Driving growth
Author Kaj Storbacka
Published on February 4th in categories Blog.
When I started my career as a consultant we used to debate with my colleagues about the importance of growth for the future of a firm. Some of us argued that profitability is as important as growth, whereas others argued that growth should be understood as a multidimensional concept. It’s not only a question of topline growth it’s also a question of competence growth, personal growth of the employees etc. With the increased importance of shareholder value, over the years the rationale behind growth became the paramount idea for all executives. Nothing drives shareholder value more than topline growth!
Today firms are realizing that growth is a multidimensional question. Firms increasingly understand that serving only shareholders may not be a sustainable strategy. Long-term success requires a deep understanding of how the firm can benefit other stakeholders as well, including society, employees, suppliers and even the environment. But in order to benefit the stakeholders a firm has to be successful, and still the prevailing metric for success is growth.
This emphasizes the importance of a more comprehensive view of the market network where the firm operates. Today I see that there are two fundamental strategic questions that firms need to answer: (1) is the firm market driven or market driving, and (2) is the strategy going to focus on ‘where to compete’ or ‘how to compete’?
Are you market driven or market driving?
Regardless of industry, one of the overarching strategic questions that firms face is their view of the market. If you accept the market as given, you are engaging in a market driven strategy, where you are adaptively responding to whatever happens in the market environment. This may lead to a situation where all competing firms have the same market definition, the same product definition, the same value proposition for customers, and basically use the same tactics for competing. Eventually, this will lead to commoditization and increased price pressures. In this kind of zero-sum game the winner is the firm with the lowest cost.
But you have an alternative. You can employ subjective market definitions, i.e. engage in a market driving strategy, where you shape or modify the market environment so that it fits your resource configuration and works in your favor. There are basically two ways to drive the market. First, you can totally reinvent the market, or make a new market around a new value proposition, and strive to get other actors in your value network to accept your definition of the market. Second, you can increase the granularity or your market definition, by breaking the market into smaller segments or competitive arenas. In our work with our clients we have been able to show that even in very mature markets it is possible to identify pockets of growth and help firms to focus their time and resources on these faster growing and more profitable segments.
Are you focusing on where to compete or how to compete?
Another overarching strategic question that firms need to clarify before they start their strategy process is whether the process should focus on where to compete or how to compete. It is my experience that most strategy processes are focusing too much on the ‘how to compete’ question, and tend to ignore the ‘where to compete’ issue. This is surprising when you consider the overwhelming evidence there is, both in managerial and academic literature, to support the fact that the choices about where to compete seem to explain success much better than choices about how to compete. In the latest issue of McKinsey Quarterly this was again discussed and the argument was that 80% of the variance in revenue growth is explained by choices about where to compete, leaving only 20% explained by choices about how to complete.
But you don’t need academic research or McKinsey consultants to figure this out. It is common sense that it is easier to grow in a growing market. In a shrinking market you are facing a tough struggle to share the market, where as in a growing market everybody can enjoy growth. Therefore it makes sense for firms to secure that they are positioning themselves in markets that have a an inherent growth, or to take a much more granular view on their existing market and secure that they are allocating their resources to the competitive arenas where growth can be found.
This has two natural consequences. First, firms need to invest in a deeper understanding of how to split the market into smaller, fine-grained arenas using novel and innovative ways divided the market. In Vectia we have developed a process called Competitive Arena Mapping which we now have used in more than 25 client cases. In all of these we have been able to show that even if the market is mature there are competitive arenas that grow. Second, firms need to be ready to employee discrete activities to tap into the opportunities identified. This may require significant changes of the existing business model, and sometimes even the development of entirely new business models.
Vectia’s slogan has for a number of years been “Driving Growth”. Our goal is clear: we want to help our clients to become market driving and develop tools that facilitate choices on where to compete.
Kaj Storbacka
Auckland, February 4, 2011