Generating Growth

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JWI 540

Strategy

Week Seven | Lecture One

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HOW DO WE GENERATE GOOD GROWTH?

Growth is the linchpin of business—indeed, of capitalism itself—and it informs most

company strategy.

At the same time, we all know that growth isn’t always positive. Think for a moment

of the adolescent boy who shoots up 10 inches in a year. Instead of making him

stronger, his added height actually weakens him, at least for a while. His gangly

frame is hard to manage and frequently feels out of control. And he still doesn’t

make the basketball team.

Companies, as well, often find that growth—increased revenue, a bigger geographic

footprint, the acquisition of a rival—doesn’t always improve their performance. In

fact, it may undermine profitability or shareholder value. The key is to create a

strategy that drives the right kind of growth.

THE DIFFERENT TYPES OF GROWTH

Often, a company says right up front that it expects to grow. It wants to grow faster

than the market, or faster than people expect it to grow. Of course, there are

advantages that come with scale. A company’s large orders can allow it to negotiate

favorable deals with suppliers.

Growing companies can often pursue new kinds of opportunities as they expand

their workforce and operating capacity.

To use the language of earlier lectures, growth can be a company’s strategic

objective. It also may affect the scope of activities. And it can provide a competitive

advantage over rivals.

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Growth also comes in different flavors. In setting strategy, companies need to

decide what kind of growth they want to pursue: fast or slow? Low-risk or high-risk?

An expansion of current operations or a move into new markets?

But the most important distinction is between top-line and bottom-line growth. Top-

line growth means increasing your revenue, usually from selling more products or

services. Bottom-line growth means increasing your profits, often from reducing the

costs associated with generating revenue. It’s frequently forgotten that top-line

growth can reduce profitability due to the added cost of generating new sales.

Now, top-line growth achieved at the expense of bottom-line growth does

sometimes make strategic sense. A company may be willing to endure a period of

losses while it establishes itself in a high-potential new market. Or it may choose to

temporarily sacrifice profit margins in order to increase sales of strategically

important products in existing markets.

But a sustained period of unprofitable growth represents a hollow strategic victory.

SOURCES OF GROWTH

In the following podcast, Jack and Suzy Welch talk about how businesses can deal

with growth issues.

Whichever type of growth managers seek, it typically will be generated in one of

three ways. Successful companies seek a combination of the three, because each

has its advantages and disadvantages.

Organic growth is generated from a company’s existing resources—its brands,

employees, capabilities, systems, and processes. It includes market-share growth

(getting a bigger piece of the pie in your existing market), share-of-wallet growth

(getting a bigger portion of a customer’s total spending), and growth through

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expansion (generating new revenue through a move into new markets or customer

segments). The Swedish home-furnishings retailer IKEA pursued a strategy of

organic growth when it sought more sales of the home-furnishing products it already

carried: added items to its product line and expanded its operations into new

countries. This strategy required expanding manufacturing capacity, hiring more

salespeople, and developing new products in related areas, such as bedding.

Mergers and acquisitions (M&A) usually provide a quicker path to increased scale

than organic growth. They can be a way to immediately jump into an attractive

industry, obtain a technology or brand that opens up new markets, or increase the

share of an existing market. Some companies, including IKEA, value their unique

culture or brand and are hesitant to consider M&A as a primary growth lever. Note,

too, that because of the challenges involved in integrating separate businesses,

mergers and acquisitions all too often destroy shareholder value—even though

aggregate revenue and profit are sometimes higher as a result of the combination.

Industry growth occurs because an entire industry is expanding. Since “a rising tide

floats all boats,” companies in fast-growing industries like home healthcare services

can enjoy healthy growth even if they’re not beating their rivals and increasing their

market share. Identifying and targeting high-growth industries, and exiting those that

are stagnant or declining, is a vital strategic leadership skill.

WHICH GROWTH OPPORTUNITIES SHOULD WE PURSE?

In the following podcast, Jack and Suzy Welch discuss the business imperative that

doesn't get enough attention.

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When you spot a growth opportunity with a potentially big upside, it can be difficult

to walk away from it. It’s human nature—or at least the nature of business—to be

attracted to the allure of sexy new ideas or exciting emergent industries.

But while a growth opportunity may be great for one company, it may not make

sense for yours. Your strengths, your current portfolio of projects and products, and

the limits of your resources all could undermine growth. Your decision to move into

an unrelated business may confuse customers and employees. And making such a

move may distract you from commitments you have already made to partners,

suppliers, and customers.

You need guidelines to help you determine whether a growth opportunity makes

strategic sense.

Start with an industry analysis. Because industry growth can be such a strong driver

of company performance, this is often the first step in deciding whether to pursue an

opportunity. Using tools like Porter’s Five Forces model, discussed in the previous

lecture, you can try to figure out where an industry is headed. Is it so easy to enter

this market that competitors will continuously drive down prices and profits? Are

new technologies poised to upset the status quo? How strong is the projected

demand?

Your analysis may allow you to reject an opportunity out of hand. For example, if the

industry fundamentals are weak, entering with a plain- vanilla strategy of organic

growth is unlikely to pay off. But don’t dismiss an unattractive industry before doing

a strategic advantage analysis.

First, consider whether this is an opportunity that your company is uniquely

positioned to exploit. What can you create that is valuable and rare? Does your

company have distinct assets and capabilities that can set it apart and generate

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above-average returns? The furniture-retailing industry didn’t seem attractive on its

face, but IKEA had a unique assemble-it-yourself, low-price approach that an

underserved customer segment valued.

The pros and cons of a growth opportunity may be difficult to quantify precisely. Still,

you need to estimate projected costs and returns. It is often helpful to do a

quantitative analysis, using a model such as net present value (NPV). NPV

calculates the value today of an investment's future cash flows, minus the initial

investment. Such tools help to verify and clarify the insights gained from qualitative

frameworks like the Five Forces. Where exact numbers aren’t available, we can use

ranges of values.

Also keep in mind that strategic growth opportunities should never be analyzed in

isolation and pronounced “good” or “bad.” They are never one or the other. You

need to do a comparative analysis of different growth options, weighting their

relative positives and negatives.

READY, SET, GROW

In addition to looking at the industry, your strategic advantage, the expected

economic value, and comparable options, you’ll want to look in the mirror. Where

and how has your company grown in the past? If past acquisitions have lost money

and destroyed morale, is the next acquisition—no matter how great the numbers

look—likely to be any different? If you’ve had problems getting products out of the

R&D lab and into the hands of customers, will your next product-based growth

strategy be similarly flawed?

Companies that are able to execute growth strategies well are realistic about

whether they are up to the task. Internal processes or human resources may need

an upgrade before a program can be launched. Some call this “earning the right to

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grow.” Expanding an inefficient operation doesn’t suddenly make it efficient; in fact,

bulking up may counter-intuitively slow you down.

Managers often overlook past growth challenges. The excitement of the next big

opportunity seizes their imaginations. As a counterbalance to your analysis of the

opportunities, you’ll also need to analyze potential roadblocks.

After taking all these steps, if you ultimately decide your company is ready to grow,

give it all you’ve got. Most growth initiatives begin small and are somewhat

experimental. Because of that, they’re often starved for resources. Inexperienced

people are handed the reins and then forgotten—until senior management checks

back in and second-guesses their decisions.

As Jack Welch likes to say, if you truly want a growth initiative to succeed, spend

plenty of money up front. Put the best, hungriest, and most passionate people in

leadership roles. Have senior managers make a big fuss about the new venture’s

potential and importance—and be sure they grant it the freedom to innovate and

succeed. The last thing you want is to doom your fledgling efforts to failure before

they even get started. (For more on this topic, see Winning, pp. 206–212.)

EVERYONE IS RESPONSIBLE FOR GROWTH

The CEO may have a vision for growth. The shareholders may be clamoring for

growth. Customers may be awaiting your next product. But ultimately, the managers

of a company are critical to how, when, and where growth occurs. No one area

single-handedly drives success, but a single area can be the weak link that

undermines an otherwise brilliant move.

Great analysis and visionary leadership may produce plans with tremendous

potential. But their success ultimately lies in the hands of your people. Operations

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managers must ensure sufficient manufacturing capacity, rigorous quality controls,

and clear-eyed inventory and cost management. Marketing managers must create

powerful branding. Talent managers must acquire, adjust, and retain the right

human capital for the job. Essential financial, legal, IT, sourcing, and distribution

activities must also be coordinated and completed.

Moving from developing a growth strategy to executing one is never easy. As in any

complex project, the importance of goal clarity (what are we trying to accomplish?)

and role clarity (who calls which shots?) are crucially important. But if everything

comes together, the payoff can be huge.