August 18, 2017


















TARGETING NEW PROFIT GROWTH OPPORTUNITIES

Many executives in mature industries are looking for new sources of profitable growth, but shouldn’t we first learn lessons from our past (profit) growth initiatives? How many former "new products" are, for example, collecting dust in our warehouse? How many of our new and veteran sales reps have done well at cracking new, target accounts over the past few years on a trend basis?

If we do have a number of fizzles in our past, we are in good company. According to studies of a wide range of growth initiatives, most companies fail to find new profits most of the time. In the book, Beyond the Core, by Chris Zook, the author cites the following average results from 160 studies on the success rate for public company, growth initiatives:

Type of Initiative      Success Rate

New product launch      30%

Related Acquisition      30%

Joint Venture              20%

Start Ups                    10%

Zook works for Bain Consulting Group. Bain Group did its own study on 181 growth initiatives companies made over a three-year period from ’95 through ’97. The initiatives were classified by common "adjacency" paths as follows:

     56 Major new product launches

     36 New customer segments

     30 Geographic expansions

     25 New businesses

     21 Moves up or down the value chain

     15 New channel selling

Management of these companies rated 27% of the 181 initiatives as "successful"; 25% were "failures"; and 48% were still neutral or too soon to judge. There was no way for Bain to determine the relative impact of the following contributing factors on "success": core strength, selection effectiveness, luck, and execution. And, for the neutrally rated initiatives, I suspect that there was no way for Bain to measure or question most companies’ denial and rationalization mechanisms to minimize "failure" classifications.

Bain did find, however, two common sense patterns worth repeating. There is a measurable relationship between success and how far an initiative is removed from a company’s core skills and shared economics: the further away from the core, the higher the failure rate. And, those companies that did not first dominate their core business(es) on a profitable basis had dramatically lower success rates than those with strong core performance. In other words, if we can’t do well at what we know best, then we are apt to get killed when we jump into someone else’s game.

The book’s quantitative findings for "adjacency initiatives" are somewhat old news. In 1976, when I was a newly promoted marketing manager at a young, growth-by-acquisition, regional distribution chain, I read a compelling case study (now lost). In the case, a now defunct, national business equipment manufacturer experimented with the 4 permutations of old and new products sold to old and new customers. The comparative, incremental sales growth for the four different promotional programs were:

Permutation:                                                  Relative Sales Increase

Sell more old products to old customers                          15 X

Sell new products to old customers                                 10 X

Sell old products to new customers                                   3 X

Sell new products to new customers                                  1 X

My immediate reflections were:

  • The case company only focused on top line sales increase. They didn’t report on: how much of the incremental sales went to the profit line; how much up front, sunk cost went into each program; or, when each program might have gone cash-flow positive after recouping front end costs. What would the flow-through rate be for incremental margin dollars from more old-to-old sales in bigger average orders for a distributor? (2)*
  • Their reps appeared to have 5 times the difficulty of selling new accounts old products as they did selling more old-to-old. Was it equally tough for our reps to crack new accounts versus maintaining old ones? Should our company rethink account cracking skills, strategies and compensation? (3)
  • The 8 profit centers (or "divisions") in our newly formed "chain" were adding a lot of "new products" to sell to both old and new accounts as well as new, inexperienced sales reps to cold call on new accounts often in new geographical territories. (Geographic expansion was still big for most distribution channels in the ‘70’s.) But, I had never heard any manager talking about systematically pursuing and measuring the much higher yielding, old-to-old opportunity. Could there be an innovative solution for this opportunity?

These results sparked me to do some rough, data-based research (not easy in ’76!) on the success rates for both past product promotions and the cost/benefit of rookies trying to open new accounts/territories both of which were surprisingly poor. Then, I wrote a big, summary memo to the CEO and about 20 managers and buyers within our chain to start a "dialogue" process that did lead to fruitful change. (For more on "leading from the middle" of the organization chart, and the actual memo contents see support note #4)

The net result of rethinking our business around the old to old matrix was that we tripled our pre-tax return on total assets in 18 months time while paying down our debt very rapidly. At that point we bought a new company in which we negotiated a better deal based on our knowledge of classifying and valuing slow-moving, inventory cash traps. We then turned the new company around in record time, because we had new: thinking, tools/metrics, repeatable operational methods and proven testimonials from our high-performance core company.

Conclusions:

Most of us should agree with Mr. Zook’s notion that we should be profitably dominant at our core business, before we endeavor to get into some new game which is probably someone else’s core. But, this guideline means that 90%+ of the players in mature industries need to first reinvent how they serve their core, because they aren’t profitably dominant. (5)

For the 5 to 10% of distributors that already enjoy high pre-tax return ratios and true, free cash flow from dominating their core in a high-value, smart economic way, I would recommend buying the book, Beyond the Core. It could help the management team develop a better conceptual framework, vocabulary and skill set for identifying, selecting and pursuing adjacencies with a much higher success rate than in the past.

*For more on this issue and all other numbers in parentheses, see article 2.21 support notes at www.merrifield.com.

Best performing distributors don’t have to look too hard for opportunities. Because of their innovative track record at the hub-economic junction between suppliers and customers, the best innovative players on both sides of a distributor are always pitching new, "win-win", living-edge opportunities. The big problem for high-performing distributors is saying "no" to most pitches to in turn be able to say "yes" to and really focus on the very best proposals. These ideally would be, among other criteria, measured moves close to their core that will also reinforce and positively transform their core.

All ambitious would-be stakeholders - employees, suppliers, customers and investors - want to take a ride on the fast train. If we want to attract winners and best opportunities to become a winner, then isn’t it time for most distributors to reinvent their core business to qualify for best adjacency opportunities?

 

Merrifield Consulting Group, Inc. Article 2.21

www.merrifield.com