Profits in Your Backyard

Improving volumes and margins from current businesses may be your best option Thirty to forty percent of revenues come from customers you don't want How much company time is spent with customers? Typically less than 1 percent Margins are not the inevitable result of market forces. Up to 30 percent of total revenue gets left on the table The management mantra of the 1990s has been cost reduction. A combination of recession in Western markets and increasing international competition has kept the focus of most European and US companies on containment rather than expansion. But the mood is changing. Companies unable to trim their fat have been pushed aside by rivals, while those that have achieved the required cost base are wondering how best to apply their new-found strength. Companies that enjoy a competitive cost structure will have to look for further profit increases from growth. Strategic or geographic growth - expansion into new or related businesses through acquisitions, partnerships, or start-ups at home and abroad - is an obvious route forward that can deliver rapid returns. Eastern Europe, Southeast Asia, and multimedia are all highly publicized areas to which revenue-hungry managers have flocked. But what these managers are in danger of overlooking are the lower-risk opportunities of operational growth that lie much closer to home. Operational growth achieved by improving volumes and margins in existing businesses - is an area over which managers have seemed hesitant to take control. It all depends on market conditions and what our competitors are up to, is a common response to suggestions that a company look to improve its sales margins. Yet just as cost reduction can be approached in a systematic and targeted fashion, so too can volume and margin increases. Programmed expansion aims to raise both revenues and margins, predominantly in existing businesses and with existing products, over a two- to four-year period. If it is to succeed, corporate focus needs to change from pursuing volume at any cost to precisely targeting the most attractive customers. This implies that customers can no longer be treated more or less equally: differentiated strategies are required. Programmed expansion offers strategies to improve margins and revenue from three different groups of customers: those who are unprofitable or barely profitable for the business; those who are already attractive customers; and potential customers. Our work on over 50 projects in the industrial sector, ranging from basic materials to engineered systems, indicates that programmed expansion can lead to an absolute profit increase of as much as 40 percent. Unprofitable customers About 30 to 40 percent of a typical company's revenue base is generated by customers who, on a standalone basis, do not earn their keep. A customer's economic attractiveness is measured by pocket contribution margins. The pocket contribution is the actual sales price minus all discounts, direct costs associated with the customer (such as technical support and delivery costs), indirect customer costs (such as salesforce costs), and the production costs of the goods or services sold.(*) Unprofitable customers frequently remain in the portfolio because of the assumption that any revenue is good revenue and the often unfounded concern that dropping a customer might harm the supplier's image. In many cases, however, suppliers have simply failed either to look at the true costs of serving their customers or to differentiate between them. Unprofitable customers fall into three categories: First, turnaround customers that can he expected to become profitable given a concerted effort on the part of the supplier. Second, customers unlikely to show profitability, either because they do not sufficiently value the attributes of a given product or because a competitor is better positioned to supply them. …