Constellation's Growth Framework

Mark Leonard from Constellation Software outlined a framework for understanding three types of business growth. Here's the key insights from his approach.

The Three Types of Growth

• Organic Growth

  • Natural business growth of existing operations
  • Typically around 7-8% annually
  • Most predictable and sustainable form of growth

• Acquisitions

  • Buying existing revenue through company purchases
  • Provides immediate revenue boost
  • Lower risk when buying proven businesses
  • Can cross-promote and leverage existing relationships

• Initiatives (New Builds)

  • Building new products or services from scratch
  • Highest risk category of growth
  • Takes more resources than initially planned
  • Distracts senior leadership attention

Key Lessons on Growth Strategy

• Building new things (initiatives) is often more expensive than expected

  • Requires more resources than planned
  • Takes senior people's time away from core business
  • Has 0% return during initial building phase
  • Lower compound returns due to delayed profitability

• Acquisition advantages

  • Provides immediate revenue
  • Lower risk than building new products
  • Can leverage existing customer base
  • Opportunity to improve existing businesses

• Resource allocation principles

  • Focus on being a capital allocator vs builder
  • Look for opportunities to buy vs build
  • Consider return on invested capital for each growth type
  • Be disciplined about resource deployment

Practical Application

• When possible, buy existing revenue instead of building new products
• Look for businesses you can improve through better operations
• Focus on cross-promotion opportunities with acquisitions
• Be cautious about starting new initiatives that drain resources
• Consider the opportunity cost of leadership time and attention

This framework influenced companies like Awesome Motive to focus primarily on acquisitions over building new products from scratch.