Mastering nitty-gritty leadership strategies.
The first examines several arguably 'glamorous-less' leaders who prefer disciplined and rigorous approaches over "glamorous." Yet riskier strategies involving daring acquisitions, bold innovations or breakthrough business models--and have created potent strategies for driving fast growing companies that achieve double digit growth.
Much of the media love to cover leaders who play business on a grand scale--the game-changing acquisition, the bet-the-house blockbuster product innovation, the breakthrough new business model. Yet in recent years, the leaders and the leadership strategies of many fast-growing companies--American International Group (AIG), Paychex Inc., Capital One Bank and Washington Mutual Inc., among them--have been anything but headline-grabbing.
In fact, they may seem mundane: adding product features here and there that delight customers and eke out market share gains; bringing unique capabilities to push aside competitors in markets related to the core; diving into arcane but fast-growing niches before anyone else.
It's time to put a certain stereotype of the successful corporate leader to rest. Boston-based GEN3Partners studied the growth strategies of 130 U.S. public companies in the years from 1997 to 2002. The study compared the growth strategies of companies that had double-digit increases in revenues and gross profits to the strategies of companies that didn't grow as fast, and found that more often than not it wasn't the daring designers of high-risk strategies--the grand acquisitioner, the bold innovator or the breakthrough business modeler--who ran the fastest-growing companies.
Leaders of the fastest-growing were not the Wayne Huizengas--who mesmerized Wall Street with his vision of a mega-car retailer (AutoNation Inc.) that would muscle the automobile makers for power and profits until the hard realities of that market brought his vision down to earth. Nor were they the Jerry Levins--the former CEO of Time Warner who vaporized billions in shareholder wealth by merging his firm with America Online Inc.
The truly great leaders of the fastest-growing companies were, arguably, less glamorous executives--like Maurice Greenberg, CEO of $81 billion (revenue) AIG, the largest U.S. insurance company; Thomas Golisano of payroll services powerhouse Paychex; Ken Kutaragi, who spawned an $8 billion videogame business from nothing and swept Sony Electronics Inc. past industry leaders Nintendo Co. Ltd. and Sega Corp.; and Noel Forgeard, who has led Airbus S.A.S., step by step, past The Boeing Co. for leadership of the commercial aviation market.
These executives have a common leadership style: They prefer disciplined, rigorous and less-risky approaches to growth over grander, riskier strategies such as big acquisitions, blockbuster product initiatives and new business launches. They and others like them--Jeffrey Immelt, when he ran General Electric Co.'s Medical Systems division; Richard Fairbank, founder and CEO of Capital One; and Kerry Killinger, who turned Washington Mutual (WaMu) into the biggest savings and loan institution in the U.S.--found growth from four less-grandiose revenue sources: base retention, share gain, market positioning and adjacent markets.
How did these leaders lead their companies to rapid growth by pursuing these four grind-it-out, less dramatic growth paths? And how can others learn these lessons and build such a leadership strategy in their organizations?
Builders of Base Retention
Companies such as Nextel Communications, GE, Harrah's Entertainment Inc. and WaMu are masters at keeping good customers in the fold and reducing revenue shrinkage from customer churn. That's critical, because the cost of acquiring replacement customers--the cost of marketing and sales--can be exorbitant.
Before Jeffrey Immelt became GE's CEO in 2001, he led the company's GE Medical Systems business to 18 percent compound annual revenue increases from 1997 to 2000, when it grew to a $7.3 billion operation. (GE Medical has doubled in revenue since then.) Immelt made it increasingly difficult for GE Medical customers to leave the fold. How? By helping the hospitals that buy its complex medical equipment, such as CAT scan machines, to manage their own businesses better.
First, GE Medical not only ships products to hospitals, it takes on the entire process by which those products are purchased and used--the financing, maintenance, upgrades and disposal. Second, GE Medical provides management-consulting services that help hospitals increase revenue, make operational improvements and improve patient care.
Since taking the reins from Jack Welch three years ago, Immelt has applied his base retention formula across GE. One of his first initiatives was called "ACFC"--At the Customer, For the Customer. The program aims to make every GE business an important adviser to its customers.
Since 1990, Kerry Killinger has led WaMu to double-digit increases in revenue and earnings. The result? At $12 billion in revenues, WaMu is now the nation's largest savings and loan company. While Immelt's base retention strategies could be called "making yourself sticky," Killinger's formula has also been a resounding success. While WaMu has made a number of acquisitions over the years, it has also become prolific at organic growth. The company is masterful at knowing when customers are about to bolt for another mortgage firm.
Killinger has built a machine--of people, process and technology--that monitors customers closely and identifies which ones are about to refinance their mortgages. WaMu tracks interest rates, home values, customer inquiries, payment patterns and customer needs (based on the life stage of their household) to predict which WaMu customers to contact for refinancing before they go elsewhere.
Sultans of Share Gain
Leaders who have been most successful at increasing their piece of the industry pie go beyond acquiring competitors. They take market share by providing higher-value products and services than competitors. This is the world of product enhancements--some big, but usually small--that gradually take share points away.
Boeing used to own the market for airline jets--at least until Airbus went aloft. A consortium of French, German, British and Spanish companies launched Airbus in 1970 so that European airlines would have more suppliers to choose from than the three U.S. companies that had dominated the business (Boeing, Lockheed Martin Corp. and McDonnell Douglas Corp., the latter two of which eventually dropped out of the market). Airbus has rapidly gained market share from Boeing, from winning 20 percent of new airplane orders in 1995 to 54 percent by 2003, as cited by Airbus CEO Noel Forgeard at The Wall Street Forum in 2004.
Forgeard, a French engineer, is also the pilot behind this stunning share gain. He has been managing director of the consortium since 1998, and CEO of Airbus since 2001. Forgeard exemplifies leaders who grab share from competitors. He has pushed Airbus to design commercial airliners that deliver better value to customers. This has come on two fronts: lower operating costs for airlines in flying and maintaining planes and high passenger comfort.
On the cost front, Airbus was the first to redesign cockpit instruments so that two people could fly a twin-aisle plane. It featured wingtips that cut down on wind drag, and innovations that replaced older mechanical technology while also introducing a system called "cross-crew qualification." This system helps reduce pilot training costs by making pilots "have" to be trained only on the differences between plane models. Airbus says that when its new double-decked 555-passenger A380 takes off next year, its cost per seat-mile will undercut Boeing's largest aircraft, the 747, by 20 percent. The company already has 129 orders for the plane.
Like Forgeard, Richard Fairbank is another leader who knows how to get an organization to radically change the value equation of an industry and gain share from competitors. Fairbank, a former management consultant, and a colleague launched Capital One in 1991 at Signet Bank. Capital One is a direct marketer of credit cards that has used information technology to outrun banks in identifying target customers and marketing credit cards. Today it is the sixth-largest U.S. credit card company with 7.2 percent share of a $643 billion market, according to data from its annual stockholder meeting presentation in 2004.
Capital One uses its storehouse of information on prospects to tailor cards to each of them--customizing loan rates, credit limits and fees. The company has grown to nearly $10 billion in revenue and generates profits of more than $1 billion a year. Capital One began life by targeting consumers with poor credit histories. It undercut other credit card issuers with interest rates that were half of what other institutions charged. "Lenders were taking a one-size-fits all approach," Fairbank told Virginia Business magazine in September 2003, "and we felt we could ... identify customers who deserved prices at half the prevailing rate."
Masters of Market Positioning
The leaders of these double-digit growth companies have a nose for where the growth is, and how to take small risks in seizing that revenue by offering incremental customer value. They closely track shifts in customer buying criteria and demographic trends. That enables them to be first to unearth fast-growing subsegments of existing markets.
Tom Golisano is another leader who noticed a good market before anyone else. In 1971, he launched a business with one employee to do the payrolls of small companies in the Rochester, N.Y. area. Today, with an estimated 70 percent share of the small-company payroll processing market, Paychex is a national company with $1 billion in revenue and pharmaceuticals-like margins of 29 percent after tax. Along the way, Golisano identified and successfully pursued other nascent market service segments such as depositing taxes and filing returns, managing retirement benefits and providing HR services.
AIG's CEO Maurice Greenberg, like Golisano, has a tremendous sense of where the next great business opportunity lies. Greenberg has instituted a rigorous management process for spotting new, potentially lucrative markets. His staff keeps an eye out on the whole insurance market, scouring for segments in which the supply of insurance is drying up, and others that are just getting off the ground.
In 2002, AIG partnered with credit reporting agency Equifax to jump into the Internet identity-theft coverage market to protect consumers against online fraud. That year, AIG also created a new set of insurance products for corporate directors and officers, just as other insurance firms were leaving the market because of the multitude of scandals and lawsuits. But, of course, the law of supply and demand ensured Greenberg that he was entering the market just as pricing moved up dramatically.
Aces of Adjacent Markets
The fourth way that leaders of fast-growth companies outpace their competitors is by looking at markets that are "next door" to them and bringing competitive advantages that make a difference on Day One. Dell Inc. has been sensational at this game, taking the ultra-efficient manufacturing and direct-marketing model it built in personal computers to related products: computer storage, software, printers, networking and computer support services. Already, Dell generates more than $3 billion annually in these areas.
The two executives who run Dell--founder and Chairman Michael Dell and CEO Kevin Rollins--choose only adjacent markets in which the company can start with a big advantage. Dell exploits its capabilities in manufacturing and marketing to lower prices and deliver new innovations to market faster.
Another believer in exploiting opportunities in neighboring markets, Ken Kutaragi vaulted Sony to the top of the global videogame industry, a market just next door to the company's traditional consumer electronics and entertainment segments. Ten years ago, two Japanese companies--Nintendo and Sega--dominated the business of making videogame consoles and games. Kutaragi saw videogames as an adjacent market for Sony. Although several industry experts believed the game business had peaked in the mid-1990s, Kutaragi and Sony felt otherwise. If the market was selling videogames to kids, they thought, then maybe it was mature. But that's where Kutaragi differed from the pack. He saw videogames as an emerging entertainment channel for adults as well.
The question then became, how could Sony steal share from Nintendo and Sega? Kutaragi concluded that Sony had two strengths that could be formidable in the videogame business: the company's consumer electronics manufacturing prowess (which would drive the cost of consoles down) and its expertise in working with third parties in licensing arrangements. The former capability enabled Sony to drive down the price of its PlayStation console from $300 to under $100. The latter asset would prove extraordinarily valuable as well. To win the videogame business from Nintendo and Sega, Sony had to convince independent videogame producers to make games for its new system.
By 2001, seven years later, Kutaragi had driven Sony to become the No. 1 videogame company in a market that had grown fourfold, to $18 billion. Last year, videogames accounted for 12 percent of Sony's $70 billion in revenue but nearly half (48 percent) its operating profits. Kutaragi's ability to win over independent software vendors was critical, especially given that Nintendo itself was also competing in the videogame software business. By exploiting the company's manufacturing and licensing capabilities, Kutaragi skillfully reduced Sony's potentially huge financial risk in being a late player to the videogame market.
Creating a Growth Machine
Are the leaders mentioned above a rare breed--among only a few senior managers who are highly skilled at growth? Consider this: Between 1997 and 2002, 30 of the most prominent U.S. companies--the ones that comprised the Dow Jones Index--together grew only 4.9 percent annually in revenue. In fact, sales at one of those companies--AT & T--have plunged 37 percent since 1999. AT & T and two other Dow Index stocks were recently removed from the list; AIG was one of the replacements. Alas, even America's industrial icons have had trouble growing in the new century.
What's the answer for such anemic growth? Is it spotting the next Michael Dell, Ken Kutaragi, Maurice Greenberg or Tom Golisano in the same way that baseball scouts look for the next Roger Clemens or Barry Bonds? While critical, talent won't be enough. Creating growth machines like AIG, Dell, WaMu and Capital One require not just great leaders but a whole management "system" that makes growth less of an accidental art and more of a serious science. Such a management system has five components: process, information, roles and organizational structure, culture and talent.
Three processes are vital to steady growth: one for formulating the growth plan, a second for reviewing it on a frequent basis (say, monthly) and the third for thoroughly revisiting the plan and the precepts on which it is based (perhaps twice a year). Call it a "strategic review." The growth plan must discuss all the initiatives in an organization for increasing base retention, gaining share, exploiting emerging markets and pursuing adjacent ones. It should also examine a fifth source of growth: unrelated new lines of business. That growth strategy, however, should be reserved for companies that, like billionaire investor Warren Buffett, know how to spot a good acquisition that is unrelated to core businesses. It is a growth strategy that very few CEOs have mastered.
The monthly review is important for ensuring the execution of the plan is on course, like a pilot checking the instrument readings. The strategic review is a grueling examination of the type pioneered by GE Corporate staff which must probe three areas: the current validity of the plan itself, the quality of its execution and the adequacy of the people doing the execution.
To make monthly and semi-annual reviews of a company's growth plan possible, managers need information that they rarely possess: market growth rates, customer retention rates and the other wellsprings of revenue growth. Just as cost-control programs such as activity-based costing demand significant new sources of information, robust growth forces managers to collect key data.
Three corporate staff roles that today largely watch their companies' growth initiatives from the sidelines will have to get into the game of growth if the objective is to win: strategic planning, finance and human resources. The planning executive is a contributor to and critic of the business unit growth plans; the CFO must be the master of the numbers that give new-found visibility on growth; and the HR director is responsible for ensuring that the key ingredient for growth--talented people--are in place. Talent, not money, is the scarce resource in funding growth initiatives. The strategic-planner, CFO and HR head must be active participants in the generation, review and deep examination of the growth plan. They must strike a positive tension between business unit leaders and the corporate center staff.
A culture conducive to growth has the following belief at its core: that the company controls its own destiny--not the tumultuous economy, fickle and powerful customers or potent competition. The culture of companies like Johnson Controls and Dell doesn't accept excuses for less than double-digit growth. Double-digit growth is ingrained in the brains of GE managers, and for good reason. CEO Immelt uses two measures to gauge the company's diversified business model: the number of GE business units that generate double-digit earnings growth, and how well they execute their growth plans, measured by cash flow increases and the strength of the balance sheet, as cited in GE's 2003 annual report, "Letter to Stakeholders."
Two other attitudes are critical to creating a culture of growth: an appetite for risk and a penchant for collaboration. Growth companies embrace risk--if it's appropriate risk. Failure doesn't decimate careers, only failing to learn from failure. Collaboration is instrumental because most of the good growth ideas are to be found at the intersections of corporate functions and whole companies, between the firm and its suppliers or customers.
Like an overrun apple orchard, most of the good ideas for growth to be found within functions have already been picked. Therefore, the companies whose people work well at the intersections have a huge advantage in identifying the next wave of growth opportunities. Take Dell's fast-growing printer business. Collaborating with the company's PC unit helped it get off to a rapid start.
The last ingredient of a management system for growth is talent. General managers who know how to grow companies--the Ken Kutaragis of the world--are rarer than albino whales. We need a far better understanding of the constitutional makeup of growth-savvy executives--the mindsets, skills and emotional intelligence that make them go. Then we need HR people who can recruit, deploy and develop such talent. Most of all, we need CEOs who want to create managers who know how to grow. "Growth is the initiative, the core competency we are building at GE," Immelt stated in GE's 2003 annual report.
Once such a growth system is in place, a company's leader--along with his/her leadership team--will feel as confident in charting double-digit growth plans as they are in making their companies more efficient. With a multitude of techniques for boosting growth, they will no longer even think of relying on a bold or risky game-changing move to rescue themselves from market oblivion.
Michael Treacy is a leading expert on corporate growth and author of Double-Digit Growth and The Discipline of Market Leaders. He is chief strategist of GEN3Partners, a firm based in Boston and St. Petersburg, Russia, that helps companies create and capitalize on breakthroughs in product innovation. He can be reached at email@example.com.
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|Article Type:||Cover Story|
|Date:||Jul 1, 2004|
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