Manage Risks, Manage Growth

Author: John Coldwell, Managing Director, InfoQuest Website: http://www.infoquestcrm.co.uk/ Email: jc@infoquestcrm.co.uk

InfoQuest’s managing director, John Coldwell, looks at the risks associated with various growth strategies and what can be done to minimise them. As is often the case, a well-executed simple plan is the most elegant, and a low-risk growth strategy well executed is the most rewarding.

Growth is desirable. Growth provides stability. Growth is the opposite of retrenchment and redundancy and therefore has to be good. Growth brings bigger rewards to the organisation’s shareholders and stakeholders. However growth is also a very risky strategy, and the most difficult strategy to manage when compared with standing still and contracting.

Opportunities to grow can be presented by new facilities (and be production driven); by acquisitions and mergers (and, linked in to this, by the reduction of margins – where the extra revenue is “bought”); by new inventions (where a brand new market is created); and by generic growth, where the same people do pretty much the same things as they’ve always done, only better.

Looking at this last scenario, where huge investments don’t have to play a major part, there are varying degrees of risk attached to the three different strategies available.

1. New products and services to new markets and customers.
2. New products to existing customers OR existing products to new customers.
3. Selling more in the same market.

The word “New” can be defined as “not knowing, not being familiar with, not having a deep understanding of, or appreciation for” and, going back to the title, it can be very difficult to manage the unknown or manage the “new”. There is only one piece of advice to the person who wants to sell new products into a new market – “Don’t”.

Diversifying

The next level down in the risk stakes consists of either selling new products and services to existing customers or existing products and services to new customers. If you go down this route remember Rule number 1.

Rule number 1: Whilst you are doing this, don’t forget who pays your bills. It is far too easy to take key people away from the bread and butter work to help with the exciting new developments. Whenever you embark on a project of this kind you must be even more diligent in watching the performance measures for the mainstay of your business. Keep track of your KPIs for internal issues (order book, response times, quality, efficiencies, utilisations, on-time deliveries and margins) and external issues, with customer satisfaction being the biggest one. Whilst diversifying you’ve got to keep making a profit.

Many years ago I was involved with a garment manufacturer that supplied Marks & Spencer. All of its production, from the 5,500 people it employed, went to the High Street store. Then, one year, worried that they had all of their eggs in one basket, they decided to branch out and sell to Tesco. This was a nice easy step into a new market, which happened to be a disaster.

Different relationships were needed in order to look after Tesco. The company made assumptions about quality, quantity and timeliness issues. Tesco had a completely different way of working from Marks & Spencer. And the very first lorry load was turned around because Tesco expected it to have been loaded in reverse order. Luckily the controls were in place to ensure that M&S were being well looked after. The next season saw a return to 100% M&S sales and growth was achieved by selling into new departments within Baker Street.

Low risk/easy growth

The strategy with the lowest risk sells more to existing customers. Superstores such as Asda, Tesco and Sainsbury try and sell their customers everything they might need on a weekly basis; not just food but clothing, petrol and even personal finance. They minimise the risk by sticking to what they know well and do best and only increase their circle of offerings by degrees, a bit at a time.

I now work in the business-to-business arena conducting business process reviews from the customers’ perspective. When appropriate, we ask the client to list out their largest and most important customers and then, with the help of their sales and marketing team, get them to assess what percentage of their customers’ available spend they have captured. In simple terms, do they have all of it; do they have 80% of it, or half perhaps?

Sometimes that question is not appropriate. For example, when our client’s customers only have the need for one of whatever is on offer – one company to take care of their in-house power-generation; one mailroom machine; one software package for managing the accounts. In these cases the question is not “can we sell them more?” but “will they buy again from us?” when the contract runs out or they need to replace the equipment, to secure future orders, and “would they recommend us to a friend or colleague?” to enlarge the circle of contact.

A few years ago I went to see a Steel Works that supplied sheet steel to the razor market. They didn’t have any plans for growth and said that their major customer had a policy of sourcing this business-critical raw material from three suppliers. So I asked what percentage of this customer’s needs they currently fulfilled. “About 15%” they replied. Sadly it was announced last year that this particular Steel Mill would be closing down in 2007.

The marketing team can quickly identify two distinct areas for low-risk growth by finding out the levels of satisfaction of the most important customers, coupled with the level of customer penetration.

Firstly, there should be a number of customers [who are only giving you some of their business] that have no real issues in terms of your own business processes – no big hang-ups as far as support, service, supplies [of product and information], management interaction and ease of doing business are concerned. These are the easy targets. There is no need to go looking for new customers, especially when it is supposed to cost as much as ten times as much to sell to a new customer as an existing one. The campaign needs to focus on selling more to these customers.

The second thing that the marketing team should find from this exercise is a number of customers (that, again, are not passing all of their business to you) who have issues with the way that you do business. The correct supposition here is that, if you make changes to improve the things that your customers have found to be difficult, you can then treat them like the first group and go sell them some more. The changes that are needed are often, once they’ve been highlighted, blindingly obvious. The most common issues are: -

• Personality clashes between the buyer and the sales person.
• Problems with the vendor’s accounting practices, such as invoicing and cash-collection; where someone in the accounts department doesn’t recognise “customers” and instead refers to them as “debtors”.
• General housekeeping issues such as keeping promises and keeping in contact.

Back in the 1990’s, research from InfoQuest’s involvement in more than 46,000 business-to-business worldwide surveys uncovered the following vital statistics: -

• A Totally Satisfied Customer contributes 2.6 times as much revenue to a company as a Somewhat Satisfied Customer.
• A Totally Satisfied Customer contributes 14 times as much revenue as a Somewhat Dissatisfied Customer.
• A Totally Dissatisfied Customer decreases revenue at a rate equal to 1.8 times what a Totally Satisfied Customer contributes to a business.

This last finding is particularly worrying since it means that if a business had twice as many totally satisfied as completely dissatisfied customers, it would still be doing little better than standing still.

And finally

Love him or loathe him, I was recently watching Gordon Ramsay on television trying to turn round a restaurant in Wales. It had been doing 800 covers a week in the hands of the previous owners, but this had dropped to just 300 covers a week and the new owner was heading towards bankruptcy fast. Gordon tackled the menu, the pricing, the cooking and the organisation in the kitchen.

But he found the real answer to the restaurant’s problems when he went out and about in the local town and listened to the customers. In the programme you saw him wander in to a hairdresser’s shop; you saw him mooching round the local market; and you saw him stopping people in the street. I thought about it afterwards and asked myself the question “was what he did ‘clever’”?

What he did required no training and no formal qualifications. But, as the views, opinions and insights of the customers were aired it became obvious that he was doing the right thing. I’ve found that too many people in business, from the head of Marks & Spencer through to venture capitalists, believe that they know what the customer thinks without ever asking them.

So, yes, what Gordon Ramsay did was clever. If you want to manage the growth of your business, the cheapest, safest, least risky option is to sell more to your existing customers. And the way to do that is to find out what they want by listening to them.

© Copyright John Coldwell, 2004

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Other articles in this edition:

• Manage growth, profit from change
• Growth for the sake of growth is the ideology of the cancer cell
• Measuring the Risk of Growth
• An SME Guide To Managing Growth
• Manage Risks, Manage Growth
• The adaptive enterprise
• Exploiting technologies to successfully manage growth
• Checklist to introduce new marketing technology
• Growth Opportunities in an Enlarged European Union: The Impact of Regulation