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Profitable Growth Is Everyone’s Business: 10 Tools You Can Use Monday Morning by Ram Charan Rating: •• (Mildly Recommended)
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Defective I liked Ram Charan’s last book, Execution, written with Larry Bossidy, so I came to Profitable Growth with high expectations that were generally unmet. While Charan provides some building blocks and some clarity on what an executive could do to promote profitable growth, there isn’t nearly enough of the “how to” in this book. Considering the reference to tools, I was reminded of the t-shirt: “I’m a professional. Don’t try this at home.” Charan has some general advice that sounds good, but I expect more executives will find the advice frustrating when it comes time to try to implement it. Here’s an excerpt, Chapter 4, “Leadership for Growth: Confronting the Enemy Within,” pp. 73-84: Every leader—those in charge of individual products, the heads of business units, the CEO—needs a growth agenda and the ability to communicate an urgency about the need to increase revenues and build the business. They need to do this so that action-oriented people within the organization find out what needs to be done today to help the company become better tomorrow. Without this leadership, the organization stagnates, and its employees get frustrated. It’s the reason why Bill Carter, the manager of the Furniture Globe store discussed in Chapter 1, threw down his copy of the Wall Street Journal, sighed, and got up and stared out the window over the kitchen sink. His first thought was a sarcastic, “It was sure nice of them to tell us ahead of time,” and then, feeling betrayed, he started to figure out how he was going to break the news to the people in his store, and wondered whether word would have reached them before he got into the office. (It probably would have. When it came to bad news, the grapevine was remarkably efficient.) The problem was simple. Carter’s new boss, Dave Duncan, executive vice president of the conglomerate that had acquired Furniture Globe, had told the Journal that the company was about to launch its third round of “major cost-cutting in less than two years because “there just isn’t any growth in the furniture market. The entire segment is flat.” Duncan’s assessment that “we’re a mature business, arid growth is slowing because population growth and personal income are flat” made Carter madder than hell. Every day he saw the growth in the upwardly mobile Hispanic community in Miami, the part of the market his store serves. Maybe the overall industry was flat, but the Miami Hispanic community is a distinct segment that Carter knew he could grow significantly. If corporate could just give him a few more resources, or simply let him once again have some discretion to source items of interest to sell to his customers, he knew he could get additional revenues. What was left unsaid in the Journal article was that the bonuses of Duncan and other people in corporate headquarters are tied only to improvement in margins and cash flow, something relatively easy to achieve through quarter-by-quarter cost control and improving cash flow by reducing inventory. How the bonuses are determined drove behavior from the CEO right down the chain of command. It seemed to Carter that Duncan was saying that “growth is beyond our control,” and that senior management was creating a self-fulfilling prophecy. Once you start down that path, Carter thought, sooner or later you will turn just about all your attention to cost-cutting, and that was already the number-one topic when he went to regional meetings. Some 90 percent of the time at those two-day affairs was spent talking about how to reduce inventory substantially and cut labor costs by getting by with more part-time people, and how the slashing of the local advertising budget was no big deal. The context and tone of those quarterly meetings have changed dramatically, thought Carter. “We used to talk about how the customers’ needs were changing, what new merchandise looked promising, whether there were better ways to display what we have to sell, and how we could reward our best salespeople,” lie explained when his wife asked him what had gotten him so upset. “Those meetings used to be all about getting more sales. We were obsessed with it. If we had a chance to boost our prices, we deliberately wouldn’t. We figured—correctly——that keeping our prices low would bring even more customers into the stores. Now all we talk about is cash, costs, and doing more with less.” That kind of mind-set, Carter intuitively knew, has never led to the creation of a dynamic company over the long term. “Why don’t they get it?” his wife asked him. “It is a great question,” he said. “Maybe we’ve met the enemy and they are us.” BECOMING A REVENUE GROWTH LEADER Of course, the leader of the corporation or the business unit determines the strategy, positions the business, ensures customer needs are fulfilled, and develops and inspires people. But if she is not connected to growth projects, as well as productivity and linking them together, then, indeed, “the enemy is us.” When we are discussing the leader’s role, it is easy to assume that we are focusing on the CEO. And clearly she is a major factor, since she will have a big impact on the corporate mind-set. But by leader we are also talking about the heads of the individual business units, the person in charge of individual products or functions such as marketing and logistics and leaders of cross-functional teams. Every leader must be truly committed to growth. Part of the job is to “walk the talk,” to act as if growth is important and to constantly communicate its urgency. That includes consistently getting information and intelligence about customers’ needs directly, unfiltered by the corporate hierarchy and communicating this information to all in her area of responsibility. This is something Sam Walton did throughout his life. He constantly visited the stores, and he did more than just walk up and down the aisles. He talked to Wal-Mart “associates” to discover what was selling and what wasn’t and what customers were asking for that the stores didn’t have; lie talked to management, of course, but he also spent time with customers and suppliers and walked around competitors’ stores (often getting thrown out, once he was recognized). Walton (and his successors have followed the same practices) was trying to gain unfiltered information about what was going on. Just about every question he asked, and almost every action he took, was designed to figure out how to keep his customers coming back (so that they would buy more) or was designed to discover what Wal-Mart could do to increase its sales. And Walton didn’t stop there. He set up a social system to ensure that his thirty regional managers (lid the same. Every week, each visited nine stores of their own and six of the competition. They would meet, along with people from merchandising, advertising, finance, and logistics, to discuss what they learned about the competition, customers, merchandise, what was selling and not selling, an(l what was out of stock. They resolved conflicts then and there and made decisions about what could be done to spark sales. SPREADING THE WORD Once customer information is gathered, it then has to be communicated internally, and then followed up to make sure that it is used to develop and foster the growth agenda. For example, at Columbus, Ohio—based Sterling Commerce, a leading global provider of e-business software and service solutions, the president and CEO, Samuel R. Starr, holds a company-wide meeting of all senior people every Monday morning between 9 and 10. (Those who cannot be physically present at headquarters participate via conference call.) The sole purpose of the meeting: revenue growth. The discussion centers on what projects are in the pipeline, what Sterling is doing to get a bigger share of the customer’s wallet, and what new products the company should he offering. These meetings solve a common problem. “Before, the management team never had the best intelligence about customers and competitors,” says Starr, whose company is a wholly owned subsidiary of SBC Communications. “What was going on in the company was filtered up through several layers, and people were often afraid to report when they were having problems. As a result, we would be expecting to book revenues on deals that were in trouble, a fact that we didn’t realize until it was too late and the deal was gone. “Now, we work off a real-time agenda,” says Sterling. “If there is a Problem closing a deal—say, that the legal department and our sales force have been having trouble getting together on terms—we talk right then and there about not only what the problem is but exactly how we are going to solve it and when, and people report back at the next meeting. We get real information in real time. As a result of having everyone together, I learn directly what needs to he done, and not just what people want uric to hear. There is accountability, and because all the senior people are present, the walls between the departments are eliminated.” Sterling Commerce is closing deals far faster than ever before. When people see that the leader is demanding, receiving, and acting on this kind of information flow, they know he is serious about growth. Sam Starr and his people experienced new energy by increasing revenues and shortening the amount of time it took to close deals. Those increased revenues were achieved without increasing costs. The weekly rhythm of the social process they developed synchronized the alignment and priorities of nonsales functions such as finance, legal, and product development. The process made them individually and collectively customer-centric. ACTIONS DO SPEAK LOUDER THAN WORDS Companies focused entirely on costs and productivity are beginning to face the fact that they need to grow as well. David Cote, the newly appointed CEO of Honeywell International, has made the linkage of growth and productivity a major part of his leadership platform, asking every leader to devote 30 percent of his time to revenue growth. To underscore the message, Cote is making growth the key subject at all senior management meetings. Every six to eight weeks, senior managers now attend a meeting devoted solely to growth - and both they and Cote are regularly calling on customers. It has become fashionable to say, “I have made a customer call.” But when the best leaders visit a customer, they make sure they know what opportunities and threats the customer is facing. They don’t have to waste ally time at the meeting being educated about their custoniers industry conditions. The leader is there to talk, one—on—one, arid offer whatever help he can. Yes, of course, they use the meeting to resolve whatever problems may exist, hut the real purpose is to look for ways to help the customer grow his revenues. Over time, this approach will help you discover opportunities for your own revenue growth. THE TYRANNY OF SELF-FULFILLING PROPHECIES Every organization (including yours?) that has experienced a problem growing revenues has tried to explain away why the lack of growth wasn’t its fault. The arguments are often based on conventional wisdom within a company or an industry as a whole. And it may he true that a company —-or indeed an entire sector, or even the entire country—is in a slump, but that does not mean there are no growth opportunities. Total sales in your industry may have l)een $30 billion last year, and let’s assume that they are going to l)e $30 billion this year. But why are you comparing yourself to the average? In evemy industiy there are segments that are growing and declining. The question, of course, is whether you can move into those segments that are growing. Investigate how other players in your industry are managing to increase revenues. What are they doing to segment and re-segment the industry from different angles? What are they seeing that you are not? (We will talk much more about segmenting in Chapter 7.) When senior management believes that there is no growth, rationalizing that “we’re in a mature industry,” the self-fulfilling prophecy starts to take over. When you hear people saying things like, “No company in the furniture industry [for example] is growing,” they engage in psychological distortion. People see what they want to see, searching for an excuse that explains away the inability to increase revenues. For example, Bill Carter’s boss, Dave Duncan, clearly ignored the fact that other specialty retailers are indeed growing, and that there is substantial growth in the Southeast. People in Detroit often say that growth in the automobile business is anemic, yet Toyota continues to gain profitable market share almost every year in the United States. It is always a sure tip-oil that someone is trying to explain away the problem when he talks in generalities (“no one is growing”) rather than engaging in specifics. Companies that are dominant in their industry may try to justify lack of revenue growth by saying, “We’re so big that there is nowhere else for us to grow.” That usually is not the case. As Larry Bossidy, the former CEO of Honeywell International, said, “No market is ever folly penetrated.” You can always segment and re-segment to find more opportunities. You can also broaden the scope of the market need you serve to gain a larger share of customer’s wallet, as we showed in the Coke—Pepsi battle in the non-cola market. HOW TO DEAL WITH RISK When I speak with middle managers, I often hear them express frustration that the people above them don’t know how to take risks. They are all risk-averse is the common complaint. Risk is inherent when you try to do anything new, and by definition trying to increase revenue calls for new ways of thinking. People often do not properly assess the potential rewards for taking a risk. Nor do they focus on how well the risks and rewards match. Suppose you discover that a potential growth initiative offers both high risk and high reward? Then, you ask the next question: “If we take this high risk and we fail, will we lose the ranch?” You may not want to go ahead if the answer is yes--— hut you might; sometimes it is worth betting the company on a new idea—but you always want to have a handle on what you are up against. You also want to know how to reduce risk, shape it, and manage it. If the risk is not of the bet-the-company type, you then ask, “If we fail, will it put us at a severe competitive disadvantage?” If not, you dig a bit deeper and try to figure just how badly the organization will be hurt if the idea doesn’t work. Convinced the risk is worth taking, you then drill down farther and decide whether the project is too risky, given the other risks in your company’s investment portfolio, and decide whether the inclusion of this project will push the company over the edge. Should you still decide to take the risk ahead, you can ask whether sharing the risk by an alliance would he an acceptable option. For example, Warner Lambert bet its survival on the cholesterol drug Lipitor. There is no guarantee that any drug will make money. The pharmaceutical companies do not know if the discovery will receive FDA approval. And even if it does, there is no certainty it will repay the investment required to discover and produce it. Top management decided to reduce the risk by sharing it with Pfizer. In exchange for $250 million and getting additional vast sales coverage following the launch of the drug, Warner Lambert shared a percentage of the forthcoming profits with Pfizer. No one had expected Lipitor to he one of the biggest blockbuster drugs of all time. ft was such a success that the stock price of Warner Lambert quadrupled before the company’s eventual acquisition by Pfizer. THE HINGE ASSUMPTION Once you have a good understanding of the risk/reward ratio, you get to the most critical question of all, one designed to get at what I call the “hinge assumption.” You ask: “What is the one assumption we are making that could cause the whole project to fail if it turns out to be wrong.” By asking this question, you are trying to discover the one supposition that you have made that is central to everything else. The hinge assumption could be an external one. For example, “We have proven technology that the customers want and will buy. But if they don’t, we are doomed.” Iridium was a telecommunications venture involving seventy-seven satellites, conceived, shaped, and launched by TRW, Motorola, and Boeing. Iridium’s Celestial Satellite Network assumed that consumers would want and pay for a cell phone that worked anywhere in the world. Success depended on three hinge assumptions. The first was that “the dog would eat the dog food,” that is, that the quality and price of the phone would be what customers wanted. Second, that there would be enough customers on a worldwide basis. And third, that all the requisite governments would approve the licenses. While they got the necessary regulatory approvals, the first two hinges broke. Write-offs for the companies involved came to hundreds of millions of dollars, and the venture is almost on its deathbed. The hinge assumption can be huge: “We know consumers want X”-—-or it can he incredibly small—“Fred is the key to this whole initiative; if he (lies or goes to a competitor, the project fails.” But no matter what it is, there is always one key assumption. You have to determine what it is, and you must decide if you have that specific risk under control. The skill of risk evaluation definitely needs to be worked on if your people are not taking risks. And it certainly needs to be in place before employees start making pie-in-the-sky projections such as Iridium’s. Risk evaluation is hard work and requires looking at the market from the outside-in, asking: What is the risk in the marketplace? What are the risks we can’t control? Without the outside-in approach, you will have a hell of a time growing the business. People also have problems dealing with risk because their leaders may be sending the wrong message. This could he the case if you overhear people within your organization say such things as, “The guy at the top doesn’t want us to take chances.” They could reach this conclusion by paying attention to all the questions you ask when someone brings up a new idea. You know you are just drilling down to figure out where the potential landmines are when you ask about market risks, hinge assumptions, and the like. But they may not. You know you are just doing your homework. But people within your organization may add up the questions you are asking and conclude that you think the initiative they are proposing is too risky. And if you go through the same due diligence—-and you should— by asking all these questions about potential risks and rewards, every time someone proposes a new idea, your people could conclude that you think al/initiatives are too risky. You have to make it clear—every time—why you are asking the questions. The final reason your organization may have problems with risk? Your people may not have the skills to handle fluid situations, so they do everything in their power to avoid them. It takes a certain mind-set and comfort level to deal successfully with risk. That is something that soldiers have long understood. At every military academy, they teach, “The battle plan is the first casualty of war.” The aphorism means that once the fighting starts, it is almost certain to evolve in a way that no one could foresee. The same thing holds true in business. As your company moves into a new area, it is likely the situation won’t unfold the way you drew it up. If your people are uncomfortable with that, they will avoid trying anything new. If that is the case, you probably have to change your people. But if you have the right people, people who have the right mindset, there are specific tools you can use to produce profitable growth. Let’s turn to them next. Charan’s examples are anecdotes rather than detailed case studies, so they sound good, but the context, relevance and meaning are usually missing. Profitable Growth can be interesting to read, but it’s unlikely that you’ll be using those tools Monday afternoon and beyond because the lack of context and additional “how-to” makes the tools defective. Steve Hopkins, March 23, 2004
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