The Hindu Business Line : Fuelling growth

Ved (not his real name), CEO of a US-based multinational company, was contemplating the rapid growth of his company with mixed feelings. On the one hand, there was a sense of pride and achievement in having grown a tiny upstart to a mid-sized playerwith a global footprint. On the other hand, the future looked less rosy. For some time now, he had been finding it tougher and tougher to identify the “next big thing”. When his company was small, just one idea could make all the difference, and he would ensure it happened through his entrepreneurial energy. Now, things were not so simple — either no single idea seemed to be quite big enough, or he no longer had the time to drive it himself. In fact, looking ahead, he found that he had just one idea up his sleeve, which could fire up his team as well. “And then what?”, he wondered. Acquisition was always an option, but knowing its spotty long-term track record, Ved preferred not to go shopping for growth.

Ved, like many CEOs, has growth high on his personal agenda, but has not yet changed his approach to it. He is still in early entrepreneurial mode, where a $10-million idea could change a company’s fortunes, and one man’s energy was enough to drive it. But life has changed — today, $10 million is just a tiny blip in the topline. Continued growth needs a succession of $10-million ideas, and equally important, he has to work through his team rather than directly. What Ved needs is an approach that can explore and execute a growth pipeline at an organisational rather than individual level.

Earlier columns of Karate-gy have discussed the ‘S’ curve, which takes its name from the curved shape characterising the performance of a product or a business over time. A quick recap: the ‘S’ curve first slopes gently, reflecting the initial slow growth as the business creates its space in the marketplace, followed by a rapid take-off as the idea gains traction. The curve then flattens out, reflecting plateauing growth as the maturing business begins to finds dissonance with the new environment. A decline follows as the old success formula becomes increasingly irrelevant in the new world. The decline happens because of several reasons. Customer preferences change, new environmental or regulatory developments could work against the product, technological leaps make old ways of doing business obsolete, or the organisation gets overtaken by competition. One way or another, it is important to accept that the ‘S’ curve of an individual product or a business will inevitably plateau.

Organisations, naturally, do their utmost to delay the decline. A smart approach is to first exploit adjacent areas — either offer the same goods to newer consumers (geographically, for example), or offer new goods to existing consumers. Brands and line extensions are one way of doing this. Consider Dove: In the last few years, Unilever has extended Dove soap to include body washes, anti-perspirants, shampoos, conditioners and now, moisturisers. While not all businesses can use brands this way, the concept stays the same. Products can be extended with design changes; cost engineering could help lift growth, new geographies could be tapped. However, no matter what the route, growth will taper off sooner or later.

The key is to distinguish organisational growth from the growth of an individual product (or service) which may plateau and decline. Growth organisations have a strong pipeline of new products or businesses — as old products enter the decline phase, they are replaced by new ones.

Take a look at the diagram on the right and you will notice that while the “S” curves of individual businesses (or products or brands ) inevitably decline, there is a new revenue curve that dovetails into place, with a diversification into new products or geographies or businesses.

So, while the individual micro-curves of products/brands/businesses grow and die, the organisational revenue curve (the bold black line) demonstrates a vibrant, upward gradient over a longer timeline.

This is where a cynic would say that this looks suspiciously pat. Doubts niggle — can it really be this smooth, can new businesses neatly dovetail into each other, the new one conveniently ready to take off just as an old one is declining? New businesses are notoriously uncertain. The success rate in them may be low, returns may start coming in only after a period of time – how, then, can one plan for sustained growth? At the same time, current profit engines need to be fuelled to keep running smoothly. How do you balance the needs of today’s businesses with those of the future?

The answer depends to a large extent on how much energy the organisation is willing to invest in preparing for the future. In their book, The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise, Baghai, Coley and White lay out a simple but powerful framework for thinking about growth over time. Called Horizon Planning, it suggests planning growth over three horizons, called (obviously) Horizons 1, 2 and 3.

Horizon 3 has the longest view. It envisages planning for businesses which could become profit engines for the company in the future. While the definition of ‘long term’ varies from business to business, for most companies the time period would be five to ten years from the present. These have moved beyond the idea stage, but are still in their infancy. The organisation may not even be sure about which of these to finally put its bets on, so the approach is to investigate, research, experiment, get familiar with the new businesses and keep options open. Typical activities for this horizon include exploratory research, test markets and alliances to learn more about the business.

Over a period of time, some of the businesses will start taking shape, and some will turn out to be more attractive than others. A business envisioned six years in the future will now loom two years away. This is the realm of Horizon 2. This covers emerging businesses, where investments have already started. These businesses are expected to become significant profit earners over the next few years. At this stage, they need resourcing and nurturing to reach a critical mass. Typical activities include investing in business strategies, business plans, and capability or competency building.

Finally, we come to Horizon 1, the here and now. Businesses which have stuck it out through Horizons 3 and 2 are now in execution mode — they are the engines for profits and revenues. The time-frame is typically the next couple of years or so, and so the focus is on exploiting the residual potential. There is little time for the luxuries of navel-gazing and strategising — the agenda is the execution of prepared plans. Typical activities in this include productivity improvements, incremental innovations to existing products — generally, trying to squeeze as much as possible out of current profit-earners.

Naturally, the horizon plan for an organisation will be a dynamic document — Horizon 3 ideas will get validated and transition to Horizon 2 businesses, and Horizon 2 businesses will become Horizon 1 profit and revenue engines, while dying Horizon 1 business get weeded out through a naturally evolutionary process. For this to work, there needs to be a focus on keeping the pipeline vibrant with new ideas “on the boil” as Baghai et al put it. As each new businesses falls into place, they form the dovetailing curves in the above schematic, and create the robust upward organisational curve — individual curves may be born, grow up and die, but the organisation as a whole fights decline and death.

Yet, exploratory studies and scouting for new ideas to fill up a Horizon plan is only part of the battle. Successful Horizon management needs superb execution and resource allocation. More on this next time.

(Radhika Chadha is a consultant in strategy and innovation and co-author of Innovative India: Insights for the Thinking Manager. Karate-gy is the proprietary name of the strategic exercises conducted by Paradigm Management Knowhow Ltd.)