Prepare for take-off

Things are looking up. Probably.

That, at least, is what some respectable data and some less reliable anecdotal evidence would seem to suggest. The UK economy is officially out of recession. Vacancies are rising, which might point to an increased appetite among employers to increase headcount and commit to a higher level of activity.

In the realm of anecdote, more business seems to be taking place: more new pitches are being required, more projects are being started, more work is being done. Will this gently rising tide of growth lift us all back to prosperity?

Not necessarily. For one thing, economic recovery is slow and uncertain. And for another, there are many things managers can and will get wrong as they strive for better results.

“This is a time for the judicious use of scarce capital,” says Steve Frobisher, head of business turnrounds for PA Consulting. “You cannot afford to use it unwisely.”

Mr Frobisher is advising clients to make sure they have sufficient liquidity before starting to drive the business harder again. Only a very conservative balance sheet, he believes, can protect the business against unforeseen shocks – such as a “double-dip” recession – or against the risk that a company trades too hard before it is ready to do so.

Most of the time, businesses engage in activities that are either value-creating or value-destroying, Mr Frobisher says. The embarrassing fact is that, sometimes, leadership teams are not able to distinguish between these two types of activity as quickly as they should. It is essential now to focus on the winning parts of the operation, he says.

And then another question has to be asked: what sort of growth are you aiming for? The general label of “growth” can actually cover a wide range of developments. “What is it you are trying to grow?” Mr Frobisher asks. “Is it revenue, profits, the number of employees or shareholder value?” There is good growth and bad growth, he adds, and businesses need to be clear which sort they are pursuing.

This presupposes that the business has devised the right strategy for growth in the first place. That is a big assumption. As Hamish Scott of the Ashridge Business School points out, the strategy development process can often be limited in outlook and faulty in execution.

Over the past four years, he has been testing a new approach to devising growth strategies with a range of corporate clients. His key insight is that a much more rounded, inclusive approach to strategy development is required. In his experience, a lot of senior managers default to their favoured approaches under pressure. These are the techniques and mindsets that got them where they are today. Surely more of the same will work again?

Mr Scott begs to differ. He has devised a growth strategy model, called the “North Star”, which allows companies to draw on many different strategic approaches and even traditions.

His model considers three broad types of growth strategy. First, there are optimisation strategies. These include, among other ideas, striving for greater efficiency and improving market penetration. Then there are scale strategies – in other words, building either an increased product range or a bigger operating (business) model. And lastly, there are innovation strategies: new products and new markets.

The thinking behind the North Star model is that top teams should be considering this much wider array of growth strategies, at least initially, before heading down a particular path. The model brings together the accumulated wisdom and experience of a range of tested and familiar strategy approaches.

Thinking and ideas need to be discussed under this broader range of headings, Mr Scott believes. “This is an ‘open platform’ on which all routes to growth are positioned,” he explains. “Managers need tools that synthesise and integrate … and that reconcile, not compete and contradict. They need a way of giving airtime to all the theories and prejudices ... executives and their overseers need to know that every route has been given due consideration. They need processes that ensure the best thinking is used in a reliable way.”

This is wise advice at a time when companies might be overhasty in committing to a new course of action. The impatience to achieve faster growth after two difficult years is understandable. But the dash for growth should not be reckless.

What other advice is emerging as we proceed though the first quarter of the year? Consultants at Arthur D Little have come up with a 10-point plan for managers. Two highlights both consider the changing demands of consumers. First, as customers become ever more discerning, businesses intent on growth will have to work harder on their responsiveness and customer focus, Arthur D Little says.

A second idea suggests one way of doing this: developing less “mediated”, more personal, even individualised communication. This may involve a range of channels familiar from the new world of social networking: “chat, mobile self-service applications and remote services”, the consultancy says.

However, PA’s Mr Frobisher remains a sceptic. Anticipating increased mergers and acquisitions activity, he points out that, in his experience of over 30 transactions, most failed to deliver the growth and value that had been anticipated. What is more, there has often been quite a mess to clear up. It might be wise to delay some acquisitions now, should valuations fall further.

But he is not a complete pessimist in terms of prospects for growth. “Considering how badly weakened some other businesses will be, there should be opportunities to achieve organic growth at the moment,” he says.

“Stronger businesses should find that there is room to manoeuvre, and there should be the opportunity to price quite aggressively,” he adds. When it comes to growth, even after a deep recession, it’s an ill wind that blows nobody any good.