Focus on Growth
- 12 July, 2006 12:53
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."
Reinventing the CIO Role
The bad news for CIOs is that when it comes to growth, IT has been and remains more a part of the problem than the solution. The answer is to secure profound changes in how people look at IT, and that means CIOs must come to a better understanding about what drives sustainable growth for organizations. It really comes down to four basic things, Treacy says.
First is that the notion of the value discipline and consideration of the value proposition is a very important foundation for any sustainable growth. There are CIOs who are really solid participants in that debate and discussion inside their firms, with enough business savvy to make valuable contributions to the discussion about the nature of the organization's value proposition: the question of why any customers should want to do business with the firm.
"The CIO can't invent the value proposition but I think they can be great contributors to the debate, and important ones, since every value proposition is founded on a uniqueness in operating model design, to the question: 'Why we can deliver value the other guy can't'. The IT community can play a big role in that. IT remains one of the fundamental catalysts for new and different ways of operating businesses. It still is the most powerful weapon we've got out there for constructing new value propositions," Treacy says.
The second thing CIOs need to tune into is how their technology investment impacts base retention, share gain and market position.
Then they must recognize that a successful growth strategy relies on a portfolio of initiatives. "A big-sized firm might have 50 or 60 or a hundred different growth initiatives," Treacy says. "They are diversified by time frame, by type, by risk profile, and the reason for it is that any one plan you come up with is inherently risky: it might work, it might not. So the way you create a steady result is by spreading your risk across a wide range of initiatives, some of which will work, some of which won't, but the overall result will be more predictable than any particular plan or initiative.
"The fourth key for these firms to grow at a steady pace is that they don't just grow, they actually simultaneously grow their capacity to grow. There is a constant reinvestment in talent. There is a constant reinvestment in how to become more innovative. And there is a constant investment in how to become better at performance management, which means having a tight control system so that they know where they're growing, where they're not, why that's growing, why this isn't, and kind of have a feedback loop that makes them better all the time at managing and controlling this growth.
"So the basic message for CIOs is that if they want to make a bigger contribution on the growth agenda, they have to start by understanding what is it that actually creates steady, consistent growth."
And of course CIOs can ensure their companies have the tools to help them secure growth. Take the set of value propositions around operational excellence, which is all about centralized, standardized, efficient, low-cost - a seamless hassle-free basic service. As soon as you paint that picture you can imagine the kinds of information technologies that you can apply without harming the value environment, he says.
Growing Irrelevance of Software
On the other hand, Treacy says software has essentially lost its relevance to business innovation. There is a tremendous tension between best in class point solutions and an integrated solution, and there is also tension between software that has been customized to the specific needs of a particular firm versus software that has been standardized to the needs of a broad set of firms.
"One side has been winning both of those tensions," says Treacy. "Things have gone from customized to standardized, things have gone from point solutions to integrated solutions. So we're seeing this rapid consolidation of the software industry; this broad set of features and capabilities built into packages, only some of which I want. They're only somewhat - and with great pain - configurable to the specific needs I have as a corporation. Quite frankly, what I think has happened with the software is that its cost has gone up while the relevance and importance of software in driving innovation has gone down."
All this has come at a time when it is proving much harder for CIOs to exert influence over software vendors, as vendors try to make all of their products fit into a one-size-fits-all kind of model.
"Of course if your agenda is cost-cutting, the big integrated packages make a lot of sense. But when the agenda should surround: 'How do I differentiate this firm and get it growing again', maybe the answer doesn't lie in buying the package that everybody else is buying. You know, this isn't a case of making a bad choice versus a good choice, it's a constrained environment in which it's very, very hard to find the best choice," he says.
It is for this reason that in addition to providing the right tools to the organization, it is also important for CIOs to become a catalytic force for innovative thinking. Treacy says the reason why information systems remain an important topic for business is that it has been one of the principal drivers of innovation in organizations. That is because if you want to innovate you need a new idea, and technology has generated a flood of new ideas about how to do business.
"I think that the biggest impact that the CIO can have, is to be seen as a source of rational, thoughtful, fully analyzed, somewhat tested concepts for growth. The growth initiatives that firms have about how to improve base retention, or how to improve share gain, market coverage or whatever, a lot of those issues are going to be technology-based, and what the CIO needs to learn is how to be more prudent and less of a cheerleader, less of an optimist in evaluating those technology-based ideas."
Treacy's portfolio management approach to licking the growth problem requires that the portfolio ideally be based on five growth disciplines that "followed with care and dedication, can aid any enterprise in achieving steady, double-digit growth year after year". All five disciplines are the outcome of insights gained from a study of the growth habits of some 130 businesses, and all have an important role for the CIO.
The first discipline focuses on improving customer-base retention. One way to grow is to stop shrinking, Treacy says. Virtually every company loses between five and 20 percent of its customer base every single year, and has to replace that base before it can start to grow. "So the question becomes: How do we apply technology to know more about our customer and translate that to better value, to create sticky relationships by increasing switching cost, and to use the advantages of incumbency to hold those customers close to us?"
Here CRM- and BI-type applications can be relevant, he says, although CRM is a "broad and blunt instrument" that is easy to implement without gaining the specific effect you need in order to reduce customer churn: the devil is in the detail of its implementation.
The second discipline in Treacy's portfolio management approach focuses on market share gain. Market share gain is about both the strength of your value proposition and your market coverage strategy (how broadly you are able to get your proposition in front of people). Treacy says CIOs can play an important role in both of these areas, since corporations achieve a better value proposition by improving their operating model, and since the Internet and other electronic communications channels are changing the way customers reach markets and corporations reach customers and create awareness.
The third discipline involves making sure your corporation "will show up where growth is going to happen". By positioning the company in market segments that are growing, you can grow by just getting your fair share of a growing pie. "Markets segment by geography: China is growing faster than the US. And they also segment by customer segment, by product segment, by channel," Treacy says. "So this is a pure strategy, which sees you get positioned and repositioned constantly in a fast growing segment of the market so you grow faster." The CIO can help the organization to discern favourable market segments.
The fourth discipline is all about penetrating adjacent markets where the company's core operating capabilities can give you a real advantage - an approach that also forces the organization to think about building or acquiring additional capabilities to meet the competitive standards in such markets. "This is not just a segmentation focus," Treacy says, "but about literally moving into new businesses next door to the business that you're in. And the reason it's important to be next door is so that you can leverage your core advantages in the new business. This is good theory, but most companies that try it fail miserably. The success rate is fairly low on growing into it."
And finally, the fifth discipline focuses on achieving growth by invading new lines of business.
Treacy says the five options have to be balanced and rebalanced according to the demands of the market, just like an investment portfolio. And like an investment portfolio, at any point of time, he says strategy is likely to be weighted heavily in favour of two or three disciplines.
He gives the example of Johnson Controls, a Milwaukee manufacturer of automotive systems with sales of $US22.6 billion in 2003, with three main businesses: manufacturing security and control systems; automotive interiors, which started out making car seats and is now involved in different elements of the automotive industry; and the lead-acid car-battery business, which the company believes in a similar way will grow to include everything under the hood except petrol. The company, which has a vision of taking many other components from windshield-washer bottles to radiators, manages growth the way other firms manage processes, Treacy says, by using a very disciplined approach to measuring performance against the objective. Those plans are adjusted as needed, and there is a detailed loop between measuring, evaluating and adjusting on the road to that vision.
With a growth portfolio embracing dozens of initiatives at any one point in time, some aimed at retaining existing customers and some looking to improve market-value process or market coverage, Johnson Controls does not have a strategy but a portfolio of strategies to drive growth, backed by a very clear vision.
Treacy says Johnson exemplifies a concept he calls "management discipline", which focuses on establishing both value leadership and customer leadership to set businesses apart and then lead them to growth in the future. It requires executives to manage growth as they now do costs.
It is all about how well you perform against a particular objective under uncertain conditions and other things you cannot control, Treacy says. Companies that have "performance disciplines" are able to consistently deliver results in uncertain times.
CIOs should make those choices with growth in mind, he says, and should constantly seek to drive innovation that can foster such growth.
Cycles of Growth
There are three cycles of business growth
Growth is predicated on cycles. Businesses are exposed to three fundamental cycles of business growth, says business author Michael Treacy, and the mere existence of those cycles makes achieving some amount of growth an imperative if those cycles are to be virtuous, rather than destructive.
The first is an economic cycle. The faster a firm grows, the higher the valuation of the firm and the lower its cost of capital. The lower the cost of capital, the more inclined the business is to reinvest in growth.
"Growth begets growth from an economic point of view, and you see that in reverse all the time. You see organizations that fail to grow lose the confidence of the financing community - whether that's a bank lending money or the issue of new stock - and therefore the cost of investment goes way up and they tend not to invest in growth and they tend to continue the non-growth," he says. "You need a certain amount of growth to keep the economic cycle at least neutral."
The second cycle is a momentum cycle or a marketplace cycle. In simple terms, customers like to do business with winners. As a business grows, it attracts attention, which harnesses more customers, which leads to more positive word-of-mouth appraisals, which leads to yet more customers.
"Growth gets easier because customers like to do business where there's reinforcement of their decision to do business," Treacy says. "Now, you definitely see that one in reverse also where when companies struggle to grow, everybody leaves. Look at what happened to Sun Microsystems when it had a disastrous downturn after 2001. These days it takes a brave CIO to stand up and say: 'Sun Microsystems is my future', because they don't have the support of the market that says: 'Yes, that's the right choice'."
Then there is the most important cycle of all - the opportunity cycle. Growth is always built on one thing and that is innovation and change, according to Treacy. Achieving innovation requires changes in roles, corporate structure, the ways people report to each other and the jobs they are required to do, and it turns out that achieving such change is "enormously easier" in an organization that offers expanding opportunities.
"Now if businesses aren't growing, if new opportunities aren't opening up, then people get frozen in place and really don't want to participate fully in trying innovation initiatives because innovation in the last few years has been another word for job termination," Treacy says.
You do not need rapid growth to keep these cycles positive but you need some growth, he says. A firm experiencing growth at two or three points above inflation - that is, one that is growing at a rate of 4, 5 or 6 percent - is typically growing enough to ensure these are not negative forces. But once you start growing at 8, 9 or 10 percent growth, achieving further growth gets easier, as these cycles become virtuous and smooth your path to even more growth.
The best management team beats the best strategy every time
1.Commit to superior customer value in everything you do.
Why customers should do business with you. At the product level ("What you sell"), provide a uniquely better product (benefits) at a competitive price (costs). At the service level (How you do business"), provide results expertise (benefits) in a hassle-free (costs) environment.
2.Focus on five, and only five, sources of revenue growth.
Base retention: Exploit the advantages of incumbency. Share gain: Use better value to take business directly away from competitors. Market positioning: Find the new growth segments before anyone else. Adjacent markets: Attack neighbouring markets, but only when immediate and practical advantage is in hand. New lines of business: Acquire in unrelated markets, but only when management has superior investment skill.
3.Manage a portfolio of growth opportunities.
How a business might manage 20 percent growth per year - Base retention: Retain client base (0% growth). Share gain: Switch clients (3% growth), in-line acquisitions (2% growth). Market positioning: Shift to growth segments (5% growth), market segment acquisitions (3% growth). Adjacent markets: Internal innovations (3% growth), adjacent acquisitions (4%). New lines of business: Transformational innovation (0% growth), new LOB acquisitions (0% growth).
4.Build a management discipline for growth.
Stretch:Tough objectives built on detailed understanding. Leadership: Committed and out in front organization. Teamwork: Effective collaboration across organizational boundaries. Technique: Tacit knowledge, formalized and improved on. Portfolio: Diversified initiatives, not an integrated plan. Accountability: Everyone responsible for their part of the growth challenge.