Achieving Hyper-Growth: Innovation (Part 2 of 4)
Private Equity firms purchase Portfolio Companies with the intent to add value and maximize their growth potential, but it’s no surprise that achieving successful growth is complex – oftentimes accompanied with unforeseen challenges.
Portfolio companies today are under enormous pressure to achieve hyper- growth, sustain constant innovation and successfully execute their business strategies – all while maintaining existing operational efficiencies and costs. But once you acquire a new portfolio company, where does your growth plan start? What needs to be addressed immediately? What are your long term goals? How much can you fund? What has been working?
In a series of blog posts, we will address the four challenge areas that have the most impact on a portfolio company’s success and the best approaches to address them head-on. The second area that we will explore is corporate innovation.
Challenge: When and how should your portfolio company innovate?
A healthy dose of paranoia can oftentimes spark innovation and change within an organization. For companies in this mindset, innovation becomes a constant and continuous part of their company culture, born from the leadership team’s strong understanding of their customers’ pain points and fear of business disruption from competitors.
Customer needs drive innovation for new products, services and entry to new markets – and leadership teams that are committed to innovation make customer facing activities a priority. When a company works closely with their customers and understands their business needs, the environment for innovation is fostered, well before an inflection point is reached. To put it simply, companies thrive when they stay true to their customers.
In order for your company to thrive, innovation needs to start at the top, with your CEO setting the tone for corporate culture. Without CEO support, innovation can’t consistently occur. Your company’s ability to achieve continuous innovation will drive its growth; therefore it should be an essential part of your company’s growth strategy.
Successful innovators understand that one of the core tenants of innovation is to stretch outside of your comfort zone, even though it’s known that not all of your company’s initiatives will succeed. The velocity of growth increases risk, and in order to manage your growth effectively, initiatives should be prioritized in a way that builds momentum for your business. Focus first on the ones that deliver business value but aren’t high risk (“low hanging fruit”), then move onto high value, riskier initiatives to build on former successes.
When developing a growth strategy for innovation, consider the four options below – laid out in order of lower risk to higher risk:
INCREASING MARKET PENETRATION: Begin a growth strategy by increasing market penetration. Simply selling more of current products or services to existing customers is a very effective and low risk growth strategy. Generating more revenue per client drives the top line and decreases the cost of sale, thus improving the bottom line.
MARKET EXPANSION: Selling products and services to a new geographic area or region is a step up the risk curve but also a very effective growth strategy. Taking a local model to a regional model, a regional to a national, or a national to global are common market expansion strategies to increase growth. However, having the right team, process optimization and technology in place to execute your expansion plan is critical.
CREATING ALTERNATIVE CHANNELS: Generating revenue through new channels of distribution can play a vital role in growth. Well-chosen channels, such as franchise models or eCommerce integration, can constitute a significant competitive advantage, while poorly conceived channels oftentimes condemn even a superior product or service to failure in the market. Before creating an alternative channel, thoroughly evaluate it while also ensuring that your leadership team is 100% dedicated to the strategic initiative to minimize your potential for failure.
NEW PRODUCT/SERVICE DEVELOPMENT: Selling new product lines and/or new services to existing customers is one of the more risky propositions. However, new product development can catapult a company into intensive growth and disrupt industries — think Apple’s iPod. Strong research and a dedicated leadership team are crucial when identifying new product or service lines. The focus should be on capitalizing on future environments with your customers’ needs at the forefront.
Once the tone for corporate innovation has been set, companies can begin developing their Strategic Roadmap.