With the sustained period of low growth looking like it is going to continue across most sectors of the economy, many management teams are considering how they diversify their operations to regain their historical growth trajectories. While this can be sound strategic thinking, it also introduces many new risks that are potentially detrimental to long-term sustainability. Thus, any such strategy must consider how the core business will be protected and what current capabilities can be exploited to profitably develop new opportunities.
A recent McKinsey study found that not only is this risky, but few companies seeking growth outside their core were able to deliver revenue gains. The study focuses on revenue, not even profit, but provides some salutary ideas on what’s important.
Just to repeat, it is imperative that management teams considering new growth pathways such as new products/services and entry into new markets must understand their organisation’s actual, as opposed to aspirational, capabilities. These capabilities form the web of activity, processes, systems and knowledge from which profitability is derived. Next, growth extensions should not be more than one strategic degree of freedom from the core, i.e. consider incremental step-outs to mitigate risk and maximise profitability. McKinsey, of course and with which we concur, state the necessity of having a clear strategy for expansion. But the evidence is compelling: companies with a clear expansion strategy are 4 times more likely to create value than those that do not.
Of concern, this study found that many firms experience only modest results in terms of revenue growth. The important factors to focus on are:
1. Understand the market context
Understand whether growth in your region or industry is an opportunity or a risk.
2. Find value close to home.
Seek to exploit current capabilities and skills.
3. Build the right capabilities
You may need to develop new capabilities to adequately scan, evaluate and integrate new opportunities.
In depressed or low growth markets it can be easy to react with a hastily considered implementation plan for action before developing a well-considered strategy. Disciplined and diligent strategising will put you in the small group of firms that create 4 times the value of others.
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