Governance Matters Associate Guy Hamilton talks about economic growth…..
Since 2009, a feature of both global and local economies has been a prolonged period of slow growth and reduced customer expenditure. Excess productive capacity that had to be reduced or re-purposed, (“resized” becoming a popular term), cost reduction and cost efficiency strategies became prevalent and yield and margin management became common conversations in board rooms and executive management meetings.
Signs of enduring economic growth are emerging and with it the question is whether it is time to become growth orientated and look towards building increased enterprise value over the medium to long term? Intuitively, the answer is now “yes”.
It is easy to say, “we are now going to move to a growth strategy” but for many it will be a challenge to deliver enduring value growth as an outcome. Simply, in flat economic conditions management mindset is founded on “more from less” whereas growth requires focused investment and re-allocation of resources to ensure “more from more”.
Arguably, cost reduction programs are not “strategy”. At some stage optimum efficiency is obtained and chasing further cost savings becomes more destructive than value accretive. At this point two paths typically emerge, a) driving better yields from an optimized but largely flat cost base and b) adopting growth strategies which will increase the size of a business, its market share, and revenues over the medium term.
Developing a growth strategy is one thing, executing it well is another. Shifting from “profitability” founded on cost management and margin enhancement to “growth” requires a fundamental shift in focus and purpose in a business. Changing the corporate mindset from cost control to growth is not easy and it takes both time and effort to achieve. Similarly, managers and directors who have safely guided a business through a prolonged down turn may well not be the right people to develop, lead and execute good growth strategies.
Michael Mankins, a Partner at the global consulting firm Bain, noted “in earnings call after earnings call we hear CEOs describe one or two bets – at most – on growth, and devoting most of their time showcasing their restructuring, offshoring and other cost-focused initiatives”. Consider also the number of high profile corporates which have announced innovation strategies but have yet to show tangible value and benefits from the same.
This pivotal point needs a bottom up review of whether the business is “fit for growth”. Boards own strategy and it is their role to debate and determine growth options and initiatives. They also need to consider whether the right resources and assets are in place and the impact on capital, investment, HR, and IT plans (amongst others).
The discussion may well need to start with the capabilities and effectiveness of the Board to genuinely promote and lead growth initiatives which will deliver long term value. Are the right skills and disciplines available to a Board to consider fast evolving market dynamics and a commercially viable “right to win”? Does a Board spend enough time on growth based thinking or do routine Board papers and reports consume most of the available time?
The truth is growth does not happen by chance. There are some clear steps to work through:
1. Is there a clear view of what the business should look like in 3, 5 and 10 years?
2. Is the business ready for growth in terms of both capacity and skills?
3. What specific growth initiatives will be adopted?
4. How does the business retain competitive differentiation (and thereby margins) around its growth objectives?
5. What resources and investment are required to support growth?
6. What risks will arise and how can they be mitigated?
7. What is the right sequence of events in terms of resource allocation and investments?
8. What mandates and accountabilities will be passed to Executive Management?
9. How will success be measured and is executive management compensation linked to this?
Each of these questions deserve time and debate; intuition based initiatives tend to provide sub-optimal outcomes. The old saying applies “doing more of the same and expecting a different outcome is a definition of insanity”. Is your business fit for growth?
Thanks again for your insight Guy.
Until next time,