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.
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?
The chances are overwhelming that you own a number of valuable hidden assets. They may include unique customer access, technical know-how, an installed base of equipment, a window on the market, a network of relationships, by-product information, or a loyal user community.
Suppose you want to build a new information business, perhaps selling services to help companies manage their software applications. Your target buyer is the CIO of any large company. The question is, if you phone 100 CIOs, how many of them will return your call that same day? If you are IBM, the answer is 100. If you are a startup, the answer is zero. The difference translates into months of delay in the customer-acquisition process, lost or delayed revenue, and reduced profits. That difference is the value of the hidden asset called “customer access.”
Or consider one of the demand-innovation examples cited earlier. Suppose you want to build a business managing important food-processing activities for customers such as those of Air Liquide, except that you’d be operating from a standing start. How much time and money will you have to invest in order to gain the required expertise? How much will it cost for you to maintain employees on-site at the food plant? How long will it take for you to build enough credibility so that a customer will allow you to run a critical section of its production line?
That’s the beauty of hidden assets: They turn size and experience into an advantage over newcomers. This is a welcome turn of events for big companies, where size and tradition have felt more like a burden than a benefit. Hidden assets have a second virtue: When leveraged, they tend to multiply. The more you use them, the more you have. Relationships become stronger. Information becomes richer and deeper. Networks become more extended. Growth begets more growth.
Growth Is Everybody’s Business
Putting a slow-growth company on the track to double-digit growth requires senior executives to reckon with new ideas about serving customers and deploying assets. It also requires them to set aside old ideas about growth that no longer apply. One such outmoded idea is the notion that new growth invariably comes at the expense of the core business. In fact, just the opposite is true: A company that wants to develop a new-growth strategy must start by reinforcing its core business. After all, it’s your core business that creates access to higher-order needs. If you don’t have a competitive product to sell, you have no related needs to serve.
Operational excellence also generates the funds that you need to support new-growth initiatives. Go back to Cardinal Health. Even as it developed expansive new enterprises, Cardinal was consolidating and improving the pharmaceutical distribution centers at the heart of its core business. Back in 1994, it maintained 40 distribution centers with average annual sales of $125 million each. Today, it operates only 24 centers with average annual sales of $1.4 billion each, or roughly triple the industry average. And Cardinal plans to drive average center throughput to $2 billion during the next few years. Every dollar saved on distribution costs is a dollar that is available for new-growth investment. This relentless focus on efficiency has allowed Cardinal to stay profitable and fund new growth even as overall industry margins have declined.
The point bears repeating: Pursuing new growth is no excuse for neglecting core-business excellence. But watch out for the trap at the other extreme: using the focus on core operations as an excuse to defer serious new-growth moves. This can easily become a permanent state of mind as management fixates on a stream of quality and productivity initiatives, squeezing out ever-smaller returns from the same core business and neglecting the foundation of the company’s future. It’s a delicate balancing act, and mastering it is a key to long-term growth.
Bob Romasco is a CEO who has thought a lot about that balancing act. Between 1998 and 2001, he led the growth-based turnaround at Direct Marketing Services (then a division of J.C. Penney Inc., now owned by Aegon USA). Romasco sees most organizations as consisting of two big chunks: unit A, which embodies the existing business model, and unit B, which is inventing the future. The CEO’s central challenge is to help unit A find capital-creation activities that can throw off the income needed to support unit B. In human terms, that means making it clear to everyone in the organization where they fit into this model and letting them see their importance. “The guys in unit A,” says Romasco, “must never be made to feel that they are the stodgy, old-model folks who are being milked to support the hip, wave-of-the-future guys in unit B.” Everybody has a role, and everybody’s role contributes to future growth.
In short, growth is everybody’s business. Don’t hoard responsibility at the top. Instead, distribute the responsibility for growth and opportunities to grow as widely as possible. When you do, unexpected heroes emerge from your company’s ranks.
Consider Johnson Controls’ approach to grassroots innovation. The firm not only encourages its people to spend time pursuing unconventional paths of inquiry but also imposes a staged evaluation that separates winning ideas from losing ones and keeps activity centered around its established business positions.
Jim Geschke, vice president and general manager of electronics integration at Johnson, describes the innovation process this way: “Think of Johnson as an innovation machine. The front end has a robust series of gates that each idea must pass through. Early on, we’ll have many ideas and spend a little money on each of them. As they get more fleshed out, the ideas go through a gate where a go or no-go decision is made. A lot of ideas get filtered out, so there are far fewer items, and the spending on each goes up.” (In simple terms, the gate consists of a cross-functional team, based within the business unit, that meets periodically to discuss new ideas and review the progress of every initiative. This team makes the crucial funding decisions.)
“Several months later,” Geschke continues, “each idea will face another gate. If it passes, that means it’s a serious idea that we are going to develop. Then the spending goes way up, and the number of ideas goes way down.
“By the time you reach the final gate, you need to have a credible business case in order to be accepted. At a certain point in the development process, we take our idea to customers and ask them what they think. Sometimes they say, ‘That’s a terrible idea. Forget it.’ Other times they say, ‘That’s fabulous. I want a million of them.’ “
Notice that Johnson’s innovation process doesn’t start with a customer survey, focus groups, or other formalized feedback. It doesn’t have to. Its engineers work on-site with customers, and they receive a stream of insights from the company’s Core Customer Research unit. Being steeped in customer needs means that virtually every new-growth initiative at Johnson has at least some grounding in customer reality. And that’s the real secret of growth: devising imaginative products and services for the future by mastering the current problems of your most important customers.
Sidebar: Champions of Growth
Our program for growth didn’t grow out of thin air. It is based on research at fast-growing companies and business units in slow-growth markets. Here are a few of those growth champions.
Cardinal Health, one of the country’s top three pharmaceutical distributors, has registered compound annual growth of 40% from 1991 to 2001.
Clarke American, a leading player in the business of printing checks for banks and credit unions, used its trusted relationships to develop entirely new services. The result? Clarke American has grown its revenue in a declining market from $280 million in 1995 to $460 million today — and maintained operating margins in the high teens.
John Deere has a rich heritage as a manufacturer of tractors, lawn mowers, and other equipment. As a result, it has great authority with landscapers, lawn contractors, and others in the green industry. So in 2001, it launched John Deere Landscapes (JDL) to leverage its hidden asset with this market. Two years later, JDL is the largest player in the industry and is meeting profitability targets.
Johnson Controls has transformed itself from a manufacturer of automobile seats into a provider of complete cockpits. Back in 1985, it was a cheap source of nonunion labor. Today, it is a $12 billion-a-year leader that registers double-digit growth.
OnStar, General Motors’ in-vehicle communication service, is a classic example of a different way for giant companies to grow. In early 2002, more than 2 million vehicles (from an array of manufacturers) were equipped with OnStar. The figure is forecast to grow to more than 4 million vehicles by the end of this year.
Sidebar: From Past to Future
Running a growth company means shifting your strategies from outmoded models of expansion to new ideas about customers and innovation. Here are a few of the required shifts.
|Viewing your business through a product lens||Studying customers through an economic lens|
|Creating growth based on traditional tools (products, factories, personnel)||Creating growth based on hidden assets (relationships, market position, information)|
|Thinking of company size as a growth inhibitor||Thinking of company size as a multiplier of opportunities|
|Worrying that marginal growth will cannibalize your base business||Building growth initiatives that reinforce and strengthen your base|
|Relying on blockbusters to revolutionize your market||Developing incremental moves based on structured creativity and operating discipline|
|Scrambling to eke out margin points in a world of diminishing opportunity||Expanding horizons to include an arena that is 5 to 10 times larger than your traditional market space|
Sidebar: The Trouble With Product Extensions
(And Other Old-Style Growth Strategies)
Traditional growth strategies are as important as ever. But for most companies, old-style moves will replace revenue and profits lost to commoditization and increased competition rather than fuel overall growth.
After years of brand extensions, for example, most spin-off products are serving ever-smaller niche markets. Between 1980 and 1998, the number of annual new food-product SKUs in the United States grew fivefold, to nearly 11,000. Similarly daunting statistics could be cited for cars and CDs, books and cosmetics. In a world of utter saturation, is anyone waiting with great anticipation for your next product extension? Not likely.
That’s why most product extensions are producing increasingly small returns in terms of growth, especially as a percentage of total revenue. And the bigger your company, the bigger the growth opportunities that you need.
Product enhancement is another depleted avenue for new growth. In most industries, product breakthroughs are increasingly rare. As a result, competition is reduced to back-and-forth jockeying. Think of Nintendo and Sony, Intel and AMD, Boeing and Airbus, Avis and Hertz. The advantages gained in this tit-for-tat combat are invariably slender and fleeting. And because meaningful breakthroughs have become rare, customers are extending their product-replacement cycles. If the newest car, copier, or computer is only marginally better than last year’s model, customers can wait longer to replace it. Sales growth shrinks even further.
The end result of these and other traditional growth strategies? Companies and their executives work harder and harder to generate smaller and smaller benefits.
Adrian Slywotzky (firstname.lastname@example.org) and Richard Wise (email@example.com) are vice presidents of Mercer Management Consulting Inc. and authors (with Karl Weber) of How to Grow When Markets Don’t (Warner Books, 2003), from which this article is adapted. Slywotzky’s last cover story for Fast Company was “How Digital Are You?” (February:March 1999). For more on their thinking, visit the Web (www.demandinnovation.com).