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How to Profitably Grow
Underperforming Companies
By Robert J. Meehan
A highly-leveraged middle-market company lacking both a unique Value Proposition and a team-oriented culture, regularly leads to EBITDA losses and a cash burn. Doctored financial results can hide the serious financial condition from stakeholders—allowing the deterioration to continue for up to one to two years.
To profitably grow underperforming companies:
01. Develop and Implement a Unique Value Proposition and Detailed Strategy.
02. Establish/Renew a Team-Oriented and Customer-Focused Culture.
03. Determine That the Results are Not Doctored.
04. Don’t Slow Walk the Changes.
“For poorly-performing and distressed companies, the strategy must free up significant cash and reposition significant assets and business units as well as grow profitable revenues.”
01. Develop and Implement a Unique Value Proposition and Detailed Strategy
Endless financial models with detailed assumptions, SWOT’s and budget Power Point presentations are too frequently mistaken as a strategy process by middle-market companies. Strategy focuses on creating value—different from your competitors—with a unique Value Proposition. Implementing a strategy will result in a more predictable, profitable revenue stream that can compensate for the risk of high financial leverage.
Too often, instead of focusing on developing a unique Value Proposition and the detailed strategy, senior management emphasizes an ongoing headcount fine tuning. This will soon damage the organization’s trust and unique capabilities, which are the foundation for your unique capabilities and Value Proposition.
The word “strategy” is over-used and managers refer to most things as being “strategic.”
Strategy is not:
+ Goals and objectives. They are outcomes and do not detail the actions required.
+ Financial models with detailed assumptions.
+ Better management of the sales force.
+ Copying what a competitor does successfully.
+ Trying to leverage the so-called Strengths—from the SWOT exercise—that competitors can do as well. Non-strengths can’t be differentiated.
Strategy is:
+ Identifying and then leveraging your unique capabilities (skills, services, technology and processes).
+ Offering a unique Value Proposition—that competitors can’t copy—supported by your unique capabilities.
+ Identifying market segments and targeted customers that need and will pay a premium for your unique Value Proposition.
+ Offering those targeted markets and customers a unique Value Proposition that meets their important needs so you don’t just compete on price.
+ Identifying what to avoid—customers, product lines, geography, etc.
+ Establishing boundaries in the decision-making process regarding which opportunities will be pursued and which will not.
+ Developing strategic priorities to execute the strategies.
+ Continuing to strengthen the specific unique capabilities that support your unique value proposition.
Continually scanning the environment—industry, markets, customers, competitors, regulations, trends—to identify changes in the rapidly-changing world market is part of Strategy’s continuous process.
Strategy Requires Difficult Choices
Developing a unique strategy forces the CEO to make difficult choices, and this will create conflict within the organization because you can’t do everything everyone wants. Many times the CEO either asks for endless incremental analysis—to delay making a decision—or spreads the limited resources to the legacy business units with the loudest voices. Regularly challenging which legacy assets to redeploy must be part of the strategy process, and such process should not just be an annual exercise. The worldwide markets won’t wait on your annual planning process. Strategy setting—decisions and actions—must be a continuous process throughout the year.
Strategy Development Suggestions:
> It’s critical that you begin the strategic process with an independent market and intelligence base. Externally-developed data will provide solid ground for the brainstorming sessions. Never blindly accept internal company and industry truisms—as they very often do not reflect market realities. In developing market intelligence, involve the business units, customers and suppliers and seek out current data as well as future market and competitive trends. The entire organization—both salaried and hourly team members—is responsible for providing market intelligence.
> Write down your current Value Proposition, usually 4-5 specific points.
> It should define:
+ What unique value you’re delivering.
+ What specific customer groups you’re going to serve.
+ What critical needs of the targeted customers you’re going to satisfy.
+ What you won’t do. What you will avoid.
+ What is the relative price.
> Is your Value Proposition really unique?
> What are your unique capabilities that drive your Value Proposition?
> Map your entire supply chain—working backwards from the end user.
> Determine your targeted customers’ most important needs; talk with them.
Ask again: What unique skills, services, technology or processes are you providing?
> What could you add or change that would make your Value Proposition and supply chain unique to a specific market segment and specific customers?
> Ensure that every team member in the organization can state your unique value proposition. If they can’t, then you don’t have a strategy.
> Everyone in the organization must know upon what unique capabilities your value proposition is based.
Test Your Strategy
Before a strategy is finalized, you must answer “yes” to the following three questions, or redo the strategy:
+ Within the implementation period, do you have the resources—cash/debt capacity, staff, systems, skills—to successfully implement the strategy?
+ Does the projected ROIC exceed your cost of capital? Exceeding your cost of capital, however, should be a bare minimum. Instead, strive to be in the top quartile for your industry.
+ For poorly-performing and distressed companies, the strategy must free up significant cash and reposition significant assets and business units as well as grow profitable revenues.
As I mentioned in my Marketing News article ‘Create, Revise Channels for Customers’: “To minimize price competition, senior management must continually redefine how it creates value for customers and the end-user. After that, adding value requires close collaboration among all organizational functions and employees.” A team-oriented and customer-focused culture breeds innovation and is the foundation for developing and implementing a strategy.