“It is simple math,” the strategist said in a tone that sounded suspiciously similar to how I explain things to my six-year-old daughter. “Decreasing churn by a percent — a single percent! — creates tens of millions of dollars of value. A point of market share creates five times that amount. Our growth investments are years from providing that kind of return.”
The general point is right — a dollar of investment in incrementally improving the core is almost always going to earn a greater near-term return than a dollar invested in a growth business that might take years to incubate. It’s one reason why it is so critical that companies begin to invest in growth before they need growth so they create space and time for those investments to mature.
Unfortunately, few companies do that. Instead…
“So,” the strategist continued. “If we just take our investment in innovation and redirect it to our core business, we’ll be much better off.”
No, no, no, no, no.
Sure, in the short term the company might be mildly better off. And I’m the last to argue against making today’s business as resilient as possible. After all, the free cash flow generated by today’s business is what funds investment in tomorrow’s business. However, slashing investment in new growth is perhaps the most dangerous thing that a company can do.
Every business and business model has a finite life. Products come and go. Customer preferences change. As Rita Gunther McGrath notes, competitive advantage is increasingly a transient notion. The companies that last over long periods of time do so by creating new products, services, and business models to replace yesterday’s powerhouses.
Scott Anthony is the managing partner of Innosight.