Thinking Differently About Growth
The 5th Annual CFO Rising Conference & Expo
Las Vegas
October 25, 2010
Ed Hess
Professor of Business Administration
Batten Executive-in-Residence
Hesse@darden.virginia.edu
www.EDHLTD.com
THE DNA OF GROWTH
RESEARCH FINDINGS
5 research projects
The Organic Growth Index ( “OGI”)
The Characteristics of High Organic Growers (“HOGS”)
The Challenges of Managing Private Company High Growth
The Myths of Growth
The Risks of Growth
U.S. GROWTH MENTAL MODEL
All Growth is Good
Bigger is Always Better
“Grow or Die”
Public Companies : Continuous Linear Growth
These beliefs are NOT supported by empirical data or business reality.
THE REALITY OF GROWTH
Growth can be good; growth can be bad- it depends
Bigger is not always better
Growth is not a requirement for every business but improvement is
Continuous linear growth is rare
OGI INDEX RESULTS
Purpose of the OGI Financial Model is to illuminate high organic
growth companies and “screen” out companies that produce
material non-organic growth earnings through accounting games,
non-core earnings, serial acquisitions, financial engineering, etc.
FINDINGS
Less than 10% of companies studied over several 5 year periods
qualify as HOGs
Less than 3% of companies studied 1996-2006 qualified as HOGs
For years 2001-2006, of the 4031 public companies, only 276
qualified as HOGs
Of those 276 companies only 35 had market caps greater than
$10B
5 other confirming studies
WHAT ELSE DO WE KNOW?
Few companies show any predictable patterns of growth
Growth is only weakly correlated to profits
Earnings growth rates are largely unpredictable
Growth/Innovation is NOT a linear mechanistic smooth linear process
GROWTH IS
Change
Messy
Hard
People dependent in most cases
Mistakes & failures
Antithetical to the goals of a corporation: predictability, consistency,
standardization, reliability, and no variance
CHARACTERISTICS OF HOGS
My hypotheses:
Unique products/services
The best talent
Visionary, charismatic leaders
Superior innovation
Cost superiority by outsourcing/offshoring
Sophisticated diversified strategies
HOGS
My findings:
None of the above were necessary or even common
Simple focused strategies
Humble passionate operators
Execution champions
High employee engagement
Constant improvement DNA
Master learners and copiers
RESEARCH CONCLUSIONS
Growth is much more than a strategy- it is a SYSTEM
Growth is Experimental Learning
Growth requires the right Leadership, Culture, & Processes
Growth results from a 2 X 2 X 4 Growth Portfolio
Customer Centricity & High Employee Engagement are Growth Enablers
RESEARCH CONCLUSIONS
Growth/Innovation Killers:
“ROI-tis”
Group think
Arrogance
Legacy mental models/cognitive blindness
Penalizing mistakes
Short-termism
Product -centricity
RISKS OF GROWTH
Growth can stress people, processes & controls
Growth can dilute culture and customer value proposition
The question is how much growth creates these risks
Toyota & Starbucks examples
Growth Risks Audit
PRIVATE COMPANY RESEARCH FINDINGS
Growth changes everything
Growth is evolutionary - waves of change
Growth requires more and better processes
Preconditions to Growth
4Ps of Growth: Planning, Prioritization, Processes & Pace
The 4 Ways to Grow
The Entrepreneur Must Grow, Too !
The Difficulty in Building a Management Team