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Thursday, November 26, 2009
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volume 1
issue 4
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“As a mother of young children, a-connect has been a dream come true. a-connect brings me
interesting part-time projects that offer flexibility while providing the challenge and camaraderie
that I seek as a professional. The result is a win for my clients and my family.” — R.H., IP since 2006
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Name of the game: Efficient growth
How to implement growth initiatives successfully
by Sascha Schmidt
In today’s booming economies plans to grow the core business or diversify into new business areas become preeminent. After a phase of restructuring and financial trimming companies got leaner and more profitable. But as history repeats itself the pendulum is swinging back. Global economic growth has emerged and CEOs are tireless in announcing ambitious growth programs to inspire the financial community and drive share prices.
In the words of bestseller author Michael Treacy growth appears to be a “virtuous circle”. Fast growth attracts capital markets bidding up the stock. In turn higher stock prices mean cheaper capital which enables more investments in growth initiatives. Growth builds customer confidence and boosts morale on the inside. However, unprofitable growth could also lead into a vicious circle: It eats capital, irritates shareholders and stakeholders and destroys firm value in the long-run.
In the past, favorable economic conditions attracted companies to start a multitude of growth projects and rapidly build up headcount and, like a Pavlovian dog, many companies assumed that “you need to build up muscles” to enter new or shape existing markets. Unfortunately when economic conditions worsened they found out that they didn’t build up muscles, but fat instead.
Learning from past experiences, today’s leading companies are aware of the trap of unprofitable growth. Pure volume increase in sales is not the name of the game but rather, “efficient” growth. At first sight the terminology sounds somehow contradictory. By definition growing into new business areas or geographies requires investments and risk taking. So how efficient can companies be in exploring and executing growth? Of course, there is no zero cost growth. However, keeping the fixed costs under control and avoiding the build-up of costly staff functions in the incubation phase helps manage the risks and keeps flexibility in the system so that adjustments to environmental changes can be made quickly.
As discussed in an earlier issue of this newsletter (see issue 2 "Walk the Talk") it is not the announcement of a strategy that counts, but its execution to fulfill shareholder and stakeholder expectations. There are a number of obstacles that prevent a cost efficient but effective implementation of growth initiatives. This is especially true for large firms that struggle to grow efficiently, particularly in the incubation phase.
First, large organizations tend to have governance focused on control, as opposed to risk taking. Second, international accounting standards and regulatory requirements focus organizations on quarterly results and create disincentive for organic build-up. Third, in the last economic downturn companies integrated the mantra of “focus on the core business” into their DNA – which contradicts expansion into new areas and unfamiliar ground. While traditional tools of prediction might be necessary for running an existing business efficiently, adopting a different attitude about resources, markets, and partners is essential for discovering and executing growth opportunities. And finally, large organizations also often struggle to attract, integrate and retain entrepreneurial talent. Access to top talent is a key challenge, in particular in emerging markets. As a result, large corporations staff growth initiatives with well educated business developers with a great instinct of self-preservation. Instead of making themselves dispensable and handing over responsibilities to managers who run the daily business once their initial business building job is completed, they tend to explore and kick off additional initiatives to keep themselves busy and justify their existence. As a result, high fixed costs remain a burden – especially on smaller growth initiatives.
Conversely, efficient growth requires “entrepreneurial business builders” combining the analytic skills of a consultant, the people skills, pragmatism and gut feeling of a manager, and the mindset of an entrepreneur – ideally on a temporary basis. Once the incubation phase is finished other capabilities are required to run the daily business. As an example for entrepreneurial business building, a global financial services company asked a-connect for support in growing its international wealth management business. The objective was to develop a viable business model for a new geography, taking into consideration the regulatory environment in the market as well as client-internal capabilities and organizational issues. a-connect seconded two IPs who wrote a detailed business plan that enabled the client to start setting up the operations immediately. The business plan included developing a distinct value proposition for all target customer segments based on focus groups, defining effective distribution channels, deriving underlying assumptions for the financial model, building the model, identifying key performance indicators and defining the infrastructure requirements. Once the analytical part was done and local staff was hired a-connect’s IPs phased out to keep the growth initiative efficient!
Besides the targeted use of entrepreneurial business builders, a-connect identified additional key success factors for efficient growth:
- Follow the principle: Business plans should drive the investment budget
- Set up an incubation structure that enables handling of a growth initiative outside of the P&L statement, and simple governance mechanisms
- Leverage all relevant internal capabilities through Service Level Agreements and the integration of existing resources early on
- Stage funding to minimize risk and ensure management commitment
- Insist on total transparency/control with focus on committed funds tied to meeting milestones.
Supporting efficient growth initiatives is at the heart of a-connect’s value proposition as it provides on-demand capacity and expertise from top talents all over the world and from various industries and situations. Most of a-connect’s IPs are in fact entrepreneurial business builders themselves, combining consulting and management skills with an entrepreneurial mindset.
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Copyright © 2007 a-connect (group) ag. All rights reserved.
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