The pressure on financial services companies to expand is not likely to let up any time soon. How can companies achieve this growth, asks Bain & Company?

Finding ways to generate steady and profitable growth has never been so crucial—or so difficult. The average company sets revenue targets at more than twice its market growth rate, and its earnings targets four times as high. But the majority of initiatives aimed at growth fall flat. And the punishment for failing to meet growth goals can be brutal. Even the hint of a slowdown in growth can cause shares to dive.

So where can companies find the growth they so desperately need? Acquisitions are one answer. The intense demand for growth helps explain the prolonged run of consolidation in the financial services industry—including J.P. Morgan Chase's recent announcement that it plans to purchase Bank One for US$58bn in stock. If a company makes an acquisition to double down on its core business and to build market share, the merger has a reasonable chance of success. But if the purchase is used to diversify into hot new markets or to prop up weak businesses, the outlook is not so promising.

That's because most new growth comes from focusing first on building up the core business until it has reached its full potential, and then from pushing the boundaries of that business into nearby—or "adjacent"—territory, according to Bain & Company research that tracked the records of more than 1,800 companies.

The rewards of repeatability
It's harder than it looks: only one in every four such moves succeeds in delivering sustained, profitable growth. How can a company increase its odds of success? One key is finding a formula for growth that can be repeated again and again. A company can take a proven business proposition and offer it to a new set of customers, as broker Charles Schwab did by moving from discount brokerage customers to high net worth individuals. Or, like Lloyds Bank in the UK, it can use its distribution network to expand from one product-mortgages-into related products such as home insurance and life insurance. Companies that hit upon a repeatable formula double their chances of success, on average, and some drive their rates up to 80% or higher.

Repeatability enables a company to build an organisation around its growth programme, unleashing a flurry of follow-on benefits. A known formula takes much of the guesswork out of the business: the next time around, implementing a strategy is both easier and quicker. GE Capital, for example, built up expertise in evaluating and executing deals—and became one of the most successful serial acquirers in history. Repetition also provides strategic clarity, enabling a company to better communicate its plans to the investment community, its customers and its own employees.

American Express taps into growth
Consider the case of American Express. For more than a decade, the company has methodically increased its revenues and profits by building upon its core charge-card business. By scrutinising customer buying behaviour, AmEx managers discerned patterns containing new business opportunities. They noticed the types of purchases business travellers made, for example, and realised the same customers would likely use an American Express card to pay for clothes or groceries when they got home. The company organised itself around identifying and developing such opportunities. The result: card service revenue has climbed 12% annually, from a low of US $14.2bn in 1993 to US $22.6bn in 2001, with most of it coming from increased purchases per cardholder.

Amex has used this approach to expand from the original green and gold cards to a family of cards with varied interest rates, terms, services and reward programmes. Its portfolio now includes everything from the Optima stand-alone revolving credit card, to special-purpose business cards for specific tasks such as purchasing, to the Blue card with special Internet payment features. "There's no substitute for your own experience in giving you confidence to move quickly and make the next investment," says Al Kelly, American Express's president of consumer card services. "This is the essence of our high success rate and it's why we can move forward on a number of new extensions at any one time. Studying each one from scratch would take forever and we would be more tentative about making real commitments to invest."

So what can other companies learn from AmEx's experience? Three basic insights emerge.

Keep moves closely related to a strong core. It took a brush with disaster to put Amex on the right path. During the 1980s AmEx's management decided to create a "financial supermarket", making seven acquisitions in six years, starting with brokerage firm Shearson Loeb Rhodes in 1981 and concluding with E.F. Hutton in 1987. The purchases may have all been financial, but they proved to have little relationship to AmEx's core charge-card business. The company was moving in too many directions at once. That sapped profits—and sank the stock price. When new management took over in 1991, it divested itself of all but one of the acquisitions, and focused on building up the core business instead. Expanding in this way allowed the company to make the most of the knowledge it had developed with its green and gold cards, drawing on existing practices and resources to develop dozens of new types of cards.

Segment your customers. AmEx's success stems largely from its detailed understanding of its customers. Managers analysed transaction data and divided the existing customer base into several niches. Categories included those who spent on travel, those who liked to shop and those who owned a business. Sometimes the analysis revealed that a single customer fit into multiple markets. "People might appear in different segments for different portions of their lives," says Mr Kelly. "At the end of the day, we often have the same customer who just happens to be in different segments depending on whether they are at their business, on vacation or shopping on the weekend." Such precise segmentation enabled the company to develop products and services specifically tailored to each customer niche.

Follow (or lead) your customers into nearby markets. Once a company has a clear grasp of its customer base, it can uncover opportunities by tracking its customers' plans and anticipating their needs. Each time AmEx considers a new offering, teams first scrutinise market data to see if existing buying behaviour supports the move. Thus the company developed a card for small business owners when Amex marketers spotted a proliferation in the creation of new small businesses, and the Internet-linked Blue card when they noticed how many purchases its cardholders were making online.

The pressure on financial services companies to expand is not likely to let up any time soon. How can companies achieve this growth? Acquisitions can work, as can organic growth—as long as every move a company makes enhances its ability to push into the market next door.

Christine Detrick directs Bain & Company's Financial Services Practice in North America, based in New York. Chris Zook leads Bain's Global Strategy Practice from Boston. Mr Zook's book, "Beyond the Core: Expand Your Market Without Abandoning Your Roots", was published by Harvard Business School Press in January 2004.