by: Issues: May / June 2004. Tags: Strategy. Categories: Strategy.

To the surprise of many, it’s back! We’re talking about GROWTH, the intoxicating – and in many cases, company destroying — strategy that had fallen out of favour these past five years or so. But look, along with a stock market revival, the pace of M&A’s and other growth strategies has also picked up. But still, it’s caveat emptor. This strategist and author has sound advice for today’s hungry, growth-oriented CEOs.

Stretching into superior growth

The economic recovery recently celebrated its one-year anniversary. But even before this milestone, many companies were already planning and negotiating their headline-grabbing comeback acquisitions: J.P. Morgan Chase and Bank One; Comcast and Disney; J.M. Smucker and International Multifoods (the maker of Pillsbury and Hungry Jack brands), and Telefonica and BellSouth. With each passing week, the appetite for deals grows. As the rising stock market once again becomes all-too synonymous with M&A announcements, one is prompted to ask: Did we learn nothing from the 1990s?

It is an important question because in the rush to please shareholders and tap into the opportunities that a recovering market promises, CEOs risk overlooking a deep, insidious problem: Favoured corporate growth strategies-with M&As nearing the top of the list- are not a panacea. Executives well know that they need to grow their businesses and eagerly latch onto strategy after strategy-most of which earn resounding applause from their boards, analysts and even investors. But while they promise quick fixes to fundamental problems, these strategies — many of them nothing more than fads — often leave the company in a weaker position than before. And when the next downturn inevitably arrives, these same companies could very well be the companies that suffer the greatest damage.

Before the turnaround took hold, executives pointed to the battered economy as an excuse for not growing their companies. However, A.T. Kearney research reveals that 70 percent of the growth opportunities available to any company lie in internal factors that are under the CEO’s control; only 30 percent are beyond company walls. Furthermore, when executives were asked, “To what extent does your company exploit its growth potential?” the results were stunning: Roughly half said their company reaches just 50 percent of its growth potential. But while half of the CEOs recognize that their companies are not achieving their full growth potential, only a handful know how-or where-to tap into it. The stakes for growth are higher than they have been in the past three years because the stock market rally has boosted share prices to a point where CEOs must struggle to meet newly built-in growth expectations. The best way to do this, however, is to look beyond the temptation of a mega merger or a similar big strategic play, and focus on building a growth-driven organization from the ground up.

The good news is that growth opportunities are everywhere: in every office, department, function, and business unit of every company and across all links of the value chain. The other piece of good news is that realizing this growth potential is within the reach of almost every company. CEOs who achieve superior growth don’t possess a covert script that others lack. Rather they simply know how to map out a course for all parts of the company, from the ground up, and then execute it flawlessly. The bottom line is that superior growth is within reach for all companies, in all industries, and in all phases of the economic cycle.

The Stretch Growth model

Most companies begin to grow by removing operational and structural barriers, and then by stretching one or more of their core strengths. Companies that achieve superior results are able to reach new heights in all aspects of their business: satisfying customers, delivering a high-quality product or service, achieving a low-cost position, building a team of motivated top-performing employees, and, most importantly, making money. How do they do this?

Look closely, and you’ll begin to notice some patterns. In fact, there are hierarchies of growth initiatives; some strategies achieve benefits more easily than others. Pulled together, these strategies can be grouped under four discrete stages that comprise a comprehensive model to help companies stretch every aspect of their growth potential. The four stages are: operations, organization, strategy, and stretch. Most companies excel at one, or even several, growth drivers in each stage. But to be truly successful, companies must master all of them. Progressing through the stages logically will achieve maximum business impact as quickly and easily as possible, while at the same time limit exposure to risk. In line with this, the strategies across the four stages progress from the basic to the very sophisticated.

1. Operations: Cleaning house

The first step on the growth journey is to do some operational housecleaning. As with regular housecleaning, it’s never done fully. And although the constant effort can resemble a Sisyphean struggle, the upside is that there’s always room for improvement. Companies that overlook the growth potential in operations do so at their own expense: A.T. Kearney’s research indicates that the operations improvements can account for 60 percent or more of a company’s future growth potential. Our research also indicates that of the four growth steps, the operations step is the easiest to implement (see sidebar, Metro: An Operations Powerhouse). At your next management meeting, raise these questions: Are you truly the low-cost competitor in your industry? Do you have the highest levels of product and service quality? If not, the operations step is critical to returning your company to a growth trajectory.

The key areas to focus on include:

Sourcing and vendor management. The decisions surrounding purchasing goods and services account for 20 to 60 percent of the cost structure of industrial companies and as much as 80 to 90 percent for retailers and wholesalers. And when a company optimizes its sourcing process, it can reduce its total costs anywhere from 6 to 13 percent. It may not sound exciting, but it is profitable.

Product and service quality. During his tenure at General Electric, Jack Welch brought Six Sigma quality standards to the world. Yet companies continue to struggle to achieve consistently superior product and service quality.

Metro: An operations powerhouse

Metro, Canada’s third-largest food retailer, is an excellent example of the operations aspect of the stretch model. With a company motto of “Retail is detail,” Metro’s emphasis on operations excellence is the core of its success.

Metro is a regional food retailer that has built its reputation on excellent operations, low prices, high quality, and a satisfying shopping experience. Metro’s business is primarily in Quebec, and for the past six years, it has been under siege from all sides. Wal-Mart, Costco, and other American superstores have invaded from the south; Loblaw’s, the nation’s largest food retailer, has attacked from the west; and Sobey’s has entered the Quebec market from the east.

Despite this onslaught, Metro has achieved fantastic results. Revenues have increased over the past six years at a compound annual rate of more than 5 percent. This stands in stark contrast to a 2 percent industry average in the region and is higher than any other established competitor. Metro’s profit margins have averaged almost 2 percent, 60 basis points higher than the industry average, and Metro’s ROE has averaged 25 percent, versus an industry average of 15 percent.

How has Metro pulled off such numbers in the face of brutal competition? It has been obsessive about operational excellence. Some of its strategies include:

• Emphasizing high-quality fresh foods, deli selections and prepared meals-all in areas where Wal-Mart can’t compete.

• Continually evaluating and readjusting store locations and its retail footprint to account for changing demographics and consumer behavior.

• Turning its wholesale business with independent retailers, hotels, restaurants, hospitals and schools into a powerhouse so it can reduce distribution costs to the bone and stay on top of consumer trends.

• Making senior executives live the business. As one colleague of Metro CEO, Pierre Lessard, explains, “On a rainy weekend, [Pierre] will take me to [rural Quebec] to check out the price of green peas at our competitors’ stores.”

New product development. A robust innovation pipeline holds the key to a company’s future. After all, what sells well today may be obsolete tomorrow. Think of Polaroid. Once a leading company in the photography industry, it was unable to keep up with changing technology and customer demands; it fell into bankruptcy in 2001. On the flip side, companies that place a premium on innovation-from 3M to Mercedes-Benz-know that a steady focus on creating tomorrow’s products and services is a cornerstone of growth.

On-time delivery. Everyone knows that time is money, but many companies continue to struggle with punctuality. Shoring up the delivery process not only prevents unnecessary losses, but is a relatively easy and low-risk area to achieve measurable improvement.

Sales effectiveness. The sales team is the main link between products and customers, and having the people and the processes needed to consistently clinch the good deals is critical. However, identifying potential lapses in this area is often as difficult as correcting them. Many companies can boost their bottom lines by revisiting and updating some of their key sales strategies, such as altering their compensation structures for sales teams to targeting new customer groups.

Pricing strategy and execution. Gone are the days when the market determined prices. A simple example is Gillette, the world’s leading maker of razors and razor blades. It won many customers by subsidizing the price of razors with superior technology-and compensated with higher prices and margins on its razor blades. Companies are finding that they have considerable power and flexibility in setting new price structures-and are seeing their profits rise as a result. Importantly, companies are using new pricing models as an alternative to traditional cost-cutting strategies.

2. Organization: Structuring for success

The next step is to create a solid, high-performing organizational structure. Organizational growth improvements can account for another 25 percent of your company’s future growth potential, but they are more difficult to implement. The two key components of the organization step are customer focus and organizational speed. In the eyes of your customers, how responsive is your organization, and, in your own eyes, why do you lose customers? Can your company make faster, more effective growth decisions than your main competitor? How many companies have compensation and reward systems, for example, that are not aligned with market and client success? The following lessons explore the key areas that companies should revisit to improve their organizational effectiveness.

Eliminate friction. Friction between two departments, or even two leaders, can effectively stall growth if the problem is not quickly recognized and addressed. However, in creating the best organizational structure for their company, executives must not only find and eliminate existing points of friction or bottlenecks, but also create a structure that encourages potential and success. In other words, it’s not just about fixing parts that are broken or smoothing out wrinkles; it’s about building a platform for growth.

Break down growth barriers. Matrix organizations, functional silos and global business units are all concepts that were popular in recent decades. Each of these theories has strengths-but it is important for senior management teams to be aware that they can affect growth in unexpected ways. Ask any executive who has dealt with organizational silos, and he or she will tell you they aren’t the ideal way to grow. It is critical to remember that the key to growth is to develop supplemental or tangential processes that cut through or across rigid organization structures to unleash the power of a company’s most talented people. At General Electric, Jack Welch was famous for his workout process and his business review meetings. Both helped eliminate organizational inertia and kept the  focus on the business issue at hand.

Improve decision-making processes. Clear and efficient decision-making processes, particularly in volatile situations, can mean the difference between profit and loss, chaos and order.  In a business environment where the potential risks and liabilities are increasing, the natural inclination for senior leaders is to rein in decision-making processes. But companies such as HSBC and Goldman Sachs have proven that this notion is wrong. They have found ways to keep employees empowered, and they are able to make important decisions effectively and quickly.

3. Strategy: Pulling the growth levers

When executives think about the role of strategy in growth, they often think of a big strategic breakthrough that will transform their industry and result in a sales jump of tens of percentage points. But our research suggests a different course of action. Most companies, in fact, are already on the right overall strategic track. And rather than look for a miracle breakthrough, they should take a comprehensive look at their core business and identify specific growth opportunities within it. Or, in other words, they should “exploit the strategic status quo.”

For some companies, exploiting the strategic status quo may lead to breakthrough results, but for most, it means redoubling their efforts on what made them strong in the first place. Consider Toyota, the leading automotive manufacturer in terms of market capitalization. Toyota’s strategy is not flashy. It has achieved its top position not by a massive acquisition or a radical diversification  program, but by slow and steady geographic expansion and by making low-cost, high-quality cars that people like to drive. What’s the right strategy for your company? The best answers always begin with the best questions:

What industry are you really in? Most companies approach their business by looking at their competitors. However, they often overlook more fundamental industry dynamics. In the automotive industry, for example, would you rather be a manufacturer, stuck in a cyclical, capital-intensive, low-margin business, or in auto insurance, where companies with the best customers enjoy a high-margin business with steady profits? Looking across the entire value chain of the industry will help clarify where growth opportunities may arise and how to capitalize on them.

What is your customer growth strategy? Spending time with customers and learning more about what they need and how they use various products or services can yield a goldmine of information about good opportunities for growth. Customers should be at the center of your growth strategy. Their wants and needs should determine product and service offerings, how your company manages your customers’ life cycle, how you serve different customer or market segments, and so on.

What is the best product portfolio? Reshaping your product or service portfolio may sound like a tactical improvement, not a strategic one. But companies need to work from a more strategic perspective when deciding what products and services to offer and promote. How might your product portfolio be tailored to better meet customer needs? Do your products cannibalize each another? How well do you develop and launch new products? Answering these strategic product portfolio questions well can lead to growth.

Where do mergers and acquisitions fit in? M&As can be an important part of the strategy step. Companies such as GE Capital, HSBC and Teleflex use acquisitions to bolster the competitiveness of their core business by acquiring companies to enter new geographic markets or gain access to new technologies or complementary products. A key success factor, however, is that they patiently wait for the right M&A opportunities to emerge and refuse to overpay.

4. Stretch: Searching for breakthroughs

The first three stages of the stretch growth model are fairly straightforward and easy to visualize, if not implement. The fourth step, the stretch growth stage, is more creative. Stretch opportunities have the potential to create breakthrough growth and transform your business. But they aren’t a sure-fire ticket to success, and your company must be prepared to fail. Only a few companies in the world are able to stretch their businesses and capabilities along several dimensions simultaneously to achieve growth from a plethora of sources (see sidebar, Loblaw’s: Stretching the Limits). These companies such as Nestlé and Johnson & Johnson, have set the standard. But in the meantime, while you build a growth strategy based on solid operations, organization, and strategic growth initiatives, there are many places in your company where a stretch growth idea might take root.

You might look at your product or service offerings to see if you have opportunities to stretch your customer base, your customer service levels, or the level of convenience and customization you provide. You might stretch your value chain or business model, your geographic reach, or your partnership and risk-sharing approach to improve growth. You might stretch the way you go to market through your distribution channel strategy or your branding. You might look to new technologies to stretch your entire company. Or, you might try to stretch in several directions at once and find the ideal combination of growth ideas that will boost your company to the next level of performance.

Loblaw’s: Stretching the limits

On the other end of the stretch growth model is Loblaw’s. As the country’s largest food retailer, Loblaw’s built on its operational excellence by using a combination of innovation and acquisitions.

In doing so, it has become a stellar example of a stretch company. Since its doors first opened in 1919, Loblaw’s has evolved into a retailing powerhouse, with annual revenues of more than $13 billion (U.S.). Loblaw’s operates more than 2,000 company-owned and franchised stores. Revenues have grown more than 15 percent compounded annually over the past five years, with profits growing more than 18 percent annually.

Loblaw’s senior management team has taken the company from its roots as a food retailer and stretched its concept and mandate in every conceivable direction:

Geographic expansion. Loblaw’s has expanded geographically both organically and through acquisitions. Originally an Ontario-based food retailer, Loblaw’s has expanded across Canada to become the leading national retailer.

Brand expansion. Loblaw’s was a global pioneer in using its strength in food retailing to build a consumer products franchise. In the late 1980s and early 1990s, Loblaw’s branded and marketed its own private-label products under the banners “PC” and “President’s Choice.”  President’s Choice became synonymous with high-quality, reasonably priced products-and became a staple brand across Canada. For Loblaw’s, this translates into the fact that 29 percent of its sales come from its private-label goods; for U.S. food retailers, the average stands at just 13 percent. This favorable sales mix results in bigger margins for Loblaw’s. In fact, the President’s Choice brand has proven so successful that Loblaw’s has licensed it to other retailers around the world.

Store format expansion. In the past few years, Loblaw’s has faced increasing pressure from players such as Wal-Mart, various regional Canadian grocers, pharmacies and even gasoline retailers. To maintain its dominance and thwart competition, Loblaw’s became proficient at competing in any type of retail format. It opened no-frills stores to compete against rock-bottom-priced competitors. It also transformed many of its stores to position them as one-stop shopping destinations, offering dry-cleaning services, wine and beer sales, a full range of pharmacy products and photo processing.

Stretching brand expansion. In keeping with its one-stop shopping concept, Loblaw’s entered into a partnership with Amicus, a subsidiary of the Canadian Imperial Bank of Commerce, to provide basic financial services to Loblaw’s customers right in the store. The idea took off, and the partnership has since launched President’s Choice-branded credit cards, savings accounts, a loyalty points program, mortgages, and, more recently, a new line of index mutual funds.

Stretching store format expansion. Loblaw’s announced that it plans to storm into yet another area by operating gasoline stations. At a shareholders’ meeting, Loblaw’s president, John Lederer, observed that because so many of Loblaw’s customers come to their stores in cars, providing gas “seemed a natural format extension.”

At every step along the way, Loblaw’s has taken risks and used innovative ideas to reach beyond traditional boundaries. Never afraid to try something new and rarely unsuccessful with new products and services, Loblaw’s exemplifies what it means to be an industry leader-and a stretch company.

Top – performing companies stretch their growth along many dimensions simultaneously. And while many good companies are able to stretch their growth prospects in interesting and innovative directions, being able to take that final step to emulate the stretch leaders is what today’s executives would do well to set as their goal. The path to getting there isn’t flashy or quick, but with flawless execution and unwavering focus, sustainable, superior growth is a goal that any company can reach.