Cycles of Growth
There are three cycles of business growth
Growth is predicated on cycles. Businesses are exposed to three fundamental cycles of business growth, says business author Michael Treacy, and the mere existence of those cycles makes achieving some amount of growth an imperative if those cycles are to be virtuous, rather than destructive.
The first is an economic cycle. The faster a firm grows, the higher the valuation of the firm and the lower its cost of capital. The lower the cost of capital, the more inclined the business is to reinvest in growth.
"Growth begets growth from an economic point of view, and you see that in reverse all the time. You see organizations that fail to grow lose the confidence of the financing community - whether that's a bank lending money or the issue of new stock - and therefore the cost of investment goes way up and they tend not to invest in growth and they tend to continue the non-growth," he says. "You need a certain amount of growth to keep the economic cycle at least neutral."
The second cycle is a momentum cycle or a marketplace cycle. In simple terms, customers like to do business with winners. As a business grows, it attracts attention, which harnesses more customers, which leads to more positive word-of-mouth appraisals, which leads to yet more customers.
"Growth gets easier because customers like to do business where there's reinforcement of their decision to do business," Treacy says. "Now, you definitely see that one in reverse also where when companies struggle to grow, everybody leaves. Look at what happened to Sun Microsystems when it had a disastrous downturn after 2001. These days it takes a brave CIO to stand up and say: 'Sun Microsystems is my future', because they don't have the support of the market that says: 'Yes, that's the right choice'."
Then there is the most important cycle of all - the opportunity cycle. Growth is always built on one thing and that is innovation and change, according to Treacy. Achieving innovation requires changes in roles, corporate structure, the ways people report to each other and the jobs they are required to do, and it turns out that achieving such change is "enormously easier" in an organization that offers expanding opportunities.
"Now if businesses aren't growing, if new opportunities aren't opening up, then people get frozen in place and really don't want to participate fully in trying innovation initiatives because innovation in the last few years has been another word for job termination," Treacy says.
You do not need rapid growth to keep these cycles positive but you need some growth, he says. A firm experiencing growth at two or three points above inflation - that is, one that is growing at a rate of 4, 5 or 6 percent - is typically growing enough to ensure these are not negative forces. But once you start growing at 8, 9 or 10 percent growth, achieving further growth gets easier, as these cycles become virtuous and smooth your path to even more growth.
The best management team beats the best strategy every time
1.Commit to superior customer value in everything you do.
Why customers should do business with you. At the product level ("What you sell"), provide a uniquely better product (benefits) at a competitive price (costs). At the service level (How you do business"), provide results expertise (benefits) in a hassle-free (costs) environment.
2.Focus on five, and only five, sources of revenue growth.
Base retention: Exploit the advantages of incumbency. Share gain: Use better value to take business directly away from competitors. Market positioning: Find the new growth segments before anyone else. Adjacent markets: Attack neighbouring markets, but only when immediate and practical advantage is in hand. New lines of business: Acquire in unrelated markets, but only when management has superior investment skill.
3.Manage a portfolio of growth opportunities.
How a business might manage 20 percent growth per year - Base retention: Retain client base (0% growth). Share gain: Switch clients (3% growth), in-line acquisitions (2% growth). Market positioning: Shift to growth segments (5% growth), market segment acquisitions (3% growth). Adjacent markets: Internal innovations (3% growth), adjacent acquisitions (4%). New lines of business: Transformational innovation (0% growth), new LOB acquisitions (0% growth).
4.Build a management discipline for growth.
Stretch:Tough objectives built on detailed understanding. Leadership: Committed and out in front organization. Teamwork: Effective collaboration across organizational boundaries. Technique: Tacit knowledge, formalized and improved on. Portfolio: Diversified initiatives, not an integrated plan. Accountability: Everyone responsible for their part of the growth challenge.
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