The Hindu Business Line : The growth Catch-22

A pioneering new business backed by a great marketing strategy needn't translate into profitability unless the business gets an opportunity to scale up.

Will size translate to scale?

RECENTLY, I was helping a client investigate new opportunities for profitable growth. The team was creative and dynamic and many interesting opportunities were thrown up in the workshop.

"I have this recipe for a yummy chutney," the R&D chap told me excitedly, opening a bottle for us to taste it. It was yummy. Most of us guinea pigs who tasted it wanted to place orders to take bottles home. And yet, at the end of the workshop, this tasty new product was not one of the shortlisted ones. It might have been a great idea for another company, but not this one.

There are many things that can doom a new business to early failure - lousy market scanning, non-existent consumer research, poor marketing, inferior technical performance, incorrect pricing - there are so many weak links on the continuum to growth. It isn't surprising that the rate of successful new products is as poor as it is.

But one reason that ranks high in my mind for failure in new product development is that the size of the opportunity simply does not translate to scale for the company. This mix-up between size and scale is what results in a conveyor belt of innovations that could be truly creative and yet do not translate into topline growth for the company.

Let me explain: Innovation for the sake of being new and different can have negative repercussions on both the bottomline as well as on corporate self-esteem. There are scores of new opportunities out there - if you want to go haring after each one, without considering its impact on your business, assessing the demands it will place on your resources, and examining the fit (or lack of fit) with your competencies, it will be an expensive route to disappointment.

A product idea that seems terribly creative may result in business so minuscule that it is doomed to failure from the beginning. There are many products which were extremely creative, except that no one really wanted them - remember the Real Value Vacuumizer? A splashy launch for an expensive contraption, to which most Indian housewives gave the cold shoulder. One could argue that the Vacuumizer was a poorly thought out innovation in the first place, which couldn't find any mindspace in the housewife's cooking habits, let alone on her kitchen top. So, what's wrong with the yummy chutney then? Why did I guide them to nixing it?

My role in the workshop was a focused, if unpopular one, as I kept harping on one key phrase: profitable growth. Scale is one expectation that needs to be articulated early in this process. How big must a new business be for it to result in profitable growth?

The branded market for chutneys in India is minuscule, less than Rs 20 crore, and even that is dominated by small, regional food companies. Further, the costing indicated that it would not be easy to price it lower than the other players. The team concluded that with its superior marketing, and distribution juggernaut, they could have exploded the market, to ... umm ... Rs 40 crore and garnered a lion's share of the expansion. This would've been a wildly successful strategy, if they could pull it off. Now, a Rs 10-crore new business would have been an excellent new opportunity for a company of turnover size of Rs 50 crore. For my client, with a base of nearly Rs 1,000 crore, this would have formed just one per cent of net sales. The result? The birth of another tiny new business.

What happens to tiny brands is that they get lost in the system, never mind how good their value proposition. If the business does not have an opportunity to really scale up, then the resources allocated to it are in proportion to the expected payoff. When the frontline sales team is out there trying to meet budgets, the new kid on the block gets the least bit of attention. Over a period of time, the sheer lack of scale would have meant it would get lesser and lesser resources to support it. It would probably lie on life-support for sometime, before it got weeded out in a brand-rationalisation exercise. One new product norm that must be properly articulated, therefore, is just how large the business can realistically grow for it to fit within the portfolio of the company's other products.

If you note, I used the words `expected payoff': How the team perceives the growth of the new business will also impact how much momentum it acquires in the organisation. Obviously, and justifiably so, a business that is seen to be marginal to the organisation's future will stay marginalised.

A kind of self-fulfilling prophecy. So, how the vision of the new business is defined - and marketed within the organisation - is also a crucial issue. More on that later.

This, then, is the dilemma that plagues most large companies. The very size of the organisation precludes it from entering tiny new markets, no matter how creative and exciting these may seem. And by the time the tiny new market has become large enough to be attractive, entering it is a tough competitive battle. Managing this Catch-22 situation is not easy. It needs clarity of growth objectives, and a willingness to re-structure your organisation accordingly.

(The author is a Chennai-based management consultant. Karate-gy is a proprietary term for strategic exercises conducted by Paradigm Management Knowhow.)

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