“Then shalt thou count to three, no more, no less. Three shall be the number thou shalt count, and the number of the counting shall be three. Four shalt thou not count, neither count thou two, excepting that thou then proceed to three. Five is right out.”
-Brother Maynard's Brother, “Monty Python and the Holy Grail”
If you take a capital deployment lens on corporate strategy, a business can only do one of three things, period. As we’ve said, the goal of placing bets is to generate the highest return. Even then, not every bet has the same potential value, due to differences in product, market, business model, commercial construct, and myriad other factors. Furthermore, to reach its theoretical maximum value, each bet will follow a different trajectory through the lifecycle stages. In short, it’s not enough just to allocate capital - we need to know how managers should nurture business opportunities through that lifecycle at each step along the way. What are the strategies available to them?
To start, we need to picture the different trajectories a business can follow as value “possibility frontiers.” Just like in economics, we can plot these frontiers graphically. If we overlay them on the Growth-Share Matrix discussed earlier, we start to see that business valuation (e.g., multiples) increase the closer that trajectory curve (i.e., frontier) gets to the top right corner. Intuitively, this makes sense. The best case for any business investor or operator would be to:
Invest in a high growth market
Capture market share until the business has a monopoly
Monetize without losing market share until the market dissolves
In real life, running a business is never that simple - we’ll come back to this. But the hypothetical example gives us important insight about the three (and only three) strategies a business can pursue:
Growth at all Costs
Profitable Growth
Cash is King
To maximize valuation, managers need to pick the strategy that aligns with where the business is in the life cycle. As long as market growth stays high, businesses should seek to maximize their market share and grow users. In some cases, it makes sense to do so even at the expense of profitability - like in an early stage start-up or as part of a loss-leader strategy. This strategy is known as “Growth at all Costs.”
As markets start to consolidate and adoption increases, businesses should maximize EBITDA with a focus on top-line revenue. This can be tricky - it’s important for businesses to continue to acquire new customers, but they also need to start to monetize the existing user base. This strategy is known as “Profitable Growth.”
As market growth slows, businesses should maximize EBITDA with a focus on bottom-line earnings. Particularly for mature or stagnating markets, this allows businesses to extract capital to reinvest in other areas or return to shareholders in the form of dividends. This strategy is known as “Cash is King.”
As hinted above, there is a critical inflection point as businesses transition from growing users to maximizing EBITDA. Those two paradigms require different strategic objectives, operating models, and capabilities. Because of this, the transition is often a “slippery slope” - once businesses start to focus on maximizing EBITDA, those decisions compound each other. It’s not always possible to reverse course.