Double-Digit Growth in No-Growth Times

A Different Way to Grow

Cardinal Health is not the sort of growth company that earns raves on CNBC. It is a wholesale drug distributor, one of many organizations that buys pills, sprays, and capsules from pharmaceutical companies and puts them on the shelves of local pharmacies or into the hands of emergency-room nurses. Demand is not a problem in this business. But profitability is: Distribution in the health-care field is caught in a squeeze play between powerful manufacturers and cost-conscious customers.

Cardinal's response? Uncover one new opportunity after another, turning its intermediary position into a platform for growth. Cardinal understood how urgent it was for hospitals to control costs. So it began to offer services to hospital pharmacies. Rather than shipping medications to the hospital's front door, it "followed the pill" into the hospital and right to the patient's room, offering pharmacy-management services -- and extending those services to customized surgical kits.

Cardinal also offered services to pharmaceutical manufacturers. It saw that its position as a knowledgeable middleman meant that it could bring significant value by providing services in drug formulation, testing, manufacturing, and packaging -- freeing those companies to concentrate on the discovery of the next round of blockbuster medicines.

Cardinal even used its position to develop new services for commercial pharmacies. Cardinal's drug-chain customers are dependent on third-party payments for most of the prescriptions that it fills. It worked with a number of the leading chains to develop a system called ScriptLINE that automates the reimbursement process for pharmacies and updates rates daily.

The result of this stream of services and innovations? A wave of growth and profits. Cardinal has registered compound annual growth of 40% from 1991 to 2001. That's double the growth rate of its nearest competitor. The company's operating profits have grown by 42% -- three times that of its closest rival. And Cardinal has created more than $25 billion worth of shareholder value during the past five years.

The Cardinal Health story is a powerful example of demand innovation in action. The company found opportunities in an unpromising business landscape by identifying new customer needs related to the activities that surround the products that Cardinal sells. Cardinal is rare but not unique. We've come to recognize a typical pattern among those few companies that are consistently successful at growth. They understand and exploit a seldom-noted truth: While the product sale may be the culmination of the supplier's efforts, it usually marks the beginning of the customer's efforts.

Think about your own product or service. Your customers spend time, effort, and money figuring out how to use your product, how to maintain it, finance it, store it, and dispose of it. Your product may have complex interactions with other products. It may serve more than one user, each with different needs. Those hassles and inefficiencies are all waiting to be improved, and they represent tremendous economic activity -- often 10 to 20 times greater than the product purchase itself.

That's why these offshoot activities are the key to creating demand innovation. There are big opportunities to grow by helping customers improve their costs. There are ways to help customers reduce complexity, make better decisions, and speed their offerings to market. Johnson Controls expanded its focus from the seat-assembly market to the auto-interior market by taking on seat design and integration activities that had been performed by carmakers themselves. The result for carmakers: better interior systems, lower capital needs, faster design cycles, and lower costs. The result for Johnson: higher margins and broader access to the $85 billion market for car interiors.

Of course, the most valuable thing you can do for customers is help them grow their top-line revenue. John Deere expanded its role in the landscaping-professionals' market through a new distribution business called John Deere Landscapes (JDL). One of JDL's breakthrough offers is low-cost credit that contractors can offer to their clients through John Deere Credit, allowing them to spend more money on landscaping projects.

Demand innovation is a promising answer to the growth crisis. But identifying opportunities to address next-generation needs is only the first challenge. Equally important is the next question: How can your company address those needs profitably? That's where hidden assets come into play.

Learning to mobilize your hidden assets begins with a new way of looking at your company and its balance sheet. The traditional financial lens assumes a narrow definition of what constitutes an asset: your factory, your equipment, the real estate that you own, and the money that you have in the bank. Mobilizing hidden assets means putting aside the financial lens and framing the issue from an entrepreneurial perspective: What assets beyond the traditional financial ones does your company own that an entrepreneur would love to have in order to create new value for customers?