Leveraged Growth: Expanding Sales Without Sacrificing Profits

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The Idea in Brief

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.

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?

The traditional routes to business growth—organic expansion and acquisition—share a common requirement: investment in proprietary assets. To grow organically, you build new assets. To grow through acquisition, you buy them. Either way, you own them. But the need to own assets—whether they’re physical ones like factories and machinery or intangible ones like information and skills—is precisely what makes traditional growth strategies so risky. You have to make your investment up front, but the payoff doesn’t come until later, sometimes much later. The pursuit of growth, therefore, almost always entails a narrowing of margins—for a time or, in the worst case, forever.

But there is another kind of growth strategy, one that involves substantially less risk and offers the potential of an immediate and sustainable boost not only in sales but in profitability. This strategy, which I call leveraged growth, begins with the realization that it is not always necessary to own the assets required to expand. If the needed assets exist within other companies, and you can mobilize them to support your own growth initiatives, you can capture the economic benefits of growth while avoiding the economic burdens of asset ownership.

You can capture the economic benefits of growth while avoiding the economic burdens of asset ownership.

Here’s how it works. Imagine that you are a successful manufacturer of high-end stoves for the home. You spot an opportunity to enter the microwave oven business using recent innovations in microelectronics technology. Traditionally, to capitalize on the opportunity, you’d hire a new engineering and design group with the appropriate technical skills, or you’d buy a small microwave oven manufacturer. Using a leveraged growth strategy, though, you’d find independent home-product designers and encourage them to work with contract-engineering groups to develop innovative oven designs. You’d also develop relationships with various manufacturers specializing in different stages of the production process and use them to actually make the ovens. Your role would be to manage the process network, facilitating the collaboration of these three groups of companies. They would go along with the arrangement because your broad distribution, sales, and marketing capabilities would speed the new line’s acceptance in the market. By tapping into others’ assets rather than either building or buying your own, you reduce your financial risk, break into markets more quickly, and stay responsive to future technological and market shifts.

Leveraged growth has always been possible, but until recently it was very difficult for most companies to manage the close yet flexible relationships required to share assets. Asset sharing almost always calls for the seamless operation of processes spanning several companies. If, for example, you are going to leverage a group of manufacturers’ factories to produce goods for your own customers, you need to be able to schedule capacity across all those plants as if they were your own. In the past, it was usually too cumbersome—or too expensive—to exchange the real-time information needed to make intercompany processes work as efficiently as internal ones. But the traditional barriers to such information flows are falling, thanks to the Internet and, in particular, to the emerging Web services architecture for information management (an architecture John Seely Brown and I described in “Your Next IT Strategy” in the October 2001 issue of HBR.) Although leveraged growth is not a technology strategy—it’s a business strategy—the new technology platform suddenly makes the strategy viable for a much broader array of enterprises.

Orchestrating Value

Companies routinely, of course, build on other companies’ assets—that’s how value chains work. Manufacturers, for example, draw on the assets of suppliers to assemble their products and on the assets of distributors and retailers to sell them. But leveraged growth isn’t about these simple buyer-seller relationships, which span just two levels in the value chain. It entails the coordinated mobilization of resources supplied by many enterprises operating at many levels of the value chain. The mobilizer of the resources (the company pursuing a leveraged growth strategy) is able to tailor the product or service created by the overall group to the needs of a particular customer or customer segment, capturing value for itself as a knowledge broker. Its success depends on a deep understanding of the economics of both its customers and the resource owners.

Leveraged growth relationships extend well beyond conventional joint ventures and other types of alliances, at least as they’ve been commonly defined. Most traditional alliances are, to borrow a computing term, “tightly coupled.” Their scope and terms are precisely defined, documented in painstakingly crafted legal documents and operating agreements. They usually take a long time to negotiate and are hard to modify once they’re up and running. As a result, companies usually enter into a limited number of alliances or joint ventures and find it very difficult to adapt them to changing market conditions. Leveraged growth relationships, by contrast, typically involve much looser couplings of asset owners. These partnerships are governed not by rigid legal agreements but by market-based economic incentives that can be rapidly changed in response to cues from customers. (For a discussion of how leveraged growth relationships relate to traditional outsourcing arrangements, see the sidebar “Where Outsourcing Is Headed.”)

To understand how a company can build and manage a process network to support its own growth, look at the experience of Hong Kong—based Li & Fung. Established in 1906, Li & Fung began as a family-run trading company that acted as a broker between Asian manufacturers and overseas merchants for transactions involving apparel, mainly. By the mid-1970s, when brothers Victor and William Fung took over, the company’s margins were under pressure. Brokerage fees were being squeezed as the buyers and manufacturers became increasingly comfortable dealing with each other directly.

In response, the brothers remade the business. Rather than connecting just two levels of the value chain, Li & Fung became a much broader intermediary, connecting and coordinating many different links in the chain. It became, in other words, an orchestrator of a process network. To produce a garment for the European market, for example, the company might purchase yarn from Korea that is woven and dyed in Taiwan, cut in Bangladesh, then shipped to Thailand for final assembly, where it is matched with zippers from a Japanese company and, finally, delivered to geographically dispersed retailers according to schedules specified well in advance.1

Li & Fung owns none of the facilities involved in processing the raw material into finished goods. It owns none of the equipment that transports the products through the various stages of production. It does, however, have privileged access to some 7,500 supply and manufacturing companies around the world that possess specialized production and distribution capabilities. By using its own knowledge of the apparel market to leverage these other companies’ assets, Li & Fung has been able to achieve impressive growth in the slow-growing apparel industry. The company doubled its revenue, to $3.2 billion, over the five years from the beginning of 1996 to the end of 2000. During the same period, its net after-tax income nearly tripled. In fact, during this period of double-digit annual growth, Li & Fung consistently delivered a return on equity of more than 30% in an industry notorious for its thin margins.

The high returns can be traced directly to the company’s leveraged growth strategy. It operates with very limited fixed assets, the book value of which amounts to only 5% of revenue. Its financial leverage is minimal, with a debt-to-equity ratio of .05. And its employee productivity is high: By this fiscal year, Li & Fung generated $5 billion in revenue with only 4,200 employees—more than $1 million in sales per employee.

When the Fung brothers shifted the company’s strategy, they also revamped its organization. They moved away from its traditional geographic divisions to a new customer-centric structure. Now, dedicated divisions serve each of the largest apparel designers—companies like Abercrombie & Fitch, Laura Ashley, and Levi Strauss. To serve smaller customers, other divisions focus on specific segments like theme stores. Each division is run by a “lead entrepreneur,” who is responsible for developing a deep understanding of customers’ needs and then fulfilling them by mobilizing the necessary resources within Li & Fung’s process network. To preserve the entrepreneurial spirit, each division is kept relatively small, averaging about $ 30 million to $50 million in revenue.

On the supply side, the company’s knowledge is equally deep. Through its experience with the thousands of suppliers in its network, Li & Fung maintains a detailed, up-to-date view of supplier performance in a wide variety of contexts. For example, some apparel cutters may do well with coarser forms of wool but lack the expertise or machinery required to maintain high quality and high throughputs for more delicate forms of wool like angora or cashmere. Such operational information helps the company not only allocate work across the process network but also give its suppliers in-depth feedback, which leads to ever stronger performance. It would be no exaggeration to say that Li & Fung understands the relative value of its suppliers’ assets better than the suppliers themselves do.

This broad knowledge of manufacturer and supplier capabilities enables the company to quickly tailor the supply chain to meet each customer’s particular needs. One of the company’s divisions, StudioDirect, is able to begin production within six hours after receiving a customer’s order over the Internet. The process network can also be quickly reconfigured to adapt to unanticipated events. Within a week of the September 11 terrorist attacks, for instance, Li & Fung had shifted production out of facilities based in potentially unstable countries to more secure plants to avoid disruption in supply.

Why are so many companies willing to shape their own operations to fit Li & Fung’s strategy? Because Li & Fung offers them compelling economic incentives. Its long-standing relationships with leading apparel designers and retailers enable the company to deliver substantial and steady business to its partners. Although the group of companies that’s mobilized to fill any particular customer order varies greatly, Li & Fung strives to maintain strong, continuing relationships with all the partners in its process network. Its goal, in fact, is to account for between 30% and 70% of each supplier’s production capacity over the long run. It tries not to go below 30% because it believes it needs at least this level of activity to get priority attention from the partner and to maintain a clear view of the partner’s capabilities. It tries not to go above 70% because it wants to avoid making partners totally dependent on Li & Fung for their business; it believes that partners can enhance their capabilities by working with other customers as well.

Beyond being a source of substantial revenues, Li & Fung offers another important incentive to suppliers: the ability to steadily improve their skills and performance. Because the company establishes detailed benchmarks across its process network, it can give all participants valuable insight into their particular strengths and weaknesses. Suppliers’ managers then have the opportunity to work with Li & Fung’s employees to understand how they can address their performance gaps. The result is a powerful platform for continuous performance improvement.

Anatomy of a Process Network

Li & Fung operates what might be called an open process network. Because it does not make or sell any products under its own brand, it can offer the services of its process network to any and all product vendors without worrying about conflicts of interest. Other companies operate closed process networks—networks that they orchestrate to make or sell their own, branded products. Nike, for instance, coordinates a far-flung network of suppliers to produce its athletic gear, and Cisco manages complex groups of both suppliers and distributors to make and sell its networking equipment.

As a basis for growth, open networks are generally more powerful than closed ones. That’s because the growth opportunities of a closed network are bounded by the orchestrator’s product offerings. If those products lose their appeal—if, for instance, Nike’s swoosh falls out of fashion—the ability to add value through a process network declines accordingly. But the growth of an open network is not constrained by the market shares of any particular products. The orchestrator can address the needs of all product vendors in the categories it targets—and, often, it can quickly extend its orchestration capabilities to new categories, as Li & Fung has recently done in expanding into different kinds of manufacturing like home furnishings and toys. Whether open or closed, all process networks operate in similar ways—and differ considerably from traditional business processes. Let’s look in more detail at the distinguishing characteristics of process networks.

Roles.

Corporate processes are traditionally overseen by internal process managers, who coordinate the work of various departments. In a process network, one company, acting as the orchestrator, plays the key coordination role (and reaps the benefits of leveraged growth). The orchestrator performs a range of critical functions:

  • Defining the requirements that companies must meet to participate in the network,
  • Recruiting companies to participate,
  • Setting standards for communication and coordination among companies and structuring an appropriate information architecture,
  • Tailoring the process to the needs of particular products or customers by specifying who will participate and what their roles will be,
  • Assuming ultimate responsibility for the final products of the process,
  • Creating performance feedback mechanisms so participants can continually improve performance.

All the other participants act as service providers, performing activities and delivering outputs specified by the orchestrator. Companies cannot join a process network on their own initiative. The orchestrator serves as the gatekeeper, certifying the capabilities of the companies before they are admitted. Both Cisco and Nike, for example, have rigorous certification procedures—involving such criteria as workers’ skills, extent and quality of investment in equipment, and capacity of facilities—to determine whether a company is qualified to join their networks. Once in, companies must regularly be recertified to ensure that they continue to meet the performance criteria.

The number of service providers in a network tends to expand over time. In part, this is due to the economic benefits of broadening the network—more service providers means more flexibility, greater reach, and a broader basis for performance measurement and enhancement. But network growth is also the result of a natural process of increasing specialization. As a result of the ongoing benchmarking and certification efforts, service providers will tend to focus on ever narrower sets of activities—those in which they have truly distinctive capabilities—and the orchestrator will divide the process into finer and finer segments, having additional providers populate each segment. That’s the process Li & Fung went through as it categorized fabric cutters according to their ability to deal with different sorts of wool.

Process networks are best thought of as modular systems, with each member company serving as a discrete module. As the modules become more specialized and refined, the entire system becomes more adaptable in its ability both to precisely meet customer needs and to achieve ever stronger levels of performance.

Rules.

Because the participants in traditional business processes are generally employees of the same company—or of closely allied partner companies—it’s feasible to use process manuals to specify every step of the work in great detail. As the number of enterprises involved in a process expands, however, such micromanagement becomes less tenable. It would be unusual for one company to have the power to impose rigid work rules on a large number of other companies. Therefore, the orchestrator of a process network does not try to manage the work that’s performed by each participating company. It manages the process at a more macro level, deciding which participants to involve at what points and specifying their outputs. It manages, in other words, the connections between modules, not the activities within modules.

Each service provider decides what it needs to do to deliver the specified outputs. If the service provider performs well—meeting or exceeding time and quality requirements for its outputs—it is rewarded with more work. If it performs poorly, the orchestrator shifts work to other service providers.

Since orchestrators aren’t directly involved in managing the day-to-day activities of service providers, the information architecture of a loosely coupled business process can be simpler than that of a more conventional process. To coordinate all the steps in a traditional process, the process manager needs full information transparency—he or she needs to know exactly what’s going on at any particular moment. That’s why business process reengineering so often requires massive efforts to overhaul corporate databases. Fragmented and imperfect information becomes a source of inefficiency. But to manage a more loosely coupled process network, the orchestrator can be more selective in processing information and need only exchange key bits of information with service providers at key moments.

The service providers typically need two types of operating information from the orchestrator. First, they must have detailed information on product specifications to perform the task at hand. Li & Fung, for example, invests significant effort in communicating to its partners the exact hue the customer requires for each item of apparel. Second, partners have to know how products and customers’ needs are evolving so they can plan their future development. Cisco, for instance, provides its channel partners with regular updates regarding the evolution of its product line.

In return, the orchestrator needs timely information about each service provider’s progress toward delivering its required outputs. Defining and tracking milestones thus becomes critical to the overall performance of the process network. The orchestrator needs to know when a milestone is completed or is in danger of being missed. If a milestone is in jeopardy, the orchestrator can call in another service provider to get the process back on track or modify the process to minimize any disruption. So-called event notification systems are, not surprisingly, mainstays in the information architectures of process networks. At a technical level, the collection and communication of the limited types of information required to operate a process network are fairly straightforward. The real challenge is a business one: identifying the right information to exchange and the right milestones to track.

Renewal.

The rigidity of conventional business processes makes them highly efficient when they’re first set up but dooms them to a slow but steady erosion in relative competitive performance. There are two reasons for this. First, highly scripted processes are by their nature hard to change. If you alter an activity at one point in the process, it can disrupt the process at many other points. Second, rigidity precludes experimentation: Every participant is required to obey the established rules. Because major breakthroughs in performance rarely happen, even state-of-the-art processes are eventually overtaken by competitors.

External benchmarking has often been promoted as a solution to this problem. By regularly comparing your own processes to those of other companies, the theory goes, you can ensure that your processes never fall behind. But benchmarking has never lived up to its promise. It’s simply too time-consuming and expensive. Gathering detailed information on the operating performance of many different companies—and ensuring its comparability—usually requires large teams of highly trained staffers and experienced consultants, people who are expensive and in short supply. As a result, major benchmarking initiatives tend to occur infrequently, forcing companies to constantly play catch-up.

Benchmarking has never lived up to its promise. It’s simply too time-consuming and expensive.

And even if management were able to maintain a clear and up-to-date understanding of performance gaps, it would still be hard to fill those gaps on a routine basis. The very factors that initially make hardwired business processes so efficient make them very difficult to reengineer over the long haul. Detailed specifications need to be developed for every activity in the process, and changes to activities often require the redesign of information systems that are equally hardwired and difficult to modify. Given these challenges, it is not surprising that companies often go five or ten years between major reengineering initiatives—and some defer reengineering indefinitely.

But it’s easy to renew a process network. First off, bench-marking, rather than being an occasional event, is an intrinsic part of process management. As we’ve seen, Li & Fung, in the course of monitoring its network, constantly compares the performance of hundreds of different companies. It then shares the information with all of them, giving them a detailed understanding of their performance gaps, ideas for addressing them, and strong incentives for taking action. The fact that orchestrators don’t specify how participants do their work makes the benchmarking all the more powerful. Different companies use different approaches to carry out similar tasks, and the orchestrator quickly pinpoints the best approaches. In this way, diversity and experimentation lead to rapid refinement. On a broader level, orchestrators can often achieve major performance improvements simply by reconfiguring the participants in the process—swapping out weaker performers and replacing them with stronger ones. This does not necessarily mean that the poorly performing participants are ejected from the process network. They may, in fact, excel in a different context. The constant reconfiguring of processes ensures that participants end up playing the roles they’re best suited for and that the overall network operates with optimum productivity and responsiveness.

Aggregators and Shapers

Orchestrating a process network is a particularly powerful kind of growth strategy. But it’s not the only one. Other forms of leveraged growth involve the aggregation of resources rather than the orchestration of activities. Charles Schwab, for example, has grown by pioneering one form of resource aggregation: the value-added service portfolio. On its Web site, Schwab brings together a rich array of specialized third-party resources—from Dow Jones news stories to Standard & Poor’s company reports to First Call earnings forecasts—to help its customers make investment decisions. Through Schwab, investors can also access other companies’ investment products, such as mutual funds, designed to meet various savings objectives. If customers want more tailored information and investment advice, Schwab will help connect them with one of more than 5,000 independent investment counselors who participate in its network. In this way, Schwab reproduces the capabilities of a full-service brokerage and attracts a whole new set of customers. But because it doesn’t own the underlying assets, its costs are much lower than those of a traditional full-service broker.

Like a process network orchestrator, Schwab carefully qualifies and monitors the performance of all the services it aggregates, mainly because its reputation hinges on their quality. It is up to the investor, though, to decide which, if any, of these third-party resources he wants to use and when. Unlike an orchestrator, an aggregator plays little or no role in managing sequences of activities.

Another form of resource aggregation, popular in the computer business, is the vendor-sponsored community. Hardware and software companies like IBM and Oracle long ago recognized that the value of their offerings depends on a broad range of complementary products and services. They also realized that users of their products would derive more value if they could compare notes with one another. As a result, computer companies routinely sponsor both user communities and third-party organizations like developer groups. Product manufacturers like Harley-Davidson and service providers like eBay have also successfully used vendor-sponsored communities to help users derive more value from their products. Most vendors manage their communities passively. They act as gatekeepers in modest ways, maintaining the quality of the interactions and ejecting disruptive participants, and they play an even more modest role in guiding the sequence of interactions among participants. The vendors may structure informational sessions at conferences or on-line forums, but otherwise the exchanges are shaped by the members themselves.

Still, the vendor reaps important benefits. As users generate more value from the product or service, they tend to buy more of it, as well as related items the vendor sells. They also become more active referral agents, attracting other customers. Users are motivated not only by a desire to increase the return on their investment in the product but also by the status and recognition they can achieve in these communities. Bottom line: The vendor generates more revenue without significantly increasing operating expenses or asset commitments. Harley-Davidson exemplifies the benefits of this approach—it spends very little on advertising and yet attracts an intensely loyal customer base.

Possibly the subtlest of the leveraged growth strategies is shaping an economic web. Think of the way Microsoft and Intel have been able to grow so explosively over the past 20 years. They’ve succeeded because they’ve placed themselves at the center of a vast, ever-shifting group of companies that build on the desktop-computing platform Microsoft and Intel created through their operating systems and microprocessors. The intercompany relationships in such economic webs are much looser than in process networks. Participants enter and leave on their own initiative, guided by their own interests. But the shapers do play an important indirect role in influencing who joins or leaves the web by the choices they make in shaping the underlying platform. For instance, as Microsoft has modified its operating system to function in portable devices, it has attracted a broad range of portable-device manufacturers and related product and service vendors into its web. This has expanded operating system sales.

When it comes to determining sequences of interactions among participants, shapers play an even more passive role than aggregators do. The interactions of economic webs are determined almost entirely by market dynamics. Intel, for example, has little control over how customers purchase computers containing its chips. They may choose to buy the machines directly from a manufacturer, or they may go through a specialized value-added reseller. The decision will hinge on the buyers’ assessments of the service, feature, and cost trade-offs. Individual vendors, like Compaq, may create their own closed process networks to mobilize specific subgroups of web participants—and the market will determine whether those subgroups thrive or perish in the broader economic web.

Here again, though, the shapers can exert indirect influence through their control of the platform. If, for example, Microsoft sees a technology that might undermine the power of its shaping platform, it can try to co-opt the technology to neutralize its potential impact. In essence, this is what Microsoft has been trying to do with Sun Microsystems’ Java language. By creating a version of Java that runs only on Microsoft’s operating system, it hopes to reduce Java’s potential to undermine the dominance of that system—though whether the courts will block this strategy remains to be seen.

Economic webs woven around technology standards are the most advanced that have emerged in business to date. But there’s no reason that webs can’t be shaped around other types of standards. Take customer profiles, for instance. Currently, different companies assemble their data on customers into proprietary electronic profiles. Because firms can’t easily share these profiles, it becomes difficult to coordinate efforts in serving customers. For example, if someone buys a number of guidebooks for Rome, this person may be interested to learn about special fares to Rome from airlines or special rates on hotel rooms in Rome. Of course, the person might search for that information on her own, but she might find it more convenient to be presented with tailored messages about special offers.

If one company could create a de facto standard for profiles, it would be much easier to share and update the information and analyze customers’ buying patterns and economics. Such a company could, in effect, become a gateway for reaching customers in much more targeted ways than would otherwise be possible. Such a platform would certainly raise privacy concerns, but what if the company acted as an agent on behalf of customers, providing access only at a customer’s request and under terms the customer specifies? Companies with rich stores of customer data—Schwab, Amazon, and Travelocity come immediately to mind—could potentially create this kind of shaping platform.2

Webs might also be formed around protocols for coordinating business relationships. For example, the Li & Fung process network might become the basis for creating a broader web-shaping platform by defining de facto standards to govern interactions in the apparel industry. As one small illustration, the challenge of representing color in a simple, standardized way has made it difficult to coordinate production activities among apparel manufacturers. Li & Fung, with its broad reach in the fragmented apparel industry, might define a set of standards for representing color and license the use of these standards to companies outside its process network. Standards like these are critical to enabling broad collaboration in specific industries. Whoever controls the de facto standards could become the center of a very broad web of relationships.

In the future, smart executives will think deeply about the different roles their companies might play in leveraging growth. Do we have opportunities to form a process network, perhaps, so as to orchestrate a supply chain or orchestrate a group of distributors or service providers? Should we build a network to sell our own products, or should we become a pure-play orchestrator operating an open network? Can we provide greater value to customers by aggregating services supplied by other companies? Do we have robust product or process specifications that might be turned into standards for a broad economic web? Can we orchestrate a network within another company’s web? (For a discussion of the ongoing roles of organic growth and acquisitions, see the sidebar “The Many Facets of a Winning Growth Strategy.”)

Calling the Shots

Leveraged growth offers considerable benefits, the most salient of which are economic. Just as financial leverage magnifies the power of a company’s cash, leveraged growth magnifies the value of its assets. Cisco’s products, for example, are much more valuable to customers as a result of the vast array of support services it can deliver through its network of channel partners. Schwab’s branches are more valuable because they offer third-party services that satisfy more of an investor’s needs. Both Schwab and Cisco capture some of that added value for themselves—a high-margin source of growth.

Leveraged growth provides another, more subtle economic benefit as well. A single company rarely has the resources necessary to tailor its products precisely to the needs of individual customers. As a result, it has to provide generic offerings that almost always include features or services that have little value to specific buyers. Because the cost of those features and services can’t be recouped through higher prices, the company’s margins take a hit. But by drawing on the specialized assets of a broad array of businesses, a company can suddenly much more finely tailor its offerings—and its prices—to specific customers. The value delivered and the price charged come into closer harmony, boosting profits. Li & Fung’s customer-focused divisions testify to the more customized nature of offerings made possible by leveraged growth, and its high returns testify to the benefits of such an approach.

The flexibility of a leveraged growth strategy also substantially reduces market risk. By reconfiguring a broad existing base of assets, a company can respond more quickly to new demands as they arise in a market; it doesn’t need to wait to build its own new assets or to integrate a merger. And the company is also shielded from market downturns; it’s much easier to shed fixed assets when you don’t own them. As we’ve seen, the greater flexibility also enhances innovation by encouraging experimentation both in the way individual activities are performed and the way the entire value chain is structured.

But there is a danger to a leveraged growth strategy. It can be tempting to go too far—to turn your company into a so-called virtual organization that has few or no assets of its own. That’s a recipe for disaster. To succeed with a leveraged growth strategy, a company needs to maintain a strong and distinctive asset base—those proprietary assets are what give it the power to offer compelling economic incentives to potential partners. Your assets are your bargaining chips; without them, you’ll inevitably get pushed out of the game by other companies able to offer more persuasive incentives.

Indeed, the central challenge facing any company contemplating leveraged growth is to decide which of its assets to hang on to. In some cases, it might be a chain of branches or stores. In others, it might be superior manufacturing or product development processes. In still others, it might be direct relationships with customers. The key question is this: Which of your assets would create the most powerful incentives to mobilize the assets of other companies? In a world of leveraged growth, the company with the most powerful assets is the company that ends up calling the shots.

1. For an in-depth look at the mechanics of Li & Fung’s operations, see “Fast, Global, and Entrepreneurial: Supply Chain Management, Hong Kong Style: An Interview with Victor Fung,” by Joan Magretta (HBR September–October 1998).

2. This is the essence of the infomediary opportunity that Jeffrey F. Rayport and I discussed in our HBR article, “The Coming Battle for Customer Information” (January–February 1997). The opportunity (and the challenges) of creating a shaping platform based on customer profiles is addressed in much greater detail in my book coauthored with Marc Singer, Net Worth: Shaping Markets When Customers Make the Rules (Harvard Business School Press, 1999).

A version of this article appeared in the October 2002 issue of Harvard Business Review.





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