Removing Growth Constraints
The need for and desirability of growth is taken as a given by most business leaders, and justifiably so. All things being equal, the ability of a company to foster and extend growth, and in particular profitable growth, is perhaps the most substantial contributor to value creation for many companies. Moreover, growth prospects also weigh heavily on the availability of financing and the ability to attract and retain talent.
The challenge for business leaders is that too often planning does not grapple with the need to not only take steps to foster growth but the frequent need to invest considerably in removing impediments to growth, whether they be immediate or impending.
Maximizing a company’s growth trajectory, and enjoying the resultant maximized value creation, requires both identifying an attractive market and value proposition nexus and working vigorously to remove impediments to growth. Those impediments can take many forms, but among the most common are:
Unit Economics. A company’s growth strategy must be in line with the fundamental nature of its business, and the absolute first step in that is to understand unit economics and the implications thereof. Unit economics refers to the price/profit/term characteristics of an individual unit of the goods or services that a company provides. A high fixed cost business with 80% gross margins will and should have a different go-to-market approach and different growth prospects than a company with modest fixed costs, high variable costs, and gross margins of 45%.
Scale or Niche. What type of business are you in, a scale business or a niche business? During the long boom that ended with the COVID-19 pandemic, a small number of companies attained stratospheric valuations as they were revealed to be capable of achieving high levels of growth over considerable periods of time; and as a result, the shareholders of these companies enjoyed stellar value creation. However, these companies, admirable as they are, do not reflect the circumstances of most small or mid-sized enterprises (SMEs). Rather, these noteworthy exceptions have tended to obscure a truism that was clearer to prior generations of business leaders: growth prospects flow from structure and some structures are inherently more supportive of growth than others.
Operational. Too often business leaders assume that constraints do not exist simply because they have not yet been reached. A manufacturing company running at 70% utilization is not capacity constrained in its production capability, but there is a level of sales as which it would be. The same holds true for nearly every type of business. Understanding operational constraints and how/when they will manifest themselves is crucial to ensuring that a company reaches its maximal growth potential.
Capital Availability. Growth is expensive. Companies seeking to execute a growth strategy must understand each of the above points while simultaneously remaining clear-eyed about the availability of capital and the terms on which that capital will be available. Is the goal that all growth be self-funded? Is the company willing to take on debt to support growth? Is the company willing to pursue equity financing to support growth? What are the terms that various capital providers will demand? What is the value that will be generated with or without this incremental capital?
The desirability of growth is taken as a given among business leaders, and for good reason. Unfortunately, constraints on growth vary considerably by company, even among companies in the same industry. When developing a growth strategy, it is vitally important that business leaders rigorously interrogate the growth constraints facing their company and chart a path for maximal growth that either acknowledges or minimizes those constraints (ideally both). Many promising companies have failed or fallen far short of their potential due to an unwillingness to engage with these key issues. A holistic approach, though more time consuming, is also far more likely to result in an extended growth trajectory and accompanying value creation.
About the Author
David Johnson is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to companies in transition. Over the course of a 25-year career, David has demonstrated a commitment to thought leadership, with multiple speaking engagements and articles to his credit on the topics of change management, business transformation, restructuring, turnaround, and value creation.
David can be reached at: firstname.lastname@example.org.