Seeking business growth? Chances are that you answered this question with a resounding “Yes!”
That said, if your desire is to create steady, lasting momentum—quarter after quarter, year over year—then it would be wise to first assess whether your business has conditions for growth in place.
In a recent KPMG survey, 72% of 400 CEOs in the U.S. said that business growth was the key to their companies’ health—higher than any other factor. A scan of the most recent annual executive surveys from each of the big four accounting firms—Deloitte, Ernst & Young, PricewaterhouseCoopers and KPMG)—reveals that, while the growth of the respondents’ businesses is a top priority, their level of confidence in achieving it is unclear, with the firms coming to contradictory conclusions.
It seems meaningful business growth remains elusive for the vast majority of executives and enterprises. Consider this: In the last decade, beginning in 2010, only one in eight companies achieved more than 10% revenue growth annually. Beyond that, growth rates for the world’s largest companies shrank. And that was before the challenges of the COVID-19 pandemic, major supply chain disruptions, swings in exchange rates and the strength of the dollar, the great resignation, U.S.-China tensions, inflation, chip shortages, and the Russian invasion of Ukraine.
“Many businesses that believe their products are lacking often churn out one relatively benign market survey after another . . . Henry Ford said it best: ‘If I had asked people what they wanted, they would have said faster horses.’ ”—Nathan Owen Rosenberg, Insigniam Founding Partner
More recently, only about 80 companies in the S&P 500 have sustained annual business growth of 15% or greater over any five-year period in the last decade. The number of S&P 500 stocks with a 15% annual growth rate has dropped from 325 to 250 in the same period. So perhaps the better question is this: “Are you ready to grow?” To answer this question, there are three key conditions to assess:
1. Metrics are critical. (But only the right metrics.)
2. It all comes down to people.
3. Capability and capacity matter.
Most importantly, executives must shift their mindset to a different paradigm for business growth if any of these conditions are to take root.
The Power of Paradigms
In An Incomplete Guide to the Future, engineer and futurist Willis Harman described a paradigm as the basic way of perceiving, thinking, valuing and doing.
The futurist Joel Barker defines a paradigm as “a framework of rules within which problems are solved.”
In Powers of Mind, economics commentator George Goodman (who wrote under the pseudonym Adam Smith) describes a paradigm as how we perceive and make sense of the world. The paradigm explains the world to us and helps us predict its behavior. Like water to fish and air to the birds, our paradigm is transparent to us.
Mr. Goodman writes, “When we are in the middle of a paradigm, it is hard to imagine any other paradigm.” To put these three definitions together: A paradigm is a mental model of reality within a specific discipline(often mistaken for reality itself) that does two things:
1. It establishes and defines boundaries.
2. It tells us how to act and interact inside those boundaries to be successful.
Markets and Organizations Are Complex Adaptive Systems
A philosopher might say that you and I think, perceive and work as if we were in a Newtonian-Cartesian paradigm. That is, our likely paradigm is that our organizations, our businesses and the people who work in them, and the markets in which they compete are linear, rational and orderly—and that they would be predictable if only we had enough data and the right algorithms. In managing and in making and executing strategy, we think, perceive and act in terms of cause and effect. Think of billiard balls on a pool table. This is a big problem!
Markets—and the companies competing in these markets—are not linear, rational and orderly. Psychologist Amos Tversky and his Nobel Prize-winning partner, psychologist Daniel Kahneman, refuted the notion of the rational consumer and investor, which was the death knell for orderly, rational markets. Less-than-rational actors—you, me and the people with whom we work—make up our organizations. Indeed, life itself is a major source of complexity.
Our businesses and the markets in which we compete can be more accurately, and more powerfully, viewed as complex adaptive systems. A fundamental principle of these systems is that they are, by their very nature, unpredictable. There are so many unique, independent actors making decisions based on limited knowledge. Making predictions in an unpredictable system is sure to be frustrating.
Complex adaptive systems are self-organizing, and if we try to control one it will die. To be effective and perform in such a system, we need to abandon cause and effect and think in terms of emergence.
Economist Jeffrey A. Goldstein defined emergence as “the arising of novel and coherent structures, patterns and properties during the process of self-organization in complex systems.” Emergence is a way of looking beyond parts and observing properties and behaviors of the whole system that none of the individual parts show.
To perform effectively inside a complex adaptive system, we must start by looking from the outside in; that is to say, we look at the marketplace with one eye on our business, our customers, our competition, our suppliers, our capital sources and other relevant participants—all inside the market. We observe the behavior of the total system and watch for patterns to emerge as we act. We then put in place the particular conditions that we think will produce the desired results, and then watch to see what patterns emerge. Then we put in place another set of conditions that are appropriate for what has emerged.
Conditions for Business Growth
After we have shifted our paradigm and viewed our company—and the markets in which we operate—as complex adaptive systems, we are left with new questions:
1. What conditions will likely pull for the growth of our business in the market?
2. What conditions will likely pull the customer in our direction?
3. What conditions will likely pull customers away from the competition?
While it is impossible to be prescriptive about which conditions are needed for your company to grow and sustain that growth, there are three conditions that are likely to support your business’ growth.
Metrics—the Right Metrics—Are Critical
Executives must first understand the right metrics to align on, commit to and monitor to determine if their companies are primed for growth—and that these indicators are not one-size-fits-all. There is no single metric—or set of metrics—that applies to the needs of every business, not even for competitors in the same market. Executives need a dashboard that employs a range of measurements to create a snapshot of the marketplace and not simply watch the top or bottom line.
Leading indicators should be measured, even if those measurements are not exact. Innovation in metrics can be a source of competitive advantage. Using the same measurements as your competition is likely to give you similar results. I can recall a specific example that impacted a division within America’s then-largest mortgage underwriter, which sold to and served real estate developers. Revenues essentially moved in lockstep with the drift of new home sales. I suggested to the general manager that if they began to measure and display the number of actual conversations with developers, revenues would grow. While he was skeptical, he agreed to experiment for six months. In that period, the growth in revenue from new home projects exceeded new home sales growth by 14%. Conversations with developers are now a part of their management dashboard.
What Sodexo essentially did was lay the groundwork for growth by creating a corporate culture centered on the issues people truly care about. In doing so, it also created a culture of accountability.
It All Comes Down to People
To grow effectively, we must prepare the people in our companies to take on roles and responsibilities that are needed in the growing companies. In other words, for our company to grow, you, I and our people must grow. In particular, we need to empower the people who are closest to the market to make choices and to be accountable for the consequences of their choices. (As executives, we need to remember that we do not have a crystal ball for the market and that the market we knew resides in the past.) In other words, we need a corporate culture of empowerment and accountability.
A great example of this is Sodexo, a French food services and facilities management company headquartered in Paris. The company reported consolidated revenues of €10.3 billion for the first half of 2022, up 19.4% year over year. Ask former CEO Michel Landel about the secret to their success, and his answer is corporate culture.
In 2009, under Landel, Sodexo adopted a continuous improvement approach to guide their corporate actions, titled the “Better Tomorrow Plan.” The plan addressed the issues essential to their market and stakeholders and was composed of such tenets as business integrity, human rights, diversity and inclusion, and corporate governance.
What Sodexo essentially did was lay the groundwork for growth by creating a corporate culture centered on the issues people truly care about. In doing so, it also created a culture of accountability, because employees wanted to better the company—as well as contribute to the greater good—by way of many tactics found in the plan.
Another example: Samsung experienced rapid growth in the U.S. in the early 2000s. The driver of success was strong communication, both internally and with the marketplace. This commitment aided Samsung immensely, as cross-functional teams had the ability to recognize issues, collaborate and solve problems, and measure progress to respond quickly to early successes and overcome barriers to growth.
Value Both Capability and Capacity
As mentioned, growth is hardly ever certain. As we think about business growth, our attention and resources tend to go to “What capabilities does our company need to grow?” Less frequently asked is “Do we have the capacity to grow?” In other words, we have to think in two different dimensions about both capabilities and capacity for growth.
Consider the example of South Korean automobile manufacturer Hyundai, which launched an exciting new luxury car line, Genesis Motors. In 2016, the first year of selling Genesis cars in the American market, it sold 6,948 vehicles in the U.S. In 2017, sales tripled to 20,612—a growth rate of almost 200%. Yet, in 2018, sales output dropped 52%. In 2019, it grew by 113%. In 2020, it fell again by 23%—only to jump 203% in 2021.
In assessing the company’s erratic growth trajectory, Car and Driver wrote an optimistic assessment in 2021: “Genesis has struggled to gain luxury market share in its early years, but patience, careful marketing and its place in the headlines next to Tiger Woods might be changing things.” However, issues in the factory and supply chain problems arose, and the company has not been able to meet demand. As is typical in such circumstances, dealers broke promises and inflated prices.
Automotive News reported this February that, “Hyundai and Genesis have a note for dealers: Customers don’t like surprise markups, and they may resent the whole organization for years to come over them.” The brand is now not predicted to grow internationally over the next four years.
A wise executive who is committed to business growth would ask: “Is our company ready to grow?” Rather than launching a sales push, it might be time to ask about the mindset and the condition of the company first. Remember, a wise farmer prepares the soil and checks the weather before planting.
This article appeared in the Fall 2022 issue of Insigniam Quarterly with the headline “Ready, Set, Assess.”
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