Double-Digit Growth in No-Growth Times

The traditional, reliable, sustainable engines of growth for American business have run out of steam.

The evidence is all around us, no matter how painful it is to look. One compelling piece of data: From 1990 to 2000, just 7% of all publicly traded companies enjoyed eight or more years of double-digit growth in revenue and operating profit.

So the growth crisis is about more than just a slow economy. Its roots are structural and strategic. Most executives think of the postwar decades (the 1950s, '60s, and '70s) as a golden era of growth. That nostalgic picture is exaggerated but reasonably accurate. Companies embraced a formula that today appears refreshingly simple: Invent a great product. Launch it. Sell it like hell. Go international. Acquire and consolidate. Cut costs. Raise prices if you can. Repeat as necessary.

That growth model is long gone -- even though it still exerts a tremendous pull on strategic thinking. The first big challenge came in the mid-1980s, with the rise of a new generation of business-design innovators. Mavericks like Nucor, Southwest Airlines, and Wal-Mart focused not on product innovations but on inventing new ways to serve their customers, capture value, and create strategic leverage in their industries. These firms grew -- but at the expense of their rivals. Billions of dollars in shareholder value migrated from the old guard to the upstarts.

But now even the most nimble, product-driven companies face limits to their growth. Most of these upstarts have done little to shape new customer needs. Southwest Airlines has built an innovative point-to-point route system with lower costs than the major airlines, but it still sells the standard airline seat. The same is true of Nucor in steel, Wal-Mart in retailing, and Dell in computers. These companies have successful but product-focused business designs. Over the long term, in an era of global overcapacity, product-centered strategies alone -- even those executed by the most-nimble companies -- won't create the kind of growth that investors demand.

Sound grim? For too many companies, "grim" is a fair description of their growth prospects -- and that bad news is reflected in their income statements, stock prices, and mood. How many times have you heard this sort of sentiment from a rising star? "During the past few years, things have been getting tougher. I used to be able to glide from one success to the next. But lately, the raises are smaller, and it's harder to win approval for new investments. Worst of all, work just isn't much fun. Walking down the hall, I used to hear laughter and debates. Now I hear people whispering nervously behind closed doors."

How many times have you heard this sort of lament from executives at the top? "There's a lot on my shoulders. It comes with the job, but the weight feels heavier today than it did five years ago. Earnings growth is so hard to come by. Walking down the hall, I sense that everyone is looking to me for answers. The trouble is, the past 10 proposals I've read look like the same ideas we tried three years ago. They didn't work then, and they won't work now."

That's the bad news. Now for the good news: Slow growth does not have to last forever. We've detected a promising response to the growth crisis. It's being pioneered by a handful of companies and business units with spectacular track records. These firms include Cardinal Health, Clarke American, GM's OnStar, John Deere Landscapes, and Johnson Controls. They may not be as familiar as Dell, Southwest, or Wal-Mart, but they do share one exciting trait: They have managed to create impressive revenue and profit growth in no-growth or slow-growth markets.

What's their secret? These companies have discovered a new way to grow. They are focused on creating revenue, profits, and shareholder value by addressing the issues that surround their products rather than by simply improving the products themselves. They have shifted their approach from product innovation to demand innovation. At the same time, they are delivering these innovations by mobilizing assets that reflect their history and expertise: unique customer access, an installed base of products, a special window on the market. They focus on hidden assets that go beyond balance-sheet items such as factories, R&D labs, and real estate.

Now here's the great news: As a by-product of doing business for years or decades, virtually all established companies have pools of hidden assets with a potential value of billions of dollars. Big organizations can turn scale and experience into an advantage over smaller, younger rivals. Size and growth don't have to be at odds with each other anymore.