When times are bad, many executives aim merely for survival. Only after their companies and conditions have stabilized will they plan again for growth. But in bad times, when business conditions require change anyway, companies have an opening for what we call Full Potential Transformation, a leap from bad to great.

The rewards can be substantial. We recently studied 32 companies that undertook Full Potential Transformations. These companies boosted sales by 23%, on average, while growth in earnings before interest and taxes (EBIT) made a U-turn, from an average annual decline of 16% preceding their transformations to an annual EBIT growth rate of 20% in the subsequent two years. Several companies were able to leapfrog competitors and claim-or reclaim-industry leadership positions.

When General Dynamics got caught in the downdraft of defense spending after the Cold War ended, for example, the US aerospace and defense contractor paid a heavy price. But instead of merely waiting for the next military buildup, General Dynamics used the crisis to adopt an entirely new game plan. Executives fixed and sold six businesses and focused on creating operational efficiencies in two others. Becoming expert at cutting costs and simplifying business processes, they removed an entire layer of management.

Successful companies drastically narrowed their focus, quickly cut costs, rejected half-measures in favor of broad changes, and transformed their capital structures to gain flexibility.

A transformed General Dynamics boosted EBIT by more than $1 billion, restoring the company to profitability, even as sales contracted by two-thirds. With a return on equity (ROE) of 14.3% today, the company continues to outpace the industry, which averages less than 11% ROE.

To pull off a transformation of this magnitude, executives must determine what their companies' peak performance ought to be along four dimensions—strategic, operational, organizational, and financial—and then systematically work to achieve that. Typically, these all-encompassing transformations require two to three years and involve employees at every level.

Despite varying circumstances, successful companies followed similar principles: They drastically narrowed their focus, concentrating on one or two of their strongest businesses. They quickly cut costs. They rejected half-measures in favor of broad changes. And they transformed their capital structures to gain flexibility. They were able to break institutional logjams, in many cases simply because they had to.

Cost cutting may be the single most effective way to start. But revenue enhancements shouldn't be far behind. Thirty-one percent of new profits generated by companies in our study came from activities such as customer segmentation, pricing moves, and new products and services. Cost cutting tends to hit the bottom line quickly. Revenue-related initiatives can take longer, but still contributed substantially to the successful turnarounds we studied.

Full potential is an aspiration and difficult to achieve. Yet even partial progress toward full potential can yield significant improvements in operating results, particularly for companies in turnaround. Once the crisis has passed, managers will find that the principles and strategies that got them out of trouble can boost them to industry leadership.

Vernon Altman, a director of Bain & Company in Los Angeles and San Francisco, leads Bain's Full Potential practice. Lisa Walsh is a Bain director in San Francisco and Stan Pace is a director in Dallas.

Download the full article: "From Bad to Great", Harvard Management Update, June 2003 by Vernon Altman, Lisa Walsh and Stan Pace.

Management Tools 2003 Survey
by Darrell Rigby

The year 2002 saw the economy in turmoil, investors in retreat and management under attack. No wonder corporate executives have been grasping for all the help they could find. In a sign of the times, Bain & Company's 2003 Management Tools Survey found a sharp increase in tool use by companies around the world.

For nine years, Bain has tracked the adoption and usefulness of management tools. The 2003 survey gathered data from 708 companies on five continents—North and South America, Europe, Asia and Africa. This year's survey reveals a dramatic increase in tool use over the past two years, with the heaviest reliance on tried-and-true "compass-setting" tools such as Strategic Planning, Benchmarking and Mission-and-Vision Statements.

Surprisingly, given pressure to control expenses, the tools chosen by managers overall show a bias toward growth over cost cutting.

The numbers tell the story. A typical company in this year's survey used 16 tools, up from 10 in 2000—a 55% leap. More than 80% of the companies surveyed this year used the three most popular tools listed above.

Why such demand? Executives are clearly spooked about short-term prospects for both their own markets and the broader economy. But they also have strong faith in their ability to navigate the storm. Surprisingly, given pressure to control expenses, their choices overall show a bias toward growth over cost cutting. The message: Moving forward, not back, is the best way to control your destiny.

Executives looked to turn the economic slump to their advantage, favoring tools to sharpen strategies and prepare for a hard road to growth. Meanwhile, senior managers avoided tools that might divert attention from core strengths or that might require a big cash outlay. Stock Buybacks, Corporate Venturing and Merger Integration Teams were the least-used tools.

For more results see the Management Tools Survey slide presentation

Especially noteworthy, almost 60% of respondents said that taking care of customers and employees should come before shareholders. Use of Customer Relationship Management systems, by far the fastest-growing tool, more than doubled to 78% of respondents.

Executives heralded Innovation as another antidote to sluggish growth. Nearly 75% said that the ability to change is a major corporate advantage; 68% believe that innovation is more important than price for long-term success.

Finally, 78% of respondents say they have enacted a Corporate Code of Ethics. Given the outbreak of corporate scandals, it's not surprising. In this context, it is notable that Pay-for-Performance—the tool with the highest satisfaction ratings in 2000—slipped to number seven this year.

Darrell Rigby, a director of Bain & Company in Boston, founded Bain's Management Tools survey in 1993.

Visit the Management Tools website for more information.