Nine Out of Ten Companies Overlook Their Best Opportunities for Profitable Expansion
BOSTON, MA–(Marketwired – Jan 21, 2016) – Too many companies oscillate between opportunities that are too small, trying to squeeze more from their mature existing businesses, and too big, radical expansion, often through acquisition, into unfamiliar industries.
This is a choice, says a new book by leading strategy experts at L.E.K. Consulting between wasting a lot of effort and risking a lot of shareholder capital.
Edge Strategy: A New Mindset for Profitable Growth shows a proven middle way that offers higher margins with far less risk by building new products and businesses out of companies’ current capabilities. The book is authored by L.E.K. Consulting Managing Directors Alan Lewis and Dan McKone.
“Edge Strategy challenges you to rethink the boundaries of your business — and see your way to new profit opportunities,” Lewis says. “You’ve got assets that most likely can make new products and services, and you have customers that want more than you are currently delivering.”
Opportunities hiding in plain sight
“You don’t have to leap into a new business or acquisition that is far from your company’s comfort zone,” adds Lewis. “There are opportunities hiding in plain sight that can unlock more return from the risk you’ve already taken.”
The returns from Edge Strategy can be substantial. L.E.K. Consulting carefully analyzed 585 of the world’s largest corporations, and found that while a majority of companies use Edge Strategies occasionally, only 10 percent consistently find and exploit the edges of their businesses.
These “edge achievers” have delivered their shareholders risk-adjusted returns that are 15 percent higher than other companies over a three-year period. And revenue for the edge achievers grew by 39 percent more than their peers.
“Compared to their peers, the edge achievers are growing faster, they’re more profitable, and their stocks perform better,” McKone says. “I don’t know if the Edge Strategy caused that outperformance or it’s just a matter that winners just do this. But don’t you want to do what winners do?”
Lewis and McKone have identified three types of Edge Strategies, which offer different levels of effort and opportunity.
- Add options to your products. Companies can increase revenue and margins by creating extra-price enhancements to its existing offerings. For instance, Royal Caribbean Cruise Lines offers passengers seven different beverage packages ranging from simple soft drinks to unlimited top-shelf spirits and wines.
- Create services for customers before or after they buy your product. There are often unmet needs associated with a product that companies can fill. Best Buy acquired Geek Squad to help its customers install, learn to use and fix the electronics it sells.
- Turn the byproducts of your operation into new businesses. Often companies have capabilities, expertise or data than can be restructured to serve new customers. Toyota captures the speed and position of cars it sells in Japan that use its GPS system and sells traffic data to municipal planning departments and corporate delivery fleets.
What’s vexing you?
The book addresses many of today’s most vexing questions for businesses, investors and consumers.
How to profit in ultra-competitive markets
Companies can build new higher margin offerings by looking more broadly at their customers’ needs. By understanding its customers want to satisfy their hunger not just buy groceries, Whole Foods now earns 20% of its revenue and nearly half its profit from prepared food.
Why businesses keep adding new fees
Sometimes companies must “decontent” their main product, turning features given away free into optional services for only the customers that need them. In 2008, United Airlines started charging a fee for checked luggage, and its rivals quickly followed in transforming an expensive giveaway that only some customers used into a profit center.
Why most corporate mergers fail
Too often companies pay far too much for acquisitions because they overestimate the potential revenue synergies. Lewis and McKone show how the edge framework can identify where two companies have complementary assets that will become more profitable together. Procter & Gamble’s 2005 acquisition of Gillette was a rare success because, among other synergies, P&G’s introduced skincare products for men who use Gillette razors, and Gillette’s Venus women’s razor was bundled with P&G’s Olay lotions.
How to profit from Big Data
Perhaps the biggest new opportunity that Lewis and McKone identify is for companies to create new products for entirely new groups of customers out of the digital byproduct of the information they already collect. United Healthcare now sells information to drug companies about how their products (and those of their rivals) are used by analyzing the millions of claims it processes.
Cultivating an edge-mindset
Lewis and McKone argue that Edge Strategy is neither a one-time exercise nor the province of special corporate teams. Rather they outline a process to cultivate an “edge mindset” throughout an organization.
“This is like judo training for the business executive. Through repetition and practice, you build muscle memory and the intuitive ability to recognize patterns,” McKone says. “It will create more and more opportunities in every part of your business to innovate and grow in a highly profitable fashion using things you have already paid for.”
About L.E.K. Consulting
L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and rigorous analysis to help business leaders achieve practical results with real impact. We are uncompromising in our approach to helping clients consistently make better decisions, deliver improved business performance and create greater shareholder returns. The firm advises and supports global companies that are leaders in their industries — including the largest private and public sector organizations, private equity firms and emerging entrepreneurial businesses. Founded more than 30 years ago, L.E.K. employs more than 1,000 professionals across the Americas, Asia-Pacific and Europe. For more information, go to www.lek.com.