The Right Theory of Growth

Many of the ScaleUps I start working with are scrambling to reach former rates of growth. But are they using the right methods? More often than not, I suspect they apply what Chris Zook calls “The Wrong Theory of Growth”

Situation-dependent

The first thing to realize is that there are several root causes for stalling growth. So restoring growth momentum requires different solutions depending on the problem. Dealing with a growth stall is situational, there is no one-size-fits-all. It is one thing if you are trying to respark growth on the basis of low and shrinking market share. This would suggest that customers are not very happy with your product. You should increase your Net Promoter Score. But if you have reached domination and your share is growing, expansion into a new category is solid.

Small market share

The large majority of scaleups I work with have a small market share, at least when we get started. It does not worry me as it is a normal starting position for all startups. What worries me is scaleups expanding beyond their core before dominating that core. Many scaleups are building footholds in several markets, while dominating none. The technology may scale, but the go-to-markets never do. It is very simple. When your marketshare is small, your job is to make your market share bigger. In fact, to make it dominant. Startups who invest in an adjacent field before dominating their core market commit a serious strategic mistake.

Large market share

When your market share is already large, i.e. you are one of the top three players in your given product-market, you are in a more comfortable position. When you aren number two or number three, your job is still to become number one and a lot of the advise off the previous action still holds for you. But when you are already number one, your strategic options change. If you are the leader and your market share is shrinking, that is catastrophic. Most likely, some competitor has found a way to appeal to a customer needs that you haven’t discovered yet. You need to neutralize this as soon as possible to maintain your dominant position. I usually recommend a deep dive into your the net promoter score system. This helps you figure out how customers are disliking your product compared to competitors’. Only if your market share is large and it is still growing, shoulld you start expanding into a new product or category. It is notable how few of these that self action on this slide actually lead to this new product or category. A new product or new category is the intuitive solution to many startup problems, but often not the right one.

Market share unclear

I will bet you cannot imagine how often clients tell me that they do not know their market share. Or that they are active in so many markets, that it all depends what markets we are talking about. In both cases, I suppress a massive frown. Not knowing your market share, or not even being able to estimated, betrays a naïve approach to growth that always leads to failure. Making a growth company successful is or about building a large market share, or building market power in other words. If you cannot even measure the degree of power you are building, then that betrays undisciplined growth projections. You can be sure that you are applying the wrong theory of growth. Even worse is when you are active in several markets and you do not know the market share of any of them. Or, you tell me that the market shares are so different from market to market that it is impossible to draw generalized conclusions. I guess it is already clear that I do not hold this argument in high regard. The job of the scaleup is to build extraordinary market power in an attractive segment. If you have no data on how well you are doing, then you’re not doing your job.