There is a saying that “an organization can’t cut its way to profitability“, at least on a sustainable basis. While this is certainly true over time, many organizations have implemented internal cost reduction programs over the past several years to improve profitability in the face of the poor economic and market conditions. Although the majority of these programs were probably overdue, and have been effective, many organizations are finding that there is not much more that can be done internally without sacrificing service, efficiency, and quality.
As a result, organizations must now look outward, and improve their profits through profitable revenue growth. However, this growth must be planned, managed, and controlled in order to make it sustainable over time, and generate the desired results.
One of the more popular, and potentially dangerous, strategies, is growth for growth’s sake, using the tactic of cutting prices, and hoping to “make it up on the volume” to improve profitability. While there may be some special situations where this tactic may actually work (at least for a period of time), in most instances, the increased revenues will not be enough to offset the lower profit on each sale, reducing overall profitability over time. In the worst case, some organizations will continue to cut prices, further reducing profits, eventually threatening its survival.
The dangers associated with this strategy include the following:
- While the lower prices may, in fact, generate more revenue in the short term, this revenue may not be profitable for the organization due to the higher costs, and increased activity required to support it.
- In many instances, cutting prices will result in an overall decline in market prices, setting the expectation of customers for those lower prices. Once this happens, it generally takes a long time to get prices back up to reasonable levels.
- Finally, if the growth occurs too rapidly, and is not profitable, the organization may find itself without the resources or financing required to support the growth, and unable to manage the activity properly. This will lead to service and quality breakdowns, and the potential for future revenue declines.
Generally, no organization can be successful in the long term with this strategy.
Profitable, and sustainable, growth results from a strategy that is well designed, managed and controlled. In order to accomplish these objectives, the organization should ask itself several key questions:
- Where will the new profitable business come from?
- Do we know our real costs, and are they competitive?
- What are the additional costs and resources that will be necessary to support the future growth?
- What is the real profitability of our current customers, and/or market niches?
- Who are our most profitable customers, and can we increase our share of their business?
- Are there more potential customers like them in our market?
- Can our existing processes and procedures handle the increased activity without a breakdown?
- What differentiates us in the market, so we are not competing just on price?
The answers to these questions may lead to even more questions, all of which will assist you in defining your profitable growth strategy, the requirements of that growth, and how best to manage and control it over time.
Those organizations that can define and execute a clear strategy for profitable growth, and manage and support it properly, will sustainably improve their profitability.
If you have any questions, or would like to discuss your organization’s specific issues, please give us a call at (727) 637-4666, or email me directly at Don@HuttlinAssociates.com.
“Without continual growth and progress, such words as improvement, achievement, and success have no meaning.” – Benjamin Franklin
“Companies that grow for the sake of growth, or that expand into areas outside their core, often stumble. On the other hand, companies that build scale for the benefit of their customers and shareholders more often succeed over time.” – Jamie Dimon
“Growth is never by mere chance; it is the result of forces working together.” – James Cash Penney