Rank by importance - then why for #1 and #3: cost reduction, revenue growth, or margin improvement

I agree with Ian. Revenue growth has to be number one. Cost reduction and margin improvement seem to be identical. Every business must scale. Increasing revenue and increasing margin are the basic building blocks of a sustainable company.

I've had this debate with many clients over the years, the deeper question is what is the company's current state? Are they profitable, are revenues growing, is there an increasing demand for products/services, and have they already gone down the cost reduction road? Then an appropriate strategy can be developed. The dilemma is if a company is already very lean, then it's doubtful any more costs can be reduced.

However, my bias based on experience is to focus on Margin first, Revenue 2nd, and Cost Reduction 3rd. Profitable growth should be the ultimate goal.

My view is the following:
1. First focus on any and all ways to improve Margin because this is your Profitability metric. Look beyond cost reduction to find the customers that are the most profitable, profile them and look for more like them. In addition, utilize Lean techniques to take as much waste out of your processes as possible.
2. Now focus on Revenue Growth but only in the sweet-spot for acceptable margins. This is the right approach for a Profitable Growth strategy.

In my opinion you can not assume one of the three without being align with company´s strategy. Sometimes a manager can focus on cost redution however he should bear the implications of this cost redution. First, a manager should think in adding value, if the cost is important for your strategy don´t cut it. The same could be applied to revenue growth. As a manager I am always asking if the focus of my strategy will add value to the business. Then, I can focus in one of the three.

Not always an increase in revenue is the best strategy. Sometimes you have to focus on cost reduction and margins than you focus on revenue growth. As I said before it will depend on the strategy and the market.

I agree with Ian and Steve. I would focus on those three items in this order:
1. Revenue growth
2. Margin improvement
3. Cost reduction

My thought is that growing revenue is the path to greater profitability. It puts more cash in the bank. Charlie is correct when he says that if your operations are not leaned out, possibly you are at risk for increasing volume but not your profits. But I'd still opt for growth first because if you do have an efficient operation, then your bottom line will grow. If revenue grows, but your bottom line stays flat, then it's a clear sign that you need to improve the effectiveness and efficiency of your organization through process improvement and/or lean engineering.

Cost reduction stays last because you'll never save your way to success.

Eric, Don´t you think that a manager should first analyze the implications of a revenue growth? The focus should be in the bottom line, if it stays flat revenue growth should not be the focus. Don´t you agree?

Haroldo: You're right. And your post about aligning with organizational strategy is certainly on target. Strategy is where it all begins. In our responses, each of us is making assumptions about what the situation might be in a given organization. I just tried to answer the question as directly as I could without digressing.

Haroldo,

It is important to understand where a company currently stands...then the sequence would adjust accordingly. As Eric said, for simplicity sake, it is easier to answer the question without delving too far into the variances.

Yes Steve that is right, you went straight to the point. Maybe my background in finance makes more prudent when the subject concerns revenue growth. That is why I am always focusing on a big picture.

Peter Drucker said that the sole purpose of a business is to create, keep and grow customers. So, let’s see how the priorities play out, based how directly they impact customer creation:

1: Reduce Cost.
Capital is required to build, market, sell and deliver/install products. If you don't spend the money, you won't have what’s required to create a customer base. Reducing costs will not directly increase your customer count. Therefore, #1 cannot, be the most important.

2: Increase Revenue.
If you increase revenue, that's usually as a result of creating more customers. But HOW you increase revenue is key. You can increase revenue quickly by increasing prices. That may help in the short term, but it will ultimately erode customer base. But if you create revenue by attracting more customers, and selling more to current customers, this will pass muster with Drucker. Also, more revenue lets you build, market, sell and support more products to more customers. So far, #2 is more important than #1.

#3 - Increase Margins.
Increasing margins means the business will be more profitable, which can fuel further growth. But what if a business stops spending on those functions that drive revenue? For a period of time (depending on length of the sales process, and order to cash cycle), the margins can be up, but the business can actually be headed down. High margins benefit the shareholders more directly than they benefit the customer. Therefore, #2 wins out.

If we're to follow Mr. Drucker's advice, we'll focus on (properly) increasing revenue. If we’re properly increasing revenue, we’re creating more customers, and/or growing our customers. That’s good; that’s our primary purpose. If we control costs in one area, in order to have more resources available to allocate toward “customer-creation initiatives, we’re still on task.

If we properly manage Revenues first, and costs second, then Margins will take care of themselves.
So, if the primary purpose of a business is to create, keep and grow customers, the we should focus on generating revenue, controlling costs, and increasing margins, in that order.

To quote the CEO of on of my IPO'd startups..."Revenue solves many problems". So, I go with Revenue, Revenue, Revenue