Not long ago, three McKinsey & Company consultants — Chris Bradley, Martin Hirt, and Sven Smit — revealed insights about sustainable growth in a best-selling book titled “Strategy Beyond the Hockey Stick.” Their experience in researching thousands of businesses in a variety of industries revealed some interesting patterns.
Among the more compelling findings are what the authors call “ten variables that make the difference”. Once organizational leaders understand these items, they have a better chance of planning effectively and moving valuable resources in the direction of sustainable competitive advantage and profitable growth.
Just as important as these 10 variables are some of the factors that were eliminated from consideration (that is, those that over time had a limited impact on future growth). Chief among these is the impact of past revenue growth.
These ten variables were clustered into three categories: endowment, trends and moves. Endowments are what you have to work with. Trends are external forces you may have little control over but have significant impact. Moves are planning decisions you act upon. How, where, when and on what you “place your bets.”
Endowment includes three variables.
- Size does matter relative to your direct competitors. Having scale won’t necessarily ensure success, but it does help you plan and execute advantageous moves ahead of competitors.
- Excessive debt over time can derail success (some companies take on and retire aggressively as part of their growth strategy and as such, their debt-to-equity ratio may look “unhealthy” but only for a time).
- Liquidity helps and provides agility in acting on opportunities. This includes but is not limited to development of new products and services and strategic acquisitions.
Trends include two variables and the most significant of the ten.
- Industry trends are the most important of all. A significant challenge confronts businesses in declining, contracting or rapidly changing industries.
- Geographic trends reflect the extent to which you can do business in high-growth areas.
The final five variables are moves organizational leaders make consistently and with a focus on profitable growth.
- Strategic M & A, the ability to fuel growth through acquisition and divesting of underperforming assets.
- Allocation of company resources, feed the winners and starve the losers thereby avoiding the “peanut butter” approach of allocating resources evenly across all departments and activities, whether they perform or not.
- Capital expenditure, ensuring that technology applications are sourced and allow for targeted expansion.
- Operating efficiency and productivity improvement, not merely through cost reduction but with a commitment to being better than the competition.
- Differentiation, keeping an eye your customers’ best alternatives, not to copy them but to distinguish your business as better in every way.
The authors highlight a major US-based manufacturer which has practiced resource evaluation and re-allocation over time (remember, you cannot “re-allocate” until you “de-allocate” utilizing processes such as “the abandonment matrix” or the “strategic renewal process”). This is often the most difficult step for business leaders to take. There always seems to be a “valid” reason to continue offering and even supporting activities which do not (and likely will not) contribute to the growth aims of the enterprise. But there they are and there they stay (think: “accounts with potential”).
These leading companies have institutionalized resource liquidity as a corporate priority. Their management team acts as a private equity firm spending 50% of their time evaluating M&A opportunities, organic investments, and divestures. Spending time on these three critical activities always matters and is especially needed when the industry you’re in is contracting and/or facing major stress and transformation.
What would happen if you and your leadership team dedicated more time to these activities?
Robust, structured strategic planning has never mattered more than it does now. To find out how your organization can benefit from a proven, comprehensive, planning process, contact me by email. We’ll set up a call.