UK: In Their Pockets: Sound Advice On Revenue Growth - How Will You Perform?

Last Updated: 3 December 2009
Article by Deloitte LLP

Most Read Contributor in UK, August 2017

Competing For Customers

Executives believe that the most powerful driver of growth over the next few years will be the acquisition of new customers. Obtaining and retaining new customers depends on continuous product and service innovation. At the heart of this process lie the sales, marketing and customer service functions. It is their understanding of customers and markets that will be central to the future growth of their companies.

In a recent study by the Economist Intelligence Unit, carried out on behalf of Deloitte, senior managers from all over the world were asked their views about their companies' growth prospects. They said they thought the biggest contributions to growth would come from the acquisition of new customers, and from new customers in emerging markets (see chart).

Central to the acquisition of new customers will be product and service innovation. Innovation these days, however, is found less and less in laboratories. We believe that innovation and future growth will be driven as much by marketing, sales and customer service functions as by new ideas emerging from research and development. The understanding that these commercial functions have of their customers and markets will be ever more critical in determining the direction of innovation and the potential for growth.

Blockbuster drugs, for example, are frequently created out of leads given by contraindications to the treatment of something completely different. Likewise, innovations in fast moving consumer goods arise from retailers' observations of their customers' behaviour as much as they do from manufacturers' ideas of what might be cost-effective to produce.

Three Steps To Growth

How can companies help foster this sort of innovation? We believe there are three fundamental steps they must take.

  • First they have to get the basics right. Many firms fail to do the simple things needed for their businesses to grow. They fail, for example, to redefine their products and services in the light of changing circumstances. Sometimes they fail at an even more basic level – like the insurance company we came across which could not process a claim properly.
  • Then they have to reconfigure their businesses so that they are ready for growth, as and when opportunities arise. If the marketing department creates a new product and the sales department sells it, the supply chain has to be in place to push the product through in time to meet the new demand. Firms have stripped away so many layers of management in recent cost-cutting programmes that they have been left with insufficient resources to think through the sort of internal changes needed to take advantage of growth opportunities.
  • Finally, firms have to execute their growth strategies well. Excellent execution requires above all a process of measurement whereby firms can gauge their success (or otherwise) in attaining their goals. It is remarkable how few organisations monitor and steer progress towards strategic aims. In particular, companies need to ensure that their marketing operation is fully accountable. Too often it is tempting to acquire new customers without calculating whether they are profitable or not.

Back To Basics

It is tempting to think that we live in such a sophisticated world that the simple things have all been done already. They haven't. Time and again companies look for complicated answers to problems while ignoring the simple ones. Innovation is no exception. Wrapping existing products in an innovative way that is more convenient for retailers, for example, can boost growth quite as much as the introduction of an entirely new product.

Original ideas in marketing are likely in future to be a more fruitful source of value creation than new inventions. But sales and marketing departments need to have a thorough understanding of their customer base if they are to come up with innovative ideas.

Respondents to the EIU survey said they thought the most important 'basics' for gaining competitive advantage were:

  • The quality of the product or service.
  • Innovation and R&D.
  • Management skills and experience.
  • Customer relationships.

Many firms are aware that these areas give them competitive advantage. But they are not investing in them. Instead, they are looking outside themselves and betting on mergers and acquisitions, joint ventures and alliances to generate future growth. When they do look internally, too many are still planning to spend heavily on the latest information technology, without looking carefully at what it can do for them. There is more competitive advantage to be gained these days from the way that IT is deployed, and the speed with which it is deployed, than there is from adding the latest bells and whistles to it. Again, simple solutions are often the ones to add most value.

The InterContinental Hotels group (IHG) has over 3,600 hotels in almost 100 countries. After a few years of indifferent performance, the group's luxury brand, InterContinental Hotels and Resorts, decided to reposition itself. It had previously targeted the over 45's, but decided to redirect its marketing efforts at the 35-45's age group. The company asked Deloitte to help it turn its strategy into reality.

We helped to plan and implement a programme to demonstrate to all the firm's employees the growing importance of brands in the hotel industry. The programme also included practical ways in which to bring the brand's new positioning to life. A comprehensive package of tools, processes and supporting material was developed in order to reinforce the learning and to enhance the employees' understanding of their new customers.

Redesign The Business

With markets changing faster and faster, and new opportunities appearing from previously unexpected directions, it is vital that companies become more and more agile. They need to be sufficiently fleet of foot to capitalise on new opportunities for growth as and when they arise, and before their competitors beat them to it.

In particular they need to improve their market insight. For example we have helped a regional newspaper publisher to significantly improve the strength of its online advertising products by developing new offerings based on future needs of specific customer segments.

It is as important to appreciate which markets to avoid – when to say "No" – as it is to recognise genuine new opportunities. Take the example of a premium-priced drinks manufacturer that decided that it wanted to produce a low-cost water to be sold in dispensing machines on the London underground. But its lack of experience in producing low-cost products led it to sink so much cost into the project that it could not bring the price of its water down to the level needed for the targeted market.

Organisations find it hard to say "No". But if they speed up their decision-making processes it can become easier. We all know that the more time and effort we invest in making a decision, the more difficult it becomes for us to say "No".

The People Factor

In many companies there is too little emphasis on recruitment, retention, leadership development and the other processes that ensure they have the required supply of skills, knowledge and experience across the board. Companies too rarely anticipate the recruitment needed to fulfil their strategic goals. Few companies have systematic training schemes, for example, for their sales force. Sales is still regularly seen as the ugly sister among corporate functions, where spending money on a little plastic surgery is considered wasteful.

Our survey threw up some interesting geographical differences in attitudes to acquiring skills. Managers in Western Europe and North America think that their companies are better at recruitment and at training and development than do those in the Asia/Pacific region. There, firms are thought to be better at talent management than they are in the other two areas.

Nevertheless, in all regions, too often the pay and rewards of individuals on the front line in creating growth and product innovation are poorly aligned with corporate strategy. They too need to be redesigned. In many organisations, the pay structure is primarily aimed at maximising individual sales targets and frequently discourages the sharing of client information. Likewise in technology companies that have grown very fast, the potential for synergy between different business units is often overlooked. Yet it is through the interaction of different units that the spark of innovation is often ignited.

In The Long Term

To foster future growth, managers must be encouraged to take a longer-term view of their markets. However, they may in practice not be as short-sighted as is often assumed. One of the more surprising findings of our survey was that only 14% of respondents said that they "consistently felt pressure from analysts and investors to meet short-term performance targets, even at the expense of future growth." Respondents claimed that analysts and investors attach more importance to the execution of strategy and to the detail of their long-term strategic thinking than they do to the setting and attaining of short-term performance targets.

Respondents did, however, express concern about the level of investment flowing into financial intermediaries that do have a predominantly short-term horizon – hedge funds and private equity, in particular. They felt that the popularity of these vehicles had made it more difficult for companies to undertake the kind of investment that generates growth over the longer term.

Barriers To Growth

Our survey asked participants to select the internal factor that they thought most likely to hinder future growth, and one of the most frequently cited was "lack of coordination between internal units". There were some marked geographical differences in managers' perceptions of which relationships work well within their companies. In North America, for instance, there is a perception that the relationship between IT and finance (ie, over issues about spending on new technology) works better than it does in Western Europe or the Asia Pacific region.

The vast majority of respondents believed that lack of communication between departments would be a hindrance to company growth, with those respondents citing the relationship between sales and operations/supply chain as the greatest barrier (see chart). Many of them have experienced occasions when sales and marketing departments have pushed out a new product or service before the operational structure was in place to deliver the goods on time and to the standard promised.

Better internal organisation and communication can help overcome the frictions that exist between departments, but a training programme is an essential part of any attempt to change relationships. Sales departments are notoriously resistant to change – in the words of Arthur Miller's Death of a Salesman, 'it goes with the territory'. But too few organisations invest in training their sales staff to take a different attitude to their work, an attitude that is less focused on what they can sell and more on how they can help their customers achieve their goals.

Revenue Growth

Revenue growth is the key measure of how effective a business has been at identifying and satisfying customer needs. And in the recent past, despite the fact that companies have been drastically cutting costs, their revenue growth has been healthy. More than half the respondents to our survey reported growth in excess of 10% a year for the past three years; only 3% of them said that their revenues had actually fallen over the period. The vast majority has been successful at satisfying customers' needs.

This strong growth has not made them doubt their ability to sustain it in the future. Almost half said they expect their revenues to increase by 10% or more each year for the next three years, whilst a massive 98% thought their revenues would increase, rather than decrease, over the period.

To sustain such a performance will not be easy. After several years in which the main focus has been on cost-cutting, firms are finding that their pipeline of new products and services is thin. Many organisations feel they have lost the ability to think creatively. They want to be "unblocked", to think outside the box, to think laterally – indeed, to think in any direction so long as it is fresh and original. 77% of the survey's respondents indicated that they intend to increase their investment in product innovation over the next three years.

We believe that this investment should not be directed primarily at blue-sky thinking about new products and services. It should be focused on down-to-earth analysis and understanding of existing markets and consumers, understanding that will help firms better anticipate and meet their shifting needs.

New Markets

Could this be that, in the current geo-political climate, American goods and services will not, in the short-term be as popular abroad as they once were? And perhaps this renewed focus on domestic markets may be a sign of bucking the trend of globalisation.

The Dangerous Allure Of The Takeover

The temptation for companies will always be to look for quick results, and to invest externally. More than a third of those interviewed in the EIU survey said that they would rely most heavily on mergers and acquisitions to achieve growth; almost the same proportion said that alliances would be their key driver. Only one in twelve thought that greenfield investments would be the most important.

But firms should be wary of trying to gain new customers by buying other organisations, as study after study suggests that most M&A deals fail to add value in the longer term. Time and again it proves unexpectedly difficult to put into effect the strategy behind the deal.

Firms that merge and acquire often may learn over time how to do it better. But for most organisations, growth is more durable if it comes from acquiring new customers organically, or by generating more business from existing customers. This can be achieved most effectively by directing a new focus onto the already existing sales, marketing and customer service functions.

Conclusion

Companies are emerging from a period of retrenchment, where the main emphasis has been on cost-cutting, to a period in which they are more confidently exploring new opportunities for growth. Deloitte commissioned the Economist Intelligence Unit (EIU) to ask executives from around the world what they see as being the main sources of their organisations' future growth. Product innovation came high on the list.

Innovation is still today assumed to come from laboratories. Too little attention is paid to encouraging innovative thinking in the marketing, sales and customer services operations within corporations. These functions are closest to their firms' customers and markets, and they are best placed to come up with creative new ways to meet the changing needs of those customers and markets.

To generate sustainable growth, firms need to invest more internally in redesigning their businesses. In particular, they need to become more agile so that they can seize new opportunities as and when they arise. Different functions need to work more closely together, and to avoid looking for complicated solutions when simple ones will do.

While over a third of our survey respondents profess that they need in practice to invest more internally to achieve future growth, over 80% cite that they are looking externally for the growth – via mergers and acquisitions, joint ventures and alliances. This is the more traditional route, but internal organic growth from product innovation will be the more enduring. And for that to happen, companies need to invest much more in marketing, sales and customer services.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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