Which Way Should You Grow?

Most companies believe they have a choice when it comes to growth strategies. Some look at firms like General Electric or Cisco and think acquisition is the way to go. Others think they should start competing on low price and high volume, as Wal-Mart and Dell have done. Still others think that jump-starting innovation will let them grab the brass ring. But too often the growth strategy du jour fails because most companies select an inappropriate, and ultimately unprofitable, path. The acquisition battlefield, for example, is littered with the bodies of dead growth strategies. Remember Merck-Medco? In 1993, Merck thought it might skim some cream from the managed care business. To that end, the giant pharmaceutical firm bought Medco, which was in the business of authorizing and supplying drugs for patients of managed care companies. Since Merck owned Medco, Medco would steer more prescriptions toward its parent—or so the theory went. But when federal regulators insisted that such practices would compromise patient health, Merck was forced in 2002 to divest Medco. Now, a highly regulated company in the innovation business like Merck should already have understood that meddling in managed care—whose business is price control—would create an untenable conflict. But it was not just a conflict of interest; it was also a conflict of value proposition. The strategy appropriate for a performance-value leader like Merck or Medtronic is not right for a price-value leader like Wal-Mart, Dell, or Medco, or a relational-value leader like IBM Global Services. To craft a winning growth strategy, you must first firmly identify your company’s value proposition—including its capabilities, assets, and cultural DNA. What is your company really good at? Do you best compete on price, on integrated solutions, or on innovation? Based on your true value proposition, you should select the strategy that imbues this proposition with meaning and direction. Growth will naturally follow. Price-value leaders like Dell and Wal-Mart grow best by extending their low-cost value proposition to adjacent markets. The European no-frills airline EasyJet, for example, has successfully expanded into car rentals and Internet cafés and is considering launching EasyCruise.com, EasyBus.co.uk, and EasyDorm.com. The common denominator? A combination of convenience and low cost that appeals to small-business people, backpackers, and other price-sensitive tourists. The firm varies prices according to demand and sells only through the Web. Relational-value players are companies like Fidelity Investments, IBM, and GE Aircraft Engines that create value for customers by offering integrated solutions. They don’t just bundle products and services but customize them to such a degree that they act as production partners in many cases, absorbing some of their customers’ risk. The best growth path for relational-value leaders is to keep expanding their scope by broadening the definition of a solution. The pivotal question they need to ask is: “Which of the functions that our customers perform could we do better?” Performance-value leaders grow best through continuous innovation—think of Genentech, Intel, and Nokia. These companies exploit emerging and converging technologies; they also shape and build new markets. They do this by deploying a decentralized, team-oriented organization that values discovery and experimentation. Merck, a performance-value leader, may have failed to grow by merging with Medco. But by drawing on its strengths in R&D, Merck has garnered a huge success with the drug Fosamax, both defining a new prevention market for osteoporosis and extending the product life cycle by introducing a once-a-week, rather than a daily, formulation. Clearly, the resource requirements for each of these three growth paths are very different. Choose the wrong growth path, and all you may have to show for it is higher costs. But focusing on your value proposition can raise the odds of choosing wisely. Consider the options open to a major brewer whose growth had stalled. Its operations and logistics group believed the road to growth lay in streamlining and standardizing new product development by employing a small staff that used stringent screening criteria to find brand concepts with broad appeal. A second group, within sales and marketing, pushed for an approach that would respond quickly to changing customer demands. This group felt the firm should develop and distribute new brands of beer tailored to local markets, which would require a more flexible, decentralized organization. Still another faction wanted to search for big new concepts such as ice beer or dry beer. That would have required a different product development process, additional dedicated resources, and the heavy involvement of senior management. After much soul-searching, management concluded that since the company was a price-value leader, streamlining was the way to growth. The other paths would be distractions that would dilute its resources. Though niche markets held a few attractive growth options, these could not be pursued within the core business. In essence, long-term winners sustain their growth by edging out from their core, with natural extensions of their resources, or by reaching out with those resources into new markets. Price players should look for growth segments within the markets they already serve. Relational players can look for latent customer needs that they can solve well. Performance players will want to embrace technological discontinuities. To achieve superior profitability, you need to beat your competition in at least one of these value arenas and equal them in the other two. But remember, the value systems are utterly different. If you try to conquer too much, you can find yourself in trouble. Long-term winners sustain their growth by edging out from their core, with natural extensions of their resources, or by reaching out with those resources into new markets.

Which Way Should You Grow?

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