Considering growth.

Margin enhancement is the number one job of a metalcasting facility's marketing and sales department. However, volume growth also can be a player in the approach to consistently achieving superior financial results over time. This fact is rooted in the concept of profit maximization, where the largest total profit flow is achieved through the business mix and pricing policy that best combines margin and turnover (i.e., volume). The "best" combination of margin and volume is different for each facility and will not only yield the most profit dollars overall but also greater capacity utilization, higher return on assets and the optimum competitive position.

There are two commonly used paths to volume growth for metalcasters. The first and most direct is to grow the existing business, which will be explored in this column. The other option, which will be taken up in a subsequent column, is integration.

Growing the existing metalcasting business can take two basic forms. First, metalcasting facilities can simply seek to sell more of its existing mix of compatible castings to its current group of target customers and other companies like them. This is known as a penetration strategy.

While targeting existing customers and their direct competitors for increased penetration is straightforward, the all-important concept of compatibility, of necessity, somewhat complicates the task of a broader market penetration strategy. That's because markets, and information about companies within those markets, are defined and organized by Standard Industrial Classification (SIC) industry, while compatibility is a function of casting characteristics rather than industry.

As a result, when seeking market penetration outside of the existing customer base and same-industry-competitors, metalcasting marketers must overlay the metalcasting-specific concept of compatibility onto the traditional SIC-based definition of industries. This is done through an information intensive approach to searching for new compatible accounts. The steps here are to identify companies within a likely SIC industry, interview a sample of casting buyers there, and develop a casting use profile as a test for compatibility. As the information base grows, a picture will emerge of each SIC industry as either significantly compatible or not, and therefore worth a serious penetration effort or not.

Product Development

The second common strategy for growing the existing business is known as product development. Here, the firm seeks to provide at least one more element of a kind of one-stop-shopping offering. This is accomplished by augmenting the company's existing product mix--and its definition of compatible castings---with new capabilities. Typical here is the addition of new alloys, new molding capabilities and different size castings.

Acquisition is one path to the development of such new products. However, given the reality of maturity, the fact that significant debt is usually acquired along with the new capabilities makes this option extremely risky. However, acquisition as a growth strategy is not without merit and should be considered seriously by those businesses with the financial wherewithal, clear strategic focus, and the proper long-term perspective.

Alternatively, successful product development endeavors can be created within the existing business by building new capabilities and products. The presence of two related factors help to ensure success. First, new products should be strongly supported--or even asked for--by the current customer base. This greatly increases the likelihood of success because the risks associated with such a strategic move can be significantly mitigated when business is, in effect, lined up before the investments are made.

The second key success factor is the process by which the new product development effort is managed. Foremost here is that the process needs to be managed so that debt-producing capital expenditures are minimized. Nothing rains a CEO's day (or a new product development venture) faster than the realization that so much debt has been incurred that the growth envisioned will never produce a sufficient return.

Growth as Separate Enterprise

Next, experience indicates that the product and, eventually, the manufacturing process development effort need to be managed as a separate enterprise, apart from the day-to-day operation of the established business. By managing the effort as a separate enterprise, the growth opportunity should be treated as if it were a distinct new business and not something done in the organization's spare time or out of existing staff or operating budgets. Further, the metalcasting facility's best people should be assigned full-time to the development project and to the ongoing operation of the new business unit, at least for a time. Their former roles in the established business should be filled from elsewhere within the organization and/or via new hires.

Growth can be an important part of the metalcasting facility's marketing strategy, but CEOs must ensure that growth does not come at the expense of margin or profitability. Pricing is critically important here, as is the patience to wait for the right opportunity to come along. It's imperative to remember that not all growth opportunities are good ones, that, profit-wise, all jobs must stand on their own, and that it's never good business to take work at below target margin levels in hopes that learning curves or additional volumes will turn losers into gold.

Dan Marcus, TDC Consulting Inc., Amherst, Wisconsin