Growth in sales revenue is hard to find these days. Most markets are down, or at best, flat. Competition is more intense than ever. When sales growth is achieved, it often comes without commensurate growth in profits -- because the “cost” to get the growth was too great. What to do? Or not do?
Don’t Mistake Proliferation For Innovation.
A lot of the growth that companies have achieved in recent years has come from proliferation of customers, products, locations, etc. Small companies make this mistake as often as large ones. Simply opening new locations only guarantees that there will be more places to manage. Growth, if and when it comes, may not bring profits.
This kind of proliferation-based growth brings with it the risk of wasteful complexity. More of everything is harder to manage, and seldom yields the kind of returns expected. And yet, nearly everyone still does it. Why? Because proliferation is easy, seems logical and often, does lead to increased sales; but it also leads to increased costs and headaches. One increase that almost always results is the need for more working capital, and that too is hard to find in these financing-constrained times.
There Are Five Ways To Grow Profitably—Only Five
1. Take share from existing competitors (a tough game)
2. Expand the market with innovative new offerings (not proliferation)
3. Change the mix to sell higher price/value products (surprisingly productive)
4. Enter new market segments or an entirely new market (go back to no. 1-3)
5. Create an entirely new market (e.g., Swiffer dusters or eBay on-line auctions)
Growth—The Five Choices
- First and most obvious - trying to take market share from competitors. Choosing this path to growth usually doesn’t add too much complexity unless the share you go after is a different kind of product, customer, distribution, etc. Then it can be doubly difficult, due to the risk of entering nearby new markets populated with less familiar products, customers and competitors battling it out.
This approach is also one of the most difficult from the perspective of profitability and likely competitive retaliation. You fight for their share, and get some - at a cost - and competitors come right back after a piece of yours. This is not pretty. It’s tough.
- The second choice - expanding the market through innovation, sounds great and is, when it works. It’s just much easier to say than to do. Innovations are not predictable and are subject to copying, knockoffs or product life-cycle limitations. Good ones can be very powerful, but for every few that work, many will fail. Or, they’ll cannibalize older, existing products/services.
This can also be attractive trap. New products, new customers, new markets, etc. lead to new complexity, which won’t be apparent in the financial projections, but will show in the financial results. Danger! Proceed with caution.
- The third option - changing the mix, is a very effective way to improve profitability and a good solution for obtaining growth—if everyone else isn’t also trying to do the same thing. Shift the mix from less profitable to more profitable products and/or customers, and from lower growth to higher growth segments, and profitable growth is yours.
This strategy is less likely to cause unwanted complexity, and might actually lead to simpler product and customer combinations.
- The fourth choice - entering new markets - has appeal because the “grass is always greener on the other side of the fence.” New markets look so attractive because we aren’t familiar with them. Remember, however that while new markets may be “new” to you, they are some incumbent’s current market, and that incumbent will defend its market position.
What you might do is add a huge number of “news” (products, specs, customers, locations, etc.) all of which will add hidden complexity costs that are greater then the profit gains.
- Finally, the fifth option - creating a new market, is a wonderful one. It is also the most difficult, most uncertain and contains elements of the prior four. Procter & Gamble created a whole new market with Swiffer® dusters. It was one that fit the company’s current markets and customers too. What a great idea. “Bagged, chopped lettuce” took advantage of the time pressures on consumers and allowed a much more profitable way to sell produce, which has not been extended to all sorts of fresh vegetables and fruits
The more innovative the new entrant - like eBay or Swiffer - the more immediately successful it can be versus less desirable older solutions. The more advantages the new method offers (like the ability to use digital photos on eBay to show products) the more likely it is to displace the older method.
But remember, eBay built on three, big new technological advances: widespread access to the Internet, growth of digital photography and cashless payment systems (PayPal, et. al.). This great new growth success looks so obvious now, but it had its own risks of complexity and hidden costs of doing unfamiliar things in unfamiliar ways.
One of the most interesting new market growth efforts was created by the realization that time-starved US consumers would pay handsomely for the convenience of buying bagged, chopped lettuce. This created a new, multi-billion dollar market. This kind of a breakthrough is rare.
Bottom line: achieving profitable growth is difficult without encountering the risks and costs of new complexity or the retaliation of entrenched incumbent competitors. When there are only five choices, the best advice is to choose wisely and use a combination of them - that gives you more chances to succeed - and innovation is always the best choice.
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About the Author: John L. Mariotti is President and CEO of The Enterprise Group. He was President of Huffy Bicycles, Group President of Rubbermaid Office Products Group, and now serves as a Director on several corporate boards. He has written eight business books and a novel and has been a conference keynote speaker, a radio talk-show host, and a multi-national columnist for IndustryWeek, Management Centre Europe, the American Management Association, Fortune Small Business, Tiempo de Mercadeo, and a contributor to Business — The Ultimate Resource and the Encyclopedia of Health Care Management. His electronic newsletter THE ENTERPRISE is published weekly. His Web site is Mariotti.net.
