The Best Ways to Grow

Every business wants to get bigger, but many do it wrong. How do you know which path is right for you?

By SCOTT THURM
Staff Reporter of THE WALL STREET JOURNAL
October 25, 2004; Page R1

http://online.wsj.com/article/SB109837589196651960.html

Corporate America’s bottom line is healthy: Driven by cost-cutting, corporate profits account for a near-record share of U.S. economic output.

But what about the top line? As cost-cutting opportunities diminish, executives need to increase revenue to increase profits. Yet in the uneven recovery of the past three years, many companies are finding it hard to grow, particularly compared with the go-go days of the 1990s.

“Companies have spent the last three to five years slashing and burning and now are trying to get on a growth track,” says Michael Treacy, a former professor of management at the Massachusetts Institute of Technology and now chief strategist at GEN3 Partners Inc., a Boston consulting firm.

It’s a crucial issue. Textbook corporate theory says that to attract investors, companies must generate profits that grow faster than the returns available elsewhere, such as on government bonds.

The 21st-century knowledge economy adds a second imperative: Companies must grow to attract and retain talented employees and managers. “Talent goes where there’s opportunity, and there’s opportunity where there’s growth,” says Steve Coley, director emeritus and former head of the growth practice at consultants McKinsey & Co., who still consults with a few clients for the firm.

So how should executives think about growth?

For many, it’s hard to be certain even where to begin, given the range of options and the weight of the decisions involved. Do you grow rapidly, to pounce on opportunities and keep pace with competitors, or more deliberately, to try to ensure long-term success? Do you expand from within, or through acquisitions? Do you build vertically, to capture efficiencies in your core business, or horizontally, to develop new revenue streams? If you make the wrong choice, you can cripple your company. But doing nothing can be at least as damaging.

Starting Simple

Geoffrey Moore, a business-strategy consultant in San Mateo, Calif., suggests starting with a simple question: Are the product categories we’re in likely to grow? Or do we need to move to another category, in the way that Nokia Corp. shifted over decades from forest products to telecommunications and Eastman Kodak Co. is moving from film to digital imaging?

At the same time, Mr. Moore says, executives must define what they’re offering customers: Is the company a technological leader, like Intel Corp. or Microsoft Corp.? Does it offer superior service, like Four Seasons Hotels Inc. or Goldman Sachs Group Inc.? Does it rely on operational excellence, like Wal-Mart Stores Inc. or Dell Inc.?

Whatever the answer, executives must make sure that the core business is operating well. “You cannot grow yourself out of trouble,” Mr. Coley says.

Only when the core business is humming can executives weigh strategic moves, such as pushing for market share or moving into new markets. Mr. Treacy suggests ranking tactics by risk, and then implementing those tactics, starting with the least risky, such as shoring up your customer base by reducing defections. Only later should executives take on riskier strategies, like moving into new markets, either internally or through an acquisition, he says.

Hidden Costs

In any case, growing consistently, and profitably, is hard work. Even during the 1990s, only 7% of publicly traded U.S. companies increased both revenue and operating profit by an average of 10% a year, according to Boston-based Mercer Management Consulting. “Nobody sustains growth forever,” Mr. Coley says.

Indeed, strategists say, any company that appears to defy gravity is probably heading for a fall. Some of the fastest-growing companies of the 1990s — energy traders such as Enron Corp. and new-age telecommunications firms such as Global Crossing Ltd. — turned out to be charades. Even where fraud isn’t involved, strategists say that too-rapid growth tends to stretch a company, and its managers, too thin, creating new problems.

“To grow faster than 20% a year for some time is unsustainable,” says Mr. Treacy, the GEN3 Partners strategist. At that rate, a business would double in size in less than four years. Most companies that grow that fast are “paying an unrecognized price,” Mr. Treacy says. “At some point, the bill comes due” as overburdened internal processes and diluted second- and third-tier management teams can’t keep pace, and the company falters.

Consultants and strategists also say too many executives chase revenue without considering profits. That’s what happened when telecommunications-equipment makers began making loans in the late 1990s so customers could buy their gear. When the network operators couldn’t pay their bills, equipment makers such as Lucent Technologies Inc. and Cisco Systems Inc. were left holding the bag.

Similarly, Adrian J. Slywotzky, a managing director at Mercer Management Consulting, says that as many as one-third of the customers of some banks and cellphone companies are unprofitable for these service providers. “They chew up so much service and provide so little revenue, or create so much churn [by defecting], that they weren’t worth pursuing,” Mr. Slywotzky says.

Mr. Treacy says executives generally don’t plan for growth as systematically as they monitor expenses. “If you challenge managers to cut costs, they know what to do,” he says. “But challenge the same management team to grow, and they don’t have a routine.”

By contrast, he says, successful growth companies such as Wal-Mart and Dell are so focused that they are able to pursue many goals simultaneously. Wal-Mart broadened its offerings into groceries and expanded overseas. Dell concentrated on new products, such as computer servers, and also pushed into new markets. But neither lost sight of its main strategy: being the low-cost provider in its industry. That has helped Wal-Mart’s revenue grow at a 12% annual rate, and net income at a 13% annual rate, for the past decade. Dell has performed even better, with revenue up 30% annually and net income rising 37% a year.

Building on Satisfaction

Strategists say executives often overlook the easiest, and least risky, way to boost revenue: keeping existing customers happy, so they don’t defect. Take notoriously fickle cellphone users, roughly one-quarter of whom change carriers each year. The defectors sap growth prospects, because the carrier must first attract a new subscriber to replace the departing one, at an average cost of $329, according to Yankee Group, a Boston-based consulting firm.

Some carriers have devised effective strategies to reduce their customer turnover, or churn, rates. Verizon Wireless, a joint venture between Verizon Communications Inc. and Vodafone Group PLC, upgraded its network to improve sound quality and offers incentives such as free phones to users who extend or renew contracts, according to Yankee analyst Roger Entner. Nextel Communications Inc. highlights its unusual walkie-talkie-type “push-to-talk” service and focuses on business customers, who don’t switch as easily, Mr. Entner says.

Once customers are happy, companies can increase sales by deepening relationships with those same customers. That’s how Johnson Controls Inc., a 119-year-old Milwaukee-based maker of industrial-control equipment, built a $17 billion automotive-supply business from scratch over the past two decades.

It began with a gamble on a new market. In 1985, Johnson bought a small company making parts for automobile seats, to supplement its controls business. But company executives didn’t just want to supply metal rods and pads. Johnson began offering custom-designed, ready-made seats that could be quickly placed in cars. Having studied Japanese “just-in-time” manufacturing techniques, the company was well-positioned when Japanese car makers began building U.S. plants.

From there, Johnson won contracts with most of the world’s major auto makers. Then, it expanded into making instrument panels, doors, ceilings and electronic components, as auto makers sought to outsource more of the production process. This year alone, Johnson won new deals for the ceiling of a Ford Motor Co. pickup truck and the instrument and door panels of General Motors Corp.’s Grand Prix car model. Johnson even offers what it calls a “total interior,” with all of these components delivered as a single unit, although it has found few takers so far. Still, the automotive business has grown to be three-fourths of Johnson’s revenue, propelling the company to 18% average annual revenue growth over the past decade.

Chief Executive John M. Barth says Johnson thrives because of its disciplined approach to growth. “We don’t try to do 20 things,” he says. “We try to do three or four or five and stay focused.” Management meetings begin and end by stressing those key initiatives. “We don’t run our business on the flavor of the month,” he says.

Smart Acquisitions

Johnson has made acquisitions to build its automotive expertise, but Mr. Barth says roughly 80% of the growth in the automotive business has been organic. Strategists say that’s a good model, because acquisitions can be tricky. Many big acquisitions fail.

Still, McKinsey estimates that 80% of successful growth companies use acquisitions at some point. Patrick Viguerie, who heads McKinsey’s growth practice, says these skillful acquirers tend to start with small deals to learn about new markets, then expand the new business internally or through additional acquisitions.

That’s how Martin Benante has revived Curtiss-Wright Corp. The Lyndhurst, N.J., company traces its roots to the Wright brothers and the earliest days of aviation a century ago. But it had devolved into a sluggish, largely forgotten supplier of aviation and industrial components when Mr. Benante became chief executive in 1999.

Mr. Benante began acquiring small, technologically innovative companies to steer Curtiss-Wright toward military customers and more precision parts, such as high-tech “leakless” valves for nuclear submarines and nuclear power plants. In five years, Curtiss-Wright has acquired nearly 30 companies. Mr. Benante has assigned 50 top performers to acquisition teams that identify targets and then integrate employees into Curtiss-Wright. For the company to grow, he says, these managers should “spend 90% of their time in a growth area.” To run daily operations, Mr. Benante relies on his “second-tier management.”

Peter Arment, of JSA Research Inc., an independent research firm that focuses on aerospace, says Curtiss-Wright has “acquired smartly.” If an acquisition helps the company gain a new capability, “they’ll do it.”

The result: Curtiss-Wright is on pace for revenue of $930 million this year, up from $293 million in 1999, a 26% annual growth rate. And its executives haven’t neglected the bottom line; net income has grown 14% a year. Mr. Benante says he’ll continue to invest in the business, so that Curtiss-Wright can grow over the long run.

“Anybody can grow, until you run out of money,” Mr. Benante says. “Growing profitably is the key.”

Mr. Thurm is a deputy bureau chief for The Wall Street Journal in San Francisco.

Write to Scott Thurm at scott.thurm@wsj.com