Welcome to The Ledger where we sum up the latest finance and accounting news for you. This week, we've rounded up everything finance leaders need to know about planning for growth. Read on to learn why you need more than one growth engine to fuel success, discover the new growth model B2B companies are embracing now, the barriers you're likely to encounter when you launch a new product and the unexpected way that higher interest rates may end up fueling long-term growth.
The 'Grow at all Costs' of the Past is Costing B2B Now — Here's How to Fix It
For years now, money has been easy to find and cheap to borrow. For business-to-business companies, especially those in the tech space — SaaS startups, software providers and "disruptors" of all stripes, that's made it easy to spend like there's no tomorrow. This made sense (you must spend to grow, after all) as well as headlines: B2B was on a hiring spree, stacking their headcounts to roll out new offerings more quickly.
Now, however, we're seeing the downside of all that upswing: money's not so cheap anymore and the headlines are likelier to announce layoffs. The lesson? It's time to find a growth model that's more sustainable and efficient. Instead of relying on that next round of funding to scale, scale with the resources you already have and use each subsequent raise to supercharge it. Sounds great, right? But how do you measure it? With a specific set of KPIs:
Annual Recurring Revenue: A straightforward calculation of the amount of revenue you're bringing in vs. what you're spending
Sales Attainment Rate: The amount of time it's taking you to hit the sales quotas you set each month for your team
Monthly Revenue per Employee: The ratio that illustrates how much revenue each employee generates per month to see how wisely you're utilizing your human capital
And for Startups, the "Magic Number" Ratio: A number between 0.5 and 1 point to sustainable and efficient operations in marketing and sales
Every market correction is an opportunity to learn from the years preceding it with a post-mortem and mindset shift. For many B2B companies, that means adopting a growth-model that's geared toward efficiency in favor of excess. Read the full article at forbes.com for more.
The Most Successful Companies are Planning to Build New Growth Engines from Scratch
Traditionally, companies drove profit and company growth through a process of adapting their core competencies to adjacent demand and markets. It was a reliable formula for success and for most companies, it still is.
However, research from Bain & Company suggests that successful companies are seeing results with a different kind of growth strategy: adding an "engine two" by adding to their core competencies by leveraging novel and emerging markets, demand or technology. Two partners and global strategists at Bain — Chris Zook and James Allen — looked at 1,000 companies with an "engine two" growth model or strategy, developing a dataset of 100 to identify three distinct types:
Next-generation iterations: Almost a third of the dataset companies developed an engine two by creating a business unit that delivered core competency offerings by reiterating the delivery model into a version that made it distinct, usually in response to an adapt-or-perish threat.
Core competencies, twice removed: Around half of the companies Zook and Allen studied leap-frogging — as opposed to branching out — into a new (but related) market by leveraging their core competencies to position themselves as de facto experts or developers of novel technologies and solutions.
From-scratch engines: The smallest group of companies did not leverage their core competencies at all. Less than a fifth developed an entirely new business unit that succeeded by being first on the scene as an investor in a brand-new technology. Then, they were able to insinuate themselves into a key leadership position and continuing to invest heavily in the second engine. Finally, they were able to add capabilities by acquiring them externally or scaling them rapidly.
In business, the adage "the only constant is change" has never been more apparent, and the rate at which we experience that change only seems to increase each year. As markets, mindsets and managerial best practices evolve in tandem, it's uncovered the possibility of profit growth outside of core competencies in a way that just wasn't possible before, and the latest research makes a good argument for from-scratch secondary engines. Take a deeper dive into the data over on hbr.org.
Planning to Identify Growth Barriers to Realize Value on New Products & Services
To stay competitive, companies need to be able to continue to improve upon or innovate what they have to offer their clients. Often, these novel offerings fail, despite being objectively good. So what's the problem? Likely, a failed introduction is the result of an inability to consider, recognize and ultimately overcome a few barriers:
Demand: If the customer doesn't want it, it's not going to do well, no matter how much time you spend developing and promoting it.
Timing: Being too early (think TiVo) or too late (Microsoft Zune) to the party can result in a failure to thrive.
External factors: Consumer confidence, economic shrinkage and supply chain factors, as well as other external factors can throw hurdles in the way of growth
Market size: Going too niche or casting too wide of a net are common ways new services and products miss the mark
Internal unrest: Even the best new product or groundbreaking service will not contribute to growth if it lacks cohesive organizational and operational support internally
VUCA: Good old "volatility, uncertainty, complexity and ambiguity". Failing to have multiple contingencies in place when its time to launch a novel offering prevents businesses from making progress on growth strategy goals.
Innovation belongs in your growth strategy — if you're ready for the barriers that can stand in its way. If you're looking to launch a new product or service, don't let them trip you up. Forbes.com has the whole story.
How Higher Interest Rates Could Incentivize Better Innovation and Grow Profits
Until very recently, the fastest and most direct way for companies to scale capability and seek innovation has been to simply purchase or absorb it through M&A dealmaking. The unintended consequence of this, according to Bijan Khezri, Chairman of the governance and investment partner Khezri Capital Research International — has been to alienate internal R&D teams and stymie internal resources that could drive long-term, cost-effective growth. According to Khezri:
" When funding is plentiful, executives can readily execute and justify deals, so they pour all their energy into buying companies instead of empowering internal R&D. But the more a company ignores internal innovation, the more aggressively it must acquire. As it buys more and more outside firms to boost its own innovative capacity, it simultaneously struggles to retain key R&D talent because its internal culture is no longer sufficiently supportive of innovation."
This is what Khezri calls the "financial control trap," arguing that companies should rethink the approach and shift toward a "bottom-up" growth strategy that recognizes the value of proximity to customers, vendors, technologies and processes within the organization. As market conditions make M&A dealmaking less appealing, he hopes, ideas and innovation will increasingly come from established teams.
Mergers and acquisitions are one growth strategy, but it's far from the only one. When interest rates climb, the argument for R&D as the new M&A makes sense. Head to hbr.org to take a deeper dive into how you can innovate internally to start planning for growth.
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