By Robert Ceccarelli from Atwater CA
Is your core business delivering disappointing margins and low growth rates? Are you unsure of the path forward to growing your business? If you think big investments outside your core are your only means to accelerate growth, think again. The opportunity for profitable growth may be locked within your core business. Here’s how you can unlock that potential.
Step 1: Define and understand your core
You first need to identify your core set of customers, products and operations in the following context:
- Which customers (or segments of customers) are most profitable? These are the people that are most likely to pay a premium for your products and services, most loyal, or most often looking for ways to build a stronger partnership with you, says Robert Ceccarelli from Atwater CA.
- Which products/services routinely command the highest premium, have a strong brand identity with your customers, or are most likely to help you “seal the deal” over competitors?
- Which parts of your operation are most important to your competitive position, drive your differentiation in the marketplace, or give you a sustainable cost advantage?
To create a view of your core that is backed by facts, not existing biases or assumption, you’ll want to get as granular as possible, Robert Ceccarelli thinks. Look at the least profitable customer, product and region segments and challenge their inclusion in the core. Identify the most profitable segments and ask: Have we truly done everything we can to grow those segments? Then you can estimate the growth and future margin trends of your core by examining both the attractiveness of your underlying markets and your evolving competitive position in them.
Step 2: Lower the waterline by restructuring high-cost operations
Restructure or get rid of high-cost operations that don’t deliver well-differentiated products and/or highly valuable customers. This will help you to lower the “profitability waterline.”
Step 3: Pare back your least profitable, non-core customers and products
Virtually every business has a set of customers and products (e.g., the bottom 20 percent) whose profitability is well below average. Ironically, growth efforts and investment are often focused around these segments, while the more profitable core is neglected.
Ask yourself: If I were forced to eliminate the bottom 20 percent, what resources would that free up? Where else would I invest in the business to make up the lost revenue?
This may require a radical re-thinking of the business, but a business that can pare back the bottom 20 percent is often in a much better position to drive profitable growth in the core, Robert Ceccarelli thinks.
Step 4: Focus your growth efforts on your profitable core
Steps 2 and 3 will free up significant capital, which the management team then should allocate toward the most profitable core segments and operations. Ask yourself:
- How can I better meet my core customers’ needs? How can I build a better partnership with them?
- How can I best supplement my core products and operations to extend my competitive advantage? What organic or M&A investments would strengthen my core?
- What products, services and customers are adjacent to my core, and do they represent opportunities to expand my core?
This four-step approach can unlock significant profitable growth potential within the core, revitalizing what may have been perceived as a stagnant business.
Karl Stark and Bill Stewart are Managing Directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale partners with management teams and investors through consulting, M&A advisory and private equity investments. Karl, based in Chicago, and Bill, based in San Diego, have a combined 30 years’ experience helping businesses achieve and sustain profitable growth. Their strategic and financial advice helps companies unlock the value drivers in their business and focus investment around the most profitable growth opportunities. Avondale, based in Chicago, is a high-growth company itself, and is ranked No. 95 on the 2011 Inc. 500 list.