Chapter 10
Changing Coiurse to Sustain

Hybrid growth strategies
Changing course
Rethinking Darwin
Survival of the luckiest
American Express
Change begins by unlearning
Levers of change


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Chapter 10

Changing Course to Sustain Growth

Excerpt from Go For Growth

By Robert M. Tomasko


Off-road driving is fun in a 4x4, torturous in a Lincoln Town Car. A minivan makes great sense when kids and car pools dominate your driving time; an Audi TT can ease the pain of an empty nest. Long, straight Western interstates were made for Detroit's muscle cars; the Pacific Coast Highway cries out for a BMW convertible.

Different paths require different vehicles. Different strategies for growth require different organizations to carry them out. The previous chapters highlighted the differing organizational characteristics of companies on each of the five growth paths. To summarize these, three growth paths are pure-breds and two hybrids.

· Most Rule Breakers have organizations in which the function of Direction predominates. Many are even called "extended shadows" of their founder or chief executive. They still require mechanisms to provide Propulsion and Stability, but these are far less developed - especially those contributing to Stability. And this is the way it needs to be for a Rule Breaker to thrive in the environment its growth path transverses.

· Game Players do better with vehicles able to steal market share from tough competitors, ones able to do well in double digit growth rate markets. For them Propulsion is the most vital function of their organizations. Game Players know where they are going; they just need the energy necessary to get there.

· Specialists also over-emphasize some aspects of their organizations, but for their slower and focused path to growth Stability is the organization characteristic that serves them best. Which, again, is not to say the do not need direction or propulsion, they just require - compared to companies on the previous two paths - proportionally less to be successful.

· Rule Makers are more complicated. They tend to blend strong Bill Gates or Michael Eisner-style Direction with well developed approaches to provide strong internal Stability. This combination may even help them carry this sense of stability to the outside marketplace.

· Improvisers are also a hybrid. Their unique ability to roll-with-the-punches and adjust quickly to chaotic markets is driven by an emphasis on Direction (like that provided by Louis Gerstner at IBM) coupled with strong attention to using the tools of Propulsion to rapidly shift course.

Another possible combination of organizational characteristics remains. It is the combination of Propulsion and Stability. Were this vehicle a boat, it would have a large hull and a powerful engine to haul it around - but no place in particular to go. This category, perhaps, should be reserved for one-time successful companies that have lost their will to grow. A number of businesses fit this type, they are just not the subject of this book.

Blending the paths
Few companies pursue growth on only one of the five paths because few market conditions are so neatly clear cut. Paths can be blended to:

· best fit the complexities of current industry realities

· adapt to changing market conditions by putting out new growth feelers

· keep a business from getting "over adapted" to its current situation - always a path to eventual decline

· hedge bets - multi product, multi path companies tend to last longer than single-focus ones.

Hybrid growth strategies
There are increasing instance of businesses following hybrid growth directions:

· For many years Xerox has nurtured its Rule Breaking office automation group within a largely Game Player corporate structure.

· More recently Matsushita gave up its Rule Making ambitions to dominate the course of the emerging "digital universe" when it sold most of its Hollywood moviemaker, MCA. Realizing it lacked the clear sense of Direction needed by successful Rule Makers, it is refocusing itself to follow a mix of Specialization in making electronic components and Game Playering in the consumer markets it already knows well.

· In the U.S. steel industry two rivals, Rule Breaker Nucor and U.S. Steel (once an industry Rule Maker, now a hybrid Improviser-Specialist) are following the cooperation-oriented New Rules for Growth. They are setting up a Rule Breaking joint venture aimed at revolutionizing the American steel industry by finding a new way to turn iron ore into steel.

· Specialist semiconductor maker, Integrated Device Technology, realizing how hard it is to mix the Rule Breaking orientation with its own, allowed its vice president of engineering to "spin-off, in-place,"forming a new semiconductor company right in the middle of Integrated Device's office space. The new company, called MoST, Inc., intends to dramatically speed up how computer screens draw graphics. The parent owns 10% of its stock, provides overhead services, and keeping the proximate operations sufficiently blurred so visitors walking through its offices cannot tell where one begins and the other leaves off.

Internal departments have their own growth paths
It is even possible to subdivide a business into units according to growth orientation.
Functional departments tend to identify with the five growth paths along these lines

· R&D often has many Rule Breaker characteristics.

· Sales and marketing departments are classic Game Players.

· Manufacturing and many administrative units share characteristics with Specialists.

· Most top managements seem to follow either the Rule Maker or Improviser orientations.

A "shoe-less" shoe company
Nike, the athletic footwear "maker," has used this logic to guide its internal organization development. The word "maker" is in quotes because Nike does not really make shoes, at least few people who work in its organization do. Nike follows a growth strategy that combines Rule Breaking with Game Playing. To keep top management attention on this blend, and what needs to happen to keep new product ideas moving into the appropriate marketing channels, Nike outsources manufacturing, distribution and retailing. These are all provinces of the Specialist, an orientation that Nike feels would dilute its focus on R&D and brand marketing. Nike even encourages its contract factories to make shoes for Adidas and Reebok, two of its strongest competitors. This gives Nike flexibility in not feeling pressured to keep them busy when Nikes's marketing focus suggests products from another source would sell better. Nike believes in the value of organizational learning, and wants its suppliers to acquire it, from what source is at hand.

Some combinations are easier than others
Some growth paths blend easier than others. Because of their shared organizational characteristic Game Player/Improviser, and Rule Maker/Specialist pairings can often find some common ground. The general rebelliousness of most Rule Breakers tends to keep companies on this growth path from mixing with others. The visionary Direction inherent in Rule Breaking is very different from the shorter-term craftiness that Improvisers use to set a course.

Other combinations are possible, and can be observed in multi business companies like General Electric and Sony that operate in diverse businesses. One principle to bear in mind when organizing businesses with diverse growth paths under one corporate umbrella, is not to try to tightly integrate things that are not meant to be tightly integrated. This is a sure way to kill off growth potential, as Exxon found when it (a Specialist cum Rule Maker) tried to diversify into computer chips and office automation (then dominated by Rule Breakers). The more the businesses resemble combinations of oil and water (Rule Breakers and Specialists; Rule Breakers and Rule Makers) the further apart - organizationally - they need to be. This is when structural forms like autonomous divisions, holding companies and joint ventures are most useful.

In theory, almost any blending of paths is possible along as the right organizational accommodations are made. Chemical opposites, like oil and water, can mix if put in a closed container and shaken with sufficient force. This requires the continual additional of energy to keep their molecules in motion, just as ongoing management attention is required to operate businesses on divergent growth paths under the same corporate structure. The important consideration here is one of opportunity costs: might not the company's overall performance be better if this management attention were directed elsewhere?

Changing course
Yesterday's growth strategy is frequently what drives today's organization. What is needed, instead, is today's organization providing the foundation for tomorrow's growth path. In business schools a great deal of time has been spent debating the "chicken-and-egg" issue of which is more important, strategy or structure, the growth path or the organization that travels it? In the real world, the issue hardly exists. Every established business has both, and each needs to be in sync with each other. The only time strategy is of paramount importance is before the company is launched, when it exists only as an idea in the minds of its founders.

This issue does become of renewed importance, however, when a company reaches the midpoint of its growth path. That is when, assuming the business has been fairly successful, the organization most reflects the requirements of the current growth path. The midpoint is when the company operates most efficiently, and when its sustained growth is threatened the most.

Rethinking Charles Darwin
Both executives and academics have long tried to apply ideas about biological evolution, concepts such as "genetic mutation" and "natural selection" to help them understand how businesses grow. The most recent of these is highlighted in the popular management book Built to Last , by James Collins and Jerry Porras. Their research, a great improvement on the flawed methods of In Search of Excellence , suggests evolutionary processes are a great way to stimulate business growth. They urge company's to follow a "branching and pruning" approach to progress: keep adding variety, "branches," to the business while continually pruning the deadwood (Darwin's idea of "selection"). The result, says Collins and Porrus, is a collection of healthy businesses well positioned to prosper in a constantly changing environment. This approach can work well for some companies in the near term (especially Improvisers), but it is based on too flawed an understanding of how evolution really works to be a useful formula to follow to sustain growth over the long haul.

In 1859 Charles Darwin launched a new way of thinking about biological development. He did not answer all the questions about how species evolve, nor are his generalities especially sound when used to describe how businesses behave. More recent research has suggested some better explanations Darwin's theories imply there is some long, single chain that connects all species. But studies done since he advanced his ideas have failed to show, for example, how birds descend from reptiles, mammals from simpler quadrupeds, or the four legged creatures from their assumed marine ancestors. Gaps, more often than not, tend to appear between different species. Some of these may be due to missing, undiscovered biological evidence, but they are sufficiently numerous to suggest Darwin's paradigm needs some rethinking.

Evolution is seldom evolutionary
Another English scientist, D'Arcy Thompson, spent years applying the tools of mathematics to understand the relationships between biological forms and the processes by which they grew. His bottom line: a biological principle of discontinuity. Some species just cannot turn into others. Their highly developed forms and process will not allow it. When big variations occur, they are much more likely to be abrupt, not orderly and continuous, as Darwin implied. "Higher forms" of life have not necessarily come from ones just below them on some "ladder of development." They are just as likely to have come from the most elementary forms that have always been around.

Or, to translate this to the business world, it is still possible for a Harvard-drop-out to create a multi billion dollar, high growth company from a garage start-up. After becoming well established, businesses do not grow by successive minor changes in strategy and organization, but by large-scale transformations that involve the corporation as a whole. This is something like the shift, for example, of a Rule Breaker to a Game Player.

Survival of the luckiest
Harvard paleontologist, Stephen Jay Gould, has even suggested the notion of "survival of the fittest" be replaced by something closer to what studies of fossil remains suggest: "survival of the luckiest." He traces biological history as a story of massive removal of species (from disease, predators, ice ages, etc.) followed by a period of differentiation among the survivors. Growth, from his perspective, is driven as much from events in the surrounding environment, than from any code plugged into the genes.

Maybe so, but chance still favors the prepared company.

Harvey Golub, American Express' former chief executive, worked hard on the preparatory activities. He undid his predecessor's Rule Making strategy of attempting to be a "financial supermarket" - a path making little sense in an environment populated with many Rule Breakers and strong and successful Game Players. Instead of variety, Golub selected the company's charge card business as the center of future growth. He has few illusions about the difficulties of this path, considering the already established strengths of competitors such as Visa, A.T. & T., and Sears. Golub believes, for American Express and its competitors, that every business is destined to ultimately go out of business. The only issue, as he sees it, is if the wounds are to be self inflicted by American Express changing its product mix, or suffered at the hands of competitors.

Evolution at American Express
Goulb, at least, has American Expresses' history working it its favor. If he is successful, this will not be the first time American Express has sustained growth through a major course change. The company, years ago, actually was an "express" company, hauling business freight along the lines of today's Federal Express or UPS.

Golub is attuned to a concept learned in a previous career as a consultant, the "S" curve. Most every product - or new industry, for that matter, goes through a period of development that, when plotted, is the shape of that letter. When the effort that goes into a growth initiative is compared with the return from that investment, three distinct phases are common. First, progress is slow and returns minimal or non-existent. Then, in the words of "S" curve charter Richard Foster, "all hell breaks loose,"and growth runs wild. Then a point is reached when new dollars invested in the growth initiative do not produce the high return of previous investment. Progress, in the lab or marketplace become more difficult. Golub's American Express is at the upper end of its curve in its charge card and travelers check businesses. Renewed growth will have to come from paths that begin at the bottom of the curve.

Successful course-changers
In looking for these Golub will have many examples of companies that sustained-growth-by changing-course to consider. These range from package haulers to coffee shop operators and computer makers.

· Emery Worldwide was once a Game Playing Federal Express-look-a-like. But its competitive position was weak. Federal Express picked up more packages at Manhattan's World Trade Center than Emery did throughout New York State. It was also plagued by high costs. It cost Emery $16.00 to pick up a a one pound package, for which it only charged customers $6.00. Something had to give, and it was Emery's Game Player-growth path. Now Emery refuses to haul letters and small packages. All resources are concentrated on freight weighing over 70 lbs. Changing to Specialization has brought large increases in revenues and profits, and Emery's share of its market segment is twice as large as its nearest rival (another long-time Specialist, Burlington Air Express).

· Emery's nemesis, Federal Express, has in less than a quarter of a century shifted path from its Rule Breaking creation of a new market to, for a brief period, a Rule Making dominance of its industry. Attempts to sustain its position by reverting to Rule Breaking - its ill-fated Zap Mail fax delivery service - and emergence of strong competition from UPS, Airborne and even the U.S. Postal Service, forced it to shift into its current Game Player mode.

· Emerson Electric, the manufacturer whose rediscovery of growth was described in an earlier chapter, is transforming from a Specialist to Game Player. Two well known consumer beverage makers, Snapple and Starbucks, have made similar changes.

· In the early 1980s Franklin Computer Company started as a Game Playing imitator of Apple Computer's products. When forced from the cloning business, Franklin repositioned itself as "Franklin Electronic Publishers," a sales leader Specializing in the electronic language translator and reference book market.

· Apple Computer itself began as a Silicon Valley Rule Breaker, for a time attempted to be a Game Player, but was forced by IBM and Microsoft to follow the Improviser path. Some industry analysts see a bright future fro the company, but one that follows the Specialist's niche path.

· American Express' Golub may find it easier learning from others in the financial services industry. Fortunately, examples of growth shifts, both good and bad , abound in banking. Bankers Trust, a once poor-performing blend of Game Player/Improviser dramatically turned its performance around when it shed its branch network and became a Specialist/Game Player, focusing on fee-based services for corporate clients. One of these, its derivatives products, led to unexpected consequences fro its largest customers and the bank has moved to the Improvising path. Bankers Trust's Manhattan neighbor, Citicorp, remained a full-service bank but, during the same period, has gone from Rule Maker to near-failing Improviser to rebounding Game Player.

Change begins with unlearning
Radical change, as these companies experienced, does not start with a learning process. Instead, it commences with some serious efforts at "unlearning." When ex-Nissan executive Marvin Runyon became U.S. Postmaster General he quickly observed that "It wouldn't hurt to loose some of the institutional memory here." Downsizing may be one way to do that, but it is usually self-defeating. The people most needed to grow the business are usually the first to leave.

The Naskapi Indians had an approach to planning that made it easy to forget old paths. The Spanish explorer Cortez, in the early 1500's, conquered a much larger and better armed Aztec nation only after scuttling or sending home all the ships that brought him to the New World. His soldiers had no choice: move forward or perish.

Where does all this new, growth-inducing wisdom come from? A strong willed executive, coping with a grow-or-perish crisis, is one source. But hard times and survival-at-stake are not the only ways change happens. Chuck Knight at Emerson moved when profits were strong, so has Federal Express' Fred Smith and many others.

Ed McCracken is no modern-day Cortez, but as chief executive of Silicon Graphics he has made use of management practices that help employees pay attention to life as it is, and can become - not how things used to be. Most major reorganizations - essential in any shift from one growth path to another - are handled very poorly in most companies. This is often because all the attention is giving to figuring out what comes next, and too little time devoted to closing the books on the past.

Before reorganizing: hold a wake
McCracken did not fall into this trap. When growth and new market conditions required a split of two Silicon Graphics divisions into five, McCracken did not just issue new organization charts, job titles and tell everyone to get back to work. He hired a New Orleans band and encouraged employees of the two groups to stage a wake. They did, filling two cardboard coffins with representative paraphernalia from each about-to-disappear unit. They were buried on the company's Mountain View, California campus - visible reference points for employees who might feel a need to mourn the old before getting on with the new. McCracken believes fun and a little irreverence can make change less scary. He's right.

Avoid delusions
In addition to burying memories of past successes, successful course-changing often requires giving up some current illusions. Xerox, a dyed-in-the-wool sales-driven Game Player has harbored hopes for many years of finding renewed growth through Rule Breaking R&D. Those are two growth paths difficult to blend. Companies obsessed with winning every game find it very hard to learn a new one. Xerox may do better reviewing its early history when it came upon the product the obsoleted the mimeograph. Xerox did not invent xerography; it bought it from an outside inventor.

Sony is, in part, another corporate want-a-be. It is the world's master at miniaturization and has one one the strongest brand names in consumer electronics. But it also has a history of failing at controlling a market's development. Its pioneering VCR product, betamax, lacked all the features consumers wanted, and a rival technology (VHS) became standard. Other missteps occurred in software and digital audio standard setting.

A strategy Sony pursued to maneuver around these failures was an attempt to become the Rule Maker controlling both the "hardware" (Sony's entertainment products) and "software" sides of the emerging digital entertainment industry. To provide "content" that can potentially be exclusively adapted for its products, Sony purchased Columbia and Tri-Star studios, and entered into the electronic publishing business. Since Sony has faced severe challenges combining the Rule Breaking electronic path with the Game Playing show business. Rule Makers seldom emerge by blending these other two paths.

Sony produces absolutely incredible products; it might benefit if it stops fighting its old battles. Sony can clearly be the 3M of global consumer electronics. 3M has had a much-envied track record of growth - achieved without it ever wanting to be the "Microsoft of abrasives."

Know when to temporarily throw-in the towel
Few companies have the patience, or realism, of French clothing maker Devanlay S.A. This company owns the Lasoste brand whose crocodile-crested polo shirts were once fashion icons. Eventually success led to ubiquity, and the crocodile logo appeared on a wide assortment of clothing, much of it not especially well made. Its exclusivity gone and its quality reputation tarnished, Devanlay did the only thing that made any sense: it took the product off the market until consumer memories of the tarnished image faded. Later, it was reintroduced, now only on 100% cotton shirts, all made in France and only sold in carefully selected upmarket outlets.

The lesson: growth minded businesses sometimes have to face the reality that there are times when "you just can't get there from here." This was an injunction that eluded John Scully, former Apple Computer chief executive. In spite of his Game Playing, consumer marketing career at Pepsi he put a great deal of effort to restore Apple's growth by attempting to take the company again down its original Rule Breaking path with the development of the hand-held electronic communicator, the Newton.

At times it seems almost every example of success at renewing growth can be countered with missteps or failures. This may be just the nature of business. But there are ways course changes can occur more smoothly and successfully.

Start before you have to
It always helps to start before you have to. Companies able to challenge their own orthodoxies, to do double- not just single loop learning, will always come out ahead. Single loop learning is what is done when a deviation from what is expected is caught and fixed. Double-loop, on the other hand, is when the existence of deviations or performance shortfall is used to question the original assumptions behind the appropriateness of the performance targets. Declines in market share may be trying to tell a Rule Breaker it is time to consider becoming a Specialist. Surges in demand can tell an Improviser it is time to consider the Game Player's path.

Beware of too-much positive thinking
Harvard behavioral specialist Chris Argyris feels this kind of awareness is unlikely to happen if the company is too committed to the power of positive thinking - always looking for only the bright side of things, killing off the messengers carrying early warnings of change. This kind of atmosphere, common in many businesses, forces managers to censor, hide or over-simplify problems when they arise. It is also an approach that treats employees condescendingly, by assuming as Argyris says they "can only function in a cheerful world, even if the cheer is false."

Sending managers to classes in organizational learning is seldom sufficient to change these inbred patterns. Structural changes are also needed to provide power bases for people with insight into the new directions for growth a business may need to consider. This is a role consultants are sometimes asked to play, but they often lack the position and continuity to fight for the changes that need to happen.

Create a group for growth
Alternatively, companies may want to build windows to future growth opportunities into their structure by creating a parallel hierarchy, mirroring the existing managerial structure. This would be a home for bright individual contributors, people more concerned about the "white space" on the organization chart than being responsible fro managing ongoing operations. Getting one of these senior "architects of future growth" positions would be just as difficult as being promoted to top management - only the focus and expectations would be different. Individuals in these jobs would spend more time worrying about what the company is not doing than what it is. These positions, as a whole, might represent some form of "shadow government," concerned with planting the seeds for and nurturing the businesses' future.

Levers of organization change
Changing growth paths ultimately requires organization change. Going back to the idea of organization-as-a-vehicle-for-growth, what organization changes can bring the fastest strategic change? In the short run changes in the composition of the top management team when coupled with new performance measures and rewards linked to the measures, will move a business farthest fastest. But for the new growth orientation to stick, it needs to be reflected in a widely shared vision of where the company is going, and in the programs used to select and develop the people who will take it there. Then, when these levers for change are in place, does it make sense to adjust the structure and the systems that support it. There is little point in putting the wrong people in new jobs they are not prepared for, and expecting growth to result.

How have companies successfully kept growing over the long haul? They:

· become aware of the need for change,

· adapt the vehicle for their growth to the requirements of a new growth path., and

· change, when necessary, from one vehicle to another.

Attention is given to whatever shifts are necessary in DIRECTION, PROPULSION and STABILITY. Gaps are identified between what is happening now, and what will be needed to sustain growth on a different path.

On the surface this is an analytic task, involving examination of a variety of important details, including:

· the management team's make-up;

· systems in place for planning and control;

· what the business mission is, and the extent it is widely shared;

· how incentives are tired to measures of growth;

· how the unwritten rules are contributing or detracting from forward movement;

· what kind of structure for what kind of employees has been chosen;

· and what mechanisms are in place to coordinate everyone's activities.

Analysis is important, but, in the end, everyone of these issues has a human side. What counts the most is the impact each element of organization has on people. The bottom line of any organization is how well it positions its employees for growth. Organizations shape the way people interact. You can tell that an organization is focused on moving forward when talk about growth permeates conversations throughout the company. No business can "go for growth" unless its employees want to get there just as much.



© Robert M. Tomasko 2002

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