The Growth Boosters

Growth, as every executive knows, is cyclical. It stands to reason, therefore, that the market for books on growth would follow a similar pattern. Managers are more apt to want books on the subject when their companies are thinking about making growth-oriented investments. During periods of low growth, demand for literature on the topic should also be low. And one might anticipate that investments in disseminating new growth literature would drop off even more sharply. That’s what I expected to find when I searched Books in Print for new books focused on growth. What I discovered, however, was that the number has held up relatively well since 2000, even though the number of new books about business in general has plunged by nearly half in the same time frame. (See the exhibit “New Business Titles.”) What accounts for this remarkable constancy? Because the demand side doesn’t offer immediate explanations, we must look to the supply side for answers. New Business Titles A survey of a dozen or so books on business growth shows a marked directional shift between those that came out before 2000 and those that followed. Earlier books, presumably written during the Internet bubble, tended to take the availability and attractiveness of growth opportunities for granted: They simply mentioned network economies or winner-take-all effects in passing before getting on with their primary tasks of discussing which opportunities to pursue and how. Later books, written against a less exuberant backdrop, spend more time making the case for growth strategies. They argue that managers must pay more attention to business growth right now for one of two reasons: either because paths to profitable new growth are less obvious than in the boom years or because cost cutting has run its course, making growth the best option. Some books cite both reasons. A cynic might conclude that the recent growth literature is practicing what it prescribes: devising creative new ways to enhance demand—in this case, by changing the rhetorical packaging of its offerings. A closer look supports that hypothesis. The three popular books on growth discussed here—Chris Zook’s Beyond the Core: Expand Your Market Without Abandoning Your Roots (2004), Ram Charan’s Profitable Growth Is Everyone’s Business: 10 Tools You Can Use Monday Morning (2004), and Adrian J. Slywotzky and Richard Wise’s How to Grow When Markets Don’t (2003)—are packaged precisely in the way I have just described. In fact, in two of them, the first chapter is titled “The Growth Crisis.” Zook’s Beyond the Core begins by stressing the importance of growth in areas that are adjacent to a company’s core strengths. Definitions of the various adjacencies (geographic, product, value chain, channel, customer, and so on) along which a business might extend its scope may be this book’s most useful contribution. Zook argues that the ideal pattern of growth is constructed around the “relentless repeatability” of a simple expansion path. He also discusses how to implement growth moves as well as how a firm with a weak core or in a turbulent industry should think about growth. Charan’s Profitable Growth Is Everyone’s Business is organized around ten principles that can be put to use immediately. They include advice such as don’t just shoot for home runs—aim for lots of singles and doubles, establish a growth budget, increase upstream marketing, stress revenue productivity rather than cost productivity, and make revenue growth a part of everyone’s daily routine. Finally, Slywotzky and Wise’s How to Grow When Markets Don’t advises executives to inventory their companies’ “hidden assets” (capabilities that might have value in new markets) and conduct an external analysis of ways to solve customer problems (what the authors call “demand innovation”). The results will reveal new avenues for growth. The key chapters in this book are those that lay out the typologies of hidden assets and of demand innovations that managers can apply to their own situations. Also worth noting are the chapters that give a checklist for improving value creation and specific ideas for planning growth. Each of these books aims to goad managers into taking action by thinking differently about growth. Achieving that goal depends as much on presenting ideas compellingly as it does on the merits of the ideas themselves. To that end, these books provide some fresh case examples, checklists that at their very best may stimulate valuable self-analysis, and writing that is generally clear. But while these books may succeed at prompting readers to act, that isn’t the sole test of a book’s worth. The novelty, validity, and utility of the ideas presented must also be weighed. While these books may succeed at prompting readers to act, that isn’t the sole test of a book’s worth. Novelty None of the books pass the novelty test with high marks because each grows directly from its author’s previous work. Zook’s Beyond the Core extends his Profit from the Core: Growth Strategy in an Era of Turbulence (2001), which introduced the concept of adjacencies (with Enron as the featured example). Profitable Growth Is Everyone’s Business seems, apart from its broader targeted readership, to share a number of core principles with Charan’s earlier book with Noel Tichy, Every Business Is a Growth Business: How Your Company Can Prosper Year After Year (2000), even though the earlier book isn’t cited. And Slywotzky and Wise’s How to Grow When Markets Don’t pursues the same basic theme—that the path to profitability lies in truly understanding your current and future customers—stressed in The Art of Profitability (2002) as well as in other prior works by Slywotzky. Readers may draw reassurance from such consistency, but they may also question whether the later works contain any novel ideas. Validity We can think about validity in empirical and conceptual terms. The empirical validity of the three books is hard to assess because none of them focuses on presenting data. The one book that makes some effort in that direction, Zook’s, is distinguished principally by its recognition that most growth initiatives—about 75%, according to the book’s meta-analysis—fail. However, in terms of actually describing or discussing data, Zook’s offering falls short of earlier entries in the business-growth literature, such as Grow to Be Great: Breaking the Downsizing Cycle (1995) by Dwight L. Gertz and Joao Baptista of Mercer Management Consulting. The contrast between Gertz and Baptista and Mercer’s current growth experts, Slywotzky and Wise, is even more stark. The latter pair’s book contains only two exhibits—one a typology and the other a blank template. This shift toward less data is understandable. Deciphering complicated graphs and reading reams of statistics are specialized tastes, and authors want their work to be widely accessible. But presenting virtually no data is like asking the reader to buy a pig in a poke. Given the dearth of their own data, these books might have paid more attention to academic research on the empirics of business growth. A great deal of the literature in industrial organization can be summarized in terms of the law of less-than-proportional growth: Large firms tend to have higher survival rates than small firms but, conditional on survival, they exhibit growth that on average is both slower and less volatile.1 And while these averages mask a great deal of variation—growth rates vary across companies for reasons other than size—even companies that are considered efficient growth machines generally run into constraints related to their size. Consider the case of Wal-Mart, the largest company in the world in terms of both revenues and employment. Since its IPO three decades ago, the organization has had a stellar track record along many dimensions. But even Wal-Mart has had to accept declining growth rates as it has grown ever larger (see the exhibit, “Wal-Mart at a Glance, 1971–2002”). For one thing, growth opportunities get depleted as fewer doublings remain possible within the company’s lines of business. And finding 600,000 new employees annually just to maintain a 1.4 million person workforce is an enormous challenge—as is communicating with them well enough to preserve a strong corporate culture. In addition, size has increased the decision-making burden at the corporate center and has attracted the attentions of both litigants and labor unions. Wal-Mart also suffers fallout from what former CEO David Glass describes as a shift in public perception from endearing underdog to overbearing top dog. At its current size, the company is even at risk for an antitrust suit. Wal-Mart at a Glance, 1971–2002 Yet not one of the three books discusses this empirical dynamic or the constraints that may be behind it. Wouldn’t this sort of information be useful to managers trying to calibrate their own company’s growth goals? Next, we turn to conceptual validity. Because this isn’t one of the primary concerns of the books being reviewed, it is not worth picking over in detail. But one specific recommendation included in two of these books merits attention. Zook and Charan both advise companies to make relatively incremental changes. Zook highlights “repeated sequences of smaller adjacency moves,” and Charan, “singles and doubles.” But while much of the business growth literature published after the tech crash focuses on making incremental moves, radical changes continue to garner a great deal of attention in the business innovation literature. (For example, consider Richard Foster and Sarah Kaplan’s Creative Destruction [2001] and Clayton M. Christensen and Michael E. Raynor’s The Innovator’s Solution [2003].) What would be useful is if the growth gurus explicitly addressed this incremental versus radical debate, instead of simply coming down on one side of it. Utility Finally, let’s look at the practical value of the ideas presented in these books—which, of course, depends on but isn’t entirely determined by their empirical and conceptual validity. I’ve already noted that they are likely to succeed at goading readers into action. The additional question is, How appropriate will that action be? I agree with the authors that existing practice leaves significant room for improvement. So I believe that these books will probably lead to action that is more appropriate than not. What is particularly praiseworthy about all three books is that they recognize the hazards of unrealistically high target growth rates. When they talk about setting growth targets, Charan, Zook, and Slywotzky and Wise mention reachable growth, the dangers of overreaching, and realistic growth, respectively. This is useful because there are still a lot of believers in “big hairy audacious goals.” That said, readers would probably find specific directions on how to set or test growth targets even more useful than injunctions to get the target growth rate right. For examples of the kinds of insights I have in mind, consider two recent horror stories. Europe’s formerly high-performing discount airline Ryanair suffered a meltdown in January 2004 because two years of more than 50% capacity growth annihilated its operating profitability and sent financing requirements skyrocketing. Ryanair acknowledged that the lure of becoming Europe’s biggest short-haul carrier led it to stray from its original strategy, which was tightly focused on cost and efficiency. Here, excessively rapid growth compromised a fundamentally sound business model. The more general point is that in asset-intensive businesses, at least, the formula for calculating sustainable growth rates, while old, is often overlooked and therefore worth emphasizing. Coca-Cola’s recent troubles show that growth targets don’t even have to be double-digit or distant from the core to cause enormous problems. Coke’s last two CEOs clung stubbornly to the company’s long-run volume growth targets of 7% to 8% despite the Asian crisis and spillover effects in the global economy. CEO Douglas Daft experimented with radical strategic changes, particularly the “think local, act local” initiative to decentralize decision making, to hit those targets—but to no avail. After it ran through two CEOs and various strategies and advertising campaigns, weathered accusations of channel stuffing, pursued several takeover attempts, and watched its market value plummet, Coke announced in December 2003 that it would stop giving analysts guidance based on volume growth rates. It finally figured out that a company cannot simultaneously maximize its growth rate and the present value of its total profit stream. The Coke example highlights two points that the books don’t address: Trying to grow a company much faster than the market once the company accounts for a large share of it is difficult, and publicly stated growth targets may be hard for a company to lower—even when such an adjustment is warranted. Ominously, Charan and Tichy had talked up Coke as an exemplar of growth in 1998, right before the company stumbled into a half-dozen horrible years related to a failed growth strategy. Ryanair has a single business, Coke has a dominant one. Companies that are more diversified face an additional layer of practical issues that these books ignore. CEOs of large diversified companies, in particular, crave advice about setting growth targets for multiple businesses within the same corporate portfolio. Right now, that process seems to be based largely on extrapolations from past performance. CEOs might also be seeking guidance on how involved they can or should be in generating and exercising growth options. But they won’t find much help in these books. A final practical concern relates to the individual motivations underlying the pursuit of growth strategies. Charan and Slywotzky and Wise write eloquently about the human costs of the growth crisis for employees at companies that fail to grow, but they don’t examine the flip side of the coin: the vested interests employees have in pumping up growth. Managers, for instance, may be biased toward empire building or maximizing the amount of corporate wealth under their control. In other words, they may retain income to fund growth initiatives rather than distribute it to shareholders. Apparent examples of this are legion. Jacques Nasser, for instance, became CEO of Ford in 1999, when it was the world’s most profitable car company and had a soaring stock market valuation (in keeping with the general exuberance on this front). Nasser had big plans that extended well beyond car manufacture, but his basic goal was to overtake General Motors for the first time in 70 years and become the world’s largest automaker. It’s impossible to say for sure that motivational biases lay behind Nasser’s grab for growth. However, it is worth noting that in an April 2001 Detroit News article, spokespeople cited “his job as head of a restructured global company with a wide area of control and broad duties” to explain his total compensation of $22 million in 2000. The sum was more than twice that received by his president-CEO counterpart at General Motors and higher than the previous year’s figure—despite net income that was one-quarter lower. Six months later, Nasser was fired. The Gold Standard If the current crop of business growth books harbors a latent pro-growth bias, where should readers turn for insights? In many ways, the whole topic of business growth and size is still overshadowed by Alfred D. Chandler’s The Visible Hand: The Managerial Revolution in American Business. Published 27 years ago, it chronicled the emergence in the United States of the modern vertically integrated, multi-unit enterprise operating under managerial control. According to Chandler, in the latter half of the 1800s the railroad and the telegraph combined with increases in population and income to help create national markets for the first time. As a result, certain industries tamed Adam Smith’s “invisible hand” using the “visible hand” of professional managers. Firms made large investments in manufacturing and marketing as well as in managerial hierarchies to coordinate those functional activities. Chandler’s detailing of this managerial revolution and the firms that spearheaded it makes for a gripping read. And the book delivers far more than interesting stories. In the introduction, Chandler advances a number of important general propositions about growth and the managerial enterprise that have withstood years of scrutiny. He claims, for example, that “the [managerial] hierarchy itself became a source of permanence, power, and continued growth,” and “in making administrative decisions, career managers preferred policies that favored the long-term stability and growth of their enterprises.” Underlying these propositions is a simple yet powerful idea: that technological changes, broadly defined, can affect the relative efficiency of different modes of organizing economic activity. This central idea has survived challenges to some of Chandler’s specific interpretations. Consider, for instance, the revisionist argument that The Visible Hand focused on a particular historical episode and that, more recently, the superiority of the large, centrally managed enterprise to alternatives such as markets and networks has declined if not disappeared altogether. Even the revisionists are seeking not to repudiate but to reinterpret Chandler in a “roomier” context by allowing for historical conditions different from those in the second half of the nineteenth century. The great contribution of Chandler’s book, therefore, is that it articulated an idea that has proved powerful enough to provide a frame for a rich and enduring debate. And while the bar cannot and should not be set as high for every book—we’d have very few new books to read—reminding ourselves of the gold standard is helpful if we are to come close to meeting it. 1. John Sutton, “Gibrat’s Legacy,” Journal of Economic Literature, March 1997; Richard E. Caves, “Industrial Organization and New Findings on the Turnover and Mobility of Firms,” Journal of Economic Literature, December 1998.

The Growth Boosters

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