Academic journal article The McKinsey Quarterly

Is Your Growth Strategy Your Worst Enemy?

Academic journal article The McKinsey Quarterly

Is Your Growth Strategy Your Worst Enemy?

Article excerpt

The "brilliance" of a strategy may lie in overcoming powerful secondary effects

Why bad things happen to good strategies

Causal loops and time lags

Achieving sustainable growth is a perennial concern for senior managers. Yet the strategies they pursue often capture few or none of the intended benefits. Their efforts are rewarded with outright failure or with short-lived wins followed by rapid deterioration. Consider these cases of thwarted initiatives:

* Growing too fast. History is littered with companies that experience "boom and bust": rapid growth followed by steep decline, often into oblivion. In the UK life insurance industry, London Life pursued an aggressive salesforce growth strategy that put it out of business by 1987. Its hiring practices had set off a vicious spiral of falling skill levels, flagging motivation, and sinking performance.

* Too much too soon. A polymer company spotted an attractive, fast-growing market and invested heavily in new plant and equipment to meet demand. Four rival suppliers responded by dropping their prices. Though the company succeeded in achieving a large share, eroding margins made the market unprofitable.

* From glitter to glut. A leading high-tech company saw first-month orders for its latest product exceed capacity by 30 percent, and got its suppliers to increase their raw component stocks. Two months later, as stockpiles built up, orders collapsed, precipitating a huge "sludge" inventory. The product ended up being branded a dud. It transpired that much of the original demand consisted of "phantom orders" placed by distributors concerned about short supplies. Tight initial capacity had actually boosted early demand.

* A fix that failed. Many companies pursue growth by attempting to improve customer satisfaction, often through staff training and skill building. One automotive OEM required its dealers to increase technician training, but saw little improvement in either service performance or customer satisfaction. It had not foreseen that technicians would react to their extra training by spending less time in fault diagnosis, or that dealers funding the training would cut back on their investment in tools and equipment.

* Unintended consequences. These frustrating patterns occur in national economies too. In the United States, the 1990 luxury tax was intended to generate an extra $76 million in annual revenues, but it actually yielded only $13 million. The reason: the luxury market for planes, boats, and automobiles dried up overnight after the tax was introduced.

Why do plans that look good on paper go bad when they are executed? The problem often lies in what might be called secondary effects - unforeseen by-products of strategy that confound its original intentions. The growth strategy of the polymer company, for instance, took no account of how competitors might react. The company won the volume it sought, but its profits were diminished because of actions by rivals threatened by its new capacity.

We believe that companies wishing to implement a successful and sustainable growth strategy need a better approach - one that takes account of the impact of these secondary effects and helps managers make more informed choices about how to accomplish their objectives.

Achieving sustainable growth

To understand these secondary effects, it is necessary to take a dynamic view of the marketplace - one that anticipates competitive reactions and explicitly incorporates them into strategy. An analytical technique called Business Dynamics has proven especially valuable in this context. Derived from system dynamics, it applies ideas about engineering control feedback to business and economic systems. It is based on six fundamental guiding principles (see the boxed insert).

In the cases below, a Business Dynamics perspective helps to explain how sustainable growth was achieved in two very different businesses. …

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