growth

Start with the right product

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If you want your business to grow and make a profit, having a product consumers want is a very good start. It’s a point some big car makers have forgotten.

Start with the right product

I was taken by a recent article in Fortune magazine in which the author, Jerry Useem, was occupied, not unnaturally, with the companies in the Fortune 500. What particularly struck me was the similarity between the experiences of some of those companies and quite a few of the much smaller businesses with which I have been associated.

Size is the determinant for admission to the 500 Club and so these companies ought to be representative of successful growth strategies. You certainly would expect companies in the Fortune 500 to be great “growers”. There, staring us in the face as number seven is Ford Motor Company with a turn over of $US160 billion. But read the fine print! Its profit plummeted last year by over 700% and it made a loss of $US12 billion. Number three is General Motors with a turnover of $US207 billion and a loss of $1 billion (not too bad, hey!). Right on top of the list is Wal-Mart, which grew from a little town in Arkansas to be the biggest retailer in the world in less than a lifetime. The fine print? Profit literally unchanged from the previous year but at least it is making a profit.

If you dig a bit deeper into Wal-Mart’s story, you find that it has grown dramatically over the past 12 years, but 12 years ago its sales per employee were almost the same as they are today. It is still on a growth binge (currently employing 2.3 million people) but to grow, you need more people and one wonders, given the difficulty that it is having in growing profit, what is the purpose of growing revenue? (It is interesting that since 2004, its stock price has declined by $US12, or more than 20%, while the Dow Jones has increased by more than 30%).

I am sure that most people realise it is a critical function of a business to make a profit and one way to do this is to grow. However, I come across too many situations where management seems to have forgotten that profit without growth (or worse still in the case of Ford, losses with growth) has to have some meaning. It may be that growth is a competitive strategy but if it is at the sacrifice of profits, it has to be a damned good strategy.

As I mentioned last week, growth brings a lot of hassles and so it has to be worthwhile. Ford believed that it would hold off the threat of the Japanese by introducing 0% interest finance to help sell its cars. It certainly sold a few cars, didn’t keep off the Japanese, but cost it billions. It might have done better had it looked at its product range and the extent to which its product was competitive. It might have helped to look at what it had to do to make the company profitable before thinking of what was necessary to help it grow.

Then there is the sad story tucked away at number 144 on this exclusive list; a company called GAP, which seems to be in free fall not for want of trying to grow but through want of concentrating on what it necessary to make a profit (answer, competitive products). It has fallen from grace with a profit decline in the last year of 30%. It has another problem which is called “patriarchy”. The old man doesn’t want to give up the reins. He knows what is best.

What are the companies that are doing well? In the top 10 are three oil companies. Pretty simple product. Then there is GE, and its formula is only to be in businesses that are number one or two in the world. Then there is the Bank of America. Money is not all that complicated.

So, if you are hell bent on growing. Just stop and have a coffee and ask yourself why you want to grow and how you are going to do it. If a big part of the answer is to make a profit then you had better be sure that your product is competitive. If not, get the product right.

To read more Louis Coutts blogs, click here.

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