The 6 Ways to Grow a Company
The term “innovation” is
often associated with geniuses turning startups into gold mines — the next
Google, Apple, or Amazon, with products no one even knew they needed. Private
equity firms place hundreds of little bets on these startups, hoping one produces
a windfall that covers the rest. These bets on the next growth
engine often depend on luck more than insight.
Meanwhile, every company
aspires to be as innovative as these startups. Many companies invest in or buy
them, unsure what they’ll yield other than the halo effect they may overpay
for, made worse by the fact that most don’t align with the company
strategy or meet a market insight. The same is true of ideas: Knowing which to
fund without making random bets is key. But according to a series of three surveys conducted over
six years by Maddock Douglas, the consulting firm where I work, while 80% of
executives know that their companies’ success depends on introducing new
products and services, more than half agreed that their companies dedicate
insufficient resources to support innovation. (For more, see Brand New: Solving the Innovation Paradox, by
G. Michael Maddock, Luisa C. Uriarte, and Paul B. Brown.)
Innovation is a word
that’s been attached to finding new ways to grow, and every corporation needs
to grow year over year. But the first step to generating real growth is to
understand where it comes from. We believe growth has been made unnecessarily
complicated, so we’ve boiled it down to six simple categories with
corresponding examples from Apple:
- New processes. Sell the same stuff at higher margins: Cut production and
delivery costs, automate for efficiencies, cut fat in the supply chain or
manufacturing, and utilize robots.
- New experiences. Sell more of the same stuff to the same people: Increase retention
and share by powerfully connecting with customers. An example is the Apple
Store experience, which many would argue is as compelling as the company’s
products.
- New features. Sell
enhanced stuff to the same people: Add improvements that drive incremental
purchases. An example of this is every new phone Apple releases, with
better cameras and so on.
- New customers. Sell
more of the same stuff to new people: Introduce the product to new markets
with needs similar to your core, or to markets where it might address a
different need. For Apple, this goes back to reaching the mainstream
rather than the design community.
- New offerings. Make
new stuff to sell: Develop a new product — not just enhancements. Find new
needs to solve within existing markets, or invest in a new category. Think
HomePod or the iPod.
- New models. Sell
stuff in a new way: Reimagine how to go to market by creating new
revenue streams, channels, and ways of creating value. This can be as
simple as moving to a subscription model, or as transformative as Apple’s
creating iTunes.
Deciding which ways to
grow needs to be intentional — not driven by luck. Innovation budgets are
finite, so allocations of your scarce resources should reduce risk and focus on
the best bets. It needs to be balanced for maximum return the same way a
retirement fund needs to be balanced among high and low risks and rewards. For
example, consider the following innovation budget allocation model:
The model above shows the
relationship among these six simple ways to grow, in the context of the four
quadrants of the portfolio (evolutionary, differentiation, fast fail, and
revolutionary), each of which gets a percentage allocation of the innovation
budget. Note that:
- New processes fall outside the innovation portfolio (no budget allocation).
· New customers are in the fast fail quadrant (about 10%–20% of the budget).
· New offerings are in the differentiation quadrant (about 10%–20% of the budget).
· The combination of both new customers and new offerings are in the revolutionary quadrant (about 5%–10% of the budget).
· New models can fall anywhere in the portfolio.
This same allocation
model applies to investments in growth. Some ways to grow are easier than
others. Cutting costs with new processes to improve margins is
low-hanging fruit. It isn’t on the level of startup innovation; it’s just a
more innovative way to do things. We don’t consider it part of the innovation
budget because it doesn’t create value in the market, only incremental growth
and continuous improvement.
The easiest goal in the
innovation pie is to maintain relevance to your core market through
enhancements — with new features for your current
offerings or the experiences that deliver them. It’s easy
because it focuses on a market you already know and on products you already
know how to deliver. A company will seldom question allocating the largest
portion of its innovation budget to these activities (40%–60%).
A smaller portion
(10%–20%) is allocated to reaching new customers with
what you know how to deliver. This low-investment, fail-fast,
test-the-waters approach is more akin to how a private equity investor might
approach innovation, making many small bets and quickly abandoning those that
fail to get traction. The key is fast experimentation through lean, agile
approaches.
Another 10%–20% is likely
to go toward differentiation — developing new offerings before
the competition does. These are things you’re not sure how to deliver, but
you know the market wants them, making it worth trying to figure out. Efforts
like these carry greater risks but promise greater rewards if you’re first
to market.
That leaves the smallest
portion (5%–10%) for focused bets on revolutionary, high-risk opportunities
with new offerings to new customers. In this
quadrant, you focus on a big idea, using agile approaches to break it
apart to see which elements drive value through continuous assessments of
desirability, since you don’t know for sure what the market values (even
the idea itself). If you continue to clear hurdles, you stand a
chance to launch a game-changer that fills an unmet need. You just have to
test and experiment quickly.
New
models — new ways of delivering — can
fall anywhere in the innovation portfolio, as do build, buy, or partner
decisions. Knowing the type of growth that your initiatives represent and their
place in the portfolio helps determine which to pursue and how, including
acquiring a startup that may hold a key to the puzzle — intentionally
identified by targeted criteria, which are de-risked by researching and
identifying unmet needs in the market.
Knowing how growth
happens, and the best ways to focus your organization’s efforts to
grow, is as critical as allocating investments across the innovation
risk-reward spectrum for maximum returns. Doing so works better than placing
random bets on the latest startup in the hopes of getting lucky. Or worse,
betting on one silver bullet that misfires.
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