How to achieve steady or lasting business growth? Recent research urges taking a 'strategic' perspective.

In business the idea of growing receives considerable attention. What's more, faster - and ideally steady or sustained - growth is usually seen as more desirable than slow growth. Actually, though, most businesses barely grow at all!

A noteworthy article on this subject appeared recently in the HBR (March/April 2024), entitled How fast should your company really grow? (by Harvard business professor, Gary P. Pisano). Based on research, it suggests companies should use a 3-question 'strategic' approach for planning growth - rather than just reacting to opportunities.

To complement this study I also checked out two other recent studies on growth. One was by McKinsey (Oct 2023) into the performance of the 10,000 largest companies globally from 2016 to 2022, particularly those who had achieved higher than average growth. The other study (2024) was by consultancy Korn Ferry who interviewed 400 senior execs from organisations considered (in a global business poll) to be the 'world's most admired companies', to learn their 'secrets' for growth.

The three studies focused only on large companies, yes, but I think they do offer some interesting and valuable pointers for all businesses.

The rarity of sustained business growth

Whilst steady, profitable growth is the common ideal, Pisano's research (looking at the long-term patterns of growth of US companies) indicates that, after taking account of inflation, most companies hardly achieve any growth. And those that do manage to achieve higher growth levels are typically unable to sustain such levels beyond just a few years at a time.

In his analysis of 10,897 public US companies from 1976 to 2019, he found that, whilst the top quartile grew at an average of 11.8% per year, the other 75% (three lower quartiles) showed growth of just between +0.3% and minus 0.5%!

The article didn't deal with the UK, but it looks a similar picture: relevant government (Office for National Statistics) data I found to-hand showed that for the year 2022 just 3.9% of companies (with 10+ employees) achieved 'high growth' (ranging from 5.3% in London to 2.9% in N. Ireland).

Beyond treating growth tactically

Pisano argues in his article that, whilst, of course, external forces - like aggressive moves by competitors or disruptive technological change - can limit many firms' growth chances, often their growth problems are more 'self-inflicted'. Specifically, too many firms approach growth "in a highly reactive, opportunistic manner" - seeing only periodic or irregular bursts of growth.

The core problem, in his view, is that too many companies over-react with how they apply their resources in both times of market demand and decline, rather than pursuing and maintaining a (steady) alignment with their resources. When demand is rising, too many firms go on 'hiring binges' and spend money on expanding operations and infrastructure too much or too quickly - without first thinking through whether they can cope - and so risk destroying the things that made them successful in the first place.

In contrast, in times when demand slows, pressure to maintain historical growth rates can lead to quick-fix, expensive actions such as drastic cuts in staffing levels or in R & D, training or production capacity. The damage caused by such moves only exacerbates future growth challenges.

To achieve sustained, profitable growth, the article argues, companies need to keep a delicate balance between the pursuit of market opportunities (demand), on the one hand, and the available capabilities needed to exploit those opportunities, on the other hand. To do this, Pisano advises that companies need a 'strategic' perspective towards growth that involves asking three crucial (interrelated) questions: i) how fast to grow? ii) where to seek new sources of growth (demand)? and iii) which method of growth to use?

Question 1: what's the right rate of growth?

In Pisano's approach the answer to this first question is not simply going for maximum growth or defining a target on the basis of market potential or target financial returns. Instead, taking a strategic perspective means choosing a target growth rate that realistically reflects and matches an organisation's range of capabilities and strengths (cutting across factors, for example, like operational capabilities, management systems, financial resources, staff skills, organisational culture, and marketing assets like trademarks and client relationships).

A strategic approach involves thinking through the trade-offs inherent in faster or slower growth. Often this means balancing the short-term with the longer-term - in terms of not straining or damanging current capabilities or assets today for the sake of trying to satisfy high levels of demand available today.

A case in point of a company that did not get this balance right quoted in the article is the home exercise equipment maker, Peloton: during the 2019/21 pandemic it furiously expanded production capacity to meet surging demand, but this led to major problems in its supply chain and significant quality, customer service and reputational issues.

Question 2: Where to seek new growth?

Which market opportunities a company should pursue is obviously a key element in its growth strategy. Pisano refers to three, alternative routes: i) scaling-up in a company's current, core market; or ii) broadening its scope into adjacent products/markets; or iii) diversifying into very different/unrelated industries.

Disappointingly, Pisano fails to advise which of these strategic routes tends to be the most profitable over the long-term: he says simply that "my research suggests there is no simple answer" and observes that in higher growth industries he found that the lion's share of industry growth tended to be produced by just a small number of companies.

More usefully, in the McKinsey research, it was found that the vast majority (some 80%) of overall growth seen in markets tends to be from companies pursuing opportunities in their current, core businesses, with only about 20% coming from adjacent or unrelated businesses.

Largely echoing these findings, the Korn Ferry research found the top three strategies for growth were: innovation with new products, enhancing customer experiences, and improving existing products (rather than pursuing mergers or targeting new customer segments). Their study also found that more of the 'most admired' companies they surveyed stress growth in term sof their bottom-line, rather than their top-line or market share (47% vs 36% and 17%).

Pisano's article sticks to advising that companies should adopt a growth route which best matches their capabilities and (unique) strengths: use a scale-focused strategy where your capabilities are mostly market-specific (think of large pharma companies) and use scope-based strategies (adjacent or unrelated businesses) where you have broader, general purpose capabilities or strengths (think of brand-based companies like Nike or Virgin)

Question 3: What method to growth?

Pisano's third question is about deciding what resourcing sources and distribution channels to use to achieve growth. Resourcing includes, of course, not just money but other types of resource like people, talent and office or factory space. Internal distribution channels, of course, include 'organic' development options like expanding an existing salesforce or setting up new company-owned operations. External channel choices range from the relatively simple like appointing agents or franchising to more radical choices like joint-venturing or merging with other companies.

Some other factors that drive sustained growth

Pisano's basic advice to view growth strategically is surely sensible, but I think - as well as rather downplaying how the sheer turbulence of many markets nowadays can surely sometimes knock sideways any strategic, safe plan for growth - his view of a strategic perspective puts rather too much empasis on analysis and planning. He hardly mentions how certain, wider - particularly 'organisational' - factors are crucial as part of a strategic approach to growth.

Below I refer briefly to some of those wider factors, several of which are echoed in the McKinsey and Korn Ferry surveys.

-Ensure your organisation has a clearly-defined long-term 'vision statement' (including purpose, mission and values) to act as a guiding northstar for selecting growth opportunities, including areas/types of innovation. Without such an anchor, leaders surely won't be able to coherently make growth decisions. The need to 'articulate a clear vision' was stressed in the Korn Ferry research as a key marker of innovative companies.

-Manage your company's range of businesses as a dynamic 'porfolio'. Pisano stresses matching to a company's strengths but fails to clarify how compannies typically need to adapt what strengths they focus on to suit the different competitive conditions of each business. Nor does he caution how competitive advantages don't tend to last very long nowadays, so leaders need to keep refreshing current advantages or developing new ones.

Also, given how markets differ, leaders should manage their range of businesses in an overall, balanced way - in terms of balancing key issues like cash needs, risk levels, and short vs long-term results. This includes, for example, a company possibly downsizing for a year or two a current business operation in order to free-up funds to invest in a new, high-potential business (the McKinsey study found that 30% of the highest growth companies had carried out some disinvestments that shrank revenues temporarily before returning to growth).

-Develop your strategy inclusively: Gone are the days when senior management can simply themselves draft strategy and then announce it to others. Instead, companies nowadays are expected to involve, consult and gain the support of not just customers and employees but also other key stakeholder groups like shareholders, partners, key suppliers, major funders and perhaps regulators.

But, increasingly, strategy is not just about consulting widely, it's about developing close partnerships and joint activities with other players across other parts of an industry's wider value chain ('eco-system'), as companies find it more difficult to find and offer competitive advantages on their own, or they lack the required assets or resources by themselves.

-Ensure organisational culture supports your strategy. Valuable qualities typically include, for example, a focus on serving customers well, continuous learning and growth, a high regard for innovation and creativity, team-work, flexible systems, good communications, an absence of silo-thinking, and an open leadership style by senior managers. Often nowadays, in fact, culture is almost as important as strategy: this was a clear message from the Korn Ferry study.

-Ensure your organisation has the right structure and talent needed to deliver defined strategy. Like culture, people are a key contributor with any strategy. It's not just a question of having the right people with the right skills in the right roles but ensuring they work together well across teams and functions and that the organisation has effective HR and management policies/systems to motivate, develop and reward desired performance levels. An interesting statistic from the Korn Ferry study was that 83% of companies used (flexible) 'cross-functional' teams to execute innovative initiatives.

-Ensure your strategy builds-in adequate adaptability and organisational resilience. Given the pace of change and level of unpredictability in most markets today, obviously, any strategy cannot be treated as fixed (forget 5-year 'strategic plans'!) and instead must be (very) regularly reviewed and updated. To meet this need, organisations' processes, systems and ties with suppliers and partners need to be flexible and adaptable.

-Extensive/continuous innovation with agile delivery. Growth-oriented companies not only put a high stress on innovation but foster it across all areas (from products/services to processes and systems) and they treat it as a continuous rather than ad-hoc/periodic activity. Such companies also emphasize fast testing and progression of new ideas - often using agile project methods - to get ahead of potential rivals. However, when a new venture is set up, senior management give adequate time and freedom for the venture to find its feet, rather than, for instance, expecting immediate profits.

-Treat technology and data as central parts of strategy. In today's world, effective and progressive approaches to using and managing IT and data are, of course, vital. In the Korn Ferry research, better use of technology was found to be the number one lever for growth, with innovation based around technology in the top three priorities for innovation. Also, being able to drive digital transformation fast enough was seen as a top-ranking concern by leaders.

-Ensure your organisation has strong intelligence and monitoring systems - to keep close tabs on trends and developments externally and for managing organisational performance internally (e.g. KPIs). External monitoring, importantly, includes ensuring sharp insights on customer trends and competitors' actions, to be able to spot and assess potential opportunities early and proactively.

In conclusion

Despite extensive talk in business of achieving growth, actually, as indicated above, most companies hardly see any growth at all. Indeed, many companies - especially SMEs - I would say are often much more concerned with coping with day-to-day operational pressures and trying just to survive!

But, for companies that want to achieve growth, Pisano's key advice - that they should try and adopt a measured, 'strategic' approach by limiting growth to a rate that can match current capabilities - is very reasonable and makes good sense (even if not exactly radical, in my view).

I do think, though, that his advice about what's involved in adopting a 'strategic perspective' could usefully have added reference to some wider, supportive factors, particularly some key 'organisational' factors (e.g. vision and culture). Some of those wider factors were usefully referred to in the McKinsey and Korn Ferry studies, as I indicated in the latter part of this article.

Written by Mike P. Owen

Copyright of Owen Morris Partnership