Chapter 2 Growth Isn't What It Used To Be Myth 1: Rising tides lift all boats Myth 2: Growth requires growing markets Myth 3: Growth means getting bigger Size slows growth Myth 4: Growth is a zero-sum game Lessons from the new economics Myth 5: Success begets success The new rules for growth
Growth Isn't What It Used To Be
Excerpt from Go For Growth
By Robert M. Tomasko
Many companies have cleared their decks and battened the hatches. A period of what economist Joseph Schumpeter calls "creative destruction," the demolition of the old order to set the stage for the new, is coming to an end. Like a small boat sailing in rough seas, these businesses are in need of a good compass, a strong hull and a powerful engine.
Managers and employees have similar needs. They are looking for a sense of new direction, an anchor for stability, and source of renewed motivation.
The good news is that the past emphasis on efficiency and cost-cutting has provided many businesses with a sound economic base from which to move forward. Productivity, the revenue generated per employee, is at an all time high in many corporations, generally because the number of employees is at an all time low. The job ahead now is to keep productivity growing by increasing the revenue part of the equation - and to keep the economy growing by creating new companies with new jobs.
Growth is also vital, if for no other reason, than to release human pressures building in many organizations. There are real limits, both physical and psychological, to how sustainable are the superhuman efforts advanced by many employees in leanly staffed, change-prone businesses.
Don't be seduced by growth
Ford's executives were endlessly pillared in the press when they tried to excite consumers with a flashy new car called the Edsel. Despite all the promotion the Edsel was given - it was even named after a Ford family member - its sales went nowhere. Several years later, another new Ford design, the Pinto, became the object of nationwide controversy regarding the vehicle's safety.
Perhaps these costly new product-flops made the automaker overly cautious when considering new ideas. It was barely noticed when a group of promising, but frustrated, mid-level Ford managers and designers left and went on to Chrysler. They left because Ford showed little interest in their plan for a new type of vehicle. It was truck with a car's personality. At Chrysler they fleshed out and tested their hybrid, the auto industry's first minivan. A best seller for Chrysler in pre-SUV days, few realize the lion's share of minivan's revenues all might have gone to Ford.
Dealing with the high stakes risks that accompany expansion strategies requires a very careful understanding of the real nature of business growth. This isn't something to be just taken for granted. It's not an escalator that gives you a ride as long as you know where to get on. Many seasoned executives have very outmoded views of how to grow a business. Simplistic solutions such as "investing in R&D," "hiring more salespeople," "upsizing the ad budget," or "increasing capacity" are seldom as effective as they once were. Many more junior managers and employees have never had first hand experience in organizations that were doing anything but contracting.
The old realities
· A rising tide lifts all boats - an expanding economy drives the growth of all the businesses in it.
· Small, entrepreneurial companies in fast growing markets will provide the lion's share of future economic growth
· Growing a business means making it bigger.
· If a company grows, its competitor's must shrink.
· Success begets more success.
Each of these ideas sounds logical Each has a ring of validity to it. But each is wrong, dead wrong. Believing in them can be harmful to your company's, and your career's, health.
To understand why, consider them one-by-one.
This attitude, however, is still commonly held. Its promise of effortless growth by riding a rising economic tide doesn't hold the way it once did. The amazing rapid growth spurt of the American economy, and many of the businesses within it, in the years between World War II and the Vietnam War was an anomaly. This was a time pent up consumer demand from war rationing was released. It was a period of massive new family formation as the "baby-boomer generation" was conceived. It was a time when American products, and companies, were in unmitigated demand throughout the world.
Production was king. In many markets, companies found it relatively easy to sell whatever they made. It was a period when you could make a five year business or career plan and have some degree of confidence it would be achieved. It's a time, however, unlikely to return soon.
New global competitors
These days are past. While the mid-1990s are also a time when long pent up demand is larger than ever, (think about the opportunities offered in places such as China, India, the former Soviet Union, Eastern Europe, Mexico, and the rest of Latin America) the competitive arena is not as empty as it was in the decades after World War II.
Ten years ago only a billion of the world's people lived in countries that were integrated into the international market economy. Now five billion would-be consumers are potentially able to "shop the world." But unlike the recent past, American companies face strong competition for these growth markets from Asian and European global giants. Many of these emerging markets also have scores of tough and nimble home-grown entrepreneurs chasing after the same opportunities. And both sources of competition are eagerly eying the American market as a source of their own expansion.
The demise of mass market
A limited role for government
Rising economic tides used to be generated by government actions. Public spending has long been a stimulus to many American industries, from highways to defense. This is another played-out trend. The U.S. government, outside the defense sector, either can't or won't play the role of growth-stimulator. Due to a combination of budget deficits, inflation fears, and an emerging sense of humility about what government can actually accomplish, the federal role is shifting to one of "trying to do no harm."
Myth 2: Growth requires entrepreneurs
in growth markets
Try this short quiz:
Which have the best chance to achieve high growth?
A. Small, entrepreneurial companies
B. Medium and large sized, established firms
The correct answer is B.
In spite of all the media hoopla about small business as the driving force of the American economy, the reality is that most small companies stay small. And a frightening high percentage of entrepreneurial start-ups shut-down before reaching their second anniversary. Extensive studies conducted by Bennett Harrison, a Carnegie Mellon economics professor, indicate that most growth in sales, employment and new products come from established companies with hundreds, if not thousands, of employees.
Even Silicon Valley, fabled hot house of innovative, garage-based businesses-of-the-future, is now and always has been dependent on large corporations and institutions to fuel its growth. Its history was driven by Stanford University and Fairfield Semiconductor. Its future is being shaped by Cisco, Intel, Oracle, Sun and the U.S. government.
Only 5% of computer companies have over 500 employees. But these firms account for more than 90% of all the revenues and jobs in this industry.
Most start-up ventures that really make it, make it big relatively quick. They don't remain small for long. Fortune publishes a list of America's 100 Fastest Growing Companies each year. It is quite an honor to make the list, but those that do find it is a slippery place to remain. Of the most recent 100 companies on the list, only six appeared on it more than twice before.
One more question:
What kind of industry can provide the most favorable prospects for a businesses' growth?
A. Industries with higher than average revenue growth
B. Industries with lower than average, or even negative, growth rates
The correct answer, again, is B.
The secret of many star baseball players is to hit the ball where their opponents aren't.
Some companies are able to find growth, regardless of how bleak or favorable their industry prospects are. A recent research study examined the growth rates of the leading companies in a dozen industries, ranging from banking and metals to retailing and pharmaceuticals. Some of the industries grew as much as 12% per year; others actually had negative growth rates. But in every one some companies found ways to grow their businesses at least three times as fast as their industries were growing. Even the troubled savings and loan industry, which declined an average of 6% during each of the years studied, has some banks in it growing at nearly 40% per year.
David Birch , a Cambridge, Massachusetts economic researcher finds that the best place to look for fast growth companies is within aged and moribund industries. He's noticed that industry sectors that do exceptionally well are often dominated by large, strong firms, such as Wal-Mart and Home Depot. These commonly called "category killers" are often so dominant that they leave little room for other's growth prospects.
On the other hand, large companies in the slower growing segments of the economy tend to be more conservative, more oriented at cost cutting and restructuring around "core competences." This leaves a lot of maneuvering room for agile, growth driven competitors.
Birch found that between 1989 and 1993, there were more fast growth companies in mature industries such as paper products, chemicals, plastics and electrical equipment than there were in more glamorous, high tech businesses.
There are many unlikely places to find growth. The top growing company on a recent Fortune survey, mentioned earlier, Grow Biz International, sells used merchandise (computers, clothing, musical instruments). Few other entrepreneurs have considered stealing market share from the Salvation Army! But that's the kind of imagination necessary to find growth opportunities in increasingly maturing, increasingly fragmented markets.
Bottom line: don't give up hope for either career or business if your are in a largish company operating in a dull, slow growth industry. Every company has some potential opportunity for profitable growth. Find the appropriate strategy, select the right people, focus their talents on the most important issues, and the future can be very prosperous.
Adherents of the "small is beautiful" philosophy have waged war over many years with those more comfortable with the idea that "progress is our most important product." Some environmentalists, social activists and economists have warned that the real cost of economic growth is far higher than its reward. Pollution, social disintegration, economic inequities and inflation are all associated with growth. Driving past crime-ridden shantytowns skirting the high growth metropolises of places such as Mexico City, Sao Paulo or Johannesburg, can make you quickly concede that rapid, unplanned growth is often accompanied by many unwanted side-effects. Bophaul, the Valdez oil spill and the savings and loan scandals have caused many to question how well business can keep control of its growth initiatives.
At other side of the political spectrum, the junk-bond fueled Wall Street raiders of the 1980s worked hard to dismantle many corporate structures whose rate of organizational growth out paced their rate of return to their shareholders. Claiming that some businesses were worth more dead than alive, these restructurers - often with a sense of great missionary fervor - forced companies to avoid the threat of hostile takeover by pruning back or shutting down major segments of their businesses. Many of these were units that only a few years earlier, had been anointed as cornerstones of their company's future.
Both perspectives on growth, and its by-products, have caused problems and pain for many managers. The environmentalists have made them feel guilty; the corporate raiders have made them feel afraid. What a formula for anxiety induction. On one hand, some managers are uncomfortable admitting to friends and neighbors that they hold a corporate job; on the other, they are not really being sure how long they will have the option to keep it.
Size slows growth
The idea applies to businesses as well as individuals. Out-of-control pollution and marginal rates of return may just be nature's ways of saying slow down. There are, in every business situation, natural limits to how much growth is achievable. The limits, though, are not the resource constraints usually blamed for slowing growth, i.e., "If we only had more capital...", "If we only had more talent...", "If we only had more ideas...". The real limits to growth are constraints that emerge as a result of rapid, but unbalanced, growth.
If your business grows in sales without increasing at the same rate the value added to customers, it will only create opportunities for competitors to move in. If salaries increase faster than the productivity of those receiving them, the extra costs will eventually limit the ability of the business to reinvest in itself.
A small business may grow rapidly because its employees are highly motivated by the prospect of the salary and career advancement they will receive if the venture succeeds. Assume the business develops into a mega-company. Great for the early employees, but how likely are such rapid advancement prospects for the second, third and forth waves of employees hired?
Eventually the line of people awaiting promotions becomes longer than the opportunities that emerge - pyramids can grow only so big without becoming nightmares to direct and control. Malaise set in, some of the more aggressive people leave, and the business soon tends to attract newcomers more interested in stability than rapid forward movement. Motivation levels drop, and growth - to no one's real surprise - drop's off. Market saturation, new technologies or overseas competitors may be blamed. But the real culprit is that common by-product of most corporate growth - size.
Growth has multiple meanings
He's right. Good measures of growth are economic measures. They may include volume, but they also deal with life cycle issues such as product introduction milestones, market share, customer satisfaction and ongoing cost-reduction. Just wanting to be a "billion dollar company" or to appear on the Fortune 500 is neither sound or rational. But it is still, sadly, very common.
Waiting for future payoffs
Managing growth requires a keen appreciation of the nature of these time lags. This is not always easy. Most of us tend to assume that whatever trend we are currently experiencing will persist indefinitely. Especially when we are in a hurry (like most entrepreneurial-types).
Have you ever stayed in an upper floor in a high rise hotel? Rushing through a shower to get ready for an early breakfast meeting you turn the water on, discover it's too cold and quickly adjust the temperature upwards. Thirty seconds later you nearly leap from the enclosure as scalding hot water streams from the shower head.
You know you've overdone it, you need to cool down, so you sharply lower the temperature setting. After a minute, and just before your shampoo starts to form ice crystals, it dawns on you that the temperature control is not an instantaneous device. And that your lack of appreciation of the time its takes for water to travel from the basement to the floor you are on is causing you to dangerously overreact.
Making decisions that are intended to grow a business involves similar dynamics. Investments are made: new people are hired, the advertising budget is increased, a promising company is bought, a new technology is licensed. Few of these moves pay-off immediately. Few pay-off independently. New people and ideas take time to be integrated into the ongoing operation. Just having them on board may make the old business bigger, but that is not enough to be better.
4: Growth is a zero-sum game
Instead they are turning to new schools of economic thought, ones that tend to pay more attention to the actual behavior of real people, as contrasted with the "black box" view of human behavior favored by the old school. Economists used to be content to let the details of how people function be the concern of psychologists and sociologists. This is a concession that, over time, made many of their ideas irrelevant or dangerous.
This omission is one a group of contemporary, broader gauged economists are working hard to correct. Sometimes called "evolutionary economists" they draw upon a broad range of ideas from game theory, genetics and quantum physics. They believe the environment in which most businesses operate has more in common with a biological organism than it does with some machine-like abstraction that is subject to a Keynesian's manipulations.
A number of their ideas are starting to win broad acceptance among both economists and leading edge business people. A recent Nobel economics prize went to several economists who showed that businesses compete, and armies do battle, in much the same way people play poker and chess. These ideas offer a perspective on growth in tune with the new competitive environment many corporations are facing.
· Destroying an opponent is not necessarily the best path to long term survival and growth - live and let live may well be a better motto.
· Too much selfishness will be self defeating - the high rewards it provides in the short term will only serve to attract new competitors.
· The key to sustainable growth is knowing how to adapt to circumstances that are constantly changing - long term winners are the best adaptors, not necessarily the winners of today's race for market share.
· A businesses' future is probably much more linked to that of its competitors' than it may want to admit.
· A company seeking long term growth should include in its plans a viable role for these competitors.
· Cooperating with suppliers to deliver the greatest value to the final customer will pay-off much more than coercing suppliers to only minimize their price.
The new rules also apply inside the company
Similarly, the unwritten rules are changing as more companies become team, rather than job based. Businesses hoping to grow through team efforts are making sure the greatest rewards are flowing to high performers who expend effort upgrading the skills of their teammates, not just publicizing their individual accomplishments.
Myth 5: Success begets more
Like the other growth myths, this made some sense once in the wide open marketplaces of the post World War II era. But its relevance is very questionable today.
Think about the unwanted, but common, by-products of growth:
·a "we-can-do-no-wrong" sense of smugness.
Over time, a string of wins will accumulate a massive number of these obstacles-in-waiting. They will combine and conspire to turn record revenues into profitless bloat. When continued successes becomes the expected norm, a business puts on a pair of heavy blinders. The only reality that counts is that which exists within ("we must be smart, look at how well we've done"). Signals about subtle shifts in market requirements are missed. Clues about changes in customer preferences count less than company determined projections. Competitors' new products, or shifts in tactics, are underestimated ("we've always beaten them before, haven't we?").
In short, success sets you up for failure.
Which really may not be all that bad. Sustainable, real growth, is driven much more by failures than successes.
Edwin Land's motto
It said: " A mistake is an event, the full benefit of which has not yet been turned to your advantage."
Examine the wording that Land admired so much.. A mistake is an event, a one-time occurrence at one point in time. It is something that happened, not a label to be hung around the neck of the person responsible. Note also Land's appreciation of time lags, of cause and effect being separated by some interval. These are hallmarks of a growth-friendly mentality.
Growth occurs on the rebound
He planned to sell tents and canvas covers for the horse-drawn wagons the miners were using to haul their tools to the gold fields. Good idea for a booming market.
Sales, however, were not especially strong.
Rather than pack-up and return to Germany, Strauss did notice some customers were using his material to make clothing that could withstand the rigors of digging and panning for gold. One thing led to another, and he soon found himself in the business of producing the world's first jeans. This business boomed, to the point that his name, Levi's, was associated with the product he invented just as later happened to Xerox and Federal Express' innovations.
Rebounding from missteps has become ingrained in the Levi Strauss culture. For a variety of reasons the company's attempts in the late 1970s to develop a product line of leisure wear beyond its traditional jeans offering met with only marginal success. This was surprising, considering all the high powered professional marketing talent Levi Strauss assembled at its headquarters to plan and roll out the new garments.
A few years later the company tried again. Instead, though, of following all the classical, top-down approaches to consumer marketing, the company experimented and watched closely what interested its customers the most.
One of its employees based in Argentina, far from the California home office, put together plans for a product that could fill the gap between the jeans and the dress pants markets. The idea, christened "Dockers" was actually given its first major trial in jeans-crazy Japan. An immediate success, it was quickly repatriated and became the core of a new billion dollar business as well as the fastest growing brand in the history of the apparel industry.
More recently, Levi Strauss has hit another speed bump on its growth path. All the more reason to keep an eye on them as they set out looking for the next Dockers or jeans.
· The only real growth opportunities are those you find yourself.
· Look where others aren't.
· Make your business better, not just bigger.
· Assist your rivals to make the industry bigger.
· Find the seeds of growth in your failures.
A battle is occurring in many companies between the old think and new think about growth. The old rules for growth that have become, at the least, increasingly irrelevant. The new ones, because they are anchored in the reality of today's marketplaces, have the greatest promise of propelling your company and your career safely into the next century. The struggle is one for dominating ideas - the perspective that will drive your thinking and ultimately your company's.
May this be a battle successfully won in your company.
May your competitors still be playing by the old rules.
© Robert M. Tomasko 2002