Many of today’s small to mid-sized manufacturing companies want to focus a majority of the company’s effort on growth. But growth without the benefit of geometrically increased net profit will only increase a company’s inefficiency and risk that could lead to an eventual decline.
Start-up companies understand that growth of market and sales is the means to achieving initial profitability. So, it is clear they must focus on both revenue and profitability in the beginning. After a company moves beyond the start-up phase a strong focus on identifying growth opportunities should become the next important item on the company’s Strategic Business plan.
Avoiding the maturity, decline or crisis phase has everything to do with your company’s Growth Strategy. Growth Strategies for many manufacturing companies is often based on expansion by increasing its market. The measure of success is ultimately focused on generating more sales and the expectation is that success will deliver more profit dollars.
However, knowing the present condition and performance level of the company is essential to creating a successful Growth Strategy. If a company has too many weak areas, such as performance, sales or marketability, a premature attempt to grow can ultimately collapse the business.
To geometrically increase net profit a company’s Growth Strategy must be aligned with the company’s Operational Strategy. Market analysis alone will not govern the success of a Growth Strategy. Instead the company must also focus on their operational capacity, capability, supply chain, business systems and reporting tools to determine the obstacles to success. If the obstacles are not removed, growth will simply amplify the existing inefficiency within the organization and increase risk to the entire business, its customers, suppliers, employees and shareholders.
Exhibit 1 demonstrates the impact geometric growth has on profitability. In this example, exponential growth of 8% will increase both revenue and profit or EBITA (Earnings before interest, tax, depreciation and amortization).
However, without the needed improvements to reduce cost, improve efficiency and increase productivity, the company will realize an increase in cost typically found to be equal to growth. In this case, the increase is 8%. Companies focused on growth alone will consider this to be a successful Growth Strategy. Unfortunately, any set back or decline in future revenue will quickly expose the increased risk and inefficiency created as a consequence of their Growth Strategy.
Conversely, the company whose Growth Strategy was carefully aligned with the company’s operational strategy and took action to reduce waste, inefficiency and cost realized a significantly higher increase in EBITA and simultaneously reduced the company’s risk level.
Profitability and growth go hand-in-hand when it comes to success in business. Profit is key to basic financial survival as a corporate entity, while growth is key to profit and long-term success. Those companies that focus on their operational capacity, capability, supply chain, business systems and reporting tools to eliminate waste will continue to see higher profits. Those that do not will simply amplify the existing inefficiency within the organization and increase risk to the entire business, its customers, suppliers, employees and shareholders.