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Strategies Toward Profit Growth

Increasing and maintaining profits is a motivation for all in business. One obvious and direct way to achieve additional profit is to cut costs. While this should be examined, controlled and reduced on a regular basis, one must be careful to avoid a significant trap.

Cutting costs by reducing human resources is often a primary strategy. The risk is that you will lose good people and then need them again to support growth during an upturn or to meet increased sales demands. Downsizing is a defensive strategy that may be required at times, but a 1993 study showed that only 45 percent of companies that downsized reported an increase in operating profits.

Of course, you should always take advantage of technological advances that enable cheaper, better and faster performance. Selling or eliminating non-performing assets will help also. These can be assessed in light of asking the question What business are we in?

The bottom line is that cost cutting can take you only so far in the quest to increase profits. So whats the alternative strategy?

Planning and achieving growth is the answer. There are three major growth strategies to consider. One is channel management, where a traditional product that has been overlooked is marketed and sold to enable a business to be a category killer. Two examples are Starbucks, which made a difference in the worldwide coffee market, and Staples, which shook up the seemingly mundane office products industry.

A second strategy is superior product development. The 3M Company and Google come to mind as examples of constant innovation. These successful companies foster creativity by allowing and supporting individual research initiatives for new products. Approximately one-third of 3Ms current profits come from products that did not exist 20 years ago. Each of these first two strategies can require vast amounts of capital and a unique corporate culture to support success.

The third strategy, which we have adopted at Greco Apparel, is customer franchise management. This approach can be utilized whether you have either limited capital or a modest number of customers. While it may be simple, achievement is not always easy. You need to determine how, in your business, you can provide competitively superior value to a specifically defined set of customers. The primary goal is to choose customers who are profitable to serve. You may want to make a list of what determines a profitable customer including a certain sales volume per year, credit worthiness, compatible culture with your own, people with whom you like to deal, history of product acceptance and opportunity for joint growth. This also allows for the fact that you may want to jettison unprofitable customers or those not meeting your criteria. Let your competitors have them! The selection and elimination process should be conducted on a regular basis, much like weeding out underperforming stocks in your investment portfolio. Your customer base is you business portfolio.

Remember that the value of your customer should be viewed over a lifetime of service. I know its simple math but worth remembering that if a customer generates $100,000 per year in profits, then over a 10-year period its worth $1 million. In addition, happy customers are a great source of referrals. They act as cheerleaders for your business and drive your profitable growth. Contented customers will probably increase their business with you as they grow. Giving great service makes it easy for them to give you additional orders when they can count on your performance. You make the purchasing agents look good. By selling more to the same customers, higher profit margins are often derived as efficiencies in administration and delivery of products and services occur. Opportunities for cross sales of additional products also will add to your growth.

Your focus should be on satisfying and retaining your highest-value customers. By knowing the profile of these customers, you also can market more effectively as you seek a specific target market. Develop your advertising budget to reach these potentially attractive customers, and attend trade shows best related to your purpose.

Most of my research for this article came from the book Grow to be Great by Gertz and Baptista, which I heartily recommend for further planning and strategy development.

Joseph Greco is president of Greco Apparel. You can visit them on the web at www.grecoapparel.com.

Above story first appeared in MADE TO MEASURE Magazine, Fall & Winter 2008 issue. All rights reserved. Photos appear by special permission.
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