You’ve started your business and survived. Now, what? How do you move from struggling to established to growing consistently and profitably? The answer is scaling, a concept very different from lean thinking. The latter pulls out costs that do not add value. Scaling allows you to reduce the costs of processes that do add value thereby sustaining competitiveness and enhancing profitability.
Here’s one man’s story, that of Barry Fleck, CEO of Patterson Precast Concrete Supplies with whom I recently caught up. Fleck joined Patterson in 1982 when it was largely a manufacturers’ representative organization for manufacturers serving the precast-prestressed concrete industry. This industry designs builds and erects huge Lego-like structures for commercial buildings and concrete sidings that mimic real stone. Years back, I worked with 40 CEOs in this industry, Fleck included.
Fleck acquired the company in 2004 and has since increased its revenue over 5-fold, despite the 2008 downturn when Patterson’s sales, due to industry conditions, fell 45%. Listening to Fleck’s story I identified five important lessons on scaling. Whether you have a new company or a new business within an established company, the lessons apply.
Get the business model right
As a manufacturers’ rep company, profitable growth opportunities were few. By dramatically shifting the mix from being a sales force for other companies to distributing Patterson-branded products, Patterson had a business model that Fleck and his team could grow profitably. 70% of Patterson’s revenue now comes from its branded products, 20% from other brands it distributes, and only 10% from manufacturer representative services.
Focus on a niche where you can develop strong customer relationships
By focusing exclusively on a narrow market, Patterson was able to build stronger customer relationships than larger companies that serve multiple, diverse markets. Patterson’s relationships were critical to identifying new product opportunities and, in price-competitive situations, getting a last chance to counter a lower-priced competitor’s bid to win a price-sensitive contract.
Evolve the business model in light of market changes
Prior to the recession, Fleck anticipated that two major manufacturing suppliers in Patterson’s core category would start selling directly to customers during a downturn. Fleck, therefore, out-sourced from China a competitive line Patterson designed. The line was ready to go market when the suppliers terminated Patterson in 2010 and 2011. Today, Patterson holds the #2 position in this category. The focus on branded products also drove an expansion of Patterson’s offering into other categories and enhanced its value promise.
Build operations you can leverage then leverage them
Technology holds the key to efficiency. According to Fleck, “If you do not make technology investments you become uncompetitive from a price perspective.” Taking advantage of smaller operational needs during the 2008 recession, Patterson consolidated operations from five buildings into one. The savings allowed Fleck to invest in a new ERP and bar-coding system.
During the same time, Patterson acquired whole or part ownership of two companies (Nycon and Kraft Curing Systems) that offered products valued by Patterson customers. The operations technology – as well as marketing and back-office support – became variable costs to the acquired companies who, on their own, could not invest to the level Patterson offered. The acquisitions also created the opportunity for Patterson to sell its current products into complementary markets, such as Ready Mix.
“There is a difference between 20 years of experience and one year of experience 20 times,” shared Fleck. Scaling is like the former. We try to leverage people and processes, using technology to lower our costs and improve our service levels. We also find where our different companies have similar costs or services – like freight, insurance and IT – and combine them together to lower our costs. By scaling across multiple businesses, we can invest at levels direct competitors the size of one of our companies cannot afford. And it makes us more cost competitive against larger corporations while retaining our nimbleness.”
Complementary acquisitions will be a key part of Fleck and his team’s future. Indeed, successive acquisitions offer more revenue and cost synergies than prior acquisitions as they leverage a larger base. Companies like Life Technologies (now owned by Fischer Scientific) in biotechnology and GE Health in healthcare pursued this strategy successfully as they consolidated their industry.
Invest in advantage where it’s cheap to build it
Patterson hired an outsider to build its marketing capabilities into a competitive advantage. Fleck knew that this investment would require less capital but have more revenue impact than investing to build a manufacturing facility. The concept was similar to Apple, which choose a design and operational excellence over owning production assets.
A culture that hires talent and is highly supportive of its talent is also a crucial part of achieving sales/employee performance that is 30% higher than industry benchmarks. Now that Patterson is larger with the leverage of scale behind it operations, Patterson will at last manufacture its branded products, versus relying on contract manufacturers.
What other advice do you have for scaling a business once it’s established?