Harnessing Skills for Growth Initiatives That Work : Internally based innovation supported by judicious acquisitions have helped creative companies achieve real growth.

Most senior managers know intuitively that relying on the inspired efforts of a few maverick managers to find and nurture new-growth opportunities is a recipe for stagnation. The odds of success are long, even for the best ideas, and in most companies the number of talented mavericks can be counted on one hand. Putting the whole burden of change on their shoulders will only produce frustration for the mavericks and stagnation for the company. Success in creating new growth again and again lies in developing a systematic, organizational capability to identify, shape, and nurture new-growth initiatives. And that responsibility lies with the CEO and the entire senior management team. Of course, achieving that goal isn’t easy. Most senior managers who recognize the urgency of new growth get hung up on a series of thorny issues, such as: * Creating innovative new-growth initiatives without losing discipline and focus on the core business; * Reconciling the pressure for short-term earnings with multiplying requests for seed funding; * Supporting innovative thinkers and risk-takers without signaling neglect of the core business; * Sorting out the opportunities that could truly move the stock price from those that are likely to produce only marginal improvements; and * Finding the time to guide and coach new-growth teams without neglecting the other burning issues on the agenda. Managing these tensions is a long-term discipline rather than a problem to be solved once and for all. No single set of formulas will fit all companies. However, examining the practices of firms that have successfully fostered new-growth initiatives suggests a number of guidelines from which other companies can learn. Here are the principles we would urge senior executives to study and apply. Make operational excellence in the core business your cornerstone. It may sound like a paradox, but having an efficient, profitable core business based on high-quality products and services gives you the license from customers to go further in solving their problems. It also gives you the funds to support new-growth initiatives. The core business helps open the door to other customer needs that involve using products more effectively: No product sale, no surrounding needs to serve. Cardinal Health Inc. is an outstanding growth innovator that has never let up on operational excellence in its core business of distributing drugs to pharmacies, hospitals, and managed care providers. Even as it pursued new businesses such as pharmacy management, reimbursement services, and contract drug packaging over the past decade, Cardinal was steadily consolidating and improving its distribution centers. In 1994, Cardinal had 40 distribution centers with average annual center sales of $125 million. Today, it operates only 24 centers with average annual sales of $900 million, well above the industry average of $450 million. Every dollar saved on distribution costs becomes a dollar available for new-growth investment. This relentless focus on efficiency has allowed Cardinal to stay profitable and fund new growth (see Exhibit 1). Moreover, the value that Cardinal provides to customers in its core transaction helps grant access to many of its upstream and downstream businesses. By making core business excellence a cornerstone of growth, senior managers can alleviate concerns about losing momentum and discipline as people get excited by the sexy new-growth concepts. Just watch out for the trap at the other extreme: using the focus on core operations as an excuse to defer any serious focus on new growth. This can easily become a permanent state of mind. While there is always some improvement or change to be managed in the core business, improvements must be managed simultaneously with efforts to pursue new growth, not at the expense of such efforts. Treat growth as a discipline to be pursued at all levels throughout the company. Companies that treat growth as the purview solely of a corporate strategy or business development group rarely create meaningful, serial growth. While their participation is important, such groups by themselves may lack sufficient funds or operating experience to spearhead serious new growth. Innovative growth also needs to include operating managers as part of their day-to-day interaction with customers and the marketplace. At Cardinal, there is no corporate unit in charge of growing new businesses. Instead, everyone at the company from CEO Robert Walter on down makes growth the central concern of every day’s decisions, and every manager knows that growth is a critical component of his or her report card. Cardinal managers focus on two dimensions: absolute growth and relative growth. The absolute rate of growth supports overall financial health, generates profits to reinvest in the business, and helps attract and motivate the best talent. The relative rate of growth is important because Cardinal competes in the fast-growing health care sector. Growing at a high absolute rate while trailing the overall market’s growth rate would not be acceptable at Cardinal because it would mean that Cardinal’s offerings were viewed as mediocre or less relevant by customers. Over time, the company would lose ground. How does Cardinal get harried operating managers to focus on growth strategy? By imposing a standard that holds them responsible for the success of their businesses. Managers know that they can’t perform on the metrics of absolute and relative growth without a relentless focus on growth strategy. Of course, they also realize that building new businesses and achieving growth targets provide the critical funds they need to invest in future growth opportunities. As a result, Cardinal has grown faster than the health care distribution market by over 50% annually, not including acquisitions. Managing growth is demanding and scary. It’s also creative and energizing. Don’t hoard the experience at the top executive level. Instead, distribute both the responsibility and the opportunities to grow as widely as possible through your organization. That’s how unexpected champions can emerge from the ranks. Develop many small maverick ideas, not a few large ones. A culture of growth alone is not enough. Someone has to come up with the breakthrough ideas and translate them into real offerings. In addition, bad ideas have to be killed quickly, before they consume significant time and money. How can senior managers unleash broader creativity to fuel next-generation growth while keeping new initiatives from running amok? Part of the answer lies in devolving authority and responsibility for growth to the operating managers closest to the action. Another part of the equation is illustrated by an approach to grass-roots innovation taken by Milwaukee-based Johnson Controls Inc. During the 1990s, the firm shifted its focus from assembling automobile seats (a commodity product) to providing automakers with integrated interior modules and, more recently, with complete cockpits. Thus, it moved from simply providing a high-quality product to addressing auto manufacturers’ needs to reduce the risk and complexity of vehicle design and improve efficiency in vehicle assembly (see Exhibit 2). Johnson Controls encourages people to spend time pursuing unconventional paths of inquiry but also imposes a staged evaluation process with the goal of “failing fast” on bad ideas. Jim Geschke, Vice President and General Manager of electronics integration, describes the innovation process this way: “We have an innovation machine. The front end has a robust series of gates to go through. Early on, we’ll have many ideas and spend a little money on each of them. As they get more fleshed out, the ideas go through a gate to decide whether to continue or stop. A lot of ideas get filtered out, so there are far fewer items and the spending on each goes up.” (In simple terms, the gate consists of a cross-functional team, based within the business unit, which meets periodically to discuss new ideas and review the progress of every initiative. The team makes the crucial funding decisions.) “Several months later, each idea will face another gate,” Geschke continues. “If the idea passes, that means it’s a serious idea that we are going to develop. Then the spending goes way up, but the number of ideas goes way down. By the final gate, you need a credible business case in order to be accepted. At a certain point in the development process, we take our idea to customers and ask them what they think. Sometimes they say, That’s a terrible idea, forget it.’ Other times, they say, That’s fabulous, I want a million of them.'” Johnson Controls’ innovation process does not start with a customer survey, focus group, or other formal customer feedback. It does not have to. The company’s engineers are working on site with customers constantly and receiving continual insights from end-user research. Being steeped in customer needs means that virtually every new-growth initiative has some basis in customer reality. The company gives staff the latitude to push a project as far as it can go, even when customer demand is not obvious. “Homelink was an example of this,” Geschke explains. “It was a product that no one asked for. But we recognized that in today’s vehicles, the beautiful, highly integrated interiors are very harmonized, yet you’ve got this ugly appendage, the garage door opener, clipped on the visor. We saw an opportunity there and developed Homelink, which is seamlessly integrated into the visor or the overhead console and is compatible with every garage door opener developed over the past 30 years. It was a significant challenge for us, and no customer asked for it. We spent a few million dollars and hoped that the automakers would bite.” They did. Homelink is now available on more than 150 different vehicle models from a wide range of automakers. “Another example is our digital compass,” Geschke says. “We did some end-consumer research, and the consumers said, I’m not interested in the feature, and if I were I’d go to Kmart and stick it on the windshield and be done with it.’ But there were a couple of champions within the company who responded, Trust me, this is going to work. People are going to like it.’ And they were right. We do millions of compasses now. So we have a bit of a tolerance for maverick thinking. If there is an individual or two with an absolute passion for a new product, they can force things through the system a little bit.” Having an idea turned back at a gate is not viewed as a catastrophe or career setback. Indeed, it is expected in most cases. “We learn a lot from failing,” Geschke explains. “So if you don’t pass the gate, that’s not viewed as a miss, that’s viewed as a hit, because now we know what not to do. In telematics, we embarked on an ambitious plan and in the process learned that we couldn’t pull it off. So we retrenched, retooled, and came out with something dramatically different. Now we have a new telematics approach that is being embraced in the marketplace, partly because of the failure we experienced on the first one. “We embrace failure in general, and we encourage people to fail fast,” he concludes. “The key is to fail before the consequences are severe.” Is the Johnson Controls system for innovation the best one? Not for every business. You need to tailor gate-keeping techniques to the economic and marketplace realities of your own industry. Examine your industry, your markets, and your customers, and then develop an informed sense of the breadth of new-growth opportunities available. Then create a process finely tuned to encourage and support the right number of maverick ideas, winnowing them as needed to focus on those with real profit potential. Your new-growth process is every bit as important to your company’s future as your manufacturing process or your financial analysis process, and it deserves the same kind of attention. Shift resources from product and technology innovation to customer and business innovation. Most CEOs will tell you that growth is one of their top three priorities. Yet in terms of the time and energy they actually spend on various activities, growth usually ends up fifth or sixth. And most spend hardly any time on nurturing new forms of growth. That’s because new growth is hard. It involves leading the organization, the board, and even investors in uncomfortable change. New-growth initiatives deserve resources commensurate with their importance. Most large companies spend hundreds of millions, if not billions, of dollars on product R&D without any certainty as to which part of that R&D will turn into revenue and when. By contrast, most new-growth initiatives are starved for funding, subjected to onerous budget reviews and held to impossibly high standards of certainty about their payback potential. Since companies can’t afford to invest willy-nilly, senior managers should consider devoting 10% to 15% of their product innovation budget to customer innovation instead. L’Air Liquide SA is a great example of how a century-old, tradition-bound supplier of industrial gases was able to make this shift. L’Air Liquide: Wake-up call from customers L’Air Liquide, based in Paris, had always excelled at technical innovation, but by the late 1980s and early 1990s, revenues and operating income were stagnating and technical innovation was leading nowhere, until it was unleashed in a way that helped improve customers’ systems economics. What spurred a shift in thinking was L’Air Liquide’s first customer survey in 1989. Asked to rate L’Air Liquide’s extensive research and development efforts, customers overwhelmingly said they did not appreciate the remote, ivory tower culture of innovation that L’Air Liquide considered to be its core asset. The survey results reverberated among the army of engineers, scientists, and technically trained managers. “Customers would have had the same perception of us had we done no R&D at all,” says Jean-Renaud Brugerolle, Vice President of marketing. And why shouldn’t they? R&D was carried out centrally and focused on three main areas: new process improvements in L’Air Liquide’s own operations, new production methods, or new applications. Of the two customer-facing activities, the new production methods were yet to become fully commercialized and had had little customer exposure, whereas the new applications were often invented in a vacuum, not taking into account how they might impact potential customers’ overall manufacturing processes. Clearly, L’Air Liquide and its customers were not on the same page. As it happens, technological prowess alone would not move the company back to growth, but it did provide the seed for a new crop of opportunities. That seed came from a new gas production method. In the early 1990s, L’Air Liquide launched technology that allowed a smaller gas production facility to reside on the customer’s site, instead of large centralized plants. On-site production was less capital-intensive, and products could be customized for individual customers. One important side effect of on-site production was a higher level of ongoing interaction between customers and the L’Air Liquide staff. The on-site teams soon discovered that their industrial customers had a variety of pressing needs that L’Air Liquide might be able to address, needs such as minimizing risk, improving quality, reducing emissions, and improving their supply chain systems. Because of a company reorganization that gave more autonomy to local teams, on-site staff now had the authority and the mandate to act on new opportunities to help customers in a variety of ways. L’Air Liquide began to realize that all of its R&D and production knowledge, which it had struggled to turn into meaningful product differentiation, was relevant to customers’ industrial processes. The company gradually expanded from its core commodity gases to offer a set of new services ranging from gas management contracts to performance guarantees, chemicals management and consulting, supply chain management, clean energy alternatives, environmental consulting, and licensing of software tools and systems. By seizing these new opportunities, L’Air Liquide has expanded its potential markets, gained a greater share of customers’ wallets, and improved customer loyalty. The financial results have also been impressive. From 1996 to 2001, L’Air Liquide has seen 10% average annual growth in revenue, 14% growth in operating income, and 9% growth in market value (see Exhibit 3). Investors value L’Air Liquide at a premium: In 2001, L’Air Liquide’s market value was more than 1.5 times higher than the average market value of its top competitors and 25% higher than its closest competitor. General Motors: The buck stops here New-growth initiatives also require active, ongoing commitment by senior managers, who must be willing to visibly support the new business with their time, personal coaching, and political capital. The acid test is whether they are willing to have parts of the organization bear the pain of supporting the new initiative in some important way. Comprehensive support from senior management was invaluable to the development of General Motors Corp.’s OnStar business. OnStar offers services such as one-button access to directions and route planning; alerts to the central information center of airbag deployment; remote door-unlock capabilities; and remote engine diagnostics monitoring. It now has more than 2 million subscribers. Many initiatives have senior executive champions in the early, heady days when a new business is all promise and no one has had to make any tough decisions or allocate scarce dollars and talent. Few can point to the kind of ongoing commitment that the OnStar project got from GM senior management, including CEO Rick Wagoner, Vice Chairman Harry Pierce, and Ron Zarrella, head of GM North America. Their commitment was manifested in three ways: * A willingness to provide significant funds to build the business over an extended number of years and in the face of significant competing demands; * The conviction to disrupt activities of the core business on OnStar’s behalf, notably by interceding in vehicle development schedules, sacrosanct territory at GM, in order to accelerate factory installation of OnStar components; and * The generosity to provide a large amount of their own time and personal contacts for advice and introductions on behalf of the business. For instance, when GM decided to approach other carmakers about installing OnStar on their vehicles, Jack Smith, former CEO of GM, opened the door by calling his friend Hiroshi Okuda of Toyota, whom he’d met years before when the two companies collaborated on a production facility. Once Toyota signed on, selling the concept to other automakers became easier. If you’re a top executive, every move you make or don’t make is loaded with symbolic and psychological importance for everyone in your company. Do you want to get serious about new growth? Then take meaningful, visible steps to nurture your new-growth initiatives. Talk about them, and back up the talk with time, energy, and money. Organize to suit the needs of the new business as much as the core business. Next-generation opportunities are often materially different from the core business, with different economics, capital structures, and methods of capturing value. To succeed, these businesses need to be understood and structured in this light. This might seem obvious, but most companies have spent considerable time and effort creating common metrics, rewards, titles, pay grades, and organizational structures in order to better align their organizations. The last thing senior managers want to do is open up the Pandora’s box of exceptions. However, form must follow function, and different business structures make sense for initiatives that are different from the core operations. John Deere Landscapes (JDL), which operates more than 200 outlets for landscapers to buy both landscaping and sprinkler products, has thrived in part because it is separate from the parent company Deere & Co. Managing the relationship between the parent and the offspring represents an ongoing challenge for Dave Werning, who heads the landscapes business, and the Deere team, as they master the differences between the economics of distribution and those of manufacturing. The financial hurdle rates set for JDL are currently the same as those for Deere’s other divisions. In time, they will need to be adjusted; but for now, since JDL is growing quickly, the pressure to meet targets that may not be realistic is minimal. Werning, John Jenkins, President of the Commercial and Consumer Equipment Division, and CEO Robert Lane also must work hard to keep the JDL business separate from the equipment business. JDL was launched with a tacit agreement among the three executives: There is a wall between JDL and the rest of Deere that contains a one-way window. Werning and his lieutenants can look into Deere and borrow ideas and resources, but the reverse cannot happen. At least during its initial growth phase, JDL is insulated from the financial, strategic, and administrative pressures of the parent company. The one-way window works in small but important ways. JDL prides itself on its entrepreneurial mind-set, in contrast to some big-company processes found within Deere. “We find we can sometimes do things like buying computers cheaper than our parent company,” Werning says, “and saving every penny is essential for a startup. So I try to maintain separate systems for things like purchasing, human resources, and other administrative tasks. I’m proud of the fact that I sit in chairs that were originally bought in 1991. They were owned by Deere, which was planning to scrap them. I said, We’ll take them; they’re fully depreciated.’ That’s the way a distribution company has to be run.” In some cases, insulating JDL may be a matter of survival. The debate over co-locating dealers with JDL outlets is an example. It’s tempting for Deere management to push JDL to create new store branches in locations that work for Deere dealers but would not work for JDL. That would amount to hijacking JDL’s business in an attempt to benefit the core business. Adapting that strategy could cripple or even kill JDL. So far, they’ve resisted the temptation; the one-way window is intact. How the relationship will evolve as the offspring grows remains to be seen. But for now, the sanctity of the one-way window has given JDL and Werning an important margin of grace within which to explore a new way of doing business. It’s a lesson in the importance of thinking through and respecting the structural requirements of your new-growth initiative rather than trying to shoehorn it into the mold of other corporate divisions. Use selective acquisitions and alliances to catalyze growth. Many companies that decide to pursue new-growth opportunities try to do it entirely with homegrown resources. In terms of staff, responsibility is often passed to strong performers who are already stretched thin or to people who have been passed over for other opportunities and may be mediocre performers. In terms of hard assets, companies often try to make do with what they already own rather than looking outside the company. While it is important to save money and use available assets when possible, most new-growth businesses require people and assets that differ from the core business in some important way. Selective acquisitions can fill this gap. Just as it is crucial to develop the right organizational structure and incentive systems for new ventures, the same is true of the asset system. When Deere wanted to enter the landscape materials distribution business, it did not develop its own product line and add it to existing dealer locations. Such an effort would have taken a lot of time and resources while resulting in an inferior distribution network. Instead, the company acquired two large distributors that immediately gave JDL scale and desirable locations in its new business. Then, as previously discussed, JDL was able to borrow skills and resources of the parent company when appropriate. Using this formula, Werning and his team have assembled the asset base required for the new business to succeed, one that takes the best of Deere and combines it with assets and resources from outside the company. Johnson Controls’ 1996 acquisition of Prince, a supplier of vehicle interior systems and components, is another example of how to fill an important gap. An environment that promoted innovation at Prince complemented the culture that Johnson was building in its automotive business, and Prince’s product line helped Johnson rapidly expand the scope of its offerings. Johnson continues to look for good ideas from outside by partnering with leading companies from complementary industries to develop new products. This approach saves resources for both firms while speeding the time to market. Started as a way to help build scale and scope rapidly in the electronics segment of the business, the approach is now part of all product areas. A word of caution about acquisitions and partnerships. Unlike traditional acquisitions, which are often focused on cost savings or synergies with the core business, the acquisitions that matter most in the new-growth context are those that speed development, bring in required skills, open doors to strategic markets, and otherwise improve the odds of success for your new-growth initiative. Keep profitability in mind when making acquisitions, but in the context of a new business that may take extra time to bear fruit. Adapted for your own expedition To achieve new growth outside the core business, keen insight and a great business design are important. But the most demanding work is executing the plan. And time is of the essence, because the value that a new initiative can create depends on speed to market. Executing new-growth strategies will never be easy. That’s true by definition, since a new-growth initiative is a discovery expedition into unknown territory. The precise methods you should use to develop the business are ones that you will discover as you travel, and they will be different for every company. The general principles presented here are gleaned from our study of companies that have created new growth, as well as others that ended up on the rocks. Only you can decide where these principles should take your company. Adrian Slywotzky and Richard Wise are Vice Presidents of Mercer Management Consulting, both based in Boston. This article was reprinted from the Mercer Management Journal.