Five Commandments For Faster Growth by Knnowledge@Wharton
In this opinion piece, Peter Cohan, a lecturer at Babson College, argues that companies looking for fast growth can find it “along five dimensions, ranging from the most basic to the most challenging.” Since 1994, Cohan’s management consulting and venture capital firm has conducted more than 150 growth strategy projects for global companies. He has invested in seven startups, three of which were sold for more than $2 billion.
Executives can pay a hefty price if their companies don’t grow fast enough.
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Take the example of LinkedIn, the business social network service. After markets opened on February 5, 2016, investors hacked 44% from the company’s shares.
The reason was easy to understand, yet difficult to remedy. LinkedIn lowered its expectations for the year’s growth in revenue (from 35% to 20%) and adjusted earnings (from 41% to 7%) — well below what analysts expected.
This slashed a cool $1 billion from the net worth of LinkedIn’s founder, Reid Hoffman, and forced its CEO, Jeffrey Weiner, to ponder important questions that must be answered before investors can hope to recoup what they’ve lost.
Where would faster growth come from? Can it be spurred by improving LinkedIn’s offerings? By selling its current products to new customers, or in new geographies? By inventing new products for its existing customers? By adding entirely new classes of products, or creating a new growth culture?
The unfortunate truth is that very few executives can think of creative, practical solutions to such questions.
Growth Comes From Five Dimensions
To me this suggests a crying need for growth discipline. By this I mean a systematic process for brainstorming, evaluating, choosing and implementing growth strategies that produce the kind of better-than-expected revenue and profit growth that boosts shareholder value – and makes it easier for leaders to attract and motivate top talent.
Companies can find growth along five dimensions, ranging from the most basic to the most challenging. These dimensions can either be the same as those in a company’s existing practices, or reflect new and different parameters.
- Capabilities, and/or
Customers: Same or Different
Can you take a bigger share of your current market or should growth flow from a new group of customers?
One startup is seeking growth by winning more business from its current customers.
“The unfortunate truth is that very few executives can think of creative, practical solutions to such questions.”
I invested in SoFi, a consumer lender based in San Francisco, which uses a unique marketing strategy to grow fast — from $168 million worth of loans in 2013 to $7 billion by January 2016.
SoFi holds parties for its customers in cities around the U.S. Such parties encourage its customers — millennials who graduated from top schools — to build relationships with each other and to bring in potential customers from among their peers.
The company seeks to turn this cohort into lifelong customers by making them “feel as if they belong to an exclusive club,” according to Bloomberg.
As CEO Mike Cagney said, “We can do some things that really get you to start to rethink how your relationship with a financial-services firm should work. We’re trying to make these guys dinosaurs. And hopefully I’m the meteor by which they all die.”
Geography: Same or Different
Sometimes growth can come from taking your show on the road.
When Starbucks decided to open coffee shops in China in 1999, it did so in the face of naysayers who assumed that with its thousands of years of tea-drinking culture, the Chinese would be the last people to drink coffee.
But 16 years after entering the Chinese market, Starbucks operated 2,000 stores in 100 Chinese cities. Moreover, Starbucks anticipated adding 1,400 more such coffee shops by 2019 – including 500 alone in the current year.
Starbucks carefully studied the market and saw an opportunity to “introduce a Western coffee experience, where people could meet with their friends while drinking their favorite beverages,” according to Forbes.
Starbucks decided not to threaten China’s tea-drinking culture through advertising and promotion. Instead it selected “high-visibility and high-traffic locations to project its brand image,” noted Forbes.
Starbucks introduced drinks that included local ingredients such as green tea and made young Chinese feel “cool and trendy” through what Forbes noted was its stores’ “chic interior, comfortable lounge chairs, and upbeat music.”
Starbucks also used its best baristas as brand ambassadors to China – they trained its Chinese employees and helped establish the company’s culture there.
Products: Same or Different
Should you sell new products to your existing customers?
That’s what McDonald’s did when it answered its customers’ call for all-day breakfast.
“Sometimes growth can come from taking your show on the road.”
In January 2016, McDonald’s beat Wall Street earnings expectations for the fourth quarter of 2015 – enjoying 5.7% same-store-sales growth in North America — well ahead of the 2.7% growth Wall Street had expected and propelling its stock to an all-time high after a two-year slump.
How did it do so? McDonald’s USA Chief Marketing Officer Deborah Wahl said, “Customers were saying to us ‘Hey, McDonald’s, this is the next big thing. This is what we want from you. This idea came from our customers. We said this really is the people’s launch, that’s what this is all about.”
As one analyst told CNBC, “I think the key takeaway with the all-day breakfast is the fact they were able to roll it out in a matter of six months. That wasn’t something we saw under previous leadership, and I think that bodes well for a lot of the new initiatives.”
Capabilities: Same or Different
Can your company’s capabilities tap new growth opportunities? Or does your company need brand new capabilities to penetrate the next big growth market?
Netflix added new capabilities in order to shift from DVD-by-Mail to online streaming. Investors approve — its stock price more than tripled in the five years ending January 2016.
DVD-by-Mail depended on such capabilities as the wholesale purchasing of a wide variety of DVDs, as well as building and operating a system to track customer orders and route delivery and pickup of DVDs between Netflix and customers’ mailboxes.
When Apple introduce the iPhone in 2007, the Netflix CEO, Reed Hastings, realized that DVD-by-Mail would go the way of the Dodo – and soon people would demand to watch videos on their smartphones.
Hastings also realized that Netflix would encounter an insurmountable challenge — obtaining early access to movies and TV programs produced by others.
“Can you change your culture to encourage your employees to create more growth opportunities?”
So rather than depend on suppliers who viewed it as a rival, Netflix produced its own content. While creating that capability was a huge challenge, the popularity of shows like House of Cards and Orange is the New Black suggests that Netflix succeeded.
Moreover, the network that Netflix had created to deliver and collect DVDs would be of no use in making videos available to consumers’ smartphones.
Instead, Netflix needed to partner with a complex array of broadband service providers. Given that its consumers consume as much as 37% of all bandwidth during peak streaming hours, such partnerships are essential for Netflix’s ability to operate its online streaming service.
Culture: Same or Different
Can you change your culture to encourage your employees to create more growth opportunities?
Intuit, the maker of accounting software such as TurboTax and Quicken, created an idea-collaboration portal that lets employees post ideas, get feedback, coaching and suggestions — and even sign up people to help implement these. And the beauty of this portal is that all this idea-generation can happen without a manager getting involved.
According to Intuit’s founder, Scott Cook, by 2012 this portal had turned 30 ideas into “shipping products and features” that boosted Intuit’s revenues.
Intuit invented new businesses by creating an environment that encourages people there to come up with new business hypotheses and test them against feedback from customers.
One example is a debit card for people without bank accounts. An Intuit finance employee — not a “product person” — noticed that the people who need tax refund checks the most are often ones who don’t even have bank accounts.
She came up with the idea of giving those people debit cards: Intuit would accept the tax refunds into its accounts and transfer the funds to the debit card. She came up with the idea in February and wanted to test it by April 1, before tax season ran out on April 15.
CEO Cook criticized the kludgy website she developed, but the employee argued that it was better to get something crude that would test her idea than to wait another 10 months. She expected 100 takers but got 1,000.
And the surprise was that half of those who wanted the debit card already had bank accounts. In this way, Intuit discovered that the need for this product was much greater than it had reckoned.
Five Commandments for Faster Growth
If you want your company to grow faster, obey these five commandments.
- Find growth from current or new customers
- Segment your current customers.
- Identify how much of your revenue comes from each segment.
- Analyze the broad trends – such as evolving customer needs, changing economic conditions, or new technology – that might boost (or contract) growth in these segments.
- Estimate your company’s share of the most important segments.
- For saturated segments, identify new segments that would be interested in buying your product and interview potential customers in those segments to gauge their level of interest.
- For unsaturated segments, determine the most effective marketing strategies for achieving further penetration.
- Assess the cost, the fit with your company’s skills, and the time-to-market of the options.
- Pick the option with the lowest cost, best fit and quickest time-to-market.
- Expand into new countries
- List four countries that best match your current markets.
- Identify how your product can boost the profits of your distribution partners in those countries.
- Ask potential end-users of your product to rank the criteria — e.g., price, quality, or service — they use to compare suppliers.
- Analyze how well your company does on these criteria relative to competitors.
- Position your product to outperform competitors on the ranked criteria.
- Grow by selling new products
- Ask your customers to tell you their goals and the biggest barriers to achieving them.
- Brainstorm new product ideas that would help your customers leap over these barriers.
- Build a prototype of the best ideas and get customer feedback.
- Turn the most promising ideas into your next product.
- Add capabilities to attack new growth opportunities
- List the skills needed to succeed in the new market.
- Assess the fit between those skills and the ones at which your firm currently excels.
- Develop a plan to hire or partner to get the skills you’ll need.
- Manage the process of changing your company’s skills.
- Create a growth culture
- Make a list of your values — one of which should be customer innovation.
- Use a hiring process that favors people who share those values.
- Give employees time to brainstorm new products that will make customers better off.
- Provide resources to commercialize the best products and reward those who succeed — as well as the noble failures.
To follow these commandments, assemble a team whose members excel in the skills you’ll need to conceive, evaluate, choose and implement a growth strategy.
Hire an independent outsider to help structure your analysis and to battle confirmation bias – the tendency to embrace data that reinforce your existing beliefs.
Follow these five commandments and your company’s growth will accelerate.
This article is adapted from a longer article titled, “Note on Growing Faster.”