Playing To Win
A Strategic Framework for Growth
The Four Growth Priorities
A reader (Guy) recently asked me about a framework for growth. He said he found my Strategy Choice Cascade very useful and wondered if I had anything similar for business growth. Good question! I will give my perspective on the topic in this Playing to Win/Practitioner Insights pieced called A Strategic Framework for Growth: The Four Growth Priorities. All previous PTW/PI can be found here.
My View on Growth
I like it — a lot! My view has always been that growth solves many problems. It is like grease for an engine — it makes everything go with less friction. Growth was fundamental to my strategy as Dean of the Rotman School. We grew our revenues by approximately 10X during my 15 years as Dean. That enabled me to not have to fight to take resources away from entrenched interests to spend on our strategic priorities. I left their budgets alone and invested disproportionately in new priorities with new revenues. While the entrenched interests might have been a bit jealous of the places that the new money was being spent, they didn’t have the motivation to fight because their proverbial oxen weren’t being gored.
The University was happy. I negotiated a lower tax rate because its absolute tax yield grew dramatically with our revenue increase. Growth also sucks young talent up into vacuums without needing push existing players aside to make space for them. Everything is just easier with growth!
Four Growth Priorities
When I work on growth, I use a framework of four priorities going from #1 to #4 in order of attractiveness and importance. For me, the order is important, and I advise never varying from it in spurring growth.
1) Increase Market Share
I hate seeing companies holding the view that they can only grow as fast as the market in which they compete. I see it absolutely all the time — ‘the market is growing at 3% so we are capped at 3% growth.’ And these companies tend to use that as an excuse to make big acquisitions in fast-growing industries away from their own, most of which fail abjectly.
The first growth priority should be to gain share in your market — regardless of how fast it is growing. And the share I care most about is $ share, not unit share. Apple has only 20% share of smartphone units but over 50% of revenue share. The latter is its real share!
To be clear, I am not arguing to only grow market share. I am simply arguing that it should be the first priority. The reason is that the prime strategic imperative for all companies should be competitive advantage. For the set of customers that you choose to serve, you need to be the best at delighting them. You demonstrate advantage by taking share. Does it have to be a lot of share growth all the time? No, but it should be consistent.
You don’t want to depend on the structural attractiveness of your industry for profitability. That comes and goes. Pharma was profitable for all in the 1980s and 1990s — but since then has been a tough industry. Now only players with competitive advantage make attractive returns. Competitive advantage has the better chance of lasting and that needs to be demonstrated by the discipline of growing share.
When do I stop encouraging growth first by increasing share? It is when you hit over 60% share. At that point, you are almost certain to have twice the market share of the closest competitor, have demonstrated your competitive advantage, and may risk damaging the attractiveness of your industry by pushing for more share. But only a tiny fraction of companies has 60+% share, so for most, gaining share is the #1 growth imperative.
2) Grow Market Size
The second growth imperative is to grow the size of your market — which if you have leading share will benefit you most. There are two primary ways to grow your market.
The first is to get existing market customers to trade up. That is, you provide more value that will cause them willingly, in fact happily, pay you more, which enables you to grow faster. Tide Pods is a great example. By putting detergent, bleach and fabric softener together in a handy unit-dose form, P&G convinced customers to pay 30–40% more per load than they did previously — which grew the market. Gillette long followed the trade-up model, convincing shavers to trade-up from single blade to Trac Two, to Mach 3, to Fusion increasing the dollars earned per face shaved. Amex has done it with cards from Green to Gold to Platinum to Centurion.
The second is to get new customers to trade into your market. That is convincing women to drink whiskey (they do!), get men to use fragrances, adults to buy and assemble Lego, or men to give women a diamond for their engagement. All these moves caused new customers to enter the market of the competitors in the industry — increasing the growth of the market and rewarding all players — the leading player to the greatest degree.
These examples demonstrate a core strategy principle of mine and that is that God doesn’t determine market growth rate — executives do! That is way I take a dim view of taking market growth to be an immutable feature.
3) Shift Growth Weighting
The third growth priority is to shift application of resources within your portfolio of markets. Most large modern companies (and even smaller ones) compete in more than one distinct market. Possession tends to be nine-tenths of the law in terms of investment levels in the various businesses. Often, businesses in slowly growing markets continue to receive high levels of investment even after market growth has slowed. I am not into selling these businesses cheaply to private equity to decrease their drag on overall company growth. But I am into being very disciplined about the level of investment into those slowly growing markets in order to be able to shift investment dollars into the faster growing markets in the portfolio. Bricks-and-mortar retailers and newspapers were far too slow in shifting investments to faster growing digital offerings, while continuing to make investments that were fated to never pay off in the slowly growing markets within their portfolios.
That having been said, I would de-weight investments in businesses only after I have demonstrated to myself that I can’t generate growth through increasing market share and growing the overall market — the first two priorities.
4) Enter Growth Adjacencies
The last and lowest growth priority is to get into new adjacent markets that feature high market growth. People ask me why it is the last priority. The reason is that there are too many abject failures.
The price of getting into a high-growth market is always high, whether it is General Motors buying EDS to get into IT outsourcing, or News Corp buying MySpace to get into the Internet or Disney investing to get into streaming. They were/are very expensive failures — e.g. News Corp sold MySpace for $35 million six years after buying it for $580 million. The acquiring/entering company typically knows far too little about the new market before entering it — and frequently crushes the spirit of the company in the growing business by forcing it to adopt the practices of the slowly growing mothership.
Even some ballyhooed entries of adjacencies are illusory, such as IBM’s much touted shift into services in 1991. It made Lou Gerstner famous, but even though it inflated IBM’s top line, it is arguable that IBM has been in secular decline ever since — and recently spun off a big chunk of that services business, in Kyndryl (who makes up these names anyway?).
That having been said, there are notable successes — like Apple getting into smartphones, Pepsi getting into snacks (with Frito Lay), and Disney getting into theme parks — that cause executives to be giddier about this growth vector than I think is warranted. The attraction of making a big splash gets them excited, relative to slowly growing share or growing their existing markets. Companies would grow a lot faster, on average, if this wasn’t allowed to be an option at all. They would invest more time, energy and capital on finding creative ways to grow within their own business.
Practitioner Insights
The best way to think about your growth is that it is in the hands of customers, not you. It doesn’t arrive just because you want it or put it into your ‘strategic plan.’ The best way to get growth is to earn it. You earn it by understanding your customers and competition well enough to know how to invest to increase your share of your existing market. You earn it by understanding your customers well enough to convince them to trade up — growing the size of the industry, and, if you play it right, also grow your share. You earn it by understanding non-customers of the market well enough to compel them to trade into the market, also making it grow. You earn it by being highly disciplined in shifting investments toward your current markets that have better growth dynamics.
And if none of those priorities work and you are desperate — enter fast growing adjacencies. Why adjacencies? Because if you enter a far away industry just because it is deliciously fast-growing you are getting down on your hands and knees and begging for trouble.
If you enter a fast-growing adjacency, the key is humility. Don’t assume that you are smarter about the market than the people in it. In fact, internalize that you are definitively dumber. Do twice as much homework as you think you need to do. And if something looks too good to be true, it probably is. Assume that to not be absolutely disappointed the result of your adjacency entry, you have to have to be two standard deviations above the mean — because the mean of this approach is so low. That will require a lot of hard thinking — which will only happen with humility.
In the end, customers control growth. And as always, your job is to make an integrated set of choices that compel customers to take the actions you desire. If you do, you can produce the growth you target.
