By Christopher Rolfe
Director at Christopher Rolfe Advisory
YPO member since 2004 in Cape Town, South Africa
“How can I grow my business by 30% year-on-year?” “How do I build a strategy that creates long term value for my shareholders?” I often get asked these questions by CEOs and board members whose business growth has stalled, and they want to see higher levels of sustainable growth going forward.
In developing the foundation of the strategy, think about the range of risks that you are prepared to take to achieve this growth strategy outcome. One framework for understanding these risks centers around products, customers and markets, including a new geographic market or sector.
Starting with your product, consider the risks around selling your same product to the same customer, but in a new market. In doing this analysis, this framework should be unpacked from least risky to most risky strategies and should ideally result in a quantified and qualified set of answers for each strategic option.
The riskiest strategy for a company to pursue is selling a new product, to a new customer, in a new market. Intuitive of course, but worth pointing out all the same. (Inside Tip: include diverse teams from within the company; be creative; look at competitor products; review other sectors for ideas.)
Let’s assume that you have done the analysis using the products, markets, customer framework, and you were unable to come up with a strategy that would result in the desired 30 percent annual growth rates. What then?
This is where further strategic options such as investing in acquisitions, joint ventures, licensing, franchising or investing in innovation need to be considered. Risks associated to each strategy should be qualified and quantified so that you proceed with your eyes wide open.
Again be creative and think outside the proverbial box. For example, when looking at joint ventures, try to identify synergies with other companies that may even be slightly outside of your orbit. It takes time to identify and understand complementary competencies between companies, and this should include both “soft” and “hard” areas of skills within both companies. (Inside Tip: once you think you’ve got the strategy, test it both internally and externally to get unbiased feedback; don’t set time limits on the process.)
Assuming that you have now found the strategy that meets the risk/return profile for the company and has a high probability of success, the next area for consideration is how to finance this new strategy.
The simple answer is to look at current operational cash flows or cash reserves. This approach however, might not be the optimal financing solution for that specific strategy and may negatively impact other areas such as current dividend policies or current interest obligations to bondholders.
The dropdown menu for financing solutions should look something like this, not in any specific order: raising new equity, raising new debt, supply chain financing (SCF), or existing cash/future cash flows from operations. The analysis should be done by testing likely returns from the new strategy against the cost of each financing options (Inside Tip: Yes, cash in any form has a cost to it; a point lost of some senior executives).
In doing this quantitative analysis, it is important to measure each possible financing solution in actual terms and to run sensitivity analysis against them – using variable rates of interest, actual costs of capital and all fees related to supply chain financing for example.
This is the one area that a lot of companies fall short as they do not consider each financing solution on its merits or demerits, but rather go with a choice that hey have either used historically, or a choice that they are most comfortable with. (Inside Tip: Use an external financial person to review internally generated numbers; assume higher costs and lower sales initially.)
The final area to consider when building out the growth strategy relates to the softer issues of people, culture and management. If your company has been focused in one market segment and one customer type with one product type for 10 years, it is often difficult for staff to now think differently beyond these institutionalized norms.
Proactively assess the skills they have, and the skills they will require in order to meet the strategic plans. And remember Peter Drucker’s famous insight: “Culture eats strategy for breakfast.” Understand your company culture, invest in it, and use it as a part of your toolset to drive the outcomes that you want from your growth strategy. (Inside Tip: Include human capital specialists in this process; understand your culture; allocate budget to this area).
In the end, you must approach this strategic process with a positive mindset. The best results in life emanate from a positive start and a positive mindset. As the loveable Winston Churchill wisely noted, “The pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” Good luck!
Original article: here