There is a common trap you can fall into when setting corporate strategy. By focusing on building a bigger business in order to chase market share, you may end up with a larger business that actually isn’t more profitable. In fact, you can chase yourself into the commodity business, with a larger, busier, and effectively weaker business.
It pays off to focus on producing greater profit, not market share. The job of a leadership team should be to develop and execute a strategy that produces a higher return on capital, and a higher profit than the industry average.
This week on the podcast, Kevin and Brad talk about the competitive advantage of being focused on profit instead of market share.
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Brad Giles 00:13
Welcome to the Growth Whisperers is where everything that we talked about is building enduring, great companies, companies that will last, companies that will endure. And that will be able to sustain the long weathered storms that the world seems to always throw at us. Today, I’m joined as always, by my co host, Kevin Lawrence, from Vancouver, Canada. G’day Kevin, how are you doing today?
Kevin Lawrence 00:42
Great, Brad. I’m looking forward to the show, as I always do.
Brad Giles 00:53
And as always, we like to start with a word or a phrase of the day, what might you have for us today?
Kevin Lawrence 01:00
Mine is refreshed. Just because I’ve been you know, taken taking the advice from my book, Your Oxygen Mask First. And, and having some recovery time over the last couple of weeks and just came back from a weekend at the spa, is a spa resort near us here up in the Okanagan, a place called sparkling hills. So had a couple of days there just to recover and relax and hang out in the pools and, and just yeah, lots of great time in nature and relaxing, which is good, feel energized and getting excited about taking on some new projects. How are you?
Brad Giles 01:37
Probably the opposite of that mine is profit per X. And really just contemplating how over the years, like 1020 years, profit per x as a simple central concept that we work with. So often we clients has evolved. And, you know, the more that we understand that deeper Our understanding is the more nuances kind of uncovered themselves. So the first time that you or I might have read about profit per X could have been in the 90s or the early 2000s. And just over that 20 year period, how much depth and nuance has grown into that. So refiners refresh,
Kevin Lawrence 02:29
those of you who are listening, no, we don’t plan those the word of the day in advance, it just kind of comes out. So that’s all well freestyle happen to work today.
Brad Giles 02:37
As it is, it is a mental note to set you up one day. Yeah, we do words that can’t be doing together. Yeah. All right. So today, we’re talking about why strategy should focus on producing more profit, not market share.
Kevin Lawrence 02:58
We can almost call it why market share should be a dirty word in your boardroom.
Brad Giles 03:04
But it isn’t. But isn’t that what we want to do that we want to grow market share in our company? What don’t we want to grow? I thought we were called the growth whisperers.
Kevin Lawrence 03:13
Exactly. Unfortunately, when a lot of people focus on growing market share, it’s just like less experienced CEOs and leaders that Chase revenue. And there’s a place for market share. But it’s a very specific place. But at a macro level, chasing market share is normally a fool’s game. Because normally, just like when you chase sales, you make a whole bunch of bad choices, because you have such a volume focus, versus a quality focus. So almost a quantity, obsession versus a quality obsession. And if we know, in doing great businesses generally have a lot of quality, quality of people quality and process and quality of their profits and cash flow. So I think market share often is misunderstood. And I think it’s a dirty word in many cases in amateurs word. It’s an amateur perspective, because they don’t realize the conflict, the the the cost of chasing market share, in many cases, although
Brad Giles 04:23
not all. Yeah, yeah. I mean, the job of the leadership team is to develop a strategy and execute that strategy that theoretically should produce better returns than the industry average.
Kevin Lawrence 04:39
Yes, that shows that they’re smart, enter and they’re running their business while are planning their business. Well, yeah, but unfortunately, sometimes people take concepts that would work in a very, very large business and apply it to a smaller medium business and it doesn’t translate again. It depends on the strategy depends on the industry that Dan But the root of it is, you know what, with all of the clients we work with, we want them to build great businesses. And sometimes they get caught up in the large business focus and wanting to get massive. And I think that being big, is consistent with being great. But the challenge is being big is just big. Usually, there’s the saying, you know, the bigger they are, the harder they fall, ie, if you’re not smart in high ability, you can build a big, wobbly business
Brad Giles 05:29
that isn’t profitable. That perfect, that isn’t profitable. And if it’s, it’s kind of built without a strong foundation, yes, maybe you acquired 20 people in the industry, and you’ve got great size. But is there any, if we look from the customer’s perspective, is there any reason apart from your size, why I should come to you and not go to the Nimble place up the road, who meets my needs better?
Kevin Lawrence 05:58
Correct. And that’s the idea is, you know, if not, again, now, I’ll make a case against sourcing, but there is a point when you could chase market share, and it could be a brilliant move. That’s in a very specific niche, that, you know, you have a sustainable competitive advantage, and big juicy margins, right? Or, or at least you’re so efficient, that you get big profitability on the business that you do substantial profitability, you know, in percentage terms. And, and there are places like that those are pocket pools, but generally people chase it as a macro strategy, versus a micro strategy. So if you find, if you’re in an industry that normally runs, you know, 32%, gross margin, and 10%, you know, net income or EBITDA, and you find a little honey hole, where you can get 52% gross margin, and 23% EBITA. Go nuts. Chase that as long as you have a sustained competitive advantage. But most people just say, well, we gotta get market share. And they chase market share without doing the profit calculations, and ensuring that they’re going to get to keep the business because they have some sort of sustainable advantage.
Brad Giles 07:14
Here’s the killer question. Okay, if you or someone in your leadership team says we should acquire or aim to grow more market share the answer, or the qualifying question should be how will that help us to improve profit percentage or net profit? Percentage?
Kevin Lawrence 07:34
Or profit per X? Yes, yeah. So if we’re, if we do a waterfall graph of our most profitable business, through to our least profitable if it’s related to our most profitable business, let’s go. But generally, people miss analyzing the profitability of that market share, they’re gonna chase Yeah. And then they wonder why an enterprise that’s doing a few 100 million, and then I’ll use EBITA. And just for the example, yeah, and doing 12% EBITA. They wonder why it creeps down to nine over time. When they get up to 300 or 400 million. They’re doing 9% He was it was because they mismanaged the business. They chased market share, ie volume, business, ie, often more commodity, lower priced business or lower profitability business. Because they go ahead, it’s hard. We’re not saying this is easy. But generally, the greatest businesses are very profitable. And they do everything in their power, not to take on profitable business. And to make sure that they price differently, so that they can stay profitable on all the business they
Brad Giles 08:45
And if you’ve got a competitor who’s chasing market share, that’s one of the best competitors to have. Because you can look and say, who are the best, most profitable customers that we can target and meet their needs better than they are? Because they only care about market share, we can take the profitable customers, and that’s why they go from 12 to nine or nine to five or whatever it
Kevin Lawrence 09:11
is, yes, pacifically challenges and a lot of the cases, if you are not really clear on your strategy, you can get stuck into this market share mindset, because you’re not smart, or you don’t have a smart enough strategy to look at it from a competitive advantage point of view. Yeah, and that’s, you know, and generally so one of our your key points here is that market share is the path to health. Usually commodity health, if you’re not careful, it’s a very, again, if you’re a massive scale business, you could be playing a different game, but for most people, the uneducated pursuit of market share, if you’re not looking into the lens of profitability, can be really really dangerous because next thing you know All your business is in that same mindset of chasing the market share, but not getting the juicy profit. And all it means is you should be having or maybe not you, somebody needs to go back to the drawing board and figure out how do we better meet our customers needs and get premium pricing. Because we have a competitive advantage, something meaningful in a way that the customer is thrilled that we exist, and, and willing to pay for it.
Brad Giles 10:28
Most industries, most products produce something relatively similar, a good or a service at around about the same price. So you have the job of strategy is to find a unique and valuable position that creates more profit compared to the competition. So you can do that only two ways. Either A, you pick out the customers where you can meet their need better, and they’re prepared to pay more profit, because you’re going to meet that need better. And therefore you can charge a premium for your service. And that’s what most small to medium businesses with high profits are doing. Because they don’t have the economies of scale to do the other way. Which is you can take out some of the things that people don’t value. And then you can charge less than the industry average and still make a significant profit. And that’s why the tech industry has been so very successful because they look at the typical business model and they say, Where’s the fat? Where is the things that we don’t need? Where
Kevin Lawrence 11:36
we cut out a layer, a middleman or middle person? Yep, no distributor level, whatever it is, they cut out something to reduce the costs and reduce the price.
Brad Giles 11:46
Yep, that’s it, and yet still make more profit. Yep, they’re creating a unique and valuable position that’s different from the competition.
Kevin Lawrence 11:56
Yeah. So again, to kind of where we’re at here is that market share is a place that if you’re going to chase it, you better duel eyes wide open and know what the heck you’re doing. And doing more volume of low profitable business, you can take and build a $250 million business at 3%. And you’re making something the doctors dollars there, there’s more dollars than when you’re at 200 million or 100 million. That’s also a very hard business to sustain. If the industry average profitability is in the 8%, or 9%. It’s hard to sustain, because you’re not going to have enough cash to put back into the business, to reinvest into things like innovation, or whatever it is that you need to do to stay competitive. So if you’re kind of skimming the bottom, so again, the root of it is, if you’re chasing volume, or when you’re chasing volume, you need to be chasing the juiciest volume. And the only way you can do that well, is to have a really good strategy so that your competitive customers love you, and are happy to pay either a premium to do business with you. Or because of your unique approach. You can do it at a lower price, but also using a lower cost base to be able to do it. Yeah, so it’s interesting. You know, one of my clients I worked with in the US had a big focus on this, it was interesting. We never ever talked to market share. We didn’t even talk revenue. It was very, like, literally the company crossed a billion dollars in revenue. And we almost missed it. You know, it was interesting number two cross but we never even talked about it ever. We talked about gross margin, and EBITDA. And everything was gross margin, which is the money we make, you know, after a transaction is done at the transaction level, and even what sticks after we apply our overheads. So we would call and they grew incredibly, because that’s all we were focused on. And the CEO again and again and again was saying, Hey, we’ve got to be out there finding creative ways to save our clients money. They were in a business where they could they did save their clients money by their offering because they were sort of a outsource solution. Yep. And they were constantly looking at solve a customer problem, save the money, and that they could do that in very, very profitable ways. But they constantly were looking at profitability, gross margin, and profitability. And then the volume came, more and more customers came but never marketshare never revenue.
Brad Giles 14:32
So you’ve just given two separate scenarios. One was a team who’s producing 3%. I don’t want to know what the second team was producing, but it’s above a lot more, a lot more, a lot more. So let’s look go back to the definition I said before the job of the leadership team is to produce an inactive strategy that you know is the highest return on investment or capital investment. The highest return on cash invested in the business that’s possible by enacting and sorry, by developing and enacting that strategy. So therefore, the second leadership team were much more successful by virtue than the first, because they’re getting a much higher return.
Kevin Lawrence 15:16
Yes, and because the CEO was very strategic, and they were obsessed with creating customer value, and in their market, because there was the people they were competing against, were established, big, slow, and expensive. They were not small, but smaller, nimble, and very creative. And so that they provided a notably better, they part of an excellent solution for their customers. And it can make spectacular problems. Interestingly, by the way, they could have made much more profit. But they didn’t try and squeeze everything out of the orange. They left some there, because they wanted to grow and continue to scale the business. So they got very, very good returns. But there could have been more, but they because of their growth aspirations. They didn’t want to run the business too tight. Yeah. Yeah. But they were doing but it was an excellent business. Yeah. Yeah. So at the root of all of this is that, you know, when you’re going into a meeting is that it’s in your planning for your next year, it’s to be thinking about strategy, differentiation and growth through that lens versus market share, and how do we compete with our competitors? Hand to hand and getting, you know, getting, getting into price wars and silly things like that?
Brad Giles 16:46
Yeah, it’s a nice simple question to ask the leadership team is, are they thinking about 10, fixing the revenue, or 10, fixing the profit. So when you think about the future think 10 years away, or 15 years away, or whatever it is, what comes to mind is it the revenue number will be much larger, or the profit number will be much larger? Now a nuance to that, as you can put in there, the profit per X? Yeah, subject that we’ve discussed previously, or the profit per unit, or whatever is the profit per x that we use for the business. But if you think about our profit will be 10 times larger than it is today, in 10 or 15 years, it gets you to think about a whole range of activities that are perhaps not profitable, or not ideal. When you think how are we going to get 10 times the profit in 10 years? It’s a whole different range of activities. And that’s what we’re encouraging people to focus on today.
Kevin Lawrence 17:53
Yes. So a couple of questions that you suggested. Another couple questions are sort of, in addition to what you suggested bread would be is how can we get our customers gladly paying 25%? More? Yeah, picking a number, right? Or how, at the same price, can we deliver what we’re doing? At 25%? less cost? Right, and really thinking about that? What would we need to do? Right? Or What other problems do our customers have that we could solve? It was zooming up to a higher level, right? Yeah. And, you know, there’s other strategic questions, but really, to open up your mind towards creating more value. Another one is, how can we double the value we create for our customers? You know, how can you look into their systems and their supply chain and what they’re doing, and offer additional solutions that would help to streamline that and save them or make them more money inside their own business. And now you’re really thinking strategically, and I’ve seen some amazing models of what people have done, and saw some great stuff that we did in retail, where you put the hat of the customer being in this case, it was a brand, and what does that brand need? And how can we better provide that for them. And as a result, coming up with different models and ways to lock up their business and drive more revenue for them. So lots of examples, but we want to give keep our mind on competitive advantage solving problems that the customers are thrilled to pay for in some way. And again, staying out of that darn commodity, hell
Brad Giles 19:45
yeah. And so next week, we’re going to talk about the eight common strategy mistakes that people make. And so that’s, I guess it’s kind of a part two under this one. But yeah, with thinking this is about avoiding commodity health stopping thinking about growing revenues. And so we’re really going to talk about the strategy mistakes that people make. But back to this episode. So we need to be thinking about widget growth at the same time. So yes, we Yes. So whilst we’ve really stressed today that we need to grow our profits, what we’re trying to do is compound the profit, growth, as well as the unit’s growth or the quantity of things that goods or services that we sell. But not only focusing on that second one, the goods or services, we’re trying to get a compounding impact there.
Kevin Lawrence 20:48
Yeah, I had a conversation with the CEO this week, and their profit growth has been excellent, but their unit growth has not meaning that they’re making more money off their existing customers, which is outstanding. Yeah. But at some point, if the growth engine itself in terms of units is not growing, your growth won’t sustain, you can only get that extra margin extra profit for so long. Until that stops, and then it will be flat. And sometimes you can decline. Because the new a new business engine has stopped, interestingly, what we talked about for the CEO, because they’ve done it lots in the past, but it’s keeping the new client, you know, the new local acquisition forefront in their reporting and their goals. Yeah, and this happens to a lot of companies, they, even if they’re focused incredibly well on profitability, growth and all that good stuff. You still need to manage the unit growth, and it easily fades, because the whole team slips more into account management, then, you know, landing of new accounts or business development.
Brad Giles 21:56
That’s so funny. About a year ago, I took a client for I took a call sorry, from a CEO. And well, he was a former CEO. Now he was the chairman of the board or main shareholder. And so he was a little bit beside himself, because he said, Look, we had, he had stepped out successfully, and they decided to appoint the CFO, the Chief Financial Officer into the C roll C E. O roll the to basically run
Kevin Lawrence 22:26
the business. I’ve been to the end of this movie.
Brad Giles 22:30
Yeah. And he said, That was a couple, two or three years ago, hadn’t spoken to this guy in that time. And he said, so it’s great that I’ve stepped out. And he said, It’s a family business that a family sits back, and they’re loving the fact that the profit grew. He said, We’ve never made as much profit as we have now.
Kevin Lawrence 22:48
But for how many? How many? For how many months? Yeah,
Brad Giles 22:51
well, it was, well, that profit was, I would say, two to three years. He said they were just the dollar profit has been unbelievable. We couldn’t get our head around, that this business could make that much profit. But he said, there’s been this sense of dread that started to step into the family because the revenue has gone backwards. Sure that yeah, it’s gone back about five to 10% Every year, over the last 10 years. And he said So yeah, we’re making more profit. But as business people we know this is this is not a good story. Like it’s not
Kevin Lawrence 23:32
because you’re you got caught up in optimizing. It’s a very common scenario, streamlining, optimizing, cutting unnecessary cost, but then you kill the growth engine or you kill the value prop one of the two, whatever, you know, it’s it happens all the time.
Brad Giles 23:46
Yeah, they switch off the strategy switch. They switch off any and they kill
Kevin Lawrence 23:51
the competitive advantage. Yeah. And they just milk it until there’s nothing left to milk.
Brad Giles 23:57
Yeah, yeah, it’s the dry cow scenario. Awesome. Yeah, so we need to ensure to circle back we got to make sure that we will plan to grow unit growth, as well as profit. But the primary question, as we said earlier, is, let’s ensure that we’re focusing not on growing revenue, but instead focusing on growing profit and then asking the subsequent questions
Kevin Lawrence 24:29
growing the honey holes in market share, not the macro market share growing into places that were strongest have a sustainable competitive advantage. And then generally we get paid for that. never mind the fact that we’re building loyal long term customer relationships versus ones where if we don’t have a great advantage, they might easily go somewhere else. Awesome. Awesome. I love this one. And whenever people start talking about market share, Brett I get fired up. I’m like, You need to probably learn a few things. And be and I And sometimes they really do know their stuff. But it says you got to be very smart and sophisticated if you’re going to start to try and chase market share. It’s a very very tricky, tricky game. Alright, well thanks for listening this has been the growth whispers podcast with Brad and I’m Kevin for the video Vision version then go to youtube.com and search for the growth whispers for Brad evolution partners.com.au And for myself, Lawrence and co.com Hope you have an amazing week. Stay out of commodity hell and chase the honey holes of competitive advantage. Have a great one.