Double-Digit Growth in a Slow Economy – A Few Great Businesses Are Doing It

Double-Digit Growth in a Slow Economy – A Few Great Businesses Are Doing It




Slow market growth leads to a great deal of uncertainty for business leaders. One thing that is certain is the need to find growth on the earnings line of your business. In the period of 2013 – 2015 the topic was topline growth. Our economy had been sluggish for long enough that we were all eager to get back to growth and a few basic sectors began to grow at an encouraging rate. Pent up need was a source of optimism. Housing, one of the larger engines for overall economic growth was coming back at growth rates of 15-20%. Automotive had been recovering in addition and companies started doubling-down on growth in their top line after several years of stagnation. Enjoying the rising tide is a good start, but growth only when the economy gives it to you isn’t a recipe for long-term success. You are a genius on the rise and most blame external forces on the decline. Being well positioned for the economic lifts and lulls is basic, but outperforming the market is where your company stands out.

Growth in a flat market? Yes. In fact, there are opportunities that exist in that ecosystem that make it very achievable. The sheer fact that competitors may limit their investments can truly open up opportunities, but you have to be in a different mindset than those competitors. One of the example companies we will discuss had experienced a revenue decline over three consecutive years reaching an overall decline of 37%. The timing was such that the economic news covered what was truly occurring, proportion loss in the chief of the business. Using the techniques in this series of articles this business roared back to a growth oriented business with growth rates of 19% yearly and EBIT growth of 5x. The success in revenue gains was so rapid, the company reached 100% market proportion with its number one and number three customers and 60% with its second largest from a base of 7% proportion with that customer. The economic growth of the category during this period… 4%. The leading competitor was later divested as a business from a very successful publicly traded company. This is what winning looks like with the right goals, processes, organizational structure, development, and… leadership.

Investors would have been satisfied with 4% growth in line with economic factors, but the best businesses take proportion from others. Very few are winning right now and it comes down to the investments or without thereof that were made to prepare companies to be winning today. The seeds are planted 18-24 months earlier. If you aren’t taking proportion today, you probably weren’t making the right investments 1-2 years ago. While we can’t hop in a DeLorean and go back in time, we can start now for 18-24 months from now. Some leaders feel boxed in by the without of growth. It limits the amount that can be diverted to begin growth plans and many companies are reducing growth investments as we speak. Will they gain proportion in 18-24 months or will their competitors? If they all behave in the same way, the current proportion-stalemate will likely continue in their category. But, what if one makes a few well positioned investments? What happens when a company from the competitive set starts to take market proportion? Two things, first one or more of the set are then losing proportion. Second, they have momentum. Momentum that takes a lot of energy to catch up with by those who decide to compete for that market proportion. Being in a holding pattern, waiting for the next budget cycle, etc. method you are positioned to be at risk as one of the market proportion donors to a growth oriented competitor.

Is growth possible in a slow market?

I was appointed President of a company that had declined in sales of 37% in three years. The change in strategic direction led to growth of 75% in the 3 years following. While the leadership change was a basic part it was more about making a shift in strategic direction instead of just making a change in the leader of the organization. How did a modest sized company of $180m in sales take $60m in business from the largest competitor in their industry with multi-billion dollar extent? They certainly didn’t outspend their competitor. In fact, this gain was achieved without making an acquisition, without adding to facilities, and by adding only a staff of 3 incremental people. Our first revenue began just 12 months after the concept was developed and reached $60m in 3 years. To the extent leader in the industry, the $60m loss represented approximately 2% of sales. On the surface it sounds irrelevant, but what if the economy is only giving 3-4% growth and you lose 2%, well it method you underperform expectations. Think about the flipside at the $180m company that earned growth of 33%? They are truly creators of value for their investors.

There is no single recipe for this kind of performance. You have to use all of your tools. You have to focus on the entirety of your business. This series will discuss all of those areas and results oriented approaches to achievement.

Optimism for pent-up need has started to wane in 2016. Businesses I speak with are now in a transitional state and confused in many situations. There is an apparent shift toward indecisiveness and cost reduction. The obvious truth is that it should never be a choice between growth and cost. This is where “And” comes in. We have to excursion high provide revenue and better business efficiency consistently. Too often we limit our businesses by believing it is one or the other. Suggesting that one or the other is more important, takes half your team off the field. If cost is emphasized, are sales leaders strive as hard as they should for new revenue? If revenue is the single thrust of the company, is operations really driving costs as low as possible? Is SG&A drifting out of control if revenues slow? Perhaps.

Growing in a slow economy is thoroughly achievable, but typically only for a single competitor in the competitive set. The competitor that locaiongs themselves to grow. You should be able to clarify one or more specific initiatives that are driving growth in your business. This should be a literal connection instead of speculation. If you set afloat new products and sales increase you may assume it is from the set afloat, but I suggest digging into the data and knowing where the sales gains are truly coming from. If you have an initiative to go into new customers and you can track the addition of new customers and the associated sales to those customers, you are on the right track. So long as there aren’t offsetting losses somewhere else, you are likely growing proportion at someone else’s expense. If you cannot tie the growth in the business to one or more specific initiatives, you are probably just going with the flow. Rising when the market rises, declining when the market declines. It is possible you will gain if your competition falters, but it is as likely you could lose if your competition steps up their game.

This series of articles is not focused only on revenue growth. It is focused on earnings growth. Earnings growth is the measure of achievement. Lower costs, increased revenue, new customers, new products, and the list of popular topics we often discuss are good indicators, but how often do we see great signs, however a disappointing fall by to the EBIT line? It is all too shared. So, step one for the CEO, division President, or COO is to set the right goal. A singular goal of the EBIT line. Everything else is a meaningful course of action Indicator (KPI). KPIs are wonderful tools and discussed at length in this series. KPIs, however, are not money. Nor are ratios. Ratios like return on sales, return on invested capital, return on assets, gross margin, etc. are measures of the businesses efficiency at producing… EBIT dollars. Dollars are money, fuel, and allurement for your investors. Too often we lose sight of the singular goal and excursion for achieving our KPIs and ratios. While important, if we hit 6 of 10 do we have the optimum EBIT generation? Maybe.

already respected managers and Vice Presidents are often misguided by the ratios we use. I frequently encountered resistance to new business initiatives as President of these companies because an initiative appeared “dilutive” to the business as a whole. This comes from living the ratios instead of living the EBIT. A business with a 15% operating income looking at adding sales that deliver 12% operating income would see these new sales as dilutive to the overall business operating income. Perhaps it drops to 13.5%. However, there are more EBIT dollars in total. Imagine, turning away profitable sales just because they are slightly less profitable units than your current units. That is what we do every day when we live the ratios. It happens frequently at all levels of organizations when they are not focused properly. This leaves obtainable business for our competition to pick up and limits some of our growth. There are measures your investors care about and EBIT is the basis. Earnings per proportion are not influenced by revenue, but by the creation of EBIT dollars. If you are a private company it won’t be value in EPS, but in the multiple applied to value the business. More EBIT dollars times the multiple leads to a higher value of their investment in the business. When we have management focused on the ratio instead of EBIT we have them focused on something not thoroughly aligned with our investors. When I hear a business unit President or CEO describe a business as a 15% business I know that cascades by the management team as a company led by the ratios not by the earnings.

My advice is to use KPIs to measure achievement of goals cascaded by the organization and ratios when you are measuring your efficiency. Keep the ratios in the boardroom and with investors. Keep the KPIs with your management team and cascading as far as you can in the organization where points of control exist for that KPI. We will talk in this series much more on setting goals, cascading goals, establishing and measuring KPIs, and aligning responsibilities in later sections.

Organizations can become distracted by their KPIs and charts and lose focus on the actual results. It is imperative we not get distracted by activity and charts and not realize bottom line impact.

A few good… ideas

KPIs alone rule to no growth or profit improvement. You need ideas. We can set a goal for growth with a given customer and measure it monthly, but without an idea it may be a waste of time. Now, perhaps your team has been idling by and not putting forth complete effort. The insignificant setting of a goal and tracking it might stimulate additional effort and create some movement. I speculate that is not often the case and I doubt it is a sustainable growth strategy. Remember, you have to build on today’s growth. The “work harder” strategy is a one-timer. You need an idea, preferably a few good ones. They can come from anywhere, but if the organization is not accustomed to having them or not accustomed to running with them, it will fall on the CEO, President, COO, senior VP, etc. to get the ball rolling.

There are natural idea people. Hopefully you have a few, but you likely don’t know who they are. Most likely they are people who propose things in meetings that get dismissed. That thing that was dismissed… was probably the beginning of that idea you need. They were probably onto something that others were overlooking. Listening is the start of an idea followed closely by looking. The senior leadership of your organization needs to embrace ideas, foster them, and leverage them. Listening can start with listening to customers, coworkers, competitors, the people in your plants, and surrounding your business. Often times the ideas are incomplete and have to be pieced together. It is scarce that an idea just pops in from nowhere. It often starts as a statement of a problem with no following solution. The solution is where your idea fits in. Embracing problems leads to embracing ideas for growth.

The growth idea hierarchy

Level – 1 Permission to grow

This is a focus on fixing your own performance problems that could limit customers’ willingness to award you new business. Your employees and customers can clarify these problems. They are areas of delay and underperformance in your business cycle. They often start with “it takes too long to… “. It may be that your delivery performance is average or your customer call center is closed by 3:00 on the west coast. Or, that your return policy is complicated. Or, that you have damage in transit. Or, that you take a long time to course of action information like invoices, credits, etc. The list goes on and on, but until your business is a good business partner, desirably the leader in these attributes, you do not have “permission to grow” from your customers. They are not likely to shift a portion of their business to a poor performer. If they have to make a move for some reason they will possibly try someone new over a so-so performer already supplying them.

Level 2 – Opportunity knocks

Where are the soft spots in the market. Is there a struggling competitor? Who is in the news? Is your customer struggling? Jumping in to aide a struggling customer is a great growth lever. We did just this in the hardware category and it led to great growth. The customer’s struggles were not financial, they were performance based. Their sales comps were inconsistent. The merchant needed more consistent performance. We listened and returned with an idea. We built a rapid deployment promotional form to be dropped into 500 stores on a moment’s notice. If the merchant was seeing soft need, we were the only supplier with a ready to ship promotional program to lift sales within a few days. It infused value and lifted category sales and we got the call every time. It formed a relationship that led to reaching 100% proportion with the customer.

Level 3 – Unmet needs

What can we listen for in needs? On a single event I listened to a customer express a need to the person sitting next to me and within 60 minutes, my company was start to build a new program that reached $60m in sales. While the person next to me was saying “no thank you”, I was sketching out an idea. There were any number of unattractive things about the need expressed, but each one could be conquer if you stopped to consider how. The combination of eliminating those barriers ended up being a better idea for the product overall and when the new idea hit stores… it sold at a rate 18% better than the program it replaced. Before you knew it, it was in 2,000 stores lifting customer sales and ours.

Level 4 – The thing no one already thought to ask for

While leading a faucet business’ commercialization effort I discovered we had an interesting technology in our R&D team, but it was nearly doomed because of cost and perceived complexity. Not to mention no one was asking for a faucet you could turn on by a touch or bump of the wrist. Once we had matured by all the levels of idea generation, we needed that next level that no one asked for. It gets harder as you go and level 4 is the most challenging. The touch-activated faucet would be the most expensive faucet we made. It would be the first to integrate electronics into a faucet meant for the home. It would challenge the plumber or homeowner to not only install the faucet, but to install the necessary electronics, which were likely foreign to them. It would be the first of it’s kind, so likely we would live by the debugging phase along with our customer. Not to mention we had never been asked by a homeowner, a plumber, a retailer, or anyone for that matter to create it. It was a great idea. We just didn’t know it however. Remember when I said that your idea generators are likely those people who tossed out an idea that was dismissed in a meeting? The touch faucet died 100 deaths in meetings. It was a terrible idea and everyone knew it, just ask around. Fortunately, a few people truly spent the time to research it. We found that no one asked because they couldn’t conceive of it at the time, but once shown it, they wanted it. In our research sessions “where can I buy this?” was the most shared question. The consumer had no idea what a bad idea this was. Most of our team applied their filters and logic, not the end user’s.

The touch-activated faucet was one of the biggest game changers to hit the market. Surrounded by a substantial advertising campaign it drove need for people to replace faucets that were perfectly good just to get the characterize. I visited a Home Depot one day and I was listening as usual. I stopped to talk to the plumbing associate, you know, the guy in the orange apron. I told him who I was and whom I worked for and that I was just looking at the aisle to see what was going on. I did this often. I said “let me know if you need anything.” He did. He said “I need those touch faucets”. We had not shipped the first unit however. We had been advertising because we thought it would take some time to create a little need. I asked why he needed it. He then let me in on the fact people had been in asking for it and that he had a list of people to call when they came in. I had to know. I had to know how many were on the list. It was 11 people who were waiting. 11 people at one store. There are over 2,000 stores. Not all stores had 11 on a list, but there was need. The best part they knew and the plumbing associate knew what brand it was. It was a meaningful building block of pushing a brand from third place to first place in just a few years.

Once you are listening, start looking… closely.

It also pays to look. Growth of the EBIT line is not just from revenue, but improving the provide of all that revenue we already have. I refer to it as our business efficiency. Most refer to it as cost. To me cost leads us down other paths like cost of goods and SG&A. Important ones to be sure, but not the same as business efficiency. Business efficiency to me is the elimination of waste. Duplication of inventory, additional labor, additional movement, higher transportation costs, delays that increase our rule-time, any one of 1,000 things that make us less financially efficient beyond just our cost of goods sold. Looking is how we tend to uncover these inefficiencies. Could a person actively look and discover $8m in cost inefficiencies in a business of $180m? Yes. More considerably, the organization already thought they were the picture of efficiency. This is because they were more efficient today than yesterday. They used the wrong yardstick. They measured off of past performance, not optimum state.

A hardware company I was appointed to as President had a number of business inefficiencies, but was improving. Every day was a bit better than the past, so we were on the right track. We were just not aiming high enough and not looking closely enough. I found three meaningful areas that led to enormous business efficiency gains by looking first hand. Walking our dispensing center I found several pallet locations that were occupied by one tiny carton. I asked if there was another location in the DC for that exact SKU. There was. In fact there were many. Looking at those, they were all slightly used. I also found cartons in other areas covered with dust. The first clue in how old the inventory was. Observation number three came when looking at incoming containers from Asia. There was empty space. Why? We could have stuffed it with anything and that anything would have shipped essentially for free. With these three visual observations I started investigation warehouse utilization, excess and out of use inventory, and container utilization. When I first asked, I was told we were world class in all three. It would have been easy to accept that point of view and say, “thanks for looking into it.” I wasn’t looking to be a little better than yesterday. I wanted to eliminate these three waste flows and take it to the EBIT line. Or, I could choose to use it as pricing strength to gain some business. Anything is better than applying those dollars as we were, in waste.

Warehouse utilization – After examination by a few bright minds, we set a goal to empty 20,000 pallet locations from a total of 50,000. We might have been the first management team ever that set a goal to use less of our fixed overhead. That’s right, we wanted to empty out 40% of our warehouse and leave it empty. Once we achieved that we could consolidate a second warehouse into our dominant and we could already take on a tenant in the remaining space. Closing the second DC resulted in $2m saved. Bringing in a tenant resulted in $1m in assistance by distributing a sister company’s goods using our fixed overhead. Later, the luxury of this new found space allowed us to go into a new business selling a new category of products without having to add fixed overhead, so it facilitated our growth. Not bad for just the first of three visual observations. A $3m improvement in business efficiency.

Excess and out of use inventory – We peaked at $15m in E&O at one point. There were all kinds of reasons, but all manageable. From my broader observations which included looking at customer level P&Ls, inventory reports, monthly adjustments for E&O led me to the realization Rome was built in just a few days. A few days a year produced the mass of E&O. They were events that could be managed differently. We set an E&O goal not to sell it off, which was our past goal, but to minimize creation of new E&O. I set the figure at $100k per month in new E&O, which would be a maximum of $1.2m per year. I was met with warm smiles and one party who told me it wouldn’t be possible because our best ever was $5m. We set the goal. We measured it monthly. We had a variety of people accountable to physically report out each month on their area of ownership in E&O creation. Our inventory planning group stepped up with great analytics and reduced our risk by better planning and management. The real tipping point came from the sales team. One lucky sales leader had to show a $400k write off in their review one month. Just the opportunity we had been waiting for. An event we could learn from. In this case a large customer discontinued an item and decided to do it closest. We had $400k in inventory on hand and no other customer. E&O was born. However, we did something about it. We discussed with our sales rule that we needed to go back to the customer and firmly suggest they take the inventory and sell it by. It was reasonable, but we hadn’t always done this. We acknowledged that a discount may be necessary, but we had to get it sold by before it was gone from shelves. That is when the real dust builds up in the warehouse. She held 3 calls with the customer and sold all of the inventory by giving a reasonable discount to move it. The consequence of this one example? Not a $400k write off on our P&L, but revenue of $600k. We were on our way. Two years later after I moved to another division, I visited and went straight to the E&O keeper. I had to know what the number was. Was it $1.2m as we set in the goal? No, it was $800k. The company had deleted a waste stream of $14.2m that covering years. In a single year it was work approximately $3m in EBIT.

Container utilization – A slightly filled container is hardly a smoking gun, but it did led me to surprise about the thousands of containers we brought in yearly. How complete were they? Were they uncompletely because of weight restrictions? Could we manage inventories so that we could cube them out? The first answer was that it wasn’t a big problem and that we were “very good” at managing container utilization. OK, lets keep looking. I looked at a dozen over a week. I saw too much air inside. I asked for the data and found we were 85% utilized. Every 1% utilization was worth $300k per year in freight costs. Getting to 95% would be worth $3m in essentially free freight. We set a goal of 95% then put people in place who were accountable for reporting their plans and progress monthly. The first 5% was achieved by great management by our team in Asia that worked with suppliers and photographed each outbound container. Inventory planners placed orders that more aligned with filling a container instead of a functional order size. The next 5% required more effort and a broader team. This is the important part. Someone had to lose in their KPI for the company to gain. The next 5% was essentially taken up by pallets loading the goods. Taking out the pallets and floor loading was going to help our container utilization, but hurt our labor productivity unloading. This became a team win, not an individual one. We experimented with a few containers and methods of receiving, while there was additional labor in receiving we found methods to keep it in check while driving a net savings. instead of saving $3m we saved a insignificant $2.5m.

That is $8.5m saved in business efficiency from looking. It requires curiosity. If you look at your dispensing center or factory and see boxes, you walked by too quickly. I saw dust on some. I saw small cartons in some. I saw air space in containers. You have to surprise why in each case or you get nowhere.

Achieving our goal of EBIT growth is the combination of driving business growth that not only takes advantage of market growth, but incremental proportion gain and the highest level of business efficiency. This series will discuss in thoroughness how to unprotected to this goal by driving high provide growth and discover greater business efficiency in organizations who will be positioned to deliver greater than expected value for investors.




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