Louis Amory is a partner at Bain and Company, a global management consulting firm. www.bain.com
Creating sustainable growth is a challenge for every family business, especially in today's highly competitive environment. The Belgian FBN chapter invited Louis Amory to expand on how modern-day business can improve its growth potential
Independence and a long-term vision are the important assets of family-owned companies, but their growth ambitions are often too modest in comparison to non-family companies. Nevertheless, sustainable, dynamic and profitable growth contributes greatly to increasing the value of an enterprise. In addition, enterprise value increases disproportionately to the level of growth of revenue and profits.
Only one in ten companies succeeds in achieving sustainable and profitable growth (turnover and profit growth of more than 5.5% per annum while earning at least cost of capital). And less than a quarter of specific development initiatives are successful. Individual growth forecasts, however, are considerably higher than reality: 70% of enterprises are pursuing unfeasible goals. Growth is therefore a complex challenge, in particular for European companies operating in very mature markets. So how can you improve your chances of successful growth?
Precisely define your main activity
It is essential to define your core business so you develop a clear vision of your market and analyse the fields in which you can differentiate yourself. At Vivendi Universal, an excessively broad definition and a lack of concentration led to a loss of h10 billion for the shareholders. To define your core business correctly, you must restrict yourself to products or markets sharing similar cost structures, the acquisition of a larger market share with your existing customers and a prudent approach to new markets. At first glance, beer and alcoholic drinks seem very similar, but there are almost no possibilities for sharing the costs or using the same distribution channels. A manufacturer of paints can maximise its profitability by targeting both professionals and retail stores, but the needs of their customers are totally different. Banks can expand their sales to their existing customers by offering insurance products.
A common error is rushing into global actions, as was the case in the car industry and its transatlantic mergers. On the other hand, an excessively tight focus on the domestic market is often dangerous because, sooner or later, the enterprise will be subjected to the pressure of global competition. In general, a strong position in a small number of countries is recommended, because this allows you to discover the specific needs of consumers while benefiting from economies of scale. Growth springs from the combination of two opposing goals: concentration on the principal activity and expansion into related activities.
What makes you unique?
Approximately 80% of companies think they know why their customers choose their products, while only 10% of their customers can give a reason. During the definition of your core business, it is important for you to know what it is that makes your product or service unique. What customer segment do you want to target? What differentiates you from your competitors? BMW, for example, targets a niche market of wealthy people and concentrates primarily on design and service. Base succeeds by concentrating on specific target groups and using its distribution channels (ethnic marketing). Dell Computer recorded losses for the first time in 1993 after opening up a second distribution channel (in the retail market) in parallel to direct sales to professionals. A poor definition of the core business leads to confusion, dispersion of strengths, too broad defence of the core business and a loss of growth potential in the core business.
Get the most out of your core business
The growth potential of an enterprise is focused primarily around its core business. The stronger the market position, the higher the returns. A recent survey of European CEOs showed that 56% of them believe this potential is still far from being achieved. Family businesses sometimes make the mistake of developing a second or third line of business in parallel to their core business, with the aim of 'spreading the risks'. The family shareholders actually fear a total loss in the event of problems with the core business. This reasoning is dangerous, because it harms the enterprise. To develop, it is necessary to get rid of secondary activities and restrict oneself to a few main activities or products. There is always more to benefit from in your core business than you think. Constant and successful growth is often based on a simple idea. Take the example of Tetrapak, which has been growing constantly for 50 years on the basis of a very simple concept. The ability to react appropriately to trends is also an important driving force. There are many significant trends around such as low prices, safety, fashion, design, health concerns or convenience. One of them may be enough to fuel significant growth.
Four growth models
A growth vision starts by observing your environment. Ask yourself the following questions: what are the key trends among customers and in the marketplace in general; who are your competitors; and what opportunities are hidden in the flaws of the market? We distinguish between four growth models:
Consolidation: growth by acquisitions
InBev is a textbook example. Between 1998 and 2004, the world beer market grew by 2.6%, while InBev achieved a growth rate of 31.8%. The conditions of success are a good mergers and acquisitions team, capabilities for integration and adequate finance.
Efficiency: achieve better results than your competitors
Vodafone achieved better growth than the market as a whole by segmenting its customers and adjusting its offerings to target groups. The key to success is to respond to feedback from customers and adapt the product to achieve a satisfying end result.
Reinventing the business
Good examples include Southwest Airlines, Ryanair, Aldi and Lidl. The trick is to always outsmart the competition. Start from a blank slate or copy an existing model. A fast launch and rollout is also essential.
Riding the wave: identify changes and react
A good example is Nestlé, who moved successfully from wet foods to dry foods for animals. This approach requires heavy direct investment in order to build a competitive advantage.
Key ingredients of growth
To experience growth, attitude (guts), competence (talent) and investment (resources) are vital. The role of the CEO is pivotal. The CEO must truly personify the desire for growth. Other qualities that are necessary for top management are: enthusiasm, ability to communicate (transmission of ideas to staff), openness, assertiveness, optimism and entrepreneurial spirit. The challenge consists of finding a repetitive (simple) formula and then integrating it into the organisation. Fortunately, a variety of formulas exist: acquisition-based (InBev), geographical (Vodafone), efficiency model (Dell), launch (Leclerc), brand extension (P&G), marketing (L'Oréal), and innovation (3M).
Expansion into related activities
The moment the complete growth potential is achieved, the only other growth possibility consists of developing new activities. Follow your existing customers and limit your diversification. On this subject, no scientific theories have been developed. Some enterprises succeed where others fail and the average chance of success is only one in four. The greatest successes are achieved when you introduce new products and services to an existing customer base, and then proceed to adapt this formula into new markets and approach new customer segments. It is more risky to penetrate new distribution channels – with one exception: Coca-Cola created a new channel with automatic vending machines – and to develop new stages in the value chain and launch new businesses. The further you stray from your core business, the lower your chance of success. Limit the number of variables, for example avoid launching a new product in a new market. Any diversification must not lead to neglect of the core business, which must create added value for the new business. Move forward progressively, but cautiously.