Where Do We Grow From Here?
(As originally published in the Ivey Business Journal, November/December 2011)
By Colleen McMorrow, Leader, Entrepreneurial Services, Ernst & Young LLP
Building from within isn’t necessarily a new approach, but in a flat-growth environment it represents a meaningful growth opportunity for entrepreneurial organizations. Readers of this article will learn what strategies and tactics they can develop and deploy to grow their firm in a meaningful way.
With a mixed bag of economic indicators that reveal no obvious path forward in the current business environment, one might expect Canadian businesses to hunker down, retrench or even retreat. Such action would certainly be a reasonable expectation of leaders of entrepreneurial, emerging companies, who are facing some of the most volatile conditions of recent history. But buoyed by a solid debt structure, low interest rates, a strong Canadian dollar, and a favourable regulatory environment, more and more Canadian companies are seeing the glass as half full. They are looking beyond survival mode to chart a path to the next era of wealth and opportunity. However, growing significantly in a flat-growth environment requires a bold combination of savvy thinking, careful planning and well-thought-out tactics.
In recent months, EY has undertaken several surveys and in-depth conversations with business leaders in Canada and around the world. While these examinations reveal a surprising degree of confidence, they also reveal a keen awareness of a shifting focus on where and how growth is pursued. This article explores and discusses the nature of that confidence. It also draws on the research to identify key strategies and tactics that can help propel growth-oriented entrepreneurs to success, despite the volatile environment.
A NEW PARADIGM AND A NEW OPPORTUNITY
First, let’s take a closer look at the “state of mind” of business leaders with regards to the current climate. In Ernst and Young’s October 2011 Capital Confidence Barometer, published in the Financial Post, a survey of 1,000 global business leaders, more than one-third of Canadian respondents said that they are focused primarily on growth. This compared with just 17 per cent of respondents among their global counterparts. Having weathered the economic storm much better than most Western nations, and in an environment of stable commodity prices, Canadian business leaders are poised to not just grow their own businesses incrementally, but to help shape a whole new paradigm for the way 21st century industry operates.
The rise of a new paradigm is the result of a collapse of many aspects of corporate culture and finance. The collapse is giving way to a whole new era, in which growth will be driven primarily by emerging, smaller organizations, not the large conglomerates that have anchored the economy for decades. We might think of this as the era of the entrepreneurial economy. However, it may be more appropriately referred to as a time of cautious or restrained entrepreneurship. Moreover, it’s a paradigm in which Canadian companies are uniquely poised to thrive.
This new kind of entrepreneurship will be built on the rise of an innovative business model characterized by measured, thoughtful, and incremental growth and development, as opposed to tectonic or transformational change. It’s a model that calls for nimble, fluid and flexible workforces to replace cumbersome bureaucracies; low-overhead marketing to replace splashy campaigns; creative and non-traditional systems of financing to fuel growth; and risk-taking tempered by more circumspection than we have seen in growth models of the recent past.
Incremental change rather than big splashy launches? Caution rather than risk? That may not sound like the profile we’ve come to associate with entrepreneurs, but it’s exactly this somewhat paradoxical mix of creativity and innovation combined with restraint, regulation and caution that is driving the next phase of Canada’s business growth. The culture of prudence that has sometimes led Canada to be seen as an economic lightweight has, in these tough economic times, proven to be our greatest asset.
Other countries’ ability to embrace an entrepreneurial mindset more like Canada’s may be a defining feature of their own recovery and growth. Why? Because more than 98 percent of Canada’s economy is driven by highly nimble, entrepreneurial businesses with fewer than 100 employees. These are the businesses that are poised to respond to the new realities. Amid the cost-cutting and restructuring of their larger counterparts, Canada’s entrepreneurs have held employment levels relatively stable, with Industry Canada figures showing net gains above the pre-recession peak.
A FOCUS ON INTERNAL, INCREMENTAL GROWTH
As the economy stabilizes, Canadian companies are taking a relatively conservative approach to growth. At the same time, they are focusing on shoring up existing businesses and growing organically. The key to this organic growth is incremental innovation, with more than 46 per cent of the Financial Post survey respondents indicating that they will concentrate on innovating to create growth from existing products and clients in the next year. The focus is on taking stock of what brand and product assets businesses already have in play, improving them, and extending their range, rather than launching into new and uncharted territory.
Which of the following tactics have been most effective in driving growth for your company?
According to our firm’s Competing for Growth survey, despite the recession, one-third of the top performing companies boosted their product range by more than 20 per cent, while only 6 per cent of low-performing companies found reason to do the same. In today’s customer-centric environment, companies that adapt products and services to meet the needs of existing – not potential – customers stand to win in the long run. One might think that this is a contrarian, or even counter-intuitive, view. But that’s not so, according to the 400 global executives interviewed in the survey. Seventy-one percent of companies report introducing new products or services to increase sales, but 58 per cent report that they are selling these products and services in markets where they are already present.
Organic growth remains a core element of business success in all sectors, and while building from within isn’t necessarily a new approach, in a flat-growth environment it represents a meaningful growth opportunity for entrepreneurial organizations.
SAVING MONEY MAY LEAD TO GROWTH
Entrepreneurs are realizing the potential – and the advantage – created from improving relationships with existing customers rather than focusing on acquiring new customers. In this same vein, helping a customer save may just be the strategy that saves your bottom line. In this post-recession world, anything an entrepreneur can do to enable cost savings is going to be well received. Modifying existing products and services in ways that actually help customers save money and increase efficiency may mean that both entrepreneurs and their clients can continue to grow together.
SUCCESS THROUGH GLOBAL FOCUS RATHER THAN M&A
EY’s research also demonstrates a shift in where businesses are seeing opportunity. The trend in Canada is clearly away from growth through acquisition, to generating additional revenue from within the business. Only 17 percent of EY’s Financial Post survey respondents had any intention of looking at M & A activity or joint ventures in the coming year – a significant decline from two years ago. This cautious approach is at odds with the upwards global trend in merger & acquisition activity which anticipates a 3 per cent uptick in M&As in the coming year.
Which changes has your company made to its business model over the past two years?
Despite a downward trend in M&A, today’s entrepreneurial businesses have more opportunities than ever before. While smaller organizations tend to think that they’re limited to the local or domestic market, the fact is that thinking and doing business globally can have demonstrable benefits for these firms. Brazil, Russia, India and China offer a wealth of opportunities for businesses of all sizes. Some – like India – may actually be a very natural fit for smaller companies looking to get started there, as that country’s economy is driven by small and medium-sized businesses in which a family culture prevails.
CASH IS KING: A NEW APPROACH TO FINANCING GROWTH
Canada’s entrepreneurs have not forgotten the lessons learned in leaner times, and they will continue to focus on those key drivers that were crucial to their ability to survive. While more than 40 per cent of those surveyed will turn to traditional bank loans for financing, cash continues to be king. Nearly 70 per cent of survey respondents said that cash had been their main source of financing for the past year and that it will continue to be so for the next 12 months.
Companies looking to succeed should look inside to make their business as efficient as possible, and to get a better handle on hidden tax benefits that could buoy their operations. Entrepreneurs are often adept at thinking up new products and services. However, they will need to apply that talent to managing their firm’s culture and inputs, not just to its products. Moreover, many entrepreneurs do not explore the full range of financing options available to them. Reducing debt load and risk by shoring up cash reserves isn’t enough. These strategies need to be paired with the broader, bigger picture view of where companies need to go – a view that can only be realized by accessing different types of financing.
FOCUS INNOVATION INTERNALLY AND EXTERNALLY TO ACHIEVE GROWTH
It’s becoming increasingly clear that creativity, diversity and entrepreneurial drive, coupled with thoughtful restraint, are essential factors in any plan for success. Regardless of market conditions, innovation remains the essential ingredient for market leadership. Yet many businesses fail to set strategic priorities for it. The smart ones make it a boardroom issue. They focus on incremental innovations and cost savings to grow business with existing customers. Meanwhile, those who apply the same approach to how their business operates – from identifying efficiencies and creative sources of financing to thinking more globally about growth opportunities — will soon reap the rewards of growth in an otherwise flat environment.