Bigger or Greater?
Abstract: Indian managers have a strong preference for growing the top line. They mistakenly assume revenue growth will automatically improve profitability. The reason for this propensity probably lies in the lessons they have learnt in the last fifteen years of the post liberalization period. Experience and self-interest – salaries are better in large firms – form a potent mix. The drive for sales growth unmindful of competitiveness is risky and often leads to unhappy consequences.
Great companies like Asian Paints (India) and Sigma Aldrich (USA) concentrate on building competitive edge. They focus on some customers and avoid doing business with others. As a result they develop capabilities that enable them to serve target customers better than competitors. This edge enables them to get bigger, gain leadership and achieve superior profitability. By contrasting examples of unsuccessful and successful companies, the article encourages managers to drive their firms to specialise and become great. Bigness is a product of greatness not the other way around.
It is paradoxical that the desire for growth can be bad for a firm’s health. Indian managers possess an unwitting attraction for bigness. They assume revenue growth is a natural and automatic panacea of most corporate ills. This is a hazardous road. Single minded quest for competitive advantage is not only good for the top line it fattens the bottom line as well.
Excessive focus on top line growth is common. It drives the strategy of many companies and propels them to fight for market share. Expensive promotions, sharp pricing and large sales force produce short-term gains. Soon competitors counter with lower prices, improved features or attractive offers and neutralize the effect.
Corporate initiatives that aim for sales growth without addressing the fundamental issue of competitiveness, assume greater effort alone will win customer preference. It can hasten decline. More customers try the product or service, find it does not meet their requirements and are disappointed. The company tries harder still. Expenses mount and margins shrink.
Too much attention to the top line gives rise to an opportunistic mindset. Leaders turn a blind eye to where business is coming from. New customers are acquired under relentless pressure from within, often at discount prices or promise of higher levels of service. The greater cost of acquisition erodes margins and strains existing resources. In time, such customers discover the company’s offerings are not of great value and exit.
An opportunistic mindset drives sales people to seek new leads without regard to where they came from. Grasshopper behavior weakens the firm’s ability to gain new insights and develop capabilities. Existing strengths are eroded and the firm loses competitive advantage. When bigness is attempted at the cost of greatness, neither is achieved.
In its early years a mid-sized Indian software company grew rapidly by entering new markets. Good but unexceptional products had brought revenue from relatively unsophisticated countries. At a certain stage, the company’s leadership decided market presence and aggressive selling would not be enough to succeed in mature, highly competitive markets. They decided to adopt a unique sales methodology as their key strategy. Customers would gain from the shorter sales and implementation cycles and the process would differentiate them from competition.
Opportunism and a hunter mindset were, however, deeply ingrained in the company. As they expanded presence to over twenty countries, they continued to scout for large opportunities. They entered new markets before consolidating old ones. Stretched thin, the top management had little time to implement the new sales process. Instead of recruiting and training more sales people, they appointed people to manage local relationships. The strategy that would have given them an edge was shelved. Not surprisingly, growth rate dropped by half in a single year!
Consider Asian Paints. They have persistently focused on painters and household consumers as customers. These customers prefer to buy a product that is readily available, other things being equal. The painter would not lose a day’s wages and the householder would not be inconvenienced because a small quantity was not obtainable. Competitive advantage of decorative paints, Asian Paints figured, flowed from improved availability of product, shade and pack. They reorganized their supply chain, production and distribution to ensure their products enjoyed the highest availability of any brand.
They chose not to focus on painting contractor market characterized by few shades, bulk packs, low prices and larger volume orders. All their competitors featured prominently in that segment; some even formulated products especially for them. This deliberate avoidance of a sizable market would not have gone unchallenged. It must have been raised repeatedly and debated hard and long in their Board Room. The strategy to focus on the retail customer and avoid the contractor has survived. In the industrial paints market, they have stayed away from custom made stoving paints, electing to serve customers with standard formulations where they can leverage the supply chain better. To Asian Paints the choice of serving one segment went hand in hand with the decision to say No to the other.
The sales team of Asian Paints is expected to deliver bigger numbers each year. But they do not lose sight of what maintains their competitive edge. Their focus enables them to serve one segment better than others. It raises their capabilities and hones business processes. It has helped them build a larger network of retailers than any other paint company in India. And they have remained the undisputed leader among paint companies in sales as well as profitability for three decades.
The bias for bigness. The history of business in post independence India may explain why Indian managers find size attractive. In the four decades since independence, large Indian companies grew through unrelated diversification. Possessing a manufacturing license created competitive advantage in a regulated economy. Present day managers have mistakenly concluded that diversification is a risk free road to growth, that serving diverse customers is good strategy.
In the post liberalization era, the Indian GDP has grown rapidly. Market expansion has been driven greatly by supply. Rapid revenue growth in nascent and evolving markets has fuelled profits. Working for a big company has also improved employment prospects and salaries for generations of managers. Experience and self-interest have happily fed on each other, often driving profitability southward and exposing the firm to undue risk.
The belief in top line growth is now headed for severe testing. As markets grow bigger new segments emerge. Customers look for differentiated value and demand to be served in special ways. In maturing markets, the opportunistic mindset grows steadily dysfunctional. Savvy firms look for customers they can over serve and say no to those that perceive a weak value proposition.
The virtues of focus. Sigma Aldrich, the US specialty bio-chemical company has, for over fifty years, concentrated on doing business with research organizations worldwide. They produce over 200,000 different chemicals and supply them in small quantities, sometimes as little as 5 grams. They discourage, indeed avoid, large volume orders from the manufacturing sector. This focus has seen them grow to US $1.8 billion in sales.
Both Sigma Aldrich and Asian Paints have grown big by becoming specialists, by turning out to be great at what they do, by over serving some and saying No to others. That is why they have achieved high profitability consistently. Since 1999 Sigma Aldrich has delivered profit before tax above 14.6% of sales. In the last seven years Asian Paints’ PBT have stayed over 13% of sales. And they have grown.
Growth is a consequence, not strategy. Being the best in the business makes a company bigger, gives it long life and puts money in the bank. Bigger is not better than greater. Being great can make you bigger and better.