The Four Paths to Business Growth

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…

Improvement

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

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

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.

Acquisition

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.

Conclusion

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.


References

  1. 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.
  2. 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.
  3. 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.
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The 5 Cs of Innovation

The “5 Cs of Innovation” is a simple and easy-to-remember tool that defines the 2 core elements of innovation and identifies 3 enablers that help your organization to innovate well.

By answering the high-level question: “What is innovation and how can you encourage it?”, the 5 Cs helps guide your organization in its efforts to be more innovative. It provides a simple way to explore the characteristics and behaviours that underpin successful innovation, regardless of your specific innovation framework or methodology.

Defining Innovation

Innovation is best defined as change that adds value. This basic yet effective definition provides us with the two core elements of innovation, namely:

  1. Change
  2. Customer Value

Change is at the heart of innovation – there can be no innovation without change. By modifying the status quo in some way, innovation drives progress and competitive success. Of course, the extent of the change involved in an innovation can vary, from minor improvements to existing offerings through to a radically disruptive new technology or business model.

Customer value is what separates innovation from mere novelty. Innovation is not change for its own sake – it is change that deliberately adds value to customers. Understanding your customers and how they define value is therefore a vital part of innovation.

Enabling Innovation

Innovation doesn’t just happen. To consistently and successfully innovate, your organization needs to pay careful attention to the environment in which your people operate. The following 3 enablers of innovation are values and behaviours that you should cultivate and reward:

  1. Curiosity
  2. Collaboration
  3. Courage

Curiosity is integral to understanding customer value. This involves having empathy for customer needs and drilling down into what they are trying to accomplish by their use of your offerings. Curiosity provides a fertile basis for idea generation and concept development, helping yield innovations that generate distinctive value for customers.

Collaboration is a strong common thread across many innovation methodologies. Forget the romantic notion of a ‘sole inventor’. The reality is most successful innovations come from diverse teams that collaborate to deliver an outcome greater than the sum of their parts. Collaboration can include external parties, including suppliers, channel partners &  customers.

Courage enables you to stay the course in the face of uncertainty and disappointment, since innovation is difficult and often involves a rollercoaster of emotions & experiences. But a lack of courage can lead to stasis, me-too offerings, and gradual decline. Successful innovators find ways to foster and reward those with the courage to innovate and take intelligent risks.

The 5Cs of Innovation

Combining the 2 core elements with the 3 enablers gives us the 5 Cs of Innovation. To make the 5 Cs even easier to remember, they’ve been laid out in a C-shape.

The 5 Cs of Innovation

The position of each of the 5 Cs in the framework is important. The 2 core elements of innovation are on the ends of the C, representing the fact that innovation starts with change and ends with delivering value to customers. The 3 enablers are positioned so that Curiosity is next to Customer Value, Courage is next to Change, and Collaboration ties it all together.

Exploring the interactions of the 5Cs

There’s a rich set of insights you can glean from considering the interaction of the 5 Cs within this simple framework.

Customer Value + Curiosity

Innovation requires being curious about how customer define value: seeking to better understand the job that they are trying to accomplish by using your product or service, and having genuine empathy for their situation and needs. There are many ways to derive insights into what your customers value, including surveys, interviews, and ethnographic research. However, while value is ultimately defined by the customer, people often struggle to articulate their own needs and tend to behave differently to how they say they do. To overcome this, innovative organisations remain deeply curious about what customers actually value and drill down into the fundamentals of what is driving their behaviour.

Curiosity + Collaboration

Curiosity helps you maintain an open mind to the contributions and perspectives of others, which enables better collaboration and ultimately more successful innovation. A curious person recognizes that they don’t know everything and actively seeks out the expertise and opinions of others to arrive at a better understanding of the situation. Even a person who strongly disagrees or is dismissive of your innovation can be valuable to the process, in that asking “why?” about their response can lead to insights into particular assumptions or barriers to adoption that you need to understand better. Collaboration among a diverse group of curious people will almost always yield better results, and makes the group less susceptible to group-think, ego-contests, or other dysfunctions.

Courage + Change

Change is often hard – it disrupts the status quo and involves a degree of risk and uncertainty. What’s more, many innovations fail to succeed in the marketplace. All of this can be challenging and cause anxiety for people (some more than others, depending on personality and prior experience). They may ask themselves: What does this change mean for me? What if our innovation fails to deliver?  Is it all worth the effort and risk?  But remember: nothing venture, nothing gained. Successful innovation is about overcoming these fears & concerns to go boldly into the future. In fact, a senior executive once said to me “if your strategy doesn’t scare you a little, it’s not bold enough”. Courage is something that improves with practice, and should be cultivated and celebrated.

Collaboration + Courage

Collaboration can help people act with courage in the face of uncertainty, by providing an environment in which they feel safe to take intelligent risks. Good decisions don’t always lead to good outcomes – the world simply isn’t that linear or predictable, and you never have complete information. But by providing an environment in which people work together and trust each other, your organization is better placed to pursue innovations that deliver substantial value to customers and help you achieve ongoing success in the marketplace. When you feel part of a strong team and good people are supporting you, it’s easier to be courageous.

Some common questions

Q. Where did this definition of innovation come from?

The definition of innovation as “change that adds value” was (I believe) originally used by Roger La Salle and strikes me as the most simple and practical definition that I have seen.  There are many other definitions of innovation (and more here) but to paraphrase an old saying, brevity is the soul of practicality.

Q. How was the 5 Cs tool created?

The 5 Cs resulted from my own review of a wide range of innovation frameworks and methodologies, including Design Thinking, Outcome-Driven Innovation, Discovery Driven Planning, Stage-Gate, SRI Discipline of Innovation, La Salle Innovation Matrix, and various others. I was curious about what these different approaches had in common and kept seeing a number of recurring themes e.g. collaborating across different functions; gaining insight into customer needs, etc. Exploring these themes and asking myself how this insight could be used in improve the actual practice of innovation, eventually crystallized into the 5 Cs of Innovation. As explained above, it’s not a formal methodology for innovation, just a simple tool that focuses on the cultural and behavioural factors that underpin successful innovation.

Q. Does innovation always require a customer?

You can take the “customer value” approach to internal customers, as well as external ones. External customers are the classic focus of innovation, but there is significant value in process innovations that serve internal customers: i.e. changes that are entirely within your firm and focus on delivering value for downstream stakeholders, even if the end result for the ultimate customer is unchanged. These internal innovations can lead to dramatically lower costs and improved competitiveness.

Q. Why haven’t you included Creativity?

I firmly believe that everyone is creative. Just look at any random sample of young kids with their imaginative play and crazy ideas. As we grow up we learn to become more risk averse and to fear the reaction of others to our creativity, so the focus in the 5 Cs is deliberately on eliminating the barriers to creativity through Courage, Collaboration and Curiosity.

It’s also not very helpful to say “be more creative”. How do you act on that advice? It’s far more practical to suggest people ‘ask why’, ‘be brave’, and ‘work together’. Sure, there are specific things you can train people in to improve their creative skills but what matters more in many organizations is removing the blocks that prevent them from applying creativity.

Q. Why haven’t you included Commercialization, Concentration, or some other C word?

The value of the 5 Cs tool lies in its simplicity and practicality. There are many things that contribute to the successful practice of innovation, some of which start with the letter C. I’ve made a judgement call here to limit the tool to 5 Cs. Producing a tool called the “43 Cs, 12 Bs & 7 As of Innovation” would be counter-productive, even if it is more comprehensive. To my mind, it is better to have a simple, memorable tool that captures the heart of the subject and helps people think through the factors and how they interact.

Q. Can I use this tool in my organisation?

Sure, go for it. All I ask is that you acknowledge my authorship of the tool. I’d also love to hear your experiences in applying the 5 Cs of Innovation, or any suggestions or perspectives you may have on innovation or this tool, so feel free to send me an email anytime.

Innovation and the Challenge of Uncertainty

The core problem with innovation is uncertainty.  Despite your best intentions and well-disciplined efforts, there is a distinct possibility your new product or service may not succeed in the market.

The Inherent Uncertainty of Innovation

Uncertainty is inherent to the very nature of innovation – creating something distinctively new and valuable means that you are necessarily venturing into the unknown.  Yet, to paraphrase the US military, some factors are “known unknowns” and others are “unknown unknowns”.

In the first category are well-defined issues like weak customer demand, poor channel access, technology performance issues, cost blowouts, organizational conflicts, and competitive response. These are a few of the many common factors that can stand between your innovation efforts and the success you seek. Being aware of these risk factors can help you devise ways to minimise them.

However, although uncertainty can be reduced, it cannot be eliminated entirely from innovation. There will always be unknown unknowns that resist your best efforts to control and mitigate them. Some may stem from an inability to fully understand the known unknowns, others perhaps to your implicit assumptions being flawed. By definition their nature is impossible to predict ahead of time, so the best advice is simply to expect the unexpected and plan accordingly.

Managing Uncertainty for Innovative Success

Faced with this uncertain landscape, organizations with a strategic commitment to innovation use a variety of methods to manage uncertainty and improve their chances of success.

Some of the common ways you can manage uncertainty in innovation are to:

  • Generate a large and diverse number of creative ideas
  • Design “better” ideas and concepts that are more likely to succeed
  • Evaluate and screen existing ideas or concepts more rigorously
  • Obtain superior insights into customer needs to guide idea generation
  • Improve concepts with rapid prototyping and customer feedback
  • Launch and learn in the marketplace, with rapid evolution of your offering
  • Set up modified management practices to support new products and ventures

You can implement each of the above approaches with a variety of different techniques. For instance, you could generate creative ideas through brainstorming (and variations such as ‘shifting’), employee suggestions, customer feature requests, value chain analysis, journey mapping, and so on.

Furthermore, these approaches are often used in combination as part of an over-arching innovation framework such as the Stage Gate method, Design Thinking, Lean Startup, Discovery Driven Growth, and Outcome Driven Innovation. Each framework is guided by an overall philosophy about how and why innovation fails to deliver the expected results, and prescribes a set of actions and methods intended to mitigate the key problems and improve your chances of innovating successfully.

Just remember that, regardless of the innovation framework you choose, to innovate successfully and consistently you need to become very good at managing uncertainty.