How Strategy Drives Profit

Two companies producing equal sales of the same products and services do not produce equal profit margins. Is it because of different management competencies, locations or pricing methods?

Sometimes, the difference is just the basic company strategy. The core of a strategy is the selection of the problem the company will solve, and the customers they will offer the solution to.

To illustrate, let’s consider two home care companies that started in the same market at about the same time. One of the companies belonged to a health system, and the other was an independent. Both companies offered oxygen and DME to the general population in the market. At first, the health system company grew quickly and seemed to have a strong competitive advantage, while the independent struggled to gain market share.

But in the third year, the independent made a strategic change. Management decided to offer the same solution — but to different customers. They chose business that others in the market didn’t want: hospice and capitated contracts with a couple of HMOs. When they made this strategic change, the company’s growth rate began to accelerate.

It would be a mistake to assume that simply selecting a different customer base was the whole solution to more rapid growth. It was not. The management team properly aligned all aspects of the business with the new strategy so that it was reflected throughout all policies and procedures. This alignment allowed the company to achieve strong profits that financed strong growth.

Once these things were done, the independent’s growth and financial performance were the best in its market, and among the best in the industry. It is important to note the increase in profits and to remember the customers from which they were derived. “Hospice” and “capitated contracts” might as well be spelled as four-letter words according to some in this industry. However, such thinking is a platform for missed opportunities.

Most solutions that can be offered — and most customers that they can be offered to — can produce lucrative profits. The hard parts are making the right selection for the market and staying focused on the strategy. A good question to ask here is, “How?” There are only five steps, but executing them requires knowledge, work and discipline.

1. Gather competitive intelligence. This is not espionage. Competitive intelligence is information about buyers/customers, rivals, suppliers, potential of new entrants and substitution of business models and products at both the industry and market levels that has been validated and analyzed for use in management decisions. There are basically three things that must be known about rivals: capabilities, vulnerabilities and intentions. It is imperative that a detailed understanding about the buyers’/customers’ problems and how they get them solved is built into this step.
2. Perform an honest self-examination. There are six areas of your company to consider in this examination. They include skills, resources, controls, capabilities, vulnerabilities and intentions.
3. Answer three questions: (1) Where are the gaps between problems and solutions being offered? (2) Which opportunities can be taken with little resistance? (3) Which gaps or opportunities are large enough to sustain a business?
4. Refocus the marketing and sales effort. In answering the questions in Step 3, there are likely to be one or more solutions that should be offered to a specific market segment. The company’s sales effort has to be redirected to these opportunities. That does not mean saying no to prior customers; it does mean that marketing and sales efforts have to be aimed only at the best customer.
5. Develop the right processes and controls. In order to stay focused, the company has to be efficient in the processing of these new sales. Then controls (the information systems) that tell whether the company is on or off target have to be developed and shared so that everyone understands where the company is, where it is going and what his or her contribution is.

These five steps have been proven many times. Use them.

Wallace Weeks is founder and president of Weeks Group Inc., a Melbourne, Fla.-based strategy consulting firm. He can be reached at 321/752-4514 or by e-mail at [email protected].