(Part 3 - 2018) 30 Different Ways to Build a 1 Billion Business

Part 3 - 30 Different Ways to Build a Billion Business 

15 Jan 2018

Abstract

If you have not yet read the 1st and 2nd post - we highly recommend that you do for context. You can find it here:

• 30 different ways to build a 1 billion business (Part 1), and follow with
• Article 2 -30 Different ways to build a  billion business (Part 2).

In these blog posts, some well-known international and potentially lesser known examples from South Africa or neighbouring countries are included. These blog articles are aimed at business readers, ranging from corporate executives to entrepreneurs and founders searching for strategies to increases revenue. It is equally suitable for interested parties who wish improve their general knowledge around strategies and growth.

Estimated reading time: 6.5 min or less

This post is the 3rd part in series of blog posts focussing on various approaches to increase company revenue/turnover. Each approach is discussed in brief with examples.

The full series will contain 4 articles. 

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0. Background

In Part 1 and Part 2 of this blog, we looked at the roles of the following factors in achieving revenue target:

          1. Product & Market Mix

          2. Price  

          3. Volume

          4. Demand

In this blog, we continue the discussion on demand and also look at the role of innovation.

            4.3.5   Satisfy more of the demand - Integrate vertically or horizontally

Most businesses form part of a supply value chain of sorts. There are usually at least four phases of the typical product supply chain:

Commodities -> manufacturing -> distribution -> retail.

E.g. A forestry company grows trees in their plantation -> trees are cut and send to a lumber mill to saw into planks -> a wholesale wood merchant resells the planks -> a furniture factory buys the wood to make furniture -> shop sells the final product to an end-consumer.

At each step of the process, different activities can take place and (usually) more value is added, typically by different role players. When 2 or more stages are combined within 1 business (or family of businesses) vertical integration is taking place.

• Backward Vertical Integration is when a company downstream in the value-chain takes on activities which normally happen higher up – e.g. when a supermarket buys a farm to grow its own vegetables for resale.
• Forward Vertical Integration is when a company higher up in the stream takes on activities which normally happen lower down – e.g. when a mine commences with beneficiation of its own minerals. 
• Horisontal Integration is when a company takes over the activities of other role players at the same level in the value chain – e.g. buying out competitors and merging them into itself.

There are various benefits to integration (horizontal or vertical):

• Integrated firms have competitive advantage in that they can compete at more competitive or lower rates, and or are able to extract higher profits to bigger cost savings from integration,

• Due to controlling their own suppliers (in the case of vertical integration) such business are less prone to external supply chain disruptions,

• Integration allows benefits of scale – both in the case of vertical and horizontal integration. Integrated firms can buy in bulk and achieve higher cost savings per unit,

• Integrating with suppliers, retailers or competitors can give access to new markets, technologies, competencies, scale

• Integrated firms can respond faster to competitors or new products.

Examples of integration (horizontal or vertical):

DEBSWANA

• In the case of Forward Vertical Integration, Debswana, a mining company based in Botswana, is a good example. Debswana is a joint venture between De Beers and the Botswana Government. 

• Prior to 2013, Debswana would mine raw diamonds and then typically send these overseas for processing. In 2013 they opened a diamond beneficiation plant (DBGSS) in Gaborone to take responsibility for sorting and valuing of rough diamonds, cutting and polishing, and also got involved in the manufacturing of diamond jewelry. All of which are high value-adding activities, and all of these activities would previously have happened off-shore – in this case mostly in and around London, UK. 

Fig 1.1 Jwaneng mine, Courtesy of Debswana

• The benefits of local beneficiation to the economy have been significant. Thousands of direct and indirect jobs were created, even in un-related industries like tourism. In 2014, DBGSS completed its first full year of operation in Botswana and directly contributed US$380 million to the GDP, contributing more than the entire agricultural sector in the same period.

STEINHOFF

• Steinhoff is another example of vertical integration, albeit a controversial inclusion on this list. The group has been in the news for all the wrong reasons lately: top management resignations, allegations of mismanagement and accounting scandals ... so I had some debate with myself whether or not to include them here. 
• While we agree that they might not be a good example of accounting excellence per se, they remain a good example of an integrated retailer that manufactures, sources and retails furniture, household goods and general merchandise around the world. In specific markets, they control substantial portions of the supply chain from manufacturer to retailer. Before the near catastrophic drop in market value late in 2017, Steinhoff ranked as the world’s second-biggest furniture retailer after IKEA. 

COMAIR

• Comair is the local operator for British Airways and Kulula (a South African discount-airline similar to the UK's Ryan Air). They were frustrated by delays and the quality of food from outsourced vendors, and opened their own air catering company called Food Directions (forward vertical integration). The use of their own in-house food services saved them R 30 million per year, in addition to generating revenue from providing similar catering services to other airlines.

FAMOUS BRANDS

• Famous Brands, the owner of various large restaurant and fast chains including Steers, Debonairs Pizza, Wimpy, Mugg & Bean, and Tashas, had 2 614 outlets across the country by mid-2016. It is interesting to note the extent to which Famous Brands embraced vertical and horisontal integration. 

• Not only do they own their own logistics business with 8 logistic centers of excellence across the country, they manufacture food ingredients too. This has been achieved by acquiring one of SA’s biggest producers of French fries and other potato-based products, also a tomato paste factory expected to reach R 100 mil turnover, taking over Coega Cheese Company and rebranding as Famous Brands Fine Cheese Company, and buying or setting up various other companies to supply bread from its own bakeries, coffee, juice, meat, spices, ice cream, even right down to serviettes from its own serviette factory. 

Fig 1.2 - Steers, one of many brands in the Famous Brands stable

• No wonder then that Famous Brands reported an increase of 33% to R5.7 Billion in Revenue and operating profit Up 18% to R938 Million for 2017

AB InBev

• One of the biggest horisontal integrations (mergers) in recent times that hogged the headlines for months during 2015-2016, also with strong South African roots - The more than $100 billion merger between Anheuser-Busch InBev (AB InBev) and SABMiller. This merged the world number 1 producer and 2nd largest producer in the world. This was the 3rd largest acquisition in history and the largest ever in Britain. The post-merger firm would be the world biggest beer producer, and the 5th biggest Consumer Goods Company in the world, controlling up to 33% of the world beer market from the word go.

Fig 1.3 - Some of the combined labels and brands in the new company

• Through this acquisition, InBev gained access to new markets in China, South America and importantly, to the African growth market, where SABMiller previously had the local market pretty much stitched up with an extensive logistical footprint and manufacturing capacity. Africa is seen as a key growth market for beer, with anticipated growth to 2025 of 44%, which is almost 3x the global growth rate. Similarly, SABMiller would gain access to the South American market, controlled by Inbev.
• This merger is anticipated to unlock pre-tax synergies in the region of $ 1 billion p.a. over areas of procurement, engineering, brewery and distribution, regional head offices and best practices. 

PIONEER FOODS

• In 2015 Pioneer Food Group (Pioneer), the leading breakfast cereal producer in South Africa, announced that it was planning to enter into a joint venture (JV) with Future Life Health Products (Future Life). Pioneer makes popular breakfast cereal brands such as ProNutro, Weet-Bix and Bokomo Limited, while Future Life focusses on scientifically formulated nutrient-dense functional food products. This merger gave Pioneer access to expertise as well as entrance to the health food market, as well as access to different geographical markets.

4.4 Innovate

Do not underestimate the importance and revenue increasing possibilities that innovation can bring to the table. PWC interviewed board-level executives from 1 757 companies, across more than 25 countries and 30 sectors and published a report called “Breakthrough innovation and growth” in 2013.

Amongst various other findings, they found that:

• 79% of the most innovative companies in the study had well-defined innovation strategies, compared with only 47% of the least innovative companies.

• The most innovative are planning a wider range of innovative operating models – e.g. the top 20% were 2x as likely to consider corporate venturing as a means to drive growth.

• Innovation is a growth multiplier. They tracked the performance of the top 20% most innovative companies out of a sample of 1 757 companies, over a period of 3 years, based on publicly available information. Their findings: the most innovative 20% had grown at a rate 16% higher than the least innovative. This equated, on average, to each of the most innovative companies delivering $0.25bn of additional revenue over the last three years, compared with the least innovative.

4.4.1 Develop new products or services and find new markets

The principle of Blue Ocean Strategy applies here – find, or create new markets to compete in with new products or services for which there is not yet any competition.

Take coffee as example: According to legend, somewhere in the 11th century, an Ethiopian goat herder called Kaldi noticed something peculiar: when his goats ate berries from a specific tree they became very energetic. Kaldi went to report his discovery to the abbot of a local monastery. The rest, as they say, is history. So the coffee market is not exactly new. Enter Nespresso stage left, an autonomous part of the Nestle group. Around 1986 they had a simple idea: enable anyone to create the perfect cup of coffee, just like having a skilled barista at home, or at the office. They launched into B2C and B2C sectors, launched an e-Commerce website in 1998, then launched their first stand-alone boutique store in 2000. 

Fig 1.4 - Nespresso

Nespresso developed a hybrid business model, partly integrated and partly outsourced, disrupting the typical coffee business model and supply chain. The perfect coffee machine was designed jointly with external design partners and specialists to perfect taste, temperature and water pressure – 1 700 patent applications were filed in this process. To this day

Nespresso’s revenue is based on the following logic:

• High-quality coffee machines are sold for a reasonable price through licensing partners. Nespresso does not profit from coffee machines
• Income primarily comes from Nespresso capsule sales. Gross margins are estimated around 85%, compared with 40% - 50% for traditional competitors.
• Secondary income comes from cross-selling of coffee accessories.

Fast forward to 2015, by which time Nespresso had grown its presence to 64 countries worldwide, more than 12,000 employees and 450 Boutiques selling coffee, machines and accessories. By 2015 they had 10 million registered customers and over 320,000 customers visiting the company’s e-commerce platforms daily. Nespresso was the worldwide leader of the “portioned coffee” industry, with estimated annual sales of over CHF 4bn.

How did they do it? Nespresso’s key growth drivers focussed on:

• Market segmentation, Unique value proposition and business model innovation;
• Consistently highest quality products and services;
• Creating long-lasting relationships with customers and suppliers, including the coffee supply chain;
• Effective sales and marketing as well as sustainability of the business.

Summary (Part 3)

In previous posts, we looked the role of product mix, price, volume, and experimenting with demand. In Part 2 of this series of blog posts we looked at other examples of diversification, integration, as well as innovation - all of which can play a very significant role in achieving target Revenue. Please note there is at least 1 more blog post to follow in this short series dealing with ways to increase turnover.  

If you liked this blog post, please share or tweet or repost this article to others who may also be interested in these topics.

Did you gain any new insights regarding diversification, integration or innovation? Which other strategies specific to volume and demand have you used to increase revenue?

Also why not subscribe? Simply scroll up and enter your email on the top right for notifications. We publish approx 1-2 posts per month on business-related topics. 

© Cogniplex (Pty) Ltd - 2018  - Visit us on www.cogniplex.co.za

30 Different Ways to Build a Billion Business (Part 2)

30 Different Ways to Build a Billion Business (Part 2)

28 Oct 2017

Abstract

This post is the 2nd part in series of blog posts focussing on various approaches to increase company revenue/turnover and discusses each in brief. 

If you have not yet read the 1st post - we highly recommend that you do for context. You can find it here: 30 different ways to build a 1 billion business (Part 1)

In these blog posts, some well-known international and potentially lesser known examples from South Africa or neighbouring countries are included. These blog articles are aimed at business readers, ranging from corporate executives to entrepreneurs and founders searching for strategies to increases revenue. It is equally suitable for interested parties who wish improve their general knowledge around strategies and growth.  

The full series will contain 3 or 4 articles. 

Estimated reading time: 8 min or less

============

0. Background

In Part 1 of this blog, we looked at the roles of the following factors in achieving revenue target:

           1. Product & Market Mix

          2. Price

In this blog, we continue our journey.

3     Change sales volume

3.1        Sell more units per transaction to increase volume

Selling more units results in higher total sales. One technique to increase sales volume is called Bundling. Bundling is the combining goods and or services in a package deal – sold together. The package deal is typically sold for a marginally lower price than when the component parts are purchased individually. This, in turn, increases turnover. Typical examples include McDonald's Meals, which include a drink, chips (Americans call them fries), and burger, or Office type software including a word processor, spreadsheet as well as presentation application in one package deal.

Once McDonald's introduced the bundled meal concept to SA, other fast food retailers were fast to cotton on and cashed in on the same concept. Now, most offer their own variation on the same idea.

Bundling works well then there are benefits of scale in terms of production or distribution, or when production set-up costs or customer acquisition costs are high.

          3.2        Sell more frequently

Increasing the frequency means finding an effective way to shorten the intervals between procuring of goods or services. If customers ordinarily on average visit your restaurant once every 3 months, develop a strategy to bring them back once per month or more. If they check in monthly, bring them back weekly.

Fig 1.1  Can't get enough Starbucks

It is important to note that purchase frequency varies between industries – while it is very plausible to see the same customer week after week in a Starbucks coffee shop, it is highly unlikely that the same customer will buy brand new furniture or a new car every month, or even every year. In that case, the program will be focussed on bringing the customer back to the same supplier, once he is ready to buy another vehicle.

           3.3        Sell over a longer period

Another way in which increased sales could be achieved is to start subscription-based services, in terms of which fixed monthly payments are charged for a pre-defined service. Cell phone or mobile subscription fees are a good example of this. Users pay the same basic amount based on a pre-defined usage level over a fixed period – locally that is around 2 years.

Maintenance plans sold with new vehicles is another way in which the customer can be tied into a specific brand for a defined number of years, or until as they sell the vehicle.

Yet a further variation on the same theme is SaaS (Software-as-a-Service), or PaaS (Platform-as-a-Service) type software such as DropBox, SalesForce or Slack. 

• Under the traditional sales model, your would buy software for use on your PC or Mac or deployment on the company servers. 
• On the SaaS-basis you would subscribe to use the same software, which is based in a cloud. 
• In essence, as a user one has access to all the same functionality you would have had, had you bought the actual software bundle and installed it on locally. 
• Key differences are that the software remains on the cloud, and typically no significant software installation happens on locally. 
• Pricing is substantially lower compared to outright purchase, but the user is tied to usage conditions around the number of users or volume of allowable usage, in return for a perpetual rental fee. 
• Ownership normally also does not transfer to the user. 
• The user usually has to some extent the option to decide the period of the rental.

Fig 1.2 SalesForce Pricing

This is, therefore, a pay for usage and availability basis rather than paying for ownership and the rights and obligations that go with that. This is again a demand vs supply consideration. If you were to sell specific software, there could be X users who might be interested in purchasing it at the full sales price. On a SaaS-basis the price to use the software could be cheaper, and availability guaranteed. This could, therefore, increase the number of users compared to the traditional ownership model. SalesForce specifically has shown very strong growth and reached $10 billion annual sales in Aug 2017

           3.4        Offer volume/quantity discounts

Volume discounts are incentives offered to customers that result in a reduced price per unit, subject to taking a specific number of units of the same product. Buy 5-for-the-price-of-3 is an example of a volume discount offered in the consumer market. 

Commercial or industrial buyers might have tiered discount structures where the discount is directly tied to the volume procured – once a specific tier is achieved pricing might reduce further.

          3.5        Offer frequent buyer discounts or other forms of customer loyalty programs

Frequent buyer discounts is a further approach to retain and reward customer loyalty. These programs come in many forms, one of which is frequent flyer programmes which entitle customers to further discounts. It is also worth noting that these types of programmes further tie in the buyer – the likelihood of next purchase increases if it counts towards a perceived real future benefit.

Ster Kinekor (a South African national movie theatre chain) first rolled out a loyalty program in the early 1990s initially targeted at a hugely grateful student audience. In terms of the specific promotion, participating students received a student discount on Tuesday nights – a traditionally dead night. The program was so successful it was rolled out to all customers countrywide. 

Fig 1.3 Vitality Loyalty program rewards members with discounts and special offers

Other examples of loyalty programmes include Discovery medical fund’s Vitality program whereby joining medical fund members get rewarded for regular gym attendance and participation in fitness-related activities e.g. by way of discounts on fitness devices or sports equipment. This program is reciprocally beneficial to the underlying medical fund - fund members who are fit and stay in shape typically get sick less and claim levels could be lower.

British Airway’s Avios loyalty program is another example of a loyalty program.

           3.6        Offer complimentary services - Cross-sell

Cross-selling is the process of selling additional, and even potentially unrelated items to a client while they are in the process of buying product A.

Example: When Client at a camping store enquires about sleeping bags, the sales assistant, in addition to making the sale on the sleeping bag, also makes the customer a competitive offer on a tent.

Fig 1.4 Cross-Selling in an e-Commerce example

Pic courtesy of Templates-master.com. 

Notably the more successful e-Commerce stores frequently use this tactic with the well known “Customers who bought this product also bought…”

           3.7        Minimum sales quantities

Minimum sales quantities come into effect when e.g. packaging forces clients to buy more than 1 unit at a time, e.g. in cases or batches of 6 or 12. Distributors also use this to great effect – in order to qualify as a reseller, buyers may be required to achieve regular minimum sales defined either in units or monetary value.

4     Sell to more Customers

           4.1        Change the sales model – traditional commerce

Some of the more traditional options available to attract more customers include:

o   Increases sales staff,

o   Agents,

o   Branches (more locations),

o   Distributors,

o   Franchises.

As these are all common and well-understood concepts, we will not go into detail to discuss these.

Fig 1.5 Steers (fast-food brand) footprint in Johannesburg

All of the above-listed methods, when implemented and managed correctly, could contribute to increased exposure to clients, increased geographical footprint, and ultimately result in increased sales.

   4.2        e-Commerce

Enabling your business for e-Commerce could depending on the product or service, make a significant impact in terms of sales. The advantages of e-Commerce above a traditional brick-and-mortar sales location (i.e. a shop or branch) is that it can significantly decrease the cost of fixed and variable overheads associated with running each location. Furthermore, the internet has much wider reach (specifically if your product goes viral), and it is open 24/7, even when you are not, translating into sales around the clock. 

Refer to the Steam example in Article 1. Another brilliant example is Dollar Shave Club

Dollar Shave Club was started by founder Michael Dubin after discussions with an acquaintance, who was stuck with an excess stock of razor blades (towards the end of 2010). Michael realised there was an opportunity in the men’s shaving market, which up to that point was dominated by premium-priced razor blades from Gillette and Schick. He formally started in 2011 and launched a beta site for direct-to-consumer subscription service for razors.

                       Fig 1.6 Dollar Shave Club's video went viral

In March of the next year he relaunched his site and on 6 March 2012, he published the video (which you can see above) which at that time was hosted on the company server. The video went viral and promptly crashed the company server in the first hour. All of his inventory was sold out in the first 6 hours. On the same date, he also announced that his company received $ 1 million in seed funding.

The company expanded in related men’s’ grooming products in the years to follow, reaching 30 products across five categories by 2017. Dollar Shave Club grew from zero customers in 2011 to more than 2 million in 2016 and was bought out by Unilever for $ 1 Billion in June/July 2016.

       4.3        Change demand

Improving demand will impact on the volume sold as long as the production capacity exists to satisfy the demand (assuming that maximum demand/saturation is not reached). 

4.3.1   Increase demand - Improve the market appeal

One specific example of a very successful brand turnaround is Land Rover – a luxury niche brand. In the late 1990s, Land Rover was in trouble, having been plagued by quality problems and perceived problems of quality and reliability in pre-dating years. They were passed around from BMW to Ford, the 2008 financial crisis hit, and they were once again taken over by new owners. This time it was India’s Tata group in 2008.  

Fig 1.7: 2017 Range Rover Velar. Not many people will do this with a brand new Range Rover. But it is nice to know you could, if you wanted to

Tata prioritized costs management, cash management, innovation and new product development as well as manpower development. All of this greatly contributed to the concerted effort that went into the Brand Image make-over. Considerable effort went into increasing the quality (tacit and perceived) and user appeal of their products, resulting in a changing of market perceptions.

From 2010 - 2016 Land Rover managed to increase unit sales by ±243%. Unfortunately, group revenue figures are combined for both Land Rover and Jaguar and we could not split out the Land Rover portion or find verifiable figures to reflect specifically only the increase in Land Rover turnover. 

4.3.2   Find alternative uses for your product or service

Finding additional uses for your product (or service) increases the usefulness and value of the offering to the buyer. This, therefore, could increase the demand, resulting in a higher volume of sales. In specific instances, the incremental value increases might justify an increased sales price. 

Let’s use 2 common everyday items as an example:

• Toothpaste, in addition to its traditional use, can be used to touch up drywalling, de-fog new scuba masks, clean shoes, clean the residue off steam irons, polish jewelry, clean residue of sinks, polish out scratches on CDs, and get the luster back in dull vehicle head lights. 

•  Coca-Cola, or Coke as it is more commonly known, in addition to being a refreshing fizzy drink, can also be used for the following purposes:

Fig 1.8 Coke, not just a fizzy drink

as greasy stain or blood remover for clothing, rust    remover, remover of oil stains from garage floors, engine  cleaner, can assist in loosening rusty bolts, kills slugs and snails, cleans burnt pots and pans, descales kettles and baths, cleans toilets, allegedly, offers symptomatic relief for jellyfish stings (it should be noted that there is some debate about its efficacy in scuba circles), cleaning car battery terminals, pacifies upset stomachs, can be used as an ingredient in cakes or as a meat tenderiser, useful to fertilize Azaleas, and increases the acidity of compost … to mention but a few.

         4.3.3    Limit quantities or increasing price

Limiting quantities can e.g. increase demand if e.g. the product is perceived to bestow status or some other benefit upon its buyer, or if there is huge demand for the product and if users are not that price sensative. 

For luxury goods or exclusive consumer items the strategy of limiting supply is acceptable, however, this rule of thumb does not apply across the board for all products or services. There are however significant ethical, moral and legal considerations that apply depending on the product and market:

Fig 1.9 Acceptable pricing strategy varies from one industry to another

In December 2015 one pharmaceutical company, Turing Pharmaceuticals, (and its CEO) shot to infamy when they increased the price of 62-year-old drug, Daraprim, from $13.5 to $750 per unit. More than 5000% increase literally overnight. After a huge outcry, the price was reduced, but not back to original price levels.

         4.3.4    Satisfy more of the demand - Scale upmarket and downmarket

Volkswagen is an example of a brand that have scaled their product offering upmarket and downmarket to cover a very wide range of price points. 

Fig 1.10 Different vehicle brands in the Volkswagen stable as at 2017

The VW group covers motoring and transport needs and wants, ranging from the ultra-expensive Bugatti brand, super-fast Lamborghini, and luxurious Bentley down to Seat, Skoda and economy VW models for the more budget conscious. The product range also includes heavy and medium-sized commercial vehicles (MAN, Scania, and VW Commercial Vehicles), as well as Motorcycles (Ducati). In doing so they are able to address a wide range of prospective buyer’s needs and requirements. 

Using the mascot matrix, moving upmarket or downmarket can be achieved when growing products or services to include the level above or below, in addition to your current level. A combination of lower priced items e.g. goats, mice and bees will reduce the target price while the number of items to be sold to reach each target level will increase. Scaling up means the price will increase but volume will reduce.

Summary (Part 2)

In Part 2 of this series of blog posts we have briefly reviewed the roles of:

• Volume
• Demand

Both of these factors play a very significant role in achieving target Revenue.  

Did you gain any new insights from this list regarding the volume or demand?  Which other strategies specific to volume and demand have you used to increase revenue?

Please note there are more blog posts to follow.  We hope and trust that you found this information useful.  If you liked this blog post, please share or tweet or repost this article to others who may also be interested in these topics.

© Cogniplex 2017