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Actual meaning of enterprise’s losses

 

“Absolute loss where net profit is negative is obvious, while relative loss is strongly hidden. Undoubtedly being involved, but the enterprise itself cannot find it objectively. In particular, with the fast development of economy and industry, this situation is more prominent, but the enterprise indeed shows a “synchronous” development. The hidden relative loss will bring strong damage to the enterprise, and when such damage is truly represented, the hidden relative loss will eventually transform to dominant absolute loss.”

———–Zhang Landing, Cyamlan Investment
The globalization tide has made the Chinese enterprises grow quickly together with the open and reform policy of the country, leading them to the focus of the world. Because of fast development of the Chinese economy, the changes of industrial development are rapid. In several years China achieved relevant evolution in economic journey of the past 100 years of the developed countries. When we put our vision to those successful enterprises, we usually forget that they are only the small part that won temporarily in heated competition and pressure. If we explore further, we will find out that many enterprises are still in loss, operation failure or at the edge of insolvency. Certainly, many enterprises are closed before experiencing a whole life circle.
If these failed enterprises are willing to introduce modern management approaches and appropriate strategic implementation system to participate in market completion, a lot of failures that in fact could be avoided with ease.
In heated competition, enterprises only realize that the competition is getting more and more severe, sighing that the “business” get more and more difficult, and profits are less and less, but very few have realized that maybe they are actually in “loss”. They think that they are still making profits, and loss is far from them. If an enterprise is not able to realize its own loss, it is far from talking about turning loss into profit.
The loss in our general idea t is usually refers to absolute loss. Its specific performance is that the net profit of an enterprise is negative due to improper strategy decision and operation management. We call it enterprise loss, which is visible, and can be observed clearly by operators, owners, management personnel or employees of the enterprise through the equity statement. As long as the net profit is positive, the enterprise would take for granted that it is not in loss. Is this a fact?
What is the true meaning of enterprise loss?
Absolute loss where net profit is negative is obvious, while relative loss is strongly hidden. Undoubtedly being involved, but the enterprise itself cannot find it objectively. In particular, with the fast development of economy and industry, this situation is more prominent, but the enterprise indeed shows a “synchronous” development. The hidden relative loss will bring strong damage to the enterprise, and when such damage is truly represented, the hidden relative loss will eventually transform to dominant absolute loss.
We may explain different situations of relative losses suffering by enterprises from the eight dimensions below:
First of all, the market price of the product of the enterprise is lower than the average price of the industry for long time, and the cost of enterprise is higher than the average standard of the industry, both of which will directly lead to the profitability of the enterprise lower than the average standard of the industry. This is a typical relative loss. Some enterprises choose the low-cost competition strategy, so it is normal that the market price of an product is lower than the average price in the market, but the cost of the enterprise will also be lower than the average cost of the industry, only under such situation, the enterprise’s profitability will be higher than the average standard of the industry. If an enterprise chooses the low cost strategy, while its cost is higher than the average cost of the industry, it might be the problem of performance of strategy, or financial control, but eventually this enterprise will show that its profitability is lower than the average standard of the industry; although the final result on the enterprise’s income statement is positive, in fact it is in “loss”, but shown in a hidden way. Another situation is that the low-cost strategy chosen by the enterprise does not match its market scale, so the market share of the enterprise fails to reach the fundamental scale needed for the low-cost strategy as estimated, when the enterprise will face significant challenge in strategy performance. If continuously performing the low-cost strategy to expect to occupy bigger market scale, the enterprise shall quickly adjust its disadvantages to “turnaround”.
In addition, if the market price of the enterprise is relatively higher than the average price of the industry, the key to decide the profitability is the own cost control capacity of the enterprise. Effective control of cost does not mean that only saving all the expenses is the best, but the asset allocation efficiency shall be the highest.
Secondly, the growth speed of an enterprise is lower than the average growth of the industry, which is typical value depreciation. The fast development of Chinese economy as well as the preferential policies from the government to encourage development has facilitated quick development of many industries. On the fast train of industrial development, almost all the enterprises that catch the train will harvest. However, usually only 5%~10% enterprises have exceeded the speed of average development of the industry, most of them are just in the free ride. The growth of the enterprise is far from catching the speed of the development of such industry. Although the final result of the income statement of the enterprise shows continuous increase, in fact the enterprise actually shows hidden relatively loss.
On one hand, industry has periodicity; on the other hand, the fast changes of market and policies have shorten the periodicity or made it very irregular. This has urged the enterprises must accelerate in strategy adjustment and the time window for implementation during the high-speed growth period, capture and realize the high-speed development of this round. The enterprise needs use more subtle countermeasures internally. Many enterprises are not able to quickly fulfill such changes, and their capacities cannot support themselves to grasp and use the strategy windows, and the eventual performance is that their growth speed is far lower than the average growth of the industry. It is easily seen that the market share of an enterprise is decreasing rapidly although the sales volume keeps growing. In order to solve the growth problem, enterprise shall adjust its disadvantages to make itself “turnaround”. Thirdly, operation efficiency of enterprise is lower than the average operation efficiency of the industry. This situation is more hidden. Many enterprises mutually consider each other as competitors and are quite hostile, rarely carry out communication or exchange. Therefore, enterprises do not know the operation status of their competitors. Usually the default values for comparison are their own operation efficiencies in the past. The way to compare with itself, although can facilitate the enterprise to keep improving, also easily forms the pattern of relative closing.
Operation efficiency is closely related with cash flow. Generally speaking, operation efficiency is cash flow. If the operation efficiency of an enterprise is lower than the average value of the industry, it means that under the same business, more cash is used. In another angle, with the same cash flow, competitors will have more production value. Then, the enterprise should regulate its own deficiency. This situation is a typical relative loss.
Fourthly, lack of basic strategic implementation system. The Chinese enterprises have not experienced long time of development that many of them grew quickly after 2000. In the process of development, in order to survive and develop, most of the enterprises focused on business exploration, and strategy implementation system is basically remaining in “naturally development” status. Enterprises are lack of clear strategic planning, and organization structures have been transformed naturally according to the needs. These are the largest difference between Chinese and western enterprises. European and American corporations that come to China are also using local employees, but they can make themselves big and strong. On the contrary, there are very few Chinese enterprises of the same scale; even so, they do have different styles and efficiency. Why? The only difference is strategic implementation system. After several years of adjustment and optimization, European and American enterprises have already very matured strategic implementation system. Such different affects various fields including cost control and operation efficiency of enterprises. Until now many senior management personnel of enterprises cannot describe the fundamental concept of the strategic implementation system. The ability of these enterprises in creating wealth when controlling effective deployment of assets is still a question. When enterprises are calling for execution, it cannot be neglected that strategic execution is to highly rely on the strategic implementation system to adjust the deficiency of an enterprise to make “turnaround”.
Fifthly, fast leaving of human resources, which has become a crisis for enterprises, showing that the “capacity” of enterprises is losing; meanwhile, the sunk cost of enterprises in human resources has been increased. Obviously, enterprise shall recruit new staff to substitute those who have left. There is a period for new staff to take the job, and a process for getting familiar with the position and the training. This process has already paid for those who left, and now it has to be paid again for newly recruit staff. Besides increasing cost, the staffs that left from the key positions will let some enterprises lose part of the capacities, lack of which, the enterprises will not be able to effectively implement the strategies, or need to extend more time to compensate. In addition, the loss of human resources is also caused by the enterprise’s lack of strategic implementation system and effective incentive strategies, being a multi-directional problem. Enterprise needs quickly adjust its series of strategies and countermeasures to effectively “turn around”.
Sixthly, fast declining of service and quality is also an important signal of enterprise’s crisis. If compared to the past of the enterprise, service and products quality decrease, it might be due to the internal system control of the enterprise encounters problem. If such situation stays for long time, it will inevitably cause the clients’ dissatisfaction and the leaving of the clients, and directly lead to the decrease of business performance, and eventually evolve to the crisis of the enterprise. Hidden relative loss will soon be transformed to dominant absolute loss.
If, compared externally, quality of service and products decline fast, it is a prominent signal showing that the enterprise has lost is competitiveness. Usually, when a competitor introduces a new product or service, no matter due to failure of judgment of strategy or insufficiency in strategy implementation, the enterprise will encounter the situation that the clients are dissatisfied with the service or products due to the introduction of strongly competitive products of the competitor, which will objectively cause “fast declining” of quality of service and products. It is simple, because the competitor has increased the competition advantages. Facing such situation, enterprise should quickly “turnaround” to catch up with the steps of the competitor and keep innovating, otherwise hidden relative loss will soon be transformed to prominent absolute loss, and the enterprise will lose the best timing for adjustment of strategy.
Seventhly, the enterprise stands still in its development for long time, while the competitors are developing quickly. Many enterprises, when having developed to a certain period of time, will show certain sense of satisfaction, and even feel superior, just like the rabbit that won the running competition with the turtle. When this superior feeling is passed from the senior management to the root of the enterprise, and form the corporate culture, the crisis sneakily arrives.
Certainly, lack of clear competition strategy will cause the development of the enterprise stop. Competition strategy is usually raised by senior management of the enterprise, and clearly transferred to management staffs at all levels. This is clear strategy of an enterprise participating in market competition. Many enterprises have not raised clear competition strategies, and the management personnel and handlers execute according to their own “understanding” on the company’s intention. The results will not be consistent.
In addition, the lack of crisis awareness of the company is an important reason. The fast development of competitor is a dangerous signal, which means that we failed to win the market share in this round of competition. Compared to the fast development of the competitors, our slow development signifies relative loss, no mention standing still. Eighthly, failure in reform or innovation for many times. No matter reform or innovation, it is a challenge to the enterprise. If such challenge comes from outside of the enterprise, the enterprise has to be reformed. There are many external factors that cause passive reform, including change of competition environment, change of market position and change of technology tendency. Once such change occurs, it will force an enterprise to quickly adopt countermeasure in reform, and usually the time window for strategy will become very tense. If the enterprise cannot get hold of it, the time window will close instantly and eventually evolve to the crisis of the enterprise. Hidden relatively loss will very soon become dominant absolute loss. If such challenge comes from inside of the enterprise, it might probably adopt active reform. Usually reform will encounter strong internal resistance because it will change the power of the enterprise and re-distribute the profits, and usually the highest resistance comes from the senior management of the company. Therefore, the active reform inside an enterprise relies on strong promotion of operators, who are the “engine” of reform, and the efficiency of reform depends on the power of the engine. Another factor related to reform is time. Usually the more urgent is the time, the reform will be more intense, which will be more difficult and thus has higher possibility of failure. No matter which of the above eight situations is, undoubtedly, it is performance of relative loss. Enterprises usually stay the concept of loss on the absolute losses in negative values on the income statement, but very few enterprises realize actively that they might be in the status of relative loss soon. Therefore, crisis has arrived quietly. If we do not adopt any strategy to “turnaround”, hidden relatively loss will very soon become dominant absolute loss.