Insights

Finding Growth Opportunities During Lackluster Times

Whether or not businesses anticipate lackluster earnings results during the first half of the year, the mandate for growth still remains. To achieve more sustainable rewards for shareholders in 2012 and beyond, companies should pursue strategies that create top-line growth.

In 2010-11 corporate profits grew owing to the cost cutting moves that many firms made to survive the recession of 2008-09. As the economy recovered and demand returned to normal levels, bottom lines benefitted. However, as this year’s earnings for many companies may demonstrate, cost cutting measures usually produce short lived effects.

An article published earlier this year in The New York Times pointed to slowing growth in emerging markets and commodity price inflation as other possible factors contributing to the disappointing results. While these areas certainly present challenges, they also offer opportunities. Firms should take advantage of these and other opportunities and take action to grow.

Expansion into emerging markets remains a huge business opportunity, even as the media emphasizes the slowed growth Asia and other emerging markets are experiencing.  It is important to note that this slowed growth is occurring in a dramatically faster growing economy than existed in the past. Data suggests that from 1999 to 2009 the regional distribution of GDP remained largely unchanged. Traditional Europe (defined by the EU 15, before the expansion to include Eastern European countries) combined with the U.S. and Canada represented nearly two thirds of the world’s GDP. Add to this number Japan and the rest of Europe and the developed world accounted for nearly 80% of global spending power.

The important story, however, involves examining the regional growth factors. In the last five years, China’s economy alone has accounted for more than a quarter of global growth, more than the U.S. and EU together. Add in the rest of Asia, Latin America, and Europe outside the EU 15 and these fast-developing regions account for 60% of all the growth in the world.  And after these years of economic progress, the citizens of these emerging markets are enjoying income gains. Consequently, a significant middle market segment has appeared. Unlike premium buyers in these emerging economies who prefer high-end, sophisticated products and services, the mid-market buyers instead purchase “good-enough” products priced at a level significantly below the best alternative. These mid-market buyers are not interested in buying low-end, locally made cheap counterfeits—products traditionally sold by indigenous suppliers.   With the right strategy, US based firms can compete with the local companies that currently profit from dominating the low-end segments and are now positioned to enter the mid-market segment.

Effective pricing strategy can also offer promising growth prospects even while commodity price inflation is cited as drag on profitability. New approaches to pricing analysis build upon insights about the extent of pricing pressures in each product-market segment, allowing firms to determine whether price pressures are real and unavoidable or imagined. While pricing is not the only factor that drives customer purchase decisions, pricing has many dimensions and firms can get smarter about pricing if they focus upon these analytics to understand what is and what is not driving profitability.

The best place to start is by examining a spectrum of factors such as volume changes, price recovery, and productivity.  The goal, of course, is to learn to what degree do you as a supplier have control over or can substantially enforce your will over pricing. Additionally, your team must understand how important pricing is to your ability to earn profits.  Are you operating in an environment where capacity is tight and your products are in demand? Is your offering strongly protected with unique technology, substantial services, or a strong brand? What is the elasticity of profit with respect to price  — do small swings in prices cause large swings in profit?  These questions and more can help determine the degree of your control over pricing and the importance that pricing plays in your business.  Now is the time to take a proactive approach to pricing strategy because even a modest improvement in price realization can yield a dramatic profit increase.

In any case, thinking beyond emerging markets and pricing successes, now is the time to look under every crack and cranny for growth opportunities. In recent months, our clients– firms that operate across various industries–have followed this rule to gain promising outcomes. The lessons from some of their projects: examine your legacy business and explore options to harness organic growth; revisit your customer segmentation structure and consider what matters to each target segment; query customers about unmet needs – are they crying out for better information, willing to reward a strategic supplier on whom they can count, or looking for a more complete solution?  Lastly, pinpoint changes that occurred during and since the recession and adjust your business models accordingly.  We have found instances in which all of these growth drivers were present, waiting to be tapped.

The list of growth opportunities goes on and on. The fact that so many firms continue to find avenues to growth is empowering. It also emphasizes the need to drive future profit reports from the top-line.

Author: Atlee Valentine Pope

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