The main objective of any executive is to achieve profitable growth at the company he or she leads. However, a survey by Sintec of 132 publicly traded Latin American companies reveals that scarcely 205 of those companies achieve such objective. The purpose of this article is to show the key successes and practices implemented by companies that are achieving profitable growth in Latin America.
When considering growth, what comes to mind are ideas on how to increase sales, enhance pricing, grow market share, and buying other companies; when the variable is profitability, what comes up is expense and cost optimization, improving returns on assets, efficiency, among others. Our research reveals that companies that achieve profitable growth go beyond those ideas. What sets those companies apart is their ability to develop a business vision articulated upon business models based on competencies along their value chains that enable the continual identification, creation, delivery and abstraction of market value.
Sintec’s study contains two dimensions: a quantitative dimension that identifies those companies with the strongest profitable growth in Latin America on the basis of economic results and process indicators (sales growth, % operating profit, return on assets, inventory turnaround, and portfolio turnaround) over the years 2007 to 2009.
The other is a quantitative dimension focused on the degree of maturity of the companies as regards their practices and their alignment to the marked. This section analyzes the companies from 6 different angles: how they understand their market and collaboration with their trade partners, their commercial strategy, their commercial execution and management, their operative strategy, their procurement execution and management, as well as the enablers utilized in the company.
In order to be able to analyze the company and be able to make decisions, we must have an open and comprehensive vision. That is to say, not only analyze the company in terms of its strategy, its practices, its processes and its management, but also look at the industry and the environment in which the latter evolves. Using this logic we analyzed the impact of each of these variables on the growth and profitability of companies.
QUANTITATIVE INVESTIGATION
The internal actions of the company are a fundamental element for profitable growth
Figure 1 shows in its horizontal axis the % of profitability of the company and on the vertical axis the % growth of the company. Each point on the plot represents a company from our study and the shape of such point relates to the activity it engages in (consumer, retail, services, and industry).
This information is overpowering: only 18 out of 100 companies analyzed in the exercise (Fig. 1) manage to be in the quadrant of high growth and profitability (G+P+). Also the data show that there are all sorts of company in the quadrant of high growth and profitability.
This leads us to conclude that a crucial factor for a company to achieve better results vs. others of its same sector is the internal actions taken within it. By internal actions we mean the development of competencies and business models grounded on practices, processes, enablers and management, and not only the existence of business guidelines.
Strategy is not enough to achieve profitable growth—the whats
Analyzing in more detail the importance of the whats in a company, i.e., the strategy, we see it is not enough to unfurl the banner of growth in the company strategy as a means to achieve the desired profitability. For example, 91% of the retail companies in our research (Figure 2) mention in their annual reports that growth is a strategic objective, but only 33% realized profitable growth.
Then, on the one hand, setting guidelines does not ensure that results are going to come; you need to set forth and execute the hows. On the other, growth per se not necessarily means profitability, an idea that more than a few executives believe—and act as though it were true. Nonetheless it’s imperative to growth in order not to hamper your strategic options in the middle and long term. This impact in the mid and long term can occur due to a company that remains static in the face of changes in its inventory (e.g., consolidations of companies in the sector) or internal events, such as the loss of human capital that perceives their growth as stunted due to the lack of company growth.
Processes and management as the groundwork for profitable growth—the hows
In figure 3 can be seen, on the vertical axis, the productivity and efficiency index, and on the horizontal axis the index of growth and profitability. These indices are normalized, i.e., reflected on a 0 to 1 scale in which a value of one reflects the best performance.
The indicators utilized for the productivity and efficiency index are: return on assets as a proxy of company productivity, inventory turnaround as a proxy of its efficiencies, and accounts receivable as a proxy of a company’s agility. For the index of growth and profitability, the indicators used are % sales growth and % operative profit on sales.
The data show a direct relationship between these two indices; the companies that have higher indices of profitable growth tend to manage their assets better. This superior management should stem from having better-developed practices than their counterparts, in terms of both operation and management.
This information is overwhelming as well. What it indicates is that companies that have higher profitable growth have developed better capabilities and competencies than their counterparts. Profitability implies enhanced use of resources along the value chain. This enhanced use is achieved via having developed practices, processes, management. Growth, for its part, brings along higher complexity in terms of products and clients. If a company tries to growth without having the competencies developed, complexity is going to be an expensive consequence, translating into higher costs. This is why growth not necessarily translates into profitability.
Here we close the results of our quantitative research. Our conclusion from all of this information is that companies that have achieved higher indices of profitable growth have been able to develop better operation and management practices integrated into a business model. In order to prove this and better understand the issue, we carried out a qualitative investigation, which is described below.
QUALITATIVE INVESTIGATION
Competencies are a differentiator of the companies with strongest profitable growth
In figure 4 we can see on the horizontal axis the level of development shown by 14 of the analyzed companies in terms of 6 major competencies:
1) Understanding of the market and collaboration with commercial partners
2) Commercial strategy
3) Commercial execution and management
4) Operative strategy
5) Supply execution and management
6)Enablers
These 6 competencies help us form an index of Level of Maturity of the Practice, where the value of 5 represents the represents the result of strongest development of the competency. This information was obtained through a questionnaire applied to executives of the companies. On the other axis, the vertical axis, we can see an index of growth and profitability. The indicators used on this axis are % sales growth and % operative profits on sales. The value of 1 represents the result of strongest performance, as such index is normalized.
Figure 4 lets us point out that there is a positive relationship between the level of development of the competencies of a company and its growth and profitability. That is to say, a company whose practices are more developed than its counterpart increases its likelihood of achieving profitable growth.
Development of Integrated Competencies in a Business Model
In Figure 5 we can observe a comparison of two consumer companies (represented as companies 1 and 2) and of two companies in the construction industry (represented as companies A and B), in the development of the analyzed competencies. It can be mentioned that company 1 has a higher index of profitable growth vs. 2, as does company A over B.
Analyzing this comparison, we can observe that the companies having higher profitability index, companies 1 and A, have both stronger level of development in their competencies and a better balance among them. What this suggests is that companies with stronger profitable growth have been able to develop in a more uniformed and integrated fashion the competencies they require, which are based on better understanding of the market and which support a Business Model they have chosen generate value. In other words, both the commercial area, supply chain area, marketing and all other departments are aligned and mutually supportive in order to generate value to the client and respond to the demands of the market.
Falabella and Concha y Toro; high profitable-growth companies
Chilean companies Falabella and Concha y Toro are examples of companies that have achieved profitable growth and which have an integral vision of value generation focused on the market included in their Business Models. Analyzing companies such as Falabella and Concha y Toro we detected in their executives’ daily language words like information, collaboration, segmentation, differentiation, balance, clear strategy, innovation, future oriented vision, solid human capital. Some of the actions these companies have implemented are described in the attached sidebars.
The results of the qualitative research tend to confirm what we mentioned above: Companies that achieve higher indices of profitable growth do so because they have been able to develop enhanced operation and management practices, integrated in a business model. In other words, it is their Business Model and developed Competencies that give them the ability to grow. To address market opportunities while overlooking the development of Competencies and a Business Model does not lead to profitable growth.
Together with the conclusions from the quantitative and qualitative sections described along this article there is a series of successes that we must seek to implement as well as a series of misses that we must avoid in order to achieve profitable growth.
CONCHA Y TORO
Chilean Company: Producer of red wine and white wine.
Largest wine company in Latin America
One of the global leaders in its industry
Average Growth of 15.9% 2007 to 2009 vs. 13.7% for the Segment
Average Operative Revenue of 20% 2007 to 2009 vs. 20% for the Segment
Understanding of the Market and Collaboration
- They diversify their clients, attacking various client segments.
- They have global reach but focus on their main markets.
- They invest in innovation: marketing and new product offerings.
Commercial Management and Execution Strategy
- They are focused exclusively on wines.
- They respond to new consumer trends and address each of the segments.
Operative Strategy, Supply Chain Execution and Management
- They are vertically integrated in their productive chain.
- They have the largest wine distribution network in Chile.
Enablers
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They increased the efficiency of previously paper-based processes by means of an SAP ERP solution.
- They automated their salesforce via mobile solutions.
- Distribution monitoring via GPS tools.
FALABELLA
Chilean Holding company (department stores, home centers, hypermarkets, Banking)
Presence in Chile, Argentina, Peru and Colombia
216 sales complexes
21 real estate complexes
Average Growth of 13.6% 2007 to 2009 vs. 12% for the Segment
Average Operative Revenue of 12.7% 2007 to 2009 vs. 11.6% for the Segment
Understanding of the Market and Collaboration
- They seek long term relationships with clients and suppliers.
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They have reaction ability to tailor commercial proposals to changes in the environment.
- They segment and differentiate their offerings to customers.
Commercial Management and Execution Strategy
- They generate unique buying experiences and service experiences.
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They offer appropriate product mixes and price/quality ratios for each segment.
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They have brands that the customers identify with (including their home brands).
- They constantly and timely improve their value proposals.
Operative Strategy, Supply Chain Execution and Management
- They seek long-term relationships with clients and vendors.
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They have reaction ability to tailor commercial proposals to changes in the environment.
- They segment and differentiate their offerings to customers.
Enablers
- They have information for decision making.
- They implement RFID for Inventory management.
- They have a focus on human capital.
LESSONS FROM THE COMPANIES WITH THE STRONGEST PROFITABLE GROWTH IN LATIN AMERICA
1.- Growth does not ensure profitability
Growth does not generate profitability simply it there is a lack of the Competencies required to manage within the increased complexity generated by the growth itself. At times, growth is going to destroy value.
2.- Strategy isn’t enough for profitable growth, the hows are fundamental
3.- Developing Competencies opens opportunities:
Companies compete not with their products and services, but instead with the capabilities they have transformed into competencies, abilities to compete. These competencies occur on at least five elements:
- Understanding of the Market
- Value Proposals
- Commercial Strategy and Execution
- Supply Chain/Service Strategy and Execution
- Management
4.- Integrating Competencies around a Business Model that is relevant to the market generates profitable growth
The big lesson from this research is that the profitable growth of companies does NOT involve constantly seeking market opportunities and trying to capitalize them, as is the conduct of more than a few executives that in a quest to grow embark in efforts that finally translate into unexpected results. The development of Competencies opens opportunities but in the long run profitable growth occurs when those competencies are generated as part of a Business Model that contains elements that are relevant to the market and are able to generate value.
Oscar Lozano
oscar.lozano@sicweb.wpengine.com
Jesus Montañes
jesus.montanes@sicweb.wpengine.com
About Sintec
Sintec is the leading consulting firm focused on generating profitable growth and developing competitive advantages through the design and execution of holistic and innovative Customer and Operations Strategies. Sintec provides a thorough and unique methodology for the development of organizational competencies, based on three key elements: Organization, Processes and IT. Furthermore, Sintec has successfully carried out more than 300 projects on Commercial Strategies, Operations and IT issues with more than 100 companies in 14 countries throughout Latin America. Our track record of more than 25 years makes Sintec the most experienced consulting firm in this area of expertise in the region.
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