Slow market growth leads to a great deal of uncertainty for business leaders. One certain thing is the need to find growth in the earnings line of your business. From 2013 to 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 critical sectors began to grow at an encouraging rate. Pent-up demand was a source of optimism. Housing, factoryextreme one of the larger engines for overall economic growth was coming back at growth rates of 15-20%. Automotive had been recovering as well 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 for the decline. Being well positioned for the economic lifts and lulls is critical, but outperforming the market is where your company stands out.
Growth in a flat market? Yes. Some opportunities exist in that environment that makes it very achievable. The sheer fact that competitors may limit their investments can 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 occurring, and share loss in the core 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% annually and EBIT growth of 5x. The success in revenue gains was so rapid, that the company reached 100% market share with its number one and number three customers and 60% with its second largest from a base of 7% share 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 share from others. Very few are winning right now and it comes down to the investments or lack thereof that were made to prepare companies to be winning today. The seeds are planted 18-24 months earlier. If you aren’t taking shares 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 lack of growth. It limits the amount that can be diverted to initiate growth plans and many companies are reducing growth investments as we speak. Will they gain share in 18-24 months or will their competitors? If they all behave in the same way, the current share 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 share? Two things, first one or more of the set are then losing share. Second, they have momentum. The momentum that takes a lot of energy to catch up with those who decide to compete for that market share. Being in a holding pattern, waiting for the next budget cycle, etc. means you are positioned to be at risk as one of the market share 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 by 37% in three years. The change in strategic direction led to a growth of 75% in the 3 years following. While the leadership change was a critical component it was more about making a shift in strategic direction rather than just making a change in the leader of the organization. How did a modest-sized company with $180m in sales take $60m in business from the largest competitor in their industry with a multi-billion dollar scale? They certainly didn’t outspend their rival. 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 scale 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 means 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 demand started to wane in 2016. Businesses I speak with are now in a transitional state and confused in many cases. There is an evident 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 drive high yield 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 striving as hard as they should for new revenue? If revenue is the single thrust of the company, are our operations driving costs as low as possible? Is SG&A drifting out of control if revenues slow? Perhaps.
Growing in a slow economy is entirely achievable, but typically only for a single competitor in the competitive set. The competitor that positions themselves to grow. You should be able to identify one or more specific initiatives that are driving growth in your business. This should be a literal connection rather than speculation. If you launch new products and sales increase you may assume it is from the launch, but I suggest digging into the data and knowing where the sales gains are coming from. If you have the initiative to enter 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 share 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. You may 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 favorable topics we often discuss are good indicators, but how often do we see great signs, yet a disappointing fall through to the EBIT line? It is all too common. 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 Key Process Indicator (KPI). KPIs are wonderful tools and are discussed at length in this series. KPIs, however, are not currency. Nor are ratios. Ratios like return on sales, return on invested capital, return on assets, gross margin, etc. are measures of the business’s efficiency at production… EBIT dollars. Dollars are currency, fuel, and appeal for your investors. Too often we lose sight of the singular goal and drive for achieving our KPIs and ratios. While important, if we hit 6 of 10 do we have the optimum EBIT generation? Maybe.
Even 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 rather than 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 the available 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 share 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 rather than EBIT we have them focused on something not entirely aligned with our investors. When I hear a business unit President or CEO describe a business as a 15% business I know that cascades through the management team as a company led by the ratios, not by the earnings.
My advice is to use KPIs to measure the achievement of goals cascaded through 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 more about 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 the bottom-line impact.
A few good… ideas
KPIs alone leads 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 full effort. The mere setting of a goal and tracking it might stimulate extra effort and create some movement. I suspect 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 ideas 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, and the people in your plants, and surrounding your business. Often the ideas are incomplete and have to be pieced together. It is rare 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 the performance problems that could limit customers’ willingness to award you new business. Your employees and customers can identify 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 process 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 into aid 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 erratic. The merchant needed more consistent performance. We listened and returned with an idea. We built a rapid deployment promotional model to be dropped into 500 stores at a moment’s notice. If the merchant was seeing soft demand, 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% share with the customer.
Level 3 – Unmet needs
What can we listen for in needs? On a single occasion, I listened to a customer express a need to the person sitting next to me and within 60 minutes, my company was set in motion 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 overcome 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 even 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 touch or bump of the wrist. Once we had matured through 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 its kind, so likely we would live through the debugging phase along with our customers. 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 yet. 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 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 common question. The consumer had no idea what a bad idea this was. Most of our team applied their filters and logic, not the end users.
The touch-activated faucet was one of the biggest game changers to hit the market. Surrounded by a solid advertising campaign it drove demand for people to replace faucets that were perfectly good just to get the feature. 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 yet. We had been advertising because we thought it would take some time to create a little demand. 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 demand. The best part was they knew and the plumbing associate knew what brand it was. It was a key 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 from improving the yield 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 the 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, extra labor, extra movement, higher transportation costs, delays that increase our lead-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 significantly, 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 previous performance, not optimum state.
A hardware company I was appointed to as President had several business inefficiencies, but was improving. Every day was a bit better than the previous one, so we were on the right track. We were just not aiming high enough and not looking closely enough. I found three key areas that led to enormous business efficiency gains by looking firsthand. Walking our distribution center I found several pallet locations that were occupied by one tiny carton. I asked if there was another location in DC for that exact SKU. There was. There were many. Looking at those, they were all partially 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 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 investigating warehouse utilization, excess and obsolete 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 streams and take them to the EBIT line. Or, I could choose to use it as pricing power to gain some business. Anything is better than applying those dollars as we were, in waste.
Warehouse utilization – After analysis 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 40% of our warehouse and leave it empty. Once we achieved that we could consolidate a second warehouse into our primary and we could even take on a tenant in the remaining space. Closing the second DC resulted in $2m saved. Bringing in a tenant resulted in $1m in benefits by distributing a sister company’s goods using our fixed overhead. Later, the luxury of this newfound space allowed us to enter 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 Obsolete inventory – We peaked at $15m in E&O at one point. There were all kinds of reasons, but all manageable. My broader observations which included looking at customer-level P&Ls, inventory reports, and monthly adjustments for E&O led me to the realization Rome was built in just a few days. A few days a year created 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 previous goal but to minimize the creation of a new E&O. I set the figure at $100k per month in the 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 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 through 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 immediately. 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 lead that we needed to go back to the customer and firmly suggest they take the inventory and sell it through. 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 through 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 result 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 eliminated a waste stream of $14.2m that spanned years. In a single year, it worked approximately $3m in EBIT.
Container utilization – A partially filled container is hardly a smoking gun, but it did lead me to wonder about the thousands of containers we brought in annually. How full were they? Were they partial 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, let’s 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% and then put people in place who were accountable for reporting their plans and progress monthly. The first 5% was achieved through great management by our team in Asia that worked with suppliers and photographed each outbound container. Inventory planners placed orders that were more aligned with filling a container rather than a convenient 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 net savings. Rather than saving $3m, we saved a mere $2.5m.
That is $8.5m saved in business efficiency from looking. It requires curiosity. If you look at your distribution 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 wonder 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 share gain and the highest level of business efficiency. This series will discuss in depth how to achieve this goal by driving high yield growth and discover greater business efficiency in organizations that will be positioned to deliver greater than expected value for investors.
About the author
Rick has led four businesses through rapid growth and profit expansion in his 27-year career. Rick is an accomplished executive having led four distinctly different businesses through a significant transformation to become the leading companies in their categories. His history is one of creating and executing business plans that drive overall business performance and EBIT growth through a series of processes that optimize costs and business efficiency along with significant growth, a combination that maximizes EBIT performance.
Rick led Marketing and commercialization efforts for Carrier’s 2.5 billion dollars residential appliance business driving a decade of leading innovation and channel expansion. Carrier became the undisputed leader in efficiency and environmentally sound products transforming the HVAC appliance industry. The impact of this work was captured in Harvard and Darden School of Business case studies.