Research from the ANZ Business Growth Program, delivered by the University of South Australia’s Centre for Business Growth, has found the majority of SME CEOs do not understand how to grow their business or how to finance sustainable growth.
"Marginal gain theory is about understanding every element of a system and making small improvements."
Tania Motton, General Manager, Business Banking, ANZ Australia
Of the 37 CEOs who participated in the program, some said they were “stepping on the brakes” because they were afraid of growing, “spinning out of control” and feared losing it all.
To help CEOs understand small changes can enable their company to accelerate growth and increase revenue, the leaders in the program are taught marginal gain theory.
“Marginal gain theory is about understanding every element of a system and making small improvements at every step to generate an overall gain,” Doug Adamson, CEO of The Profit Optimiser and Growth Expert at UniSA Centre for Business Growth Programs says.
British Cycling legend David Brailsford applied the theory when coaching Olympic champions and three recent British Tour de France winners, with Chris Froome taking out his third Tour De France crown in 2016.
By breaking down everything that goes into riding a bike, improving every element by a small amount and then putting it all back together again, Brailsford teams become winners.
Brailsford’s approach is not only applicable to physical fitness and racing tactics, but to technological development, athlete psychology and business. He found if you make a small improvement (even just one per cent) in everything you do, the impact is cumulative and provides a winning edge.
The same theory applies to business. ANZ’s Business Growth Program shows CEOs if they make small changes (as little as 2 per cent in some areas) across just four aspects of their business they can lift profit up to 38 per cent.
ANZ’s Business Growth Program encourages CEOs to apply small changes to their businesses in a bid to grow revenue and margins. Below are three examples.
• Sell 2 per cent more product or service at an existing price. Examples: find new channels to market; improve your sales skills.
• Save 2 per cent on operating expenses. Examples: use less electricity; have virtual meetings instead of traveling.
• Save 2 per cent on the cost of goods sold: Examples: negotiate agreements with suppliers to lower their cost; improve the efficiency of the warehouse or the manufacturing line.
While marginal gain theory can be applied to any business, product or industry it works particularly well for SMEs as it is about making small, very achievable changes.
By paying attention to these elements in the growth phase, businesses can generate more revenue as well as greater profits putting them in a better position to grow.
Many participants in the program indicated their goal is to become $A25 million- to $A35 million-sized business. Many are surprised when told they have the potential to add an extra zero to the end of their financial target.
Connecting CEOs to the expertise, knowledge and skills they need to accelerate company growth and compete in a global marketplace enables them to understand what they need to do to reach that goal.
The flow-on effect of providing Australia’s business leaders with growth knowledge cannot be underestimated. The group of 10 CEOs who went through the first program in 2014/2015 created 114 new jobs in just one year.
What has been great to hear from participants - regardless of industry or market – is there are common challenges and opportunities for business owners. This can vary from how to source and retain talent, or how to use digital as a competitive advantage.
ANZ Chair in Business Growth Dr Jana Matthews says one of the most important changes to becoming a sustainable high-growth business is to change from a ”small-thinking” to a “growth-thinking” mindset.
“CEOs are often puzzled about why something that was working, isn’t anymore,” she says. “They know they need to do something different but they’re not sure what it is. Some just hunker down thinking the risks associated with borrowing money are too high.
“Once they take a deeper look at their business with a growth mindset – analysing their marketing strategies, customers and employees, and understanding what to do in what order, they become more comfortable about taking the calculated risk to finance growth.”
A solid growth plan which looks beyond month-to-month calculations and includes a mission, vision, specific goals, strategies, activities, timelines, responsibilities and accountabilities for employees results in a clearer understanding the plan and in turn financing options suitable for growing the business.
Systems, people, property, technology, product, strategy are just some of the essentials CEOs and executives need to invest in when positioning their company for growth.
Research from the ANZ Business Growth Program found almost 50 per cent of SMEs involved in the program use cash flow or their own personal money to self-finance company expansion.
While this approach is very common for start-ups it can constrain the growth of a company ready for expansion. The research indicates financing growth is the second biggest barrier to growth facing CEOs behind building an organisation that can sustain growth.
The research found the five biggest barriers to growth are:
• Building an organisation - understanding how to build an organisation that represents your values and can operate without you.
• Financing Growth - knowing when to take on debt or equity, from whom and under what conditions.
• Marketing & Sales - figuring out who to sell to, at what price and through which channels.
• Products & Services - determining what to sell and how to design, develop and manufacture.
• Externalities - tracking things that impact your business but you have no control over like foreign exchange, regulations and interest rates.
Armed with the skills to execute growth, more than half of the CEOs who attended the program now project annual profit increases of 20 per cent.
Software and hardware developer Pixel Technologies, which participated in 2014/2015 program, made a number of changes to its business as a result.
Pixel founder and managing director Eral Aykutyan spent time communicating the direction and progress of the company before making sure the financial, operational and people systems were in place to support growth.During the first six months of the program the company’s turnover increased by almost 30 per cent.
Three brothers from a family-owned footwear business Styling Services went through the program and later financed two acquisitions which more than doubled the size of the business.
By applying concepts such as marginal gain theory, changing your mindset and better understanding how to finance growth, CEOs from a diverse range of businesses can lead their business toward greater profits and sustainable growth.
Tania Motton is the General Manager of Business Banking for ANZ Australia.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
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