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.
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 makes sense 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.
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
- Examples of a 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.
There are seven different paths to grow your organization
Through our extensive research, we found seven different ways in which you can grow 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.
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 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 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 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 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 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 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
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.
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.
The Best Strategy 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.
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.