The New Playbook for Growth in the Age of Digital Transformation

Permanent shifts in the digital economy have forced corporations to move from dominantly organic growth to significantly more inorganic approaches. This framework helps corporate leaders develop the new skills and capabilities needed to drive growth through strategic partnerships, acquisitions, and venture collaboration.

The Shifting Growth Landscape

Idea In Brief: Permanent shifts in the economy in the era of digital transformation have forced corporations to make a permanent shift in the way they approach growth, from dominantly organic to significantly more inorganic; because of this shift, corporations need to develop new skills and capabilities and put in place new infrastructures to execute.

The pervasive discussion about digital transformation over the past several years has clouded the real issue: Transformation is not itself the objective, but instead, a means to deliver long-term value growth. As we described in this original article, The Four Types of Digital Transformation, digital transformation is not monolithic — and it involves far more than digitizing back-office processes. The greatest promise for digital transformation is in harnessing continuously evolving, cutting-edge technologies to unlock new revenues, business models and markets. To capture this growth, corporations are investing in home-grown solutions — launching innovation labs, building innovation cultures, and empowering employees to be innovators. But the digital era has also opened up vast new external sources of growth — where startups, ecosystems and 3rd party solutions represent an increasingly compelling, if not dominant, share of the opportunity set. This is a permanent realignment of the growth landscape, with far-reaching implications for the corporate growth playbook. Whereas historically, growth was seeded primarily internally and organically, going forward, the growth playbook must look to a much greater degree externally. To be successful in this new era, corporations need to do more than just think about growth differently: they need to develop new skills and capabilities and put in place new infrastructures to execute.

The Expanding Landscape for Growth

Traditionally, CEOs relied on three main strategies for growth: market penetration, consolidation, and expansion into business adjacencies [1]. Market penetration drives share growth in existing markets. Consolidation merges competitors to aggregate revenues, strengthen market leadership, and drive cost and scale advantages. Adjacency growth involves moving into new product & solution categories, customer segments and/or markets with complementary new offerings.

In order to pursue these strategies, CEOs relied on a short list of growth levers (see inset). Market penetration was achieved by investments in marketing & sales and by improving the value proposition of current offerings. Consolidation was pursued through scale-focused M&A. Business adjacencies were activated primarily by the work of internal R&D and innovation groups to create new offerings, and/or reach new customers; sometimes adjacencies were pursued by acquiring complementary businesses (so-called “scope” deals). These strategies and levers were, more or less, the way companies approached growth.

But the era of digital transformation has unlocked three new strategies for growth and activated three new growth levers.

New Growth Strategies

There’s no need to dive deep into the implications of digital transformation; that story has been told. But we will emphasize the importance of digital transformation to the growth playbook.

Technology is blurring traditional boundaries between products & services, value-chains and entire industries — and that is forcing corporations to rethink not only business processes but business models and fundamental scope of their businesses. These are all opportunities for growth. Further, this is not a one-time event; the continued advancement of technology will force corporations to continue to evolve. As strategist Rita McGrath has written, the era we today live in has ushered in the end of sustained competitive advantage. To succeed going forward, corporations must be flexible and adaptive and to realize growth, corporations will be required to continuously reshape their businesses to shifting markets.

To address these opportunities, corporations are pursuing three new strategies (These are described in more detail, here: The Four Types of Digital Transformation [2]):

• Technology-Enabled Growth: New technologies are enabling corporations to fundamentally reshape business processes to an extent previous generations of technology were not able to deliver and translate those improvements into growth. These new technologies allow corporations to improve customer experience, expand value propositions and reach new customers in new ways. An example of this is Domino’s AnyWare app, which lets customers order from any device, and helped the company overtake Pizza Hut in sales.
• Business Model Innovation: Rather than focus on business processes, business model innovation drives new growth by using technology to change the fundamental building blocks of value. A good example of this is the shift by auto insurance providers from fixed monthly contracts to unbundled, “by-the-mile,” contracts. Technology, for the first time, enables auto insurers to understand and price contracts based on consumer behavior, opening up new ways to offer value to customers.
• Domain Expansion: Technology also enables corporations to significantly rethink their business boundaries and enter marketspaces far afield from their core business. This is not traditional adjacency growth; that approach entails taking a company’s core products to new distribution channels, geographies, or customer segments; creating new-but-related offerings (such as when IBM moved from IT products to IT services); and expanding to new-but-related points on the value chain (such as a product manufacturer shifting to owning retail distribution of its products). Domain expansion, by contrast, is growth far away from the core business, based on entirely new (generally technology-enabled) capabilities. An often-cited example of this is Amazon’s creation of the cloud computing offering Amazon Web Services — a wholly new business in a wholly new marketspace requiring wholly new capabilities.

To be sure these approaches to growth have always been available to corporations. But in the era of digital transformation, these strategies are much more powerful and important than ever. A big reason they are so potent is because of how corporations can, today, can pursue them.

New Growth Levers

The digital era has activated new external growth levers. Like the new growth strategies, these levers have also long been available to corporations. But the digital economy has made them more pervasive and powerful:

• Scope M&A: Scope M&A has always been a growth lever, but the digital growth era has invigorated and expanded its importance. According to Bain, the proportion of scope deals (vs. scale deals) rose to become the majority of corporate deals in 2018 and reached 58% of all deals in 2019. We see scope M&A focusing on both new technology capabilities for growth as well as for sheer business extension. Scope M&A for capability can be demonstrated by FrontDoor’s acquisition of start-up, Streem. FrontDoor, a large provider of in-home repair and maintenance services, acquired the startup to gain access to “…computer vision technology [that could] automatically detect the brand and model number of a part or appliance,” significantly decreasing technician time in home and enabling Frontdoor to drive growth through value. Scope M&A for business extension can be seen in the UnitedHealth acquisition of DaVita medical clinics, extending its business into direct-to-consumer services. This acquisition is part of a broader strategy UnitedHealth, the large health insurer, is pursuing to take advantage of the growing profit pools in the healthcare services market as that market changes due to technology.
• Venture Investing: Low start-up costs, pervasive technology and business-building expertise, and financing accessibility have made starting a technology venture easier than ever before. At the same time, municipalities all over the world have invested heavily to bring startup innovation to their cities, intertwining startup economies with hundreds of local economies. Together, these trends have fostered the creation a vast, global, universe of ventures and an enduring new source of transformative solutions corporations need to grow. Corporations are recognizing this shift. According to Global Corporate Venturing, corporate venture capital has increased over the past decade from an estimated $50B in 2010 to near $300B in 2019; further, corporate venture capital now accounts for nearly 25% of all venture funding. Corporations see venture investing as a powerful growth lever because it gives corporations early, quick, access to cutting-edge technologies without the need to own them (yet, or perhaps ever). Investment aligns economic interests of the corporation and the startup, creating opportunities for corporations to steer development of solutions and create growth options to be exploited later. Venturing is also an efficient way to qualify companies that may later be acquisition targets; in many ways, the growth of the venture ecosystem has fueled the growth in scope M&A. (We have spoken considerably on the corporate-to-venture relationship, here: “How to Collaborate with Corporate Venture Capital”).
• Ecosystem-Building: A third growth lever has become more potent in the digital era: Ecosystems. Many of the most valuable companies in the world, such as Apple, Google, Amazon, are so valuable because they have created ecosystems. Business strategist James Moore introduced the concept of ecosystems in 1993: “In a business ecosystem, companies co-evolve capabilities around a new innovation: they work cooperatively and competitively to support new products, satisfy customer needs, and eventually incorporate the next round of innovations.” Ecosystems are not merely a way to reach more customers, but can be a fundamental, differentiating element of business models. They tend to feature low/zero relational and scale costs, abundant data, powerful network effects, and an efficient ability to expand value propositions. And although the phenomenon of ecosystems has been around for a long time, their importance is greater today than it ever was. Corporations are taking note. According to BCG/Henderson, as of 2019 the word “ecosystem” appeared in corporate annual reports 13x more than a decade earlier. Why are ecosystems such good growth drivers? They enable corporations to leverage 3rd party assets and organizational power to efficiently extend and expand the value proposition of offerings. They scale quickly and can operate effectively even with dozens of participants. And unlike M&A or venturing, ecosystem relationships or more flexible financially and can adjust over time as the business environment changes. One example is FirstNet, a partnership between the US Government and telecom giant AT&T, is an important young company aimed at revolutionizing the way first responders communicate and do their jobs. The core objective of FirstNet is to build a nationwide cell-network (with new 5G capabilities) dedicated to public safety responders. Early on, the company realized that the network could become more valuable to society if it enabled not just better communication, but better solutions for first responders. So, the company is hard at work at building a robust ecosystem of partners — with various financial and non-financial ties — that are creating new tools, like cameras that see through walls and sensors that track the motion of fire-fighters, that can make use of the network. The resulting ecosystem of solutions stands to revolutionize public safety.

External growth levers enable corporations to leverage balance sheet capital, rather than expense, to drive new growth. It’s the only way to meaningfully advance innovation and growth while minimizing the hit to operating income.

What is common about these three new growth levers is that they are all external/inorganic growth. Inorganic growth delivers several advantages relative to organic growth — particularly in the digital era. First, external growth widens the aperture for opportunity. Whereas organic innovation may face practical limitations regarding what technologies that can be pursued (because required expertise simply does not exist), no such limitations exist externally. Virtually any technology, capability, or solution is available, accessible, investable and acquirable from external innovation universes — and at an increasingly reasonable relative cost and risk. In some cases, external innovation may be the only viable option to pursue certain opportunities. Second, external innovation shortens development timelines and drives efficiency. Corporations that engage external innovation tap into robust new solutions and technologies already in flight — saving time and resources and potentially avoiding costly failures (if developed internally). The speed of change in the digital era makes speed of innovation important. Third, external growth levers can enable corporations to leverage balance sheet capital, rather than expense, to drive new growth. It’s the only way to meaningfully advance innovation and growth while minimizing the hit to operating income. Where corporations (especially publicly-traded) often feel forced to constrain innovation during times of earnings pressure, capital-driven (external) innovation enables growth and innovation to continue.

The New Growth Landscape

Shifts in the growth strategies available to corporations combined with the efficacy of new growth levers have altered the growth landscape, forever. In the digital era, there is now a “green sea” of opportunity at the intersection of digital growth and external (inorganic) execution. And this new landscape offers many more points of entry among external/inorganic paths than internal/organic paths. This is not to diminish the value of organically-driven growth & innovation. Internal innovation labs, digital growth efforts and other home-grown activities are powerful parts of the overall strategy for growth in the digital era. Our objective instead is to point out how important and broad the external landscape has become and to point out that we believe this shift is in the landscape is a permanent realignment of the opportunity set.

In this context, corporations that ignore external growth will miss out on ripe opportunities to create value. And as their competitors become more adept at tapping into this kind of growth, corporations that don’t follow suit risk falling behind. Going forward, corporations need to actively re-balance the share of growth toward external opportunities.

New Growth in Action

When corporations recognize the expanded set of growth opportunities afforded by external innovation — that wholly new technologies, solutions, business model changes and scope expansion opportunities are available — they expand their growth agendas in ways they wouldn’t have thought possible, otherwise. To capture strategic opportunities for growth, we tend to see companies employing not one, but several growth levers, simultaneously. The smartest companies understand the relative importance and contributions of M&A, venture investing, ecosystem-building and internal innovation. They have also built organizational capabilities to enable them to successfully weave the pieces together. We have worked with and observed scores of corporations that are pursuing growth in this way:

• Truck Manufacturer — Technology-Enabled Growth: One, a major truck manufacturer, identified AI-driven predictive maintenance as a way to differentiate its truck offerings and accelerate growth. There is significant internal innovation work being done to create this new offering, but the company has also invested in several ventures that are developing different aspects of the broader solution. Venture investments have given the company access to otherwise challenging new technologies and opened up ongoing collaborative development and IP licensing relationships that will accelerate the product launch.
• Broadcasting Products Manufacturer — Business Model Innovation: Many corporations are leveraging new levers to drive growth through business model change. One corporation is shifting its media and broadcasting equipment business from hardware only to a platform-driven “X-as-a-Service” business — enabling it bundle services with equipment sales and capture a greater share of the profit pool. Although this company is highly skilled in core media tech, the company is leveraging venture investing, M&A and ecosystem-building to create a new business model where hardware systems are augmented by software and services to make broadcasting “smart.” One venture investment is in a video imaging company that enables automatic identification of people and optimization of scenes for interviews; that relationship began with investment but is expected to progress to an eventual acquisition. Other venture investments are enabling seamless interoperability with other broadcasting devices. And, further, the company is building an ecosystem of 3rd parties to contribute other customer-focused tools and solutions (such as transcription services) to the platform.
• Construction Company — Domain Expansion: Still other companies look to expand business boundaries. One company, a construction firm, sought growth beyond it’s traditional heavy equipment business by launching a construction coordination, communication and planning business alongside its traditional core business. This new business offers asset tracking, birds-eye views of the construction site, and software tools to integrate and coordinate the myriad of activities driving construction jobs. Because this business is so different from its core, the company was forced to pursue growth differently. Playing architect, the company has determined which pieces of the new business should be pursued with M&A, venture collaboration, ecosystem partnerships, and internal innovation. As engineer, the company is building the new business with select M&A transactions that will bring core IT functionality to the platform, a series of venture investments in next-generation drones and radar technologies to enable mapping and situational awareness and, building carefully-constructed ecosystem partnerships to deliver complementary offerings like asset-tracking. If the full vision for this adjunct new business could have simply been acquired, the company would have done so. But because it couldn’t (no target available), this architect/engineer approach to business-building is the fastest and most efficient path for the company to capture this opportunity.

Toward New Corporate Infrastructures for Growth

Inorganic growth has always been a lever for growth. But, except for all but the most highly-acquisitive and adept corporations, it was only a sporadic contribution. Corporate Development — the traditional owner of inorganic growth — was a small, but effective, function dedicated to pursuing these kinds of opportunities. But in a world where inorganic growth is a more important key to success, corporations need to build new capabilities that expand and supplement the traditional skills of Corporate Development. They need to adopt new strategic approaches to growth. They need to build new muscle, including bringing new skills to M&A, adopting what we call “growth venturing,” and gaining ecosystem-building skills such as learning to synchronize economic ties with ecosystem partners. And they need to build organizational structures and processes that seamlessly weave external growth into the core way they grow, day-in-day out.

_{[1] We recognize there are other levers to create value, such as cost-cutting, restructuring, and share buy-backs; but for this discussion we are focusing on profitable revenue growth}

_{[2] Three of the four types of digital transformation are essentially growth strategies; the fourth type, cultural transformation, is a growth enabler but not itself a strategy for growth}

By Andy Annacone at TechNexus Venture Collaborative