How to achieve profitable growth

Does your business have plans for growth? If the answer is yes, you are most likely investing in a broader product range, new warehousing and production facilities, new employees, etc.

At ABC Softwork, we see three scenarios when manufacturing and trading companies grow:

  • Profitable growth The turnover exceeds investments. Both top and bottom line are strengthened.
  • Zero-sum game The higher turnover is offset by investments at the same level.
  • Unprofitable growth Investments in growth exceed the increase in turnover.


Avoid unprofitable growth

Growth ambitions often manifest themselves in numerous product introductions, a broader product range, new customer groups, new geographical markets and new distribution channels – all of which are positive, healthy measures. However, the strategic initiatives also come with an entourage of costs which management must maintain an overview of, in order to avoid the growth becoming one of zero-sum or” loss.

Studies show that only 2/3 of a company’s customer and product mix are profitable.

The question is: Can Danish companies do better?
Our experience shows that: Yes, they can. A collective awareness can shift the company from unprofitable growth to profitable growth.


Your growth challenges your capacity

Let us shed some light on the causes.

Why do so many companies have so little transparency in their product and customer portfolios?

Because: When a company grows and adds new products, customers and markets, complexity increases.

Increased complexity increases the demands for efficiency. This is particularly true in the supply chain, which must now serve more markets and different customer groups and needs with a growing number of products and varieties. When growth challenges capacity, strict prioritisation is required in the everyday life of the company. This prioritisation is particularly critical to customer satisfaction and profitability.


Top-down prioritisation is a requirement

If the company works without a common strategic basis for prioritisation, everyday decision-making will be left to “chance” and made on a decentralised basis in the various departments. Sentiments concerning each individual customer dominate, rather than facts.

For example:

  • The sales department wants ​​more products and varieties on the shelves
  • Finance wants less tied-up capital and an improved cash flow
  • .. and somewhere in the middle, the supply chain is left trying to balance service and costs.

This makes a centralised, top-down approach to prioritisation a necessity. One example from a large Danish company illustrates how much it “takes” for unprofitable growth to be detected.

Quote from the customer case:

A growing dissatisfaction among our biggest customers, unmet customer needs and capacity shortages marked the beginning of supply chain segmentation.


Segmentation of customers and services

Most trade and manufacturing companies operate with standard “one size fits all” approaches, meaning all customers – large and small – are entitled to low prices, fast deliveries and high service levels.

In actuality, a single standard means that some customer groups are over-serviced, while other customer groups are under-serviced.

A segmentation of customers should be self-explanatory and divide customers by profitability. What we see, is often a simple tripartition into “gold, silver and bronze” – the gold customers being the few customers, who drive profitable growth.

At worst, a single standard means large, dissatisfied gold customers and many small, unprofitable bronze customers.