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The Four Gs of Smartly Growing Your Business
in Good Times and Bad
The slow economy doesn't have to mean the end of growth for your business.
Here's how you can grow your business the smart way despite the slow
economy.
By Ed Hess
Tune in to the latest financial and business news and you are likely to get
a mixed-bag view of what is going on in today's economy. One pundit might be
lauding the fact that thousands of new jobs have been created. While another
might be telling the story of yet another business that is shutting its
doors after succumbing to the pressures of the down economy. Try to get any
to-the-point information from those in charge of stabilizing the economy -
politicians, government economic experts, and Wall Street big shots - and
the response you'll get is often reminiscent of the replies from the "Magic
8-Ball" toy: "Cannot predict now." Or, even more likely, "Reply hazy, ask
again later."
In the midst of this uncertainty there are a few things we can know-at least
about the likely generators of a period of sustained economic recovery. One
is that job creation depends on true economic growth. A second is that
smaller, private businesses are the most likely engines of that job
creation.
Growth is the goal of most businesses for many different reasons: to
increase profits; to increase stability; to increase defensibility; to
reduce customer concentration; to build cash reserves; to fund improvements
and expansions; and to outcompete other companies in the marketplace. But
how can companies pursue those goals, especially in a time of economic
duress, in a way that truly strengthens their business instead of putting
themselves more at risk?
The nation's small businesses have been hit hard by the down economy. Many
have had to close their doors. And for the owners who have managed to keep
things going, growing their business to create jobs is probably the furthest
thing from their minds. But a slow economy doesn't have to mean the death of
growth for your business. By following a methodology I call Smart Growth,
you can grow through the authentic expansion of your company's value to its
customers.
My new book Smart Growth: Building an Enduring Business by Managing the
Risks of Growth (Columbia Business School Publishing, 2010, ISBN:
978-0-2311505-0-7, $27.95), features the findings of much of my research on
sustainable growth, including the Darden Private Growth Company Research
Project, which was funded by the Batten Institute at the Darden Graduate
School of Business and the Darden School Foundation.
The book introduces a research-based growth model called Smart Growth. In
it, I counsel corporate executives and small business owners to pursue
growth strategies based on what he calls the "4Gs":
1. Growth through improvements.
2. Growth through scaling.
3. Growth through innovation.
4. Growth through strategic acquisitions.
The 4Gs - which are based on my extensive research into how both public and
private companies grow successfully - take companies a step beyond the basic
strategic options that have been in force at least since Harvard's Michael
Porter explored them a couple decades ago (e.g., low-cost strategies, a
focus on a niche market to add value, or the pursuit of particular customer
segments).
Those strategies are certainly a necessary part of the decision making about
a company's core value proposition. However, in addition to that, companies
must figure out how, if at all, they intend to grow their business. My
research has found that growth turns out to have similar characteristics,
regardless of the particular strategy or core value proposition chosen.
The 4Gs help companies understand that if you want to achieve authentic
growth from your chosen strategy, the point isn't simply posting better
numbers. There is no scientific basis whatever for believing that growth has
to be continuous and linear. Real growth instead is based on one or a
combination of several things: being better at what you're doing; doing more
of it on a broader scale; doing something new; or by buying growth through
savvy acquisitions.
Read on for a more in-depth look at the 4Gs and how you can apply them to
boost your business:
G1: Improvements - Becoming better at what you do. Becoming better at
executing your core value proposition is the bread and butter of authentic
growth. The DNA of great growth companies is constant improvement - making
products and services better, but also something more: improving the
customer value proposition, and improving everyday business processes. Being
better, faster, and cheaper results from pushing responsibility out to the
entire organization. By enlisting everyone - from the highest-paid executive
to the newest employee just joining the company - in searching for better
ways to do things, companies can dramatically increase the pace and impact
of process improvements.
G2: Scaling up - Doing more of what made you great. One way to grow
quickly is by scaling. Once a company gets into a groove with its customer
value proposition, and once it reaches a point where its business processes
are standardized, then it finds it can replicate those processes across a
larger footprint. Scaling then means doing more of whatever you are already
doing by selling to more customers or by expanding into a new customer
segment. For example, retailers and restaurants scale by opening new outlets
in different locations.
Successful scaling requires excellent execution, and it means scaling of
both production and distribution, so it can be costly, as well. Scaling up
production requires more space, more equipment, and/or more people, and
those costs are usually incurred before additional revenues from increased
scale are generated.
Scaling distribution is more complicated because it depends upon whether
your customers are individuals or businesses and whether you sell directly
to customers or to someone who does. For many growing businesses, the
challenge of scaling distribution means figuring out how to reach more
customers efficiently, without necessarily adding physical locations, or
without needing a bigger sales force, both of which can be costly and
time-consuming.
To scale both production and distribution with lower capital costs, many
growing companies leverage outsourcing strategies, at least for a time.
Outsourcing provides access to proven capabilities and resources for a
variable cost, rather than taking on additional staff or facilities
yourself.
Replicating business processes across a larger footprint is just part of the
challenge in scaling a business. The other part is figuring out the new
business and operating models that might be required. For example, a product
company looking to scale might need to change from a retail model to a
wholesale model. Or a service company might need to change its marketing
strategies, leveraging the Internet more or getting into digital or mobile
advertising. Scaling a business will affect every part of it, not just
production and distribution. Remember, scaling should be undertaken
cautiously in order to limit financial risks and in order to make sure the
business can in fact scale without sacrificing quality or a great customer
experience.
G3: Innovation - Selling something new. Another way to grow is to
bring something new to the marketplace - an innovation in a product or
service, or in a way of doing business. Innovation is "improvement on
steroids" - not just doing something better, but doing something new.
Innovation, like leadership, has become an important buzz word in the
corporate community, but, in reality, few companies are truly innovative.
The reason? Innovation is risky. In fact, when pursuing innovation,
companies need to remember that they have limited resources in terms of
people, capital, and time. Growth pursued through improvements or scaling up
is less risky than growth through innovation. Innovation is sexy, but in
truth it's not for everyone, and not for every stage in a business cycle.
G4: Acquisition - Growth through inorganic expansion. Inorganic
expansion is another obvious path to growth - mergers with or acquisitions
of a similar business, or a key part of a company's value chain, or even a
competitor. For smaller businesses, however, acquisitions can be extremely
risky. Even large and experienced companies find it difficult to get a
timely and adequate return on an acquisition because of the specialized
skills required - experience with due diligence and post-merger integration.
For smaller companies, acquisitions should be approached with extreme
caution.
A key part of your success with the 4Gs - no matter how good or bad the
economy - lies in knowing how to choose the right path for your business.
For many companies, a likely path to pursue would be to focus on a product
or service niche with a specific customer segment, and then to grow the
business by improvements and scaling.
Much depends on a company's appetite for risk and the capabilities it has -
both in the C-suite and across the work force. Businesses need to place
their bets in areas where they have the strongest capabilities—while also
being open to the opportunities for growth that might present themselves
through the lightning strike of innovation, or the smart pursuit of
partnerships and acquisitions.
About the Author:
Professor Edward D. Hess is author of Smart Growth: Building an Enduring
Business by Managing the Risks of Growth (Columbia Business School
Publishing, 2010, ISBN: 978-0-2311505-0-7, $27.95) and is available in
bookstores nationwide and from all major online booksellers.. He spent over
30 years in the business world. He began his career at Atlantic Richfield
Corporation and was a senior executive at Warburg Paribas Becker, Boettcher
& Company, The Robert M. Bass Group, and Arthur Andersen. He is the author
of eight books, over 40 practitioner articles, and over 40 Darden cases
dealing with growth systems, managing growth, and growth strategies.
Professor Hess's work has appeared in Fortune magazine, JiJi Press, the
Financial Times, Investor's Business Daily, CFO Review, Money magazine, and
in more than 60 other print publications as well as on CNBC,
BusinessWeek.com, Fox Business News, Forbes.com, Reuters.com, Inc.com, WSJ
Radio, Bloomberg Radio, MSNBC Radio, Huffington Post.com, Business
Insider.com and Chief Learning Officer.com. His website is
www.EDHLTD.com. |
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