Buoyed by its stellar past operational and financial performance, the Company embarked on a rapid growth strategy by focusing on securing contracts with large national retailers encompassing hundreds of locations. Top-line revenue soared. However, the management team was disappointed to find margins, profit, cash flow, and customer satisfaction rapidly declining.
By catching a wave of rapidly-rising demand in the local market, the company took on a wide range of new projects and aggressively recruited talent to keep pace. While enjoying three years of 20% annual revenue growth, the management team was confounded as profits fell and profit margins slumped to less than half of the industry average.
Facing declining sales and commoditization of the offering upon which the company had been founded, the Company added two distinctively different services in an attempt to grow sales. Motivated by top-line sales target incentives, revenues grew. However, even though all three offerings were priced to yield the same gross margin, profit plummeted.
Betting that it could generate more profit by delivering a higher service level, this food processing company stimulated rapid growth by making enormous capital investments to provide customized, less-than-bulk offerings. Expecting both profit and margins to grow in sync with rapidly-increasing top-line revenue, the management team was surprised and frustrated that both net profit and margins were instead falling rapidly
The Path to Profit