Innovation and Growth

As any corporate manager can attest, growing a business is a complex and challenging process. The average company fails 75% of the time in launching new initiatives; however, organizations that have discovered a repeatable formula have much higher success rates while some even drive their success rates up to 80% or above (Zook & Allen, 2003). In general, when a company expands into new markets or the industry itself has faced a major upheaval, a change of strategy should typically follow. In order to achieve sustainable growth, especially on the heels of an industry-changing event, strategies must be formulated through restructuring and re-engineering that lead to increased revenue without sacrificing earnings or customer satisfaction (Mascarenhas et al, 2002). Porter (1996, p.78) expands on this idea further by suggesting that “new strategic positions often arise because of industry changes, and new entrants unencumbered by history often can exploit them more easily.” Clearly, a company needs dependable ways to generate and sustain growth. Although the core business of some organizations may provide a fundamental advantage, companies who are first at defining their competitive position will realize such sustained growth as opposed to entering what Porter labelled as a “rat race no one can win”. As technology becomes more and more central to the strategy and core capabilities of a company, successfully defining and establishing a company’s competitive position is vital.

It is interesting note that between 1990 and 2000 (the period of time when Porter made these comments), just 10% of publicly traded companies realized eight of more years of double-digit growth in their top line (Slywotzky & Wise, 2002). Considering that this decade was viewed as somewhat of a boom time in terms of economic growth, the numbers are surprising. Possible causes of this lacklustre growth vary from Slywatzky and Wise’s (2002) suggestion that tactics used previously to increase revenue are running out of steam and no longer provide the foundation for long-term, sustained growth, or perhaps the root of the problem lies in the desire of a company to grow. Porter (1996) posits that the desire to grow possibly has the most damaging effect on strategy. Even though some companies are struggling to achieve any sort of perceptible growth to their top line, managers must be cognisant of what can be considered bad growth or simply growth for the sake of growth. The key metric, then, is profitability as opposed to pure growth. For instance, a company that is growing will find that it is able to provide fulfilling jobs and a company that is profitable will be able to pay higher wages and benefits; only a company that is growing and profitable will be able to serve both interests simultaneously (Dodd & Favaro, 2006). Obviously, there is nothing inherently wrong with growth as it can be considered a by-product of doing things right. However, problems arise for companies addicted to growth (for growth’s sake) in that they often ignore or become disconnected with the strategies that helped them to achieve their original success. The high-technology industry in particular has seen what rapid growth can lead to as the expanding proverbial pie offers opportunities for all competitors. Regardless of whether the entry barrier is high or low, high growth will not guarantee profitability. For example, some high growth businesses such as personal computers have been the least profitable industry in recent years (Porter, 2008).

When a company falls into the growth trap, consciously or unconsciously, they begin to take steps that indeed fuel growth, but ultimately add confusion to a company’s strategic position. Steps such as broadening the position by extending product lines, adding new features, imitating competitors’ popular services, matching processes, and even making acquisitions, all end up diluting the company’s overall value (Porter as cited by ivoireConsultancy, 2009).

There are a number of generic strategies that can be employed to fuel growth. Five suggested by Thompson et al (2010) include:

• a low cost provider strategy

• a broad differentiation strategy

• a best-cost provider strategy

• a focused strategy based on low cost

• a focused strategy based on differentiation

The choice of which strategy to employ will have a direct effect on how the business will be operated. In order to outshine the competition, competitive strategies must be implemented– that much is clear. However, they cannot come at the expense of core capabilities. Likewise, value chain activities cannot be compromised. When compromises occur, sustainable competitive advantages are lost and a distinct competitive position fails to materialize (Thompson et al, 2010). Porter (1996, p.77) highlights this condition by saying “too often, efforts to grow blur uniqueness, create compromises, reduce fit, and ultimately undermine competitive advantage.”

Regardless of the size of the company, or the industry in which it is operating, growth is only sustainable when it is profitable, supported by a good corporate culture, as well as fitting within the existing core business. A pursuit of market share and an outsized growth rate year-on-year is a warning-sign for any manager that trouble is ahead (anon. 2006).

References:

anon. (2006) Market Share Myopia and The Growth Trap [online]. Available from: http://breakoutperformance.blogspot.com/2006/11/market-share-myopia-and-growth-trap.html (Accessed: October 19, 2009).

Dodd, D. & Favaro, K. (2006) ‘Managing the right tension’, Harvard Business Review, 84 (12), pp. 62-74.

invoireConsultancy (2009) The Growth Trap – Why growing too fast, too quick can be disastrous [online]. Available from: http://hubpages.com/hub/The-Growth-Trap–Why-growing-too-fast–too-quick-can-be-disastrous-for-a-business (Accessed: October 19, 2009).

Mascarenhas, B., Kumaraswamy, A., Day, D. & Baveja, A. (2002) ‘Five Strategies for Rapid Firm Growth and How to Implement Them’, Managerial and Decision Economics, 23 (4/5), pp. 317-330.

Porter, M. (2008) ‘The five competitive forces that shape strategy’, Harvard BusinessReview, 86 (1), pp. 80-86.

Porter, M. (1996) ‘What is Strategy?’, Harvard Business Review, 74 (6), pp. 61-78.

Slywotzky, A.J. & Wise, R. (2002) ‘The growth crisis and how to escape it’, Harvard Business Review, 80 (7), pp. 72-83.

Thompson, A., Strickland, A., & Gamble, J. (2010) Crafting and Executing Strategy. New York: McGraw-Hill Irwin.

Zook, C. & Allen, J. (2003) ‘Growth outside the core’, Harvard Business Review, 81 (12), pp. 66-73.