As the economic outlook begins to brighten, executives are turning once again to the opportunities and challenges of growth. Investors are looking for companies that can deliver high levels of sustained profitable growth — but cutting costs can only do so much.
We will wager that when most of you think of growth, you tend to focus on two options: organic growth or acquisition-driven growth. A company can either build new capabilities internally or buy it.
This mindset misses a third path: leveraged growth.
We don’t mean leverage in terms of financial leverage — adding more and more debt to the balance sheet — that is what got quite a few companies into trouble during the downturn. We are talking about a different kind of leverage — the ability to access and take advantage of other individuals and institutions in ways that help your customers.
This is a leverage that can work in bad times as well as good times. If done in the right way, it can generate returns and avoid the dilemma of diminishing returns that is common with traditional growth initiatives, which are characterized by a burst of growth followed by a rapid leveling off.
Implementing leveraged growth tactics can be deeply challenging, especially since there are only a limited set of companies that one can look to for examples of how to put this into practice.
Consider how Apple (AAPL) and Google (GOOG) quickly established leadership positions in the smartphone world largely by developing a platform for third party developers to make their own apps. Or look at the phenomenal growth of Li & Fung, a Chinese company, now orchestrating over 10,000 business partners in their global network of apparel manufacturers.
In this column and the contributions that will follow from us, we will explore the potential of leveraged growth and what is required to make it a significant contributor to shareholder value.
Here are four key opportunities and issues associated with leveraged growth:
1. Leveraged growth can improve a company’s economic performance
Whether we talk about growing organically or through acquisitions, traditional growth initiatives require significant upfront investment followed by long waiting periods for these investments to deliver. Both traditional approaches also come with considerable uncertainty about the probability and size of the return on investment. In an increasingly competitive global economy, this kind of uncertainty is not very attractive.
Leveraged growth can modify this pattern in significant ways: the initial investment can be much more modest and the growth approach can be modified as a company receives feedback.
2. The importance of business ecosystems
A business ecosystem is any set of more than two independent players that interact with each other on an ongoing basis to access resources from each other. This covers everything from a simple supply chain to vast global networks with thousands of participants. An ecosystem can be a contest where large numbers of people compete for prizes or a scenario where a broker helps to bring together partners to work together on a specific task.
Executives understand that ecosystems are becoming increasingly important. But, in private, they express significant confusion and frustration regarding the loose way that these ecosystems are often discussed.
Working within different types of ecosystems requires very different management styles, but executives are often left to their own devices to figure out which style to choose and discover what works as they go along.
Not all ecosystems are created equal and many companies today are trapped in partnerships that significantly limit their growth opportunities.
3. Choosing the best way to work within a business ecosystem
Executives often fear that joining a business ecosystem means that they will lose control of their business. But that doesn’t have to be the case. Ecosystems demand active involvement and management so they can deliver the most value to their participants.
4. Leveraged growth benefits from new generations of technology
There are so few examples of successful leveraged growth today, especially for large companies, because these kinds of tactics are very difficult to implement without very close communication between all the participating players.
Today, however, cloud computing, social software, sensor technology and mobile technology, are changing the game in profound ways. For example, it is now possible to monitor the complex equipment of participants in a global business ecosystem and deliver real-time updates to participants wherever they are in the world — coordination that would have been impossible to achieve at a large scale just a few years ago.
The four items above bring us back to Apple and Google, companies that have deftly taken advantage of an army of willing, hungry application developers who can now sell their wares on virtual markets thanks to technological advances. We’ll take a closer look at each of the opportunities and issues related to leveraged growth mentioned above in future columns.
John Hagel III is co-chairman and John Seely Brown is independent co-chairman of the Silicon Valley-based Deloitte Center for the Edge, which conducts research to support corporate growth.