There are four fundamental paths by which a business can grow: 1
- Improve your offering incrementally to increase revenue and profits
- Innovate to create and capture significant new value
- Scale your operations to reach new customers or do more for existing ones
- Acquire other businesses to build scale and/or capabilities
The first three paths (improve, innovate & scale) are the “organic” options for growth, where you take your existing business and work over time to help it grow. This is distinct from growing in a more discontinuous fashion through acquiring other businesses and integrating them in some way.
It is possible, even advisable in many cases, to pursue multiple paths to growth at once. This can provide you with a portfolio of growth opportunities with different characteristics and timeframes. Which specific paths you should follow depends on your situation, objectives and constraints.
Let’s zoom in on each of the four paths to growth to look at how they differ and what it takes to follow each one successfully…
Continuous improvement is the lifeblood of a successful business. If you don’t improve how you do things, you risk losing relevance with customers and getting left behind by more agile competitors. Improvements are relatively small, focused changes in your business operations or offering that help you become “better, faster, or cheaper”1 i.e. they improve your revenue, costs and efficiencies.
Companies that are good at this growth path encourage their staff to regularly ask “how can this be improved?” and seek regular input from customers and suppliers to identify problems, inconsistencies and bottlenecks that they can seek to resolve and improve.
Innovation is about significant and distinctive changes that deliver real customer value. It is typically a higher risk option than simple improvements but also offers the prospect of significant growth above and beyond business-as-usual. Innovation is often achieved by questioning key assumptions and/or combining existing technologies, business models or concepts in new ways.
To innovate successfully, firms to manage uncertainty and to identify & explore promising opportunities without killing them too early with business-as-usual metrics but also without wasting resources unnecessarily. Various innovation methodologies exist to help manage this balancing act, although cultural considerations are also important (see the 5Cs of Innovation)
Scaling is the fastest way to achieve sustainable organic growth, as it focuses on doing more of what you already do. The two primary ways to scale are to find more customers for your existing offerings and/or to sell more things to your existing customers. This assumes you have a well-established offering and customer base, plus the systems & processes to support significant growth in volumes.
Investors love to support a business that is ready to scale, because so much of the risk has been taken out of the equation already. There’s much less market and technology risk compared to innovations, and the upside is more significant than incremental improvements. But it all comes down to how well you can execute on the scaling plan.
Acquiring new businesses can lead to rapid growth in revenue and market capitalisation … but it’s equally true that mergers and acquisitions (M&A) are a highly effective way to destroy value too. It takes a fundamentally different skillset for companies to identify good candidates, conduct due diligence properly, negotiate the right deal, and manage the integration process well.
The research shows that many acquisitions destroy value and on average the return to acquirers is around zero. 2 Given that statistic, it’s curious that the activity remains so popular … but I suspect the allure of rapid growth in headline metrics is hard to resist, particularly when personal incentives are tied to company size. Interestingly, companies which acquire for reasons of “market power”, “diversification”, and “using excess cash” are much more likely to destroy value.
Nonetheless, there are plenty of examples of companies that have achieved profitable growth via acquisition. This is particularly true of “bolt-on” acquisitions of smaller companies3 that are focused on complementing existing offerings and where they have a compatible culture.
This has been a quick review of the four main paths to achieving business growth: Improvement, Innovation, Scaling and Acquisition.
Each growth path has its own characteristics and success factors, and you would be well-advised to consider your particular situation and objectives before deciding which path (or multiple paths) make sense for your business. It’s also very important to make sure you have a clear understanding of exactly why you want to grow and by how much, and to have laid the groundwork properly with your existing business so you are ready to grow successfully.
- This approach is based on Ed Hess’ excellent book Grow to Greatness: Smart Growth for Entrepreneurial Businesses (and his associated Coursera subject). It’s a simple and effective framework for thinking about exactly how to achieve business growth.
- See “Does M&A Pay? A Survey of Evidence for the Decision-Maker” by Robert F. Bruner which reviews the evidence from 130 studies on merger and acquisition performance.
- See “Who says M&A doesn’t create value” by Thomas J Herd and Ryan McManus from Accenture, which shows that smaller deals tend to do better than larger ones.