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Thursday, February 4, 2016

Growth Vectors and Strategies: You Can’t Shrink Yourself into Greatness!

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 marketPanasonic 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.  

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:  
Very low
Minor line extension (different shape or size of product e.g. WD 40 in larger spray can)
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
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
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 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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