June 2003

Road Map for Growth

The "road map" for peace is a simple yet compelling plan to guide warring enemies to a distant goal &emdash; peace in the Middle East. Rather than laying out a detailed plan or formula, it outlines two overarching objectives and a dozen or so milestones that must be achieved over three phases. And a little arm-twisting encouragement from the President to get it done doesn't hurt.

In the same way, emerging private businesses and new ventures in public companies should have a "road map" for growth. The ultimate goal at the end of this road map is straightforward but daunting - establish and scale a business that delivers a differentiated offering and meets a range of compelling customer needs while achieving a rate of return attractive to investors and generating liquidity for owners. Like the road map for peace, the road map for growth breaks the journey to this goal into several phases, each with clear milestones that measure progress. (And investor encouragement and possibly arm-twisting doesn't hurt either.)

The road map for growth breaks the journey into several phases, each with milestones that measure progress

Just as the road map for peace says what needs to be accomplished rather than how it is to be accomplished, the road map for growth is not a strategy. The ways and means to achieve each of the road map's milestones is up to those pursuing growth.

The chart below lays out a road map for growth made up of four "business stages," defined in the dimensions of time and money. Each stage has specific objectives and key milestones organized into a handful of "growth challenges."

During formation, the primary objectives are to define the basic business and product or service concept, and to establish the legal and organizational requirements necessary to operate as a business.

Formation stage - Identify and understand a pain point; define a business model

Key milestones during the formation stage are to identify and understand a customer pain point and define a model that shows how a business can make money by solving the customer's problem.

One common pitfall during formation is defining a market too broadly - capturing a customer need but not isolating it sufficiently to create a unique offering. Entrepreneurs must be analytically disciplined, sizing the market from the "bottom-up" rather than from broad strokes, top down available research.

Formation-stage companies are often blinded by their enthusiasm for the technology or product solution and fail to define a realistic, robust business model. Entrepreneurs must be sure to separate their enthusiasm for the opportunity and their solution from a cold-hearted, highly skeptical analysis of a range of fundamental business considerations, including market direction and unmet needs, customer accessibility and selection, differentiation and value capture, and early decisions about business operations, product development, market development, and management and organization configuration.

Development stage - Gain market traction

In the development stage, the principal objective is to build the business' first product or service, test it with a few initial customers, and adjust the business model based on what is learned during this stage.

Even though achieving those objectives consumes most of the effort and dollars, the critical milestone during this phase is to gain initial market traction, essentially a broad endorsement from the right mix of market leaders that the product and model provide great value.

Early market success with leading customers makes it easier to achieve two of the stage's other milestones:

• Recruit new management talent to the organization
• Attract funds from both customers and investors

Equally important, market traction will boost morale of employees who have been working long hours for many months.

During this stage, cash can be burned very quickly on product development and testing, so early market results are critical. To maximize the chances to achieve market traction, more and more companies are involving potential customers at the very beginning of product development in clearly defining customer and market requirements. And where customers are not willing to get involved, smart companies are spending sufficient effort to analyze market-leading customers' needs, buying behavior, technology architecture, customer base, etc., before starting the development process.

Revenue stage- Sustain market momentum; manage growth

In the next stage - revenue - the overriding objective is to achieve sales growth for the business' product or service and demonstrate that a wide group of users are willing to pay for it and that the company is able to consistently deliver it.

One critical milestone at this stage is broad based and sustained market momentum that can attract new customers, channel partners, industry influencers and investors. The other is the ability to manage growth.

As true revenue lift is achieved in this stage, growth management becomes more complex. Gone is the single-minded focus on product development and managing cash, as new opportunities and challenges appear across the business. Good companies regularly consider a broad range of business options and priorities and evaluate their potential actions in the context of a longer time horizon. They continually test the limits of their business model and end up with a re-shaped version of it that will be strong enough to support their long-term expansion.

Profitability stage - Formalize business processes; extend the business model

Finally, in the profitability stage, the objective is to sustain revenue and margin growth at levels that public markets or potential acquirers find attractive, leading to the ultimate goal - liquidity for business' owners.

If milestones were well met in the prior stages, the profitability stage becomes a classic focus on execution, pushing forward on a course in which the company has great faith. One critical milestone to achieving successful, company-wide execution is the establishment of formal, repeatable business processes.

However, the profitability stage is not a time to merely drive the business forward on its established path. Another critical milestone is to extend the business model into new opportunity areas - markets, regions, and partnerships or acquisitions. Whether still private or now public, companies must reinvigorate their growth efforts in new areas, by taking some people in the business back through the first three stages to define and serve new growth opportunities. This approach enables profitable companies to establish broader market presence and strengthens the defensibility of the company's market position.

Because growth companies are facing longer and longer time horizons (5-7 years to liquidity), and continually face unexpected short-term challenges and adjustments, it is often difficult for management to assess its long-term progress. However, if the journey can be divided into shorter stages with clear objectives and critical milestones to focus management attention, its overall complexity can be reduced. Like peace in the Middle East, achieving a growth company's ultimate goals appears more attainable if there is a road map to follow.