The following post originally appeared on the Harvard Business Review Blog Network.
Passing through an airport lounge the other day, I saw television images of Greek, Italian and Spanish legislators debating austerity plans, interspersed with pictures of the rioters in Athens. In the UK, the prime minister was claiming that the country was not drifting into a second recession—yet. And U.S. politicians were squabbling over whether we were still in a "jobless recovery." Bad news is becoming a way of life.
Within most executive teams, this turbulence is playing out as a different debate: What levels of resources should we continue to devote to the United States and Western Europe, and how fast should we shift resources to the growing markets of Asia, Latin America and Africa?
Two common company behaviors tend to undermine real action on these questions:
Flog the dead horse: Teams in Western Europe and the United States focus on squeezing more growth out of the same products through the same channels to the same consumers—with no real innovation. They try to do it more cheaply, but with the same operating model, and experience inexorably declining returns.
Tomorrow's always a day away: The business in the developed world promises more resources to its counterparts in faster growing markets, but doesn't deliver. Resources stay locked far away, in big operations in the United States and Western Europe that were built during happier times, and companies aren't well positioned for the take-off when it comes.
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In our experience, executives that think of their company as running on "Engine 1 and Engine 2" are less likely to be tripped up by these behaviors, and more likely to pursue radical solutions to break out of the trap of low-growth markets.
Let's define terms:
Engine 1 is the current core business, supplying 80% of profits. For most Western multi-nationals, Engine 1 is firmly rooted in the United States and Western Europe, with most of the firm's assets. Sadly, in all too many companies, for the reasons I've just pointed out, the business in the developed world acts as a drag on global business performance.
Engine 2 is the full set of adjacent businesses that the company might pursue to replace the declining growth rates of Engine 1. This includes not just growing markets in new geographies, but also new products and services in both existing and new markets.
Typically, it takes 6 to 8 years to build new adjacencies and have them contribute materially to the business. All companies go through cycles where Engine 1 gradually declines. If they build Engine 2 early enough, it can take over as Engine 1 declines.
The pressing Engine 1 question for many companies is what to do in low-growth markets of the United States and Western Europe. Generally, the answer is threefold:
- Become much better street fighters—agile and fast moving to win with key customers by exploiting the "transformational power of routines"
- Devote resources to 'growth pockets'—key products or consumer segments that are still growing and
- Radically reduce the complexity of everything else, as complexity remains a silent killer of growth. This includes country operations that were built up in Europe when it offered higher growth for the complexity it demanded.
In my experience, companies say they're doing these three things in their Engine 1 businesses, but are doing so with only 20% of the ambition, focus and speed they need—and few are driving these activities into sustainable, repeatable business models. A hard look typically will reveal too many resources trapped in businesses to deliver growth rates that are no longer possible.
As they think about Engine 2, companies face two questions. The first, obvious one that most executives recognize, is: Are we moving fast enough to shift resources to where the growth is? For all the rhetoric, I have yet to find a company that is moving too quickly to shift time and attention to Asia and the developing markets of Africa and Latin America. Most are behind. Their advertising and promotion budgets are tied to last year's revenues, not growth priorities. They typically shift resources dramatically in the second half of each year to shore up developed market businesses and existing products at the expense of share positions in new geographies or product lines. The cost of this: you begin to lose the hearts and minds of both teams.
The second Engine 2 question, the one that executives tend to ignore, is: Are we pursuing real innovation to make business in the US and Western Europe a high growth proposition? As Steve Jobs demonstrated, there is no shortage of growth opportunities, only a shortage of new ideas that capture consumer imaginations. Most companies are doing very little to develop innovative products and solutions that could revive these markets. We didn't know we needed iPads, iPhones, or iPods, but when we saw them, we rewarded Apple with growth.
For executive teams, an Engine 1 and Engine 2 framework provides focus, but also presents a challenge: the steps most companies are taking today to simplify operations in Western Europe and the United States are likely just a fraction of the complexity reduction truly required. Likewise, most companies can do far more to bring true new innovation to these markets, while shifting remaining resources to Asia and the development world.
We've gotten too used to bad news—it's time to take back control of the headlines.
James Allen is a partner in Bain & Company’s London office and co-leader the firm’s Global Strategy Practice. He is co-author, with Chris Zook, of the upcoming book: Repeatability: Build Enduring Businesses for a World of Constant Change (HBR Press, March 2012).