As a strategy consultant, you often hear your clients say how difficult it is to balance growth and profitability and know where to prioritise. We wanted to try finding an answer to this dilemma, and Valcon therefore carried out an analysis of the last five years’ financial statements from Danish production companies. Our objective was to see whether the actual financial statements show the same picture which we have observed with our clients in the years after the financial crisis. And our analysis does indeed confirm that very few Danish companies are able to reach that magical spot on the curve where both growth and profitability are maintained.
Danish production companies with a turnover of more than DKK 1 billion formed the data basis for our analysis. These companies were furthermore characterised by having published financial figures in three dimensions:
- Average growth (growth in gross profit)
- Profitability (growth in operating result)
The graph represents a total turnover over five years of DKK 1,340 billion distributed across 82 companies.
- The average profitability over five years is 9 per cent p.a. for the population
- The average growth rate over five years is 7 per cent p.a. for the population
- The average annual revenue over five years is DKK 4.4. billion for the population
As the graph illustrates, only few of the companies included in the analysis are able to maintain high growth simultaneously with a high level of profitability. And none of the companies are able to stand out from the pack and move up into the desirable upper right quadrant of the figure in which both profitability and growth are high simultaneously. It is a difficult balance to maintain equal focus on both tracks at the same time, and there is a major risk that you end up getting completely side-tracked. But that does not mean that it is impossible.
Keep a cool head and insight into the customer journey
Our experience shows that you win in the long run by keeping a cool head as company manager and daring to keep a strong focus on existing core competences in the company’s DNA. This does not in any way mean that you should ignore the risk of disruption in the market and continue as always. It means instead that you should accommodate the constant development by always paying attention to the changing needs of your customers and preferably anticipate their needs, which requires deep insight into the entire customer journey. It is furthermore necessary to be innovative throughout your entire value chain to be able to offer your customer the exact product which fulfils his needs with respect to functionality, delivery or price.
And it is in fact possible. Some of the most successful Danish companies are those which have managed to crack the code and align growth and profitability on a continuous basis. VELUX is an example of a Danish company with focus on its strength, roof windows, and which has bet everything on optimisation of their production of these roof windows to enable them to offer agile delivery at low costs. In other words, they focus on their core competences. They know who their customers are, what they want, and what they are willing to pay.
As the below model illustrates, the recommendation will therefore be to constantly make minor adjustments instead of major, comprehensive and heavy transformations. Baby steps are in other words the way to progress. The more agile your company is, the better you will be to adapt to a market in constant change in which disruption and agenda set the agenda.
Another example is LEGO, which when from being in a deep crisis to again being a global success. LEGO forgot their internal core competences along the way and tried to span too broadly. They consequently proved that you should not try to be everything to everybody. LEGO then returned to the core of their own strengths – the illustrious small plastic brick in limited colours and sizes – and the rest is history. However, the Danish financial press is currently commenting on LEGO’s most recent financial statements, which could indicate that the intensive focus on growth in recent years may have happened at the expense of profitability.
The above-mentioned analysis and examples all serve to illustrate that it is a long and tough job to constantly keep focus on both growth and profitability. The best recommendation is therefore to keep a cool head and make minor, continuous adjustments rather than major, comprehensive changes. It may be easier said than done, but here are three pieces of good advice, which the company manager can follow to achieve simultaneous growth and profitability:
- Focus the entire company on the 1-2 areas which enable you to provide something unique, and where you see a real and growing customer need in the market
- Create and maintain a deep understanding of your customers’ needs, wishes and dreams, which will enable you to continuously adjust your value proposition
- Slowly build up the required management and support processes around your core business, but never lose sight of the customer …
Unfortunately, there is no magic recipe for becoming a success in record time. The recipe for success in your company, which we have described here, may seem slow and not very sexy, and it requires guts. But the result of our analysis speaks for itself. If you are able to maintain a balance between profitability and growth through innovation and constant adaptation to your customer’s changing needs, your company will be on the path to success. And success as you know is always sexy.
Originally published in Børsen Ledelse.