Thinking Clearly About Growth
In mid-1997, we were talking with a group of Ford Motor Company's top people about how to grow profitably. It was the second day of a six-month senior executive leadership development program launched by CEO Alex Trotman. We had designed a program that would help them to think about new ways to create shareholder value, and to develop leadership skills that they, in turn, could pass on to the rest of the organization. Later stages of the program would reach throughout the company.
Ford has transformed itself heroically over the past decade--cutting costs, raising quality, reducing cycle time, and making good money, especially with its highly profitable trucks and sport utility vehicles. In the segments that count, it is a market leader.
But leader of what? The auto industry is considered mature: it has tough competitors, increasing worldwide overcapacity, and viciously cyclical demand. No company playing the established game can hope to grow profitably and sustainably much faster than the broad economic growth rates in its markets. Trotman knew that the successful present was already history; in the future, he was sure, Ford had to do something different. He was determined to transform his company into one that could grow and make money reliably in the twenty-first century.
Alex Trotman knew he needed more than a game plan. Ford's people were terrific at playing the old game--and that was part of the problem. Whatever the new game might be, it would require a whole new way of defining opportunities. Everybody at Ford would have to learn how to think differently.
The leadership development program was a beginning. Trotman and his executive committee aimed to do nothing less than develop a generation of leaders who could escape from the company's old view of the business. In this first stage, we were working with two dozen "high-potential" executives chosen by top management to team up and develop proposals for everything from lowering fixed costs and finding new growth to exercising corporate citizenship. Trotman was with us for this early morning session, awaiting his turn to work with them as teacher and coach.
Trotman was listening carefully but quietly. Suddenly he began scribbling notes. What had caught his attention was a favorite story of ours--how the late Roberto Goizueta transformed Coca-Cola in the early eighties.
Most people have forgotten just how bad Coca-Cola looked when Goizueta took over. At the time, the company dominated the U.S. soft-drink market, with roughly a 35 percent share1, and everyone knew the market was mature. The game involved fighting for tenths of a percent of market share--at exorbitant cost to the bottom line--or defending each tenth of a percent, since PepsiCo was kicking Coca-Cola's can in marketing. Security analysts and business writers were all but composing its obituary.
Goizueta didn't buy it. But how does one break the mindset of a mature business--the deeply ingrained set of beliefs that circumscribes everyone's thinking and hopes, dulling their minds and imaginations? His company was full of talented people butting their heads against a stone wall--the inexorable logic of squeezing out drops of market share in a zero-sum game.
Goizueta had an insight--a simple but stunningly powerful one that he shared with his senior executives in the 1980s. What, he asked almost casually, was the average per-capita daily consumption of fluids by the world's 4.4 billion people? The answer was: 64 ounces. And what, he asked, is the daily per-capita consumption of Coca-Cola? Answer: Less than 2 ounces.
Finally, he asked: What's our market share of the stomach? Not Coca-Cola's share of the U.S. cola market or the world soft-drink market, but of all the fluids everyone in the world drinks on a given day. Coca-Cola's share was scarcely measurable.
Coca-Cola's people had invested a lot in the idea of PepsiCo as their enemy. But Goizueta led them to see that the enemy was coffee, milk, tea. The enemy was water.
With a few simple questions, Goizueta redefined Coca-Cola's
market to be vaster than anybody had imagined. And he changed the psychology of its people. They saw that their company was not a large fish constrained in a small pond, but a small fish in a huge pond. Rather than facing the depressing chore of struggling to not lose more fractions of market share, they could set their sights on winning a larger share of a huge opportunity.
Obvious? Yes--but not until Goizueta pointed it out. It was the beginning of Coca-Cola's transformation from a threatened leader in a mature business to the greatest market value creator ever. (Goizueta's stockholdings at the time of his death were worth over $1 billion, making him the first "hired hand," or nonfounding head of a company, to become a billionaire.)2 PepsiCo, the comer when Goizueta took over, is no longer in the same league.
After our presentation, the leaders--Ford executives from around the world, from all functions--broke into groups to work on the growth exercises. Gathered at four round tables, six people to a table, they were teaming up for an hour to start developing the new ideas and strategies that they would eventually present to top management as actionable plans.
Trotman started the session by telling the assembled teams: "We have to have quality. We have to have low costs, and we have to get to the market faster. We have to satisfy our customers. But that's not enough.
"We have to become innovative. We have to find new trajectories of profitable growth.
"This is what I want you all to think about: What is Ford's water?"
As Trotman moved from table to table, asking questions, listening, engaging in informal dialogue, he was totally immersed in the energy and excitement that filled the room.
That's something we observe every time. When people shift from talking about holding the fort and cutting costs to talking about growth, they come alive.
Once again, a simple question redefined how a company's leaders could and should look at their opportunities and possibilities. In the months that followed, Ford's executive groups met and worked through long weekends, simultaneously developing their leadership skills and a new view of the possible.
First, they took a hard and realistic look at the limits of their traditional business. In terms of a vehicle's lifetime usage and total cost, the company's value added is less than 15 percent. Profit margins are typically less than 4 percent--about the same as the grocery business, but with only a fraction of the inventory turns. Moreover, the cyclicality of the business causes automakers' balance sheets to take a terrible beating during recessions; as earnings tank, they usually have to borrow money. So even though they're big and their products are permanently in demand, returns on investment are mediocre, and the relative valuation of their stocks is among the lowest on the market. Automakers' p/e ratios are typically well under half those of the S&P 500.3
Next, the executives stepped outside of the box--away from their customary ways of looking at their businesses and markets--to expand their view of the possible. Over the life of a vehicle, consumers' major expenditures are for financing, maintenance and repair, and all of the other services associated with use and ownership. Such opportunities forlucrative growth amount to the best part of a vehicle's full profit
potential. Profit margins are much higher, and capital intensiveness is lower. These after-purchase businesses are dramatically less cyclical than manufacturing.
And so they came up with Ford's water: the lifetime use of the product, including all of those other associated services. Ford's challenge now is to identify the likeliest ports of entry to this richer territory.
It's too soon yet to know what will happen. An enormous amount of hard work and radical change lies ahead, not only for the company's leaders but also for every Ford employee. Formerly, their careers were steeped in a certain inevitability--the limits to growth, the poor returns, cyclical downturns, and underperforming stock. Such long-held ways of thinking die hard. But the leaders have taken the critical first steps away from muddling along in a mature industry and toward coming alive with growth prospects. They are identifying opportunities, developing criteria, and selecting the avenues for profitable growth.
Growth is a hot topic today. Business leaders who have been through the wringers of repetitive downsizing, reengineering, and all the rest, are discovering that they must now focus not only on operational excellence but also on growth. Incremental market-share gains won't secure a future for their companies. There's nowhere else to go now; literally, they either grow or die.
There are five crucial points to the story above. They're what this book is all about, and they set it apart from anything else you'll read or hear about creating growth opportunities for your company. They are the hidden secrets behind many familiar success stories. When you understand them, you will have a real understanding of how, say, a GE or a Coca-Cola or a Compaq grows. These crucial points are:
1. There's no such thing as a mature business. Get the ideas about mature businesses out of your mind forever. Any company of any size in any industry--no matter how "mature" the industry--can grow, once its leaders learn how to look beyond their traditional definitions of industry and markets.
2. Not all growth is good. Growth at all costs, or growth for its own sake, can be a recipe for disaster. Good growth is sustainable, profitable, and capital efficient; don't confuse it with feverish spurts of volume that ravage earnings or steal from the future.
3. Growth is a mentality created by a company's leadership. It starts with the spark of a new point of view, and it catches fire when everyone buys into what the leaders are teaching and coaching.
4. Balanced growth is the key to prosperity in the twenty-first
century. Sustainable growth--growth for the long haul--requires meticulous attention to the basics: cost structure, quality, product development cycle time, productivity, asset utilization, investment of capital, supply chain innovation, customer service satisfaction, and all the other components of operational excellence. Never-ending focus on these generates the resources for growth.
5. Growing is less risky than not growing. You'll hear people say that growth is about taking risks, but they're wrong. Personal risks, yes; it takes courage to stand up for new ideas. But a sustainable growth strategy, based on tightly defined customer needs, is far less risky than rearranging the furniture while a competitor grows at your expense.
This book challenges you as a leader to develop a clear point of view about growth, and to make it a part of your company's genetic code--a concept we'll elaborate on later in the book.
The lessons and principles are universal. We talk mainly about big, complex corporations because that's where we've gotten most of our experience. But what we've learned is invaluable for companies of all sizes and in all stages: small or large, publicly or privately held; not growing but needing to grow, or growing now but needing ways to sustain growth.
The principles are the same; in general, so are the practices. Even leaders of nonprofits will find the thinking and tools offered here valuable in focusing, energizing, and strengthening their organizations.
We're not giving you yet another potpourri of tactics, strategies, slogans, and convenient examples, nor a theoretical view from 50,000 feet. This book is reality-based; it is a journey to the very roots of the corporate psyche and human behavior. It brings together the best practices and ideas within a new framework forged from our combined fifty years of experience working with companies struggling to change.
Our central theme is common sense, a much-abused term. People tend to dismiss it as too subjective to take seriously. Or, they confuse it with conventional wisdom, which, because it looks to the past, usually is not commonsensical at all. Common sense is very uncommon.
Yet there is a business common sense, and it informs the views and actions of all true businesspeople, whether they run giant corporations or trinket stands in the third world. Roberto Goizueta literally urged his people to act with "the common sense of a shopkeeper."
We offer two original, fundamental, and common sense insights into the secret of creating and perpetuating a growth company:
1. Our fresh approach to strategic thinking cuts through the muddle of conventional planning to provide a clear path for identifying market opportunities. We call it strategy from the outside in.
2. The distinction between growth companies and also-rans starts with leadership. Growth companies' leaders create operating mechanisms, behaviors, attitudes, and dialogues so deeply ingrained in the corporate psyche that we liken them to a genetic code. For the new growth strategy to work, changing the genetic code is essential. Chapters 4 and 9 explain these insights in detail. For now, here's the short form.
Strategy from the Outside In Growing is a creative game. It doesn't require a degree or a license. It requires curiosity, imagination, and emotional energy--qualities that exist, and even abound, among the people working in most companies today. They may not be visible, but enormous amounts of dormant creative potential flower in the companies we see--once the leadership frees
A sustainable growth strategy starts with understanding the difference between what you make and what people need--which often turn out not to be the same thing. Tapping your sources of energy and imagination, you look at your company from the perspective of your once and future customers, and asking endless questions about what's going on in the real world. What's happening in your marketplace? How are needs changing? What's causing the changes? Where are the resulting opportunities?
Having stepped outside of your business, you then work backward to ask such questions as: What needs do we satisfy now? What needs could we satisfy now? In the future? What's the gap between them and what we do now, and how do we bridge it? What advantages do we have? What advantages do we need to create? What old competencies do we need to deemphasize?
That's called looking from the outside in. Sound simple and obvious? Then probably your company is doing it already. The fact is, it's human nature to look from the inside out. Astonishingly few companies ever try to see themselves as others see them.
In what we call an inside-out company, people typically look at their business environment through the lens of their internal products and processes. They look at what they make, and try to figure out how they can sell more of it. If there's no way to sell more, they look for something to sell that's visibly in higher demand. These companies and their people are trapped in their own past and experience. Looking from the inside out, they see mainly that they are stuck in industries and core competencies that have limited prospects.
In the outside-in company, the key word is need, not product. Its people are not focusing on getting half a point of market share; they're totally immersed in the minds of their customers, looking for ways to expand demand. Their business plans and value propositions derive from the marketplace, based on knowledge gathered at ground level. Often, the needs they define haven't yet been identified by the customers themselves.
This is real world strategic thinking. It is both imaginative and highly disciplined. And it has never been more important than now. In this era of unparalleled change and opportunity, the profitable growth will go to the companies whose leaders can see the possibilities beyond their traditional served markets. In the remaining chapters of Part I, you'll see how outside-in thinking transforms businesses that are "mature," "commoditized," or otherwise supposedly without growth prospects.
People in outside-in companies think expansively. They are, in a phrase we use regularly, broadening the ponds they fish in. They focus not on how much they're improving, but on what portion of wealth creation they're missing, and how they can enlarge the market itself. They want an ever bigger share of each customer's wallet; they look for ways to offer the customer more (and more profitable) products and retain the customer longer.
The process is circular: growth energizes people. If you are fighting for gains on the right side of the decimal point--the tiny increments that seem to be your only opportunities for growth--it's hard to be imaginative and energetic. In fact, it's hard to feel really good about what you do. To how many people at a cocktail party would you say, "I work for a mature business . . ."?
What energizes people is the broader horizon, the excitement of new challenges and big opportunities. When their leaders offer this excitement, people come alive.Changing the Genetic Code
Your outside-in strategy will bring a whole new way of looking at your business--a new mindset. But the mindset doesn't flow automatically out of the strategy. You must first set your mind to host certain patterns of thinking and behavior. If you've been focusing on restructuring, cost cutting, trench warfare over market share, and all the rest, you have precisely the wrong mindset for enlarging ponds. So do all of your people. You must be ready to articulate a new point of view that you can teach to the others.
We cannot overstate the importance of confronting this issue head-on. People tend to be heavily invested in the past; it has determined their rewards, their career paths, even their identities. Left untouched, old reflexive behaviors will defy any new direction imposed from above.
You could call these embedded behaviors part of a company's culture. This term includes all of the well-known intangibles that powerfully shape organizational behavior: basic assumptions, expectations, values, myths, and the like. But how do you get your hands on the levers that change them? For the past decade, companies have launched thousands of cultural change initiatives, most to little avail.
We view culture as a dependent variable, and we use the concept of the genetic code as a way of focusing on the underlying determinant. The concept draws on the "nature versus nurture" debate long argued in the biological and behavioral sciences. Cultural change, promulgated through training, coaching, and workshops, represents a nurture intervention designed to reshape an organization's behaviors. But the genetic code is nature, and--in organizations, at least--it is the more powerful determinant. It shapes corporate culture at the most fundamental level, because it specifically decrees how people make decisions and how they work together.
The code originates with the organization's leaders--their thinking and behavior send signals and cues that set the pattern for everyone else. In time, these become the organizational genetic code. And this code is all-pervasive. As in a biological organism, the genetic code's signals direct what the body does, no matter how the brain might try to contradict them. They influence how people think and behave in all areas of their working lives, from how they look at opportunities to what kinds of working relationships they form with other people. They determine which ideas fly and which ones sink; who gets promoted and who gets ignored. In the end, they determine whether the corporation succeeds or fails.
So real and lasting change can come only from fundamentally re-engineering the genetic code. Doing so is just as important as devising your growth strategy. In fact, it's part of the strategy, because it determines what the strategy will be and whether it will work.The Critical Role of the Leader
Changing the genetic code is a major challenge for an organization's leaders. The old code embodies the thinking of past leadership, and its inertia is amazingly powerful. The new code has to be consciously created by leaders who aim to transform their organizations. This will require either new leaders, such as Larry Bossidy at AlliedSignal, Eckhard Pfeiffer at Compaq, and Dave Holmes at Reynolds and Reynolds--or strong leaders who can fundamentally change the definition of the organizations, as Jack Welch did recently in defining GE as a global service company.
When Alex Trotman launched his plan for transforming Ford, it was no accident that he focused on leadership. His goal was to create, at all levels, leaders who could change the embedded beliefs and spread the new ones throughout the entire organization. Jacques Nasser, president of Ford Automotive Operations, took charge of training the top 200 leaders in his organization to think differently about growth and about creating shareholder value--and to train, in turn, the 5,000 managers below them. In 1998, Ford's top 1,000 leaders were made responsible for teaching the same ideas and values to all 53,0004 of the company's salaried employees.
Noel Tichy wrote, in his book The Leadership Engine:5 "Winning companies win because they have good leaders who nurture the development of other leaders at all levels of the organization." Good leaders possess a teachable point of view, which includes:
1. Ideas based on clear knowledge of what it takes to win in the marketplace and how the organization should operate.
2. Values that support the business ideas and that everyone in the organization understands and lives up to.
3. Emotional energy that drives the leaders themselves and is actively communicated to create positive emotional energy in others.
4. Edge, the leader's ability to face reality and to champion tough decisions about products, investments, and people.
In growth companies, the leaders' teachable points of view revolve around grasping opportunity and creating value. These become the genetic code of the organization, once they are shared and deeply ingrained among the critical mass of leaders at all levels.
Leaders aiming to transform their companies into growth engines may have to start by changing their own points of view. Alex Trotman had to shed some long-held beliefs about growth. Those beliefs were born of hard experience in an industry where expansion inevitably led to overproduction, cyclical collapses, and huge financial losses and layoffs. To his immense credit, he was able to look beyond the conventional wisdom of his industry and see creative new possibilities for growth.
A lot of people don't have that kind of vision. Often, a company's top leaders and designated successors are so trapped in the old genetic code that new leaders have to be imported--leaders whose fresh insights and perspectives will make change possible.
Some organizations have found great potential leaders in unexpected places. Jack Welch at GE, Roberto Goizueta at Coca-Cola, and Eckhard Pfeiffer at Compaq were rogue genes in terms of their companies' old genetic codes. Welch was in the plastics business, away from the mainstream; Goizueta was a Cuban immigrant who rose through the technical side of a company historically headed by marketers; and Pfeiffer came from Compaq's European operations.Developing Your Own Teachable Point of View
Growth company leaders are people like you. They face and struggle with the same challenges and opportunities, and they put their careers on the line to transform their organizations. We can't repeat this often enough: They are leaders at all levels. Like Goizueta, they have teachable points of view--earned wisdom that they can impart so that others can develop their own teachable points of view.
They may not use the genetic code metaphor (though more and more are starting to do so), but they intuitively understand its usefulness. Through their teachable points of view, they transform the genetic code into a replica of their own mental architecture.
You'll notice that, whenever possible, we try to avoid talking about what "companies" do. We talk about what leaders do, and what people do. This is no small distinction. Organizations don't do things, people do. We always admired the old British practice of referring to companies as "they," not "it" (as in "Glaxo have raised their earnings . . ."), for this seemed to us to implicitly recognize the distinction. Alas, in recent years, the British seem to have adopted American anthropomorphism; Glaxo, Grand Met, and all the rest are now "its," like GM or IBM. We would have preferred the other way around.
In fact, we think that the common practice of personifying the organization is positively dangerous. It feeds into the victim mentality: "It's not me, it's the system." We've never heard Andy Grove or Jack Welch or Eckhard Pfeiffer talk about being victims of the system. Real leaders, at any level in an organization, control their own destiny. They use their teachable points of view to change the system, i.e., the genetic code.
After you read this book, we want you to come away from it a leader able to develop your own teachable point of view. This means learning from the experience of others, taking ownership of it, and using it to help others to lead. We want you to have clearly articulated ideas that you can communicate to people in your own company and in outside companies. Your customers, suppliers, and shareholders--and their proxies, the securities analysts--need to hear your point of view. So do the people you want to hire. A persuasive and realistic growth story is the key to attracting and energizing the best employees.
The ideas, principles, and practices explained here run the gamut from identifying marketplace needs to developing incentive systems. All are field-tested; other executives and managers are using them to build powerful growth companies. (Your closest competitor may be among those already using them.) They're flexible--you can adapt them to your own requirements. And as you come to understand them, you will doubtless invent some of your own.
Some are new, others are familiar. It's the viewpoint that's radical--the framework that links them and synchronizes them to energize people, change their focus, and realign their thinking and behavior. Used together, they give you the power to do things you've never done before.
You'll see some unfamiliar words and phrases. People applying any new management concept such as reengineering develop a specific language to pinpoint what's different and to give immediacy to ideas. For example, growth companies focus their thinking about growing the market with such phrases as "broadening the pond" or "getting a bigger share of the customer's wallet." (Conversely, if they talk about a "mature" market, it's with a derisive curl of the lip.) We've borrowed some of the language of growth from companies where it's in common use; other vocabulary we have created ourselves.
We hope that as you read this book you will say repeatedly: "Aha! That's simple. That's obvious." The simple is not always simple, and the obvious is not obvious until it hits you. Any good idea can be stated plainly. But simplicity, like common sense, gets short shrift in the organizational world. Too often, an insight or truth is veiled in so much complexity that nobody can see it. A convoluted presentation is sometimes deliberate; people are afraid that, in being simple, they will seem simpleminded.
Aim for simplicity and clarity in your own efforts to lead change, but be aware that understanding complexity and making it simple is hard work. You'll be most successful in getting new ideas across to your associates if you can peel away the outer layers and serve up the clear truth in the center. Making things simple is one of the great strengths of a true leader. As AlliedSignal CEO Larry Bossidy puts it: "Complexity is not the sign of an intellectual gift. Making things simple is."6
One final note: People don't live happily ever after unless they keep working at it. New problems arise, systems and approaches that worked in the past pump out red ink, and suddenly yesterday's king of the hill is today's dinosaur.
In 1981, when Coca-Cola was awakening to infinite possibilities, PepsiCo was the company to beat. For four decades, PepsiCo led the Fortune 500 in top-line growth, setting an unequaled record.7 But PepsiCo lost its way in recent years, and CEO Roger Enrico is struggling to get it back on track. In later chapters, we'll give examples of companies that got into trouble when leaders who had done the right thing for years took their hands off the steering wheel.
And frankly, there's no guarantee that companies we hold up as shining examples today will ascend forever. Just as no market is permanent, no strategy is immune to becoming obsolete or irrelevant.
Explaining how Compaq keeps ahead of the fast-changing computer industry, CEO Eckhard Pfeiffer told us: "It has to come to a way of thinking, of constantly challenging what we're doing today. It's a constant questioning process."8 By building that way of thinking into Compaq's genetic code, Pfeiffer has made it the wellspring of both the company's strategy and execution. But a genetic code is not per-
manent, either; it requires constant questioning, reinforcement and renewal.
You can start to challenge your own assumptions right now. Are you proud of your dominant market share? If so, wipe the smile off your face and rethink your opportunities. Change your organization's point of view. What is the bigger pond of which your share is minuscule? AT&T, for example, has nearly 50 percent of the American long-distance telephone market9, but is that its pond? Or is its pond the global market for voice, data, and video transmission and other related services? Chase is the biggest U.S. bank measured by assets10, and a merged NationsBank and Bank of America would be the biggest in terms of deposits11, but what does that mean? Are banks fishing in the banking industry, or is their pond the global market for financial services?
The ultimate secret of sustainable growth is the secret of life itself--permanent change and constant adaptation to the ever-changing external environment. Don't forget it for a moment.
The change begins in these pages. This book gives you the power to look from the outside in, and expand your horizons, opportunities, and capabilities. You are holding in your hands the ideas, tools, and techniques for making your company grow profitably. This is the most exciting transformation you can imagine. Unlike cost-cutting, which is most often defensive, growth is energizing. As you grow, your people will grow--and they are the ultimate competitive advantage.From the Hardcover edition.
Excerpted from Every Business Is a Growth Business by Ram Charan and Noel M.Tichy, author of The Leadership Engine. . Excerpted by permission of Three Rivers Press, a division of Random House LLC. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.