Thursday, February 03, 2005

Adjacencies & Business Going Forward

Another of the several periodicals that should be read is CFO Magazine. I, like most of you am not a Chief Financial Officer, but once past the pure accounting and treasury articles that are too technical (some are ready for the non-CFO to read and absorb) there are good insights to be gleaned from this publication. As many publications do as the new year begins, they do a recap of the best of the prior year. The following post is from one such article.

In the last five years as economies slowed, stagnated, and have given us short spurts of activity in specific sectors or geographies. During this time businesses “slashed spending on new factories and equipment, salaries and bonuses, technology, benefits and travel to mitigate their risks during the times of uncertainty. They have exited unprofitable businesses and sold off non-strategic assets. They have downsized, outsourced and offshored.” said Joseph McCafferty in his March O4 article in CFO magazine “Going for Growth”.

Companies now are changing gears and positioning for growth as the economy is recovering and making progress. Mr. McCafferty references management consultants as saying that for many companies who are investing in growth there will be disappointing results. “When you look at a lot of markets, the functionality needs of those markets have pretty well been met” says Adrian Slywotzky of Mercer Consulting and author of How to Grow When Markets Don’t.

Is there a growth crisis? Where is all the budgeted growth to come from?

Chris Zook, a consultant at Bain & Co. and author of the book, Profit From the Core says that to grow companies have to move systematically to adjacencies. Products, services, geographies or customer segments that are related to the companies core business.

Mr. McCafferty then decides not to review the books, but to go out and see if what the books teach when applied works. The problem is that the choice of companies he reviewed to see if adjacencies work, are not the picture of typical companies in the real world. They are real companies, but not regular for the most part.

Selecting UPS, Cardinal Health, Reynolds & Reynolds, and General Motors allows for easy pickings in the world of adjacencies due to the momentum and capital capabilities of each of the company’s core businesses. Reynolds I am not familiar with so it may be an exception.

The stories of these companies and their growth successes are really like most companies ability to swallow an elephant. Most companies cannot do what UPS, General Motors and Cardinal Health can do.

When the article ends, the real reality begins as Adrian Slywotzky says that new sources of growth can't be simply bolted on to a weak business. "The tricky thing about creating new growth is that you don't get to do it unless you get an A or an A+ in what you already do."

So, lets look at the reality for most of the rest of us who still have to grow to make our budgets.
Lets say you’re a B or B+ in what you already do. Take those growth investments that the article would say need to be in adjacencies, and drive them into listening to customers, deepening relationships with customers, improving productivity to create capacity and the contribution management of your customer list.

Keep your current sales organization out working for new business, but put some emphasis on optimizing your markets and customers and productivity.

For many customers the ball game is changing fundamentally as they turn to speed and convenience rather than functionality. Take your account and customer service managers and get out and see your customers. Listen to your customers and those who you want to be your customers.

Are your core competencies relevant to them? Are your strengths continuing to evolve with the strategies and directions of your customer base? Do you know? If you think you know, but are not sure, your customers may be planning their futures without you and you may not know it.

Talk to your customers, face to face and engage them in their strategies. Work with them to create and execute the tactical and transactional requirements of those strategies. They will not forget you and you will be with them as they grow.

You have leaned out your business in the days of uncertainty and have left yourself with limited capacity to handle growth. Are you growing productivity to create capacity?

Productivity improvement means being VERY good at the basics. Usually that means modeling and analyzing your work processes.

Have you done that already in the cost cutting days? Implemented by department or plant or vertical? Were you systemic and horizontal? Are you traditional in structure meaning vertical or are you horizontal?

Process improvement that optimizes inside the departments or divisions and also usually sub-optimizes across the business.

I don’t want to sound like a broken record, but repetition is good when something is important so, remember that the one item of real value you have in your business is your customer’s order. (see Business Rules 1 post)

That means that your process analysis and improvements must be horizontal across that flow and that flow only. Anything not on that flow must be look at and evaluated as to its value.

Optimizing the customers order cycle will bring productivity to the company and an ease of doing business with you for the customer. It will also create the capacity you need to grow and not have to add resources equivalent with the growth.

As for contribution management this one requires some work, but yields great results. Do you know the cost to serve your customers? Do you know the profitability of each of your customers? If so, you are ahead of most companies.

If not, the general rule is that around 20% of the customers you have are not profitable or marginally profitable. That is a huge drain on cash, resources and financial outcomes.

Grow based on upselling those who are profitable, grow based on pricing up those who are not profitable and don’t grow your competition when those who wont pay higher prices go to your competitor who is not measuring profitability. They will think they are growing while their resources are being eaten up with customers you don’t want.

Now, you will find your approaching A and A+ and you know that you know what is going on with your customers and your processes. Now you can plan adjacencies. So go out and grow!



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