New Venture Lab: Equipping Christian Entrepreneurs

One of my maxims is to never invest in infrastructure that already exists in order to launch your business.  The concept goes like this: got a great product idea?  Good.  Have someone else manufacture it for you, rather than build the plant yourself.  This brief article extract does a good job of making the case for what is also called "leveraged growth."

The Idea

Most companies face enormous pressure to grow. But traditional growth strategies require up-front investment in new assets in the hope of future profits. Result? Narrow margins—for a time, or forever.

But what if you didn’t have to own those assets? What if you could take advantage of other companies’ resources instead? You can—through leveraged growth. This less risky approach leverages the assets of many other companies at many levels of the value chain. It maximizes the benefits of growth while minimizing the burdens of ownership—enabling you to grow and increase profits simultaneously.

Example: Hong Kong-based trading company Li & Fung owns none of the facilities that produce the finished goods it supplies to European garment retailers and designers. Yet it doubled revenues to $3.2 billion in five years and delivers +30% returns on equity in an industry (apparel) notorious for thin margins. How? It has privileged access to some 7,500 companies worldwide with specialized production and distribution capabilities. It uses whichever companies best make each part of whatever goods its customers demand. So it can break into new markets quickly and respond flexibly to technology shifts.

Dependent on sharing assets, leveraged growth strategies require close but flexible relationships and seamless intercompany operations. Internet technologies are making such coordination viable for more and more enterprises.

The Idea in Practice

Leveraged Growth Strategies

1. Orchestrate an open process network. Exemplified by Li & Fung, this strategy operates at many levels in the value chain. Your company functions as the network orchestrator. You manage connections between participants—not daily activities within each of them—by defining participation requirements, recruiting members, and setting communication and coordination standards. You also constantly compare participants’ performance, pinpoint best practices, and match participants to the most appropriate roles—regularly replacing weaker performers with stronger ones.

2. Aggregate resources. Rather than orchestrating other firms’ activities, you aggregate related companies’ resources, for example, by creating value-added service portfolios.

Example: Investment giant Charles Schwab aggregates specialized third-party resources—e.g., Dow Jones news stories, Standard & Poor’s company reports, First Call earnings forecasts—to help customers make investment decisions. Through Schwab, customers can also access other companies’ investment products (e.g., mutual funds) or one of 5,000 participating independent investment counselors. Providing comprehensive brokerage services, Schwab attracts more customers—at lower costs than if it owned the underlying assets.

3. Shape an economic web. You center yourself within a vast, ever-shifting web of companies that build on a technology platform or other standard. By modifying its operating system to function in portable devices, for example, Microsoft attracted portable-device manufacturers and related product and service vendors into its web—boosting sales of its operating system.

The Dangers

The benefits of leveraged growth may tempt you to shed all your assets. But without these bargaining chips, you can’t offer compelling economic incentives to potential partners—and may get ousted from the game.

Ask: Which of your assets would best enable you to mobilize other companies’ assets? Superior manufacturing processes? Direct customer relationships? How will your company call the shots and fulfill its growth potential?

By: John Hagel III

Source: Harvard Business Publishing