Breaking Down Corporate Strategy: Growth Levers
This is part two of Breaking Down Corporate Strategy, a three-part series of articles where I explore the components of corporate strategy, the factors that steer its development, as well as the interesting relation it has with game theory. Read Part One here.
In the first part of this series, we explored different internal forces that influence a company’s corporate strategy and ultimately its growth (or lack thereof). But of course, there are always external forces that have an equal, if not greater, influence on corporate strategy.
And despite the limited control we have over external factors and their relatively unpredictable nature, a few select factors are regularly leveraged by companies to boost growth. These factors are called growth levers.
A growth lever isn’t a silver bullet
Growth levers may be broad in definition but they are well-researched and well-documented concepts that are an important part of corporate strategies as they are powerful tools for controlling the direction of growth.
Which begs the question, if we’ve already identified these growth levers and if they are so influential, why don’t we implement them all the time to grow continuously? There are a few reasons why this isn’t such a straightforward discussion for companies.
First of all, growth levers are very resource-intensive, and unchecked growth can quickly exhaust a company of its resources. That is to say there are constraints from using all levers all the time. Second, the market landscape is never static. Investing in any growth lever will have a series of consequences that may result in unfavorable market conditions. In some cases, pulling the wrong growth lever can cause internal problems (like integrating with the wrong distributor). The corporate strategy attempts to mitigate the risks involved with growth levers to a certain extent through in-depth evaluation and predictive analysis. But even then, risk can never be fully eliminated.
Another reason why growth levers cannot be used injudiciously is that sometimes one or multiple growth levers may simply not be available. Companies that fully control their supply chain have limited options for vertical integration while companies that only have a single product, serving a single target demographic have limited customer segmentation options.
Things become far more complicated when the corporate strategy encompasses a multi-business corporation where each business may respond differently. So in such cases, how would a strategist decide on what growth levers to evaluate in order to get the optimal results across the board?
One way is to focus on increasing a metric called Share of Wallet (SoW).
Fighting for a larger share-of-wallet
Growth can mean many things including increasing profitability. However, it’s not always ideal to make a company more profitable. For instance, many companies deliberately choose to have lower profits for a myriad of reasons including tax benefits and to prevent cannibalism between product lines or sister companies.
So while profitability isn’t always wanted, share-of-wallet is.
Share-of-wallet is the percentage of a customer’s spending in a category (such as groceries, computer accessories, office stationery, etc) that is captured by your company. Share-of-wallet or SoW is so important because it is not only an indicator of customer loyalty but also an indicator of price elasticity as a very high SoW indicates a high level of dependency on your product/service (stickiness of your products and brand).
Corporate Strategy Levers: How to Control Growth
Now with a clear goal in sight, we can finally get to the meat of the article — exploring the different growth levers available to us. Starting with…
Vertical Integration (Economies of Scope)
Almost every business has buyer-supplier relationships that form a value chain through which raw materials become useful products for customers or end-users. For companies, this means signing a contractual agreement that defines the scope of this buyer-supplier relationship. However, in many cases, companies make the decision to acquire one or more of their suppliers to gain full control of a part of the value chain. In fact, vertical integration is one of the most popular growth levers for value creation from linkages.
The decision to pull this lever, however, is complex. One of the things that dictate whether or not companies make this jump is called economies of scope. Economies of scope is a concept where producing products A and B reduce the cost of product C (which in vertical integration would usually be the end product). This is different from economies of scale which reduces the cost of production through sheer volume.
As a company continues to grow, the number and type of customers it serves also grows. This means that with time, the target audience of every company becomes more diverse. Sometimes, the target audience can consist of consumers with conflicting tastes and preferences. All of this means that products are bound to be liked by some and disliked by others.
This is an ironic side effect of growth that can be tackled with a growth lever called customer segmentation. Customer segmentation prompts companies to reevaluate their users to form new subsets of their target audience, based on their needs and buying characteristics. This enables companies to more effectively develop successful products and strategies.
Market expansion is a broad growth lever that encompasses various strategies that ultimately involve selling a product to a different target audience. Market expansion happens in different shapes and sizes, from adjacent expansion to a different geographical location (same industry) to diversification to different industries.
As you may imagine, market expansion is one of the most difficult types of growth levers to nail due to the political, social, legal, and technological challenges that come with changing geography or product lines. Still, for many companies, the risk and upfront investment is offset by the potential but massive reward of lower competition or even an untouched market.
In the long history of corporate strategy planning, information technology is a relatively new addition — yet, equally important. Information technology is a growth lever that generally removes technological bottlenecks within the company to bring its capabilities up to par with the competition. This includes digital transformations and migrations or re-platforming to more scalable solutions.
IT might seem like an oddity in this list of traditional growth levers but it’s important to understand that technology has already become an integral part of modern corporate strategy and IT truly is a factor that companies are leveraging to grow and expand their products and services in this digital era.
Mergers and acquisitions have an infamous image for failing more often than succeeding and while there is some truth to it, most of this perception is the result of massive, failed mergers and acquisitions making for better headlines.
In reality, M&A is a strong growth lever that enables companies to build resilience while once again, enjoying economies of scope. But the potential for massive value creation is often met with the risk of massive value destruction. But once again, through in-depth due diligence and a comprehensive roadmap for integration, M&As can be very successful tools for growth.
Building a Sustainable Competitive Advantage
Earlier in the article, I mentioned that growth levers aren’t available all the time or to every company, and pulling growth levers without the proper due diligence can have unfavorable consequences. To do this, businesses begin by identifying where they are in the industry value chain to then strategically alter their product lines with the goal of achieving a larger share of wallet. This creates a competitive advantage. But competitive advantages don’t last because competitors are bound to catch up which may mean that the growth levers which worked before may not be viable.
So how does a company build a sustainable competitive advantage? Is such a thing even possible? Some believe that there is no such thing as “sustainable” competitive advantage but I think companies can maintain a series of competitive advantages without disruptive shocks, by taking a proactive approach to corporate strategy — always planning for the future and exploring potential growth levers that may become viable in the future (and those which may stop being viable).
As Andy Grover wrote, ‘Only the paranoid survive’. Be paranoid and continuously and diligently work to create barriers and hurdles to competition.
Like in a game of chess, companies need to always be scanning ahead. This (rather conveniently) brings us to the final part of this short series — corporate strategy and game theory. Game theory is a theoretical framework through which we can find out the best course of action when our actions depend on others’ actions and choices — can you see the relevance to corporate strategy already?
This is part two of Breaking Down Corporate Strategy, a series of articles where I explore the components of corporate strategy and the factors that steer its development. The third part of this series will go live shortly. Feel free to hit Follow to get a notification when it does.