In last month’s newsletter I set out the common barriers I’ve found in organisations that have new opportunities for growth that management just can’t see. In this month’s article I will set out, as promised, one approach that I’ve used with success at two of my larger retail clients to overcome these barriers.
Most companies don’t operate a single business; they operate a portfolio of businesses. A fashion retailer, for example, operates in ladies fashion, ladies accessories, ladies shoes, men’s fashion, men’s accessories and men’s shoes, and potentially in children’s fashion, accessories and shoes as well.
By breaking down your business into its constituent markets you are more likely to spot growth opportunities than if you look at it as one homogenous entity. You are likely to be in a different business where (1) the products are different; (2) the customers are different; (3) the suppliers are different; and/or (4) the competitors are different.
Once you have broken down your business into its constituent parts you need to collect three pieces of data in order to identify potential new growth opportunities:
- Profit productivities. For my retail clients this measure tends to be profit per square foot, as retail space is the key asset that retailers manage. In the hotel industry the measure is profit per available room and in banks it tends to be profit per employee. You will need to work out the best measure for your business, but it is critical that you focus on profit rather than sales. In my experience many organisations focus excessively on sales productivities and don’t realise the potential of high-profit categories that perhaps don’t deliver the volumes of some of their other lower-margin businesses.
- Market share. For each of your business categories you should obtain or estimate your current share of the market. You may define the market on a national, international or more local basis, and you may wish to focus on certain customer groups and channels, but you must ensure that your definition of the market reasonably reflects how and where your business operates and, importantly, could operate. As we shall see a low market share could be an indicator of opportunity.
- Profit pools. Your last piece of analysis is to determine the total ‘pool’ of profit that your business is competing for in each of your markets. This information requires two estimates: (1) the overall size of the market in terms of sales; and (2) the average net profit margin achieved by all the players (which is most easily calculated by working out the margins achieved by some ‘average’ players).
Once you have these three pieces of information you can then complete a chart similar to the one set out below, which identifies profit productivities on the x-axis and market share on the y-axis. The size of each bubble reflects the size of the profit pool in that particular market.
Category Performance At A Major Retailer
This chart is based on my work with a major retailer. We immediately identified three insights. First, although the retailer was putting a lot of effort into driving its share of Category C, the profit pools in this market were relatively small and their were bigger opportunities for profit growth elsewhere. Second, the retailer enjoyed high market shares in Category F and Category H, but these were low-productivity categories with relatively small profit pools. If new growth opportunities could be found, there was an opportunity to donate space from these categories, as well as categories A and B, to the higher-potential ones. Third, Category D was a highly productive category in a highly-profitable market. The retailer also had a relatively low market share in this category, and it was likely that increasing its space would drive new sales and profit growth.
On the back of these insights the space allocations for each category were changed – including a 50% space increase for Category d – and in a trial of the new offer the retailer has seen a 10% improvement in profits.
What new growth opportunities could you be pursuing by better understanding the profit productivities, market share and profit pools of your different business activities, and reallocating your scarce resources in line with their true potential?
To find out more contact Stuart by clicking here or call +44-(0)1636-526111.