01 June 2014

Profitable Growth

"By itself, there is no virtue in business growth. A company is not necessarily better because it is bigger, any more than the elephant is better because he is bigger than the honeybee."

--Peter F. Drucker

In the fourth and final installment on principles of business growth, we turn our attention to additional findings on this elusive subject.   

Our premise from the beginning:

That a one-dimensional strategy is insufficient to achieve sustained growth and create a future for the organization. In addition, healthy and sustained growth, even with the right people and processes, is as much a mystery as a planned strategy.

In the book, The Alchemy of Growth, we are reminded of two key factors for growth:
  • That accelerating growth lies in turning ideas into reality 
  • A group cannot profit from an opportunity, no matter how attractive, if it does not have the capabilities to capture and defend it
An article published in the McKinsey Quarterly raised this question, "Is your growth strategy your worst enemy?"

The authors then asked: "Why do plans that look good on paper go so bad when they are executed?"

Not accounting for how the competition might react is a secondary reason why plans don't go well. Rivals often threaten the best-laid plans with inventive responses. Put another way every action produces a reaction, some of which may not be anticipated in the planning process. 

Good growth and bad growth

What else does management writer Peter Drucker have to say about business growth?  
  • While every business would likely claim a desire to grow only a handful have a growth policy or growth strategy. Fewer know whether they are really growing or just becoming more obese.
  • A business has to be the right size for its market, its economy, and its technology. The danger is becoming marginalized in any markets the business may be in. An enterprise is always the wrong size if it is marginal in its market.
  • A company must know its minimum growth goal or it has no growth policy. 
  • The first step in a growth strategy is not to decide where and how to grow. It is to decide what to abandon. To grow you must have a systematic policy to get rid of the outgrown, the obsolete, and the unproductive. The foundation of a growth strategy is the freeing of resources for new opportunities.
  • It is not how much growth we want?"Rather it is how much growth do we need so as not to become marginal as our market grows?"
  • The greatest mistake in a growth strategy is to try to grow in too many areas.  
Changing Mindsets

Coming out of a very deep recession, how do leaders manage the polarity between expense and growth? 

"Going after revenue productivity requires a different corporate mindset than the one for achieving cost productivity," says consultant Ram Charan. 

"Here, what you spend is less important than what you spend it on and the revenue it produces. And just as you get everyone to focus on cost-cutting, you need to get everyone focused on revenue productivity," Charan adds.

He goes on to propose a "growth budget" for getting silos to work together; to lay out a growth plan; and most importantly, how to fund that plan.  

A growth budget would be separated from the traditional budget so it could be identified and have its discipline and review. That way everyone could see the funding for growth. This design focuses on building the business while encouraging and rewarding cooperation to reach a common goal.

Charan makes the point that having a social engine (not a task force), centered around open communication and relationships built on trust, enables collaboration to occur naturally and helps foster growth.   

Do you have a growth budget to pursue the right opportunities?

More than the right organizational chart, do you have a healthy social system to get things done?

The next big thing

"Everybody is fleeing into the future just as fast as they can," says Paul Saffo, of Discern Analytics. He adds, "They don't know what they are going to need in their toolkit, so they are grabbing stuff as they go."

So Google and Facebook start a bidding war for Titan Aerospace, a drone start-up that makes high-flying robots. Google bought Titan (terms not disclosed) as Facebook acquired U. K.-based Ascenta, another drone maker. 

That Facebook deal puts in place another building block of beaming the Internet to a third of the world's population who can't get it any other way.  

In the meantime, Apple pays $3 billion to acquire popular headphone maker Beats Electronics, and its related streaming music service Beats Music, to shore up iTunes.    

With billions in reserves (Apple alone has more than $137 billion in cash--greater than Microsoft and Google combined), these technology and social media giants can afford to place multiple bets on the next big thing and wait for their investments to pay off if they ever do.

Unfortunately, most cannot participate in that kind of big-dollar acquisition spree with an uncertain or likely delayed return on investment.

How then does everyone else grow profitably (including nonprofits who also need to show a profit or have reserves)?

To answer that question let's come back to our original post in this series. As the Alchemy writers conclude, in addition to hard work and timing, most businesses and nonprofits grow and sustain that growth by extending and strengthening the core of an existing business; developing new entities (faster than existing ones are extinguished); and instituting a process for creating viable options--stretching the mind for future possibilities

Perhaps that three-dimensional approach is worth a look during your next strategic planning cycle, especially if profitable growth, however, defined, is the ultimate goal.


(C) Bredholt & Co.