Growth secrets: The 14 keys to growth
TODAY SmartCompany launches a special series based on the secrets of high growth companies, from Tom McKaskill's eBook, Ultimate Growth Strategies: A practical guide to engineer high growth into your business. We will continue this series each Friday.
Most businesses never gain the traction to move into the high growth phase.
For many, this is a deliberate intention – the owners being quite content to keep the business small and allow it to generate an acceptable income for themselves and perhaps some family members. But others would like to grow but don't know how.
High growth can occur by chance but waiting around for it to happen is hardly a proactive strategy. Basically, high growth happens by setting out to create a business which satisfies a number of key principles – fundamental attributes which support high growth successful ventures.
When I walk down most main shopping streets, I am constantly amazed at the number of shops which are closing or opening. I wonder what happened to the ones that failed. However, it isn't hard to guess what went wrong. They set up the business using the 'hope' strategy. They put a sign up and say:
* someone walks past
* they see my sign
* they are interested enough to come inside
* they like something
* they buy
* and more will come
Is it any wonder that so many of them fail?
Restaurants have the highest first year failure rate of any business type. Many are started by chefs who want to move from the kitchen into the office – but they know little about running a business. Failure rates are also very high for tradesmen – just because they are good at what they do, they think this means they can build a business.
However, a successful business is more than a good product or service. The successful business is a bit like a jigsaw puzzle, all the bits have to be in place before you can make it work properly. Any missing piece will ultimately create the seeds of failure.
Businesses which have a fundamental flaw will typically only last until the founders' investment is used up. Others with major weak spots may be able to go on for a long time but won't be able to move beyond being a small business, and eventually the weak spot may be the cause of their failure if they hit a period of bad luck.
Even relatively large businesses can come unstuck if they fail to maintain the essential pillars of survival. An aggressive competitor, a change in regulations, a man-made or natural disaster or a personal crisis can all have a disruptive effect on the business and it may be sufficient to send it into a downward spiral.
Businesses that are able to maintain relatively high growth, say greater than 20% per annum, over many years, are fundamentally different from the vast majority of businesses. They stand above the crowd because they aggressively create a set of conditions which drive and support continued growth and profitability. While they may not be able to keep a high rate of growth going forever, they can maintain it for a sustained period of several years.
What do they do which drives the growth?
As you would expect, high growth businesses have a lot in common. It's by examining many hundreds of successful high growth businesses that I've come to understand the essential features of such ventures. Over the last 25 years, academic scholars have created a significant body of knowledge about these businesses. Some of this knowledge has been created through systematic enquiry and research but the vast bulk has been accumulated through anecdotal evidence, often from successful entrepreneurs. It is from this body of knowledge and my own personal experience of 20 years as an entrepreneur that I have developed the High Growth Venture Wheel of Success.
There is no doubt that getting your hands dirty in an entrepreneurial venture teaches you a lot. Like a lot of entrepreneurs I find it easier to understand the lessons from my mistakes. Much more difficult to understand is what you did that resulted in success. Luck, good timing and being in the right place can play a significant part in any business venture – even aside from the generally held belief that we can create our own luck.
This is where the accumulated body of knowledge and the established entrepreneurship theory has much to offer. When you have access to the experience of many hundreds, if not thousands, of entrepreneurs you have a better chance of teasing out what works and what doesn't. After all, the purpose of theory is first to explain what happens in the real world. Great theory is robust and can provide predictive power. That is, it can help us predict the outcome if we take certain actions or if certain conditions apply. High growth entrepreneurial ventures all have certain principles in common.
Those 14 principles are:
1. Right place, right time
It is not just luck. The best ventures are based on a dramatic change whether it is technology, regulations, the economy or in the way society operates.
That change generated an opportunity for a new product or service, a new process or a new way of delivering an existing product or service to meet an unmet need or solve an existing problem in a much more effective manner.
2. The compelling need to buy
Business is driven by transaction revenue. The best high growth businesses solve a problem which has high urgency, high utility or resolves a strong physical or psychological need for the customer. Situations where customers have extensive choice, can delay buying, or are indifferent about buying the product or service are very difficult situations in which to drive a high growth business.
3. The right customer
While it is possible to sell to everyone, the successful high growth business typically has a very tight definition of the ideal customers and knows how to find them. The best customer is easily identified, able to be approached and is willing and able to purchase. Businesses which rely on the potential customer finding them have difficulty proactively influencing their growth.
4. Channels to market
High growth businesses develop and/or secure capacity in the necessary distribution channels which allow it to reach their target customers. This might be through a wholesale or retail distribution system, direct through a sales force or via an eCommerce facility. Without the bandwidth of the distribution channel(s) the enterprise is not able to support its growth plans.
Since many channels have pre-existing agreements, finding ways to access the appropriate channel is an essential key to successful growth.
Realising the Opportunity
5. Innovation as the driver
Innovation is the fuel of the high growth enterprise. This could be an invention, such as a new or enhanced product or service. It might be in a new way of working, such as a new manufacturing process or a different consulting technique. Or, it could simply be a new way of delivering an existing product or service into a market – a new business concept.
Innovation either creates more value by reducing costs or by enhancing customer utility or experience.
6. A competitive advantage
Obviously the best place to be is to have no competition, however, few businesses have such a luxury and, of itself, it is no guarantee of success.
High growth, however, requires that the business is able to carve out a place in the market which allows it to have some freedom around its target market. Along some dimensions of user utility and customer experience, the business needs a superior position which matches the needs of its focal market.
While the initial conditions for high growth can be created through innovation, ultimately competitors will chip away at that advantage. Only by establishing long-term barriers around the business can the venture hope to secure its existing customers and ward off competitors.
Sustainability requires the business to find new ways of protecting its entire supply chain as, over time, competitors will find ways of eroding any single advantage.
High growth, by its nature, requires the business to solve the problem of scalability. Many businesses are constrained by the shortage of skilled staff or essential ingredients. Only by developing a robust process where the business can be expanded through scalable systems and/or processes, or be readily replicated, can the business grow rapidly over an extended period.
This also means that knowledge has to be codified, decisions have to be devolved and organisational structures have to be built that will cope with the demands of such growth.
Making it Work
9. A clear vision
Knowing who you are, what you are doing and where you are going is an essential ingredient to a successful enterprise. Too many businesses fail to have a clear focus which clearly sets out where their position is in the market place. This lack of vision results in many decisions taking them in the wrong direction and away from the conditions which will drive their growth.
10. A long-term strategy
Sustained growth requires the business to set out a path of product/market activities over a medium-term horizon. High growth firms typically create future scenarios which they want to achieve and then develop the tactical plans to get them there. Constraints to growth then become apparent and investment can be made to overcome them. Often acquisitions are used to underpin the growth.
Acquisitions can bring new products, new customers, experienced staff and new competitive advantages.
11. Robust margins
Almost without exception, high growth businesses have above industry average gross margins. This may have come from their product, process or business concept innovation or may simply have come from superior management which has enabled the business to run more effectively and efficiently than it's competitors.
However, where a competitive advantage can be created around a compelling need, especially in a growing market, prices are less sensitive and thus higher prices and better margins can be achieved.
12. Management of risk
There are always going to be bumps in the road, but sustained growth requires the management team anticipates what might go right and what might go wrong and plan for contingencies.
Successful ventures mitigate their risks by involving partners, building resilience, putting in place options, shoring up their risk exposures and staying on top of events as they unfold. They undertake continual risk scenario planning so they understand the likely impact of different assumptions on their business and work to reduce the negative impact of things which might go wrong.
Turning the Wheel
13. A capable management team
No one person can do everything and, as the business grows, many specialists will be required to support the operation. Senior management of the business must collectively represent the set of skills, knowledge and experience necessary to carry the business through the growth phases. It also must be able to work as a team rather than a collection of individuals.
High growth businesses are driven by entrepreneurial activity – an opportunity focus which stimulates and drives growth.
Any business that is well funded can sustain a period of losses, but ultimately the business has to make a profit to survive. The basic business concept must generate a healthy return on investment for the shareholders for it to have a future, otherwise the investors would be better off selling out and putting their money somewhere else.
Profitable operations over time require the business to have very good performance setting and monitoring systems, clear lines of responsibility, accountability and authority and a proactive attitude to fixing problems. The fundamental economics of the business must be able to support a long-term positive cashflow.
An entrepreneur, seeking to create the conditions for high grow in their venture, needs to move along the spokes of the wheel towards the center. Thus incremental improvements along any attribute will enhance the capacity of the venture to move into high growth.
Changes in one part of a business can have a significant impact on another part. Thus a product can be repositioned to solve a problem for a more select group of customers which has a higher compelling need and this may in turn change the way the product is sold into the market. As a result, the channels of distribution may be changed to provide more targeted positioning and the marketing campaign may be changed to focus advertising and public relations where the target audience can be influenced.
Often better targeting can uncover potential product or service innovations which can not only provide better customer value, but will result in a stronger competitive advantage. This in turn might allow the business to raise prices and generate better margins. Ultimately it leads to higher profitability.
The purpose of the High Growth Wheel of Success is also to show the interconnectedness of the key attributes of the business. A major deficiency in any one attribute will ultimately disrupt
With these essential drivers in mind, the entrepreneur can examine his or her business and start a review to see which elements need work. Being forewarned of a potential problem is a great place to start. While everything can't be fixed overnight, a plan can be put into place to work on the least desirable features of the business.
A business which cannot be fixed can always be sold. If you know that a business has a fundamental weakness, you might be better off taking what you can get for it now, rather than letting it get into a situation where you lose significant value and yet still have to liquidate it or sell it in a fire sale.
Few entrepreneurs have the skills necessary to fix all the possible problems in their business. The entrepreneur who is open to learning should be prepared to take the time to become better educated in business related subjects and thus be in a better position to undertake improvements. They might also employ a business advisory consulting firm to help them but they should undertake some due diligence on them first to ensure that they have the skills and experience to assist in the areas where help is needed.
The entrepreneur might also recognise that a deficiency comes from not having the right people in the management team. Finding the right person will not only bring the right skills and experience on board but it may be a long-term method of fixing other weaknesses in the business.
Major problems are rarely fixed overnight, however, it is worth developing a plan to systematically examine the business along each of these dimensions.
For many entrepreneurs, it is the insight they achieve through seeing this type of model that opens their eyes to new possibilities. Often they are simply too close to the business to see the missing bits of the puzzle. Sometimes just by being taken on the journey is sufficient for them to come up with the ideas necessary to substantially improve their businesses. The High Growth Wheel of Success will certainly do that for many potential high growth ventures.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.
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