Markets Is an Overlooked Profits Lever

Many U.S. companies are battling persistent economic headwinds as they strive to attain profitable growth. Executives are finding that the growth levers that have traditionally served them well — boosting volume, pushing up prices, cutting costs, and investing in growth opportunities — have become less effective.

One overlooked lever, however, offers a path toward sustainable, profitable growth: Improving the mix of the products and services a company sells, the customers to whom it sells, and the geographic markets in which it operates. For any company, profitable growth opportunities are almost always highly concentrated within its products, customers, and geographies. Some segments can generate profits 10 to 100 times higher than other segments. Mapping these variances, then growing the most profitable segments and focusing cost improvements on the least profitable ones, can yield sustainable, profitable growth, even in the face of economic headwinds.

 

Diminishing Returns

Despite diligently planning and executing smart moves, leading companies in mature industries remain at the mercy of the broader macroeconomic and competitive environment.

Boosting volume — or growing revenue — has been far more challenging in the recent environment than in previous decades. In the expansion (1992–2000) that followed the recession of 1990–91, annual U.S. GDP growth averaged close to 4 percent. In the six-year expansion following the brief 2001 recession, average growth clocked in at close to 3 percent. But in the seven-plus years since the end of the 2007–09 Great Recession — the longest and deepest downturn since the Great Depression — average annual GDP growth has lingered around 2 percent.

Raising prices has likewise been tough to justify in the past seven years. In the U.S., inflation averaged 2.7 percent per year in the 2001–07 expansion. But since the Great Recession, inflation has averaged only 1.5 percent.

The tried-and-true tactic of cutting costs to improve margins is also becoming more difficult. Management teams have been aggressively reducing costs since 2008, and most run lean operations — partly in response to consistent pressure from institutional and activist shareholders. PwC analysis forecasts that operating margins for the S&P 500 will reach 14.5 percent in 2016, well above the 12.1 percent rate that prevailed from 2000 to 2007.