Achieving growth is a challenge in any environment and that is particularly the case in today’s ... [+]
By Julian Birkinshaw, Vice-Dean and Professor of Strategy and Entrepreneurship at London Business School
Achieving growth is a challenge in any environment and that is particularly the case in today’s business world, which is still feeling the effects of the economic instability unleashed by COVID-19. A crisis of confidence in the US banking sector following the collapse of three small- to mid-size US banks in March 2023, doggedly high inflation, climbing interest rates and increased commodity prices have all brought additional pressure in the search for recovery. What is more, this recent economic disruption is expected to persist, so how, in such circumstances, can companies achieve the breakthrough growth that so many crave?
Pondering the question of where growth might come from has exercised the minds of many a chief executive and entrepreneur. In recent years, technology has been considered the default answer, but at a recent event at London Business School, I discussed with colleagues and Chris McCarthy, Director of Strategy and Growth and Chief of Staff at Johnson & Johnson MedTech EMEA, what opportunities exist for businesses to grow rather than simply stay afloat. What developed from our discussion was that it became patently clear that there are other considerations to bear in mind too.
Beware euphoria
Human nature is driven by euphoria, but my colleague and Adjunct Professor of Economics at LBS Linda Yueh advises caution around unimpeded growth fuelled by euphoria as for every boom there is a bust. Linda, author of ‘The Great Crashes: Lessons from Global Meltdowns and How to Prevent Them’, cites the dot.com bubble as the last time that there was a massive build up in terms of euphoria around technology. Valuations were so high by November 2021 that interest shifted from unicorns to ‘tetracorns’, valued at over $10 billion. The correction in market values finally occurred in 2022, triggered by the steep rise in inflation and interest rates.
What does this mean for funding? In a down-market like we’re in now, business realities kick in. Expectations of exponential growth have been curtailed and investors are now looking properly at companies, to see if they have viable business models. Shareholders with equity invested in a company don’t want to see the value come down and companies are now being pushed to turn a profit. It’s not difficult to get growth in consumption if you’re giving things away. It’s much harder to get people to pay for things, but that’s the route to profit. Have an operating model that works, then it’s more likely that funding will come in.
Don’t rule out the big guys
I have been researching the big picture changes in the competitive landscape for years, and I see it as a Darwinian struggle between the new big-tech and Unicorn companies on one side, and the established incumbents on the other. Unfortunately, too much oxygen has been given to the idea that big tech companies are killing everything off in their wake. The Nokias and Kodaks of this world are the exception rather than the rule. Many of the big incumbents are still thriving.
Indeed Johnson & Johnson is a prime example of a company that has been around for over a century and continues to invest proactively in growth through R&D, acquisition, and a highly successful corporate venture unit called JJDC. It does so precisely because there are still opportunities to grow. With over 60% of the global population having no access to healthcare, and one in ten people in the UK waiting for surgery, there is plenty of room for growth in the healthcare sector and MedTech space.
Growth through innovation
Established companies like Johnson & Johnson tend to follow the well-established route of acquiring companies and/or investing in innovation through shark tanks, venture funds and start-up labs. In companies where there is continuous integration of new business through acquisition, there is always the opportunity to learn, but there can be a flip side. Being customer-focussed can be forgotten in complex working environments, particularly matrix systems. Choices need to be made about where to focus and where to double down. Importantly, start-ups must be given time to succeed.
Indeed, most new ventures fail because they aren’t given long enough. Start-ups don’t just need top management’s buy-in at the start, they need top management’s stewardship. People expect the first few ideas to be successful and want to see profit immediately, but what if that breakthrough idea does not materialise for several years? A longer-term view allows for better success, and longer-term reporting can also play an important role here.
Growth through micro innovation
While start-ups tend to be very focused on consumers, there is also a lot of micro innovation which drives growth. The genius of the iPhone, for example, is that it created a platform on which micro innovations in the form of apps could be built. Similarly, Open AI (the company behind ChatGPT) is creating a platform on which thousands of new AI-based apps are likely to be built in the future.
And of course, it’s not just high-tech companies that are being innovative. For example, companies operating in the eyeware, footware and luggage space, for example, are creating ‘direct to consumer’ channels, cutting out the middleman, customisation and doing things more sustainably. These types of innovations can lead to bigger change. Indeed, the investment paradigm is shifting on this, with the venture capitalist community and other funders starting to appreciate that micro inventions, adaptations and adoptions are improving lives.
Seek quality growth
Respect for the planet, our fellow human beings, and for all animal and plant life, are compelling motivations for people today. While capitalism is the world in which we live, and growth is intrinsic to that, excessive growth brings with it many problems. Today’s consumers increasingly wish to be more respectful of people and the planet, but equally they won’t necessarily want to consume something that is inferior because it’s more sustainable. They also don’t want companies that engage in greenwashing, and nor do investors. Returns on ESG investment are lengthy, but having businesses which are more sustainable, and which provide a better quality of life for all of us, is the crux of the issue that businesses must solve.
Look to the margins
Disruption – with all the opportunities that cascade from it – tends to be seen as a supply-side phenomenon, with technology viewed as the major driver of growth. An over-reliance on technology, however, means that the opportunities there are to be gained from looking at the demand-side are overlooked.
As my colleague Helen Edwards, Adjunct Associate Professor of Marketing at LBS, writes in her latest book ‘From Marginal to Mainstream (Why tomorrow’s brand growth will come from the fringes – and how to get there first)’ there are benefits to be gained from focusing on consumer-driven disruption – when markets get overhauled by sudden new forces of collective consumer preference – where waves that started as ripples crash onto commercial shores and carve out a changed landscape of corporate winners and losers. As Helen ably demonstrates, one only need look at the example of veganism, to see that consumer-driven disruption rather than tech-led disruption can lead to growth. Where vegans were once a tiny, if vociferous, minority, camped well inside the margins of the 1% of the population, an explosion of interest in the health benefits of veganism has led to a vegan food and drinks sector globally worth $23bn and growing.
Early adopters can give companies a clue as to where demand is going to come from. Once consumers in their millions change habits and adopt new ways of going about their lives, this propels new categories, inspires new ways to market, and fuels new growth. What is more, consumer-driven disruption can fuel multiple categories, not just one. Veganism, for example, has led to an increase in demand for health care and beauty products, clothes and furniture.
Looking to the margins is an exciting, and counterintuitive new route to growth. It doesn’t mean we stop thinking about technology, the growth it can bring and the lives it can change. It just means we sometimes do things the other way round – observe how lives are changing, then innovate – processes, products, services, and yes, technologies – to serve people better and grow our businesses and economies faster.
Julian Birkinshaw is Vice Dean and Professor of Strategy and Entrepreneurship. His research focuses on how large established firms are adapting to a rapidly-changing business environment. Professor Birkinshaw is a Fellow of the British Academy, the Strategic Management Society, and the (US) Academy of Management. He has been awarded Honorary Doctorate degrees by the Stockholm School of Economics (2009) and Copenhagen Business School (2018), and is regularly ranked among the Thinkers50 list of the top global management thinkers.
