A mandate for growth.

After years of restructuring pain, it's about time business starts to see some gain. A penny saved is good; a new penny earned is better. CE asked participating CEOs how they are creating tomorrow's markets and opportunities.

For years, the high priests of management have been preaching the virtues of downsizing and re-engineering. Efficiency has its merits, but no company has shrank itself to growth and glory. The trouble is, after nearly a decade of creating a cultural mind-set geared toward internal process improvement, organizations find they need to adapt again. According to an American Management Association study, fewer than half of downsized companies increased operating profits. Shrinking companies create paranoia and low morale; growing companies create optimism and loyalty. The top line is as important as the bottom line. Certainly, the will to grow is as important as the way to grow. In the following roundtable held in partnership with Deloitte & Touche LLP, CEOs were asked how they go about creating opportunities for tomorrow.

Are today's re-engineered organizations prepared to pursue growth? Not if their performance measurement systems are still tied to old productivity benchmarks, reckoned Deloitte Touche Tohmatsu International's Ed Kangas. "If leadership wants the company to grow," he says, "it must lay the foundation by changing its measurement systems." Nor can business wait for domestic economic growth to pull it through anymore. Real average U.S. GDP growth has slowed in the 1990s to 1.5 percent annually. This is why many companies are pursuing international markets more aggressively. A study of Fortune 500 companies' sales and profits by global strategy consulting firm William Kent International showed that between 1989 and 1993, international businesses grew faster and had greater profitability than domestically focused companies.

CEOs might consider re-establishing a few guidelines in sorting out the opportunities and where they lie. Among these guidelines:

* No company is too big to grow. Wal-Mart, McDonald's, and Coca-Cola continue to expand at double-digit rates, although not in all markets.

* No sector is too mature or moribund. Great Lakes Chemical has been growing at about 20 percent a year despite an average 2 percent growth in the chemical industry it serves. Mary Kay's Dick Bartlett reports that by identifying the value proposition and being customer-focused, the closely held direct-selling firm has more than doubled the growth of the cosmetics industry. Steel, the quintessential 19th century commodity product, often is viewed as overrun with cheap goods from foreign competitors, yet companies such as Nucor, Birmingham Steel, and Chaparral Steel haven't had an unprofitable quarter in years.

Category cataracts can indeed limit one's vision. Participating CEOs agreed that they need to prepare their organizations to regain or sustain growth momentum. How do CEOs do this? In addition to removing impediments such as ill-suited measurement systems, companies ought to push aggressively for new products and services, as well as explore alternative distribution channels. Many companies are vigorously pursuing growth through international expansion, but as former Hyatt Hotels Chairman Darryl Hartley-Leonard pointed out, this will only succeed if one properly identifies the value proposition.

During the discussion, another mental checklist for CEOs emerged:

* How much time do you spend looking outward versus looking inward? Braxton Associates' Tom Doorley had a client CEO who actually kept a record of the time he spent on growth. That time sheet revealed the CEO was only spending an hour or two at random.

* How much time is spent building a collective view among direct reports and other key individuals?

* Do employees understand or share your point of view about markets and opportunities? Front-line employees often can identify key expansion areas.

* Have you identified the capabilities you will need to grow in the next five to 10 years? Many think the technology "express train" will push their organizations, but technology momentum can potentially derail a corporation. Electronic commerce is revolutionizing shopping, but it's not certain who the victors will be.

Nevertheless, it's probable that the winners in the next millennium will be those companies well-versed in the growth gospel.

- J.P. Donlon

SOWING THE SEEDS

Thomas L. Doorley III (Braxton Associates): Growth-focused companies achieve sharply higher performance in terms of jobs for the economy, creation of innovative products for customers, and shareholder value. In fact, for every dollar a slow-growing company creates, a fast-growing organization creates five. But sustaining value-creating growth is not easy. Competition is rigorous, customers change all the time, and moving to new markets - particularly foreign ones - is difficult.

We've tried to synthesize our knowledge of how companies successfully grow into a "growth system," which has three principles. First is underlying commitment. You have to believe in growth to make it happen. The second part is understanding your company's "valuable formula" - what makes your products or services special - and then exploiting and changing that over time. The final principle is creating growth-supporting foundations. The trick is not to grow at 20 percent per year for two years. It's to sustain growth over a long period of time.

There are three major mistakes a company can make in terms of growth. One is thinking of growth in overly simple terms. I know of no easy, five-step process that will ensure growth. Another error is trying to grow too fast. For example, some consulting companies sell their services faster and at a higher rate of return than they actually can deliver the answers. The third mistake is growing too soon. Growth companies may create lots of profitability and value, but an organization will burn out if it's not adequately prepared to grow.

Charles A. Dickinson (Solectron Corp.): Some growth is demand-driven rather than self-created. In my business, more and more companies want a big project manufacturer. So our impetus for growth has been trying to get more market share. The only way we can provide service at the level our customers expect is to be prepared both from a capital and labor standpoint to take on large projects.

Doorley: Our clients in Asia are demand-driven, too. They have hyper-charged economies growing at GDP rates we would love to see. The issue for us is, "Can we satisfy that demand?"

The issue for them is whether they're building the capability to sustain that growth, because that high growth rate is going to slow sooner or later. Sometime in the future, the Western company they've been overwhelming is going to get smart and become a real competitor again. Demand-driven growth is different than growth you have to work hard to create. But the three principles have to be in place to sustain you when the growth rate drops.

Joseph M. Saggese (Borden Chemical): In the chemical industry, growth is predicated by market share improvement and capital investment. However, I believe the most important investment in growth is people. In this era of downsizing, many companies have forgotten that people are an important part of our future. If the U.S. as an industry continues to take this attitude, we're going to have a major problem.

J.P. Donlon (CE): Does Borden invest in its people?

Saggese: It didn't in the past. The chemical group now is starting to realize that people are probably our most important investment.

Ara K. Hovnanian (Hovnanian Enterprises): Does downsizing and investing in people have to be mutually exclusive?

Saggese: Not necessarily. You invest in people by not tying every employee into a P&L or sales objective. You have to spread people around and give them responsibilities that are not necessarily rewarding to the unit at that moment, but will be in the future.

Doorley: One of our clients tried over 18 months to grow his organization. The problem was that the company was so driven by productivity measures that no one could do the things necessary for growth. For example, it took about six weeks before a call center employee became productive, but the executive running the business was measured every two weeks on his revenue per person. Finally, the company created "ghosts." Four people in the six-week training period are counted if they generate revenue in the numerator, but they don't appear in the denominator for six weeks. After the training period, they come back in, and then the executive has to justify their productivity. As a result, annual revenue growth has risen from about 3 percent or 4 percent two years ago to about 8 percent now.

Thomas S. Johnson (GreenPoint Financial): The best strategy starts with understanding your company, markets, and the businesses you are in. Anybody making the generalization that growth ought to be the thing now instead of downsizing or re-engineering has never looked at General Motors. GM has the biggest market share in the biggest industry in the world, and it had to re-engineer its processes. It had to take smaller market shares - at least for a while - not just to maximize shareholder wealth but in order to survive.

At the other extreme, an emerging high-tech business shouldn't overemphasize productivity and cost, because it can wind up having 30 percent growth, but if the industry's growing 38 percent a year, it's dead in the long run. In the long term, market share is going to count for a whole lot. You have to start with a clear understanding of the logical, derived mandates for your business. And they're not the same for everybody.

That means we should try to avoid listening to each quite as much as we do. As business leaders, we tend to hang around with each other, and that sometimes can lead you to forget you're not just like everybody else. We all have different needs and objectives.

SHARING THE SPOILS

Edward A. Kangas (Deloitte Touche Tohmatsu International): Part of the reason companies can't grow is that they don't change their accounting and productivity measurement systems. In my profession, we often underestimate the power of statistics, management reports, and P&Ls. In fact, some research shows that if you compensate managers based upon growth instead of profits, most of them will opt to have a more balanced and profitable business. In fact, sometimes they will actually forego compensation to make their P&L look better. Thus, if leadership wants the company to grow, it must lay the foundation by changing the measurement systems.

James J. Byrnes (Tompkins County Trust Co.): There seems to be a growing chasm between how lower-paid employees and management are treated in this country. I wonder if that trend holds true at growth companies, too. Growth gives you an opportunity to share the spoils, so I would assume that one of the advantages of a true growth company is that everybody sees a benefit of growth.

Our bank has profit-sharing and ESOP plans, so that employees own a piece of the company. That means they're interested in results and personally interested in growth.

Richard C. Bartlett (Mary Kay Holding Corp.): My business has been able to grow 16 percent compound for the past 10 years when the two industry groups it represents have been growing less than 6 percent. That's because we are taking share from the bigger players and creating shareholder value. Our employees are involved in creating shareholder value - they have shares in the company, so they are strongly motivated to grow the base company.

Saggese: Do privately owned companies have more success than public ones?

Doorley: We do find a correlation between stock ownership at various levels and growth. The more ownership throughout the organization, the better off it is in terms of growth and performance in general.

Josh S. Weston (Automatic Data Processing): We divided our payroll operation into 45 different geographic locales that have the same business mission and chart of accounts. We display that to everyone, right down to the salespeople, so they can see how their units are doing compared with the others on lots of indices, not just profits. We've institutionalized growth, because we're hooked on it. We've had 140 consecutive quarters of double-digit growth in EPS. That makes the units worry like hell, since they don't want to be the first to break that string. This internal benchmarking gets peer group juices and growth going.

Bartlett: Another key strategy is setting and consistently emphasizing company values. I teach Mary Kay's values to every new employee and to all our independent contractors. Each month, I hold two separate sessions, one for every new employee hired that month and one for every new person in the sales organization who is ready to be promoted into a leadership role. That way, if something goes wrong in an employee's career, I can come back to the set of values he or she heard from me the first time around. It sustains you in times of terror and gives you a foundation for future growth.

Doorley: We have a client in a retail-type business with a lot of turnover at the entry level. Some 40 percent of its people have been with the company for two years or less, but we found incredible consistency throughout our client's organization in terms of the vision. New hires were saying the same thing as those who had been with the company for 25 years. That indicates the power of the vision and the ability of the people to teach new hires what's important by the second day, so the new employees can teach it to someone else by the third day.

Kangas: We noticed that our consultants' turnover rate was about 25 percent during 1982 or 1983, a time when the economy was improving, but we weren't getting the growth we wanted. The single biggest thing we did for 18 months was aim to cut the turnover rate from 25 percent to 12 percent. And we did it. Suddenly, a cadre of experienced people was staying with us, the growth took off, and the turnover rate has never gone back up.

Richard H. Vissers (Computer Travel Systems): Are there any companies that don't have a strong value system, yet are still successful?

Doorley: A company with a weak culture and values can be successful for a while, particularly if it has a hot product or if it just happens to be at the right place at the right time. However, the problem is sustaining it. On the flip side, we have seen companies that have strong values but don't grow and aren't successful, because their values were anti-growth.

GROWTH VERSUS DOWNSIZING

Bartlett: If we had been focused on human capital 20 years ago, would we have had to go through the current period of restructuring and re-engineering? I wonder if we couldn't have made the transition as we went along.

For example, in the last seven years, we've increased our unit productivity on the manufacturing lines by 300 percent. So, I've been downsizing my manufacturing lines, but only in the sense that I'm hiring fewer people. Is it the macro world that has created AT&T-like situations or just poor management that has not laid the foundation for the right kind of growth? I believe it's poor management.

Weston: Part of the reason companies such as AT&T and IBM are enduring these downsizing earthquakes is that they consistently failed to examine their organizations - their people, hierarchy, and expanse of control - at least once a year. Even with its current downsizing, AT&T is still playing catch-up with MCI and Sprint in terms of revenue per employee. The competition won't let AT&T - or any other large, negligent company - coast anymore; the only answer is making some painful - and hopefully, one-time - changes.

Doorley: You're right. When you lose competitive fitness, you have to do something. However, when the European companies look at their U.S. brethren, they see organizations that have downsized, paused, downsized, paused again, and then said, "Gee, maybe we ought to grow."

European businesses, on the other hand, are trying to grow and regain fitness simultaneously. One French company, for example, downsizes in certain areas to recover competitive fitness, but continues to invest in growth in the form of new businesses, international expansion, and strategic alliances.

Henry Drewitz (Astoria Federal Savings): We've been restructuring, downsizing, and growing all at the same time, though it didn't happen the same way at the identical level. To increase profitability, we got rid of our in-house data center and went to a service bureau, a move that saved us $2 million a year. In addition, we had to furlough about 60 to 65 people, which made their work space available for other departments we wanted to expand. We also moved headquarters from New York City to Lake Success, which saved us money in taxes.

However, for us, growth generally comes via acquisitions - though they must be profitable. So we might go through periods of stagnant growth, but when an opportunity presents itself, we are ready to jump at it.

Doorley: Fast-growing companies do a lot of acquisitions. Often, they get good at picking acquisitions, bringing them in, and integrating them. In addition, companies that tenet to do more smaller acquisitions seem to achieve much higher success rates.

Weston: Larry Tisch is on our board, and he says that 80 percent of all acquisitions are failures with honest hindsight. Culture is monumental. IBM bought 49 percent of Rome, screwed it up thoroughly, and bought the other 51 percent, because it couldn't control the buggers. When a big company buys a little one, there's a danger of the staff guys swarming all over the little company and stifling its people.

Harry E. Gould Jr. (Gould Paper Corp.): If you're growing by acquisition and try to change the acquiree's corporate culture, you do so at your own peril. In the selling business, at least, people capital is your No. 1 asset.

Darryl Hartley-Leonard (Hyatt Hotels Corp.): Sometimes, you have to grow whether you want to or not, because you constantly put yourself out there as a company that's offering a certain opportunity and you must fulfill it or someone else will. So occasionally, you have to make an acquisition that isn't as economically viable as others you've made in good times. That happened in our industry in the early 1990s. We could see a slow-down coming. We knew no major hotels were going to be built in the U.S. starting in the late 1980s. Therefore, to continue to grow, we had to continue to invest in the brand and increase revenues and shareholder value. The international arena offered us the greatest opportunity to do that.

GLOBAL GROWTH

Donlon: How do CEOs manage the transition from a focus on domestic growth to one on international growth?

Hartley-Leonard: To some degree, our international growth came about because of the environment created by our competitors. In the 1970s and 1980s, a lot of M&A activity took place, creating insecurity in the hotel development arena. Hotels are usually owned by private investors and corporations, so they are looking for a stable operator. The companies in play created an unstable environment. Hyatt was the viable alternative, though not the dominant player. We got an opportunity to sign a lot of contracts, and now have 45 hotels in the four- and five-star market under construction internationally.

The other thing we brought to the table was that we were more opportunistic than growing by design. When you're part of a massive organization owned by one family, each dollar you ask for is up against dollars for many other corporations and opportunities. Therefore, the yield you might produce may be less than another opportunity, and that can stifle growth.

We went through re-engineering because the economics of the business made us uncompetitive from an investment point of view. The only way we could be attractive to investors was to produce the same type of margins as our main competitor, Marriott. To that end, we examined our business processes and corporate structure. Looking back at American business, the fundamental concept of management in the U.S. was Victorian, brought over from Europe. It had two fundamental beliefs. One was that employees, if left to their own devices, are lazy. The other was that they are inherently stupid. Therefore, companies felt they had to create layer upon layer of management to oversee employees.

We conducted an experiment: What would happen if we downsized management instead of employees? That's where the high cost and heavy concentration of bodies traditionally has been in our industry. Sure enough, as we took out layers of management, productivity increased. If we took out the kitchen supervisor, the cooks' productivity rose; the level of intensity about the job went up.

The barriers to growth - particularly international growth - are as much cultural as anything else. Americans tend to be missionaries in the sense that we try to make people adapt to our way of doing things. You can't do that. Unless you are willing to say, "In Singapore, we are an Asian hotel, and in England, we are an English division," you will run into some real problems.

Weston: One of the keys to growth is for the fat cats - no matter how good they think they're doing - to get the hell out of the high-rise and meet their customers and their employees often enough to affect the culture and recognize that if you're in France, you'd better not behave like an American.

Hartley-Leonard: Our corporate office staff has to work in the field at a unit one or two days every year.

Bartlett: The common denominator of those companies that have maintained growth is knowing their customers well. In the old days, when I did business with IBM, it didn't know me as a customer and wouldn't want to understand what I was as a customer. It had an arrogant approach to our business. GM and Sears were the same way. It's not just a management technique either; it's part of your culture. Getting feedback from customers should be a constant, everyday thing.

Donlon: Darryl, what in your thinking allowed you to reorient the company toward an overseas focus?

Hartley-Leonard: Desperation as much as anything. [Laughter.] Our culture has grown from within. We recruit froth college campuses and invest a lot in our employees' education. Every employee is given an education allowance, and every one has to work in other businesses.

John W. Guffey Jr. (Coltec Industries): Before we decided to sell one of our companies, we offered computer courses to its 110 employees. Four people signed up. Management figured everyone else must be up to speed. A little while later, we decided to relocate and sell the company. Again, we offered a program to help the employees; this time, 69 people showed up, because they had to get a job. Maybe if the company had had a culture that encouraged employees to be curious about continuous improvement, we wouldn't have sold it.

THE POWER OF TECHNOLOGY

Donlon: Technology often plays a major role in continuous improvement initiatives. Is it also a driver of growth?

Doorley: One of the foundations I mentioned is knowledge. The technology piece is in knowledge. That is one of the most difficult pieces to get a handle on. It's particularly difficult to move ideas quickly around a large, widely spread organization. We haven't unlocked the genie in technology and knowledge yet; it has tremendous potential.

Weston: We use an acronym: DINK. "D" is for data, "I" is for information, and "NK" is for new knowledge. Information is better than data. Most auditors and accountants give you data. If you're lucky, you might get information. New knowledge is probably on p. 29, surrounded by all kinds of crap. So I just write DINK on the report and send it back.

Kangas: Our out-of-state tax professionals use a relatively straightforward Lotus Notes platform. Each one is hooked up to a wide area network and local area networks in the offices. They indicate via tax code what typical savings would be, how to approach a client, sort clients by size and industry. Every morning, our tax professionals get a report on all the new tax ideas, and they can sort it by industry and client size. About 3 percent additional annual growth has resulted from the implementation of that idea two years ago.

STAYING ON TOP OF THE CURVE

Donlon: What will be the great growth enabler for your business, and what action will you take as a result?

Hartley-Leonard: The big enabler for us is technology. Our industry was technologically inept. The distribution systems of the travel industry now are changing rapidly. We're seeing a lot of technological consolidation. Companies are realizing it's too expensive to go it alone. And other companies, such as IBM and EDS, are setting up whole divisions dedicated to the travel industry. That will be our main focus for the next three to four years.

Saggese: Our growth is going to be outside the U.S., primarily in Asia. We aim to increase our non-U.S. business from 22 percent to 35 percent to 40 percent in the next five years. In the industrial sector, we want to always have another product sitting on the shelf. And, of course, we must continue to invest in people.

Byrnes: Given the size of our company, I think a lot of growth will continue to come from the new products we develop through alliances with other companies. But we also need to improve the focus on growth and motivation for growth throughout the organization.

Weston: We have to improve our time to market, which not only applies to products for the marketplace, but also to internal changes, plans, and processes. One of the best ways is to shorten the business cycle for every particular function.

Guffey: I want to recreate the culture of growth that made my company what it was before the LBO times. The LBO mentality brings necessary disciplines, but they are not necessarily conducive to growth in the future. I have to spend a lot less time talking to our institutional investors about their definition in desire for growth possibilities and more time talking to the people within our companies who can do something about them.

Johnson: We're in a portfolio-lending business, so our biggest challenge will be managing the interplay between risk control and growth. We're niche mortgage lenders. Our niche is maybe 5 percent or 10 percent of the total mortgage business. If you characterize that business as $800 billion of origination per year, our little niche could be anywhere between $40 billion and $80 billion. But if you lose control by 3 percent or 5 percent of the proper management of risk, you fall off the cliff. We have to have the proper mix of attention to the control systems and the governors on what we do - and a growth culture underlying it.

Drewitz: The important thing is to control expenses, watch out for the opportunities that come along, and maintain a satisfactory spread between the cost of money and the bottom line.

Bartlett: Our enabler of growth will be better knowledge of the customer: how to provide better value to her, both in new products and in innovative services. We have to be on top of the curve, not buried by it.

Vissers: We are trying to find an innovative way to share ownership besides the standard methods out there now. We also want to manage growth to a level where we can enjoy it more.

Hovnanian: In our industry, the largest builder in the nation has a 1 percent market share. Growth is easy, and we can grow any time we want. The key is finding a competitive edge that brings both bottom-line results and growth in revenues. So the key enabler is going to be the optimization, standardization, and improvement of our processes.

Doorley: The CEO has to be involved in the growth initiative and devote a great deal of time to it. For example, we told a CEO client of ours that he had to spend a quarter of his time on growth. So he kept a time sheet. He found he was only spending an hour or two here and there. Over time, he changed that, so he was spending around 25 percent of his time on growth, and the company's growth rate now has started to rise incrementally. This resulted both from his good ideas once he started thinking about growth and from the signal he gave to the organization that growth is important.

If you want to be a high-performance company, you have to grow. We plan to focus on how to keep growing forever, never taking a breath and never thinking it's over.

A Who's Who Of Roundtable Participants

Richard C. Bartlett is vice chairman of Dallas-based Mary Kay Holding Corp., a $1 billion-plus provider of cosmetics and toiletries.

James J. Byrnes is chairman, president, and chief executive of Tompkins County Trust Co., a $577 million bank in Ithaca, NY.

Charles A. Dickinson is chairman of $2.1 billion Solectron Corp. in Milpitas, CA, an assembler of electronic equipment.

Thomas L. Doorley III is founder and senior partner of Boston-based Braxton Associates, the global strategy-consulting arm of $1 billion Deloitte & Touche Consulting Group.

Henry Drewitz is chairman of Lake Success, NY-based Astoria Federal Savings, which has $7.1 billion in assets.

Harry E. Gould Jr. is chairman and president of $830 million Gould Paper Corp., a New York distributor of printing and business paper.

John W. Guffey Jr. is chairman, president, and chief executive of Charlotte, NC-based Coltec Industries, an $880.8 million maker of engineered products for the aerospace, automotive, and other industrial markets.

Darryl Hartley-Leonard is former chairman of $2.5 billion Hyatt Hotels Corp. in Chicago. He currently is vice chairman of Production Group International, a privately held global events and trade show company in Arlington, VA.

Ara K. Hovnanian is president of Red Bank, NJ-based Hovnanian Enterprises, an $800 million real estate developer.

Thomas S. Johnson is chairman, president, and chief executive of New York-based thrift bank GreenPoint Bank and its parent, GreenPoint Financial, which has $14.7 billion in assets.

Edward A. Kangas is chairman and chief executive Deloitte Touche Tohmatsu International, a $6.8 billion audit, tax-services, and management consulting firm.

Joseph M. Saggese is chairman, president, and chief executive of $3 billion Borden Chemical in Columbus, OH.

Richard H. Vissers is chief executive of Melbourne, FL-based Computer Travel Systems, a privately held software company that services the travel market and has approximately $500 million in revenues.

Josh S. Weston is chairman of $4 billion Automatic Data Processing, a Roseland, NJ-based provider of computerized transaction processing, data communications, and information services.