One of the trickiest challenges in business is finding the appropriate balance between investing for the future and reaping rewards – or keeping the enterprise on sound footing – in the present.
There is a push-pull tension in this dilemma. And ‘tension’ is the right word – getting the balance wrong in either direction could be a costly mistake.
Currently, many companies face heightened pressures to find this equilibrium. Post-Covid, major economies are either in stop-start, gradual recovery from their worst contractions in 80 years, or shown signs of being on the precipice of another recession. Inflation and interest rates are rising, supply chain disruptions continue to impact even world-class operations, and talent issues are challenging large and small enterprises across industries and sectors.
In this context, the question of growth may seem not only overly optimistic, but irresponsible. This is correct – and also off the mark. The paradox of uncertainty is that it is even more important to have a crisp idea of, and a compelling aspiration for, where the organisation wants to go. This is a North Star through difficult times, a beacon of current strength and future positivity. Similarly, doubling down on the company’s core attributes that have brought it past success, firming up on business continuity measures and tightening compliance indicators, make it resilient and foster the energy needed for new horizons and fresh challenges.
A good place to start cohering the implications of these considerations is to revisit the corporate strategy.
Forecast cautiously, act boldly
Over the past decade, three noteworthy thinkers about strategy have been Chris Bradley, Martin Hirt, and Sven Smit. In their studies of the strategic factors that differentiate the top quintile of high-performing companies, they identify psychological influences upon how leaders formulate strategies, and the gap between strategy and execution.
The inputs into strategy are subject to all sorts of biases. Often, the hidden purpose of a strategy roundtable is to rubber-stamp, with minimal conflict, a document very similar to the previous year’s, and to grab the budget line before any proper evaluation happens. This entails starry forecasts which allow for comfortable buy-in.
Bradley eloquently calls the outcome of a combination of optimistic forecasts, failure to see beyond our biases, and repetition of same-old strategies and their execution a “grand promise of futures not delivered.”
In contrast, leading organisations interrogate and articulate the strategy carefully, and clearly communicate it throughout the enterprise. Most importantly, they make bold calls on aspects which are earmarked as drivers of competitiveness, growth, or profit. Usually, this means that forecasts are more realistic – but the actions that follow are dynamic and committed.
Disciplined, strategic growth
Two other leading authorities specialising in growth strategies are James Allen and Chris Zook. In the wake of the economic downturn caused by the 2008-9 financial crisis they co-authored Profit from the Core: A Return to Growth in Turbulent Times, which pinned down reasons why some growth initiatives succeed and others fail.
A particularly insightful section in the book covers adjacencies – those growth thrusts that veer, in varying degrees, from the core business. (An example is the Nike+iPod Sport Kit, launched in 2006, a strategic collaboration between Apple and Nike which shifted both brands into new but logically-related territory.) Their research showed that, historically, adjacency moves had only a one-in-four chance of success. The significant majority failed because they attempted to stretch capabilities too far, too fast. The authors’ guidance was to do an adjacency growth initiative no more frequently than every 3-5 years.
Subsequently, Allen and Zook have updated their advice, possibly due, for instance, to the significant successes of rapid-fire, digitally-rooted adjacencies by Amazon and Netflix, and in complementor markets by electronics giant Samsung. They explain this as a function of the ability of digitally-mature companies to expand their core capabilities faster. “New capabilities, once acquired, can bring ‘distant’ adjacency moves much closer. Moves that might have been impossible decades ago are now coming into reach of savvy companies faster than before,” says Zook.
The example of Nike confirms his point. Having partnered with Apple fifteen years ago, Nike continued to build its core capabilities in data and analytics, app development, and technology-assisted design. The company is now one of the first movers in the metaverse, and will probably succeed in this experimental virtual arena because the growth adjacency is based on solid, reinforced and extended foundations.
A powerful competitive differentiator is a unique set of value propositions and capabilities, including ones in which rivals have not yet achieved prowess. These are the capabilities that will inevitably provide the best new growth opportunities.
So, paradoxically, scaling back may help fulfil growth plans, because the source of strategic growth is what the company is already best at. By protecting and fortifying the core, the organisation can become even better at these things.
The nature of strategy: needs must
This is an apparently simplified ambition. But further evidence that it works is in the turnaround of the LEGO Group by new CEO Jørgen Knudstorp from 2004. At that point the company was unrecognisable from its 70-year heritage, and was in serious financial trouble. Trying to capitalise on myriad digital fads, the previous 8-10 years had seen LEGO morph into territory far removed from its roots as a creative, problem-solving, systems-based toy design. (At the height of their quest to keep up with trends, LEGO were doing five adjacency growth initiatives each year!)
Knudstorp shelved complex strategies about the future. Instead, he improvised quickly to halt the sales decline, reduce debt, and tighten emphasis on cash flow – an absolute refocus upon the company’s core, the present, and a pared down approach to the business.
In answering the question ‘Why does the LEGO Group exist?’, profits were restored within two years, and subsequently a series of record sales and profits have been posted.
The LEGO story in the early years of Knudstorp’s leadership also lends credibility to the contrary view that strategy is overrated, because it always plays second fiddle to action – whether planned or unintended. So, the case study says, in tough times put strategy to one side, drive the actions that solidify the key deliverables of top- and bottom-lines, and keep a watching brief on what needs to be done in the present. This protects the core of the enterprise, keeps it competitive, and primes it for quick moves when the circumstances are right. “You don’t think your way into a new way of acting. You act your way into a new way of thinking,” is Knudstorp’s summary of the need to concentrate on priorities when the chips are down and the survival of the company may be at stake.
Innovating carefully for growth
We default to the understanding of innovation as something relatively radical. But, by definition, it simply means a progression to a new and better state. So, feasibly, innovation could be the adoption of a new enterprise software system that provides better end-to-end supply chain visibility, or the migration of marketing functions to a best-in-breed CRM platform which enables improved inbound marketing and smarter customer metrics. These may not be glamorous changes, but they are likely to be important ones which elevate core functions and make significant contributions to growth.
In the excitement of pressing ‘go’ for growth projects that are evidently smart ideas for innovation, two mistakes are often made. One is about overestimating, or not fully understanding, the potential for scale. Assumptions get made about production costs being minimally incremental to existing lines; go-to-market channels are paralleled with existing routes; consumer research is done fast – to get to market fast – but not rigorously. In reality, costs may rise faster than revenue growth from sales of the new innovation. Even great ideas take time to scale, so allow for that bedding-in phase when forecasting the innovation’s contributions to growth.
The second is to underestimate the resources required to bring the innovation to life. If production machinery and equipment has to be reallocated, if warehousing and logistics gets stretched beyond capacity to fulfil standard orders on current lines, if brand managers need to take on bigger portfolios, then the result will be that core product sales may fall as much as new product sales tick up. This is not growth – it’s cannibalisation.
The learning in all of this is that disciplined business inventiveness is the best kind of innovation. Jørgen Knudstorp provides another piece of wisdom: “Innovation flourishes when the space available is limited. Less is more.”
The company’s physical core
‘Space’ is also important in a more conventional sense. Research confirms what we instinctively know: bonds form when people are co-located and work side-by-side. In turn this improves many aspects of collaboration. Although many industries have shifted to hybrid or entirely remote work, the issue remains an important one. Relationships between distant co-workers can certainly work, but the team’s productivity and innovation is likely to be inversely correlated with its degree of separation.
Is the company’s culture strong enough to keep the bonds tight? If the answer is uncertain, know that this needs to be fixed in the present before major future growth initiatives can be attempted.
Further, for the entire workforce, now is the time to embed a growth mindset. What are their core capabilities, and how can the organisation maximise their strengths while it nudges ongoing skills development?
Know the (core) customer
Organic growth is beautiful. It proves that current customers value what your organisation offers them. Often, however, companies seek growth in ways which ignore what core customers want and expect.
120-year old US retailing giant JC Penny is an example of this misdirected quest for growth. Under the 2012-13 leadership of former Apple executive Ron Johnson, JCPenney attempted a pivot to a high-growth strategy by carrying more premium labels, changing the product mix to include multiple new lines, and marketing to trendier, youthful market segments. But traditional customers, accustomed to value-based offerings and predictability rather than novelty, became confused and ceased trusting the store. During Johnson’s tenure the company’s turnover fell by $4 billion, and its share price halved.
The company has been in the doldrums for nearly a decade since he left, culminating in its bankruptcy filing in 2020. This finally prompted its latest CEO, Mark Rosen, to return to what made JC Penny great. It is now refocused on customer segments the company had served for its first 110 years – value-conscious, previously loyal American families. In turning inwards towards its core and remembering what made the retailer a stalwart go-to in middle America, the shift seems right for the times – and permanently. “This time we are going to love those who love us,” said Rosen.
Psychology studies prove that a preoccupation with planning for, or thinking about, the future can dissipate attention in the present. Without current solidity there can be no growth – and yet, without a strategy for growth, the present is mundane. Business leadership should strive to find the equilibrium that works.
Finally, remember the anchors of basic principles. What every business should always be doing is striving to increase revenues by satisfying existing customers and recruiting new ones, engaging with its employees’ aspirations, and uplifting leadership mindsets to cope with challenges and embrace tough decisions. By concentrating on these infinite struggles, the corporation will be sticking to its knitting. These areas of focus, no matter how far ahead the gaze, are clearest in the present.
Five questions to assess whether your company is positioned to drive growth from a solid, current core:
How well do senior leaders know the business?
Growth strategy expert Chris Zook notes that he regularly discovers senior leadership in complete ignorance about their company’s strongest capabilities, about where new competencies must be added to the business, and to what degree. Separately, in a 5-year rolling survey of 4,000 leaders and middle managers of 124 companies, results showed a near-total misalignment between the perceptions of managers and those of the C-Suite on nine fundamental business drivers, including key priorities and strategic resources. These sorts of issues must be addressed before kickstarting any further growth initiatives.
Are marketing activities directed to the most pressing challenges?
“Create plans for the future, but market for the moment,” says Lorinda Ellis, Head of Marketing at the LRMG Group (of which DigitalCampus is part). This must involve close attention to the metrics, and tight synchronisation between sales teams and the marketing division.
Does leadership understand digital transformation?
By the end of this year 60% of global GDP will be digitised. A separate but related projection is that three-quarters of all businesses will leverage digital ecosystems by 2025. Being on the path towards digital maturity is a prerequisite for growth, even in the near term. Make sure your organisation is as capable in Industry 4.0 technologies as it needs to be – because Industry 5.0 is already here.
Are risks being mitigated – but not avoided?
We’ve written recently about how, today, business leaders need to be futurists, because not applying concerted imagination to what could be around the next corner could result in serious strategic errors. However, this does not imply avoidance of risk. Consider mergers and acquisitions, for example. ‘Not now’ may be overly prudent, because there could be clear opportunity for exceptional price-earning (PE) ratio deals. If your leadership team has been diligently eyeing a prospect for a while, and your organisation has flex within its capital or debt structures, now may be the time to strike.
Is the company strengths-based?
Forging a strengths-based company is a solid banker for growth. As opposed to trying to identify and improve weaknesses, by cultivating and harnessing collective strengths – including those of the C-Suite and senior management – companies can focus on their core and make the most of the present.
We have developed a fascinating audio-visual presentation of the LEGO story, with rich insights and learnings about corporate innovation, over-reach, turnaround and recovery. If you would like you a presentation for your company’s management team, or for more information, click here
Senior Partner and Managing Executive
DigitalCampus
In partnership with Dave Gorin
Sources:
The Changing World Order, Ray Dalio, Simon & Schuster, 2021
Stop Tinkering with Your Corporate Strategy, Dan McKone, Harvard Business Review, 9 June 2022
When Your Business Needs a Second Growth Engine, James Allen and Chris Zook, Harvard Business Review, May-June 2022
What to Learn From JCPenney’s Failures, Pendora at The Start Up, 17 May 2020, medium.com
How Future Thinking Can Derail Your Company’s Present, MIT-Sloan Management Review, 13 July 2022
‘No One Knows Your Strategy — Not Even Your Top Leaders’, MIT-Sloan Management Review, 12 February 2018
