The Strategy Page: Growth Edition

At a glance:

1. Three Modalities of Growth
2. Considerations
3. New Optimize Clients
4. Podcast recommendation: How much do you know about immigration?

What is the ideal rate of growth? It’s the answer to any question in business—it all depends. While “grow or die” has become a mantra, the pace of growth differs by industry, sector, and company. In this Strategy Page, we offer perspective on how, where and how much to grow. Maintaining long-term growth is tenuous. A recent study revealed that of 170 top-quartile public companies, only 7 remained in the top quartile of performance between 1985-2019.

Three Modalities of Growth

Growing companies typically fall into one of three growth modalities:

Growth via scale?is growing within a core market to achieve higher market share. Growing in existing markets requires the least investment because a provider can expand capabilities in an integrated fashion (augmentation by addition). Scale is most appropriate when a business either has low market share or is in an expanding market. This has been the principle strategy of private equity firms that roll up similar companies.

Expanding scope?is entering into ancillary markets with existing products or capabilities or through new applications. Expanding scope is appropriate when a company begins to run out of runway in its existing market. Ancillary growth is best achieved in categories directly adjacent to the businesses the company is already in.

For example, our long-time client operated call centers servicing telecommunications and healthcare. Over time, they developed into a revenue cycle management business that provided services as customers evolved through the life cycle–from basic questions about their bill, to dealing with collections. These were natural adjacencies to their core business, which required similar capabilities like call center, auto-dial, and analytics.

Growth through diversification?is extending into entirely new businesses, usually as a hedge to limit financial exposure. Some such as Berkshire Hathaway succeeded in combining dis-similar companies, while others like GE struggled as conglomerates with disparate businesses. True-play diversification has fallen out of favor, in part because of the challenge of creating synergies in such businesses. For example, if a construction company were to buy a financial services business, it would probably need to keep the management team, and perhaps the ERP of the acquired company, and operate it as an autonomous business.

An excellent example of diversification would be to buy a business with a unique technology or capability that could create a competitive advantage.

Considerations

A business can only grow as fast as its internal capabilities allow. As Harvard Business School Professor Gary Pisano noted in a recent HBR article, Peloton got over its skis as it navigated new demand during the pandemic, when supply chains were under stress. This vicious combination resulted in poor quality and service. We've observed similar growing pains from manufacturing clients unable to source key ingredients during the pandemic, to financial services clients who can’t hire people fast enough to keep pace with demand.

So, here are some considerations:

What is the industry structure?

Some industries may have only 1-2 dominant public company competitors, or a handful of major customers.

What are the barriers of entry?

Some industries are highly regulated, or require heavy capital investment or unique technology and expertise. Our close-tolerance manufacturing clients selling into aerospace must meet exhausting standards to sell parts for technically advanced aircraft. But once they’re accepted as a vendor, they become hard to replace.

What is the industry size and growth rate?

Operators need to think about how much runway they have for growth in their existing market. Today, most large clients want secondary suppliers, so achieving even 30-40% market share is difficult.

It’s also critical to know a market’s growth rate. If a market is growing, it will accept new competition and price increases. If it’s flat or in decline, it’s primed for price competition, market erosion and commoditization.

So operators need to ask—we are growing, but to what end? As a rule, we advise clients to maintain a growth rate 15-25% faster than their marketplace growth (noting variance based on the nature of the industry), putting them in a position to create new offerings, utilize the best technology, and hire the best people. But they must also have awareness of the macro-economic cycle and industry growth rate. It’s hard to catch a falling dagger.

New Optimize Clients

Westcliff University– A for-profit university providing undergraduate and graduate degrees in technology, engineering, business, education and law (Western State College of Law), in Irvine, California

TrueRx– Benefits management providers based in Washington, Indiana

Coast Packing– Provider of fats and oils to consumers, and industrial and retail clients in Vernon, California

FreeState Electric Cooperative– An energy cooperative based in Topeka, Kansas

Podcast recommendation: How much do you know about immigration?

The political debates over immigration can generate a lot of fuzzy facts.? We wanted to test Americans’ knowledge.

Listen to the episode.

The Strategy Experts

Marc Emmer?is President and Chief Strategist & Facilitator at Optimize Inc. He is an author, speaker and consultant recognized as a thought leader throughout North America as an expert in strategic planning.