(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 1 Billion Business (Part 1)

30 Different Ways to Build a Billion Business 

24 Oct 2017

Abstract

This series of blog posts focus at a high-level on various approaches to increase company revenue/turnover and discusses each in brief. 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. This post is Part 1

Estimated reading time: 7 min or less

0. Background


The inspiration for this article comes from a blog post by venture capital partner, Mr Christoph Janz, posted in 2014, "Five ways to build a $100 million business", and subsequent articles here and here. 

Mr Janz' article was itself an expansion on an earlier article by Mr Boris Wertz, "The only 2 ways to build a $100 million business".  

While some of the concepts included in Mr Janz's articles were used as the basis for this series,  there are some key differences:

• The original focussed purely on the e-Commerce & SaaS markets, while this series of posts go much broader into different industries,
• We have adjusted for local conditions and markets,
• The original article was limited to 5 ways, this expands up to 30 ways.

1.   Introduction

There are different ways to turn your business into a Billion turnover (or more) company. In this article, we will delve deeper into some of the factors and considerations at play. This series of blog posts will look at various companies in a variety of industries. The discussion is therefor not limited to start-ups, unicorns, or e-commerce.

Fig 1.1 One BILLION 

Courtesy: Austin Powers, Capella International

While most of the examples in this article substantially focus on the topic of billion (Rand) revenue/turnovers, this does not mean that you should stop reading if:

•     Your company is pre-revenue or turnover is e.g. 7 million …i.e. well   below a Billion;
•      You are a brick-and-mortar company or not a brick-and-mortar company;
•     Your company is already well in excess of a Billion;
•     Your company uses another base currency e.g. U$ or € and not ZAR;

Various principles outlined in this article can still be applied to great effect in order to increase company turnover and take the business to the next level, whatever level your next level is - even if it means reducing examples below by a zero or two, or adding a zero or 2, or ignoring or substituting the currency symbol for your own purposes.

This article is based on the assumption that there is already a fully functioning business and an active and sufficient large market. Within the chosen target market, a business would target specific demographics or groups of customers, and specific markets to serve. These groups of customers can be either be broadly classified as:

• Public sector – meaning you provide goods or services to either national government, local government, city and town councils, or State Owned Entities,
• Business or industrial customers (for purposes of this article clustered together which means you are in the Business-to-Business or B2B market), or
• Individual consumers (Business-to-Consumer or B2C market).Within these markets, there are sub-sections again, some of which we may cover later. Certain companies might target more than one group of customers, e.g. Public Sector and B2B, or both B2B and B2C. It is entirely possible that companies serving more than 1 group of customers might do so from different departments, divisions or perhaps even different subsidiaries.

In order to reach a billion in annual sales, the options are broadly as follows:

2.   Change the Target Product or Market mix

For the purposes of this discussion, each of the animals in the market matrix below is a mascot representing a specific market or product segment.

Fig 1.2.  Product or Market Matrix

To keep the maths simple, this diagram has illustratively been based on the logarithmic scale.  Please note: international or larger U$ denominated markets may be segmented slightly different from what is indicated in the discussion below. However the principles stand – there will be some market overlap based on local market conditions:

2.1 Catch a Whale – 

Landing a whale is not quite as easy as one might imagine - just ask any your circle of friends which one of them ever pulled a whole whale out of the sea. Chances are none have. In the local context this would mean landing 1 x Rand billion single year transaction.

Fig 1.3 Artwork Credit: Frits Ahlefeldt

In the local market landing a whale is difficult and rather scare – Reason being is that locally there are not that many whale catchers (companies or individuals able to land and successfully deliver on a billion Rand transaction), and also not that many whales (opportunities) waiting to be caught. However it does happen. In other countries with larger economies, more whales can be found.

Locally, and even regionally, these type of transactions would most definitely be commercial in nature – either in the Public Sector (e.g. infrastructure or construction), or alternatively private sector B2B at enterprise level (large companies or groups of companies). For example, it might include sale of assets (such as huge tracks of land, office buildings or shopping centres), or sales of companies or shares (pension funds and investments).

There is likely to be some extent of risk for the parties involved.

2.2        Bag an Elephant (or 10) – 

         If you are in the market to hunt for elephants, you would have to bag 10 elephants at a price of R 100 million each in one year to reach a billion.

Elephants are easier to find than whales so while these transactions are not quite abundant, they would be more common. The transaction would still most probably be commercial in nature and involve either Public Sector and or the Private sector (B2B). This would definitely target the enterprise market e.g. large-scale ERP implementations, or industrial equipment such as smelters or sale of large assets such as property or businesses.

It should be noted R 100 million is at the high-end for the ultra-rich locally when it gets to big ticket purchases. This may e.g. include luxury personal assets such as property.

2.3        Hustle up a Herd of Hippos – 

         100 hippos going for R10 million will bring home R 1 billion.

These transactions will commonly be B2B commercial type transactions either with the Public Sector or Private Sector, for example, IT systems developments for enterprises or medium-sized businesses or manufacturing equipment such as bottling plants or mining equipment. 

This could however also include top-end luxury items for wealthy consumers such as property.

2.4       Seize a Tower of Giraffes – 

A group of giraffes is occasionally referred to as a tower or more commonly, a herd. At a sales price of R 1 million you only need 1 thousand sales. 

These transactions could be either B2B (business-to-business) or at the high-end of the B2C (business-consumer).  Included in this list is personal or business assets such as property (land, entry level houses, townhouses, flats or personal construction projects), luxury vehicles, and business transactions such as consulting assignments, smaller industrial assets such as medium or heavy vehicles, system implementations or other professional services.

2.5         Find a forkl of Kudu 

          

         10 thousand clients at R100 000 per client

(According to Google "forkle" is an actual word, but again you can stick to herd if that feels more comfortable).

If your market is Kudus, you need to find 10 thousand transactions at R 100 000 per item. These transactions could be B2B (business-to-business) or can be B2C (business-consumer) but it should be noted they are at the middle to higher-end of the B2C market. This could include high-end electronics such as sound systems or home cinema systems, small construction projects such as bathroom renovations or new home kitchens. Also included would be business targeted services such as consulting or professional services.

2.6        Gather a flock of Goats

100 thousand customers buying R 10 0000 items from you

These transactions can be B2C (business-consumer) or B2B (business-to-business). This could be bigger personal assets such as jewellery, furniture, middle to high range cell phones, or business services such as software licenses or subscription services.

2.7        Fascinate a fluffle of Bunnies 

          Catch one million bunnies at a R 1000 per bunny

These transactions could e.g. be B2C (business-consumer) or B2B (business-to-business). Examples could be luxury consumer products such as shoes, entry-level electronics, car tyres, or services such as life insurance or short term insurance.

2.8 Corner a colony of Mice

        10 million mice at R 100 per transaction

You need to catch 10 million mice, or 10 million transactions of R 100 each to reach a billion. These transactions can be B2C (business-consumer) or could also include B2B (business-to-business). Examples could include physical consumer items such as clothing, groceries, restaurant meals, services or information products such as insurance or airtime.

2.9        Catch a swarm of Bees   

       100 million bees at R 10 per transaction

If you target bees, to reach a billion you would need 100 million transactions at R 10 each. R 10 transactions happen daily all around us. These transactions can be B2C (business-consumer) or maybe even B2B (business-to-business).

Examples could include e.g. consumer goods such as grocery items such as margarine, illuminating paraffin (approximately max retail price at time of going to press), or airtime. 

= = = = =

Moving on to another consideration ...

In addition to the above, the following options can be considered on a case-by-case basis to increase your turnover. It should be note that these strategies may be influenced by market or other economic or industry specific variables: 

3. Change the sales price

3.1 Increase price

McKinsey & Co. studied the Global 1200 (top 1200 companies in the world) and found that if they raised prices by just 1% — subject to demand remaining constant — profits would go up on average by 11% (hbr.org/2012/07/use-pricing-strategy-to-boost).

This is not merrily a cases of randomly pushing prices up. Prior to making any changes to the pricing structure we recommend conducting a benchmarking exercise to determine competitors’ pricing. This would also include a determination of value-for-money and perceived value/quality inherent in your own product or service offering vis-à-vis your competitor’s products or services. If your pricing is significantly lower than that of competitors, and/or if you offer more value or quality compared to competitors, then you could be losing out due to offering lower prices.

Other considerations include:

• Consider price elasticity of demand. If demand is inelastic, meaning demand does not reduce when prices increases, there might be scope for increases,
• Availability of complimentary products – if you produce butter while your competitors sell margarine (or any other almost perfectly acceptable substitute for your product), increases in your pricing might send customers to the competition.

3.2        Reduce price

It might feel counterintuitive, but under certain circumstances reducing prices can also increase the sales volume, depending on the demand curve for your product or service. This can be ascertained on a case-by-case and product-by- product basis by targeting key or significant customers in order to determine their willingness to purchase higher volumes for any given reduction in price.

Fig 1.4 Steam Library

Consider the case of Steam - one good example that gamers will know about: Steam is a multi-player platform developed by Valve Corporation. It is used to distribute computer type games and related media online, a type of specialised e-Commerce platform. During 2009 Steam held a sale for a specific computer game title, during which time prices were heavily discounted. When they dropped prices by 75%, this resulted in a 1470 % increase in sales. Another undisclosed game title achieved a 36 000 % jump in sales, however the discount applicable for that specific sale was not disclosed.

Another example is offering price reductions on available, but unused capacity. This equates to e.g. reducing the price of bus tickets outside of prime rush hour periods or after say 21:00 at night. If the bus runs the whole route in any event, reducing the price might result in more bums on seats (subject to demand at that time). A key consideration is that fixed cost is still covered (possibly during normal hours) and variable costs (if any) is marginal, or still covered by the reduced pricing. Also refer to the Ster Kinekor movie theatre example mentioned later under loyalty programs.

It should be noted that in instances where price deductions do not automatically result in volume increases, any ill-considered reduction can have a significant and negative impact on gross profit. Again this exercise would have to be approached with caution, and be limited to small decreases. This will require a benchmarking of competitors’ pricing, determining demand curves, as well as a rigorous assessment of margins and contribution prior to implementation.

         3.3  Change currency & export

While selling products or services inside SA (or most other countries), vendors are typically limited to charging domestic customers in their local currency. If however, you are able to compete cost efficiently overseas or in neighbouring countries (after taking into consideration additional costs of export, transport, storage and handling), valuable foreign exchange can be earned in the process.

Example: Local product sells for R 120, but the equivalent product sell for $9.95 in neighbouring countries. If the additional expenses are not significantly more for the exported product, the sales price achieved could be R 132.41 vs R 120 (based on U$ vs ZAR exchange rate as at 16 Oct 2016). 

3.4        Upsell

A good example of upselling occurs when purchasing a new motor vehicle. The basic car on offer might come with 4 tyres, standard seats, an adequate engine and a steering wheel. And maybe a five speed fan on entry level vehicles. The sales person will then take the buyer through a long and confusing list of upgrades, add-ons, or other more expensive items to “bling” up the vehicle including warrantees, guarantees, motor plan extensions etc.

Fig 1.5 Artwork Credit: Mark Anderson

If the seats come standard as material, the upgrade might be leather, with a premium price e.g. for super-soft suede. The vehicle will come in standard unimaginative colours, but metallic paint will cost more. Ditto if there is a basic radio, the upgrade might have GPS touch screen, while the top-of-the-line might come with a premium surround-sound and DVD system.

The profit margins on add-ons are typically higher than on the basic item.

3.5        Value-based pricing 

Value-based pricing is a pricing strategy which sets prices primarily, but not exclusively, based on the perceived or estimated value of that product or service to the customer, rather than according to the cost of the product or historical prices.

Consider the customer’s willingness to pay, is typically contingent on the sum of the perceived benefits which accrue to the customer on purchase of your product. When seen from a customer point-of-view, if buying your product is a no-brainer, it could mean the combined value-offering of all the features presents a high ratio of value for money when compared to the price he or she has to pay to acquire it.

Summary (Part 1)

In Part 1 of this series of blog posts we have briefly reviewed the roles of:

• Product & Market Mix
• Price

Both of these factors play a very significant role in achieving target Revenue. While Product & market mix sets the foundation, Pricing is affected by the demand for the product, determines Profit, and influences the Volume of Sales.

Did you gain any new insights from this list regarding the product / market mix or pricing?  Which other strategies specific to pricing or mix 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 to others who may also be interested in reading this article.

© Cogniplex 2017