A time to grow.
It's still possible to pick up a newspaper and read about a company that's laying off a significant number of employees yet again. It's still possible to pick up a business magazine and read a spirited debate about the pre-eminence of profits and productivity. And it's still possible to eavesdrop at the watercooler and hear executives bemoaning the state of their industry - which is, of course, what is keeping their company from achieving its potential.
But listen more closely, read more carefully, and you'll see that behind those fading gasps of the "corporate anorexia" that gripped America in the late '80s and early '90s is a new spirit of enterprise, an understanding that out of all the cost reductions, the downsizing, the Sturm und Drang of corporate restructuring, has come a need to grow.
And that makes sense. Growth, after all, drives return, creates value and jobs, and ensures a company's survival. Consider:
* A review by Braxton Associates, the strategy arm of Deloitte & Touche Consulting Group, of 1,200 publicly held firms between 1975 and 1994 showed that companies with low growth tend to have low returns, while companies with high growth tend to have higher returns. In fact, more than 40 percent of the slowest-growth companies showed up in the bottom quintile in terms of return, while half of the fastest-growth companies were in the top return quintile.
* Between 1980 and 1990, the 100 fastest-growing companies in the Fortune 500 created more than $200 billion in value for their shareholders. The 100 slowest-growing companies forfeited more than $50 billion. On average, the fast-growing large firms each created $2 billion to $3 billion more for their shareholders in a decade than did their slow-growing peers.
* A review of once-sizable firms that went bankrupt in 1994-'95 shows that while their average revenue was more than $200 million in 1980, by 1990 it had fallen to just over $100 million. The average firm in this group shrank more than 4 percent each year. In comparison, the 1,000 surviving firms in the research data base, from which Braxton Associates gathered this information, grew at nearly 8 percent each year. Top value creators averaged nearly 13 percent annual growth.
* The 200 companies that ranked highest in growth and value creation in Braxton's study were responsible for 11 percent of all the new jobs created in North America during the last decade.
* A 1995 survey by the American Management Association found that the most important business or strategic issue facing companies - beyond productivity, competition, technology, and customer service - was growth.
FEAR OF GROWING
If growth is so clearly desirable, why has it eluded so many companies? For starters, it's risky. Better, some think, to sit back and stick to their knitting: hone that core competency, trim those troops, push for productivity, prime for profitability. This tendency toward retrenchment has caused many companies, their eyes focused on short-term tangible results, to forget how to grow; to forget growth's benefits; and to forget, primarily, that growth - particularly sustainable growth - generally only happens if it's planned. Too many companies have grabbed at growth without developing a strategy that was based on both a thorough analysis of the competitive environment and attention to actually implementing that strategy. The predictable failure of these attempts led many companies to take stiff corporate dietary measures and left many executives with a residual fear of growth.
But just as the annals of recent corporate history, to paraphrase sportswriter Red Smith, are littered with the bones of failed growth attempts, so are they overflowing with success stories. Intel. Wait Disney. Thermo Electron. Microsoft. Rubbermaid. Southwest Airlines. WD-40. Automatic Data Processing. Illinois Tool Works.
That Rubbermaid could achieve double-digit growth rates in the garbage can and plastics-related industry is proof positive that growth can't be held hostage to an industry's current state.
Similarly, soap-maker Neutrogena has scored more than 20 percent annual growth and 30 percent annual return for two decades in an often-problematic category. And at a time when airline travel was hardly skyrocketing, Southwest Airlines bested the industry growth rate by some 20 percent, achieving 40 percent annual returns in the process. The fact is that growth, even double-digit growth, is possible in virtually any industry (see chart on following page) - if the growers themselves have found the way to unleash their potential.
So what's the secret to growth? Just as failure to grow can't be blamed on a company's industry, successful growth doesn't come from just choosing the right industry, the right customer group, or the right investment strategy. It's not as simple as acquiring into a "hot" market or spending lavishly to bring out more and more new products.
There is no single set of rules to follow. Growth is, and has to be, a system that evolves out of change, in response to customers. And it must be reflected in a company's capabilities, in a company's willingness and readiness to grow.
Growing requires that a company's management shift its focus from cost and "denominator" management to revenue and "numerator" management. It requires building long-term foundations and executing actions that capture growth. Growth must be managed, with time spent focusing on the future, not just on the bottom line. And companies must be flexible through the long-term so that market shifts don't become traps, as some computer corporations learned when they missed the dramatic shift from mainframe to client/server while their competitors proliferated and profited.
For any company to grow, it must create a formula. At the heart of this formula is a compelling product or service offering. But the formula is not simply the new product. Around this offering, a company needs to build a business system, a collection of structures, management, systems, people, and policies that fit the product or service and support growth.
By aligning all these resources, assets, policies, and structures to the offering, a business can create a unique and valuable formula that is difficult to duplicate. New products can be copied. New services can be created. But a formula that involves appropriate human-resource policies, a supportive organizational structure, and a leveraged asset base presents a strong and defensible competitive offering.
McDonald's exemplifies the strength of the "whole is bigger that the sum of the parts" formula. No single component of what McDonald's does is exceptionally innovative. Its food is fresh and reasonably tasty, but hardly something to make a gourmet's mouth water. Its stores are uniformly clean, but that's almost de rigueur these days. Its employees are well-motivated, but so are those of many other fast-food outlets. Its burger-bin management approach is somewhat innovative, but it's not hard to copy. Its store location strategy is solid, but any company can get its hands on good demographic information. McDonald's' success doesn't stem from any one of these elements; it stems from all of them, acting in concert.
Many companies fail to make the leap from formula creator to formula exploiter. They create something but then leave its value on the table. They innovate but fail to take the next crucial step.
Exploiting a formula requires focusing more on operations and efficiency and on rooting out opportunities - geographic territories to be conquered, new extension products to offer, new channels of distribution. It means developing a clear understanding of competitors and the basis of competition, identifying incremental opportunities, and looking for possible alliances and acquisitions.
It used to be that companies could sail along on a single formula, rolling out similar products to new markets or making incremental gains in efficiency. But in an era of "mass customization" and decreased product life cycles, such behavior is less and less possible. In this sort of highly competitive environment, the best defense remains, once again, a strong offense. Companies must continuously create and exploit new offerings, even to the point of cannibalizing their own offerings.
Hewlett Packard, for example, which controls about half the laser printer market and derives 70 percent of sales from new products introduced in the last two years, is famous for out-doing its own products - before the competition has a chance.
Great Lakes Chemical, once an unknown producer of flame-retardant chemicals and now a global player in a number of markets, prides itself on the same philosophy. The company, says it "works hard to make its products obsolete before legislation or the competition does." The company's largest growth challenge, adds Senior Vice President Robert B. McDonald, "is to pinpoint leaders at all levels - both inside and outside our broad organizational structure - and put them in positions where they can continue our growth and instill the culture of Great Lakes in new generations."
EYES OUT FOR CHANGE
Inevitably, companies face a radical change in the way things are done. Customer needs change. New technology appears overnight. Distribution channels merge, converge, and evolve. Competitors merge, converge, and evolve. Companies looking to sustain growth must not only react to those changes, but see them coming, far out on the horizon.
The consequences can be devastating, for, as Intel's Andrew Grove has pointed out, "there is at least one point in the history of any company where you have to change dramatically or rise to the next performance level. Miss the moment, and you start to decline."
The keys to survival are flexibility and the willingness and ability to imagine a new place for the company, and to marshal whatever forces are necessary to get there. To do that, leadership teams must be able to scan the horizon and get a clear sense of where things are headed, taking the faintest signals and interpreting them succinctly, translating their views of what might be into concrete, long-term growth.
Take WMX. This pioneer in waste technology started life as Ace Scavenger in the late '60s, collecting garbage at curbside in small towns throughout Illinois. But Ace saw a place in this chronically undermanaged industry for a service that was considerably more professionalized. Through significant investments in infrastructure, Ace created new systems for financing and insurance and new procedures for contract bidding, personnel management, and sales training.
During the '70s and '80s, it aggressively exploited that formula, acquiring and consolidating garbage hauling and waste companies in the Midwest and Florida, and then going international. In the meantime, with an eye out for what was "hot" in the waste arena, it experimented with liquid waste and other technologies, eventually changing its name first to Waste Management and then to WMX Technologies, now an almost $10 billion provider of services in environmental engineering, medical waste, and toxic cleanup.
However, while WMX had created a smart formula and had exploited it, it found itself up against some dramatic changes in the early '90s. New competitors were fighting for decreasing market share. Environmental policies and social demands had shifted. And waste-management technology had evolved.
Searching for a new and workable approach, WMX reorganized several times, dividing and redividing, laying people off in the process. By 1994, Forbes magazine noted that Wall Street was wondering whether WMX had become a "burned-out growth case." But a final restructuring and an intensive, soul-searching analysis of every facet of the company's organization, combined with a new and intensified focus on waste-management's new frontiers - recycling and hazardous materials - is putting WMX back on the right track and priming it once again for the sort of growth that's long been its hallmark.
WHO'S A GROWER?
Some key clues to what makes a company such as Rubbermaid a grower, while others slide into oblivion, came out of Braxton Associates' research on the attributes of high- and low-growth companies. For example:
* On vision and leadership: While nearly 50 percent of growers had explicit, highly growth-oriented visions and strategies, only 13 percent of the lagging companies made the same claim. ServiceMaster, for example, which has been in the top quintile of growth for the last two decades, could be considered a "growth-vision fanatic": Annual report covers sport growth themes, and the company systematically pledges - and achieves - billion-dollar growth goals. Southwest Airlines' colorful chief executive, Herb Kelleher, once was considered crazy for pursuing a vision that violated the standard hub-and-spoke route system. Southwest's double-digit growth and returns since the mid-'70s has sent his airline into the stratosphere and other, more conventional carriers scrambling. Critical, too, is the stability of the leadership team. In a large portion of the high-growth companies - including Hewlett Packard, WMX, and TCI - executives have been working together for decades, overlapping and passing on a common vision of where the company should go.
* On innovation and new product/market development: Nearly half the growers displayed high levels of innovation, while only a quarter of the lagging companies were as innovative. Growers found equal success with new products and new markets, although neither emerged as the exclusive route.
* On research and development: While 40 percent of growers spent a high portion of their revenues on R&D, only 15 percent of lower growers did the same. For growers, this investment generally means more than just having "enough dollars." It means aggressively and expertly managing the R&D process, making sure they capture the full value of what they create.
* On focus: High growers were considerably more focused in terms of industry participation. If 85 percent of revenue from the core industry displays high focus, then 82 percent of high growers, but only 50 percent of low growers, fell into this category.
* On being oriented toward growth: Although talking about something doesn't necessarily make it happen, talking about growth appears to be a common trait among those companies that grow. Nearly 90 percent of high growers had a medium or high-growth orientation. Packaging manufacturer Sonoco, for example, which has maintained a 13.4 percent average annual growth rate throughout its entire 95-year history, consistently features growth as a theme in its annual reports. H.B. Fuller, a manufacturer of specialty chemicals, reports, "Growth will always be an essential element of our success. Profits and profitability are very important, but they do not represent the sole or primary purpose of our endeavors." On the other hand, only half the low growers had the same levels of attention; only 13 percent, in fact, claimed a high growth orientation.
STEPS TO GROWTH
What these findings indicate is that for a company to grow, it must have a number of solid growth foundations, and these foundations must be aligned. The firm's culture must be oriented toward growth. Growth must be designed into the business structure. The company's top managers must provide the correct, consistent, visionary leadership to guide growth. Throughout its processes, the business must be managed for growth. And finally, information and technology must be leveraged into the company's processes and products for growth.
Just how a company, once its foundations are solidly aligned, taps into growth strategically will depend on the company's history, its current product or service offerings, and the state of the company's industry. Growth may require that a company create or leverage a relationship with a non-competing grower, as MasterCard has done through co-branding.
It may require finding new audiences for existing products - as Wrigley's did with its gum for smokers - or taking an existing product and finding new uses for it - as Arm & Hammer has done with baking soda.
It may require a redefinition of the product mix, as Mercedes did with its less expensive C-class cars. Or it may require a complete reinvention of the way the company operates, as Chrysler found through its watershed reorganization.
But whatever it takes, it's clear that the days of the incredible shrinking corporation are past. The values, and value-creating properties, of growth are too obvious to be ignored. The opportunities for growth are there for the picking - if you're paying attention. For corporations emerging from the era of "rightsizing," it's a matter of being ready to grow. It's also a matter of survival.
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|Title Annotation:||Growth: Reaching the Stars; corporate growth|
|Publication:||Chief Executive (U.S.)|
|Date:||Dec 1, 1995|
|Previous Article:||Northern exposure.|
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