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Processes are not enough to drive growth. There needs to a number of support mechanisms that ensure the processes flow properly. These are what I refer to as the platforms for growth. There are three main platforms: Strategic, Organization, and Networks. The Strategic platform ensures the necessary flow of information into, out, and across the company to ensure the best possible growth decisions are made.

First, there needs to be mechanisms to ensure organizational alignment of the growth strategy. A communication plan should define how critical information will be disseminated to the right people. This includes communicating the high level strategy to all employees, a clear strategy roadmap that will help the growth leaders understand the company's growth strategy over the next 3-5 years, and regular reports to growth leaders to help them understand recent decisions and their results. The top mission of alignment is to ensure the right information gets into the hands of the right people at the right time.

One good way to communicate alignment is a strategic planning session. For example, every 5 years Royal DSM conducts a strategic planning session that defines how much revenue will new product launches generate in 5 years, what new areas they plan to go into, and how their capabilities will change. Li & Fung do a similar exercise every 3 years. In between exercises, the companies review how they are performing against plan and make course corrections as necessary.

Second, a metric plan should be devised to translate the growth strategy into metric-trackable objectives and build a reporting plan around it. Starting with the defined growth strategy, identify the top level metrics that relate to each objective. For example, any strategy should have a clear new product revenue target - that is how much annual revenue in 3-5 years time will come from new products launched since today. From the top level metric, break it down into sub-metrics. For example to hit $200 million in revenue in 3 years time, a company would need 5 successful launches which implies 10 total launches which implies 20 projects started which implies 100 opportunities evaluated. All these represent targets to track. Now, you need to map how you will report on these metrics. Everyone does not need to see all metrics in a report. The CEO may only need to see the current annual revenue number and the forecast number expected by the target date, while pipeline statistic may only be of interest to innovation leaders.

Third, any strategic platform needs an inflow of competitor intelligence data. Competitive Intelligence programs should strive to know what competitors are doing and how they might respond to your strategies and tactics. Competitive Intelligence programs should know competitor's RPV - resources (assets and capabilities), processes (business models and competitive advantages), and values (vision and strategies). Understanding your competitors will help your people make the best decisions.

At the strategic perspective, growth breaks down to revenue and profits. Certainly, it is risky to overemphasize revenue and profit when pursuing brand new opportunities, but at the end of the day you evaluate the success or failure of a growth program by revenue and EBIT growth.

Every business is different, but they all can be examined under two dimensions. First, their natural planning cycle length. Most businesses have a natural time frame for planning that is dictated by the rate of change in their industry. Common time frames are 3 or 5 years, but they could be shorter or longer. The second dimension is levers of potential growth. These are potential growth strategies like core product growth, new products, acquisitions, and expansion of core products into new verticals. There can be others as dictated by the business's industry, but those are the most common.

How can we use these dimensions to look at growth? Looking at our fictional company, Global Co., the graph below looks at how it has grown over its past planning cycle of 3 years. The ends of the graph shows Global's revenue in 2007 and 2010. The columns in between are the various levers of growth and show us how much each contributed to the revenue growth over that three year period. From the graph we can see that Global's 2010 revenue is $250 million greater than 2007's for a compound annual revenue growth rate (CAGR) of 10.1%. Of that $250 million increase, the majority of the increase came from core product growth ($135 million). $100 million came from new products launched in 2008, 2009 or 2010. Acquisitions and Vertical Expansions made minor contributions of $10 million and $5 million respectively. The percentages above the columns indicates the driver's CAGR since 2007 (due to how it is calculated the sum of the dimensions' CAGR will not equal the CAGR for 2010). 

Now a 10% CAGR over the past three years doesn't sound too bad, but we know better when we looked at their revenue trend graph. Drilling into the dimensions of growth we see that the majority of the growth comes from core products and new products. Global Co. should be concerned that Core product growth is only 5.3%. This tells us that the core is slowing to steady state; Global Co. will need to find growth in its new products, acquisitions or vertical expansion if it wants to maintain its strong growth. That $100 million from new products is a good start. Digging into the new product growth, we see from the graph below that the bulk of that revenue comes from 2008 launches. 2010 new product launches have also had a very successful year. The 2009 vintage appears to slightly under perform. 

Using this format, we can look forward at the type of growth Global Co. needs to meet their growth goals. Global Co.'s growth goals is to maintain a double digit growth rate. Setting the CAGR to 10% we can calculate how much revenue that would be in 2013, $1.331 billion. In other words to maintain that 10% growth rate, Global Co. will need to find $331 million in new revenue over 2010. Under the dimensions, most companies should be able to forecast what the core group of products in existence as of 2010 will grow over the next 3 years. For the rest of the dimensions, the strategic planning process should identify the planned initiatives and the revenue they are expected to generate by 2013. Add up the dimensions of growth to the 2010 revenues and compare to the 2013 target - that is your growth gap.

I expect most companies will be shocked to see a gap between their plans and their needs. This is natural because as companies get bigger, the revenue required for 10% revenue growth gets continually bigger. To grow 10% from 2010 to 2011, Global Co. needs $100 million new revenue. It only grew $50 million in 2009! The great thing about this analysis is that it is a reality check for companies. Once the growth aspirations and expectation assumptions are defined, real discussion can occur on how to achieve those goals. Without clear definition, growth is simply an abstract concept. At some point, companies that live in the abstract will begin to consistently miss their growth targets.

How's does your company look at their growth aspirations.

Nabeel Hyatt, Founder and CEO of Conduit Labs has an interesting post that examines how to predict the success of a Facebook app. Essentially, he looks at the ratio of two metrics made available by Facebook, Daily Active Users/Monthly Active Users (DAU/MAU).

I love it when people dig into the data to find answers - even when they are slightly off like this case! Nabeel's point is that a high DAU/MAU ratio predicts strong DAU growth (DAU counts is how Nabeel quantifies app success) as indicates by the high R-squared value.

Of course this is a bit of a self-fulfilling prophecy as DAU is used to compute the DAU/MAU ratio (the term of this bias I believe is called autocorrelation). Not to say this is a useless exercise. In fact, every entrepreneur should engage in a form of this exercise. The better you understand the key variables that affect your success, the easier it will be for you to devise strategies that directly impact your sucess.

In this case, I would like to see DAU or DAU/MAU regressed against app revenues. I think a person may want to incorporate a lag in those variables). The best thing you could do it collect a wealth of different metrics and use statistics to find the most important ones. I did something similar when I worked at THQ. I built a dataset that helped me identify the key factors that influence a video games revenue and unit sales success for the Kids fighter game genre. The process still can be applied to any situation, but I think it could be very valuable for web-based games where data is very abundant.

I think this would be a really interesting exercise. If anyone has a revenue-generating Facebook app out there and is willing to collect a dataset for me, I would be willing to try to identify the key determining metrics for you. No charge - I just need to know you are willing to put in the time to collect the data. Let me know in the comments.

1. Evaluate the Health of the Core - By deriving Annual Revenue Growth and  Annual Revenue Growth from New Products, you can calculate Annual Revenue Growth from Core Products (I = G - H from last post's example). This number will give you an indication of the health of the business's core product line (often the products that brought you to the dance). There are 3 categories for Core Product health:
   • Growing (>20%) - The core is still in growth mode. Like most growing things, it needs support so focus efforts on enhancing the core products.
   • Hitting Steady State (0%-20%) - Core growth is maturing and heading to a steady state level (often between 0%-5%). Now is time to begin thinking about moving into product or market adjacencies to fuel new growth.
   • Declining (<0%) - Core has begun to shrink usually as the result of some exogenous shock. If not already underway, New Product development into product or market adjacenies should be a priority. If the shock is expected to be permanent other strategies may need to be considered such as harvest/exit strategy or refocusing the core.
2. Determine Your New Product Growth Needs - Once you understand and predict how your core will grow next year, you can set a New Product Innovation Strategy. If your core is:
   • Growing - You probably don't need much revenue growth from New Products. So focus on building out your core products, but you should be slowly doing research on potential adjacent markets to enter when growth slows.
   • Steady State - Two good options exist: 1) segment your customers; and 2) move into adjacent markets or products. Segmenting your customers allows you to identify which segments are growing and find new needs and uses for your product that you haven't considered. If your core is well rounded, another strategy is to identify new adjacent markets to offer your existing products or services; or identify new products/technologies to offer your existing customers (customer  segmenting helps identify this).
   • Decline - Not only does your New Product Growth need to be strong, it needs to offset the declines from your core. Note as mentioned above, if this is viewed to be a permanent decline you will need to determine a strategic response such as harvest/exit strategy or refocusing the core.

% of Annual Revenue Growth (ARG) = %ARG from New Products + %ARG from Core

1.  Actionable: While you will need to do some digging to better understand the source, the results are very consistent - if the %ARG from New Products increases that is good and if it decrease that is bad. A definite improvement from percentage of revenue from new products.
2. Common Interpretation: Once people understand the metrics construction, it can be painfully clear what the metric is telling you.
3. Credible, Actionable Data: Data is sourced from your financial system, so I hope that it is good data.
4. Transparent, Simple Calculation: As I show below, the metric is slightly more difficult to construct, but once you understand the concept it is simple to construct.

Measuring innovation presents a conflict of interest. If you build a measurable process around innovation are you not destroying the openness needed to fuel innovation? Maybe so, but when trying to instill a culture of innovation in a large, successful corporation it will be hard to change anything that isn't measured. So a CEO has two options: 1) Let the final performance of a business unit be the ultimate judge of successful innovation or 2) Find some metrics that will provide indications of how well a business unit is executing in all phases of innovation.

The first option demands that business units meet a threshold level of Revenue and profitability growth (GE sets it at 8% per year) . The problem is that a CEO will never know there is a problem until they miss their numbers. After heads roll, getting the business unit back on track will be a 2 - 4 year process. I know of few CEOs who could survive such a setback. The second option tries to find a delicate balance of measurement without dictating process. Measuring innovation provides a second challenge that most innovation will take multiple years to come to fruition (often with losses in the front end). As Robert Louis Stevenson said, "Don't Judge each day by the harvest you reap, but by the seeds you sow."Any interpretation of innovation metrics must keep this statement as the overriding context. A fair innovation metric exercise should try to incorporate a balanced scorecard approach - there is no dominant innovation metric. Try to look at innovation in multiple phases. I propose Inputs, Process, Execution, and Value Creation.

• Inputs - Are you putting sufficient resources and generating enough ideas to fuel your target growth (see my post on innovation math)? Track the number of ideas you generated, how much resources you had dedicated to innovation (not evolutionary product developement), and what types of opportunities do you have in your pipe (is your pipeline evaluating enough ideas of a sufficient market opportunity).
• Processes - How quickly are you processing ideas through each stage of your pipeline from early evaluation through to launch?
• Execution - How many launches have you had this year? How many launches attack large market opportunities? How accurate have your forecast efforts been?
• Value Creation - What is the contribution margin of your recent years' launches? What percent of revenue growth is contributed by innovation projects?

You can find the best measures for the four headings based on your company environment. The goal of these metrics is not to judge the success or failure of a business unit. It needs to be a collaborative effort to help business units identify any red flags in their innovation processes so that they can course-correct before it becomes a big problem.

I wanted to highlight the imposing math of innovation. Companies who experience great success often fool themselves into believing that they will grow like that forever. But as your revenue gets larger the absolute value of that 15% growth rate becomes much larger. In the big leagues, innovation is big work. Let me demonstrate in this simple example.

Preface: By innovation I am talking about a truly new product or the expansion of an existing product into a new channel or geography - not a product extension (that's organic growth). I will just use revenue for the goals for the sake of simplicity, but you could do this exercise for target profits.

1. Innovation Revenue Needs

• Current Company Revenues: $ 1 Billion 
• Organic Growth Rate: 5%
• Target Growth Rate: 15%

 This implies that this year the company must find 10% growth ($100MM) through other channels like innovation.

2. No. of Launches Required

• Avg. Opportunity Market Size: $50MM
• A successful launch will achieve a 50% market share
•  Probability of Launch success: 45% 

Therefore, this implies that company will need 100/(50x.5x.45) = 9 launches! They must launch 9 innovation expansions this year! Sounds easy? We are only getting started.

3. No. of Development Projects Started

• Probability Project Passes First Stage Gate: 50% 
• Probability Project Passes Second Stage Gate: 60%
• Probability Project Passes Third Stage Gate: 80% 

Just because you need nine innovation launches doesn't mean you only need to start development on 9 projects. Remember by definition you are going into some form of new territory here. Projects fail. You will need to rigorously verify assumptions if you want to keep Probability of Launch Success as high as 45%! This means applying a stage-gate process where you will kill  projects that do not meet your hurdle thresholds. The above assumptions can vary for many organizations, but the point is you will need to start development on more projects than you need to launch if you want to maintain that high growth rate. In this case it is 9/(.5x.6x.8) = 37.5 projects. So company will need to innitiate research and development on at least 38 projects to meet their goals.

4. No. of Concepts to Be Evaluated

• Probability of a Concept Being Approved: 70% 

It doesn't stop at projects either. Your best ideas must go through some sore of filter to identify the ones with the most potential. In this case, company is easy on the concept evaluation but it still requires 38/.7 = 52. That means company must generate 52 great ideas to expect to find 38 projects that will lead to 9 launches!

5. No. of Ideas Required

• Probability an Idea has Adequate Potential: 25% 

It all starts at the ideas. No company will continously grow without a system of identifying good ideas. In this case, company will need to generate 52/.25 = 208 ideas in order to expect to deliver its $100MM in innovation growth!

How does your company do in each of these phases. I find most companies underestimate the work it takes to deliver the growth it wants and suddenly finds itself underperforming. I recognize that many of these assumptions can be played with, but I encourage you to do the math for your organization an tell us what your numbers are!

Josh Bernoff of Forrestor's Research posted a blog that social applications will thrive in a recession. I have no problem with his conclusions, but he makes a controversial statement that awareness advertising is ineffective in a recession and that marketers should consider advertising that targets the consideration phase with which I take issue. I will argue that awareness advertising is precisely the type of advertising a marketer should pursue in a recession. Let's start with Josh's statement about awareness advertising:

Advertising (or as we often call it, "shouting") is mostly about generating awareness and reinforcing brands. In a recession, ordinary consumers like you and me aren't as willing to spend. Sure, we'll be aware of the product, but that doesn't make so much difference when you're worried about your future.

and let's see his point about the consideration phase:

You may resist advertising if your finances are tight, but if your bud tells you that new movie is really worth seeing or that the Gap has the cutest new tops, that's more persuasive than advertising. Basically, in a recession, the consideration phase is more important than awareness

Did you see the problem here? In the awareness comment he notes that in a recession that consumers are not willing to spend, then he promotes consideration phase advertising to encourage purchase. The problem is that the pot these ads are competing for are much smaller than usual and definitely much smaller that it will be when the economy picks up. Now, I am not saying consideration advertising is not important - you still need to sell and friend recommendations are important - but, many consumer decisions in a recession are made based on price and value. In a thriving economy, if we get 3 friend recommendations for restaurants, we may actually go to all three in a month. In a recession, we may not even go to one. My key point here is that in a recession immediate conversion should not be your primary goal; Awareness should be your primary goal.

In a recession, it is less about what consumers buy today and more what will they buy when they start spending again. Research shows that in markets with a great deal of choice where the product is not a commodity consumers tend to buy recognizable brands. What better time to build brand than in a recession. As Josh observes, "In the 2001 recession, US advertising dropped 9% and Internet advertising plummeted 27%". A drop in ad spending means a drop in ad prices as less companies are bidding up the prices. This makes awareness ads relatively cheaper in a recession than in a boom cycle. Therefore, awareness advertising in a recession has two compelling benefits: 1) It is relatively inexpensive to build brand recognition; and 2) it will improve your brand's positioning for when the economy recovers.

If we agree that awareness advertising is important in a recession (and I hope I persuaded you), then I want to comment on challenges with awareness advertising on the internet. The internet has allowed granular level tracking that traditional advertising never could. This has made advertisers and analysts in this new age focused on click-thru rates or some other type of conversion. I remember hearing Jason Calacanis in an episode of Steve Gilmor's The Gang state social networking ads are no good because they don't convert! It is a fascinating comment that is shared by many people, but I would like to examine the underlying assumptions of the comment. The comment assumes conversion is the only successful result for advertisements. Search got people focused on this, but I argue that it is incorrect. Why does Pepsi spend so much money on TV ads? Why do people buy space on bulletin boards in Times Square? Why does Starbucks invest so much in ensuring every Starbuck's location has the same look and feel? These do not directly cause conversions. What they do is build brand that raises the chances their good will be selected over others when people make purchases.

This article is not meant to discuss the power of brand, but I ask that you take it as true. Now, I ask if building brand is so powerful, why do ads on the edges of Facebook must have click-thru's in order to be considered successful. Often (brand) awareness advertising just wants to get impressions. Expose consumers to enough impressions and sales should increase. They do it all the time for TV ads. Proctor & Gamble would calculate the frequency of an ads appearance multiplied by the % of the product's target audience that would be exposed to the ad to get Gross Rating Points. They would use these GRPs to predict future sales. I believe that CTM ads on sites like Facebook need to be considered in the same manner. Accept that they are not made to convert, but to build brand awareness (a potentially more powerful effect).

The great news is that the cost of these ads are incredibly low, thus providing a great source of value to a smart marketer. Last point is to remember that the style of awareness advertising should be different from the style of conversion advertising. You are just trying to reinforce brand image - it is a subconscious effect. Conversion's demand engagement from a consumer. Different styles for different goals - be aware. I appologize for the length and scope of this article, but I strongly feel it is an important discussion to have. I encourage other marketers to share their thoughts.

UPDATE: February 22, 2008 - I just saw a Feb 14th post by Aaron Wall who also advocates that companies need different strategies when advertising on social media sites. He suggests that companies find sites that relate to their brand and co-brand with them. I agree this is another strategy that companies can look at. At the heart of it, it is trying to build brand awareness. Great post.