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Focus on Growth

Focus on Growth

How do businesses tapped out on cost cutting and with no room left to manoeuvre on price continue to grow their profits? The only way left is to grow volume and few managers know how to do so.

Cost cutting has been the dominant strategy for growing corporate profits for the past few years, but that option appears to have run its course.

Challenge almost any management team in any company to slash costs by 10 percent in a year, and they will know exactly what to do - from pinpointing the data they will need to get the job done, to working out exactly how that data can become the raft they can use to ferry themselves towards the target. Practically every team thus charged will be able to move confidently from allocating responsibility to launching a host of projects and programs that will steer them unerringly towards that goal.

Ask the same management teams to grow their business by 10 percent a year and they will likely scratch their heads. Especially if the market is stalled or static, they will tell you they might be able to get there, but only with a rainbow full of luck and bucket loads of trial and error.

Why is this so, when achieving growth theoretically requires the exact same discipline as executing large-scale cost reduction - that is, gathering data, analyzing it, setting objectives, initiating projects and then following up to secure the desired results? Because, says Michael Treacy, former MIT Sloan School professor and author of numerous business books including Double Digit Growth: How Great Companies Achieve It, No Matter What, most companies have no diagnostic information on growth, and managers spend little time thinking about that part of their business.

Treacy thinks CIOs can, and should, be working to rectify that shortfall, not only because they are ideally qualified to do so, but also to help rebuild credibility after past lapses.

"For the past two or three years the business agenda has principally been an agenda of cost-cutting, in which the IT community can play a very significant role - the traditional role that technology applications play," Treacy says. "Now to be sure they have had to be dissuaded from their worst behaviours, which were to invest in fantasies and concepts that never actually became reality, but nonetheless the history of IT is that it has been a tool for driving efficiency in business.

"What's happened is that most businesses now have become exceptionally efficient and the agenda has shifted and is really around growth, and how to build sustainable, profitable growth. The IT community has very little to say on that issue - they haven't invested sufficiently in creating a point of view of how technology contributes to that."

Treacy argues that business has put billions into accounting systems that churn out data on costs but almost nothing on revenue, despite the fact that figuring out sources of revenue is simplicity itself. For years, he says, business's standard modus operandi has been to grow profits on flat revenue by championing cost cutting. Now, that strategy has reached its limits with no more costs left to trim and opportunities for raising prices equally limited. How do businesses tapped out on cost cutting and with no room left to manoeuvre on price continue to grow their profits? The only way left is to grow volume, Treacy says, and few managers know how to do so.

CIOs who can help show the way may even help redeem themselves in the eyes of the CEOs who hold a widespread and deep resentment that the IT community sold them a "bill of goods" in the late 1990s all under the banner of Y2K and the Internet.

"If you look at what happened to information systems over the last eight years, there was the enormous ramp-up to the Y2K phenomenon, so there was all this rebuilding and reinvestment. And, quite frankly, there was a loss of financial discipline in the lead-up to Y2K because the answer as to why we were redoing our systems was because we had to, not because it was economically sound to do it," Treacy says. "At the same time CIOs were losing their financial discipline in the face of wildly optimistic notions about the Internet, just as 2001 was ushering in the start of an economic recession which was accelerated by 9/11.

"So all companies were cutting back, and as soon as companies cut back the first thing they ask is: 'What are we spending money on, and how much of that is really required and should continue?' That's when many, many CIOs got pushed out of the executive team and told to go back and work for the CFO because the CFO at least has financial discipline.

"Now here we are today, three to four years later: Businesses have been cutting costs furiously, every investment has a solid business case and is very tactical. We've become very good at cutting costs, but I think the IT community has lost sight of the vision and the objective of how it can contribute to growing companies. I'm a huge believer that IT is a big catalyst for innovation and change, but they've got to change their whole approach."

Treacy says his research into firms experiencing good rates of growth suggests that growth is largely achieved by making steady, small, solid improvements. Information systems should be, but largely is not, playing a major role.

A Model for Growth

Before getting on to Treacy's advice about how CIOs can reinvent themselves to support corporate growth, it is worth taking a moment to understand his notion of "value disciplines". In an earlier book, written with Fred Wiersema, The Discipline of Market Leaders, Treacy defined a value disciplines model that describes three generic value disciplines: operational excellence, product leadership and customer intimacy. Any company must choose one of these value disciplines and act upon it consistently and vigorously, with the aim of excelling in the area without neglecting the other two dimensions. These "performance disciplines" are about how well the organization performs against objectives and provide a means of ensuring the ability to deliver results consistently in uncertain times.

"Operational excellence" is characterized by superb operations and execution, often achieved by providing a reasonable quality at a very low price. There is a task-oriented vision towards personnel. The focus is on efficiency, streamlined operations, supply chain management and no frills. Volume is important. Most large international corporations are operating out of this discipline.

"Product leadership" is characterized by great strengths in innovation and brand marketing. A product leadership company operates in dynamic markets and focuses on development, innovation, design, time to market and high margins in a short time frame. The company culture is typically flexible.

"Customer intimacy" is the model for companies that excel in customer attention and customer service, and tailor products and services to individual or almost individual customers. Such companies typically have large variations in product assortment. The focus is on CRM, delivering products and services on time and above customer expectations, lifetime value concepts and reliability, and being close to the customer. Employees that are close to the customer typically have decision authority.

Treacy says in compliance with this model there are four new rules that govern market leaders' actions:

1. Provide the best offer in the marketplace, by excelling in one specific dimension of value. Market leaders first develop a value proposition, one that is compelling and unmatched.

2. Maintain threshold standards on other dimensions of value. You cannot allow performance in other dimensions to slip so much that it impairs the attractiveness of your company's unmatched value.

3. Dominate your market by improving the value year after year. When a company focuses all its assets, energies and attention on delivering and improving one type of customer value, it can nearly always deliver better performance in that dimension than another company that divides its attention among more than one.

4. Build a well-tuned operating model dedicated to delivering unmatched value. In a competitive marketplace, the customer value must be improved. This is the imperative of the market leader. The operating model is the key to raising and resetting customer expectation.

Treacy says the notion of value disciplines is a very simple idea that emerged from a formal study of mainly US companies that were growing very rapidly in their marketplace and that were coming to be acknowledged as market leaders. Comparing these companies against other firms in the same industry that were not faring very well led to the simple conclusion that achieving double digit growth was all about delivering customer value.

"When you looked at the dominance of Southwest Airlines in the airline business or Wal-Mart in retail or Dell in personal computers or any of the others, what you saw was that they were able to deliver to the marketplace substantially better value propositions to consumers than their competitors. And when you got beneath the surface and asked: 'Why is that?', it was always about operating model innovation. How they did business was fundamentally different from how their competitors did business and that was the engine that allowed them to generate the excess value. Now, they could have taken the value and put it on the bottom line as profit, but in most cases they put it instead into the hands of customers to deliver better value and that drove the growth."

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