It’s the Revenues, Stupid!

from Peter Martin’s Third Millennium Management

Peter Martin’s Third Millennium Management introduces a concise, effective and cheap management theory that “replaces in a stroke all previous strategies – the managerial equivalent of penicillin.”

According to Martin all management theories – from Taylor’s detailed time and motion studies, Deming’s total quality approach, the experience curve, and the re-engineering craze – have had cost at their heart. Sometimes dressed up as synergy, economies of scale, or core competence – cost rules thinking, and in Martin’s view this is fundamentally flawed. In the real world successful managers focus on revenues, and to do so they set aside much of management theory and ignore what they’ve been taught. They do what makes sense in practice.

So on with the theory.

The Third Millennium Economics places revenue at the heart of strategy – in other words:

“Look after the pounds and the pennies will look after themselves.”

Why? Fundamentally the new era is one in which variable costs will trend to zero, completely swamped by fixed or semi-fixed costs. And as manufacturing elements of products or services become relentlessly cheaper, the design, branding, marketing, and control elements become irresistibly more expensive. If costs are fixed, then revenues are all important. “Guesstimating revenues becomes the central task. Controlling costs, essential but unglamourous, becomes secondary, on a par with office cleaning.”

The Laws of the Third Millennium Management Theory

The First Law:

Business genius lies in imagining revenues that do not yet exist.
“When Sony’s Akio Morita dreamed up the Walkman, he wasn’t just imagining a product, he was imagining a stream of revenues for which there was no existing evidence.” Imagining those revenues was as important as designing the product that would generate them.

The Second Law:

Every company will soon find itself in a “hits” business.

“Films, TV shows, records, books – were once a class apart. Cushioned by predictable sales, other managers found the wild swings of hits businesses frightening and alien. Now, in industry after industry you are only as good as your latest product. Each new launch could be a wild success or a complete failure. Winner take all.”

Managing a hits business requires a different skill set from managing the profits of an established stable of products. Peter Martin suggests the key is a nose for revenues.

The Third Law:

Your core business is what you make it.
“In the Third Millennium world, two well-managed rivals can have completely different degrees of integration, insourcing, outsourcing, diversification, and focus – and neither of them need be right or wrong. The key is not some schematic, ultimately cost-driven analysis of where your company’s past and present strengths lie. Those will be irrelevant tomorrow. What counts is where you can derive substantial new revenues in the future, with the emphasis on “substantial,” “new,” and “future.” Whatever allows you to do that is your core business.”

The Third Millennium Management also offers several practical rules of thumb for executives:

Spend twice as much time thinking about revenues as about costs.

Avoid the temptation to devote months on the “familiar soothing” cost structure while “plucking a revenue estimate out of the air.”

No amount of analysis can make revenue forecasts accurate. Revenues are elusive, prone to error, and ‘out of your control.’ Energy and time devoted to thinking about revenues can however ‘cast a stronger light on the risks.’

Tailor your costs to your imagined revenues, not the other way around. Avoid tailoring the revenue stream to justify the costs.

Set a price for your product or service that reflects its worth, then halve it before you launch. After six months, halve it again. Avoid the common temptation of going for margin rather than market share. “Remember, revenues are what count.”

Somewhat tongue in cheek … but we know he’s right. A real insight!

Third Millennium Management, by Peter Martin, Bathos Press, New York and London. Apologies – we’ve lost track of Peter Martin and the Third Millennium Management is out of print.