When can higher volume lead to lower long-term profitability?
By Denise Harrison
As a company looks for additional growth, its strategic planning team needs to remember that not all growth is good growth. When searching for growth, a team can be lured by the siren song of a big customer or a high growth segment. However, the team might find the new opportunity is being sung in a different key from the music that is producing the company's current success. How can you prevent the dissonance?
High volume and revenue activities have to harmonize with your strategic competencies and company values to be worthy of consideration. Some examples of high growth opportunities:
The Iraqi Conflict
Some government contractors pursued opportunities in Iraq when they saw significant funding siphoned off from their existing government contracts to fund the war effort. An evaluation of threats and possible mitigation tactics is imperative before jumping into such a high-risk, but potentially lucrative area. The threats assessment includes protecting against and dealing with kidnapped or deceased employees and the stomach to handle these events if they, in fact, occur. It also requires evaluating the culture and environment, where accomplishing objectives may include methods of doing business not acceptable in the US. Preventing corruption and unsavory business practices must be evaluated upfront and evaluated on a continuous basis as new and evolving situations unfold. In addition, the contracts may be lucrative now, but what happens when the funds dry up? In pursuing this opportunity, did you lose focus on your existing business? Will you be able to utilize the capabilities developed in Iraq to generate business elsewhere? Or will this be a one-shot deal that gave the company a short-term revenue hit which then forced significant retrenchment after the funding stopped?
Saying No to Wal-Mart
Many executives have followed the beaten path to Wal-Mart headquarters in hopes of generating more volume only to find themselves in a downward spiral of lower prices, lower profitability driving lower quality and losing the brand image that enabled their market leadership position. In the article The Man Who Said No To Wal-Mart, (Fast Company, January/February 2006) Jim Wier, CEO of Snapper™, told Wal-Mart that his company would no longer sell Snapper™ lawnmowers to Wal-Mart. Wier knew that Wal-Mart's pressure on Snapper™ to lower prices would eventually lower the quality of the product. Additionally, Wier knew that Wal-Mart would not be able to sell the differentiated features or be able to service the mowers in the manner that Snapper™ desired. He feared that the brand's image would be tarnished and their profitability would suffer. "We're not obsessed with volume," says Wier, "We're obsessed with having differentiated, high end/high quality products." Wier knew that his customers were people who enjoyed cutting their lawns and were not looking for a cheaper product, but these lawn connoisseurs were looking for a better product and willing to pay for it.
Growth for growth's sake may cause long-term damage to a company's overall health. Make sure the opportunities and customers you pursue are consistent.
Denise Harrison is Vice President of Center for Simplified Strategic Planning, Inc.
She can be reached by email at
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