The Duality of Growth
Growing the business of today and the business of tomorrow
When credit tightened and revenue declined during the recession, companies worked to extract value from efficiency and austerity. In many cases, those sources of value have been wrung dry. Now, companies are once again turning to growth.
Companies often approach growth as one of two opposite extremes:
- Execute better and deliver more from the existing business
- Charter a team of big thinkers to look deep into the future
We believe both of these approaches to growth are likely to fall short of expectations. Instead, companies can apply the same discipline to growth that they have brought to the cost side of the equation. A new view of growth can help companies set better growth targets, identify new opportunities, balance investments and risk and carry strategies into action with a clear eye toward expectations.
The duality of growth demands that companies fortify and expand the business as it exists today while simultaneously creating the business as it will exist in the future. This is not simply a temporal difference. The business of today and business of tomorrow are separated by uncertainty as well. This uncertainty introduces risk, impedes decision making and often causes companies to mistake discussion for strategy. This duality requires companies to execute now and consider future risks and opportunities while anticipating changing needs in leadership and capabilities.
When a company plots an executable growth strategy, it must address four major questions:
- What is the appropriate growth target?
- Where and how should we look for growth?
- How should we align our growth portfolio?
- How can we execute on this plan?
Establishing the right growth target requires clarity and bold leadership
Generating sustainable growth is difficult and requires bold leadership. And leadership has a way of feeling and sounding bolder when it paints in broad strokes. That’s why company growth objectives are often simple and capricious: “We will double last year’s rate of growth,” or “we will achieve double-digit increases.”
Even when they move beyond inspirational pronouncements, leaders may choose arbitrary growth targets. They often benchmark against organizations they see as peers or try to use industry averages as a stalking horse.
There’s more science to it than that. To be realistic and workable, a growth target should emerge from the interplay between internal and external factors and expectations. Externalities may include the industry’s overall momentum, investor expectations, the state of the economy, the intensity of competition and wild cards such as regulation, innovation or disruption. From within, a company should take into account its state of lifecycle maturity, its culture and talent, the resources available, its risk tolerance and its own innovation capabilities. These inputs create the context that helps determine whether a company can produce superior performance to create additional value by surpassing investors’ growth expectations. One can readily determine how much of current share price is based on expected future growth. We don’t need to cover the science and math here – Mark Sirower, a Principal in Deloitte Consulting LLP’s strategy practice, has written extensively about value in his book The Synergy Trap1.
A sophisticated growth strategy departs from the orthodoxy of core, adjacent, new
Much has been written about growth in terms of the core and moving into adjacent or new spaces. There’s certainly nothing wrong with these classifications – in fact, we firmly believe in them as a useful way to think about some aspects of growth. But we find those perspectives insufficient because they fail to account for uncertainty. And they do not address the complexity of creating growth in current and future businesses.
As we outlined earlier, the duality of growth means finding ways to grow the business of today while also finding growth that will create the business of tomorrow – and to fit both together. Leaders need to figure out how to scale and integrate tomorrow’s potential business back into today’s existing operations.
A comprehensive view looks at growth options along a continuum: In building the business of today, companies will typically turn to key areas of focus such as customer retention, pricing optimization and improvements to existing offerings. Moving along the scale toward choices that carry higher uncertainty and lie farther from existing operations, companies will likely start building the business of tomorrow by designing new offerings, intruding into new markets and geographies and creating entirely new business lines for entirely new customer sets.
Figure 1 below depicts the growth levers as they progress from the greater certainty of today’s core business to the greater uncertainty of the new businesses of tomorrow.
Few companies employ every one of these tactics at once. Yet in choosing from among them, many risk a cognitive dissonance. The greater opportunities may lie at the distant end of the uncertainty curve, yet comfort may induce a company to invest more heavily in familiar near-term growth strategies that may carry less overall potential.
It is useful to understand the range of levers to pull, but crafting the full strategy rests in knowing how to apply those choices to specific markets and offerings. As pictured in Figure 2, each axis measures a degree of “newness” – newness of customers and markets along one side and newness of products and business models along the other.
Where existing offerings meet existing customers at the lower left, companies are engaging in core growth with relatively little uncertainty. Where entirely new offerings meet non-consumers at the upper right, growth is more uncertain. In between lays the realm of adjacent offerings and markets that aren’t new to the world, but are new to a particular company.
Combining these two axes yields seven distinct boxes, each of which is a potential growth strategy. Where growth strategy may once have been a dartboard, this model turns it into a marksman’s target. Applying this discrete lens allows a company to employ Cell Based GrowthTM. Cell Based GrowthTM produces growth insights for individual “cells” where opportunities may lie (say a particular segment of the core business or application of a disruptive technology in brand new segment).
Using the Cell Based view, a company can match its capabilities, opportunities and risk tolerance with specific levers – then allocate effort among those levers to balance “company of today” growth with “company of tomorrow” growth, control risk exposure and more closely achieve shareholder expectations.
Balancing a growth portfolio requires both a near- and long-term view
Look again at those seven boxes and imagine them empty. To construct the growth portfolio that most suits a company, its leaders must make clear choices about where to invest time, capital and other resources. A leader should take the overall growth target – for example 10 percent – and deconstruct it to identify which initiatives will produce the required growth.
Company A might walk a conservative line, targeting 5 percent growth from existing products and markets, then dividing the remaining 5 percent among the mid-range strategies in adjacent spaces. Alternatively, Company B might begin with the same 10 percent goal and weight its strategy more toward new products or new markets, inhabiting the upper right of the graph and embracing the higher potential upside – and higher risk – that come with the territory. This idea of a targeted growth portfolio isn’t new, but this “duality of growth” lens adds more specific rigor to the ways in which companies seek and achieve that balance.
Where should a company place its investments? Matching new offerings with new markets offers the potential of a high-energy combination. But trying to break into new markets with old offerings can make it harder to edge out well-entrenched incumbent competitors. And investing in a new business model without finding new customers invites the risk of an insufficient payoff. A solution to this “high risk, high reward” approach rests in strategic options.
We have seen that no one effectively predicts the future. Michael Raynor, a Director in Deloitte Consulting LLP’s strategy practice, has written extensively about uncertainty, risk and the value of options in his book The Strategy Paradox2. He asserts the future is inherently unknowable and it’s likely most readers agree. Companies that embrace this view need Strategic FlexibilityTM to perform effectively in an uncertain future.
Strategic Flexibility allows a company to make commitments in the core business (perhaps building a new plant to increase capacity) and take strategic options to create the future business while managing risk (perhaps taking an equity position in a potentially disruptive new technology). This approach allows companies to adapt their core to changing regulations and market conditions without relying exclusively on long-term predictions. And if the new business part of the playing field is where a company wishes to end up, it controls for risk without strangling growth.
Managing a growth portfolio that spans both new and future businesses requires thoughtful governance and understanding of a company’s culture. A company may elect to treat its new growth plans – the ones that involve new offerings, new markets, or both – as separate from the rest of the business. In some cases, a “firewall” approach can benefit both the existing core business (by insulating it from new risks) and the growth-oriented operations (by freeing them from legacy structures that may not fit their mandates).
However a company chooses to structure its growth portfolio, the broader point remains – viewing it in a structured way enables not only a more rational identification of growth areas, but also a more effective way to assign priority to each of them. Companies can iterate and refine concept development and evaluation – meaning that their opportunities are not found over time but shaped.
Now go do it
Planning growth this way requires a diligent eye on the external world, but it’s largely an internal process. Moving from strategy planning to strategy execution does not eliminate the need to focus on the duality of today and tomorrow.
Where the growth plan focuses on core offerings and markets, the imperative is to enhance and extend what a company is already doing. In some cases, that can take as much creativity and innovation as creating something entirely new.
Where growth is aimed at new frontiers, it’s time to be a pioneer – willing to explore, disrupt, create and leave the familiar behind. Building the business of tomorrow may require consolidation to build scale, or divestiture to free capital for new uses. It may alter the pace with which a business phases in – or phases out – component operations for the most effective use of resources.
To take a growth plan from theory to execution, an organization must recognize the duality that both joins and separates today and tomorrow. First, a company must identify the capabilities it needs and either build or obtain them. For each growth lever a company has decided to pursue, there may be an entirely separate set of required capabilities. Organizations must then define the leadership and talent required to pursue these opportunities. Exploring uncharted territory requires different skills, experiences and inclinations from driving incremental improvements to the things an organization does already.
Finally, different metrics are required to measure success. While traditional metrics such as growth rate, market share and time to market may be appropriate for business-of-today initiatives, non-traditional metrics such as growth rate above market, percentage of revenue from first-to-market launches and time to break-even may be better predictors of success when entering new spaces. By taking what we call a Cell-Based approach to growth strategies, companies can identify the key opportunities and measures in each part of the business – whether today or tomorrow – and build the required capabilities to grow effectively.
Although many organizations have invested considerable resources in defining and improving processes around quality, cost, or efficiency, growth and innovation are too often viewed as a “black box.” This is a mistake. Setting a clear target, identifying the right growth levers, apportioning investments amongst them and managing growth with programmatic, repeatable rigor are the keys to opening this black box and building the foundation for sustainable, long-term growth.
1Sirower, Mark. The Synergy Trap: How Companies Lose the Acquisition Game. Simon & Schuster, 2007
2Raynor, Michael E. The Strategy Paradox: Why Committing to Success Leads to Failure (and What to Do about It). Doubleday, 2007.
As used in this document, “Deloitte” means Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Financial Advisory Services and Deloitte Tax LLP, which are separate subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.