CEO Forum

Growing Challenge

Growing Challenge

Growth begets complexity, but paradoxically, complexity is the silent killer of growth.

  • min read


Growing Challenge

Amongst all the change businesses experience, one constant challenge remains: that of getting growth. James Allen, partner at Bain and Company and coauthor of Repeatability (Harvard Business School Press, 2012) describes how this challenge is evolving. How has the growth challenge changed, if at all, in recent years for global companies?

James Allen: One key question we have looked at globally is this: is the world getting more turbulent, or is it simply returning to the turbulence that was typical a few decades ago? If you take a long (100 years or so) view of business, what is remarkable about the last few decades is how stable and benign the environment has generally been. So turbulence as such is not new.

What is new is the complexity CEOs face, and the speed with which they need to react to events in their key markets. Simply put, growth begets complexity: as companies introduce new products, develop new channels and move into new geographical markets, this creates organizational complexities, which in turn demands major process of information systems changes. Growth begets complexity, but paradoxically, complexity is the silent killer of growth.

The need for speedy responses to competitive threats is to do with the greater volatility in earnings, revenues, market share and even leadership security, many companies are experiencing. Twenty years ago, for instance, if you looked at the dominant consumer brands, they were virtually the same brands that had dominated forty or fifty years before. Nowadays’ however, the more typical situation in industries is that you have seen massive change in competitive positions.

US and European global companies also face a special challenge that, for historical reasons, most of their revenue and assets are located in Europe and the US, but most of their growth opportunities are outside those markets. There is also a major strategic uncertainty about Europe and the US: is it unrealistic to expect good growth from these markets, or do I simply need to come up with better ideas? A company like Apple, of course, has been enormously successful with a string of innovative products, but they are very much the exception in that regard, They demonstrate, however, that this isn’t a consumer problem – they are ready to spend money on great ideas.

A second uncertainty is: How do I best think about these growth opportunities so I can execute on them effectively? Calling China, for instance, an ‘emerging market’, looks increasingly silly, given some China's market characteristics for some products are at least as sophisticated as anything in the West. South American markets are different again, as are African and South East Asian markets, and all require specific strategies to succeed in.

In fact, many companies are now thinking about China as being uniquely important, rather than just another important national market. One CEO commented to me that China is now as important to his company as the US domestic market “Think about winning in the US market in the 1920s – that’s how important we see China as being now. Does that geographical mismatch many European and US companies have between where their assets are and where their opportunities are disadvantage them against emerging global companies from Asia and the like that have a very different geographical distribution of assets?

JA: It’s a big issue for US and European companies. If you look at how US and European companies went global you typically see two patterns. The US companies tended to globalise on the back of a very strong domestic market, and then took the same business and organisational model to different national markets, often with very different conditions. European globalization, on the other hand, was often done on the back of the old colonial empires, and typically grew by allowing a lot more local entrepreneurialism. The problem, however, with this approach, was many companies struggled to develop the required scale to compete in global markets.

Now you have emerging global companies from countries like India and China, who are very entrepreneurial, have no problems with the ambiguities of emerging markets. China in particular is prepared to take a very long term view, and is making bet bets in many key markets. And they are not planning on incremental growth – many Chinese companies expect to quadruple in size over the coming decade.

The whole debate about Asian markets has evolved. Originally, the question was ‘Is Asia Important’? Then it became ‘Is Asia different?’ Now the issue for global companies is ‘How will (and should) our engagement with Asia fundamentally change the company?’ That is top of mind for many global CEOs. How does Australia fit into the big picture global companies are typically operating with?

JA: Australia is something of an anomaly, being located in a geographical area dominated by new/emerging markets, but with most of the market characteristics of an advanced Western economy. Because it is a big island, it is a very useful location for testing new products and/or business models. This is also due to the fact that Australian managers tend to “punch above their weight” in terms of getting the attention of the global company. My own view that, when you consider the revenues and profits Australia typically generates for global companies, I know of no other country that has such a disproportionate voice in global companies How did the GFC change, if at all, how companies pursue growth?

JA: In the four to eight weeks following Lehmann’s failure in September 2008, you had profound uncertainty. Government and business leaders had no idea how bad things would get, yet, because we are looking back in hindsight, many people have forgotten how profound that uncertainty was. That could happen again, although I am not in the business of prediction. Once companies got through this first period, however, I would argue that corporations did really well to adjust. The view then become that the GFC was simply a deep recession, and managers certainly knew, and know, how to manage through that kind of event.

The difficulty now is that, while you are starting to see signs of recovery in the US in particular, it is hard to see where the job growth will come from in Western Europe and the US. This may become a significant political and social problem. How, then, should companies think about growth opportunities in markets like Australia? As you know, there is much talk locally about a ‘two-speed economy’, where the resources and allied sectors are doing very well, while businesses like retailing, tourism and manufacturing face challenges similar to those facing companies in the US and Europe.

JA: One thing I find helpful when talking with clients is to think about two engines of growth. Engine 1 is about optimizing your current business model and major sources of revenue. Here you need to take advantage of all the paradigms of business efficiency, which, for global companies, often means reducing the scope of the Australian subsidiary to its sales, marketing and distribution functions.

Pursuing Engine 1 is the right to thing to do, but, on its own, is a profoundly defeatist approach to pursuing growth. As you reduce the scope of a local operation to sales and distribution, you are also reducing the capability to innovate, to grow, to introduce new products and services. Developing these capabilities is the second engine of growth, and you need to pursue both.

Most companies understand the need for engine 1 initiatives, even though these are often by no means simple to execute. Developing Engine 2, however, is more challenging, especially as you can undermine your chances for success here by pursing Engine 1 initiatives in an unbalanced manner. IS this challenging for a CEO and senior management team to balance these two perspectives on growth?

JA: Right. The analogy we use is that organizations need to think with both sides of their brain: must as the left hemisphere of the brain is associated with logic and the right more associated with creativity, we need s similar capability in organisations.

The role of the CFO is critical here. CFOs typically oversee the control functions in an organization – what capital investments get made and which get knocked back, what projects go ahead and which are killed, and so on. There is this enormous system of controls and checks which basically is designed to stop bad things happening, and that is all good and proper. When it comes to innovation and creativity, however, you don’t want to prematurely kill ideas, so this control mindset can be counter-productive. You need to develop and nurture, rather than simply destroy, ideas, and this needs a different approach.

Understanding their role in the innovation process within their companies is a critical challenge for CFOs. How are you budgeting for growth? What are the processes for innovation? How are we building capability to enter key new markets? It’s the CFO role to integrate this thinking into the financial and business planning they oversee. Other than the two engines of growth, are their other important ways CEOs should think about when pursuing growth.

JA: More so than ever before, growth is about execution. Strategy does not exist until it is translated into the attitudes and behaviours of frontline staff. We can’t assume that strategy presumes delivery; we need to ensure that frontline staff understand exactly what it is they need to do to make things happen. That means investing time and resources in building execution clarity across and down the organisation. We are focusing a lot of time now in our strategy work on what we call ‘repeatable models’ – how to drive strategy to the front line through a set of repeatable activities, through routines. We call this ‘the transformational power of routines’.

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