How do companies grow? Is there a pattern that can guide entrepreneurs, offering a roadmap for every stage of their venture? A set of strategies that most companies execute as they grow? While I might risk over-simplifying, creating a pattern “cheat-sheet” could be useful and fun. Here my thoughts on the topic.
Typically, a company or venture progresses through the following stages:
1. Starting with a niche and affirming viability
Developing a unique value proposition is crucial. Companies should aim to develop a product or business model that better meets customer needs than anything else in the market. Agility is also essential, allowing companies to stay flexible and avoid outdated technology or business model debt. Creating a model that’s tough to replicate, whether through patents or unique component integration, is vital. In today’s age, and such model should be grounded in a deep customer-centric approach, leveraging two-way communication with customers and a data science approach that envisions personalization and big data marketing.
During this stage, the primary focus is on solidifying the company as a viable business. A company that starts from scratch, especially a small business, first establishes itself on its selected segment or market. Once stability is reached, it typically transitions to the next level of growth.
2. Scaling up
Once the niche is saturated, the focus shifts to market saturation and replication. This involves replicating the model through geographic or market expansion, ensuring the essence and quality are maintained while reaching more customers. When expanding globally, it is essential to balance the trade-offs between brand/product consistency and localization Increasing customer share is another critical aspect, which can be achieved by capturing more of the customer’s share of wallet through promotions aligned with local competition. This continues until new locations or segments are saturated. Leveraging customer loyalty to introduce complementary or substitute products further increases share of wallet through line and brand extensions.
3. Leveraging corporate advantages and scale
Maintaining agility and competitive knowledge is crucial for a market leader. Focusing on developing sustainable competitive advantages enables a company to stay at the top by leveraging built resources, first entrant advantage (if any), and developed processes and alliances. Companies must innovate and closely monitor competition to stay ahead. Thanks to their scale, companies can gain buying power with suppliers, focus on efficiencies, and consider vertical integration or exclusive agreements to reduce costs and create barriers for competitors, thereby leveraging corporate advantages and achieving cost reductions.
4. Maturing and Re-evaluation
As companies mature, they often realize they have grown too much or in the wrong way This stage involves a re-evaluation of ROI and strategic investments or divestments to focus on high return areas. Delving deeper into corporate responsibility and the company’s role in its community/society becomes increasingly important. Employees and customers develop relationships with the brand and organization, making it critical to take care of those relationships beyond direct transactions.
5. Reinvention
Continuously reinventing processes and updating technology to avoid obsolescence is essential, particularly as technology evolves rapidly. This applies not only to products but also to overall business operations, including marketing and financial practices and technologies. Investments in automation, artificial intelligence and emerging technologies is crucial to optimize, further scale, and accelerate the business. Companies must stay tuned to trends and evolving needs, recognizing that customer preferences change rapidly. Looking ahead and investing in being well-positioned for future trends ensures companies remain at the top.
Case Studies:
- Starbucks: Starting as a coffee shop in Seattle, Starbucks evolved into a powerful franchise, scaling geographically in the US and internationally. Over time, it expanded its menu, introduced merchandise, and offered refreshment drinks. To deepen its share of wallet, Starbucks introduced its loyalty program and invested in technology to streamline transactions. Recognizing the need to refocus, it closed some stores to concentrate on profitable locations. Also, it formed strategic partnerships like the one they currently hold with Delta Airlines.
- Citibank: In the nineties, Citibank was the most international retail bank. Today, it has exited most international markets, refocusing on its core private banking and US consumer market to reduce risks and optimize investments.
- Coca-Cola: This iconic brand has stayed at the top by evolving its product lines, protecting customer loyalty, and leveraging its distribution network. Coca-Cola adapted to trends like low-sugar beverages, becoming one of the largest producer of bottled water and launching many low-sugar or zero-sugar drinks.
A company’s evolution could also be observed as happening in two phases: A period of exponential scaling and a period of progressive scaling. When the baseline is small, or there is significant low hanging fruit (usually using tactics like geographic and customer access expansion), every movement significantly contributes to growth, often yielding double-digit increases. However, as the baseline grows larger, the same movements no longer result in exponential growth, they instead lead to smaller, progressive changes. At this point, companies enter a phase of strategic investment, leveraging models like the growth share matrix grid from BCG to manage product/business portfolios.
If the business cycle of a company’s products is to progress overtime from exponential to progressive scaling and sometimes decline, companies must stay attuned to customer needs and future trends to thrive, making bold bets to lead in emerging trends. A company with a killer product may thrive during exponential scaling, but success can mask inefficiencies. As growth slows, it’s crucial to have a well-functioning “internal machine” that is flexible, modular, scalable, and compatible, particularly in management, marketing, portfolio management, and innovation. Being proactive rather than reactive is key. A business needs to keep in check its internal and external fit. Companies like Blockbuster, Kodak, Nokia, Toys R Us, and Xerox, which failed or were late to evolve, serve as cautionary tales of missing opportunities for innovation or reinvention. In contrast, successful companies like Amazon, Apple, Tesla, Netflix, Microsoft, and Procter & Gamble continually seek new opportunities for exponential scaling and strategic investments. Balancing exponential growth with progressive scaling.
Not every company has the margins to do significant R&D, but all companies need to have a minimum of it. All companies should be accustomed to some level of R&D losses. When it comes to trends and innovation, getting one big win entails doing many experiments and many failures. Therefore, business should always keep an experimentation and innovation budget. Foster a culture of innovation across the organization. It will not look like it, but in it lies the longevity of the business.
No company strictly follows each phase sequentially, opportunity and foresight often require management teams to “build the plane while flying it.” However, awareness of these stages can enhance leadership effectiveness, potentially enabling leaders to operate like Formula 1 pit crews, rather than mechanics constantly chasing the car.