If you’re running a business – or a business within a business as I used to do in sales – the one question you probably ponder more than any other is simply:
“How do we grow from here?”
Everyone wants to grow their business. Everyone wants to beat budget. Everyone wants to beat their competitors. Everyone wants to win.
The question of how to grow never, ever goes away.
Ever since the first entrepreneur set up the first business and realised he or she was onto something interesting, this question has gnawed away at humanity.
Because of the short term nature of business – pressure to deliver more this quarter – the focus on growth is often tactical, or organic. How can I get my team to deliver a bit more, or work a bit harder? How can I get this client to buy a bit more from me?
This kind of incremental growth is fine, insofar as it can wring a bit more out of existing resources and give a shot in the arm to near term business performance.
However, the problem with this approach is that it blocks us asking a far bigger and much more fundamental question. It drives solutions at the ground level, whereas the real problem lurks 10,000ft up in the air, where strategy happens.
Winning in business is fundamentally about building and sustaining competitive advantage.
This is no great revelation of course. Academics and practitioners far more qualified than me have been writing about this for decades. One of the most well known, insightful and enduring articles on the topic is “What is Strategy” by Michael E. Porter, published in the Harvard Business Review back in 1996.
Porter’s critical point is that a company stakes out a competitive position in the marketplace through choosing to focus on a specific and limited set of activities (products, markets, customer segment etc). “The essence of strategy is choosing to perform activities differently than rivals do.”
Steve Jobs was a great exponent of this at Apple by insisting on a laser-like focus on producing just a very few (insanely) great products. A couple of phones and a couple of tablets, essentially, have driven hundreds of billions in revenues over the last decade. “I’m as proud of what we don’t do as I am of what we do”, he said.
There’s more to this puzzle than having a clear focus on a few things, however.
It’s quite possible to focus on producing just one or two brilliant products or services, ones that no-one else provides, only to find that the market doesn’t care less. The ‘Build it and they will come’ approach is often a deadly trap.
The point then is that without a clear understanding of what the market looks like and will pay for, it is hopeless trying to choose what unique activities to focus on.
The sequencing here is critical. Build a rich understanding of the market before deciding how you will organise and expand your business activities.
Here’s a simple analogy.
Modern car Satellite Navigation systems – or Apple / Google maps on smartphones – are brilliantly equipped to help you get from A to B as quickly and efficiently as possible. Thanks to live crowd-sourced data on traffic conditions, they provide close to a real-time picture of roadblocks, accidents, jams and all other kinds of variables that impact your journey time.
Compared to the dumb SatNavs of twenty years ago (which were just a CD-ROM of the road network plus a GPS locator), not to mention the old AtoZ books of the analogue era, they really are quite smart today.
Now, when you jump in your car ready to go from A to B, at what point is is sensible for you to consult your SatNav? Once you’re stuck in traffic chaos or before you set off? The answer, the sequence, is obvious.
In essence, your SatNav gives you a richly detailed mapping of external conditions (the market), and your journey through that map (business performance) is all the better because of it. The better you know the market, the better you can arrange your activities to ‘win’.
Michael E. Porter helps you understand the thinking behind assembling a uniquely capable car (piloted by a great driver) that is unrivalled by competitors. The SatNav is essential though for translating that car’s capability into a winning performance – getting from A to B as quickly as possible. Choose a 4x4, not a Rolls Royce, if your journey takes you across a muddy field.
So, as you think about strategic growth opportunities in front of you – how to arrange your business activities in a way that confers a sustainable competitive advantage over your rivals – you must first ensure you have a truly detailed mapping and understanding of the market you plan to attack.
Then, and only then, once you have pulled this information together, can you properly figure out how to expand your operation. And ask the following types of questions:
- Do you go after more clients in the same market segment with your best product (e.g. Aston Martin opening up a network of dealerships aimed at wealthy potential buyers in South America)?
- Do you add additional products/services to sell to the same loyal customers (e.g. Apple adding the Watch to it’s line-up of other gadgets)
- Do you attack an adjacent market within the same broad industry vertical (e.g. a consultancy business aiming its services at UK insurers as well as UK banks)?
- Do you upscale or downscale your service to appeal to a different market segment (e.g. Virgin Atlantic offering a budget airline service in Europe)?
All of these ideas could lead to growth, but without knowing what the market looks like and will pay for, it’s little more than a guess.
More importantly, while all of these strategies might indeed lead to increased sales, what do they mean for return on sales? As the cliché goes, turnover is for vanity, profit is for sanity, cashflow is reality. If a strategic expansion increases your sales by 50% over five years but halves your overall profitability, you are worse off.
Apart from purely digital products such as Facebook, the increased business complexity that results from strategic expansion almost always exerts a drag on your return on sales. So choosing a growth strategy is as much about preserving (or even enhancing) your profitability as it is about increasing turnover and market share.
Attempting to launch any of these strategic growth initiatives without first understanding the market (including rivals already operating there) will most likely lead to failure. It did with Virgin Atlantic and, closer to home, it did in a bank I worked at which tried to build a new capability in a market adjacent to its core competence – and within five years shut down the operation.
Understanding the market and then trying to fit your unique business capabilities to it is like solving an incredibly complex puzzle. This is the role of strategy, the task of finding optimal strategic fit and identifying the most effective way to expand an operation.
It should be the dominant focus for any executives running a business. I have the feeling, unfortunately, that executives are too often inward-looking and not obsessed enough with looking out and knowing what they don’t know about the market they are operating in.
Bringing it together with a little maths
To try to illustrate some of these points a little better, I’ve dusted off some of my old algebra skills (which, trust me, have lain dormant for a long time – I had to visit the Khan Academy to get set!).
It occurred to me that the activities and resources in a business could be described intuitively in a simple [1 x y] matrix where y columns represents the number of different moving parts in a business. At a very basic level, all businesses have three essential ‘pillars’ products/services, customers/clients and staff. On top of that, they all operate in an industry.
The simple matrix to represent this stylised business is then a [1 x 4] matrix. The value in each of the four columns provides information on the resources and capability of the business in it’s chosen market, for example:
[ 4 7 11 3 ]
Don’t worry about what this array of numbers means, the point is simply to represent some key variables in the business set-up – the balance of business activities.
The choice to expand the business is represented in the matrix by one or more of these numbers in the array going up. So expanding the product line-up would change the matrix to, for example:
[ 6 7 11 3 ]
Increasing the number of staff and entering a new vertical would do this:
[4 7 16 4 ]
While ramping up sales staff to sell existing products to more customers in the same verticals would do this:
[ 4 12 14 3 ]
The market context
Of course this business operates in a market which is far bigger and far more complex than the business itself. The market can therefore be represented by a much larger matrix, [y x z], where the number of columns in the business matrix equals the number of rows in the market matrix.
The number of columns z in the market matrix could be huge, describing in rich detail the many variables and layers that make up a large and mature market. Let’s imagine for our example that 6 columns adequately describe the complexity of this hypothetical market. So we have a market matrix of [4 x 6].
In a world where the executives running our business only have a partial understanding of the market place they are operating in – the SatNav has some blind spots – the market matrix will look to them like this (please forgive the ugly syntax, it’s hard to present it properly writing the web) :
[ 7 2 ? 9 3 8 ]
[ ? 8 12 ? 7 1 ]
[ 6 1 5 ? 4 ? ]
[ ? 3 ? 8 ? 3 ]
These question marks dotted across the market place are a real problem for the executives. They might be able to guess at their values, but they don’t know with any certainty.
Hence when we come to do the matrix algebra, multiplying the business activity matrix by the market matrix, we have no idea what the solution is. In purely mathematical terms it is unsolvable.
In reality, any business will actually have that answer anyway, in the form of it’s financial performance. A financial result – turnover, profits or losses, margins etc – is the outcome when a business hurls its activities into a market. But it will not fully understand why it’s financial performance is what it is. That’s what happens when there are blind spots – and is standard operating reality for practically every business of course.
Closing the gaps
Hence, looking through this lens of matrix algebra, the first task of executives in our business is to go out and close their knowledge gaps. Ensure that their SatNav is providing a detailed, rich and realtime map of the market. By doing this diligently they will arrive at this understanding of the market:
[ 7 2 4 9 3 8 ]
[ 9 8 12 2 7 1 ]
[ 6 1 5 8 4 2 ]
[ 1 3 6 8 8 3 ]
Now, our executives are in a position to calculate what happens when they hurl their [1x4] business activities matrix at their chosen [4x6] market matrix. The answer is, naturally, 788.
[ 4 7 11 3 ] x [market matrix] = 788
Once this has been done, the really exciting stuff starts to happen.
Our executives, armed with complete knowledge of their market, are now well placed to optimise their existing operation. In other words, using roughly the same overall resources in the business, what is the optimal mix of operating activities that yield the highest return?
In essence they are taking their activities and looking to fit them as well as possible to the varying terrain of the marketplace. They are trying to achieve what many call product/market fit, but, more generally, business/market fit.
So, returning to our business matrix,
[ 4 7 11 3 ]
let’s assume that the sum of our array (25) represents the total resources available to the business. Given our market context, what re-organising of those same resources yields the best return, or fit?
Well, by summing each row in the market matrix, we understand which aspect of the market provides the best response to the application of a given variable in the business matrix. In this case, it’s the second row of the market matrix, which totals 39.
The second variable in the business matrix, customers/clients, therefore has more leverage on returns than any of the others. So our executives’ optimisation strategy should plough more resources into adding customers.
Where do those resources come from, given we are only allowed 25 total at the moment? The third and fourth rows in the market matrix, staff and industry, score low at only 26 and 29 respectively. The first row, product/services, sums to 33.
So, an optimal organisation of activities as defined by Michael E. Porter, using the same resources now looks like this. A business which has one product/service line, serving as many customers as possible, operating with few staff (bring on automation!) and active in only one industry:
[ 1 22 1 1 ] x [market matrix] = 946
Of course that extreme re-organisation of activities might not be possible, but the direction of travel is clear, and an improved operation such as this could certainly be achievable:
[ 3 12 8 2 ] x [market matrix] = 833
In other words, pulling out of one vertical, deploying some technology to reduce staffing requirements and simplifying the product offer a bit would certainly pay dividends versus the original operation which was generating 788 of value.
This exercise is essentially telling us what the market we are in rewards. In his timeless study of brilliant businesses “Good To Great”, Jim Collins talks about a business needing to understand the ‘economic engine’ that drives it’s business performance. It is about organising an operation around the lever which has most impact on overall performance – in our case the lever of many clients.
And now for disciplined and focused strategic growth!
Now that they understand what their optimised set of business activities looks like, our executives are in a much better position to choose where to add new resources.
Our executive friends hammer out a $50mm equity raise, which gives them 5 extra units of resources. They take the operation from this:
[ 3 12 8 2 ] x [market matrix] = 833
[ 3 16 9 2 ] x [market matrix] = 1015
by adding a bunch more clients, and, begrudgingly, one necessary extra unit of headcount to handle all the new client activity.
Our executives are able to drive this strategic growth safe in the knowledge that no other choice would be as well rewarded by the market. Great!
What if the market changes?
All of the analysis above presumes a static marketplace. But what if market conditions change? As they do in reality, thanks to economic cycles, the impact of new technologies, disruptive innovators barging in, changing customer preferences etc.
So (adding the row totals to help compare) perhaps we go from this market matrix:
[ 7 2 4 9 3 8 ] = 33
[ 9 8 12 2 7 1 ] = 39
[ 6 1 5 8 4 2 ] = 26
[ 1 3 6 8 8 3 ] = 29
to this one:
[ 7 8 6 9 3 8 ] = 41
[ 7 6 7 2 7 1 ] = 30
[ 6 1 5 8 4 6 ] = 30
[ 1 3 6 5 5 3 ] = 23
After this shift, the market now rewards product variety above anything else. The number of clients is now only as important as manpower, which has itself become much more beneficial to the business (knowledge and expertise is more rewarded?) and industry focus becomes even more critical.
The performance of our existing activities falls back:
[ 3 16 9 2 ] x [market matrix] = 919
Well, the role of our executives is to be on top of those changes and adjust accordingly. Not over a week, of course, but certainly from one year to next, as a new market dynamic points to a tweaked allocation of resources and activities within the business.
[As an aside, one only needs to look at the banking industry to see what havoc a changing market dynamic (financial crisis, massive new regulations and FinTech disruption) has wreaked on old business models.]
After a re-optimisation, the agile executives are able to deliver an improved setup with their 30 units of resources:
[ 6 12 10 2 ] x [market matrix] = 952
Business performance does has not yet recovered to its former peak before market conditions changed so rapidly, but the process of re-adjustment to the new reality is underway.
When it comes to opportunities for growth, any new resources can be channelled intelligently according to what the new market conditions reward.
Again, the role of executives is to be as close to understanding their market as is humanly possible.
This is why Big Data is seen to be such a Big Deal. AI and incredible processing horsepower, accessible easily through the cloud, give companies a now super-human ability to crunch through data about their customers and markets like never before.
The extent to which companies can leverage Big Data is unknown, but there is no doubt the love affair with Big Data can be seen quite clearly in this overall context of the necessity to understand the market in as much detail as possible.
This, to my mind, is what strategy and strategic growth is all about. Understanding the market better than any rivals is the holy grail for business executives. Thereafter, choosing a set of unique operating activities within that market, fitted precisely to the market map, makes it possible to drive and sustain huge competitive advantage.