book.chapter Growth's initial paradox

When shareholders challenge a management team to foster growth within a company, the initial reaction is often to zero in on the underperforming segments with the aim of revitalizing them. However, experience has consistently demonstrated that this approach is misguided. The most lucrative opportunities for growth are typically found within the highest-performing divisions of the business. It is more strategic for management to concentrate on aiding these successful units to achieve even greater heights in the future. Businesses that maintain a sharp focus on a well-defined and distinct core business are adept at creating value for several reasons. Firstly, when management's attention is channeled towards a singular business activity, it prevents the dilution of focus across a spectrum of activities. Secondly, the impact of ongoing reinvestment and business-building initiatives is amplified when they are concentrated in a single area. Thirdly, a business that is centered around a core activity is more likely to adapt successfully to changing market conditions. Lastly, there are opportunities to extend the reach of a successful business into new markets, applications, or distribution channels. With this framework in mind, the initial steps a management team should embark on when crafting a growth strategy include: 1. Delineate the core of the business. The core is the crux of what the business does best, comprising five key assets: the most profitable customer base, the most distinctive strategic capabilities, the most significant product offerings, the most vital distribution channels, and all other essential strategic assets at the company's disposal. For some businesses, pinpointing the core is straightforward, but for others, it can be quite complex. A practical working definition of the core might be "the combination of products, customer segments, and technologies that offer the greatest potential for competitive advantage." This perspective is often more beneficial for making sound business decisions than a rigid formula. 2. Identify the key differentiators. After successfully pinpointing its core, a firm must assess how it uniquely leverages this core to generate more business and expand its influence in the marketplace. Companies typically gain market power and influence through customer loyalty, channel dominance, product development, or capturing capital. Understanding these sources of differentiation is crucial as they confer market power and influence over customers and competitors alike. Strong differentiation also enables a firm to capture a larger share of the potential industry profit pool. 3. Assess the full economic potential of the company. Once a firm has a clear understanding of its core business and differentiation sources, it should evaluate whether it is operating at or near its full economic potential. Often, there is significant room for growth surrounding the core business without the need to venture into entirely new fields. Management should ask probing questions about the business's potential earnings, especially in a market leadership position, how to invest more in the core business than competitors, and how to ensure that the company is generating greater profits than its competitors while seizing opportunities to invest in adjacent businesses. In conclusion, the key to sustainable growth and value creation over extended periods lies in focusing on one or two core businesses where the company is a clear leader. These core businesses should be the recipients of continual reinvestment, constant adaptation to the business environment, and persistent leveraging into new markets or geographies. It is a paradox that the strongest core businesses often have the most untapped potential relative to what they could achieve.