When a global medical diagnostics firm reached the point at which it could no longer answer these two fundamental questions, it decided to undertake a deep analysis of economic profitability by region, customer segment, product and other dimensions, featuring a rigorous total cost allocation along each dimension. The findings shocked executives. It turned out that secondary countries significantly lagged on profitability. For instance, just 1.5 percentage points of profit growth in the largest country market was equivalent to the total profit of the entire Venezuela operation. Even in a country such as India, after years of investment, a path to profitable growth proved elusive.
The executive team decided they would exit or serve indirectly the unprofitable and low-profit countries. They would narrow the focus to 12 key regions where the firm could directly improve commercial effectiveness and focus innovation and supply chain capabilities on growth in those regions. Just four months after the analysis, growth in the largest country market began to run well ahead of expectations because of the increased attention and resources.
Similarly, at a top five pharmaceuticals firm, the head of global manufacturing recently told us that products making up 5% of total revenue caused 60% of manufacturing overhead. More broadly, many healthcare supply chain executives complain vehemently that the business units don’t realize the supply chain complexity and cost they generate through their commercial decisions.
The call to simplify may sound obvious, but it runs counter to the growth strategies of most pharmaceuticals and medical technology companies. Many have pursued revenue growth through expansion and investment in more countries, additional product variations and new customer segments. As a result, their businesses have become rife with complexity, which has raised costs, slowed innovation time to market and impeded decision making across the entire organization, usually without delivering profitable growth.
In fact, much of the investment made to grow actually creates a drag on the core business.
With all our investment in new products, new customers and new countries, why don’t we see profitable growth for the company overall? And exactly where in the company do we find the strongest profitable growth?BAIN & COMPANY