Why growth can be a high risk strategy

Developing strategy starts with asking questions. At the beginning of the process, the most important question is 'what will success look like for this strategy?' Sometimes there is an unspoken assumption that success looks like 'growth' of some kind; often, there are differing opinions about what exactly is meant by 'growth' .

Growth can come in many forms, and it pays to think carefully about its implications. On a global scale we are having to recognise that untrammelled growth is simply not sustainable; we cannot continue to use the resources of the planet as if they are inexhaustible. On a corporate level, we are (I hope) thinking harder about the true value of what we create vs the true cost of creating it (including its life after use).

However, an unthinking focus on growth can threaten the sustainability of the company in the short term as well as the future of humans on the planet in the longer term .

I was prompted to think about this recently by Fonterra’s announcement of a loss of $605m, including asset write downs of $826m, on its businesses in South America, China and Australia. It’s been a humbling reversal. Under it’s former CEO, Fonterra had big global ambitions. The export of Fonterra’s dairy farming system model was to drive it’s ‘V3 strategy’ – growing milk volumes to higher value at high velocity. Ultimately, it proved to be a V2 strategy – ticks for volume and velocity, not so much for value – that has proved disastrous. With the retreat to a ‘back to basics’ strategy, the company has to deal with the neglect of the core of the business back in NZ that occurred whilst Fonterra’s management was absorbed by global aspirations.

In a recent Newroom article* Rod Oram argues that the focus on global ambitions has meant that Fonterra completely missed the rapidly intensifying global debate about food and the planet. He says “our farmers argue they are the best at the current dairy technology, and hopefully will make some slow incremental improvements in it. Therefore, they will always have lots of happy and loyal customers. That’s as illogical as car makers believing they will keep selling lots of fossil fuel cars because they’re very nice and efficient”. The need to improve environmental credentials has been recognised for some time within Fonterra, but until recently has been treated as a PR issue rather than a fundamental business issue. The need to innovate is both critical and pressing, in terms of how milk is produced on the farm, what products are made with it, and to who and how it is marketed to continue to generate demand. Rather than being ahead of its competitors, Fonterra’s focus on global growth, and its under-estimation of the speed, scale and impact of these shifts on its core business have left the co-operative in a weak and fragile state and playing catch-up.

There is nothing wrong with being ambitious. But problems arise when companies adopt a ‘set and forget’ mode for their core business, and set off for pastures new, forgetting that it’s essential to evolve and innovate the core at the same time. The drive for new customers, into new products, new markets or whatever, must not come at the cost of neglecting the core and assuming that business will continue as usual, unless you are knowingly ‘betting the company’ and planning to exit the core.

In recognition of this, I generally talk to clients about a min/max approach:

  • what’s the minimum we must achieve
  • what’s the maximum we could achieve

The minimum can be a variety of objectives but most often it is some variation on protecting the sustainability and growing the resilience of the business or organisation. When technology, markets, competitors are constantly changing, it’s dangerous to assume that BAU will just continue on, as usual. As a foundation to strategy, it’s well worth putting some effort into thinking about what might put the sustainability of your organisation at risk, what might damage its resilience and what you could do to mitigate these factors. As a minimum, your strategy needs to recognise these so that, even if you decide to do nothing to mitigate (or can do nothing), the risks you are taking are apparent.

For any business, sustainable growth is most often achieved off a strong core.

Thinking about the maximum that you could achieve allows you to dream a little. What’s your biggest ambition? What’s the most you could do? What goal makes you most excited? What do you want to be known for in 5 or 10 years time? The key to successful growth generally lies in leveraging the core in some way through an in-depth understanding of where your sources of competitive advantage lie now and in the future. For Fonterra, for example, this could have lain in building the environmental credentials of milk produced in NZ ahead of our dairy competitors. Having set a max goal, strategy development means looking at how you will get there, what it will take, what do you need to do and not do, what resources are required and where will they come from. Importantly, what is the fit and where are the friction points between achieving this and the requirements of achieving the minimum goal? For example, will resourcing a growth strategy divert resources from the core that will weaken it? For the overall strategy, where is the sweet spot between min and max?

The benefit of the min/max approach is that it makes clear the trade offs and risks that need to be considered between protecting and evolving the core and pushing for ambitious growth goals. It means that strategy is coherent, and doesn’t contain conflicting objectives. It means that priorities are thoughtfully set, and resources applied accordingly. It means not unintentionally betting, or at least severely damaging, the farm. It doesn’t de-risk growth, it doesn’t stunt ambition, but it does create a realistic foundation for growth.

*“Sustainability, innovation should be Fonterra’s way forward”: Rod Oram in Newsroom, September 29th 2019

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