All growth is good, right? Wrong.
Many companies pursue growth by trying to keep up with the market, wherever it may take them. They start with the question: “Where can I grow?” What that really means is: “Where do the trends point to large, accessible growth opportunities with relatively low risk?” If you’re pursuing growth this way, it will likely lead your company to chase the same market opportunities that all your competitors are going after, with the idea that if you can get there first, you can win. This tends to be a recipe for disaster. Everyone can spot the same trends. Even if you gain some advantage, it will be very hard to defend.
The struggle to compete where you don’t have the capabilities you need to win can be tremendously expensive, distracting, and disappointing. It can also be habit-forming: Try to grow in several different directions in short order, and you end up investing in several different new offerings, each involving its own organizational changes, R&D initiatives, and marketing efforts. You can easily get trapped on a growth treadmill: chasing multiple market opportunities, feeling increasing pressure to show results, but always falling further behind. That’s the nature of bad, unprofitable growth. It’s so common, and has hurt so many companies, that it’s made many business people overly cautious with new ventures.
The alternative is good growth, based on a fundamental understanding ofhow your company creates value for customers. There’s no chasing opportunities, no searching the market for answers. Instead, you look inside your own company and start building a growth engine — the kind that yields sustainable growth for years to come, with a line of products and services that all fit together and build on each others’ success. This is the kind of activity that makes business leaders confident in their ability to promise and deliver results.
To develop this kind of growth, you start with a different group of questions: “What is my company uniquely qualified to do? And how can I match my distinctive capabilities to market opportunities that create demand?” Identify the things you can do better than anyone else and rally your entire company around enhancing, refining, and using those key capabilities. As a proprietary growth engine, this capabilities system allows you to carve out a formidable position in your market, create steep barriers to entry for others, and open up robust growth avenues that others can’t match. Think about Apple’s ability to spot a burgeoning consumer need; develop the right technology for it; design the interface to be intuitive, elegant, and easy to use; and market it in a compelling way. Think about Walmart’s sharp-penciled management at every link in the value chain, expertise in assortment, incredibly lean supply chain, and unrivaled point-of-sale analytics — all of which come together to make the company a leader in low-cost retail.
We call this thecapabilities-driven strategy approach. Our research shows that companies that successfully apply this kind of strategy are three times as likely to report above-average growth (and twice as likely to report above-average profitability). Deals that apply this strategic lens deliver shareholder returns that are 12 percentage points higher per year in the first two years than those with a limited capabilities fit.
Getting strategy right is the single most valuable decision that any executive can make. And it’s the most expensive and disastrous mistake you can make if you get it wrong. In thisnew video series, we explore capabilities-driven strategy: how to develop and articulate it, how to execute it, and how to transform your company by unlocking good growth that lasts.
The bottom line: Every day executives make dozens, maybe even hundreds of strategic choices about where to invest, where to cut, and where to focus scarce resources. Strategy is a series of choices. If you want to improve your hit rate on making winning choices, you need a better way of making them. Make every decision based on what’s essential to fueling your company’s unique capabilities system. This will create a powerful engine of growth — one that can’t easily be copied or bought off the shelf by your competitors. That’s the basis of building enduring competitive advantage that fosters growth and gets you off the “chase the market” treadmill for good.
This article was also co-authored by Paul Leinwand, a senior partner with Strategy& based in Chicago.
This article has been adapted from strategy+business with permission.