VideoFor the past three years, Corporate America has been nothing if not stingy. Stalled by sluggish demand, companies have slashed spending on new factories and equipment, salaries and bonuses, technology, benefits, and travel. They have exited unprofitable businesses and sold off nonstrategic assets. They have downsized, outsourced, and offshored.
Now, as the economy finally springs back to life, CEOs are ready to start spending again. But for many companies, investments in growth will produce disappointing results, predict a handful of prominent management consultants. The main reason: traditional sources of revenue growth—such as product enhancements, grabbing market share, or acquiring competitors—have been largely tapped out.
"When you look at a lot of markets, the functionality needs of those markets have pretty well been met," says Adrian Slywotzky, a leading management guru and a managing director at Mercer Management Consulting Inc., in Boston. Where does a shaving company go, for example, when it has already packed four blades on its razors? How do automakers or steel companies grow when the markets for their core products are flat? Slywotzky, for one, thinks that many companies are facing a growth crisis.
So does Chris Zook, director of the global strategy practice at Boston-based consulting giant Bain & Co. Zook says research shows that during the booming 1990s, only 13 percent of companies worldwide achieved "even a modest level of sustained and profitable growth." And he predicts that far fewer companies will be able to sustain that level of growth over the next five years.
Meanwhile, investors are bullish, coming off a year where earnings for the S&P 500 grew 18.2 percent, according to Thomson First Call. For 2004, says Thomson, analysts are predicting earnings growth will slow to 12.6 percent—but that's still a challenging goal. Based on his research, Zook says the average company plans to grow revenue at an annual clip of two times the rate of its core markets, and earnings at four times that rate. Where is all that growth going to come from?
Fortunately, consultants rarely identify problems without offering solutions—and books. (Business books on growth have become something of a growth industry themselves.) In his latest book, How to Grow When Markets Don't, Slywotzky and co-author Richard Wise, also a Mercer managing director, call on companies to engage in "demand innovation." This means that instead of focusing on improving products incrementally, companies should create new growth and value by addressing issues that surround products. IBM successfully followed this strategy in the 1990s, moving from primarily making low-margin PCs and servers to becoming a one-stop shop for high-margin IT services. Growth, comments Slywotzky, comes "not just from providing customers with better products and services, but from providing them better economics."
Zook, who advised companies to perfect their knitting in his previous book, Profit from the Core, explains how to expand into new markets in his new book, Beyond the Core. He says a company can combine high growth and low risk by moving systematically into "adjacencies"—products, services, geographies, or customer segments that are highly related, or adjacent, to the company's core business.
Other books published in the last year, also by well-known consultants, offer more or less similar answers to the growth conundrum"—books like The Innovator's Solution: Creating and Sustaining Successful Growth, Profitable Growth Is Everyone's Business, and Stretch!: How Great Companies Grow in Good Times and Bad.
Believing that experience is the best teacher, we decided not to review books but rather find out whether what the consultants preach actually works in the real world. Accordingly, we examined four companies that have adopted variants of the strategies promoted by Slywotzky and Wise, Zook, et al. They are United Parcel Service (UPS), which wants to embrace the whole spectrum of logistics services; Cardinal Health Inc., which went from $2 billion to $50 billion in 10 years; Reynolds & Reynolds Co., which was incorporated in the era of buggy whips and now offers Internet tools for its auto-dealership customers; and General Motors Co., which has leveraged intangible assets to create a brand-new technology.
Seeing the Big Picture
A key principle of successful growth is that it should add to, not detract from, a company's core business, says Wise. "The idea is not to abandon the pillars of growth, but to add to the playbook." For Zook, UPS is a stellar example of a company that has strengthened its core by exploiting adjacencies—here, new, high-growth business opportunities that also create greater demand for shipping.
Not that UPS was a slouch to begin with. From 1981 to 1991, the Atlanta-based company tripled revenues, from $4.9 billion to $15 billion. That was achieved by building on a solid brand, expanding overseas, and acquiring competitors. Along the way, the company built a network that serves more than 200 countries and millions of customers. By the mid-1990s, however, UPS was failing to deliver on its growth goals. From 1994 to 1997, revenues grew at less than 5 percent annually, as growth in the U.S. package-delivery business slowed to the single digits. Clearly, UPS needed a new source of revenue.
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