Demand Plus Capacity Equals Growth

 Demand Plus Capacity Equals Growth

THE FORMULA FOR SUSTAINABLE AND PROFITABLE GROWTH

By Shennandoah Goodson

Accelerating growth is top of mind for CEOs, but figuring out how to get there in a way the organization can afford, manage, and support is tricky. Many leaders think the answer to growth lies in new customers. Even more think the answer lies in acquiring human capital and financial capital. Both viewpoints are on the right track, but offer a very narrow and expensive approach to growth.

In the simplest terms, growth is a function of increased demand and increased capacity. New customers are an element of demand, but not always the best place to start. Although people and capital can increase capacity, they can also mask inefficiencies, eat up profit margins, exacerbate issues, and undermine the value of increased demand in an organization that lacks a solid framework and strategy for growth. In short, a sustainable growth strategy doesn’t start with new customers, people, and capital. Those come later after the organization has established a solid foundation and a strategy that lets the firm leverage existing resources, maximize the value chain, and develop a profitable, scalable business model.

The Demand Side of the Equation

Increased demand always starts with existing customers. Rarely does an organization fully realize every possible dollar they can earn from their existing customer base. Often it’s because the organization hasn’t identified every possible way they can serve the customer within the realm of their core competencies. This is usually due to a lack of understanding of the customer and an inability to see beyond their legacy product or service. This is true for both B2C and B2B companies.

Developing the demand side of the equation requires the organization to explore every possible way to serve the customer. This is more than just upselling. This is understanding the customer’s needs, wants, problems, and goals and looking at every aspect of the organization for sources and ideas to satisfy the customers’ wants and needs. New services and products can come from internal tools the firm has developed to manage operations, educational resources and programs, new features, or the development of complementary products or services. In fact, opportunities for new products and services can come from surprising places.

For example, a professional services firm that accumulates data about customer projects over a thirty-year period can repackage that data and the trends and insights it reveals as a tool to aid customers in making future decisions. Proprietary software developed for managing operations at a manufacturing plant can be licensed or sold as a subscription in tandem with custom orders from customers. Even internal training and development programs can be a complementary product or service.

In some cases, increased demand is simply a matter of better communicating the firm’s current offerings to its existing customer base. This is very common in multi-disciplinary firms in the engineering and construction sectors. It is very convenient for the customer to call one company instead of dealing with five, and by bundling services, the firm is able to offer competitive rates without sacrificing profits.

The Capacity Side of the Equation

As the firm increases demand for its products and services, they also have to ensure they can meet that demand and deliver as promised. Many companies want to sell more, but it isn’t hard to see they can’t handle any increase in demand—not for a lack of resources, but for a lack of structure.

Capacity is not always improved by adding people or capital. Start by eliminating unnecessary, non-value-adding tasks. If it’s not critical to operations or to the customer, get rid of it. Legacy processes that haven’t been reviewed in years are often riddled with these types of tasks. Next, address the necessary, non-value adding tasks. If it’s critical to the company, but not critical to the customer, then automate it. This is usually achieved by implementing enterprise wide software and unifying IT systems that break down information silos and automate the transfer of data, “if this, then that” processes, and reporting. Eliminating and automating administrative and other non-value adding tasks often frees up existing resources and allows the firm to reallocate people and other assets toward income generating tasks.

Once the non-value-added items are addressed, the firm must then fine tune the value chain and create a human performance system with the proper training, incentives, and organizational supports to maximize the onboarding and implementation of human capital. This is when investments in people and capital injections are most beneficial, when they can be put to their highest and best use right away and not diverted to pointless activities and dead-end pursuits. Only then can the firm earn a return quickly and profitably and justify the risk of taking on those additional liabilities.

To achieve sustainable growth the firm needs to increase demand and increase capacity, but does so knowing the starting point to growth lies within the firm and its existing customers. Once the foundation is established, then they can leverage capital and people to acquire new customers and greater revenue.

Shennandoah Goodson is Director at Endeavor Management where she helps mid-size companies accelerate growth, improve business performance and navigate change. Contact her at sgoodson@endeavormgmt.com or 210-558-2817.

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