a on the other hand has taken a very different approach. Not only is the menu small and streamlined, but Chick-fil-a spent most of its existence having a regional footprint. Rather than being the global leader in fast food, it focused on simplifying operations and offering top-tier quality and service. Only in the past decade has Chick-fil-a began to expand across the country. At the same time, the company has increased its offerings with different variations of its famous chicken (spicy, grilled, deluxe) and seasonal items. The brand is consistently rated the #1 fast food chain in the country, yet has little to no presence outside of the U.S.
Conclusion
In terms of choosing the “right” strategy for your business, the only wrong answer is to not be aligned internally as a company, and externally with the market, on whatever approach is taken. The sales team and operations team need to work together to find the sweet spot that maximizes and optimizes the capability/quality of what can be created and sell it for a price that maximizes profitability within consumer constraints.
At Thought Ensemble, we work alongside business leaders every day to lay out these strategies and follow them through execution for both immediate needs and long-term goals. Check out some of the work we have been involved in at https://www.thoughtensemble.com/services/
Want More?
When we think about a business strategy that focuses on top line vs. bottom line, we are suggesting that one take priority over the other. We are not suggesting that the lesser priority become an afterthought. Its focus may be to a lesser degree, but it is equally as important to not lose sight of that metric’s performance. In the book The Discipline of Market Leaders, authors Michael Treacy and Fred Wiersema take this idea a step further by distilling business strategy into 3 disciplines:
- Operational Excellence
- Product Leadership
- Customer Intimacy
The book goes on to propose that each of these strategies is a proven winning strategy in nearly every business model/industry. In addition, a business must exhibit each of these disciplines in order to see success. A company can really begin to flourish when they identify one of the disciplines to focus on, while maintaining the others to an acceptable level. The authors go on to give numerous examples of well-known companies that have put these models to the test, even going into the few industry-leading mavericks who set the standard in two disciplines, coined a “Master of Two.”
