Member Fred Canney Speaks: Steps for Prioritizing Profitability Over Growth

The Challenge:

In the situation at hand, an executive of a public company had been prioritizing a fast-growth trajectory, but their value in the market wasn’t matching his competitors and he felt a lack of strong profitability may be the culprit. He was seeking insight into how to effectively balance growth vs. profitability with an eye on the share price.

If you were in this situation, what would you do?

If I were in your shoes, I would keep in mind that I can’t improve on what I don’t measure. In this situation, since I’m interested in increasing profitability, my first step would be to establish a second metric, return on equity, in addition to the growth metric I’ve already been using, be it number of accounts, customers, revenue or the like. It’s important that I monitor these two metrics on a granular level across the different areas of my business based on their stage of growth and respective growth potential, as I might have lines of business that are still young and can benefit from continued growth before they are ready to prioritize profitability.
My next step to enhance profitability would be to adjust my approach to analyzing business investments by assessing opportunities on a portfolio basis as opposed to individual project lines. In my experience, when I was in the mining industry, my investment decisions were “chunky” – these were expensive investments that had three-to-five-year horizons. It was helpful for me to take a high-level approach by looking forward in time, gathering all my anticipated investment options, prioritizing them, and then making decisions within the constraints of my budget. Before I took this approach, I found that frequent investment decision-making was quite distracting and could lead to sub-optimal investment decisions. I also found that if I were to say yes to an opportunity that's in front of me today, it could mean that I had to say no to a better one that came to me the next month. With a focus on profitability, it was not only advantageous but necessary to take a high-level view and prioritize the best investments that help us meet long-term goals.
From there, I would move to develop scenarios for the various go-forward strategies that our business could pursue, ensuring these strategies cover the range of alternatives between higher profitability to continued pursuit of high growth. This would help the executive team "visualize" the potential future of the company to ensure they can make improved decisions on the direction we should take today. Lastly, once my executive team has had the opportunity to choose the scenarios they’re most interested in, I would then create and run a series of simulations for middle-upper management to help this group of leaders understand why we are shifting strategy. During these simulations the middle management would be formed into a series of groups to analyze and "implement" their preferred scenario as if they were the executive leadership of the company. At the end of the simulation, each team would present their findings back to the executive team as if the executives were the organization's board. My executive team would then choose the best plan of action and, in turn, offer it to the actual board as their recommended path forward. This activity has multiple benefits: not only do all ideas get tested on a lower level before implementation, but employees also have the opportunity to develop an understanding of why changes are occurring and the potential tradeoffs to come. In my experience, this approach reconfigured how the organization pursues strategic planning to great effect.

Flipping the switch on a new strategy can seem daunting, but a roadmap is at our fingertips. Much like many things in life, our businesses will align to what we put our energy into. Best of luck!