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Pay Attention to Revenue Growth

Pay Attention to Revenue Growth

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commentbrie
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ategy+busin
essis
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by Paul Leinwand, John Loehr, and
Kolinjuwa Shriram
rowth is back on the agen-
da. It\u2019s the increasingly

prominent topic of discus- sion at board meetings, executive sessions, and corporate retreats. Executives recognize that, with cost savings intrinsically limited, long- term financial performance hinges on improving the top line.

But although companies find it more advantageous to pay attention to revenue growth, very few do it well \u2014 mostly because they are not confident about what initiatives will drive successful and profitable growth. Many companies find it difficult to deliver and sustain growth in the face of greater compe- tition and commoditization. In fact, in the long term, few companies have outpaced the growth inherent in inflation and population increases. Because of this, they\u2019re often driven to seek growth in risky, and usually disappointing, acquisitions.

But what if the problem \u2014 the stagnation that leads businesses to attempt desperate measures \u2014 was partly a matter of misunderstand- ing? What if there was a known inherent growth rate for any given portfolio of businesses? If so, then companies could achieve profit- ability, and outsiders could evaluate companies more accurately, by developing a clearer awareness of a company\u2019s real-world potential.

To pursue a successful growth strategy, companies must ask two critical questions:

1. What is the inherent growth rate of our portfolio of businesses? In other words, what is the growth rate that demographics and infla- tion would predict for our particular set of geographic markets and prod- uct categories?

2. Measured against that inher- ent growth rate, how well does our company perform?

Answering the first question requires an honest and uncondi- tional evaluation of your company\u2019s business structure. The goal is to produce accurate forecasts of geo- graphically based growth rates for each market and category you com- pete in. In other words, understand \u201cthe cards you were dealt.\u201d

Booz Allen Hamilton ran this analysis for leading companies in the automotive and consumer goods industries. (See Exhibit 1.) Com- panies that had \u201cpositive\u201d inherent portfolios and, thus, high expected growth rates \u2014 Chrysler, Toyota, Heinz, and Wrigley \u2014 lie to the right on both charts. Those with a potentially weaker growth mix \u2014 Honda, Nissan, Clorox, and Kimberly-Clark \u2014 are at the left.

Next, we plotted actual growth rates. This tells the company how well it has \u201cplayed its hand.\u201d Did actual growth outperform the com- pany\u2019s inherent growth expecta- tions? We found that when a company exceeded its forecasts (the dots above the shaded area) or underperformed them (the dots in the shaded area), there was always a logically robust explanation.

For example, Honda had a neg-
Briefs
Pay Attention to Revenue
Growth. But How?
G
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ative expected growth rate because for most of the 1980s and 1990s, the automaker\u2019s portfolio was heav- ily weighted toward small and mid- sized sedans \u2014 which were losing sales industry-wide to minivans and SUVs. Nevertheless, Honda was

able to far outpace its potential by increasing market share in its exist- ing lines through vast improve- ments in quality and value.

In consumer goods, Wrigley and Alberto-Culver came out win- ners by adopting new channel

Paul Leinwand(leinwand_paul@bah.com)

is a principal with Booz Allen Hamilton
in the Chicago office. Mr. Leinwand\u2019s
primary area of focus is strategy develop-
ment for consumer packaged-goods
companies.

John Loehr(loehr_john@bah.com) is a

senior associate with Booz Allen
Hamilton in Chicago. He specializes in
product strategy and innovation for auto-
motive, aerospace, and other manufac-
turing companies.

Kolinjuwa Shriram

(shriram_kb@bah.com) is a senior
associate with Booz Allen Hamilton in
Chicago. He focuses on strategy develop-
ment and innovation in consumer-
focused industries.

Max Landsberg

(mlandsberg@heidrick.com) co-heads
Heidrick & Struggles\u2019 leadership consult-
ing practice in the U.K. He specializes in
developing senior executive teams that
are aligned to commercial strategy.

Madelaine Pfau(mpfau@heidrick.com) is

managing partner of client services at
Heidrick & Struggles. She focuses on
helping major corporations recruit top
executives and enhance their talent man-
agement capabilities.

Bill Jackson(jackson_bill@bah.com) is

a senior vice president with Booz Allen
Hamilton in Chicago. He works on major
organizational change programs, includ-
ing restructurings, post-merger inte-
grations, and growth, for a variety of
industrial clients, especially in the global
automotive industry.

Natasa Azman(azman_natasa@bah.com)

is an associate with Booz Allen Hamilton
in Chicago. She works with automotive,
consumer, and media clients on organi-
zational strategies, business process

redesign, and various strategic issues
involving financial modeling.
Robert P. Siegel(bobs@rainmt.com), an

inventor and consultant on innovation and
intellectual property, holds 43 patents
and is currently working on a biography
of Jerome Lemelson.

Exhibit 1: Actual vs. Expected Growth Rates
Note: Volume-weighted average growth rates
Source: Ward\u2019s Communications,Euromonitor Market Research for Consumer Goods,and Standard & Poor\u2019s
Ab ove Expected
G ro w th R a te s
Ab ove Expected
G ro w th R a te s
Be lo w E x p e c te d
G ro w th R a te s
Be lo w E x p e c te d
G ro w th R a te s
A u tom o ti v e
A c tu a l G ro w th v s. E x p e c te d G ro w th R a te s
(1 9 8 7 \u2013 2 0 0 2 )
Co nsum e r Pa c ka ged Goods
A c tu a l G ro w th v s. E x p e c te d G ro w th R a te s
(2 0 01 \u2013 2 0 03 )
To yo ta
Ch ry s le r
Fo rd
Ni s s an
Wrig l e y
Cam pb e ll\u2019s
A lb e r to-C u lv e r
Co c a- Co la
S mu ck e r\u2019 s
G en e ra lMi lls
Pe p si
GM
Hon d a
ActualAnnua
lGrowthRate
ActualAnnua
lGrowthRate
E x p e c te d An n u a l G ro w th R a te
E x p e c te d An n u a l G ro w th R a te

8 % 6 % 4 % 2 %

\u2013 2 %

3 0 % 2 0 % 1 0 %

\u2013 1 0 %
\u2013 2 0 %
\u2013 1 %
1 %
2 %
3 %
4 %
5 %
6 %
5 %
1 0 %
1 5 %
N e stl\u00e9
Gi lle tte
Unile v e r
Hein z
Sa raL e e
Co l ga te- Pa lm o li v e
Ke llog g
G e o rgi a-P a cif i c
Co nA gr a
Ho rm e l
De an Fo o d s
He rsh e y
Kr a ft
Kim be rl y -
Cla r k
Clo ro x
P&G
Many of the potentially weaker companies outperformed their seemingly stronger
competitors, with actual growth outpacing their inherent growth rates.
commentbrie
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41

strategies. Wrigley relied on innova- tion, such as the introduction of sugar-free Orbit in the U.S. and radical new flavorings for aging popular brands like Juicy Fruit, to increase sales in convenience stores. Alberto-Culver drove growth in part through the expansion of its own Sally Beauty retail outlets.

Heinz represents the other end of the spectrum. Despite an excellent product portfolio, led by ketchup and other sauces, the company failed to deliver because of a weak competitive position in Europe; sales of its Ore-Ida frozen potatoes line also slipped badly after private labels precipitated a price war.

In our analysis of the automo- tive and consumer goods industries, companies that exceeded the inher- ent growth rates of their portfolio always produced superior returns on equity. Meanwhile, a large majority of companies that underperformed saw their share prices sink.

There are scores of frameworks, tools, transaction models, and orga- nizational structures for evaluating revenue growth, and most of them suffer from the same weakness: They drive companies to pursue random avenues of growth without assessing the inherent growth poten- tial of these new businesses (or the company\u2019s existing business line). In our view, that\u2019s akin to the blind leading the blind. Only by first identifying actual and inherent growth rates can a company have enough insight to know where and how to grow.

To identify growth rates, start by analyzing the limits to inherent growth for your company\u2019s portfo- lio. What are the individual growth rates for your company\u2019s products and services, given the geographies in which you operate? How is the

population expanding (or contract- ing)? What is the potential impact of inflation or other pricing pres- sures on the revenues you would expect?

With a more specific and pre- cise analysis, you may discover, as many companies do, that you\u2019re actually doing better than you think. That is, you have realized more growth than predicted given your portfolio\u2019s limits. Or perhaps you\u2019ll discover the opposite \u2014 that the relatively high growth you\u2019ve achieved is not living up to the in- herent growth of your business. In either case, understanding how your existing portfolio can be adjusted or better managed is a clear priority

before pursuing more \u201cdesperate measures\u201d that might diminish your profitability.

What can the executive team do to improve your company\u2019s abil- ity to reach and surpass its poten- tial? Are acquisitions, chancy as they may be, the only answer? Or can you improve your portfolio by reprioritizing, expanding the geo- graphic reach of successful prod- ucts, improving the performance of lagging brands, or deemphasiz- ing money-losing businesses? These are the questions that must be the focus of a solid growth plan grounded in a better understanding of the true growth potential of your business.+

by Max Landsberg and
Madelaine Pfau
ho is better equipped to
set the corporate agen-

da: a small and homo- geneous top management team of like-minded individuals, or a larger, more heterogeneous team of indi- viduals from a wider variety of back- grounds and perspectives?

There are many opinions on this issue, but very little hard data exists to recommend one approach or the other. As a result, in collabo- ration with the Center for Effective Organizations (part of the Marshall School of Business at the University of Southern California), we sought to address the issue by analyzing 66 peer-reviewed studies of top man- agement team composition and per- formance conducted since 1984.

Two findings stand out. We dis- covered that diversely educated and experienced top management teams give corporations an edge, enhanc- ing their ability to manage global- ization and strengthening their fi- nancial performance. But there\u2019s a catch, and this is our second signifi- cant finding: Without the right mix of incentives and an appropriate leadership style, diversity can hinder, not help, performance.

Specifically,we examined corre- lations between corporate perform- ance and four measures of hetero- geneity in the leadership team: breadth of functional expertise, edu- cational background, international experience, and industry experience. We also considered whether corpo- rate performance varied with the size of top management teams \u2014 a rough proxy for heterogeneity given

Developing Diversity:
Lessons from Top Teams
W

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