It's Time to Grow—the Right Way

Is it time to for business to start paying more attention to top-line growth and less to cost savings? Based on improvements in the underlying fundamentals of the U.S. economy, a growing number of analysts say yes.

But the approach they recommend differs markedly from the one that many firms followed during the late 1990s. Today's growth initiatives must be ever mindful of the hard-won efficiency lessons of the past several years. Strategies in vogue during the last growth cycle—boosting revenues through mergers and acquisitions, even if they lacked strategic rationale, or using price cuts to gain market share without creating corresponding savings in operating costs—will no longer suffice.

To be truly valuable, top-line growth must be impatient for profit, notes Dallas-based consultant Ram Charan. It must be primarily organic—internally generated rather than acquired. And it must also be sustainable over time, which means that added organizational capacity may be required in order to make the growth repeatable.

In effect, top-line growth requires muscles that many firms haven't exercised for decades. The companies that do it best, the experts say, are those that understand that growth requires a different orientation from cost cutting but a similar zeal; that base their strategies on strong value leadership; and that simultaneously pursue a diversified mix of growth initiatives.

From a cost mindset to a revenue mindset
When managers focus on cost productivity, as so many have during the past several years, says Charan, they look to increase net income by decreasing expenses. But what firms need now is a revenue productivity mindset, one that combines an awareness of the need to spend with the new discipline they've developed on how to spend.

While important for every business, revenue productivity is crucial when there are high fixed costs and low margins. "If a company like GM focuses only on cost reduction without generating additional revenue," writes Charan in Profitable Growth Is Everyone's Business (Crown Business, 2004), "not enough falls to the bottom line, the result being that there are not enough resources to refresh the product line."

Examples of a revenue productivity mindset include:

Investing in sales training and personnel to improve productivity. Milwaukee-based Johnson Controls saw an opportunity to achieve more-profitable growth by shifting from selling just energy hardware to helping clients with the larger task of improving the efficiency of their energy systems. But for this plan to work, says Charan, the company realized not only that it would need to train its existing sales staff in solutions selling, but also that it would need to add new staff skilled in solutions selling—and that those employees would command a higher level of compensation.

Spending to improve ordering and replenishment systems. "Industry research reveals that out-of-stocks (products that are not on the shelves and thus not available to consumers looking to buy them) can result in the loss of 43 percent of the potential purchase of that product," says J. P. Brackman, global retail presence manager for Procter & Gamble. "Solving these problems can boost a retailer's top-line growth by an average of 4 percent."

Revenue productivity differs from cost productivity in its emphasis on spending that will have a multiplier effect on sales. But like the move to cost productivity several years ago, shifting to a revenue focus is a change initiative requiring a sharp swing in organizational attitude: People must open up their minds about where to look for opportunity. A simple growth box can help employees at all levels think more expansively, says Charan.

Consider, too, the General Electric approach. Former chairman Jack Welch used to require not only that all business units be number one or number two in their markets, but also that the share of those markets be no greater than 10 percent. If its market share was over the threshold, the unit had to conceptualize an even larger market of which its current share represented a smaller percentage, thereby creating additional growth opportunities.

Be sure you have a solid value proposition
"The foundation of any successful growth strategy is strong value leadership," says Michael Treacy, founder and chief strategist of the Boston-based product-innovation company GEN3 Partners. "The cost-benefit mix of the product or service you offer doesn't have to be world-beating, but it does have to stand out."

Product leadership in design innovation is what makes carpet manufacturer Mohawk Industries of Calhoun, Georgia, stand out. "At every price point in the market," says Treacy, "Mohawk offers products whose designs and colors are always at the forefront of home-fashion trends."

As Treacy and coauthor Fred Wiersema note in The Discipline of Market Leaders (Perseus Publishing, 1995), you can't excel in more than one of the three value disciplines: operational excellence, superior product quality, and customer intimacy. You have to focus on one and commit your company to improving its chosen value proposition year in and year out. In addition, you must make sure that your company maintains an industry-average level of performance in the other two disciplines.

With their value proposition established, most companies pursue the following three paths to meet their targets:

1. Retaining the customer base. As Treacy notes in his recent book, Double-Digit Growth (Portfolio/Penguin, 2003), two useful tactics here include keeping customers focused on the dimensions of value in which you excel and increasing their switching costs (making it more difficult for them to shift their business to a competitor).

2. Gaining market share. This is the most difficult way to grow since no one surrenders market share without a fight. When it occurs, says Treacy, it's usually because a company has developed a unique business model capable of delivering superior customer value. It steals business from its entrenched competitors, who defend their position rather than emulate the new business model.

3. Exploiting market position. Tapping into an expanding market or market segment is the easiest way to grow—provided you make repositioning an ongoing focus. Three leading indicators that point to potential new and fast-growth markets, notes Treacy, are shifts in customers' buying criteria (for example, customers who used to buy on price suddenly making quality their primary concern), leaps in customer value (the introduction of a product or service that draws customers into what had been a sleepy market segment), and demographic trends.

When such initiatives prove insufficient, firms must turn to more demanding and often riskier options. Although the following two types of initiatives don't always require a change in a company's business model, they call for significant shifts in organizational focus or structure.

Moving into adjacent markets. These typically involve new market opportunities stemming directly from core products, services, capabilities, or geographic base. In the demand innovation approach advocated by Mercer Management consultants Adrian Slywotzky and Richard Wise with Karl Weber in How to Grow When Markets Don't (Warner Business Books, 2003), the focus is on the customer's economic equation—helping to solve customers' cost and efficiency challenges.

For example, when consolidation in the banking industry, changes in printing technology, and the advent of online banking began to commoditize San Antonio-based Clarke American Checks' core business, the check-printing company decided not to go into adjacency markets related to its traditional core (customized special printing) because the same trends affecting the check-printing business were also commoditizing those other businesses. Instead, the firm set about studying the shifts within the financial services industry and exploring ways it could reorganize to better serve the needs of the developing customer categories. High-level conversations with customers revealed a strategic opportunity for Clarke American to provide comprehensive conversion management services—integrating account databases, combining check-ordering processes, and performing other functions that must be taken care of when one bank acquires another. Drawing on skills and capabilities from its base business, Clarke American created a new platform for growth not so much by introducing new products or finding new customers as by addressing customers' concerns about the company's existing products and services.

Although adjacency moves can lead to handsome payoffs, Treacy adds a note of caution: "Companies often deceive themselves into thinking there are more bona fide opportunities here than there really are. Don't just assume that the advantages you have in your core market will transfer over into the adjacent market."

Investing in new lines of business unrelated to your core competency. This highly risky conglomeration approach is rarely used these days, writes Treacy, because companies are "not likely to have any core advantages in these distant markets, much less any capacity to match the standards of competition." Johnson Controls serves as an exception, having successfully entered both the automotive-battery business and the automotive interiors business through acquisitions of firms unrelated to anything going on in the company at the time. Keys to its winning formula have been ensuring that its operating capabilities will enable it to meet the standards of competition before it enters a new business and partnering with the management of its newly acquired companies.

Experts recommend building growth portfolios that include a number of initiatives and several strategic paths. That way, you're not betting the farm that any single initiative will hit the jackpot. Still, it makes sense to bias your portfolio toward the initiatives you think will bring the strongest growth. For example, payroll services firm Paychex, based in Rochester, N.Y., has a portfolio that includes base retention, share gain, market positioning, and adjacency initiatives. But its portfolio is weighted toward market positioning moves that include enlarging its target area, and adjacency efforts such as offering tax, retirement-benefit, and other services to its current customers.

Reprinted with permission from "Do You Remember Where to Find Top-Line Growth?" Harvard Management Update, February 2004, Vol. 9, No. 2.