What Happened to My Strategy? Part 3 - Growth

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(Download pdf of Parts 1,2,3)

You have completed your reorganizations to survive and have been hoarding cash.  Your team has gone through the effort to understand what your customers want as the first step in developing a new business strategy for the next economic cycle, which, if like most others gives the company 7-8 years of robust growth.  The economy is slowly improving and there are many opportunities and temptations to spend cash.   On February 11^th, 2011, Bloomberg reported that companies have over $1.1 trillion in cash on their balance sheets.   Companies, large and small have been doing more with less.   This is a great tribute to productivity and careful planning in board rooms around the globe.

 

Most companies saw their sales decline 15 – 80% over the last three years.  The construction industry was the hardest hit with some companies in the southwest seeing 80% declines in sales and bankruptcy.  For the companies who did survive, growth is now the major focus.  The Wall Street Journal recently reported new construction for 2011 will see an upturn, but current indicators are that new construction will be a long bumpy road and companies that serve those industries will need to branch out.  Many other industries face the same uncertainties.

Strategies always have a growth component.  But, will lost sales of the last few years come back?  Although not a clear answer, for most companies, the answer is that they won’t.   As many companies restructured, they pared product lines, inventories, customers and whole market segments.  They focused on their core business:  the thing they do the best.   As a result of this restructuring, vendors lost sales that won’t be coming back anytime soon.  I have seen reports of companies who are more profitable now than they ever have been with lower sales.   Why?  Because they jettisoned customers, suppliers and products that produced poor financial results and got focused on their core business.

An effective growth strategy will have three growth components:  acquisitive, organic and innovation.  Many management teams will be tempted to hit the big home run through acquisition, because purchase multiples are at the lowest level in many years.   For the purposes of this discussion, acquisition includes the sub topics of joint ventures, strategic alliances and minority capital investments.  Strategies for this will include:

1. Finding producers of complementary products
2. Getting products that will serve adjacent markets
3. Expansion into unserved geographic markets
4. Creating alliances with other companies
5. Taking out weak competitors

Organic growth strategies will be focused on developing what the company already has.  These strategies include but are not limited to:

1. Getting as many old customers back as possible
2. Finding adjacent markets the company’s products can support with minimum investment
3. Identifying new sales channels
4. New product development internally or through licensing

Innovative growth strategies will focus around creating an entirely different approach to your markets:

1. Redefine the view of the markets you serve
2. Create a unique set of products and services
3. Make your competition irrelevant

Acquisitive Growth and Alliances

So the cash is burning a hole in your pocket.  O.K., let’s look at the ways you can use it.  Acquisition of another company is a way to significantly increase revenues and global presence.   It provides access and exposure to markets you haven’t served.   It potentially provides the best ROI available to you.  Choosing this strategy or going the route of a strategic alliance is very complex and requires thinking through the ramifications to your business.  It is important that you satisfy yourself in the following areas:

• Understand the needs of your customers if you are buying complimentary products to yours in the same channels of distribution.   Don’t make the assumption that because you now own another company or have a strategic alliance with one, that existing customer are going to buy those products.  You and your team have the best insight on this.  Be extra careful if you are acquiring another company in alternate channels where you expect to sell your product.   Take extra time to understand those customers and sales channels.

• Leave your ego in the trunk of your car.  An acquisition or an alliance can be a very heady thing, but it can also get ugly if you haven’t paid attention to the basics.

• Treat an acquisition strategy like any other important strategy.  It needs to be complimentary to your strategic plans for organic growth, investment, new product development, global expansion, etc.

• Don’t bet your company and its future on any acquisition.  The litmus test should be:  If this acquisition fails, can my existing company survive?   Be worst case in your analysis.

• Understand the cultural differences between your company and the one you are acquiring or aligning yourself with.  I have been through many integrations of acquired companies where few people got along and integration decisions were rebuffed and drug out.

• The first question that an executive is usually hit with from board members is:  How much money are you going to save?  The temptation is to report large synergies in every area and to overestimate the cost savings.  Rarely does any acquisition go completely as planned.  System integration is more difficult, merging functional areas and combining offices take more time than planned, you lose key staff members….. etc.   Be honest with yourself and again, plan for worse case.

• Buy or joint venture with good companies.  This may sound simple, but the temptation is to buy poorer performing companies because your team knows they can whip them in shape and really make progress with their products and their organization.  You also know that the cost of acquisition will be smaller on an underperforming company because of multiples.  When you buy an underperforming company, be prepared to have your attention to other parts of your business diluted.  They are under performing for a reason, and seldom do you get to the bottom of it in due diligence.

Taking out weak competitors might seem counter intuitive, especially given the caution of the previous bullet.  But, in some instances, this is the right thing to do.  Competitors will often do radical things in the marketplace as a result of poor strategies, a focus on sales [at the expense of profitability], or the desire to grow at any cost.  These types of competitors make the marketplace miserable.  So, an acquisition might be a very successful way to deal with them.  They may also have some products that complement your existing ones.   Be sure to understand why they are a weak competitor and understand the issues they are facing internally.   Also, be sure that their customers are going to continue buying that product either under the existing brand name or yours.

Last, but not least, get outside advice.  This is especially important for the acquisition of foreign companies.  No matter how much we as executives have traveled to any country, we don’t know the rules or the culture well enough to make great decisions.  If you allow yourself to get caught up in the acquisition euphoria, you are likely to miss something.   If you don’t believe this, read the following closely:

"Various studies have shown that mergers have failure rates of more than 50 percent. One recent study found that 83 percent of all mergers fail to create value and half actually destroy value. This is an abysmal record. What is particularly amazing is that in polling the boards of the companies involved in those same mergers, over 80 percent of the board members thought their acquisitions had created value. We are beginning to understand some of the reasons why these mergers fail."
— Robert W. Holthausen, The Nomura Securities Company Professor, Professor of Accounting and Finance and Management

Organic Growth

Organic growth is tough.  It requires hard work and focus on the key issues customers have with your products, your company, your sales force and your markets.  Having done the work of understanding the voice of your customer as outlined in part 2 of this series, prior to creating your growth strategy will make the job easier.  Senior leaders who haven’t taken the time to understand the customer will be tempted by whimsical thinking and will not be able to grasp the requirements of their marketplace, leading to an under-performing growth strategy.  Organic growth can come from many different areas of the business as discussed earlier.  Let’s discuss it further.

• Getting as many customers back as possible is an obvious choice.  They too are looking for ways to grow their business.  It is important to understand why they pared your product line in the first place.  Was it because of poor financial performance, lack of support or other reasons?  You must offer a compelling reason for them to come back, either through lower total cost [notice I didn’t say lower purchase price], new products or services and convince them that your organization is ready to help them grow.   You already have an established relationship with them, so your presence and commitment will carry more weight than with a new customer.

• When was the last time you took a full look at where the customers for your products are located and what they really use your product for?  You will be surprised the various ways your customers acquire your products and what they use them for.  Often, a slight change in a product design, a new certification or a different sales approach will yield huge benefits to your company.   Customers and end users are very creative and we all have experiences with utilizing a product for something which wasn't exactly its intended purpose.  In a machining company that made precision components, they had equipment that wasn't fully utilized and found several other markets where their capabilities could be applied, taking their business to another level.

There are many strategies for making small modifications to a product and selling it to a different audience.   When Black & Decker was in the household appliance business they were the best at making small modifications and then selling the product to the hospitality industry.   Keep these adjacent markets in mind, but don’t build upon a weak core business.   Get your core business in order first and then move on to these adjacent opportunities.

• I am always surprised at how many companies don’t look closely at alternate channels of distribution.   Over the last few years, channels of distribution have changed dramatically especially in the eCommerce arena.  The executive team needs to look closely at how their competitors go to market.  They also need to understand where their end users buy product.  I haven’t yet been in a company that doesn't have potential customers they haven’t spoken to in other channels. 

As an example, a company that made brass products for the plumbing industry was totally focused on new construction.  They only used manufacturer’s representatives for their sales organization.  Their motto was “we don’t do retail”, because they were under the impression that selling the product in retail cheapened its value at wholesale.  When crafted properly, the retail markets were happy to buy their product because it offered a point of differentiation in their “good, better, best” product offerings. 

They also didn’t have an eCommerce site for their business.  They didn’t realize that only 20% of their SKUs were represented by their distributors.   But what about the other 80% of their SKUs?  As it turns out, their end users wanted the product and were frustrated by the lack of availability of it in normal distribution channels.  They were more than willing to pay full price plus shipping to get it and not have to leave their office.  This helped their commercial markets through better visibility and no wholesaler is ever going to get upset about the company selling their product at list price.  This was a win-win.  

This example applies to every company.   Senior leaders have to break through the old paradigms and fully embrace new ways of doing business.  In today’s environment, companies are hungry to sell more and are now receptive to listening to your sales pitch.   Make sure you know what they need and how you are going to add value to them.

• New product development requires cash.  It requires resources, but most importantly it requires a thorough understanding of the markets you serve.  Visualization of the new product development process is helpful.  Take a look at our visualization diagram.  After visualizing the process, define what your product is.  It is a combination of products and services.   Many companies focus on the product they manufacture and sell.  Senior teams often overlook the fact that your customers view your company as a complete package.  When we talk about new product development, let’s keep in mind that we are speaking of products and services.

There is an old Russian proverb “He who doesn’t take risks, doesn’t drink champagne”.  Given that, we all know that most new inventions don’t work out well and that only about 10 – 20% of new products are very successful.  With those facts in mind, new product development might seem like a losing proposition.   You have listened to the voice of your customer, but they usually only tell you about current conditions and current products.   It is generally believed that customers don’t know what new and innovative things would get their attention.   I would argue that this is farthest from the truth.

Your customers and their end users have issues to deal with, usually around cost and productivity.  It could be improving sales productivity, total cost to do business with you, or the cost of applying your product for its intended purpose.  Creating new products that deal with these issues always have a favorable result because it improves their bottom line.  Cash Acme created a product called “Shark Bite” that eliminated the need for soldering connections in plumbing systems.  This product was more expensive, but was a huge productivity improvement for plumbers and a big success.   Focus on how your products and services improve the productivity of your customers and you will see results.

When developing a strategy for a new product, be a value risk taker.  By that I mean assume the worst volume and divide it by two.  Tool up the new product with the least expensive tools and assembly lines and see how it goes.  I am not suggesting that you do this and reduce quality.  What I am suggesting is that you tool your product line for minimum production and then, when you find it successful, work very hard at increasing capacity and lowering cost.  Most companies create product plans that aren’t usually achieved, but believe that they need to have the capacity in place, so as not to lose momentum in the marketplace.  This mentality is misguided.   With all the excess capacity that exists in the marketplace today, ramping up production is easily done.   Does anyone believe that Apple had plans for iPhone sales to be up 300% in a quarter and to double year over year?   They just have great execution and know how to ramp things up.

My favorite place to look for new products is in the existing development labs of companies I work with.  Over the last few years, product development budgets were slashed and existing projects were mothballed.  The very first thing that needs to be done is to look at the programs that were identified over the last few years and figure out which of them should be moved forward.  Going back to Black & Decker, Snakelight and DeWalt were two such products.  Snakelight had been invented 5 years before a management team came along that was willing to take the risk on it, and DeWalt hadn’t produced a product in 15 years prior to the adoption of the name to a new line of professional power tools.   Don’t underestimate the power of the work your company had done previously on new products.   After all, there was likely some good thinking that went into those programs.   Dust them off, look closely at how your served markets have changed and move forward on those that make sense.  Whatever you do with new products, be sure to have a new product development process in place with stage gates and rigorous reviews.  If you don’t have one, you can use our MPD™ process.

Innovative Growth

Innovation is the dream of every senior management team.  It is a process of identifying new products and services that heretofore haven’t been in the marketplace.  It requires ideation and concept development which you can read more about.  It requires the company to look at its markets and identify needs that aren’t being serviced, and may not be known or be clearly understood by the customers in your markets.  If you have done a good job listening to your customers and their end users, you will be able to glean from that investigation recurring themes.  Innovation in value and products require paying close attention to those themes and a lot of brainstorming.

Apple is certainly one of the most well known innovators.  With the Ipod, Ipad and ITunes, Apple has created markets that didn’t exist before, or created products that were significantly better at servicing existing markets.  As well, they created useful, engaging devices that lead to deeper, ongoing relationships with end customers as they make content (downloaded songs, applications, etc.) available, applying the “razors and razor blades” strategy that Gillette made famous.  Often, value innovation is about creating products and services that meet the needs of multiple markets at once.  By doing this, many companies have made their competitors irrelevant as a result of products and services that didn’t previously exist in the marketplace.

There are a number of effective ways to innovate, including bundling services/benefits to appeal to more users (e.g., Starbuck’s), unbundling products/services to better segment key users (e.g., Southwest Airlines), adding style or mystique to otherwise “mature” categories (e.g, Swatch), and so on.  In most cases, however, effective innovation strategies start with a thoughtful assessment of the compromises that end users have to put up with regarding existing products, services and technologies and then devising new ways of addressing those compromises.  

Innovation strategies often work in great harmony with organic growth strategies, as touched upon in the prior section.  Frequently you can grow with established, loyal customers by offering goods and services which allow them to eliminate other “narrower line” suppliers, which will help customers streamline their supply chains and associated costs.  When you add related goods and services and/or business processes to make your company “easier to do business with,” such innovation improves your “share of wallet” with established customers and makes you that much harder to displace.

There are a large number of ways to apply different innovation-based strategies to drive growth, some geared toward new customers or markets, some toward existing customers.  A common element among all of them, however, is that the effective approaches start with customer intimacy and truly hearing the “voice of the customer”.   

Sales growth is the one of the top objectives every senior team needs to be focused on.  It drives the future of your business.  It needs to be planned, executed and your team needs to measure your progress against those plans.  You need a good marketing plan for these efforts.  It is important that your company stabilize your core business, products and services.   And only then, focus on growth.  In many of these activities, it is important to enlist outside help that can provide your perspective another dimension.  If you want to learn more about Group50’s processes for helping companies grow and innovate, give us a call at (909) 949-9083, or drop us a line at info@group50.com.  Plan wisely and carefully to prepare your company for the next economic cycle which is just now emerging.

About the Author:   Jim Gitney has over 30 years experience in world class companies.  He is the Founder and CEO of Group50™ Consulting. His latest endeavor is The Global Leaders [www.tgleaders.com].  His background includes running large operations consisting of thousands of people and multiple facilities both in the US and abroad.  Jim’s strength is working with boards, business owners and executives to develop business strategies that are focused on growth, improving productivity and significantly reducing cost.  Jim has lead 7 turnarounds during his career.  He works equally well in the board room and on the shop floor.  He learned his trade from companies such as GE, Black & Decker, Sunbeam and Rain Bird. 

About Group50 Consulting:  In its eighth year, Group50 Consulting has more than 30 consultants who have spent over 20 years of their careers in corporate America.  Our three consulting practices in Marketing/Sales, Manufacturing and Business Excellence are focused on speed, quality, cost, productivity and growth.  Group50 Consulting provides high level project resources that have experience in the issues that are keeping you up at night.  We provide consultants for individual projects, interim/part time executives and board members/advisors.  We guarantee our results.  Find out more at www.group50.com.  For a free consultation on how we can help, send a note to jgitney@group50.com or call (909) 949-9083.