Several years ago, I had about the next dialogue with the General Director of the construction and installation company:
- – You know, over the last few years we have stopped growing.
- – And what do you do to make your business grow?
- – Just do not tell me that we need to “sell more”!
- – Selling is just a tool that helps to do business.
- – And what is the business in then?
- – Business is working on the market, working with specific customer needs.
- – Then how do we grow?
To find an answer to the question that every manager is worried about, we will have to take a broader look at some things. In many markets, the lack of company growth threatens to lose business in the long term. For example, one of my clients, a manufacturer of electrical products (bulbs, switches, etc.), was confident that his market share was stable. He claimed, “for many years now the production volume has been growing by about 1% annually”. In his opinion, this meant a stable position. Moreover, he believed that planning “from what has been achieved” is the best way of long-term management. In fact, he was losing market share: the market was growing and the company was maintaining the same turnover. I recommended him to consider a growth strategy.
The classic growth strategy, as it first appeared in the world, was aimed at increasing capital by investing in companies and industries that grow faster than others.
In today’s world, the growth strategy aimed at the growth of both the business itself and new lines of business
A global survey conducted by McKinsey in 2005 shows that companies with sales growth of more than 20% tend to reduce it to 8% within 5 years, and to 5% to a ten-year mark. Some exceptions are explosive market growth, such as certain segments of IT technologies (tablet computers, former cell phones, etc.) or new construction materials for our country (plastic windows, building mixtures, wall panels, etc.). Such markets have been growing at a giant pace due to the significant superiority of goods in terms of consumer properties of domestic counterparts. Nevertheless, each market has its own limits, which do not allow companies to grow at the same pace. It is important to understand that no market exists in a constant form forever. Even the rapid growth in new markets decreases over time, stiffening competition for existing consumers and cutting yield.
What Is the Idea of a Growth Strategy?
It is simple: it is necessary to find a balance between optimization of the main business, development of new lines of business and creation of new businesses.
Such an idea becomes a strategy when systematic decisions made, with the help of which it becomes possible to manage further development activities efficiently. In general, it is necessary to identify relevant to a company challenges and decide how to work with them. Despite the fact that each company has its own challenges, it is possible to identify common ones, characterizing the problems and setting the framework.
For the convenience of working on long-term sustainable growth, it is worthwhile to consider three horizons. (see the figure).
Each horizon has its own generalized growth challenges. To continue its development, the company needs to define in detail what tasks it will have to solve and how it will deal with these challenges.
The closest horizon well known to every manager or owner. In the near future, it will be important to manage your existing business efficiently by periodically introducing a certain number of innovations that allow you to lead your segment and win the competition. In any industry and market, there are always companies that offer new ways of dealing with customer needs. These can be new technologies, a combination of customers’ needs, better service, improvement of some products, and/or service parameters. There are many examples for each market. At the same time, each of these examples confirms the need to look for new opportunities for business development.
And if your company does not so, competitors or new players entering the market certainly do
The example of Dimitrovograd Automobile Units Plant, which in the early 2000’s Toyota was planning to purchase, is indicative. After a thorough inspection of the production facilities, the Japanese came to the conclusion that it was cheaper to build the plant anew than to make up for decades of missed investments. The huge lag in the technology of the company’s core business, which occurred during the long period of lack of any innovations and upgrades, made it uncompetitive. The opposite situation is with the brewing holding “Ochakovo”. Competent operational management, timely investments made in the late 90’s into modernization of brewing equipment and business expansion at the time of rapid market growth allowed not only to strengthen positions, but also to develop new business lines, laying the foundation for future growth.
The core business of a company always has a certain growth potential. However, we should not forget that it is declining over time. On this horizon short-term efficiency, cash flow and profit are crucial. A stable financial flow is the basis for further development. Success ensured by good job of competent executives-practitioners, operational managers, capable of confidently working with the existing business. Their main tasks will be operational efficiency, emphasis on cash flow and profit, not forgetting about a growth potential (even a small one) and modernization of existing technologies.
The second horizon defines activities for a slightly longer period of time.
In fact, this is the answer to the question of what we need to do today, so that in a few years we will grow at the same pace
It is necessary to decide which new business will be created on the basis of the existing one, which new business lines, potentially interesting and perspective niches will be the source of new growth and create an increasing revenue stream. Whether a new business will need to be expanded or pivoted in new directions – each company makes such decisions based on its situation and position. It is important to stimulate and support promising entrepreneurial efforts that will help accelerate a development of new areas. If the business lines chosen wisely, in a few years it will be possible to reproduce and replicate the business model successfully proved with today’s main business.
Among Russian companies worthy examples will be the success of “Parallels” (they started with the server administration panel, developed the business line desktop, developing one for cloud technologies), radio station “Silver Rain” (formed a specific, quite solvent and very loyal audience of the radio station, launched the TV channel “Rain”), Alfa Bank (breakthrough technologies in lending, customer service).
The third horizon reflects the challenges of the long ahead perspective.
In fact, it is an attempt to look into the future and understand how we want to see it
To work with the challenges of the third horizon requires a certain courage to think. It is a chance to take part in shaping the future of an industry or several. To respond to such challenges, we need breakthrough ideas that can generate goods/services that change the industry, create value propositions that have no analogues, and yet have no confirmed demand for them. The brightest example of such work is Apple, which has created a completely new user experience and ways of working with multimedia products. In Russia, we can note the activity of Oleg Tinkoff, who created a new business, Tinkoff Bank, on the cash flow of existing businesses in other areas.
For success on the third horizon, it is important to initiate a future business capable of transforming the industry, to change the consumer’s perception of the usual way of meeting needs. New ideas backed by investment can take various forms. It can be technological research, alliances and partnerships with other players to exploit synergies from working together, “pilot” projects testing ideas, or buying a small part of a promising company. It is critical to define your vision for the future and look for ways to implement it. Unlike venture startups, of which only a few are becoming a real business, it is much more efficient to grow a new business from an idea within a company.
The necessary resources and competences could always be found inside, and the acquisition of the missing can be financed by the cash flow of the main business. In the end, the business sprouts grown inside the company are more likely to take root in the long term.
Let us leave aside bureaucratic barriers, tax optimization and corruption. All companies operating in the same market have similar barriers. All these are just limitations, however, quite serious, which should be taken into account when directing work towards meeting the needs of clients.
A Question “When to start thinking about long-term growth?” Is a Rhetorical One
You should think about it continuously. The sooner the company starts taking deliberate and planned actions in this regard, the stronger its future will be, the more sustainable its long-term growth will be.
It is reasonable to start working on long-term growth by understanding a situation, a company is in, and tasks it faces on different horizons. It is important to find a balance between optimizing your core business and building a new one. There are many factors to consider: finances, competences, management efforts, time, market changes, etc.
Different methodologies can be applied when working on a workable growth strategy: Porter’s Five Forces of Competition model, industry analysis, Blue Ocean strategy, and other strategic thought advances. Such a toolkit well described in professional literature; all you have to do is to choose the right way to apply it. As a result, it is critical to form an understandable and achievable long-term action plan that makes all necessary decisions.
It is also crucial to involve in such work the managers of the company who have long been in business. They have a deep understanding of the nuances and peculiarities of consumers, competitors, and as a rule, are able to generate breakthrough ideas. It is also very useful to put at the head of such a process a person who is able to look far into the future, who can think outside the box and who has leadership skills. In such a long-term activity, it is important that the right people are in the right places.
The article was published as well in the magazine “On the Executive’s Desk” in issue 8 of 20.02.2012.