GROWING YOUR COMPANY: FIVE WAYS TO DO IT RIGHT THIS IMPLIES, OF COURSE, THAT YOU CAN DO IT WRONG TOO. HERE'S HOW SOME SHREWD COMPANIES AVOID THE PITFALLS.
(FORTUNE Magazine) – Every half decade or so, Corporate America rediscovers a concept so astoundingly fundamental that it's a wonder anyone forgot it in the first place. Companies that were recently pronouncing themselves born-again on ideas like quality, efficiency, and speed are now latching on to something very basic and overweeningly simple: growth. In a survey by the American Management Association, executives at large and midsize companies ranked the quest for revenues as their second-most-pressing priority--after customer service. Reengineering, last year's management panacea, finished way back in 16th place. Companies once obsessed with cutting costs are now urgently trying to boost sales--with new products, new services, and new markets, both at home and abroad. Admits Charles Knight, CEO of Emerson Electric: "We got so bottom-line oriented that we were inhibiting growth. We were cutting, cutting. But you can only go so far." Having come to this realization, however, revenue-hungry managers are now colliding with the harsh, mostly unspoken truth about growth: Getting it right is considerably harder than it looks. Says Dwight Gertz, a consultant and co-author of Grow to Be Great: "This rush for growth is going to create more losers than it does winners. Real growth is rare." He's right. Five of the most common ways to grow--overseas expansion, innovation, acquisitions, new distribution channels, and buying market share--are fraught with peril. Buying market share, say, with promotions and coupons can lead to red ink as competitors keep slashing prices to keep pace. For the uninitiated, foreign bureaucrats and antiquated infrastructures can make going global an exercise in futility. Making acquisitions, one of the most popular ways to grow, is a tactic that fails more often than it works. If there's no sure-fire formula for growth, then what can you do? FORTUNE has found some companies--like Emerson Electric, Starbucks, USAA, and Cisco Systems--that know how to increase their revenues profitably year in and out. What makes their cases so compelling is that, with the exception of Cisco, these companies are not hot Silicon Valley startups swarming with Gen-X brainiacs. They are large--and largely glamourless--companies that compete in mostly mundane, mature markets. Emerson Electric, for example, whose revenues increased 16.3%, to $10 billion, in 1995, is a 106-year-old St. Louis manufacturer of electric motors, refrigeration compressors, garbage disposers, and hand tools. Chuck Knight, who's 60 years old and has been CEO since 1973, has injected his company with new vigor through innovation, acquisitions, and expansion into the developing countries of Asia. USAA, an insurance company that primarily serves military officers, stimulates its existing customers to buy more, rather than discounting to increase market share. The trick? Overwhelming them with attractive new products and services. Starbucks, the 25-year-old coffee bar chain with the high-caffeine growth rate, has expanded at an annual pace of over 50% since 1987, mainly by perfecting new ways of delivering one of the oldest commodities known to man. Different as these companies are, they share several fundamental traits. They have stable, experienced management teams, they spend heavily on R&D, and they invest a great deal of energy and money in recruiting and training employees. Above all, they realize that growth doesn't just happen. It has to be planned, nurtured, measured, and rewarded. BUILD PYRAMIDS Innovation is on everybody's short list for growth--as well it should be. But new products rarely live up to their hype. Just 42% of the products that hit the market meet the expectations of the people who manage them, reports Group EFO, a Weston, Connecticut, consulting firm that annually surveys new product managers at major companies. More than half of those managers woefully admit that their companies skimp on R&D spending. Thomas Kuczmarski, president of a Chicago innovation consulting firm that bears his name, says the main problem is that companies don't spend their R&D dollars in the right places: "They don't do enough consumer research early in the process. They just wait until they have a concept; then they test it." The worst way to create a new product, Kuczmarski adds, is to have a bunch of managers sit around in a room and brainstorm. That's certain to produce minimalist innovations, like the newly shaped bottles and marginally more concentrated soap powders that pass for inventions in the packaged-goods business. One CEO who's seen the light on innovation is Emerson Electric's Knight. Three years ago he unleashed creativity in his company by radically changing the corporate culture. Emerson didn't look then--and doesn't look now--like a company that needed to shift course. In his 23-year tenure, Knight has sustained an impressive string of bottom-line results.The company has posted 38 straight years of record earnings per share. Its total return to shareholders, an annual average of 16% since 1991, has outpaced the S&P 500. But in the early 1990s, Emerson, which had been getting much of its profit increases from cost cutting, began to see its revenue growth slow. The marketing and sales forces, constrained by tight budgets, were missing critical opportunities. Innovation flagged as well, in part because division managers were opting for those investments that they knew would fatten profits in the short term. Foreign expansion, long a stated corporate goal, got stuck in first gear as division chiefs, anxious to protect their home turfs, shied away from adventurism abroad. In 1994, Emerson altered its strategy. It now pursues growth with the same kind of methodical zeal it once used to squeeze costs. The hallmark of Emerson's approach is an annual two-day growth conference conducted by each of the company's 60 divisions. Don't think of these sessions as a bunch of managers sitting around making pie-in-the-sky prognostications. Division presidents start prepping two months in advance for these conclaves--for two good reasons. First, because Knight, a tall, athletic executive with wavy gray hair, sharp facial features, and a famously short fuse, personally attends every conference. Second, because part of every senior manager's pay is tied to how well he does on setting and meeting his goals for growth. Emerson execs, who are fanatically fond of charts, neatly express their growth plans on a single sheet of paper with two pyramid-shaped illustrations, which are known, inevitably, as the twin peaks. The pyramid on the left summarizes last year's growth programs. The pyramid on the right depicts the proposals for next year, including plans to invest in new products, expand into new markets, and acquire new businesses. The growth conferees weight the proposals by risk, using an elaborate formula that takes into account market conditions, capacity constraints, and how long it's likely to be before any investment pays off. Those proposals with the best chance of succeeding--including some that didn't make the cut last year--fall to the lower parts of the pyramid and are funded first. Explains George Tamke, executive vice president in charge of Emerson's electronics business: "In the past, every division had the same sales growth objective. We'd pick something out of the air, like 15%, because it was a good high number. But we didn't execute new products well. We didn't assess the risks of new technologies and new markets, and we didn't evaluate our own track record." Emerson's commitment to growth shows up most tellingly at Copeland, the company's largest division. The business, with annual sales of $1.3 billion, makes compressors for refrigeration and air-conditioning equipment. So far, Copeland has spent a whopping $300 million--Emerson's biggest single investment in innovation ever--to perfect a technology known as "compliant scroll." Elegantly simple in design--it looks like a child's pinwheel--the scroll is devilishly difficult to make. The device, which acts as the lungs of a compressor, allows Copeland to produce machines that are smaller, quieter, and more energy efficient than those made by its rivals. The scroll is on a roll, with sales growing at a 40% annual clip. But the scroll probably wouldn't have flourished if Knight hadn't personally made it clear that he cares deeply about growth. Admits Copeland group vice president Howard Lance: "Before, some of these projects would have been taken off the table. People would say, 'Oh, Chuck won't want to talk about that.' Now we talk about it, because we all know we're pushing for growth." Knight, who once thought his company had become "idea limited," now realizes his heavy emphasis on cost control was stifling innovation: "It's just been amazing to be sitting in these conferences, looking at these growth programs, and thinking, 'Why the hell haven't we done some of this stuff before?' Well, we hadn't done it because we didn't have the resources to do it. And we didn't have the resources to do it because we were pounding the shit out of profit margins." DON'T BRIBE YOUR CUSTOMERS One time-honored route to growth, known as discounting, rebating, and couponing, is as common as crabgrass. But it can also be just as noxious. The theory sounds compelling: If you cut your prices and advertise enough--in other words, bribe potential customers--you'll then increase your volume, build your market share, and boost your revenues. But buying market share, like buying a company, is often no more than a quick fix--one that debases rather than builds the value of your brand. Says Fred Reichheld, a director at Bain and author of The Loyalty Effect: "It's a sure route to the poorhouse. This is the absolute best way to acquire the worst customers, the ones who are fickle and disloyal to begin with." Once your competitor responds with his own gimmicky discounting, your newly acquired customers are likely to flock to him. The long-distance phone market--with its confusing promotions and its migrating subscribers--is a case in point. The surest--and ultimately cheapest--way to increase your total sales is to persuade your existing customers to buy more products. But few compensation systems actually encourage employees to coddle their current clients. The big bucks go to the sales people who land the new accounts, not to the forgotten folks who labor in the cubicle-land of customer service. One company that's cracked this formula is USAA. This San Antonio financial services company is largely run by former generals and colonels. That makes good sense. USAA's main mission is to provide insurance to military officers and their dependents--a service it executes with enviable distinction. The company, which is owned by its policyholders, covers a phenomenal 95% of active-duty military officers. How's that for market share? But USAA has one significant problem. Its niche is shrinking. The armed forces commissioned just 17,600 officers last year. That's down from 22,000 in 1990. Yet even as USAA's customer base declines, the company continues to grow. Last year it reported its best results ever. Revenues increased 7%, to $6.6 billion, and net income surged 29%, to $730 million. How do you expand in a contracting market? You offer your customers progressively more service. Chief executive Robert Herres, a retired Air Force general with a master's degree in electrical engineering, sums up his company's success in three deceptively simple sentences: "First, you decide who you want your customers to be. Then you decide what they need and want. Then you figure out which of those needs you can meet, and then you do that better than anyone else." By sticking with that formulation, USAA has avoided many of the discounting tricks that companies often deploy as they try to grow market share. Founded in 1922 by a group of Army officers who couldn't get auto insurance because they moved around too much, USAA has, over the years, transformed itself into a life and health insurance company, a discount brokerage firm, a mutual fund manager, a travel agency, a buying club, and a bank. This financial services supermarket, which conducts all its business by telephone or post, is now the biggest direct-mail outfit in the country. Consumers rank USAA's life insurance company, its homeowners insurance company, and its investment management service No. 1 in customer satisfaction, according to a survey by Dalbar, a Boston research firm. What makes USAA's growth recipe work isn't just the ingredients. It's the execution. The company answers 80% of all phone calls in 20 seconds, and it provides its 16,500 employees with the training and technology to do more than one task. An associate selling a customer car insurance, for example, can also help him open a bank account. USAA tries to make it easy for its employees to work hard. Its campuslike setting boasts restaurants, convenience stores, fitness centers, playing fields, a child care center, a dry cleaner, and a post office. Most employees work a four-day, 38-hour week, and they often commute in company-sponsored van pools. But what really distinguishes USAA is its career development programs. The company shells out some $2.7 million per year in tuition reimbursement for college courses--some of which are taught right inside corporate headquarters. The company's employees are going to need even more education in the years ahead. USAA recently made the momentous decision to make its niche significantly larger--by marketing insurance not just to military officers and their dependents but also to the nation's four million enlisted personnel (including retirees). In that hotly contested market, the company will have to do battle with the likes of Allstate and State Farm. Declares Herres, a trim, bespectacled executive with an engineer's mind for numbers: "We're big enough now that we can take this on." Herres, who served as vice chairman of the Joint Chiefs of Staff under Presidents Reagan and Bush, says his biggest challenge isn't figuring out how to conquer this new market. It's winning the hearts and minds of his own troops: "It's hard to convince the work force that this growth opportunity is for real, that there are job opportunities here, that there won't be pink slips. They've read so much about downsizing, and they think it will happen here. I tell them the only real limitation to growth is how well we do our jobs." GO GLOBAL, GENTLY It's no secret that the U.S. has turned into a hard-slogging, slow-growth market for many businesses. Nor is it any great revelation that there's a wide world of opportunity in developing countries like China, where GDP has been leaping forward at an average rate of 12% for the past five years. Americans invested a walloping $95 billion overseas last year, up from $27 billion in 1990, according to a report by the United Nations. But anyone looking for a bonanza abroad is likely to be disappointed. Says Raymond Vernon, emeritus professor of international affairs at Harvard's Kennedy School: "People don't invest overseas because they're happy about it. They do it because they're scared. It isn't as if they've got a hell of a lot of choice. There's no place to hide today for many, many industries. But the main message is to prepare yourself for a headache." Actually, the main message is to prepare yourself, period--with the right local partner and the right local product. Procter & Gamble stumbled for years before it found the right formula for growth in Asia. It once offered All-Temperature Cheer to Japanese housewives, who always wash their clothes in cold water. Now it's doing quite well in Japan, matching its products to local tastes. General Motors recently halted a three-year effort to make American-style pickup trucks in China. Among other glitches, GM insisted on producing a two-door model that seats three, despite the fact that the Chinese clearly prefer four-door trucks that seat six. Just 44% of the Western companies operating in China are making money there, according to a survey by Andersen Consulting. Says Denis Simon, director of Andersen's strategic practice in China: "People who rush into China saying they'll worry about making money later, don't. A business deal that would look bad someplace else isn't magically going to turn into a good one just because it's in China." One company that's in no hurry to expand further in China is Chrysler. Says President Robert Lutz: "There was a great deal of euphoria, but it's dying down as people come face to face with the reality of just how difficult it is to get anything done. It's going to be a long time before those countries can sustain a true consumer-driven automobile market." One way to succeed overseas is to know the local markets intimately. It's no wonder that U.S. auto companies, whose cheapest cars typically sell for around $10,000, are reluctant to enter a market like China, where most people earn under $500 a year. But for a company like Emerson Electric, China offers exciting potential. For instance, rural villages in China need and--for the most part--can afford Emerson's small electric generators. The company also sees opportunities in the rest of Asia, where newly affluent populations are demanding increasing numbers of air conditioners and refrigerators. The company's toughest challenges in Asia include coping with the region's underdeveloped transportation systems and mastering its multiple layers of government bureaucracy. But the biggest hurdle of all is finding the right managers. Says Emerson's vice chairman Robert Staley, who's based in Hong Kong: "People are the Achilles' heel of our growth plans in Asia." The company woos graduates of top universities with generous pay and brings them to the U.S. for intensive training. Emerson also sends some of its best homegrown talent to the region. Insists Staley: "If you want to be a senior manager of this company 20 years from now, you'd better get some experience in Asia." ACQUIRE ONLY ADDED VALUE Buying another company is the easiest way to get bigger faster--at least on paper. Merger and acquisition activity, which blew up into a frenzy in the 1980s, is once again racing ahead at a torrid pace, threatening to break the record of $515 billion, set just last year. But before you call your investment banker, ponder this startling statistic: Just 23% of acquisitions earn their cost of capital, according to a study by consultants at McKinsey, who looked at deals made by 116 companies over an 11-year period. That means the rich prices companies typically pay to snare their quarries are often as foolish as they look. Quaker Oats, for instance, is still struggling to explain why it dropped $1.7 billion two years ago for Snapple. The beverage maker, awash in losses, has drained Quaker's earnings. Corporations that successfully use M&A as a tool for growth know exactly what they want from the companies they're buying--be it technology, market access, or distribution. They also know--and here's the part that often gets neglected--exactly what value they can add to the deal. When Cisco Systems goes shopping for an acquisition, it's interested in two things: the right technology and the right culture. The San Jose company, which makes hardware and software for computer networks, has grown at a phenomenal rate of nearly 100% per year, reaching revenues of $4 billion in fiscal 1996. About one-fourth of that growth has come from acquisitions--carefully targeted acquisitions. When Cisco paid $90 million for Crescendo Communications in September 1993, the fledgling company was doing just $10 million in sales. "Everyone thought we were crazy," says Charles Giancarlo, Cisco's vice president for business development. Crazy like a fox. Three years later Crescendo forms the nucleus of a Cisco division that generates $500 million in annual revenues. "What we were buying," explains Giancarlo, "was a superior technology and a topflight team of people." Cisco has spent $5.5 billion buying 14 companies in the past three years. But it has quashed twice as many deals as it has consummated, often at the last minute and usually because Cisco decides that the entrepreneurial owners of the target company are more interested in cashing out than staying with a bigger company and building their business. Those who pass the fire-in-the-belly test gain access to Cisco's vast distribution network and manufacturing expertise. Companies that are skittish about getting married can try living together. While alliances are everywhere, they're especially popular in the computer and media industries, where the cost of research, production, and distribution can make it prohibitively expensive to undertake a new project on your own. But these arrangements have a decidedly mixed track record. Consultant Jordan Lewis has surveyed 2,000 managers in North America, Europe, and Asia since 1991. When he asks the execs to assess how well their partnerships have met their strategic goals, they award the setups an average grade of B-. But when Lewis asks them to rate the financial performance of those same alliances, they report an average mark of just C-. The problem, says Lewis, is that managers don't do the grunt work necessary to get both partners pointed in the same direction: "The importance of having shared objectives seems obvious, but it's often overlooked. It's hard enough to get two departments of the same company to agree on the same thing." CHANGE THE CHANNEL An oft-neglected route to growth, distribution has become a road to riches for companies as varied as Starbucks, Dell, Home Depot, and Charles Schwab. These businesses all took common products--coffee, computers, hardware, and securities--and found uncommon ways to get them to consumers. Says Robert Atkins, a director at Mercer Management Consulting in Lexington, Massachusetts: "A new channel is a source of competitive advantage. Think about Kraft, P&G, and Nestle watching Starbucks for so many years stealing market share in coffee, but not responding with a retail channel of their own." It's no accident, says Atkins, that most of the innovation comes from upstart competitors. Big companies that try to open a new channel often get stymied by internal culture clashes. In the early 1990s, Avon had to scrub a plan to direct-market its products after its own door-to-door salesladies complained that the new channel would deprive them of income. But it's the companies that refuse to switch to a new channel that can get clobbered the hardest. PC maker Wang, for example, faltered in part because it failed to recognize the importance of doing business with the burgeoning network of retail computer dealers. Few know how to manage channels as well as Starbucks, one of America's fastest-growing companies. Much of the Starbucks story has become overtly familiar: CEO Howard Schultz, the lanky Brooklyn lad with a fondness for jazz, basketball, and java, buys into a foundering Seattle coffee chain, experiences an epiphany in the espresso bars of Italy, and then, with virtually no marketing budget, reinvigorates one of the oldest, dullest, deadest commodities known to man. Since Starbucks went public in 1992, its stock price has increased nearly ninefold. The chain has opened 335 stores in the past year, including two in Japan, its first outlets outside North America. The company now has 1,020 coffee bars in total, compared with just 50 in 1989. Says Schultz: "Starbucks is not a trend. We're a lifestyle." But its growth isn't limited to stores. The company constantly searches for new avenues. Starbucks ice cream, produced with Dreyer's, has become the best-selling coffee ice cream in the country. United Air Lines pours Starbucks on its flights, and Barnes & Noble serves it up alongside its romans a clef. Most recently Pepsico has teamed up with Starbucks to market a cold coffee drink in a bottle called Frappuccino. Starbucks keeps its channel flowing smoothly by deliberately restricting its growth. Yes, it's hard to believe a company that's expanding over 50% per year is limiting anything. But Starbucks won't franchise, won't artificially flavor its coffees, and won't join hands with most of the hundreds of would-be partners who bang on its doors each week--stores, restaurants, airlines, hotels, and gas stations, all anxious to piggyback on Starbucks' good name. Explains the CEO: "Over the short term these steps would drive up revenues and profits. But over the long term they would be a giant mistake." Schultz fears that if he grows too fast, he'll lose control over quality and tarnish his company's upscale image. That's why you won't see Starbucks coffee being sold in a 7-Eleven. And just where will Starbucks be 18 months from now? Says President Orin Smith, 54, a calming, gray-haired presence in a den of overactive boomers: "We're going to have to look more at opportunities to grow earnings, at how to manage the bottom line, not the top line. We're looking for efficiencies in manufacturing and distribution. We're reengineering." Wait a minute. Did he say earnings, bottom line, efficiency, reengineering? One of the most amazing growth companies of the era plans to focus more on the bottom line? But is that really so surprising? The businesses that thrive over the long haul are likely to be those that understand that cost cutting and revenue growing aren't mutually exclusive. Eternal vigilance to both the top and bottom lines is the new ticket to prosperity. Stop the presses. This could be the start of something big. REPORTER ASSOCIATE Amy R. Kover |
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