Growth Strategy in the Age of Smart Systems
Software and digital technologies are displacing physical hardware and replacing labor-intensive services in nearly every market and application imaginable, and it shows no signs of slowing down. The traditional differences between so-called high technology companies and the remaining product and service businesses that utilize the innovations that tech-focused developers provide is fading away. In one form or another, every company is becoming a technology developer which is forcing businesses to re-think how they approach growth.
In a mere two decades, the digital transformation of every aspect of human affairs has been profound enough to make silicon-based computation seem almost as important to our evolution as DNA itself. The undeniable and irreversible effects are visible everywhere.
However, somewhere along the digital transformation journey many companies have become confused. Transformation is not monolithic nor an end unto itself. Transformation is the process that enables new growth opportunities and unlocks paths to long term value creation. Digital transformation is a means to an end, but not the end state itself.
The growth opportunities that software and digital innovations enable, what we like to call Smart Systems, are creating unimagined new solutions based on new customer experiences, new business and revenue models and new service delivery modes. As the cyber-physical world continues to dovetail with IoT, machine learning and artificial intelligence, Smart Systems will enable previously unimagined capabilities. The question is whether business leadership really understands the new dynamics driving value and are ready to grasp its potential.
EVOLUTION OF CORPORATE DEVELOPMENT and GROWTH STRATEGY
source: Harbor Research
Established product manufacturers and services providers, what many people often refer to as “old economy” or “bricks and mortar” businesses, are operating with outdated growth strategies and innovation models that were conceived in the post-WWII era and cannot serve the needs of a truly connected world.
DRAGGING GROWTH STRATEGY BAGGAGE INTO A NEW ERA
When we coined the term Smart Systems our intention was to highlight two important trends driving future information systems innovations: the first trend was that innovations would accelerate exponentially, and the second trend was that interrelated combinations of compute, network, sensor and software innovations would reinforce one another and multiply their impacts.
Evidence of these two concepts surrounds us daily. Technology is blurring the traditional distinctions between products & services, value chains and entire industries. New innovations are forcing companies to rethink not only business processes but business models, operating models, domain focus and even the scope of their core businesses. All of these impacts represent new growth opportunities and are driven by the following market forces:
- Exponential Technology Advancement: The rates of impact will accelerate in a logarithmic way resulting in far-reaching intended and unintended consequences. Industry boundaries will blur, value chains will be reformed with value migrating to new places, and entirely new industries will be created. Every sector of the economy will be affected.
- Confusion About Smart Systems Impacts: There is a general understanding in business that Smart Systems will drive enormous impacts however, the specifics are not well understood because it is difficult for most people to imagine exponential growth.
- Re-Design of Corporate Structures: Modern enterprises have been deconstructing for decades and are becoming value-delivery networks consisting of diverse business functions and entities – some owned directly, many sub-contracted, but all requiring orchestration.
- New Value Creation Modes: Agile organizations are extending skills through new relationships and ecosystems increasingly comprised of coalitions of diverse self-motivated participants, not sub- contractors tied to “command and control” schemes.
- Excess Capital and Less Capital Needed To Form Ventures: Capital is superabundant. Global financial assets are more than 10X global GDP making talent and ideas more important than capital. At the same time, it’s becoming ever cheaper to form and prove new ventures.
- Catalytic Technologies Will Drive Abundant Value: Evolving technologies will radically transform our lives and the global economy, scaling their equity market capitalizations from over $10 trillion today to potentially more than $150 trillion in 2030.
Most importantly, these changes are not one-time events. Technology advances will force corporations to continuously evolve their growth strategies. To succeed, companies must become more flexible and adaptive and will need to continuously reshape their businesses to address changing market and competitive structures.
MULTI-MODAL CORPORATE GROWTH STRATEGIES
To take advantage of these growth opportunities, leaders in diverse companies are investing in home-grown solutions, launching innovation incubators, hiring digital natives to instill innovation in their company cultures and more. Many of the companies and maneuvers we observe are, for the most part, organic and internally focused. Will this be enough?
Historically, established companies have pursued three broad avenues to growing their businesses: Core market penetration to drive share in existing markets, consolidation of peer companies to drive economies of scale and cost, and expansion into adjacent growth opportunities including new offerings or new market segments.
Companies pursuing market penetration make investments in new product or service capabilities or investments in expanding marketing and sales resources to help drive dominance in their core markets. Consolidators utilize M&A to build scale and companies pursuing adjacent opportunities make investments in new products and services or utilize focused M&A to acquire access to customers in new target segments. While this summary portrayal might oversimplify corporate growth strategies it does sum up most of the levers traditional businesses have utilized to grow.
Smart Systems and digital technologies are creating many new external sources of growth opportunities. Ecosystems, corporate ventures, autonomous start-ups, joint ventures with customers and partners as well as minority equity investments and more. External growth maneuvers and inorganic growth mechanisms are multiplying fast and becoming much more dominant than internal organic approaches.
We believe executives need to think more about utilizing multiple parallel growth vehicles and strategies. However, many established companies are conservative and tend to select only one, or possibly two, of the many emerging sources for new growth:
- Internally via spin-off of sound new business ideas that surface in existing core businesses, but where the culture and operating mode in the core do not permit them to survive beyond early R&D and development.
- Internally via incubators, accelerators and other similar innovation development modes.
- Autonomous (standalone] ventures often developed via a corporate venture function or similar for new high potential innovation and business concepts.
- Externally via acquisitions and minority equity investments.
- Externally via joint ventures and other similar vehicles for collaboration with customers or partners.
- Externally through collaborative ecosystems and creative combinations of start-ups and larger organizations
MULTIPLE PARALLEL GROWTH MECHANISMS REQUIRED TO ADDRESS DIGITAL AND SMART SYSTEMS
source: Harbor Research
The strategies and organizational approaches adopted by many companies today reflect their focus on too few sources of new business development. In contrast to these more limited approaches, we believe executives need to move beyond their “comfort zone” and focus on multiple parallel growth mechanisms that foster a more flexible mix of approaches.
Developing autonomous growth ventures in parallel with the core business raises challenging operating model questions. To what extent should a new growth venture re-define elements in the core business? How, when and in what manner should the new business be integrated into the core? How will leadership make critical allocation decisions around skills, people, talent and investments? All these issues lead to a very basic question, is it better to create new growth ventures or does it make more sense to keep an eye on similar external developments and players in the market and then either invest or acquire the new growth business?
New inorganic growth levers offer several advantages relative to organic growth — particularly in the digital and Smart Systems era. Inorganic growth increases a company’s options and increases the odds of success where organic innovations have practical limitations regarding what technologies that can be pursued. Virtually any technology, capability or collaboration mode is available and accessible with inorganic growth strategies. Moreover, external maneuvers are less costly today and can significantly shorten development time.
CREATIVE COMBINATIONS OF GROWTH LEVERS & STRATEGIES
source: Harbor Research
Corporations that embrace external growth and innovation mechanisms can take advantage of new solutions and technologies already in development — saving time and resources and potentially avoiding costly internal failures. External growth levers enable corporations to leverage balance sheet capital, rather than expense, to drive new growth advancing innovation while minimizing the impacts to operating income and performance.
New emerging investment and venturing approaches are being organized in a variety of industries including investment vehicles that tie investors to specific ventures within a larger organization—investments that are suited to their risk profiles and that do not involve owning a share of the whole company.
We believe the rapidly expanding number of inorganic growth alternatives represents a structural shift in how companies will approach growth. No longer will traditional product and service businesses rely only on seeding growth internally. The center of gravity for growth strategy will dominantly shift to diverse external approaches.
Corporate growth strategy is radically changing with far reaching implications. This amounts to much more than how executives think about growth. Companies will need new skills, capabilities, and relationships as well as new processes to support corporate development and growth strategy.
RE-THINKING CORPORATE INNOVATION
While we strongly believe digital and Smart Systems technologies will play a central role in many company’s growth strategies, many managers will be challenged by the trade-off decisions they will face. When traditional business practices, company culture and operating models inhibit the required creativity and speed to effectively develop new customer solutions, or when traditional operating models constrain the organization’s ability to develop new technical skills or organizational capabilities, leadership teams will need to seriously consider alternative innovation modes and non-traditional growth ventures.
To develop and capture strategic growth opportunities, companies will need to consider multiple growth levers simultaneously. Corporate development’s role will expand to enable multi-modal growth weaving together new growth ventures and maneuvers, including M&A, venture development and investing, as well as ecosystem-building and internal innovation. ◆
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