Category Archives: Business

Business

Pricing and Profitability Management as vehicles for growth

Businesses can grow in several ways: maintaining sales and reducing costs (increased profitability and margins); maintaining costs and growing in income (increase in sales and nominal contribution margin) or with a mix of these factors, to increase the value of the companies and their results.

The retail and mass consumption industries have a lot to say in this regard. On the one hand they have the need to align themselves with the reality of consumers; and on the other they must continue to grow in value. The way forward should combine: Strategy, Government, Execution and Technology oriented to price management and profitability.

In the Retail industry and mass consumption in Chile, a certain immaturity can be seen in the teams and structures, and the need to deepen their capacities is evident. Although it is understood as a natural immaturity characteristic of our market, the way to grow and the competitive advantage will come from those companies that focus on the following aspects:

Have definitions of your pricing strategy to maximize revenue / profitability
Train and form a governance and management team of the pricing process to maximize income / profitability
Optimize prices via Software, to be able to adjust ad hoc to the demand by segments and products
Align regulatory and tax aspects to the model
Generate processes to define, execute, and evaluate prices and profitability day by day
Understand that Price and Profitability Management is the key to being able to grow and maximize value in times of slowdown
Invest in a better understanding of customers, in order to define a price that generates a deeper and fair relationship with them
Globally, all Retailers and mass consumption companies invest millions of dollars in improving their models, equipment, and technology around Price and Profitability Management. An increase in these capacities can impact up to 5% the EBIDTA of a company, with an investment that usually has returns within a year.

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Generating Profitable Growth

The permanence of a company in the market is closely related to its ability to grow: small companies are more fragile to the changing Latin American environment and, therefore, more likely to disappear. However, growing profitably is not easy. Knowing the edge strategy model is very important, since it offers us alternatives to increase sales and profits.

Various statistics maintain that in Latin America the mortality rate of companies is around 70%: 7 out of 10 companies created do not exceed the first year of life and, most, close in less than five. The main explanation is the difficulty of adapting to the external environment, which presents innumerable challenges on the continent due to its volatility.

 

Normally, companies that overcome these external storms, among other aspects, have a common denominator: they have exceeded a certain minimum level of sales, generating a size that ‘protects’ them against certain ups and downs. Some have successfully explored unfamiliar markets, while others have efficiently squeezed their key assets.

 

Most often, however, companies fail in this quest building a  profitable growth strategy. Exploring unfamiliar markets is no easy task: sometimes the desire to leave a mature market forces the company to venture into businesses where they lack strategic assets or the ability to create them. Similarly, the more that is squeezed out of a current business model, the more assets specialize toward that way of making money. There we have the example of Walmart and its difficulty in facing the challenges that Amazon presents .

 

Fortunately, there is a middle way, less risky than exploring unknown markets and more profitable than seeking efficiency in today’s business. Edge strategy is a way of thinking that emphasizes taking advantage of what is at the edge of the company: discover benefits in nearby territories.

 

Edge strategy is a way of thinking that emphasizes taking advantage of what is at the edge of the company: discover benefits in nearby territories.

 

The edges of the business

The edges of the business are generated in the mismatch of our value proposition and the set of permission granted by the client. People have desires that they satisfy by buying a good or service; By choosing a particular company, you are granted “permission” to fulfill part of those wishes.

 

When our value proposition is not exactly the same as these wishes, a mismatch occurs. For example, a professional may seek a master’s degree program in business to open up career opportunities, but is not interested in the international component of the program as he wants to work in his own country.

 

This mismatch should not be seen as a problem, but precisely as an opportunity: given that our clients vary a lot between them, our value proposition will hardly meet the expectations of all of them 100%. The exercise of identifying these mismatches is known as the edge strategy.

 

The product edge strategy describes situations where our product or service is imperfectly calibrated to meet the needs of our customers: many of them will be willing to leave us more money if we seek to calibrate it better. This is what Apple does when it sells phone cases to its customers; whoever buys a telephone is not looking for the device itself: it seeks to be able to communicate and carry out other operations without damaging the telephone. A housing offers additional security, better meeting customer wishes.

 

The strategy of the edge path describes situations where our company can redefine its participation in the way that helps the client to complete their mission. Some young couples would be willing to go to the movies if they had an area where they could safely leave their baby. The Mexican Cinemex, by offering CineMá, an adequate room in volume and sound for these couples to enjoy the film in the company of their baby, is a clear example of growing through sales at the edges of the business after deciding to accompany one more step in the set permission of the client.

 

Finally, the enterprise edge strategy describes situations where the strategic assets of the business are exploited in a way that was not envisioned when they were created to sustain the traditional business. It is reflected in Amazon’s strategy when it rents or sells much of the technological infrastructure that sustains its businesses.

 

In short: it is necessary to grow profitably without putting at risk our current or future position in the business. Seeking opportunities at the edge of the business, in the product, in the definition of the customer path or in the company, can generate significant growth and support the strengthening of the company.

 

Have you ever thought about the growth opportunities that present themselves at the edge of your business?

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How to ensure the growth and profitability of companies?

Too many companies fail to meet their revenue and profitability growth targets. However, the likelihood of achieving profitable growth is increased when the organization has a clear and clean growth strategy coupled with strong execution within its infrastructure. One without the other hurts the likelihood of success.

Why is growth so elusive? Based on research and experience, there may be two main reasons: An organizational infrastructure that cannot sustain successful execution and an inadequate consideration of opportunities within the core business activity, adjacent, or lack of customer knowledge.

Set clear growth goals (SMART):

S: Specific

M: Measurable

A: Achievable

R: Significant

T: Timely

Setting SMART goals  gives you structure and the ability to monitor your goals and objectives. Exchange your incomplete resolutions, setting SMART goals creates verifiable trajectories towards accurate objectives, with clear steps and an estimate of the ability to achieve your goals.

In corporate life, this type of goal planning is one of the most effective and least used to achieve goals. Clarify the way in which your objectives arose and the criteria that will shape their realization.

Identify the ideal customer

Generating sales is relative. If you are selling to clients whose business need is not sustainable, this represents a zero-sum game for you. If you don’t have the right mechanisms in the right place to prospect your ideal client , it will be difficult for you to maintain growth or even grow.

You have to adopt a business or entrepreneurial attitude that allows you to see beyond the obvious and locate the client that is compatible with your business model. This keeps acquisition costs low and ensures that customer relationships are mutually beneficial, and that objectives are aligned.

Create a dissemination and / or promotion strategy

What is the use of setting my goals and knowing who my ideal customer is if I cannot promote my products or services effectively? It is necessary to understand that a marketing campaign needs to be designed specifically for your ideal client and spread in the exact place where they are. General advertising no longer works, it is necessary to contact only potential prospects in order to start an effective process that takes them by the hand at the moment where they make the decision to purchase your products or services, becoming future clients and promoters. One of the most effective ways to achieve this is through an inbound marketing campaign  led by trained professionals who understand who your company is and your ideal client profile, and thus creating a more effective way to ensure the growth and profitability of your company.

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Business Growth Strategies

If a company wants to remain competitive in the market, it must constantly consider the development of growth strategies, but not only to improve sales, market share, profit or the size of the organization, but also to survive attacks from the competition, thanks to the economies of scale and the experience effects it offers.

FROM THIS POINT OF VIEW, FOUR BASIC GROWTH AND EXPANSION STRATEGIES CAN BE DISTINGUISHED FOR A COMMERCIAL DISTRIBUTION COMPANY:

Market penetration strategy : exploitation of the same commercial format in the same market, using the same products or slightly altered products.

Internationalization strategy : opening to other geographic markets with the same commercial format.

Vertical integration strategy : extension of the company’s activities towards wholesale and production activities.

Diversification strategy : entry into other commercial formats and sectors that support commercial activity.

BASIC WAYS TO GROW

Growth strategies can be realized through internal or organic growth or external growth. The choice of one or the other option will depend on various factors, such as the life cycle phase of the commercial formula, market saturation, the level of competition, the need or not for rapid growth, the existence or not of possible external collaborators, the level of resources and capacities of the company, and so on.

 

INTERNAL OR ORGANIC GROWTH

The internal or organic growth is to carry out the strategy of growth through the creation of new facilities , new production plants, new representative offices of the same company, perfectly controlling the expansion and ensuring that the entire entity meets the objectives.

 

This strategy can also be developed by creating a new business formula through a subsidiary with the same or new brands. The internal growth strategy has been the normal one in most business development processes, which is why it is known as natural growth.

 

SOME OF THE ADVANTAGES OF THIS TYPE OF GROWTH ARE:

Facilitates the optimization of locations and commercial distribution

Resources grow gradually, so financing it is more comfortable and can optimize the management of the process

Enables the acquisition of the latest technology, especially when it comes to capital goods

Many companies decide to grow under this scheme, but more and more, given the processes of business concentration that we are experiencing, the trend is towards non-organic growth.

 

ORGANIC OR EXTERNAL GROWTH

It is the growth formula that we can most commonly observe day by day in the economic press. It is based on the processes of mergers, acquisitions or alliances , through which a market is accessed through a company that is acquired, with the peculiarity that it is in operation, which eliminates some hidden costs of internal growth.

 

When the sector in which the company is located is saturated or wants to enter new markets quickly, external growth may be the preferred option. Thus, external growth is fundamentally based on the purchase of other companies or on acquiring significant financial stakes in them. In this sense, in recent years there have been very important purchases and mergers in all sectors, one of the most recent in 2010 is the merger of British Airways and Iberia, a process that has taken several years to sign. of the definitive contract.

 

External growth occurs as a consequence of the control of one or more companies in operation, either through a simple association, such as an alliance, or through the acquisition of all or part of its assets through shares or other securities. that form its social capital. This type of growth is materialized, therefore, by acquiring existing capacities and resources, so from the macroeconomic point of view it does not represent an increase in real investment or a growth in aggregate supply , but a simple transfer of ownership. .

 

Advantages :

External growth saves time compared to the internal one, since it needs time to develop products, build new facilities, develop new distribution channels or be accepted in the market.

It may be the only way to overcome a barrier to entry due to the difficulty of internally developing the necessary capacities or resources to compete.

It involves less uncertainty, since both the investment required and the current results are known

As there is less uncertainty and less risk, the financing alternatives for the process are much greater.

Disadvantages :

An acquisition is generally expensive as a large part of the final value of the going concern is made up of what is known as goodwill. By buying it, a part of the future profitability will already be discounted in the value of the sale with the subjectivity that valuing it entails.

Sometimes unnecessary assets are bought that are tied to the company being bought, which limits the flexibility of the company to make decisions.

The problem of integration of two organizations and their cultures can be a major brake that deteriorates the expected results of a merger or acquisition.

Antitrust legislation, which, in the case of Europe, is governed by the Antitrust Court, may limit the possibilities for this type of growth.

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BASIC GROWTH STRATEGIES

An outline of the different growth strategies that any type of company can develop in general was proposed by Ansoff. This scheme, called by Ansoff as the “ matrix of intensive growth strategies ”, classifies the strategies according to the product offered (current or new) and the market on which it operates (current or new) in four modalities.

THESE MODALITIES ARE:

Market penetration strategy. The possibility of growth is considered through obtaining a greater market share in the products and markets in which the company currently operates. Thus, it consists of increasing participation in the markets in which it operates and with the same commercial format, and there may be three ways to develop this strategy: first, that current customers consume more products and services; second, attracting customers from competitors; and third, attract potential customers who are not currently buying in this commercial format. This strategy can be developed through a internal growth strategy (for example, by increasing the number of own stores) or through external growth (for example, through the purchase or merger of competing companies). For example, the market penetration strategy is the strategy most used by commercial distribution companies. This is because it is the strategy that carries the least risk, since it involves the development of similar commercial formats in the same market, that is, the development of the basic business, about which there is a high level of knowledge.

Market development strategy . This strategy implies looking for new applications for the product that attract other market segments different from the current ones. It can also consist of using complementary distribution channels or marketing the product in other geographic areas. The vending sector is an example of how to develop the market, although the most traditional strategy has consisted in the internationalization of the company, through the development of new geographic markets.

Product development strategy . The company can also launch new products to replace the current ones or develop new models that involve improvements or variations (higher quality, lower price, etc.) on the current ones. A typical example is the appearance of new game consoles such as the WII or the PlayStation 3 that have come to replace the previous models.

Diversification strategy . It occurs when the company simultaneously develops new products and new markets. The diversification of a company responds to the needs of continuing to grow in other markets when the current market is saturated or for strategic reasons. A company can diversify in a related way (in similar companies) or in a conglomerate way (in companies with little relation to each other). A case of diversification in Spain is that of the Nueva Rumasa company, which is acquiring companies from very different sectors.

INTERNATIONALIZATION STRATEGIES

Through this strategy , the company enters other geographic markets with the same commercial format . This strategy presents higher levels of risk the greater the difference between the target market and the source markets in terms of lifestyles, language, cultural environment, legal requirements, per capita income, etc.

 

IN THIS SENSE, WE CAN SPEAK OF TWO LEVELS OF INTERNATIONALIZATION:

First, entry into markets with a high socio-cultural and legal affinity.

Second, entry into markets where affinity is low.

In the case of Spain, the first level markets would be made up mainly of the European Union and Latin American countries, and the second level markets, the countries of the rest of the world.

THIS INTERNATIONALIZATION STRATEGY CAN BE CARRIED OUT IN THREE WAYS:

Making a direct investment (creation of own establishments or purchase of a local commercial distribution company).

Carrying out a joint-venture (creation of a new company with the association of a local company that provides market knowledge).

Export of the commercial format through the franchise formula.

One of the problems that internationalization entails is the ability of the company to face the regulations and laws of the country in question , but there is also one that can become fundamental, the repatriation of profits, since not all countries that They welcome foreign investment, they encourage profits to leave the country and, if they do, they carry very high taxes. For example, in the case of Brazil, the investments of a company there are welcome, but there are a number of innumerable taxes and legal and administrative obstacles that make it difficult to repatriate the investor’s profits.

The tax aspects therefore are a factor to consider when a company decides to make an internationalization strategy and to this end, it is important to analyze in detail the existing double taxation agreements. Another relevant factor is that the exchange policy, since it can play against the interests of the company and that it also entails important commissions every time the currency is changed.