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Grokking Growth: Part I

The topic is a vast one in itself, so I’ll address only a smart part of it and that too from a business-to-consumer perspective.

Growth is one of the key drivers for a business and it is not as uni-dimensional as it is often made out to be. For example, you keep hearing about Facebook hitting a billion users and then some more after it and so on and so forth. Does it mean that once a vast majority of the population in the world is on Facebook the company will stop growing? Obviously, not. Market saturation is a business reality for all businesses that marks an inflection point that often leads to diversification or a comprehensive strategy. Smart companies pre-empt this and change course and pursue another kind of growth, while the not-so-smart ones stagnate and expose themselves to significant risk due to disruption.

 

Chasing growth is, though, quite simple for most companies (keeping side M&A options which don’t happen for most). You can either:

a) Keep getting more users (usually known as the hyper growth stage)  or b) Get more from the same (happens after hyper growth, when market saturation has kicked in).

It is harder for companies to segment growth strategies to address both (a) and (b) as you need to deploy 2x of everything (strategy, resources, measurement) to make this hybrid approach happen, while keeping even a single strategy going is tough enough for most companies. Companies that accomplish it, though, tend to be significantly agile. A good example of a company that didn’t manage a dual strategy would be Nokia.

This dual approach can be applied to specific components of a company’s operations:

Revenue:  How do you increase revenue by getting more users? How do you get more revenue from the existing users?

Profitability: How do you increase profits by getting (customer acquisition cost) new users? How do you increase profits from the existing users?

Putting in place a growth strategy also requires a good understanding of which stage is your company at.

Stage-I: Companies that have low to moderate turnover, revenue growth rate that outpaces at least inflation (ideally outpaces other obvious investment segments). The healthy ones tend to be debt/financing-free and privately held. They also have low risk appetite and low profit margins.

Stage-II: Companies that have medium turnover, they aim for explosive revenue growth through hyper growth. These companies tend to have an extremely high risk and limited runways to make the strategy work. They usually involve significant external investment and/or debt load and tend to be privately held. They have a high risk appetite.  Profit margins are nearly non-existent. Companies in this stage either die or make it to Stage III.

State-III: Companies that have massive turnovers. Their revenue growth rate is low but predictable and use debt as a routine path to fund growth. These tend to be public companies and they have a good ability to absorb risk. Their profit margins tend to be steady and companies like this die a slow agonizing death when they do die.

S-I companies typically grow organically. S-II companies typically grow by spending vast amounts on customer acquisition. S-III companies accelerate growth usually through M&A or by diversification.

I’ll examine each theme in detail in a later post.