Recipe for Disaster? How Trading Profitability for Growth is Like Playing with Fire

This article originally appeared in the January 2015 issue of Smart Business Philadelphia.

Robert S. Olszewski, CPA

Striving for increased growth is an objective for most businesses. However, the path is not always a smooth one. Companies are forced to have an understanding of what products, services, industries and market segments will provide them the desired growth and then deploy strategies to ensure they achieve their goals.

Changes in lifestyles, the economy, globalization and developments in technology are affecting the way businesses and their customers interact, says Robert S. Olszewski, a director at Kreischer Miller.

“These changes have wide reaching implications on how businesses must develop to remain competitive and effective in the future,” Olszewski says. “Consumers are motivated by a ‘feel good’ expectation and are looking for instant gratification from their spending dollar. Consumers are taking control in the marketplace which can make growth difficult.”

Smart Business spoke with Olszewski about sustaining profitable growth.

Why is growth the common issue facing companies today?

Now that the worst of the global financial crisis is probably behind us, many business owners have changed their focus from survival to growth. Businesses who managed to survive the recession are now facing the daunting prospect of funding the recovery. Conversely, the well-capitalized companies that invested in equipment and people during the recession are now well-positioned to strengthen their market position.

Growth has significant funding implications as businesses generally will have to invest in additional inventory and receivables. However, as companies reach out to traditional financing sources, they should not assume that the financial ratios and costs that previously applied are still the only relevant factors being considered.

What is a key element for driving profitable growth?

Reviewing pricing methods and strategies provides the quickest improvement to profitability. Customers will pay for perceived value and there must be strong links between the selling price and perceived value.

The product design, packaging and function should all send a strong signal that matches the price. If an image suggests high quality, customers will pay more than if an image suggests low quality. Companies growing profitability sell the concept of total cost as opposed to unit cost.

Where should companies focus their attention during growth?

Focusing on top line growth with products or services that do not generate the greatest economic benefit is a common error. Companies must understand where the greatest impact is before embarking on the sales journey. Businesses tend to invest only 20 percent of their time engaging with customers or products that generate nearly 80 percent of the economic return.

A company must place emphasis on conducting a Product Portfolio Analysis (PPA) to develop its product strategy. This process enables an organization to map out its range of products, the amount of sales by product, and the profitability of product range, and then determine factors for business strength in regard to each product within the business.

How can companies monitor successful growth?

Accountability for tangible results is critical. Benchmarks and financial scorecards provide a performance management tool designed to identify opportunities for improvement, track the execution of activities and monitor the consequences arising from specific actions. Put simply, it is the process of comparing one set of measurements of a process, product or service to those of another organization.

The main concept of benchmarking is to find a better way to do what is being done. It is the process of identifying, understanding and adapting outstanding practices from within the same organization or from other businesses to help improve performance. Most business processes are common throughout an industry. However, one common mistake companies make when benchmarking is not looking beyond their own industry or geographic region.

Robert S. Olszewski can be reached at Email or 215.441.4600.

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