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Updated 29 Feb 2020

Why good strategy beats bad growth

Growth might be a key success signifier, but there is such a thing as bad growth – and it should be avoided at all costs. 

Kevin Mackenzie, Entrepreneur, 25 May 2014  Share  0 comments  Print

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As a high-impact business owner, you’re geared for growth. Every business decision you make is focused on how to grow your company, from attracting new customers, to entering new markets, introducing new products, increasing margins, buffing up the bottom line, improving your differentiation, or being more innovative, all for the purpose of building a larger company and hopefully increasing the value of your business.

“Growth is undoubtedly not only a necessity but a medium term requirement for sustainability,” agrees Kevin Mackenzie, founder of Conversations in Growth, a boutique growth strategy consultancy.

“But not all growth is good. Growth that fails to improve your medium term cash flows and generate returns on investment proportionate with the risk you are taking with your capital is destroying value.

Related: Is your business making this one giant mistake?

“And here’s the bigger problem: Bad growth is surprisingly pervasive. Many companies are happily growing their revenues, but miss the fact that their net cash positions remain unchanged, margins are flat or declining and returns on capital are way below realistic shareholder expectations.”

Understanding good strategy 

So what’s the alternative? In two words: Good strategy. “I would argue that as an entrepreneur one of your most important jobs is to make sure that you’re addressing anything in the present that’s affecting your ability to stay relevant in your customers’ eyes, stay differentiated and protect your ability to produce sufficient returns on capital.”

1. Stay relevant in your customers’ eyes

When the products and services you offer start becoming less relevant to your customers, your business has a significant strategy problem.

No amount of differentiation, customer service and operational excellence helps. You need to go back to the basics: Do your customers want or need what you’re offering? If not, it’s time to change the offering. 

2. Stay differentiated

In a crowded market the margin tends to follow the most differentiated offerings. A relevant product with little difference is left with very few strategic options, and you’ll end up competing on cost alone.

Find something that differentiates you from your competitors if you want to charge higher prices. 

3. Your ability to produce sufficient returns on capital

Your products may be relevant and have differentiation but your underpinning cost structures are robbing you of capital value.

Strategy’s job is to deal with the challenges in the here and now that when addressed overcome or start moving you along the path to solving any relevancy, differentiation and value inhibitors. Remember, when growth is viewed through the strategy lens it becomes valuable only to the extent it makes your business better. 

Aligning strategy with growth

Here are seven practical steps from Mackenzie to integrating good strategy with your growth aspirations.

1.Build a strategic balance sheet

Document your core products, profit pools, customers, differentiation, markets and the competency systems you use to operate.

What is the cold light of day state of your business? Good strategy starts here and not with your envisaged future growth position.

2. List all the things that are a risk to your ability to stay relevant, differentiated and building value over the next 12 months

The more specific, the better. These can range from customer perceptions or changing buying criteria, to lack of skills in key areas, inflated cost positions, new competitors, poorly performing channels, and fragmented systems.

3.Establish proximate and prioritised 12 month targets

If met, these targets will put your business in a better position. If they’re clearly defined, they can help you stay focused.

For example, perhaps you should be focused on improving your logistics processes and management skills rather than securing new customers.

Related: 7 Keys to growing your business

4.Create growth targets but view them as directional intent

Don’t emphasise the financial elements and focus on commercial positions that if attained will make your business more relevant.

This is highly strategic and requires long-term goals, but can lead to real value growth. 

5.Think competency systems and how you can develop and expand them

The fact is that a business (and its employees) can only do what it (and they) can do, which in reality is a big constraint on your strategy options and growth.

Identify the competencies that, if you heightened, deepened or expanded them would give you more options.

To help identify the areas you should be focusing on, take a careful look at the challenges you face with your top five customers.  Now develop a strategy to improve the competencies that would solve those challenges.

6.Focus your efforts on your core business

Figure out how you can expand your business outward in small incremental steps, slowly expanding and stressing capabilities. This approach leverages what you have learnt, understand and have foundation skills in.

7.Manage your targets through small focused projects

Your project teams are usually resourced with staff that have ongoing operational responsibilities.

Related: How to know if your business has reached the next level

A string of continual small wins in pivotal areas of your business builds momentum and underpinning capacity.

Big targets should therefore be broken up into smaller targets, which can be celebrated as they’re met. This will also keep the team more focused.

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About the author

Kevin Mackenzie, Entrepreneur

Kevin Mackenzie has 18 years of diverse entrepreneurial and consulting experience. He is the founder of Conversations in Growth, a boutique growth strategy consultancy specialising in navigating the never ending growth gap. CIG has engaged over 20 management teams, of various sizes and industries, within the last four years and has built a robust and practical set of thinking tools, frameworks and insights into how best to approach this complex subject of growing businesses.

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