Lesson 1, Topic 1
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7.2 Achieving growth: Recommendations for increasing the probability of success

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1. Strengthen the execution infrastructure by investing in ‘safe bets’.

Regardless of which growth strategy is selected, a firm’s infrastructure must be up to a standard that supports successful execution. An on-going commitment to creating such an infrastructure is a ‘safe bet’. Achieving this requires:

(1) eliminating departmental or regional silos,

(2) utilizing leading indicators and performance drivers that align with the strategy and

(3) growing leaders at all levels – managerial and non-managerial

2. Initiate a process to identify strategies with a high probability for success.

Three customer growth strategies are presented below:

(1) Growing the core business,

(2) Growing by sub-segmenting customers and

(3) Growing adjacent opportunities.

It is recommended that the senior leaders begin the process by considering the growth potential within the present core business and/or the opportunities and growth potential associated with creating innovative value propositions for underserved customer groups. As the senior leadership group moves through this process, it will become clear if and when adjacent growth options should be considered.

Customer-Focused Growth Strategies

1. The process of identifying profitable growth opportunities most often begins with the Core Business, that is, the products, services, customers, channels and geographic areas that generate the largest proportion of revenue and profits. In-depth conversations with the senior leaders on the topic, “What is our core business?” is the preferred starting point.

An evaluation of the overall performance of the core business follows. This involves measuring and benchmarking profitability, rate of revenue growth and the firm’s reputation with its most important customers.

Such an assessment will raise a number of questions. For example:

  • In what direction is each of these key indicators headed and why?
  • Who are and who are not the core customers? Why?
  • What is the firm’s key competitive market differentiator? How can it be strengthened?
  • Is the core business under major threat?
  • Are there attractive growth opportunities within the core?

When considering these questions, input from external stakeholder groups is very helpful, particularly from loyal and even not-so-loyal customers. The overall process need not take a great deal of time, but can yield significant returns. These include:

  • A renewed commitment to operational excellence within the core business,
  • Insightful conversations on the growth potential of the core business, or conversely,
  • An urgent need to make significant changes to the core or even a plan for abandoning the present core and exploring more profitable growth options.

Acklands-Grainger Inc., a leading Canadian industrial supply company, initiated such a process.

Prior to doing so, Acklands-Grainger was described as a “stodgy Canadian supply company…complacent” and one with a 4% growth rate. “In less than 12 months” it had been transformed “to an exciting place to work with (close to) a 20% growth rate and higher profitability”. How did such a dramatic change occur?

The starting point was winning the commitment of key employees at all levels, individuals who were willing to step forward and lead.Processes were created to help refocus on the core business.

Key elements included:

(a) defining three market platforms on which the core business is based – Industrial, Fleet and Safety

(b) eliminating products and markets that did not fit on these platforms

(c) adding new products to augment the core and

(d) strengthening market coverage with significant investments in the two major channels – sales depots and the firm’s website

2. A second customer-focused growth strategy is based on the firm’s existing customers. This strategy involves creating High Impact Value Propositions for new customer sub-segments. Underpinning this strategy is the willingness to view customers through a different set of lenses.

A process can be created to assist both managers and specialists at the customer interface gain fresh insights into customer needs and preferences. This is a necessary first step in discovering underserved customer groups and hidden growth opportunities.

Key elements of this process include:

 (a) sub-segmenting existing customer groups based on newly discovered needs, buying patterns and contribution to profits and/or revenue,

(b) creating innovative and high-impact value propositions for the most attractive sub-segments,

(c) field-testing the new value propositions and

(d) scaling-up based on the results of field tests

In addition, some firms choose to focus on lower end customer sub-segments. These are usually groups of customers for which the cost of supplying and servicing exceeds the revenue the customer generates. In such cases, value propositions can be designed which will move the customer to a profitable position or at least minimize the losses. For example, direct sales calls can be replaced with on-line ordering systems and non-essential product/service features can be eliminated. These actions not only lower the costs of serving customers but often also lower the customer’s cost. After the initial shock, many customers welcome the new lower-value proposition.

Leading Canadian financial organizations have successfully applied this overall approach to sub-segmentation. But so have mid-sized and small firms, e.g. The International Group Inc., a Toronto-based petroleum specialties manufacturer and third-generation family business. Also, think of your favorite owner-managed restaurant, the one you select for meetings with important clients or special family occasions. Such businesses often owe their success to delivering attractive value propositions to different customer sub-segments.

3. A third customer-focused strategy is to enter businesses that have strong strategic links to the core – adjacent businesses. This is a particularly appealing alternative when the core business is approaching its full potential, operates efficiently and generates surplus cash for reinvestment. It is also an important option when it is clear that the core’s future growth potential is weak.

Many leaders prefer to start this process by focusing on current customers. A series of meetings with the most innovative customers can be a valuable source of opportunities. Alternative channels, new products or services or even new joint ventures may be suggested as well as entering new geographic markets, serving different customer segments and redesigning the customer’s value chain.

Another alternative is to consider the non-core businesses of the firm. Is there the potential to leverage present positions into attractive growth opportunities?

When considering adjacent growth alternatives, the relationship to the core business requires special consideration – specifically an assessment of the major strategic differences and similarities with the core. Too many differences can overly tax the organization’s capabilities. To minimize this risk, business leaders may wish to test their organization’s capacity by piloting adjacent growth initiatives in stages, one or two degrees of strategic difference at a time. Some leaders choose to look at adjacent growth options in an opportunistic manner – as one-offs. This often results in disappointment. Initial successes with one or two close customers can soon fade under the onslaught of strong established competitors. To prevent this, leaders are advised to “organize to suit the new business as much as the core”.

Tim Hortons presents an interesting example of an adjacent growth strategy.

After a series of market tests, this prominent Canadian organization identified regions in the U.S. north east and mid-west in which there is potential for profitable growth. Based on these tests, the firm is selectively investing in establishing a position in these highly competitive markets.

Contrast entering new geographic markets with the alternative adjacent growth strategy of creating a new product platform in the core Canadian market – specifically, soup and sandwich lunches and more recently the very popular breakfast sandwiches. These new product initiatives have significantly increased revenue (and profits) within existing stores.

In the short term, adjacent growth initiatives that leverage a strong position with existing core customers have a higher probability of success. The alternative of expanding into new geographic markets provides the advantage of building a larger customer base, but often at the cost of a longer payback period and higher risk.

Self-Check Activity

Provide some recommendations for increasing the probability of success.