There are many advantages to being an established organisation in a mature market. A strong brand can yield stable profits, pay dividends to shareholders and allow a business the opportunity to grow by acquiring smaller competitors or successfully leveraging that brand in new markets.
However, while these strategies are able to move the business forward, they are both risky strategies and history is littered with expensive mistakes that can erode value for shareholders and put pressure on CEOs. Let’s face it, you can’t go half-heartedly into new markets in search of growth. Commitment costs money, and, as we’ve explored in other blogs, you really need to execute M&As well to get value from the arrangement.
So how can companies grow, while creating value for shareholders and not throwing the proverbial baby out with the bathwater?
Boston Consulting Group (BCG) recently published an article looking at how growth drives value creation. It acknowledged up front that growth is a challenge, as many of us lack the tailwinds that help propel a Facebook or an Amazon (if only…).
This gave way to the term ‘uphill growers’. These are companies facing maturity and commoditisation (which erode advantage) or disruption and changing customer behaviours (which erase it). Stagnant developed-market demand, costly M&A, lottery-like innovation odds, and increasing price transparency stand in the path of growth.
In the context of value for shareholders, BCG found that over a typical one-year time frame, upper-quartile value creators of the S&P 500 create twice as much value from growth as from margin or cash flow improvement. Over the longer term, growth for these outperformers drives 75 percent of shareholder value creation.
These observations resonate with many of its clients’ CEOs who have driven operating improvement to points of diminishing return. They— and their investors—know that continued value creation depends on top-line growth.
In search of uphill growers, BCG studied the performance of 1,600 global companies with revenues over $1 billion. The study’s design focused on mature businesses that found ways to grow sustainably. To take a longer view of value creation and to avoid extremes in the market cycle, BCG looked at rolling five and ten-year periods covering 1990 through to 2007.
The criteria: stagnant revenues for the five prior years, breakout growth at double the rate of peers, and sustained growth for at least five years. Only 310 companies—1 in 5—made the cut. And among these uphill growers, there were companies that destroyed value in their attempt—through bad acquisitions, expansion of a doomed core, or unrewarded innovation. BCG focused on value-creating, uphill growers and looked for patterns among their moves.
Here were the four lessons identified by BCG:
1. Earn the right to grow
Value creators pursue growth in its proper order: operational soundness first, followed by core premium reinforcement and core or adjacent expansion. Nearly all value-creating growers in the study held or expanded margins as they grew. They avoided expensive resuscitation of structurally unwinnable positions or divested these altogether to concentrate on areas of advantage and strong capital returns. They built margin through concurrent, aggressive fund-the-future operational improvement. And they pursued profitable growth by favouring adjacent segments with higher margin exposures.
2. Know your advantage
Companies do best when they define precisely what they do well and use that knowledge to edit portfolios and evaluate growth opportunities. Wolverine, one of BCG’s uphill growers, had an advantaged capability in making sanded pigskin leather. This allowed the company to make shoes people have to wear feel like shoes they want to wear. Understanding this advantage helped Wolverine make choices, divesting losing positions in retailing and in athletic shoes and aggressively expanding in casual and work shoe adjacencies.
3. Expand your field of vision
Companies have biases and comfort zones related to where and how to grow that can constrain opportunity. Look broadly before selecting a growth plan. Are there faint signals in the core—such as unusually profitable customers or rapidly growing subcategories—that can be amplified? Beyond the core, consider adjacencies that deliver standalone growth, profit accretion, or some reinforcing benefit to the core. Finally, new frontiers of opportunity can exploit old advantages or assets in radically new ways. Gerber Products, for example, has grown by multiple means throughout its history. It expanded organically from baby food to the toddler segment. And it found an unconventional way to exploit its trusted brand by moving adjacently into juvenile life insurance.
4. Integrate vision, choices, and action
Having envisioned the phonograph, Thomas Edison drew a quick sketch, marked it with the words “Make this,” and handed it to his machinist, John Kruesi, who turned vision into action. This is a translation that eludes many value-destroying growers. One of BCG’s clients—who says that vision is “where the rubber meets the sky”—is taking pains to translate the company vision into concrete choices on where to play and invest. The company is creating a culture of growth execution by chartering specific initiatives, defining new and needed capabilities, and aligning operating metrics and targets. This alignment of vision, choices, initiatives, capabilities, and metrics is a hallmark of BCG’s successful clients—and of valuable growers.
Applying this knowledge
In conclusion, business leaders need conviction in the face of slowing growth or static numbers. In mature markets, conservatism and removing costs will help improve short-term profitability and minimise risk, but cultivating a culture that rewards innovation will help businesses achieve the right type of growth – sustainable, cash rich and creating value.
- When ‘earning the right to grow’, business leaders should never lose sight of expansion as the ultimate goal, but make positive use of those who say operational deficiencies will hold back the organisation in an aggressive growth phase. Give those people the resources and targets to improve operational soundness by exiting unprofitable positions elsewhere. Make them part of the growth, not the opposition.
- To truly know your advantage, you need to understand reality and perception and drive hard at the most salient points. Recalibrating your position in the market with a new product or successful marketing of an existing product can be very lucrative. Firms in cyclical markets like fashion can do very well by creating demand again – find out what people want from your company and your market, as the solution could be a lot closer to home and carry a lot less cost and risk to achieve.
- Expanding your field of vision can be done with a degree of introspective focus. Look again at your data, perhaps with the view of an external party, to identify positive trends (or negative trends to divest positions) and challenge commonly held perceptions. Try to rationalise biases and comfort zones – are the circumstances that created these positions still relevant? Again, someone not exposed to these biases, is best-placed to evaluate this.
- A disparate growth strategy can create the impression of a disjointed organisation to internal and external stakeholders. Integrating vision, choices and actions into an easily identifiable and rational growth strategy with clear targets will consolidate support. Maintaining a strong position in core markets is vitally important for fuelling growth, so if successfully articulated, there shouldn’t be a part of the organisation unaffected by the strategy.
Applying the four lessons from the study, where could your business’ growth come from? And are you well positioned to create and execute a growth strategy?