Two Important Dimensions of Profitable Growth: Strategy and Innovation

In general, all firms have a desire to grow, and, for that reason, they use various growth strategies as they perceive to expand their firm’s activities. Growth can be achieved in several dimensions of corporate strategy: growth in sales, growth in assets (ROA), growth in equity (ROE), and growth in profitability, or some combination of these measures.

However, to grow a firm will need money first, therefore growth and financial needs are closely related. Financial planning models should be constructed to understand the relationship between the two. A firm’s growth can be achieved through external or internal financing. There are two common methods to measure growth: in the percentage form “year-on-year growth (%)” and “compound annual growth rate (CAGR).” If a firm wants to grow rapidly and growth is not planned properly, it can run into cash flow problems and, subsequently, financial difficulties.

Setting a goal for growth alone is not appropriate for a growth-oriented company, growth must result in profitability. Growth in sales can also mean growth in profitability or growth in losses. At one time, before the year 200o, Amazon’s goal was “growth at any cost.” But unfortunately, the company continuously reported rapid growth in losses. It was only after the year 2000 that the company repositioned to sacrifice growth to achieve profitability.

Profitable growth creates shareholder value and attempts to maximize the value of the firm, which is also the ultimate goal of the strategy. A firm’s value is a function of three variables: return on invested capital (ROIC), the weighted average cost of capital (WACC), and the growth rate of profits (g). Growth in sales can be substituted in the formula only when growth in sales is leading to profitability. Profitable growth means increasing a firm’s value by increasing the growth rate of profits. Economic profit is the right metric to measure a firm’s profitability and, by discounting economic profit, one can calculate a firm’s value. Therefore, a growth (in sales typically) oriented company should strive to become profitable first rather than pursue growth. Because growth in profitability is a better measure to achieve sustainable competitive advantage.

Corporate and Business Strategies for Profitable Growth

The primary goal of the strategy is to achieve superior financial performance to maximize the firm’s value. The corporate strategy allows a firm to do business in attractive industries where there are opportunities to generate higher margins. Business strategy helps the firm to attain a position of advantage over its competitors to earn a return that is above the industry average. If the returns on capital are not sufficient, then it will not help to create higher firm value.

The growth strategy is an important component of a firm’s corporate directional strategy. A growth strategy can be useful to a small firm operating in one industry with a single product or product line and for those firms operating in different industries with multiple product lines. There are two basic types of growth strategies: concentration—focusing on current or innovative products in one area and diversification — moving into other industries or other product lines.

Innovation Strategies for Profitable Growth

The best profitable growth a firm can achieve is through a robust innovation strategy, which is a subset of the firm’s business strategy. The profitability from innovation is distributed among various contributors, including the innovator. Different innovations create different values and the distributions of value to participants are also different. There are many alternative strategies available to exploit innovation to capture value from it. Innovation can be generated through internal commercialization, outsourcing, and by forming cooperative business arrangements such as strategic alliances with other companies. These alliances can range from mutual service consortia to licensing and joint ventures to value-chain partnerships. The selection of the best strategy depends on the size of commitment each strategy requires in terms of resources and capabilities. Innovation is a complex undertaking that requires a coordinated effort from all functional departments. Profitable growth can only be achieved when innovation is managed strategically because these two functions (strategy and innovation) can attempt to create a synergy that can maximize a firm’s financial returns.

Marketing Strategies for Profitable Growth

The purpose of a marketing strategy is to create market value for its offering, achieve profitable growth, and sustain that growth in the long-run. Managing growth requires dealing with four key issues related to market position, sales growth, new product development, and product lines. These four issues are briefly described below.

Market Position

The company’s market position focuses on two key aspects: gaining a market position and defending a market position or sustaining growth in a competitive environment.

Gaining Market Position

The company can gain market share by using three strategies: (1) attracting competitors’ customers or selective demand strategy, (2) attracting new customers, and (3) tapping into new markets or creating new markets.

Defending Market Position

Gaining a market position to achieve growth is not enough, the company should be able to sustain its profitable growth. To achieve sustainable growth, a company can use defensive strategies: take no action, reposition the offering, and add new offerings. Taking no action means ignoring competitors’ price moves. Repositioning means reducing costs, moving up/downscale, or increasing benefits. Additionally, to reposition, a company can add new offerings to address the needs of new customers. Here, repositioning means changing the value proposition of the new offering in any of the two ways- vertical and horizontal repositioning. Vertical repositioning modifies the value proposition to a different price range (either higher or lower). Horizontal repositioning also modifies the value proposition, but by altering the product benefits without changing the prices. Adding new offerings means responding to competitive threats by adding new offerings to its existing product line.

Capabilities to Generate Competitive Advantage

To gain and sustain a competitive advantage, a firm should develop capabilities in key areas important to the firm’s business model, allowing the firm to create market value. Here are some key areas in which a firm can develop capabilities: business innovation, strategic innovation, strategic change, technology development, product development, and brand building.

Business Innovation

Competency in business innovation refers to expertise in managing business processes: goals, strategies, tactics, and implementation to improve a firm’s overall performance. This also involves developing collaborative networks to improve the functional efficiency of the business. Developing competency in this area provides a strategic benefit to business model leadership. Examples of firms that have developed and demonstrated business innovation capability include McDonald’s, Amazon, and Pay Pal.

Strategic Innovation

Profitable growth may also be achieved through strategic innovation, which is also known as creative destruction, which makes the competitive advantage of rivals obsolete. Strategic innovation introduces new ways for creating market value from new products, customer experiences, or finding new ways of doing business, including designing new business models. For example, Dell formed an integrated system to order, assemble, and distribute PCs with the advantage of meeting different types of customer needs with speed in delivery. Some companies, such as Southwest Airlines and Nike, have successfully reconfigured their industry value chains to change the rules of the game in their favor.

Transformational Change

When a firm’s profitability declines significantly consistent with the punctuated equilibrium models, then the only way out is through a strategic transformation (strategic change) to first stabilize the organization and then restore it to profitable growth again. For example, to achieve transformation, Apple’s initial effort was reconstruction, followed by the second phase of evolution. Apple computer’s financial performance declined considerably before Steve Jobs took over as CEO in 1997. In a transformational effort, he first stabilized Apple by taking turnaround initiatives on many fronts: through cost control measures, restructuring the distribution system, and removing unwanted products and product lines. Apple broadened its mission by removing ‘computers’ from its name to Apple Inc., redefined its purpose, and shifted its goals to give the company a new direction. Then Apple introduced a planned evolutionary change: formulated a new strategy to focus on the consumer electronics business- to develop iPods and iTunes platforms, to become profitable and grow.

Technology Development

Core competency in this area means a firm’s ability to develop new technological solutions that can lead to the acquisition of the strategic benefit of technological leadership. Examples of firms that have developed and demonstrated this capability include Google, Intel, and Motorola.

Product Development

Having this capability demonstrates the company’s ability to develop new products that can deliver superior customer value. This capability can lead to the acquisition of the strategic benefit of product leadership. For example, companies such as Apple, Microsoft, and Merck have developed and demonstrated their capability in this area.

Brand Building

To gain and sustain a market position, a firm should develop capability in brand building. Having this capability can help a firm deliver superior customer value and create a source to generate and sustain a competitive advantage. This competency provides the firm with a strategic benefit of brand leadership.

Sales growth

Growth in sales can be achieved by selling more to the existing customers and attracting new customers to the category. Managing product adaption and usage are two key aspects of managing the sales growth strategy.

New Product Development

The marketing issues related to new product development are new product demand forecasting, the adaption process, imitation, and the product life cycle. New product introductions are important for achieving sustainable growth.

Product Lines

Product line management focuses on optimizing the captured value of the entire product line instead of focusing on optimizing the captured value of a single product from a broad market segment. The firm can use product lines to create additional sources of revenue and profits.

All the above strategies can contribute to achieving profitable growth and competitive advantage, but the major contribution can only come from corporate, business, and innovation strategies. When innovation is managed strategically, it can generate a “synergistic effect” between innovation & strategy that can generate higher margins and contribute to achieving higher profitable growth rates. In contrast, marketing can only contribute less to achieving higher growth rates.

References and Further Reading

1. S. A. Ross, R. W. Westerfield, and B.D. Jordan, Fundamentals of Corporate Finance (New Delhi: Tata McGraw-Hill Publishing Co., 2002), Chapter 4.
2. Farris, Paul W., Neil T. Bendle, Phillip E. Pfeifer and David J. Reibstein (2010), “Marketing Metrics: The Definitive Guide to Measuring Marketing Performance,” Second Edition, Upper Saddle River, NJ: Pearson Education, Inc., Chapter 4.
3. Ashok N., “Importance of Shareholder Value in Improving Firm’s Performance,” A&N Strategy Consulting (January 12, 2012).
4. Ashok N., “Strategic Role of Economic Profit (EP),” A&N Strategy Consulting (June 26, 2014).
5. R. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2013), Chapters 1, 2, 8, and 9.
6. T. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (New Jersey: Prentice-Hall, 2000), Chapters 5 and 6.
7. T. L. Wheelen & J. D. Hunger, Alan N. Hoffman, Charles E. Bamford, Strategic Management & Business Policy (United Kingdom: Pearson Education Ltd., 2018), Chapters 6 and 7.
8. Ashok N., “Importance of Strategic Management in Managing Innovation,” A&N Strategy Consulting (November 5, 2018).
9. E. Romanelli and M. Tushman, Organizational Transformation as Punctuated Equilibrium: An Empirical Test, Academy of Management Journal (October 1994), 37(5), pp. 1141-66.
10. J. Balogun, V. Hope Hailey, and S. Gustafsson, Exploring Strategic Change (United Kingdom: Pearson Education Ltd., 2016), Chapters 1 and 2.
11. A. Chernev, Strategic marketing Management (USA: Cerebellum Press, 2014), Chapters 2, 14, 15, 16, and 17.