Chapter 1
The Growth Imperative

Build, don't destroy
Limits of cost-cutting
You can't rent your future
Emerson's about-face
Fear destroys the future
Turn competitors into customers


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Chapter 1

The Growth Imperative

Excerpt from Go For Growth

By Robert M. Tomasko


Grow or die - it's a call to arms spreading throughout America's corporations. Growth is appearing at the top of many management meeting agendas. It's prominently featured in glossy annual reports and confidential strategic plans. It's optimistically discussed with investment analysts. It's pros and cons are quietly debated around the water cooler and on the e-mail.

And none too soon.

American business people have always preferred growth to contraction. It is an idea deep in the culture. Maybe it's something in the water. Maybe it's lingering memories of "manifest destiny," an idea once studied in an otherwise forgettable history class.

The frontier has always played a big part in American history. Horatio Alger's "rags-to-riches" tales are entrenched in our folklore. We are a nation of immigrants, people attuned to breaking away from something old, to looking for something better. When we filled the continent, and expanded our living space through acquisition and annexation, we focused offshore. Today multinational isn't a particular type of company, it is a dimension of growth attractive to many American businesses. Increasingly, though, contemporary frontiers are not geographic, they are intellectual and technological. These will be the drivers of future growth and expansion.

Our best business heroes - Henry Ford, Thomas Watson, Steve Jobs, Akio Morito, Sam Walton - they are all people who have taken an idea, or a technique that embodied it and grown it. They made something happen, where before there was nothing.

That is the kind of challenge that gets the adrenalin moving, the morale up. It's what makes it exciting to wake up in the morning. It's an excitement easily appreciated, regardless if it's driven by a personal vision or fueled by a team project whose goal is bigger than what any of its members could accomplish alone. It's a challenge sorely needed after a decade of dispiriting downsizing and making do with less.

Build, don't destroy
The main benefits of cost-cutting are past. Operating from a low-cost position is something many in business have come to take for granted. It's a minimum requirement, an admission ticket to the competitive arena. It may help keep the wolf at bay, but cost reduction alone won't take a business anywhere. At some point it also becomes very hard to generate any enthusiasm for the next round of downsizing.

Downsizings inevitably lose the wrong people. Bright, aggressive, self confident and independent employees are usually among the first to accept voluntary severance or early retirement offers. Leaving the company, unfortunately, with a higher percentage of people with exactly the opposite traits - not always the best foundation for the future.

Mobil Corporation, now combined with Exxon, worried about the dearth of new blood. "Most of us have stopped bringing in young talent in adequate numbers to replace the talent that will be retiring over the next five to ten years," lamented Rex Adams, a Mobil vice president. This is a real danger of the contraction mind set. Most downsizing is done very myopically. Today's cuts go to tomorrow's bottom line, but their positive impact can be too easily reversed by serious skill shortages lying just over the horizon.

In contrast, if you have a chance to visit very long with Wayne Calloway, PepsiCo's chief executive, you are bound to hear him implore: "You can't save your way to prosperity." Growth is one of his favorite subjects, and for good reason. PepsiCo's sales have grown at the annual compound rate of 17%. He'd probably call it "the real thing" if that phrase hadn't been usurped by another beverage company.

It's getting harder and harder to justify mega job cuts with vague references to "staying competitive" or "overseas competition." Is the size of your payroll really the biggest impediment to its success? Or, as is increasingly becoming the case, are your employee's contributions the key to the business' future?

The limits of cost-cutting
A recent study sheds some light on this issue. The U.S. Census Bureau closely examined the performance of over one hundred thousand plants during the past decade of downsizing. What they found contradicts much of today's conventional wisdom.

Their research shows that companies increasing productivity and employment are the ones that also do the best job growing the value they add to their customers. These growth-oriented upsizers had more than five times as great a difference between their manufacturing coast and price they received as did those suffering from downsizing myopia. They weren't slackers in productivity growth either - it was almost as high as those who relied exclusively on painful cutbacks to increase efficiency.

A Boston-based consulting firm considered at the same issue from a different angle. They examined how well the stock market values growth. Its results indicate the chronic criticism Wall Street receives for being shortsighted may be a bum rap. After studying 800 public companies, the firm found that not all profit dollars are equally valued. Those generated by by cost-cutting count, according to the stock market, only half as much as those derived from higher sales. The stock price of companies who achieved better-than-average earnings from better-than-average revenue growth grew twice as fast as those whose ahead-of-the-pack profits came from internal economies.

Cost cutting may seem easier, but the benefits of growth last longer.

Many businesses are coming to appreciate that "lean and mean" is a slogan, not a strategy. It's also a slogan that, if over-applied, can result in a company better characterized as "lean and lame." Cost-reduction is a tactic, not a business objective. Downsizing and reengineering can masquerade as a plan, but they alone won't necessarily provide top line growth - or a future for the business.

You can't rent your future
Outsourcing has become a widespread practice in American business. Contract-out what others can do better, or cheaper is its rallying cry. Create, perhaps, a "virtual corporation," one whose lean compliment of employees exist primarily to coordinate the work of subcontractors. An enticing vision, one with great appeal to headcount-reduction-driven business people. But it is also a dangerous one. It is a vision that can lead a company to cutting its heart out, if the heart is not carefully identified before the company is deconstructed.

Outsourcing does have its place. It is a useful way to move overhead and routine administrative activities out of core of a business. It can, at its best, keep managers from blurring their vision about what elements of the company will really fuel its growth. Be wary, though, of overdoing it. Outsourcing is no substitute for growth.

The question "should I make something inside, or would it be better to purchase it on the open market?" is really a question about where the seeds of a businesses' future are to come from. Sadly, it is too often a question answered only with reference to today. A particular part or component may be cheaper, today, to buy rather than build. But what else may get lost if it's not made in house?

The experience and knowledge that are acquired in parallel with making something, for one thing. may never be gained. So might the new technologies that know how could lead to. Nor will outsourcing make any easier the discovery of new or spin-off products than may emerge as an old one fades in usefulness.

Manage as if the future really matters
The future is what growth is all about. Industry has worked overtime in the last decade to earn more money by being more productive. From here on, for many of us, earnings growth is going to have to come from revenue growth.

In the long run, growing profits by cutting people and costs is - by definition - a dead end. It is even self-defeating. As a company becomes better and better at cutting, it eventually run out of things to trim. It's not just that the business runs out of what productivity experts like to call "low hanging fruit." Eventually there is no fruit left at all, no more processes left to reengineer. If is possible, if care is not taken, to work very hard to fine-tune a source of diminishing payback.

If managers lack a clear understanding of what really creates value for their customers, both today's customers and tomorrow's, they may find themselves in a very dangerous situation. They can fall into the trap of mindlessly lopping off expenses, all the time strangling the business' ability to generate new revenue.

Consider the plight of Zenith Electronics Corporation. This U.S.-based television maker has been under siege for years from Asian consumer electronics manufacturers. After a decade of downsizings the company halved its payroll. Was this a necessity for survival of the business? It possibly was, but it also resulted in Zenith leaving money on the table when demand surged for its new hot product, flat computer screens. Compaq and other personal computer makers were left looking for other suppliers when Zenith's chronic cutbacks left its manufacturing operation too lean to fill all its customer's orders.

Emerson Electric's about-face
Has your boss ever asked you to tell him what he was doing wrong? If you dropped in on a recent meeting of Emerson Electric Co's fifteen most senior managers you would have heard Chuck Knight, their chief executive, do just that.

Emerson makes a lot of mundane electrical products: garbage disposals, pressure gauges, refrigerator compressors, and power tools . But they are not a mundane company. Emerson is one of the few In Search of Excellence companies whose performance would warrant a place in the book's sequel. They've had an unbroken string of 36 years of increased earnings. This rare track record stands despite Emerson being in global markets so hotly contested that customers haven't allowed significant price increases in over ten years. In short, Emerson is one of America's productivity superstars. And Chuck Knight's forceful leadership one of the chief reasons behind its success.

He is a very direct man. Knight expects very direct answers from his managers. When he asked them for criticism, they didn't hold back. While acknowledging that Emerson is already more productive than its Japanese competitors, further gains from cost reduction, their forecasts indicated, would be marginal at best. While they felt pride in profit margins far higher than the industry average, revenue growth was stalling - stalling because Knight was directing all their attention to the bottom line. This was WRONG, they said.

Where was the business going, they wondered? Was the path that served it well in the past the right one to take it safely into the next century?

Focus on the top line
Knight quickly got the message. No laggard in the vision-department (he started worrying about overseas competitors nearly a decade before most U.S. manufacturers), Knight quickly realized that productivity was yesterday's battle and that his management team was right about where Emerson's future advantage lay.. He soon announced a company-wide top-line growth program. Noting that Emerson invested more than $300 million in the past five years in restructuring and cost reduction, Knight pledged - publicly in the company's annual report - an equivalent amount over the next five years to go for growth programs. Emerson's millions are targeted to be spent on:

· New products - introducing twice as many as in the past five years
· Geographic expansion - doubling sales in the Asia/Pacific region over the next five years
· Joint ventures , and
· Acquisitions.

Changing leadership at the top is a common, but drastic remedy to slow growth stagnation. It's also one fraught with many perils of its own. A better solution may be for a businesses' managers to light a fire under their chief executive. All it takes is a leader with enough self-confidence to be able to listen to their concerns, or maybe one bold enough to regularly ask what's on their minds. It also takes followers with the courage to speak their minds without fear of being seen as disloyal. A rare combination? Perhaps, but one that when present can quickly galvanize major change.

Fear can destroy the future
A sound approach to growth is the best insurance that a business has a future. To be sound, though, its needs a strong foundation. It needs to be a plan that will motivate people to move forward. It has to be based on something more than fear. There are limits to how far fear can effectively motivate.

Cost-cutting has been largely fear-driven - fear of lower-cost competitors, fear of impatient stockholders, fear of fickle customers. This kind of motivation may be necessary in the short run. It is a good way to wake-up a sleepy company, or to induce a crisis mentality in a laggard. But it wears thin after a while. It is dispiriting and burnout-inducing. It puts us on constant guard, worrying about covering our backs, watching our flanks - postures that makes it easy to miss those subtle, future-oriented growth clues the market constantly offers.

Fear is also an emotion that does its greatest damage when it blinds you to the strengths that exist inside.

If a growth goal is to endure is has to come from inside the organization. Emerson's growth prospects are brighter because they trickled up from the managers directly responsible for serving the company's individual markets. They weren't imposed on the company from Wall Street or from its strong-willed CEO.

Psychic benefits
Growth has many financial rewards to offer. But it also provides the opportunity to forge a link between the material world of a business - products, money, promotions - and the "softer" needs of the human psyche. Being a part of something bigger than ourselves, building something that can outlast ourselves - these are important cravings. They offer a chance to grow personally, to forge new relationships, acquire new talents, challenge old assumptions. Growing a business and growing a person have a lot in common.

They are certainly mutually interdependent. Wayne Calloway of PepsiCo appreciates this connection. He wanted PepsiCo to be a company that offers more than the daily grind to its managers and employees. To achieve this goal, the company has to keep people energized, to become it a magnet for new talent and new ideas. Without an orientation to growth and building, what is left but slow motion death? Good, energetic people leave and those remaining turn inward and build Byzantine bureaucracies instead of strong market positions.

Let's be fair, though, to downsizing, and its trendy cousin, reengineering, These tactics do have a place in the manager's toolkit. They are not always the antithesis of growth. sometimes they are its prerequisite. Like many unpleasant medicines, they hurt while curing. Sometimes they make up for past errors, other times they set the stage for the future.

Moving to the a buisnesses' "next level"of growth almost always requires pain for the gain. Established ways of transacting business must be put aside. A new perception of the marketplace, and how the company intends to thrive in it, first must be acquired and then reflected in the business' structure. New ways of approaching customers, competitors and products need to be reintegrated into the core of the business.

Many years ago I was an advisor to the president of the Burlington Northern Railroad. His main concern at that time was running the railroad as efficiently, especially in minimizing the number of new locomotives he had to purchase each year.

Like many people in his industry, he was well immersed in railroad lore. Photos of large steam engines, long gone, lined his office. Models of sleek, efficient diesel trains painted in the company's new, bright green logo dominated the tops of his bookshelves. He was clearly a railroader . He even offered the use of his private railroad car to use to conduct my efficiency study.

Breaking a railroad free from its old ways
He, like most railroaders of his time, hated trucks and truckers, a natural reaction given the competitive threat they posed. He hated the fact they rode on taxpayer subsidized highways. He hated the fact that, unlike his capital intensive railroad, trucking was a relatively easy busy to enter. And he especially hated the fact that they were stealing his customers.

What he, and many of the company's other executives chose to ignore was that truckers were also customers of the railroad. At least some were, those that took advantage of the service the Burlington Northern and other railroads offered to have their trailers hauled over long distances on top of specially designed flat cars, piggyback style. Top management's ambivalence about the trucking industry was mirrored in the lack of aggressiveness the railroad took to market this service. In 1981 the Burlington Northern actually ranked at the bottom of the U.S. railroad industry in the performance of this "intermodal" business.

At that time time railroads were verging on experiencing the kind of massive upheaval that jolted the telephone industry in the mid-1980s and health care in the mid-1990s. Congresionally-mandated deregulation was about to change all the rules about how successful railroads were run.

Converting competitors into customers
Rising to meet this challenge was one bright, aggressive, team-oriented middle manager, buried in the Burlington Northern's backwater marketing department, Bill Greenwood. With his bosses' OK, he took charge of a recently formed intermodal business unit.

From that obscure power base Greenwood took on every assumption the railroad's executives had about truckers being, at best, a necessary evil. Looking outside the ingrown traditional boundaries of the industry, it was clear to Bill that deregulation's new pricing freedom would encourage many Burlington Northern's customers to move their good out of railroad box cars and into containers and trailer trucks. Bill, a natural optimist, saw this as a great opportunity for the railroad to grow the intermodal business.

The growth team
Not wanting to challenge the entrenched power structure singlehandly, Greenwood assembled a team of six like minded people from across the railroads' functional fiefdoms and from outside the industry. By using a series of carefully crafted carrot and stick scenarios they slowly but surely focused middle and senior manager's attentions on the opportunities of forming alliances with the truckers. They backed these projections up with detailed blueprints for constructing 22 intermodal hubs at points where the Burlington Northern freight tracks intersected the most heavily trafficked interstate highways.

They scoured the railroad, looking for opportunities to cut costs to raise funds to build these hubs. After they got the green light to go ahead, they even hired ex-truckers to run them. It took years of political infighting and a healthy dose of what one team member termed "Jesuit management" ( "It's always easier to ask for forgiveness than permission - if the new idea works nobody will ask if it was approved in advance, if it fails the reason you are fired will have nothing to do with your failure to secure an advance OK" ).

The rest is history. The intermodal concept was fantastically successful. Burlington Northern became the nation's number one intermodal carrier and a new billion dollar business was built in less than ten years.

By that time my client had long since retired. Who had his job? Bill Greenwood, of course. And as for me, I should have taken my old clients offer to ride across the Rockies in his private car back when it was extended. These days, Burlington Northern's executives are too busy for that sort of thing. They all fly on commercial jets.

Growth requires more than the right plan
Achieving growth objectives requires more than the right plan, analytic technique or consultant. It requires a skillful custom blend of strategy, organization and people.

· It requires a strategic path that connects the demands of the marketplace with the inner world of the company. There's more than one way a business can grow; there's more than one way a company can deploy its talent. In a given situation, some paths are more promising than others.

· It requires an organization that focuses its people's attention on the growth issues that matter most to the business'' success. This sounds simple, but the net result of most of today's organizations is a blurred focus, a sense of distraction on the part of many of those the business depends on to be alert to carry out its plans. Most corporate structures are monuments to past successes, not power bases for future growth.

· Finally, it requires a careful match between employee capabilities and the work at hand. Too many businesses are like the shipwrecked sailor who attempted to cross a rough ocean with a crew that had never left coastal waters before.

The book is based on a simple premise. When it comes to growing a business, what really counts most is people. Strategies and organizations only exist to help channel people's efforts. Debates about the future that lead to new insights about the marketplace occur among people. New ideas are created, nurtured, championed (and squelched) by people. The Herculean efforts required to crush a sales target or produce and ship a critical rush order come only from people. Change happens only when people change. Growth happens only when people grow.


© Robert M. Tomasko 2002

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