What is a Growth Strategy?
A growth strategy is a collection of business initiatives that seek the maximization of a company’s value within a period.
Despite what many people believe, a comprehensive growth strategy is not only about getting more clients and selling more stuff. I mean, getting clients is super important but there’s much more in a strategic growth plan than just expansions and market development.
If what you’re looking for is learning about different ways to target more clients and expanding your existing businesses, then I recommend you download a free copy of my book AI-Powered Lead Generation, where I explain how established businesses and startups leverage artificial intelligence and other technologies in their sales outreach.
But if you are looking for a comprehensive strategic growth plan, then you’re on the right page, so read on.
As we explained in our business strategy principles, the first order of business for any executive is having a core business under control, which means ensuring that the business’s products and services occupy a market position that is both profitable and
Once you achieve that, you can then shift your attention to growth, and start thinking about different ways to maximize your business’ value within the foreseeable future.
In an ideal world, we’d expect executives to only go after growth initiatives that are beneficial to their organization, but in reality, we’ve all seen how pressure from demanding shareholders and investors, and misguided incentives, can lead a company to sometimes pursue growth at all costs even if doing so destroys value over the long term.
In general, we say that a growth strategy is comprehensive if a combination of the following conditions is met:
- It increases the company’s bottom line over time,
- It produces an attractive return on investment (ROI),
- It leverages the company’s value chain,
- It builds a new critical capability, or
- It improves the business’s strategic positioning.
Not all growth is created equal, and sometimes more sales don’t necessarily means that you are growing profitably. That’s what I mean by Strategic Growth.
For that reason, you must always pay careful attention to “the costs” of your growth effort (both financial and non-financial) and to how sustainable you expect these efforts to be over the long term.
In this article, we explore different ways in which you can grow any business and provide some ideas to help you create your growth plan. These are some of the things that we’ll be covering:
- Business Growth Strategies
- Categorizing Growth
- Creating your growth plan
- Creating your 5-year growth template
- Breaking down your company’s growth
- Adopting A Portfolio Approach to Strategic Growth
- Examples of a growth strategy?
- Inorganic Growth Strategy
- The Best Strategy Books
We have included some charts, links, and other references to help you improve your understanding of what a good growth strategy is. We have also created a mindmap with all the growth options we cover so that you can download it and make notes as you go through this article.
This mindmap is also a visual representation of the strategic choices that as a business executive you have to make when developing a new growth strategy.
The content of this article is based on our best-selling book Strategy for Executives™ which you can now download free here.
Now let’s get to business.
Business Growth Strategies
When most market analysts talk about growth, they are usually referring to an increase in revenues (aka the top line) during a given period, usually a quarter or a year.
But when we talk about growth here, we are exclusively referring to an increase in Net Earnings (also known as the bottom line) or “Free Cash Flow” (usually just referred to as FCF), concepts that we review in more detail in our Financial Analysis section.
Through our extensive research, we found seven different ways to generate growth in any organization:
- Market Penetration: Selling more of your existing products to your current consumers or targeting new consumer “segments” within the same markets.
- Market Development: Selling your existing products to new markets, or into new markets internationally.
- Product Improvement: Improving your products and services that serve existing customers (to reduce your churn rate, more on that later).
- Product Development: Creating new products and services to target existing customers or to enter new markets (which would qualify as some type of diversification move).
- Revenue Optimization:
Increasing revenuesthrough the implementation of alternative pricing options or new business modelsfor your existing products.
- Cost Optimization: Reducing
costs throughthe optimization of the business’s cost centers, by streamlining operationsor eliminating inefficient uses of cash.
- Inorganic Growth: Leveraging
other companies’assets through synergistic mergers, acquisitions or strategic alliances.
Your job as a business executive is to explore how this list relates to your organization and make educated decisions about which paths you believe would deliver the most impact to your bottom line.
The collection of the paths you handpick is the core of your growth strategy, which along with your strategic positioning plan and your execution system, give you all you need to succeed in the creation and implementation of your organization’s strategy.
In the next sections, we explore different tools and ideas to help you manage your growth strategy.
Categorizing Your Growth Strategy Plan
While a growth strategy can be generally described as a group of business initiatives aimed at increasing a company’s bottom line, I prefer to talk in terms of an executive plan for the strategic growth of the organization, which contains the initiatives that the executive team has handpicked to maximize value within the foreseeable future.
Not all growth paths will have the same impact on a business, and for that reason, you must narrow down the universe of initiatives they could go after to the handful that would deliver the most impact within a given period, with the least amount of effort and resources.
That’s why your plan for growth must be strategic in nature, because in the end, no company has unlimited resources or management bandwidth to pursue all the opportunities that are presented to it, so you must carefully select the things you will spend attention and resources on.
Consulting firm McKinsey & Company found that organizations that distribute growth efforts across three buckets Expansions, Creations (new businesses) and Optimizations are best positioned to outperform market peers over time.
That translates into a growth plan that seeks to do more of what’s working, get better at it, and find new ways to create value, which results in a synergistic and balanced approach to growth.
I have also found this categorization to be useful in explaining the sources of growth in executive meetings and for making better resource allocation decisions.
But beyond the categorization of growth opportunities, a more fundamental problem you often face is the actual selection of the growth initiatives that you should focus your strengths on.
That’s what we cover in the next section.
Creating a Strategic Growth Plan
The best way to start a growth plan is by estimating the growth “gap” that we need to fill in with new businesses.
For example, let’s say that you are planning your strategy for the next five years and that your goal is to grow 15 percent a year. If your operating businesses are expected to produce $100 million this year in net earnings, and you expect them to grow at a rate of 9 percent per year, then you can easily calculate the type of earnings that your new businesses will need to create every year.
|Core Business Earnings||100||109||118.8||129.5||141.2||153.9|
|Target Earnings (15%)||–||115||132.3||152.1||174.9||201.1|
|Growth Gap (difference)||–||6||13.4||22.6||33.7||47.3|
You can get a copy of the spreadsheet with the calculations here.
Having an indicative number for the earnings gap can help you understand better the type of growth initiatives that you have to go after.
For instance, in the case above you’d then know that the growth strategy initiatives you pick should be such that they can deliver $47 million in net earnings by the end of year five, which can help you prioritize and facilitate their selection.
A good way to brainstorm initiatives that could be pursued is to go through each of the growth paths we mentioned earlier, asking simple questions like:
- Could you originate and develop strategic growth opportunities that would be both profitable and defendable following this particular path?
- Are there other incumbents doing it? If so, how?
- Which capabilities in your value chain could you leverage if you decided to pursue this approach? If none, how could you then succeed in that market? Pioneer advantage? Through partnerships, maybe?
- Would this path create synergies with your other business units?
- How significant could this growth path become for you in terms of potential net earnings? What would be the expected returns?
The ideas that show the most potential can then be further developed to get a better sense of the type of profits they could create, the level of investment needed, partnerships and capabilities to be built, and so on.
There’s no perfect approach to selecting strategic growth opportunities since the selection must comply with a variety of company preferences (including returns) and meet the strategic goals of the moment.
Our recommendation is to select a handful of the most important investment parameters for your company (e.g. net earnings, investment required, returns, inventory preferences or just for strategic reasons), then “fill the growth gap” starting with the initiatives that promise to perform best at those parameters until the gap has been closed.
In an ideal situation, you would end up with a balanced growth strategy across all three of McKinsey’s buckets (expansions, creations, and optimizations), but in reality, you will most likely end up with a strong bias towards a particular category, based on the prevailing strategic goals of the moment, which is ok in our experience.
The next step is to work on your 5-year template which is the subject of the next section.
Creating a 5-year Strategic Growth Template
When it comes to managing different business units, you can (and probably should) adopt a portfolio mentality, where you seek to maximize the value that the portfolio creates as a whole over some time, usually five years.
That provides you with a 5-year growth template, that will help you to better balance efforts across the different business units and make better capital allocation decisions.
Putting all your eggs in a single basket is always a risk, and while it is true that many companies have won big betting on new products and technologies, there’s a difference between betting “big” on a growth initiative and betting “all.”
That’s why, as a company, it makes sense to have a portfolio of your growth initiative cutting across multiple markets, business units or products which could be launched at different times in the future.
By creating such a map, you can easily keep track of all of the opportunities in your pipeline, better balancing resources across each of them.
Breaking Down your Company’s Growth Strategy
Unless you can say how much each effort is contributing to your company’s growth, you won’t be able to get the maximum out of them. You know, when Peter Drucker said that “What gets measured gets managed,” he may well have been talking about growth.
If you understand how each business unit, product or optimization experiment is contributing to your company’s growth, you can double down on the things that are working, pay attention to things that are not, and find opportunities for improvements.
A great tool to help break down and track growth efforts is the Sources of Revenue Statement, or just SRS, created by Michael Treacy and Jim Sims which allows you to create a nice waterfall showing how your revenues break down for a particular period, which is very useful to gauge growth efforts and reallocate resources.
We describe this tool in great detail in the book where we provide a step by step process to create the waterfall.
You can make a similar breakdown for profits or net earnings if you have enough information to allocate costs and prorate some accounts, but this statement of sales can give us a good starting point to understand where our profits are coming from.
Adopting a Portfolio Approach in your Growth Strategy
When it comes to managing different business units, you can (and probably should) adopt a portfolio mentality, where you seek to maximize the strategic growth that the portfolio creates as a whole over a period of time.
That will help you to better balance efforts across the different business units and make better capital allocation decisions resulting in a better growth strategy.
You can do this by placing business units in a four by four matrix based on their competitiveness and the strategic growth potential of their markets.
Those familiar with classic growth strategy tools will note that this is an updated take on the Growth-Share Matrix introduced by the Boston Consulting Group (BCG) in its early days, where we are using competitiveness and market potential as proxies for the original dimensions.
Following BCG’s naming convention for each of the quadrants, we can define each business unit as one of these:
- Cash cows: Businesses with a strong market position in a low growth market. These units produce a healthy cash flow that can be used to fund other businesses.
- Stars: Units with strong positioning in high growth markets. These businesses usually need lots of cash to retain their share of the market and will eventually become cash cows when the market reaches its maturity. Because of their strong position, they yield high returns on the company’s money, so they must be an investment priority.
- Pets: These are business units with a weak position in a low-growth market. Pets usually yield a low return on the company’s money, the reason why many experts call them “cash traps”, so by Jack Welch’s rules these business units should be either sold or closed.
- Question marks: These are businesses with a weak position in a strong market. They need cash injections to fund their growth, but that investment won’t yield high returns until the business achieves a stronger position. By Jack Welch’s rules they should be fixed (e.g. by funding their growth) or sold.
To select where each business fits in the matrix you can assess its competitiveness based on its ability to defend a profitable position in the foreseeable future, something that’s usually related to factors like margins, size, recent growth, market share, profitability, technological position, intellectual property, reputation, image, brand strength and people.
One idea behind the growth matrix classification is that each of the four quadrants have a different investment profile in terms of the returns they produce.
For example, cash cows behave a lot like bonds, an investment instrument that gives you a steady cash flow every year, and that maintains its value over time. If you decide to sell it, you get your original investment back.
Stars behave more like a savings account, where you put money in and this compounds every year. You don’t get an annual cash flow but at the end you get your investment plus a return.
Pets, on the other hand, behave much like a mortgage where as the holder (in this case as the owner of that business) you get a return on your investment and you get your money back, but at the end of the period it is worth nothing.
The power of positioning businesses in this matrix is in helping you see how the different units can help each other to produce the maximum growth as a whole.
For example, the cash flow coming from cash cows is best used to finance the growth of stars and question marks. The question marks that are not selected for growth money, then, must be sold to other companies for which they could create some synergies.
The question marks quadrant is also the best candidate for mergers and acquisitions. Since those units are performing poorly in a market that shows strong potential, a quick way to gain the strengths you need to make them stars is through strategic M&A or JVs.
Pets are units that are performing poorly in a weak market, so unless they are strategic in nature (e.g. being used to develop a key technology) they should be closed or divested. Alternatively, some pets could be repositioned to target a different market where they could perform better.
Growth Strategy Examples
Let’s quickly go through a few examples of the different growth paths we introduced before, to give you a better perspective on each one.
Increasing market penetration
In many ways, trying to increase market penetration is a bit of a win-lose game where every new customer you make is a customer loss for another company that’s targeting the same market. Put simply, increasing your market share implies serving customers that would otherwise be served by a competitor (aka stealing other companies’ customers).
For example, in the cloud computing industry, Amazon Web Services (AWS, a company owned by Amazon.com) has retained most of the market for many years, but Microsoft’s Azure service has been growing at a fast pace at the expense of AWS’ market share.
Targeting new customer segments
Along the same lines, you can also expand your core business by making your products more appealing to different segments within the same market.
For example, yogurt maker Chobani has introduced different presentations for its yogurt offers that go well beyond its popular fruit-in-the-bottom presentation. It now features Flip®, a yogurt-based snack that students and office workers can grab “on the go,” and a yogurt drink that has amassed avid fans among sports enthusiasts who consume it as a post-workout drink.
Entering new markets
Consider the case of a motor oil company that makes and distributes lubricants for the automobile industry. To serve its markets the company has distribution deals with auto repair shops, department stores, and gas stations since those are the places where their target customers, i.e., car owners, usually buy motor oil.
In an expansion effort, the company could decide to create a new brand of oil targeting trucks and the heavy machinery industry. Although the underlying product is relatively the same, its distribution channels, customers, pricing policies, presentation, and even its business model will have to be different because the company will be now attacking a different market.
Selling new products to existing customers
In a way, when you try to sell new products to existing customers, you are using your brand as a kind of “distribution channel” to reach those customers and make them buy the new thing.
For example, when ride-sharing app Uber introduced its food delivery service Uber Eats, it leveraged its vast user base to promote the service and millions of their existing customers immediately downloaded the new app within a few hours. Any other food delivery service trying to compete against Uber Eats will be at a big disadvantage if it has to build its audience from scratch.
Creating complementary products
A potentially great way to increase sales in operating businesses is through the development of complementary solutions that help increase demand for your products. Think about Nestlé’s success with its Nespresso machines which multiplied sales of its coffee products and helped the company leapfrog in the very competitive coffee space.
Nespresso turned out to be a great “vehicle” to deliver Nestlé’s coffee products, making it a perfect match for the company, reminding us a little of the success of Gillette’s famous razor and blade business model that we mentioned earlier.
Productization of the value chain
Another area that’s usually ignored, but that could offer important growth opportunities, is what we call the productization of the company’s value chain. In other words, taking something that the company is very good at and offering it to third parties as a standalone product or service.
For example, back to Amazon Web Services (AWS), the company allows companies around the world to use Amazon’s vast array of servers and cloud computing tools for their own purposes. AWS leverages a technology platform that Amazon already needed anyway to run its own operations and makes it available for third parties to use for a fee, giving Amazon the opportunity to scale this operation to levels it would never have reached on its own.
Shifting focus from customers to buyers or vice versa
You may find space for growth by exploring the relationships between buyers and users that exist in your markets. In the healthcare space, for example, some companies have stopped promoting their products to doctors, which most providers do, and instead refocused their efforts to reach patients directly through targeted advertising and promotional efforts.
If the people who buy a product or service are different from those who use it, you should explore whether switching from one to the other can give you better results.
Inorganic Growth Strategy
I have found that most definitions of inorganic growth (also known as non-organic growth) try to limit it to mergers and acquisitions (M&A), however they leave out two alternatives to M&A that I believe should be evaluated before considering an acquisition: strategic alliances and corporate investment.
To make sure we are not limiting ourselves too much, let’s define inorganic growth as any growth strategy that results from controlling another company’s resources, rather than developing those resources ourselves.
In most cases, you will go the inorganic route as a way to produce rapid and strategic results, catch up in a market where you were left behind, access key assets and intellectual property, or to build synergies to put your company in a favorable position against competitors.
This means that inorganic business growth are almost always of a strategic nature and involve certain levels of risks, especially M&A, but those risks can be mitigated by testing the waters first through one of the alternatives.
Let’s briefly review each of these alternatives before diving into M&A.
Strategic growth alliances
At its most basic level, a strategic alliance is a collaboration agreement between at least two companies to pursue a common set of strategic growth goals and is usually a cost-effective alternative to an acquisition or a merger.
A common case of a strategic alliance is two firms forming a partnership to tackle a particular market segment with a combined offer that incorporates complementary capabilities of each partner.
This is what car manufacturer Ford and clothing retailer Eddie Bauer did when they joined forces to create the widely successful Ford Explorer Eddie Bauer Edition, which featured premium leather seats and other luxury perks in an effort to compete with Japanese companies in the luxury SUV market.
One reason to consider a strategic alliance instead of a full-blown merger is that an alliance can achieve most of the same growth strategy goals without the commitment and complexity of the real thing, making it a good alternative to see how the companies work together before making bigger commitments.
The obvious downside of a strategic alliance is that we have to share the profits that the collaboration produces, and the fact that managing the combined effort as two separate companies may turn out to be more difficult.
But in the cases that work, a strategic alliance is a great alternative to M&A and in some cases may be the best way to test one BEFORE making an irreversible commitment.
A particular form of strategic alliance is the Joint Venture (which is normally referred to simply as a JV), where two or more companies co-invest in a new entity to undertake a new business or tackle a market together.
Unlike conventional strategic alliances, a JV entails the creation of a separate entity with its own governance and organizational structure to manage its operation.
A JV can be executed between private companies only or it can exist between government and private entities, an arrangement that’s usually referred to as a Public-Private-Partnership or PPP. These are very popular in developing countries to promote private participation in public projects.
Strategic alliances work best when the capabilities of the companies are complementary in nature, and not competitive with respect to each other. For example, a company that provides industrial equipment could partner up with an engineering firm that provides design and construction services.
In that way the partnership could offer a bundled solution including all the equipment and services needed for a project under a single roof.
Just as you’d do for a merger or an acquisition, you must do extensive research and due diligence on the potential partner to make sure their growth strategy goals for the partnership align with yours, and that the final agreement will be manageable.
Another way to test the strategic growth waters without getting too wet is by investing in companies that operate in a space that’s attractive for us. This is somewhat popular in large corporations and is a judicious step prior to a full acquisition.
These investments can be done by directly acquiring a minority piece of the target company, or by allocating money in common investment funds (e.g. private equity funds) which find and screen companies operating in a particular space.
Through the investment you gain insights into that industry and how that particular company operates, which is a great way to learn more about a company before pursuing an acquisition.
A new trend that’s becoming popular for making direct investments in early stage companies is by creating a Corporate Venture Capital (CVC) arm inside your company that finds and screens potential targets in need of seed, growth or expansion capital.
Through a CVC program, you create a fund to invest in startups in the form of equity. With this, your company becomes a shareholder in the entrepreneurial company as a way to keep a close watch on its developments and progress.
A CVC program is an in-house effort that allows you to seek (and be pitched by) startup companies with relevant technologies or business models in your business space.
It is startups, not large corporations, that usually redefine industries and change the ways of doing business. Our corporations are usually slow, bureaucratic and careful, while startups are agile, creative and fearless.
By investing in startups, you can tap into that stream of creativity and energy and extend your innovation engines.
If well structured, a CVC plan should be a win-win for both sides: the startup gets access to funds and markets, while the corporation gets to expand its product portfolio with cutting-edge developments without the risks and costs of an in-house innovation effort.
The Best Strategic Growth Books
The content of this article has been extracted from Strategy for Executives, a book that provides a fundamental, but practical, framework to understand and create a good strategy from scratch, applicable to the dynamic conditions that modern executives face in pretty much every market today.
There are many excellent business strategy books that cover growth extensively, including “High Growth Handbook” by Elad Gil, “Dual Transformation” by Scott Anthony, Clark Gilbert, and Mark Johnson, and “Growth IQ” by Tiffani Bova, but why go through all these different frameworks and ideas, some of them outdated, when you can get a unified map to strategy that incorporates all of them in a single framework?
Strategy for Executives, which is now free to download here, is based on extensive multi-year research, where we broke down the most popular strategy frameworks of the last 40 years, extracted their core ideas, and tied them all together into a single didactical and self-contained body of knowledge.
The research was led by Sun Wu, a seasoned Fortune 500 executive with more than 15 years of real-life experience, complemented by a thorough revision of more than 300 books and research papers, and over 500 hours of videos, interviews and formal training.
The result is a combination of fundamental concepts and a concise map to the strategic choices that modern executives have to make to thrive in today’s highly competitive markets.
Every concept in the book is explained from scratch so that, plain and simple, this is the only strategy book that you and your teams will ever need.
Author: Sun Wu
Wu, Sun. Strategy for Executives, this book can now be downloaded for free here.
Ahuja, Kabir; Hilton Segel, Liz; Perrey, Jesko. The roots of organic growth. McKinsey Quarterly. August 2017. URL: https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/the-roots-of-organic-growth
Ahuja, Kabir; Hilton Segel, Liz; Perrey, Jesko. Invest, Create, Perform: Mastering the three dimensions of growth in the digital age. McKinsey article. March 2017. URL: http://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/invest-create-perform
Anthony, Scott D.; Johnson, Mark W.; Sinfield, Joseph V.; Altman, Elizabeth J. The Innovator’s Guide to Growth: Putting Disruptive Innovation to Work. Harvard Business Review Press. Kindle Edition.
Treacy, Michael; Sims, Jim. Take Command of Your Growth. Harvard Business Review OnPoint, Fall 2008.