Gushers of Growth

Gushers of Growth

After more than three years of debilitating downsizings and quest upon quest for greater efficiency, finding the next wave of profitable growth is again at the top of the CEO agenda, but with a different twist.

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Gushers of Growth

Like an instrument long missing from the orchestra, the drumbeat of growth investment is finally audible again. Philips and France Telecom unveil plans to offer wireless broadband services to homes. Hanover Re reports quarterly profits on its reinsurance business up 53% over a year, to 94 million euros. General Electric breaks the silence of acquisitions with a $9.5 billion purchase of Amersham, a British life-sciences company.

After more than three years of debilitating downsizings and quest upon quest for greater efficiency, finding the next wave of profitable growth is again at the top of the CEO agenda, but with a different twist. In the past, growth-seeking companies looked to diversification, the next hot market, or building up their weaker businesses. But this time around they are focusing on adjacencies to their strongest businesses, such as moving from products to services, expanding into a major new geography such as China, or launching a new business based on a core technology or skill.

Certainly many of the growth success stories of the past decade have been triggered by so-called adjacency moves, such as IBM's push into services or the global expansion of Vodafone from its base in the U.K. But what is not often recognized is the extent and cost of flawed adjacency moves and the hidden dangers that lie therein. For instance, when we examined the worst 25 business disasters of the past five years, which in total destroyed $1.3 trillion of value, three out of four were caused or accelerated by such adjacency moves gone awry.

Our research on hundreds of adjacency moves over the past 15 years found that more than three in four failed to deliver on their promise of sustained, profitable growth. Yet, some companies had a much higher success rate, as if they had mastered a "new math of profitable growth." Their skill extended to handling more moves, anticipating them earlier, executing them faster, and making them pay back more often. Often competitive differences on these dimensions made all the difference between stagnating in the pack and achieving true breakout. Three key disciplines were central to their successes:

— Customer-driven innovation. Over 80% of the most successful adjacency moves came not from corporate idea sessions, or investment banker proposals, or the search for the next hot market. They came from drilling down deeply into core customer needs and seeing them first, seeing them uniquely. Hilti, a global leader in drilling and fastening tools for construction, has excelled in its target market by developing a complete picture of customer needs.

Using videocameras and detailed observation, a Hilti team of ergonomic experts broke down the day of an electrician minute by minute. They found that the biggest portion of time—35% of the day—is spent determining where to drill anchor points for cable trays and electrical fixtures, before using Hilti's products to complete the drilling and fastening. The cumbersome process sent workers up ladders to measure by hand. Hilti determined that laser technology was the answer. With a partner, Hilti developed a positioning product that has grown from nothing to 100 million Swiss francs (64 million euros) in sales in four years.

— Relentless repeatability. Hitting on a repeatable formula for adjacency expansion was central to the success of 70% of the best performing growth companies. ST Microelectronics became a global player in semiconductors by focusing on a smaller set of key customers and anticipating the technologies those customers needed to grow their own adjacencies. When ST's customers in the computer industry began expanding into disk drives, printers and monitors, the firm saw an opportunity to grow with its customers in a market largely ignored by Intel. ST invested to adapt its logic chips, and today is the world's leading supplier to computer peripheral companies.

ST's growth follows a repeatable pattern: the company adapts a core technology prompted by the expansion plans of its dozen largest customers, applies the technology to new segments, expands into new geographies, and then starts the cycle again. The company's R&D spending as a percentage of sales is 15.4%, among the highest in the industry. And more than 95% of the R&D budget goes to developing new capabilities for existing customers rather than making bets on future technologies that look generally promising.

— Reinforcement of the core. New growth opportunities do not exist in isolation, but derive much of their value from how they reinforce the core. When U.K.-based Tesco turned to adjacencies, they were tightly bonded onto its strong core grocery retail business. One set of moves consisted of product expansions into in-store pharmacies, selected kitchen products, and coffee shops in stores. "The key to our model was `keep it simple, stupid,'" said Lord McLaren, CEO of Tesco at the time (now chairman). "We knew we were a supermarket and only invested in things that we could prove our customers really wanted." That kind of focus helped Tesco grow revenues at a 13% annual rate during the last 10 years, while profits have tripled.

— Growth from discipline. On the surface, the two seem in opposition. Yet even in individual human endeavor, like the sculpture of Rodin, or the Renaissance work of da Vinci, one finds intensely disciplined preparation married to bursts of truly productive creativity. One can only hope that this time around the lesson will be discipline first, then growth, as opposed to the other way around, as companies seek growth in the enticing, but dangerous territory beyond their core.

Mr. Zook leads global strategy at Bain & Company from Boston, and is the author of "Beyond the Core: Expand Your Market Without Abandoning Your Roots," out next month from the Harvard Business School Press. Mr. Allen, based in London, is co-leader of Bain's global strategy practice.

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Beyond the Core

Learn more about how how powerful, repeatable methods for moving into new adjacencies can dramatically increase the odds of success.

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