Profitability vs. Growth: How to Achieve Both

Bottom-line margin or top-line growth? Ask managers which they want and they will tell you “both.” But research into over a thousand companies shows that only 32% are able to achieve both more often than not. With the odds stacked against them, how should managers master the art of achieving both?

The conventional answer is to seek “balance” between a focused portfolio and a diversified one; between organic and inorganic (M&A) growth; and between exposure to high-margin business and high-growth business.

But I have observed that such balance does not lead to higher success rates in achieving profitability and growth at the same time. Indeed, the few companies that are able to achieve both profitability and growth at the same time span a range that includes all degrees of portfolio diversity, all levels of acquisitiveness, and all types of industry exposure, “balanced” or otherwise. No matter how intuitively appealing, “balance” is not the secret to getting bottom-line margins and top-line growth at the same time more often than not.

Benefit, not balance

What does enable profitability and growth to coexist is the extent to which both are rooted in customer benefit. The customer benefit of a product or service is not what it is or what it can do. It is the reward that customers receive through their experience of choosing and using that product or service. It often varies by individual and context: the reward one person gets from chocolate is the pleasure of eating it; for another is it the pleasure of giving it as a gift.

Revenue growth that is based on customer benefit is more likely to be compatible with profitability. If a product has high customer benefit, customers will be willing to share a greater burden of making it profitable. They are more likely to consent to a high price for a high benefit; they will not require additional costs to persuade them to keep buying; and they will be happy to promote to new customers through word-of-mouth recommendation, thus lowering your marketing and selling costs. Without high or increasing customer benefit, the only way to retain and acquire new revenue is for the company to pay all these costs itself through advertising or special price promotions.

Conversely, profitability that is based on customer benefit is more likely to be compatible with growth because it aligns costs with the attributes customers are willing to pay for in the first place. When a company removes costs that serve little or no customer benefit, it will improve its margins without undermining top-line growth.

Customer benefit, not customer focus

This is no clarion call for more "customer focus.” That’s often the surest way to “benefit blindness”—a trap that ensnares companies when they become fixated on the features of their product rather than its benefits; on how customers differ rather than how, or whether, benefit differs; on the prices customers pay rather than the benefit they are willing to pay for; on the opportunities to grab customer attention rather than the reasons it should be grabbed; and on attractive customers rather than the attractions of the new benefits that can be brought to customers. Moreover, even customers find it hard to articulate the benefit they get from a company’s products and services.

Creating more focus on customer benefit

If more customer focus is not the answer, what can managers do to promote customer benefit?

Make “grow customer benefit” your broken record.Your “broken record” consists of the questions everyone just knows you will ask. They help to shape how your employees prepare and what they think about when you’re not there. Chris Jones, former chairman and chief executive of J. Walter Thompson (now JWT), points to three particular places where the record should get stuck:

“The most important question: 'Is this intended to increase customer benefit?' Then there is the question of 'How is this intended to increase customer benefit?' There has to be something detectably different about the customer’s experience. The third question is 'What is the evidence that we have in fact increased customer benefit?' The answers should tally with the ultimate arbiter of whether you have, in fact, increased customer benefit: whether your price and/or volume vs. competitors is higher than it was before.”

Grow the market not just your market share.

After the acquisition of the Adams confectionery business, Cadbury Schweppes CEO Todd Stitzer asked the team to give him a strategy to grow the market rather than just the company’s share. This led them to go beyond breath freshening to, for example, teeth whitening, stain prevention and anticavity treatment—and to new fruit flavors more akin to other confectionery categories. This has boosted market growth rates for both higher consumption and higher price points. Meanwhile Cadbury’s share has grown five percentage points with profitability remaining high. Thinking about share makes you look to competitors; seeking market growth makes you look to the fundamental customer benefit of your category and forces you to look at what determines—and limits—consumption.

Tie your costs to customer benefit not earnings.

Most companies manage costs to achieve earnings targets. But this apparently sensible practice means that bad costs—those not needed for customer benefit—are allowed to grow in the boom times; and good costs needed for customer benefit are cut in the hard times. Managers should tie costs to customer benefit instead. In its German lubricant business, BP did this by mapping company costs to customer willingness to pay—a proxy for customer benefit. They found that an important benefit to workshop owners were own-label products. That told BP that big brand sponsorship was a bad cost, not a good one, and that plans to reduce the number of brands might cut into good costs rather than bad.

These three practices can help to create more focus on customer benefit. And it is to benefit, not balance, that managers must look if they want to master the art of achieving both profitability and growth.

Best Regards,

Tauqeer Ahmed

Key Performance Indicators

Key Performance Indicators are quantifiable measurements, agreed to beforehand, that reflect the critical success factors of an organization. They will differ depending on the organization. A business may have as one of its Key Performance Indicators the percentage of its income that comes from return customers. A school may focus its Key Performance Indicators on graduation rates of its students. A Customer Service Department may have as one of its Key Performance Indicators, in line with overall company KPIs, percentage of customer calls answered in the first minute. A Key Performance Indicator for a social service organization might be number of clients assisted during the year.

Whatever Key Performance Indicators are selected, they must reflect the organization's goals, they must be key to its success,and they must be quantifiable (measurable). Key Performance Indicators usually are long-term considerations. The definition of what they are and how they are measured do not change often. The goals for a particular Key Performance Indicator may change as the organization's goals change, or as it gets closer to achieving a goal.

 

Key Performance Indicators Reflect The Organizational Goals

An organization that has as one of its goals "to be the most profitable company in our industry" will have Key Performance Indicators that measure profit and related fiscal measures. "Pre-tax Profit" and "Shareholder Equity" will be among them. However, "Percent of Profit Contributed to Community Causes" probably will not be one of its Key Performance Indicators. On the other hand, a school is not concerned with making a profit, so its Key Performance Indicators will be different. KPIs like "Graduation Rate" and "Success In Finding Employment After Graduation", though different, accurately reflect the schools mission and goals.

Key Performance Indicators Must Be Quantifiable

If a Key Performance Indicator is going to be of any value, there must be a way to accurately define and measure it. "Generate More Repeat Customers" is useless as a KPI without some way to distinguish between new and repeat customers. "Be The Most Popular Company" won't work as a KPI because there is no way to measure the company's popularity or compare it to others.

 

It is also important to define the Key Performance Indicators and stay with the same definition from year to year. For a KPI of "Increase Sales", you need to address considerations like whether to measure by units sold or by dollar value of sales. Will returns be deducted from sales in the month of the sale or the month of the return? Will sales be recorded for the KPI at list price or at the actual sales price?

 

You also need to set targets for each Key Performance Indicator. A company goal to be the employer of choice might include a KPI of "Turnover Rate". After the Key Performance Indicator has been defined as "the number of voluntary resignations and terminations for performance, divided by the total number of employees at the beginning of the period" and a way to measure it has been set up by collecting the information in an HRIS, the target has to be established. "Reduce turnover by five percent per year" is a clear target that everyone will understand and be able to take specific action to accomplish.

 

Best Regards,

Tauqeer Ahmed

Role Models For Success

Present day Marxists believe that Karl Marx opened their eyes and taught them that communism is a good thing, that there is no rich, nor poor.

André Bazin was idolized by filmmakers for ushering in the concepts and philosophies of cinematic realism. People look up to Gen. Douglas McArthur as a war hero, a master strategist and a great tactician. These are some of the personalities who have (posthumously) evolved from being masters of their respective crafts, to role models people want to emulate.

Any person, regardless of social stature, race, creed, and geographical location has looked up to someone for inspiration and aspire to be like him or her. People that motivate other people to do great things are role models. But role models need not come from the best schools, or have waged and won many wars, or have written tons of tomes that contemplate on man's existence; any person can be a role model to someone.

A role model serves as an inspiration or, as the case may be, a living guide to those who are inspired by his works, values, character, and life as a whole. Role models are pivotal to a person's success. College students, according to a study, were heavily influenced by their role models when deciding which career path they would likely take.

The criteria a person uses to choose a role model vary. Criteria are irrelevant in the grand scheme of things in one's life though, if a role model inspires one to do great things.

Best Regards,

Tauqeer Ahmed

The Difficulties Of Starting A Business

Any business startup, no matter how well-planned, will find it hard to establish a foothold in its respective industry. There are so many bumps and potholes a growing company must endure on the road to success. One thing a proprietor must consider is how he can ensure the stability of his company in its first, most vulnerable years.

There are many difficulties a business startup faces. Oftentimes, it is money-related. Issues like low or no funds to pay employees, purchase better equipment, or rent a better office space have sent many fledgling enterprises crashing down midway in their launch. Most entrepreneurs opt to borrow money from lenders and banks but the problem with this path is that financing institutions are wary of lending funds to a company without a respective track record or to a person without a record of success from a previous business engagement. One can consider home equity loans, but they are way too risky should the business fizzle.

Another difficulty is finding the right people for the job. Budding entrepreneurs may have ideas but most of them do not have the skills. Finding the right people for a business idea is hard. It would be even harder if the right persons in the immediate region the business operates in are already employed, with big salaries and benefits at that.

Aside from money and the right employees, a business startup must also face competition, especially in a tight market where other big names have already gained a large consumer base. That problem branches out to more problems, with company and product exposure campaigns to name a few.

In any venture, there are risks involved. But a sound strategy coupled with some smarts and luck, any business can endure and grow eventually.

Best Regards,

Tauqeer Ahmed

"Wish you best of luck."