Distribution CEOs may be missing the mark

CEOs who confuse revenue targets with strategy aren't taking advantage of real business opportunities

By Tim Horan, Indian River Consulting Group -- Industrial Distribution, 3/1/2006

Have you ever heard of the "gazillion-dollar disease"? A company has a couple of good years, usually due to the economy, and all of a sudden the CEO is a genius. And though the company needs a comprehensive strategy, instead, he catches the "gazillion-dollar disease."

CEOs often are susceptible to catching this ailment. It tends to flare up when they confuse strategy talk with revenue targets. We'll explore the onset of this disease and how it can be avoided.

At Indian River Consulting Group, much of our work is with small to medium-sized companies. And as with all other companies, the leaders are always trying to find new ways to grow their business. Many of these companies have had years of steady, if unspectacular, growth. They chug along, demonstrating an ability to keep growing, and all without a formal strategic plan.

But then the company hits a growth spurt. This could happen for any number of reasons, but usually, it's the economy. The CEO likes the newfound success and decides to create a company-wide strategy.

There's nothing wrong with this. Organizations need a sense of direction. The problem occurs because the strategy usually contains two fatal flaws: the CEO ignores the reasons for recent successes, and the strategy focuses on a revenue target.

By ignoring the recent successes, companies bypass their best opportunities for future success. As an example, if a company that sells building supplies opens new markets with a revolutionary product at their key vendor's request, they should continue to exploit this opportunity. The product meets an emerging need. The economics are perfect for growth and the company thrives.

Every new market entered with this product improves the company's revenue and profitability. Yet, when the company creates a strategic plan, there is only a passing mention of this emerging opportunity.

Goals instead revolve around grand strategies to double the company's size. They include entering completely new business arenas, such as consulting. The strategy may also include an initiative to improve the skill level of the current employees. While there is nothing wrong with any of these initiatives, the problem is with ignoring existing opportunities.

In another example, a major distributor of safety equipment wants to become an outsourced safety provider for its key customers. The company is a distributor, not a training company, and is not positioned to provide this service.

This strategy involves entering a new market, requiring new skills and abilities. While developing this strategy to exploit the outsourced safety market, the company ignores the emerging markets of its existing products and services, such as a new supplier product.

It appears that instead of improving inventory turns, warehouse and delivery functions, and other systems, or taking advantage of emerging markets, the CEO gets attracted to the shiny things, like a magpie chasing a piece of foil hanging in a tree. Yet, it is these core competency improvements that can bring immediate success and sustained profitable growth.

There are as many books about strategy as there are theories of what it means, and of how companies come to discover their "strategic direction." One classic theory defines strategy as "position," such as understanding your market and positioning products to take advantage of the market demand (as in Michael Porter's Competitive Strategy). This strategic theory requires that the company looks outside itself for opportunities in the marketplace and then "positions" itself to exploit the opportunity.

Another theory holds that strategy is "perspective," which defines a company's fundamental way of doing things (Peter Drucker's Management, Tasks, Responsibilities and Practices). This strategy looks inside the organization. Companies using the perspective approach are very clear and loyal to their visions. An example of a company using this strategy is McDonald's with the development of the Egg McMuffin.

Henry Mintzberg, in his book Strategy Safari, discusses many different schools of thought, saying that strategy can set direction, focus effort, define the organization, or provide consistency.

In none of the works of these three authors is there a mention of strategy as a target. Yet, it is common for companies to confuse vision and strategy with revenue targets. The result is that many managers feel compelled to add a revenue target to their strategy statement.

Unfortunately, the targets come first, blurring the line between a strategic statement and a business plan. Then, the strategy team of managers, charged with the task of implementing the strategy, only sees the revenue target. For example, the CEO decides the company should grow or double in revenue within five years.

The strategy team takes the lead. Instead of trying to position the company to take advantage of existing market opportunities, it starts looking for big unproven opportunities. It starts projecting revenue streams from these new businesses.

It doesn't matter that these are flawed projections, but just that they add up to the CEO's revenue goal. The company develops a form of tunnel vision and focuses on achieving a number. The resulting "to-do list" of initiatives drives the company toward untested businesses, ignoring obvious opportunities.

There are ways to avoid the "gazillion-dollar disease," including:

• Understand where your current business comes from and be prepared to expand that arena first. Your core business, the products you sell, and the services you provide are the best source of future expansion. Look to the 80/20 rule. Twenty percent of your business provides you with 80 percent of your revenue and profitability. How can you expand this business? Are there opportunities for geographic growth?
• Understand customer and product profitability and focus your resources where they can have the greatest impact. The 80/20 rule applies to customers as well. Who are the 20 percent of customers (or customer segments) that provide you with the best opportunity to grow revenue and profit? What other products do they buy and from whom do they buy them? Using your sales department, do a thorough customer evaluation and make sure you are doing as much business as possible with profitable customer segments.
• Make sure you are taking full advantage of current opportunities. This cannot be overemphasized. Many of our clients are comfortable in the belief that they are maximizing current opportunities but are actually leaving a lot of business on the table.
• Abandon existing unprofitable businesses, no matter how sacred. Planned abandonment provides an opportunity to free up resources, both capital and human, for future endeavors.
• Expand into unfamiliar new businesses in good times, taking small steps, and achieving short-term goals. Revenue targets encourage companies to move into new arenas in "big ways." Small, simple projects, when carefully approached, can provide companies with new opportunities while minimizing risk.
• Forget the revenue targets. If companies take care of suppliers and customers and expand into new businesses cautiously, revenue will take care of itself. Revenue targets are not a strategy. They are not even good goals. They provide a guideline to budgets and forecasts and that should be their only purpose in an organization.

Whether you believe strategy is about position or perspective, remember that business is not about chasing a revenue target. Business is about taking advantage of opportunities.