In business, a growth curve is certainly a great ride for executives, managers, and employees. They enjoy an expanding market, healthy gross margins, and unlimited demand for their products and services. For public companies, a high valuation also opens up an appetite for more aggressive acquisition. But all growth eventually comes to an end, and management will quickly shift their focus to managing costs, putting any non-core play projects on hold, and delaying major systems upgrades.
Even the most innovative companies in the world eventually need to wrestle with this challenge. So what are the typical signs for companies heading into an ex-growth phase? Let’s take Apple as an example. Unit growth is likely to come increasingly at the expense of gross margin declines. The core product or portfolio has exhausted its extension and reached the end of the S-curve, meaning that they are now relying on incremental improvement. The net effects are limited earnings growth and EPS that is likely to top and begin to decline. Even if the company is managed well, growth can only happen when Tim Cook figures out the Next Big Thing.
Not long ago, these growth industries appeared to earn spectacular margins and ever-increasing demand, thanks to endless new solutions for our unmet needs. They experienced the virtuous circle of expanding product lines, increasing sales, profits, and cash flow, which in turn enabled greater research spending and bigger marketing investments that lead to more demand. But industries mature, competition intensifies, consumer demand shrinks, and revenue growth falters. The terrible part is that there is no evidence that this ex-growth phase is only temporary. One such example is Microsoft, which has been in this ex-growth phase for more than a decade, with the task of ending the phase now left to Satya Nadella.
An easy answer would be consolidation, but merging two ex-growth companies is not going to jumpstart growth, and so is not a real solution. HP’s acquisition strategy for the last decade was based on buying increased earnings or filling strategic holes through transformational deals. Management refused to accept that it was in the ex-growth phase, and would not consider using its cash flow to create new business units. Most of HP’s deals have not turned out well, and the company has had to write down much of the value of EDS (acquired for $13.9 billion) and Autonomy (acquired for $11 billion), while the $1.2 billion acquisition of Palm was a compete waste of money. So was Microsoft’s recent write down of Nokia (acquired for $7.9 billion).
Consolidation reduces competition, increases economies of scale, and improves market power. But historically, it’s difficult to drive innovation in these post-merger massive organizations. It also takes away the main focus – which is to reinvent out of the ex-growth phase. Instead, time and energy are wasted on integration rather than industry reinvention. So what do companies need to do instead?
Here are the secrets to reigniting a company’s growth and driving the company out of the ex-growth phase:
1/ Avoid conventional strategic thinking. If you want to have strategic sessions with the senior team because it makes them feel better, that’s fine. But don’t expect anything to come from it. Traditional strategy processes have favored incremental, logical, and defensive moves over substantive change, and this is not the time and place for it. It puts too much emphasis on analytics and extrapolation rather than creativity and radical innovation. The result is usually a comforting illusion of certainty and an assumption that the stall is only temporary.
2/ Build a small strategic foresight taskforce to examine what the drivers of discontinuities are. This needs to be done within 30-60 days, and you need to pick the right people who can see the challenge ahead. Be sure to include outsiders so the view is not entirely one-sided. You don’t need full functional representation, and the main criteria for picking people should be based on their ability to see the future. This working group will develop scenarios of different and radical futures based on the key drivers of change. With these scenarios, the group can identify a clear strategic window of opportunity in the marketplace, and pursue it with a relentless enthusiasm that inspires managers and employees at all levels of their organization to participate. In essence, the job of this group is to reignite the entrepreneurial spirit that helps them behave like startups.
3/ Craft a compelling growth story. At this point, no one knows exactly what the best strategy is and what risks are involved. So, a story needs to come first even before the company fully develops its strategy. Storytelling is the art of corporate strategy making. It is an essential part of the strategy making process, despite the fact that many senior executives are not equipped with the right skills.
4/ Think about a narrative about your growth story. The story allows some room for execution, but it must be built upon the company’s key capabilities, culture, assets, customer access, as well as a strong and compelling vision of the future, why that future will play out, and how the company is best positioned to leverage it. Understanding core capabilities is not a simple undertaking; you need to audit your assets and understand what role they play in the future before you uncover value form it. Matching those with creating new demand will be the basis of your growth drivers.
Executives, board advisors, and managers understand that we live in an era of saturation and overcapacity and ex-growth is always around the corner. Expectations should be adjusted to these realities and companies should be prepared to anticipate it. There will always be new opportunities for finding growth that leads to value creation, but traditional strategy models simply won’t get you there – it takes far more creativity.