INTRODUCTION
Two of the main items in a CEO’s agenda are to develop and execute growth strategies and generate value for the stockholders. A term that is frequently mentioned and that satisfies both criteria is profitable growth (i.e., selling more and with higher margins).
Several studies have dealt with the issue of profitable growth. Among them, a Sintec research study based on information from 165 publicly-traded companies in Latin America, revealed that less than 40% of those companies were able to achieve profitable growth over the period 2000- 2011. A common trait of companies that did achieve profitable growth is their ability to develop organizational competencies throughout their value chains. Such trait has enabled them to identify, create, deliver, and mine market value on an ongoing basis.
ALIGNING THE STRATEGY AND THE ORGANIZATION: GENERATING COMPETITIVE ADVANTAGE
Defining successful client strategies is a component of the equation to achieve profitable growth. Once the company defines the strategy, the need will arise for organizational enablers to manage the additional complexity that growth entails.
It’s easy to understand the importance of aligning the organization to the strategy, once the relationships are detected between strategy and performance. Performance is commonly measured by senior management via indicators including net operating profit, return on investment, operating costs, and economic value added. Organizational skills are those that enable a company to identify, design, and manage strategies in a more timely, accurate and agile manner, in order for the strategies to translate into improvements on those indicators. All of the above, turned into a habit, becomes a competitive advantage for the organization.
BUSINESS STRATEGIES AND THE ORGANIZATIONAL DNA: IDENTIFYING RELATIONSHIPS
There are two key competencies that maximize the profitable growth of companies: The first one relates to an understanding of the market’s needs in order to translate them into actions that add value for the client. The second relates to an ability to predict the evolution of the market we’re participating in. Both are leadership competencies that must be sought by senior management and trickled down to all levels of the organization.
The development of competencies can only be achieved among individuals, and only through individuals are competencies achieved within a business unit. The complex issue is to integrate these competencies into the organizational culture.
Next, we will discuss three client strategies and identify the direct relationship between client strategies and those skills/competencies that have a direct impact on the success or failure of their implementation:
1 – Effective Client Segmentation
Given that our goal is profitable growth, the initial step will be to achieve an understanding of the market and to identify variables that will enable the grouping of consumers or clients in sets displaying homogeneous characteristics (clusters) in order to offer them differentiated treatment (segmentation). The importance of adequate segmentation is fundamental; however, it is not uncommon to come across companies that have no clear idea which of their client groups have the maximum contributory potential.
Those responsible for the segmentation process need to possess competencies which guarantee decision-making based on rational analysis and that enable the building of a client mix that creates value for the business. Such persons need to possess analytical skills, market understanding, and the drive and ability to make decisions (i.e, the correct assignment of resources commensurate with the potential profitability of each of the clients…).
2 – Building a Value Proposal
Once the client segments have been identified, the next step is to develop the value proposal for each of the segments. This competency defines the requirements for client offerings in terms of portfolio, pricing strategy, promotions, commercial conditions, and resource allocation. Preparing a value requires individual and organizational competencies to understand the factors that add value for the client segments in a way that is profitable for the company. Also needed will be an understanding of market dynamics in order to set up prices, promotions, and commercial conditions. This enables a near-optimum resource allocation. The competencies for people involved in the preparation of the value proposal are: merchandising expertise, an understanding of market dynamics, analytical skills, strategic thinking, and an understanding of the cost-to-benefit ratios of serving a given client segment.
3 – Defining the Go-to-Market Platform
The key to success for your client strategy is how the company is organized in order to address its markets. An organization’s ability to define a model to serve its clients is another fundamental competency for profitable growth. There are various ways to serve the segments in terms of order capturing, which include attention elements (e.g., visits, phone calls …) and electronic elements (EDI, Web…). Likewise, product distribution/delivery may be achieved via logistical tiers (e.g., delivery to factories, CEDI, or point of sale…) or directly to the end consumer.
Defining the adequate go-to-market platform for each segment is relevant because it seeks to meet client requirements while optimizing the cost of serving such needs. Team participants need competencies relating to the characteristics of the order capture and distribution systems. Other required individual competencies are: negotiation dynamics, market and segment understanding, and focus on profitability and logistical execution.
EXECUTING THE CLIENT STRATEGY: ORGANIZATIONAL AND MANAGEMENT STRUCTURE
Once the business strategy, the client strategy and the processes to support them are defined, a framework must be set up for their correct execution. This requires organizational elements that create the foundations for said execution.
STRUCTURE, COMPETENCIES, AND INTERACTIONS BETWEEN THE SALESFORCE AND THE DISTRIBUTION CAPACITY
A design for commercial distribution needs to ensure coverage of the target market segments, as well as on site, on time and as-required products at the lowest possible cost (labor costs, transportation costs, etc.). This involves aligning and setting up the commercial structure in terms of what the market is demanding (client characteristics, available technology, geographic dispersion). The goal is enhanced client services and satisfaction at the lowest cost. The design of the model must eventually define the competencies and interactions among all business associates.
SUCCESS STORY: ALIGNING THE STRUCTURE TO THE STRATEGY.
In order to emphasize such relationships, we now discuss the case of “Embutidos S.A.”, a company that a business analysis showed it was at risk of becoming obsolete. Sintec’s business analysis disclosed that the problem lay in the inadequate structure of its commercial organization to address the modern channel. This caused lost sales, eroding client relations, low product availability and discontinued items, and high operation costs. The solution was based on three major pillars:
- Analyzing client and channel needs (Competency: Client Focus).
- Restructuring the commercial organization (Aligning the commercial structure and strategy).
- Defining roles, indicators, and control and decision-making routines (Competencies and Management).
Sintec’s solution demonstrates the need to continually address questions such as:
- What is the optimum commercial organizational structure in terms of how my clients are distributed?
- Are the commercial competencies aligned for adequate services to target clients?
- Do indicators exist that enable commercial performance in terms of productivity and cost-of-service?
Via the implementation of our solution, “Embutidos S.A.” achieved a sales increase of 12% in the first year. This was done by focusing commercial efforts on the strategic clients, adapting the product portfolio to the formats of the various clients, and modifying the commercial structure to accommodate such changes.
IMPACT OF ORGANIZATIONAL SKILLS IN AN ENVIRONMENT OF ONGOING CHANGE
We have demonstrated the importance of organizational factors throughout the process of designing and executing effective client strategies. Given that profitable growth is one of the major goals of any company, it is worthwhile to analyze how organizational awareness and openness to change prepare companies to confront periods of expansion with higher chances of success. Organizational awareness refers to the level of importance that senior management gives to organizational elements in the formation and execution of specific actions. Openness to change gives an idea of how much companies are prepared to adapt to new conditions or to modify previously-planned strategies.
THE ORGANIZATION AS A COMPONENT OF BUSINESS STRATEGY: RESULTS OF VISUM 2012
Seeking to learn the perceptions of senior management of the current situation of their companies as regards organizational elements, in September of 2012 SINTEC conducted a study involving around 100 senior managers of 71 segment-leading companies in México. The face-to-face study included 11 questions relating to the major components of an organization: Culture and Leadership, Competencies, Organizational Structure, and Management Practices.
The study revealed that, even though many companies do have an awareness of organizational elements, such awareness does not reflect on concrete actions supporting a successful journey through processes of change. Only 45% of the executives surveyed believed that the changes their organizations had undergone over the prior 24 months had been generally successful (new markets, channels, products, processes). According to the study, there are various reasons for this; at times the company had not yet achieved a culture of collaboration, communication, transparency, and the commitment needed to sustain processes and drive a culture of change (65% of respondents). Other causes include insufficient analysis of structures or failure to execute the needed structural adjustments identified (49% of respondents).
Another relevant finding of the study is that 34% of the senior managers believes that their company lacks persons responsible for change management activities in any of their areas. Questioned whether their companies have achieved any balance among processes, organizational structure, and information technology, 71% of the executives responded in the negative, or that focus existed only on one or a couple of those elements. Result findings indicate that, generally speaking, change strategies are yet to be effectively implemented within organizations.
UNDERSTANDING OF THE MARKET AND ENABLERS AS A FACTOR FOR PROFITABLE GROWTH: A SUCCESS STORY
Coppel is currently a market leader in department stores in Mexico. In 2011 it recorded net sales of 58.733 billion pesos (an increase of 18% over 2010). One of the major characteristics of its organizational culture is their understanding of the market and of the needs of its customers. The company focuses its conversion efforts on individuals of the mid-to-low-middle class and segments them in two major groups: customers with active credit accounts and one-time customers. Additionally, Coppel segments the states of the Republic in which it participates in terms of its level of market share as compared to those of its competitors. This is a reflection of how aware Coppel is about understanding its target customers and about the existing differences in terms of regional factors and external factors (the presence of competitors). Store formats are chosen in terms of the type of customers in each region.
Over the past few years, Coppel has demonstrated a strong ability to respond to changing conditions, but also keeping an eye on growth. Thus, in conducting 80% to 85% of its sales via credit operations, Coppel has ensured that its organization possesses competencies that will guarantee adequate risk analysis. During 2008 and 2009, it reduced its annual expansion plans (by 50%) and was much more rigorous in its credit background checks in order to control payer delinquency during the global crisis that also impacted Mexico. Add to this a solid collections structure with 6,000 associates to personally deliver monthly statements at customer addresses. Such are some of the competency and structural factors that had enabled Coppel to implement it strategies successfully and in alignment with the vision of its senior management.
Another example of how Coppel has been able to align its strategies with its organization structure was the creation, in 2007, of its subsidiary Bancoppel. The branch offices of Bancoppel are located in differentiated spaces within Coppel stores, with the goal of serving the credit needs of the same type of customer that comes shopping. This has not only enabled Coppel to grow its banking business at lower costs than those of a traditional bank; it also has reinforced the company’s risk-analysis competencies and enabled it to gain a customer base of nearly 20 million individuals. This translates into a strong focus on decisions based on high-quality information.
Coppel is a role model of how competencies, aligned with the culture and organization and combined with successful company and customer strategies, are factors that enhance the prospects of success and in the achievement of profitable growth.
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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