The slow economy doesn’t have to mean the end of growth for your business.
Tune in to the latest financial and business news and you are likely to get a mixed-bag view of what is going on in today’s economy. One pundit might be lauding the fact that thousands of new jobs have been created. While another might be telling the story of yet another business that is shutting its doors after succumbing to the pressures of the down economy. Try to get any to-the-point information from those in charge of stabilizing the economy—politicians, government economic experts, and Wall Street big shots—and the response you’ll get is often reminiscent of the replies from the “Magic 8-Ball” toy: “Cannot predict now.” Or, even more likely, “Reply hazy, ask again later.”
In the midst of this uncertainty, notes Edward Hess, a professor at the University of Virginia’s Darden Graduate School of Business and author of the new book Smart Growth: Building an Enduring Business by Managing the Risks of Growth (Columbia Business School Publishing, 2010, ISBN: 978-0-2311505-0-7, $27.95), there are a few things we can know—at least about the likely generators of a period of sustained economic recovery. One is that job creation depends on true economic growth. A second is that smaller, private businesses are the most likely engines of that job creation.
“Growth is the goal of most businesses for many different reasons: to increase profits; to increase stability; to increase defensibility; to reduce customer concentration; to build cash reserves; to fund improvements and expansions; and to outcompete other companies in the marketplace,” says Hess. “But how can companies pursue those goals, especially in a time of economic duress, in a way that truly strengthens their business instead of putting themselves more at risk?
“The nation’s small businesses have been hit hard by the down economy. Many have had to close their doors. And for the owners who have managed to keep things going, growing their business to create jobs is probably the furthest thing from their minds. But a slow economy doesn’t have to mean the death of growth for your business. By following a methodology I call Smart Growth, you can grow through the authentic expansion of your company’s value to its customers.”
Smart Growth features the findings of much of Hess’s research on sustainable growth, including the Darden Private Growth Company Research Project, which was funded by the Batten Institute at the Darden Graduate School of Business and the Darden School Foundation. The book introduces a research-based growth model called Smart Growth. In it, Hess counsels corporate executives and small business owners to pursue growth strategies based on what he calls the “4Gs”:
1.Growth through improvements.
2.Growth through scaling.
3.Growth through innovation.
4.Growth through strategic acquisitions.
The 4Gs—which are based on Hess’s extensive research into how both public and private companies grow successfully—take companies a step beyond the basic strategic options that have been in force at least since Harvard’s Michael Porter explored them a couple decades ago (e.g., low-cost strategies, a focus on a niche market to add value, or the pursuit of particular customer segments).
Those strategies are certainly a necessary part of the decision making about a company’s core value proposition. However, in addition to that, companies must figure out how, if at all, they intend to grow their business. Hess’s research has found that growth turns out to have similar characteristics, regardless of the particular strategy or core value proposition chosen.
“The 4Gs help companies understand that if you want to achieve authentic growth from your chosen strategy, the point isn’t simply posting better numbers,” says Hess. “There is no scientific basis whatever for believing that growth has to be continuous and linear. Real growth instead is based on one or a combination of several things: being better at what you’re doing; doing more of it on a broader scale; doing something new; or by buying growth through savvy acquisitions.”
Read on for a more in-depth look at Hess’s 4Gs and how you can apply them to boost your business:
G1: Improvements—Becoming better at what you do. Becoming better at executing your core value proposition is the bread and butter of authentic growth. “The DNA of great growth companies is constant improvement—making products and services better, but also something more: improving the customer value proposition, and improving everyday business processes,” says Hess. “Being better, faster, and cheaper results from pushing responsibility out to the entire organization. By enlisting everyone—from the highest-paid executive to the newest employee just joining the company—in searching for better ways to do things, companies can dramatically increase the pace and impact of process improvements.”
G2: Scaling up—Doing more of what made you great. One way to grow quickly is by scaling. Once a company gets into a groove with its customer value proposition, and once it reaches a point where its business processes are standardized, then it finds it can replicate those processes across a larger footprint. Scaling then means doing more of whatever you are already doing by selling to more customers or by expanding into a new customer segment. For example, retailers and restaurants scale by opening new outlets in different locations.
Successful scaling requires excellent execution, and it means scaling of both production and distribution, so it can be costly, as well. Scaling up production requires more space, more equipment, and/or more people, and those costs are usually incurred before additional revenues from increased scale are generated.
Scaling distribution is more complicated because it depends upon whether your customers are individuals or businesses and whether you sell directly to customers or to someone who does. For many growing businesses, the challenge of scaling distribution means figuring out how to reach more customers efficiently, without necessarily adding physical locations, or without needing a bigger sales force, both of which can be costly and time-consuming.
To scale both production and distribution with lower capital costs, many growing companies leverage outsourcing strategies, at least for a time. Outsourcing provides access to proven capabilities and resources for a variable cost, rather than taking on additional staff or facilities yourself.
“Replicating business processes across a larger footprint is just part of the challenge in scaling a business,” notes Hess. “The other part is figuring out the new business and operating models that might be required. For example, a product company looking to scale might need to change from a retail model to a wholesale model. Or a service company might need to change its marketing strategies, leveraging the Internet more or getting into digital or mobile advertising. Scaling a business will affect every part of it, not just production and distribution. Remember, scaling should be undertaken cautiously in order to limit financial risks and in order to make sure the business can in fact scale without sacrificing quality or a great customer experience.”
G3: Innovation—Selling something new. Another way to grow is to bring something new to the marketplace—an innovation in a product or service, or in a way of doing business. Innovation is “improvement on steroids”—not just doing something better, but doing something new.
“Innovation, like leadership, has become an important buzz word in the corporate community, but, in reality, few companies are truly innovative,” says Hess. “The reason? Innovation is risky. In fact, when pursuing innovation, companies need to remember that they have limited resources in terms of people, capital, and time. Growth pursued through improvements or scaling up is less risky than growth through innovation. Innovation is sexy, but in truth it’s not for everyone, and not for every stage in a business cycle.”
G4: Acquisition—Growth through inorganic expansion. Inorganic expansion is another obvious path to growth—mergers with or acquisitions of a similar business, or a key part of a company’s value chain, or even a competitor. For smaller businesses, however, acquisitions can be extremely risky. “Even large and experienced companies find it difficult to get a timely and adequate return on an acquisition because of the specialized skills required—experience with due diligence and post-merger integration,” says Hess. “For smaller companies, acquisitions should be approached with extreme caution.”
“A key part of your success with the 4Gs—no matter how good or bad the economy—lies in knowing how to choose the right path for your business,” says Hess. “For many companies, a likely path to pursue would be to focus on a product or service niche with a specific customer segment, and then to grow the business by improvements and scaling.
“Much depends on a company’s appetite for risk and the capabilities it has—both in the C-suite and across the work force,” concludes Hess. “Businesses need to place their bets in areas where they have the strongest capabilities—while also being open to the opportunities for growth that might present themselves through the lightning strike of innovation, or the smart pursuit of partnerships and acquisitions.”