The Dow Jones Industrial Average had its strongest month in July since October 2002 and its strongest July in more than 20 years, climbing 8.6%. Caterpillar was the strongest Dow stock in July, up $11.02, or 33%. The strong performance of the Dow in July was driven by earnings reports as many companies reported performance better than investor expectations.

I had the opportunity to speak with top executives from Caterpillar, The Hershey Co., and PPG Industries this past weekend. Each of these companies outperformed market expectations and have enjoyed a significant “pop” in their stock prices as a result.

As members of the board of trustees of Juniata College, a top-quality and well-respected central Pennsylvania college, we were all together for the summer board meeting. While each of these individuals was pleased with their company’s performance, a common concern was voiced: "We’ve cut overhead as far as we can. Without top line growth we won’t be able to repeat our second quarter’s success."

The majority of companies who reported earnings growth in the second quarter reported flat or negative top line growth--the trend was consistent across all industries. Company after company have successfully slashed overhead reducing everything from head count to travel budgets. 

Home builders have not been excluded. Home builders too have slashed overhead, but in many cases SG&A as a percent of revenue actually increased as revenues fell by a faster margin. 

The challenges for Caterpillar, Hershey, PPG, and every builder is how do we drive top line growth. Caterpillar is relying on emerging markets such as China. PPG and Hershey Foods had a previous small footprint outside the United States, but are now thankful they have operations in emerging markets to drive short-term top line growth.

Builders for the most part can’t rely upon emerging marketsor overseas operations. Therefore, top line growth can only come from taking market share from our competitors--there’s just no other way to drive top line growth when market demand is level or declining.

If your company has additional room to reduce overhead and improve earnings as a result, that’s great, but what have you been waiting for? If top line growth is the only realistic answer, how do you out-compete and outperform your competitors?

Ultimately, the answer lies not in discounting and price reductions. The volume increases required to compensate for the necessary discounts and price reductions are not obtainable; such a strategy forges itself into a death spiral.

The answer is through differentiation; providing the opportunity to charge a premium price because your value is noticeably superior in comparison to your competitors. It’s through innovation and staying ahead of your competitors in understanding today’s customer, not yesterday’s customer. It’s not imposing more rules, policies, and procedures on your people, but demanding and giving them the approval to act with common sense. It’s no longer accepting mediocre performers, but actively recruiting top talent.  

Regarding talent, I ask myself, if I were in a life or death situation would I rather have mediocre performers or the smartest, most talented individuals with me. It’s a pretty easy question to answer, yet very few of us take its conclusion to heart.

Home builders do not have the luxury of generating top line growth from emerging markets. Therefore, with little room left to reduce overhead expenses, the only solution for improving profitability is to increase revenues. In an industry experiencing little or no market growth, companies must take market share. While discounting and incentives can increase revenues in the short-run, the impact on margins outweighs the incremental revenue growth. The only hope is to offer a compelling value to your customers. You have to increase your market share at your competitor’s expense. To do this, you need to innovate, provide your decision-makers the room to make common sense decisions, and ensure you have the highest quality talent on your side.

If not, you’ll find your market share being taken by one or more of your competitors. And any hope of growth in profitability will be dashed.