Spreading the success story

Is your company stagnating? Do all your profits come from cutting costs? Are you floundering for want of a growth strategy?

If so, Michael Treacy claims to have the answers to your problems. This ex-MIT professor says that double-digit growth is within the grasp of any business "" provided, of course, you listen to him.

Between 1997 and 2002, says Treacy, the thirty companies that make up the Dow Jones Index "grew at a collective annual rate of 4.9 per cent in revenues, 4 per cent in gross profits, and 0.5 per cent in after-tax profits."

If you exclude strong performers Wal-Mart, Home Depot, Microsoft, Merck and Citigroup, the remaining twenty five companies "have actually shrunk since 1997, while revenues and profits have grown at 2.3 per cent and 1.6 per cent a year, respectively, about the rate of inflation."

But perhaps that's because Treacy's reference period includes the slowdown in the US economy after 2000? The author thinks not, claiming that many Fortune 500 companies hardly grew at all throughout the heady nineties.

Treacy calls it "no-growth paralysis "" a broad, profound, systemic illness worsened by constant denial".

He gives telling examples to prove his point: if you thought that acquisitions are a quick route to growth, AT&T's CEO Michael Armstrong would have proved you wrong.

He spent $100 billion on acquisitions in five years, only to achieve lower revenues at the end of it all. IBM's much-touted CEO, Lou Gerstner, grew the business at an annual average rate of 2.9 per cent during his ten-year reign, barely enough to beat inflation.

Thankfully, not all companies have been laid low by the fatal disease. Treacy found several businesses that were able to achieve double-digit growth year after year.

These include Wal-Mart, Harley Davidson, Starbucks and Dell. What intrigued him, however, was that apart from these well-known value creators, there was a clutch of smaller companies that were also able to grow consistently at double-digit rates.

This inspired the author to "formally study the growth habits of 130 businesses of all kinds and sizes" in order to uncover the growth formula, the antidote to the "no-growth paralysis".

So what's Treacy's secret of success? He starts from the proposition that "Growth endures when management follows a portfolio of disciplines to ensure that a broad set of growth opportunities are identified and captured."

In other words, managements have to plan for growth, in the same way they plan for cutting costs or improving processes.

Treacy's idea is to build "robust portfolios of growth initiatives that spread risk and improved the predictability of results" and then to employ management systems that systematically plan, control and measure growth.

The idea of having a growth portfolio, similar to an investor's portfolio of growth stocks, is intuitively appealing.

Such an approach helps in identifying undervalued opportunities and focuses management attention on getting rid of deadwood.

It could be argued, for instance, that LN Mittal's spectacular rise is the result of spotting the value in decaying steel companies and having a plan to turn them around.

It's the latter part of the LN Mittal strategy, however, that is not so easy, and calls for management expertise of a high order.

That's where the similarity to an investor's portfolio ends "" running a business is far more demanding that merely making an investment.

Treacy's approach consists of six principles and five "growth disciplines".

The key principles are: Spread the risk "" hedge your bets by creating several growth initiatives, you'll be protected if one or two of them fail; take small bites "" split the growth objective and break it down into small, easily manageable parts; balance your strategies "" strive for a balance between organic growth and acquisitions; commit to superior value "" offer top value in all aspects of your business; expand growth capabilities "" build management capacity for growth; and manage for growth "" establish a system that coordinates all growth aspects, including attitudes, behaviour, information, roles, responsibilities.

Treacy says that the growth portfolio is based on five growth disciplines. These are: improving the company's customer base retention, gaining marketshare, market positioning, penetrating adjacent markets and invading new lines of business.

Having established these broad principles, the author examines and expounds his theories by referring to several successful American companies.

What are we to make of these prescriptions? Too much of management literature is of a simple type: press buttons a,b,c,d and you get results w,x,y,z respectively.

Follow the right management strategy, so goes the logic, and you'll achieve your goal. So while one management pundit offers 'The Rule of Three', another offers 'Six Principles'.

While one talks of leadership and HR, another says that you need to be obsessed with winning, while a third says that building a brand is what counts. If only real life situations were so simple.

The answer to this criticism, of course, is that all these management approaches are valid, and the worth of a management book depends, not on its claim to ultimate wisdom, but whether it succeeds in drawing attention to at least one element of how companies create value.

Treacy's book is useful in once again emphasising the primacy of growth in an age obsessed with cost-cutting. As C K Prahalad has put it, companies need to build future muscle at the same time as they cut the fat.

Perhaps they need to come to India, where scores of companies routinely deliver double-digit growth without any fuss. Or they could read Treacy's book.

DOUBLE-DIGIT GROWTH
How Great Companies Achieve It  "" No Matter What

Michael Treacy
Published by Portfolio
Pages: 224