In this blog I will present a couple of useful tools to help
companies define different growth paths- growth vectors and strategies. It’s a little lengthy, but I trust it will
provide value and will be thought provoking.
Do you know of company CEOs that say, "We don’t want to
grow; we are comfortable where we are?” There
may be a few small businesses that are under the leadership of a founder or family
member that take that approach and maybe that company serves a very small niche
market that generates a nice income. Typically,
growth and how to grow are foremost on the minds of a company’s
leadership. Why?
Why companies want to
grow
Regardless of the ownership structure of a company, the
pressure to grow is apparent because CEOs want to increase their company’s
value. Whether through share appreciation for a public company or the increase
in a private company’s multiple because it makes the company a more attractive
acquisition candidate, value cannot increase without growth.
Growth must include both the top and bottom line. Companies that grow top line revenue are
normally accorded a higher multiple (e.g., price to earnings ratio) so upon
merger or sale, the company will be at a higher value (market cap) than a
comparable company with less growth. But
growing revenue alone is not necessarily sustainable. Companies have to couple that revenue growth
with reasonable margins i.e. EBITA, and margin growth.
Some executives are less concerned with top line growth and
focus on managing operational expenses, especially in times of economic
downturn. I am sure we can think of executives such as Al Dunlap who was
recognized as a cost cutter. Yet, there are
only so many expenses that can be cut.
Eventually, as we say, you cannot shrink yourself to greatness.
Growth is second nature to many executives. Top line revenue growth can be developed in
several ways using different strategies.
Executives have to guide their company to grow intelligently given their
company’s competencies, the competition they face, the customers they have, and
the culture they have created in their companies.
Growth is also important for other less tangible reasons. With
growth, a company will be able to retain its employees, as opportunities for
personal growth are tied to overall corporate growth. Top employees will leave
a stagnant company for a company that is expanding and promises them the
opportunity to grow with them. Just look
at the tech companies in Silicon Valley as poster children for this.
Growth is typically driven by innovation in products,
services, processes, and technology. A
company that is stagnant will likely lose its ability to remain innovative and
thus take on a much greater risk of becoming obsolete. Once you lose the momentum of growing, it is
hard to restart those efforts.
Most of our clients are interested in growing. One company wanted to grow their business
because they had a limited number of very large customers. Losing a major customer would be a very high
risk to the company, not only their value but their ability to pay for their
infrastructure and salaries. Unfortunately
they lost a major customer representing approximately 30% of their business. It
took several years to recover from that debacle.
Another client had a more unique problem. They were a B2B chemical company and bought a
relatively strong brand from another company.
However, they started to lose market share to competitive products and
technology was such that existing customers were willing to invest in the
technology on their own and become their own supplier. The question we faced was whether their
brand could survive and if it did, would they be able to grow their brand. Fortunately, we were able to map out a product
strategy and plan to enable them to stem the exodus and expand their market.
A third client wanted to grow as they positioned themselves
for sale. Yet they set self-imposed
constraints on their growth because they did not want to build certain types of
products because of their internal competencies and what they perceived to be
competitive threats. This company was
bought in short time frame at a bargain price given the patent portfolio they
created.
The Product-Market
Matrix
Growth is fundamental to creating value for owners,
employees, and customers. In all three cases above, there were obstacles- real
or perceived- to their growth. Their
goal in all cases was to grow their business.
So the question they faced was: How
does one grow intelligently?
Let’s take a look at a couple of tools that can be used to
break down a difficult problem into smaller bite-sized chunks. A very powerful strategic planning tool is
called the Ansoff Matrix developed and reported initially by Igor Ansoff in a
Harvard Business Review article in 1957.
The product market matrix described below is a classic method for
analyzing the opportunities and risks facing a company seeking profitable
growth.
The Ansoff Product
Market Matrix
There are four broad categories for growth based on a
combination of expanding products and/or markets. Each category presents different risks,
opportunities, and returns for the company.
For example, developing new products or markets assumes a higher risk
than increasing market share in your existing markets. Diversification, where a company not only
develops new products but targets new markets is the most risky. However, different strategies may be
necessitated based on the business life cycle of the company, its products, and
the competitive landscape.
A CEO needs to consider its strategy for growth and the risk
he and his/her board want to take. Let’s
briefly look at each of the four quadrants.
Market Penetration
This strategy suggests there is room to further penetrate
the current market with current products.
The product life cycle may be relatively young and both revenue and
margin growth are possible. Maybe there
are new ways customers want to buy, or perhaps changes in customer buying
habits increase their willingness to buy your company’s products. If the price
of the company’s product is inelastic, a price increase can generate additional
revenue and margin. One small insurance
company we know used this precise tactic.
Another way to increase market penetration is by increasing
awareness of your company’s products to other similarly situated customers in
the markets you serve who may not know about your company and your products. A third way to increase penetration is by expanding
channels of distributions and partnership relationships. A partner who is selling into the same market
can sell your product as a tie-in sale.
One wireless company for whom I worked increased its channels of
distribution and added more market development funds to several channels. Sales increased by more than 25%. Uber is increasing penetration in their
current markets by adding new drivers.
Market Development
Companies can grow by selling its existing products into new
markets. Market development
opportunities may be implemented in several different ways: by advertising
different features, modifying the core product slightly by feature, repackaging
the product to be more suitable to the new market, focusing on new uses,
developing new applications, and expanding geographically.
For example, it is not uncommon for veterinary medical
devices to be slightly modified for the human market. Panasonic Toughbook
which is a PC slightly modified for rough terrain. GE modified its standard bulb with a tougher
covering for harsh outdoor environments. Black and Decker modified its tools
slightly and rebranded them as Dewalt for the professional. Meguiars Mirror
Glaze for the professional detailer market was repackaged as Meguiars Wax for
the consumer market. Arm and Hammer
baking soda was repackaged as a refrigerator deodorant by changing the
packaging. Uber started in San
Francisco and expanded to other US cities and then internationally. Microsoft offered its Office product to
Students and Teachers by reducing the price, changing the licensing options,
and eliminating Outlook from the Student and Teacher version.
Other means for market development may
include partnerships and building a stronger eco-system.
Product Development
This growth vector relies on creating new products and
selling them in its current markets. This
strategy offers a company the ability to expand its “market share of wallet” in
existing markets. Product development
has its own unique risks and constraints and will be discussed below. However, product development and innovation
have the potential to yield solid financial results if performed
correctly.
Look at Apple and how they were able to expand from the PC,
to the series of I-devices like the iPod, iPhone, iTouch, iPad, and then add
larger sizes (line extensions) for the iPhone and iPad. Boeing was able to take the 747 platform and
develop a tanker for use in military applications. Honda and other car companies have developed
new models to appeal to specific sub-segments of the markets they served. McDonalds developed the McCafe and Burrito to
complement their existing products in their breakfast menu.
Diversification
A company can grow by
developing new product in new markets through diversification. It offers the company a new opportunity to grow
with high margins. However, it is the
most difficult because the company may need new competencies in development,
new partners, new channels, new sales and marketing skills, and new processes
and infrastructure. Some companies have
chosen to reduce risk by partnering with another company which brings
complementary skills.
Some companies have
been successful in making that transition.
Here are some examples. Coca-Cola diversified into Vitamin Water
(related diversification) as well as branded merchandise and clothing. The NFL has moved from the teams as the
products to licensing deals for clothing with the team’s logos and other
merchandise. Eddie Bauer diversified
from rugged outdoor clothing to car interiors for Ford. Google, which was founded on search
algorithms and advertising keywords, is developing self-driving cars.
Another way companies
can diversify is by taking an internal competency and commercializing it. Amazon leveraged its internal computing and
server management skills and built Amazon Web Services which is one of the
dominant providers in its market.
Motorola was attempting to be diversified yet became overwhelmed and had
to retrench and spin off some of its business.
So it is fraught with a high degree of difficulty.
The product
development spectrum
Since product development is a major component of growth in
the Ansoff matrix, I want to briefly cover the product development spectrum. Depending on the type of product development
undertaken, the risks can be relatively small or very large. Companies need to develop a product
development strategy reflecting their growth plans and include how to manage
the risk of development.
Several questions must be asked. Does the company have the right resources and
competencies? What is the amount of time
the company is willing to invest in developing new products? Can the company protect its product through
new Intellectual Property or by otherwise developing a “moat” surrounding the
product? Or is there some other
strategic control point that can be developed by the company that enables a new
product to be successful. How much risk
is the company willing to take in developing a new product?
From lowest risk to highest risk, the spectrum of new
products is as follows:
Type of Product
|
Risk Level
|
Organization Effort
|
Pricing/packaging change:
|
Low
|
Very low
|
Minor line extension (different shape or size of product e.g. WD 40
in larger spray can)
|
Low
|
Low to Mid
|
Major line extension (adding significant features to the product to
make it different e.g. Panasonic Toughbook or GE Tuff Bulb. Hyundai marketing
the Equus as a high end competitor to Mercedes and BMW.)
|
Low- Mid
|
Mid
|
New to Company (adapting a product in the market or copying a
competitive product, e.g. Kroger developing Cola K to mimic Coke.)
|
Mid- High
|
Mid-High
|
New to the World (a new technology, new IP, new process like the
iWatch or iPhone when it first was commercialized.)
|
High- Very High
|
Very High
|
The rewards for different product development activities
will vary with the ones toward the bottom of the table normally providing
greater returns and a potential position of dominance in the market. But clearly there is a higher risk to the company,
especially in the area of product development costs and R&D.
Managing the growth path
This blog shares a few
ways to grow a company’s business. There
is, of course, organic growth using one’s own resources as well as growing via
partnerships, alliances, joint ventures or other business combinations. The right answer depends on the analysis of
both internal and external factors and the risk – technological, regulatory,
business, or financial- that the company wants to endure.
Depending on the size and complexity of the company it may
be pursuing several of these strategies at the same time. As part of the
planning process it is helpful to plot each growth strategy against the Product
Market Matrix and assess the level of risk being undertaken. We worked with a
company that, upon mapping its growth strategies, realized it was taking on too
much risk and slowed down its efforts to enter a new market with a new product.
As companies seek
growth, they need to keep in mind the following key issues. First,
what are their new routes to revenue? Where
do they want to play on the product-market matrix and do they have the right
skills, competencies, resources, and culture to be successful? Second, as companies grow their business
through these new routes to revenues, who are their ideal targets? How will they identify them? How will they market and sell to them? Third, what are the financial and market
metrics the companies will use to gauge success? Will those metrics be incorporated into
operations reviews and a balanced scorecard?
Fourth, how will the company determine the best growth path? Is there consensus on how to score opportunities? (In a future blog I will present a method
called the Analytical Hierarchical Process to score disparate opportunities.) Finally, how will the company manage risk and
impact? Brian Newton has written a
couple of blogs on this topic and can provide some thoughts and tools to use.
Regardless of which
direction a company takes to increase their growth vectors, metrics for success
and a continual review of progress need to be implemented. This should be accomplished through
operations and strategic reviews, and incorporated into a dashboard for review
and action. We suggest that companies implement a test of their strategies and
tactics in order to gain feedback from customers and suppliers prior to
releasing a final product. The readers
of this blog may be able to suggest other ways to manage the risk of growth (or
the risk of non-growth if companies perceive they just want to manage cost
efficiencies.)
We, at C-Level
Partners, would like to continue this dialog and welcome any thoughts you might
have. Feel free to contact David
Friedman at dfriedman@clevelpartners.net
or via phone at 949 439-4503 for a confidential discussion on how to develop
new vectors for growth. After all, you
can’t grow without a plan and you can't shrink your company into greatness.
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