Growth is a big decision because business leaders have to manage the costs (hard costs, soft costs, opportunity costs and hidden costs) that come with servicing the growth.
Growth can happen in a variety of ways. Often, in order to minimize some of the costs that come with growth, businesses will consider creative growth paths. The beauty of creative growth paths is that, in addition to helping manage costs, they naturally create innovation and advantages by default. This is often the root of innovation that spurs technology, a better way to streamline operations or new opportunities.
This is the most common way to grow. Get a bigger piece of the pie by getting more of the customers or more of the dollars in a given market, or both. The key is for leadership to keep a long-term view and realize that there is a ceiling to this strategy. The ceiling isn’t necessarily a bad thing. The ceiling could be high enough that it doesn’t cap growth for all practical purposes. In other instances the ceiling does cap growth. After getting to a dominant market position, leadership will have to find new ways to grow while maintaining the market position. This is common and very doable. Businesses manage growth costs in vertical growth by:
- Using technology to reduce costs or increase efficiency
- Reallocating internal talent from outdated work to more relevant growth initiatives
- Outsourcing executive structure roles rather than incurring immediate additional overhead (The AxisPointe can help with this).
Businesses can grow horizontally into new markets where it costs less to compete. New markets could be new customer markets, new product or service markets, new geographic markets or markets where the business has a natural advantage. It is important not to, “rubber stamp” market operations from one market to another. Many businesses that try to do this mistakenly make assumptions about the new market. The result is often high sunk costs, unexpected opportunity costs or general failure in the new market.
Remember that top line growth comes from selling stuff to customers. Bottom line profit can’t happen without top line revenue. If leadership is creative in how the business goes into a new market, businesses that grow in this way find that the business can serve customers in exponentially better ways than any alternative. It is easier and more cost efficient to compete. In this scenario, the business benefits from operational efficiencies to reduce costs and increase margins or can charge a higher price point while not having to increase costs.
Business Development to establish strategic relationships to drive revenue and decrease costs of getting customers is very effective in this growth strategy. Business development can be done through an existing sales team, but it is more effective here if business development is its own function. Even if it is a department of one. Businesses either pull a person or people over from the sales team to just do business development or they hire a person or people for business development. If people are pulled over from the sales team, you don’t have the costs of an additional hire and on-boarding, but the business needs to provide enablement for these people. There are costs to enablement, but often they are significantly less than an additional hire and on-boarding in this scenario. Enablement is necessary because of the slight paradigm shift that needs to happen for success in business development. The skills for Business Development are similar to Sales, but the approach and relationship management is completely different (The AxisPointe can help with this).
An exploitation growth path fills gaps in the market that competitors either don’t see or can’t fill due to their business models, capabilities or resources. This growth strategy exploits gaps in the market to capitalize on opportunity while bringing more value for customers. This is a typical, “see a need, fill a need” approach. It is typically customer-focused rather than spreadsheet driven, which increases the likelihood of success.
Exploiting gaps in the market often can make competitors irrelevant. When your competitors become irrelevant, you have a wide open market, which reduces your costs significantly.
Often gaps in markets are large voids which means lots of opportunity. Businesses can operate in these voids like they would in a new market. The difference is that there is much less risk in these voids than there is when expanding into new markets. An exploitation growth path can be an effective strategy to grow dollars without having to incur serious additional operational costs. As a matter of fact, businesses can eliminate costs that are traditional to the industry while creating pricing power at the same time. In doing this, innovation and relevancy often happen by default.
Many times a business’ internal operations in serving customers can be spun off into separate divisions, new revenue streams or even a stand-alone business in its own right. In these scenarios, the business is providing a higher level of service or some added value that comes with a product (“higher level” and “added value” being defined by the customer, not the business). Growth happens when these internal operations are spun off as separate offerings, separate divisions or a new business that can stand on its own or become part of a larger business group.
The beauty of this growth strategy is that, initially, the additional revenue does not require additional operational costs, it often strengthens customer loyalty and it creates higher barriers for your competitors, which reduces the costs to compete. As the result of a spin-off strategy grows on its own, operational costs can be controlled with technology, economies of scale and newer business models.
Merger & Acquisition (M&A)
Mergers & acquisitions are a classic growth strategy, but it is often a numbers game and therein lies the risk. Incorporating another business’ capabilities, talent or IP can drive growth more quickly than other growth paths. Business leaders must be careful after the merger or acquisition not to run the business out of a spreadsheet and run it in the market. I know this sounds like Business 101, but you’d be surprised how often this happens, especially after an acquisition. There is much financial due diligence prior to an acquisition and businesses are often bought and sold on EBITDA metrics for valuations.
The problem is that EBITDA doesn’t show the nuances in the market operations and the culture in customer relationships that made the acquired business attractive in the first place. These are often considered soft assets and are regularly overlooked in due diligence and in market operations after the acquisition.
The financial and growth projections made in due diligence make it tempting to run the business out of a spreadsheet instead of in the market. Spreadsheets are about minimizing costs and maximizing profits, generally speaking (assets, liabilities, utilization, productivity and debt all come into play, but they eventually funnel to minimizing costs and maximizing profits). The risks in running a business out of a spreadsheet are loss of customer trust, increased competition, decreases in overall revenue and diminished capabilities. I realize that diminished capabilities sounds counterintuitive, but it is often a result of a spreadsheet-driven decision to spread resources too thin or cut costs back too far. A business can streamline it’s way to profitability, but it can’t streamline its way to growth. Profitability is no longer a viable metric if revenue isn’t coming in the front door of the business. The market is where it all happens. It’s where the customers are, where competitors are and where opportunities are. Businesses have to be run by the numbers, for sure, but not by the spreadsheet. There is a difference. Everything happens in the market.
Bringing the nuances in market operations and the culture in customer relationships from the acquired company into the market ops of the new company has a double benefit. It helps manage the costs of growth while protecting advantages so they can be used for long-term success. This is a significant tactic for achieving the financial projections that were done in due diligence before the acquisition.
These are just a few growth paths that, with a little forethought and a little creativity, can be valuable in managing the costs that come with growth.
Growth is easier said than done. Getting to the next level can be a giant step. It is a decision that is made on purpose. It’s not an easy decision because there’s a lot that comes with it. Some business leaders want to grow as quickly as possible. Others are looking for slower, more manageable growth. No matter your preference, take time to consider what the growth path is and how to manage the costs. Make things easier for yourself and your team, not harder.