Far too many companies fail to achieve their growth targets in revenue and profitability. However, the probability of achieving profitable growth is heightened whenever an organization has a clear growth strategy and strong execution infrastructure. One without the other impairs the probability of success. This author describes why and prescribes strategies.
Many organizations fail to achieve their desired growth targets in revenue and profitability.
Most businesses fall short of achieving their growth objectives for revenue and profitability. In fact, studies report success rates as low as 20%. Why is growth so elusive?
- Inadequate consideration of opportunities within the core business, adjacent to the core business or within new customer sub-segments.
- An organizational infrastructure that cannot support successful execution.
However, managers can do certain things to improve the chances for success. This article will describe one such thing managers can do, namely build a systematic framework composed of three strategies for growth and three key elements for successful execution. The article will also explain how the three strategies and three key elements increase the probability for success.
* This article is an amalgam of extensive experience and research undertaken by the author and his colleagues, David Day and Dr. Donald Baer, on creating and implementing growth strategies, mostly with mid-sized firms.
Achieving growth: Recommendations for increasing the probability of success
Customer-Focused Growth Strategies
1. The process of identifying profitable growth opportunities most often begins with the Core Business1, that is, the products, services, customers, channels and geographic areas that generate the largest proportion of revenue and profits. In-depth conversations with the senior leaders on the topic, “What is our core business?”, is the preferred starting point.
An evaluation of the overall performance of the core business follows. This involves measuring and benchmarking profitability, rate of revenue growth and the firm’s reputation with its most important customers.
- In what direction is each of these key indicators headed and why?
- Who are and who are not the core customers? Why?
- What is the firm’s key competitive market differentiator? How can it be strengthened?
- Is the core business under major threat?
- Are there attractive growth opportunities within the core?
When considering these questions, input from external stakeholder groups is very helpful, particularly from loyal and even not-so-loyal customers.
- A renewed commitment to operational excellence within the core business,
- Insightful conversations on the growth potential of the core business, or conversely,
- An urgent need to make significant changes to the core or even a plan for abandoning the present core and exploring more profitable growth options.
Acklands-Grainger Inc., a leading Canadian industrial supply company, initiated such a process.
Prior to doing so, Acklands-Grainger was described as a “stodgy Canadian supply company…complacent” and one with a 4% growth rate. “In less than 12 months” it had been transformed “to an exciting place to work with (close to) a 20% growth rate and higher profitability”.2 How did such a dramatic change occur?
The starting point was winning the commitment of key employees at all levels, individuals who were willing to step forward and lead.
Processes were created to help refocus on the core business. Key elements included (1) defining three market platforms on which the core business is based – Industrial, Fleet and Safety, (2) eliminating products and markets that did not fit on these platforms, (3) adding new products to augment the core and (4) strengthening market coverage with significant investments in the two major channels – sales depots and the firm’s website.
2. A second customer-focused growth strategy is based on the firm’s existing customers. This strategy involves creating High Impact Value Propositions for new customer sub-segments. Underpinning this strategy is the willingness to view customers through a different set of lenses.
A process can be created to assist both managers and specialists at the customer interface gain fresh insights into customer needs and preferences. This is a necessary first step in discovering underserved customer groups and hidden growth opportunities. (Senior leaders who frequently interact with customers can make a significant contribution to this process.)
Key elements of this process include (1) sub-segmenting existing customer groups based on newly discovered needs, buying patterns and contribution to profits and/or revenue, (2) creating innovative and high-impact value propositions for the most attractive sub-segments, (3) field-testing the new value propositions and (4) scaling-up based on the results of field tests.3
In addition, some firms choose to focus on lower end customer sub-segments. These are usually groups of customers for which the cost of supplying and servicing exceeds the revenue the customer generates. In such cases, value propositions can be designed which will move the customer to a profitable position or at least minimize the losses. For example, direct sales calls can be replaced with on-line ordering systems and non-essential product/service features can be eliminated. These actions not only lower the costs of serving customers but often also lower the customer’s cost. After the initial shock, many customers welcome the new lower-value proposition.
Leading Canadian financial organizations have successfully applied this overall approach to sub-segmentation. But so have mid-sized and small firms, e.g. The International Group Inc., a Toronto-based petroleum specialties manufacturer and third-generation family business. Also, think of your favorite owner-managed restaurant, the one you select for meetings with important clients or special family occasions. Such businesses often owe their success to delivering attractive value propositions to different customer sub-segments.
3. A third customer-focused strategy is to enter businesses that have strong strategic links to the core – adjacent businesses1. This is a particularly appealing alternative when the core business is approaching its full potential, operates efficiently and generates surplus cash for reinvestment. It is also an important option when it is clear that the core’s future growth potential is weak.
Many leaders prefer to start this process by focusing on current customers. A series of meetings with the most innovative customers can be a valuable source of opportunities. Alternative channels, new products or services or even new joint ventures may be suggested as well as entering new geographic markets, serving different customer segments and redesigning the customer’s value chain.
Another alternative is to consider the non-core businesses of the firm. Is there the potential to leverage present positions into attractive growth opportunities?
When considering adjacent growth alternatives, the relationship to the core business requires special consideration – specifically an assessment of the major strategic differences and similarities with the core. Too many differences can overly tax the organization’s capabilities. To minimize this risk, business leaders may wish to test their organization’s capacity by piloting adjacent growth initiatives in stages, one or two degrees of strategic difference at a time.
Some leaders choose to look at adjacent growth options in an opportunistic manner – as one-offs. This often results in disappointment. Initial successes with one or two close customers can soon fade under the onslaught of strong established competitors. To prevent this, leaders are advised to “organize to suit the new business as much as the core”.4
Tim Hortons presents an interesting example of an adjacent growth strategy.
After a series of market tests, this prominent Canadian organization identified regions in the U.S. north east and mid west in which there is potential for profitable growth. Based on these tests, the firm is selectively investing in establishing a position in these highly competitive markets.
Contrast entering new geographic markets with the alternative adjacent growth strategy of creating a new product platform in the core Canadian market – specifically, soup and sandwich lunches and more recently the very popular breakfast sandwiches. These new product initiatives have significantly increased revenue (and profits) within existing stores.5
In the short term, adjacent growth initiatives that leverage a strong position with existing core customers have a higher probability of success. The alternative of expanding into new geographic markets provides the advantage of building a larger customer base, but often at the cost of a longer payback period and higher risk.
Executing growth strategies
The three Customer-Focused Growth Strategies described above require a supporting infrastructure to increase the chances of successful implementation. Lack of an adequate infrastructure is the second reason cited for not achieving growth objectives.
A supportive infrastructure includes (1) organization capabilities that are valued by customers, (2) a management-performance system and scorecard which focuses on leading indicators and the drivers of growth and (3) strong leadership practices at every level of the organization.
- Successfully entering new markets,
- Create excellent new products or services which appeal to customers, or
- Provide an outstanding level of customer service.
Note that the three organization capabilities selected are vital to the success of specific Customer-Focused Growth Strategies.
Each of these capabilities is rooted in processes that move across the organization and require the expertise and commitment of various individuals and departments.
It’s widely accepted that an organization’s success is rooted in its competitive-edge, organizational capabilities. Therefore, a major challenge that senior managers face is to clarify, assess and continually strengthen their organization’s strategic capabilities.
- Highly visible to key individuals within the customer organization, and acknowledged as providing exceptional value.
- Difficult for present and potential competitors to replicate.
As an example, let’s examine the capability to provide an outstanding level of customer service in a manner that would make it difficult for competitors to replicate. In order to provide such a high level of customer service, employees from different departments (not only the Customer Service Department) must be involved in service delivery. Employees throughout the organization should connect quickly and collaborate willingly. Collectively, relevant information and insights about customers and product or service delivery must be shared.
The high level of cross-departmental collaboration required can prove challenging for some organizations, particularly those with rigid vertical structures. Such structures make it difficult for employees to adapt and respond to special customer service requirements. Note that under these conditions, an employee’s loyalty often shifts from the firm to their department or profession.
Delivering a superior level of customer value requires uninterrupted flow across the organization. Eliminating barriers to flow – breaking down departmental silos- is a necessary first step to building an organization’s strategic capabilities, regardless of the specific capability.
Let’s return to the question of how difficult will it be for a competitor to replicate a key organizational capability. It should be very difficult! A number of senior leaders view organization capabilities as the key element of their business strategy. These leaders focus on continually building and leveraging the organizations’ capabilities to drive new business growth.6
2. A second key element of infrastructure necessary for successful execution is the Performance Management system and scorecard. (Note: Performance Management systems are rooted in the widely held belief that “what gets measured gets done”.)
The process starts by answering the question, what should be measured and why?
- Scorecards depict key strategic relationships, particularly between the desired performance outcomes such as revenue and profit growth and the drivers of performance (e.g. new market entry, service quality, customer loyalty, employee engagement).
- Performance of both individuals and departments (or regions) is directly linked to the growth strategy and successful execution.
- Company scorecards should provide a balanced perspective based on the needs of key stakeholders groups and/or major organizational processes – internal operations, value provided to customers and employee development.
Let’s assume that the overall strategy of a firm is to grow the core business and that growth will be achieved through increased market penetration of existing products. What are the drivers of growth that must be measured, monitored and managed?
This question is best answered by those directly involved. Precise measurements are not always possible but proxy indicators established in a thoughtful and open manner are. Let’s assume that increased market penetration will be driven by the strength of the company’s brand and customer loyalty. But what drives customer loyalty and brand strength? Is it the quality of service provided, the reputation of the sales staff or the depth of knowledge of the customers’ business and requirements?
When there is a reasonable level of confidence that the above questions have been answered, the process shifts to (1) how and when will performance be measured, (2) how will those directly responsible access the performance measurement and (3) what follow-up action, if any, is necessary?
Performance management systems based on the processes described are becoming more evident in successful organizations. A brief description of the approach RBC Banking uses follows.
Leaders in the Banking Group have utilized performance scorecards to link execution with overall business strategy for a number of years. The scorecard has been aligned with four major stakeholder groups – customers, employees, shareholders and the communities in which the bank resides.
The focus is on measuring and monitoring leading indicators – for example, the drivers of customer loyalty, employee engagement and financial results. Considerable input from many sources is solicited before these measures are set and appropriate action undertaken to continually improve performance.7
3. The third key ingredient of a supportive infrastructure is Leadership.
- Why the organization must perform at a high level in the increasingly competitive and global business environment.
- Why barriers to cross-departmental collaboration are harmful and weaken the organization’s ability to adapt.
- Why, when a colleague’s performance appears to fall short, it may be preferable to view this as an opportunity for learning and professional development rather than expulsion from the organization.
- Why the ultimate success of the organization is rooted in its ability to continually be innovative in delivering value to customers.
Leaders are found at all levels in organizations, including, non-titled, non-managerial positions. They are best identified by their behaviours and influence rather than the hierarchical position. Together, such leaders create a network that reflects the very essence of their organization – ‘who we are, where we’re going and how we’ll get there’.
Such a perspective on leadership significantly differs from the more traditional ‘leader as hero’- the person who fires-up the troops, leads the charge and performs ‘heroic’ feats.
Can leadership skills be developed? The answer is clearly “Yes”. Some organizations owe their success to being able to recognize that the organization is a lab for leadership development. The process of leadership development can start with an assessment of an individual’s emotional intelligence, a key predictive attribute of successful leaders at all levels. Hands-on learning experiences with one-on-one coaching and mentoring are also vital elements of the process.
The relationship between senior leaders and other leaders throughout the organization merits special consideration. Senior leaders ultimately set the overall direction and create conditions that encourage others to join in and lead – particularly with respect to executing the strategy. A condition that has proven effective is the continual reinforcement by senior leaders of the expectation that all employees should exhibit leadership behaviours. With persistence, the growing network of leaders will tip the scales as other members of the organization from every level and in every role join in and commit.
Two organizations, Southwest Airlines and KI (formerly Krueger International), a mid- sized furniture manufacturer, have taken different approaches to the challenge of building leadership at all level and in all roles.
Since its founding, Southwest Airlines has focused on the hiring process. The organization created a unique candidate screening process that has been highly effective in selecting individuals whose values and abilities embody unique and imaginative approaches to dealing with challenges. Such individuals are a good fit with the highly disruptive and innovative low-cost strategy of the airline.
When employees share identical values with the values of the company founder and connect at a very basic level with the organization’s core business strategy, it can be expected that each employee will step forward and lead. Over the last 5 years, Southwest’s sales have grown at an average annual rate of 11 percent. The airline has been profitable for the last 34 years.
In contrast, the president of KI (formerly Krueger International) a Green Bay Wisconsin business furniture manufacturer started the process of expanding the organization’s leadership mindset and behaviours more that 40 years after the company was founded. The president’s approach was based on the belief that (1) teaching employees how to think like a business person and (2) providing all employees access to whatever information is required is an absolute necessity. These beliefs have been continuously demonstrated at well-attended regular scheduled monthly meeting organized by the president. Employees at all levels and in every role receive performance-related information from the president and discuss how to solve problems and capitalize on opportunities. (Note: As a result of the diligent efforts of the president, all employees are company owners.)
The company’s growth strategy has drawn on the approaches described in this article – redefining and growing the core (expanding the product line), entering adjacent businesses (European expansion) and focusing on new market segments and sub-segments (universities, leading high tech firms). During the president’s tenure, sales increased from $45 Million to $630 million, an annual growth rate of 14%. The annual growth in ROI exceeded 30%.
In summation, we can say that the probability of achieving profitable growth is heightened whenever an organization has a clear growth strategy and strong execution infrastructure. One without the other impairs the probability of success.
(David Day, Donald Baer and Jim Liabotis have contributed to the preparation of this article.)
Notes and References
- In Beyond the Core, published by Harvard Business School Press, 2004, author Chris Zook, describes both core and adjacent businesses. The author also uses the term “economic distance” (referenced later in this article) to describe how closely linked an adjacent business alternative is to the core business.
- Elspeth Murray, Peter Richardson, Fast Forward, Oxford Press Inc., 2002.
- Angel Customers & Demon Customers, co-authored Larry Selden and Geoffrey Colvin (2003, Penguin Books) provided useful insights into augmenting processes for sub-segmenting and creating new value propositions.
- Six principles for making new growth initiatives work, Adrian Slywotzky and Richard Wise, Ivey Business Journal, May/June 2003.
- Tim Hortons Annual Report, 2006.
- The description of organization capabilities is adapted from Competing on Strategic Capabilities: The new rules of corporate strategy by George Stalk, Philip Evans and Lawrence Shulman, Harvard Business Review, March – April, 1992.
- For a more complete description, refer to Bringing Strategy to Life: How scorecards help RBC align business and HR plans, Donald Baer, HR Professional, February/March, 2005.
- For a more complete description of the Southwest Airlines and KI examples, refer to Maverick at Work, William C. Taylor & Polly LaBarre, HarperCollins, 2006.