Thinking Differently About Growth

The 5th Annual CFO Rising Conference & Expo

Las Vegas

October 25, 2010Ed HessProfessor of Business AdministrationBatten Executive-in-ResidenceHesse@darden.virginia.eduwww.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 ISChange

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 FINDINGSGrowth 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