The Alchemy of Growth What is the formula?

GROWTH IN AUTOMOTIVE & ASSEMBLY - EXTRANET

Vinzenz Schwegmann March 23, 1999

Growth creates wealth for shareholders, brings new jobs to the community and unleashes creative energy in the organization that pursues it. Yet so many companies are unable to achieve and sustain it. Only the exceptional few. What is it that keeps them on the fast track? There is a formula, it turns out - though its more hard work than magic. Its contained in The Alchemy of Growth, a special research initiative by McKinsey & Company. Read about it in our clientonly website.

INTRODUCTION

The Alchemy of Growth

The transformative power of growth is akin to the alchemy of old. Always a mystery, alchemys magical blend of science, philosophy, art, and spirituality held secrets that even its practitioners found difficult to penetrate. Still, they were all drawn to its alluring aim: To transform the everyday into the exalted. The pursuit of corporate growth seems to prompt a similar reaction. Managers are excited by growths promise, by the generous rewards it offers. But unlike the alchemists, they often hesitate to act, feeling under pressure to take care of todays business problems and sometimes uncertain about where to begin. This was the starting point for The Alchemy of Growth, a special research initiative by McKinsey & Company, aimed at helping our clients in their search for growth. Over the course of three years, we attempted to find a pattern that could explain the success of fast-growing companies. Analyzing over 600 recent growthrelated engagements in the firm and digging deeply into the workings of 30 fastgrowing companies willing to participate in the research, we arrived at some very interesting conclusions. There is no magic formula, of course, but there is a formula. We have condensed our findings for this site integrating some examples from the automotive and assembly industries to make the message more meaningful to you. We hope you will travel around a bit in our space. We also heartily recommend the book "The Alchemy of Growth", written by three of our consultants, Mehrdad Baghai, Stephen Coley and David White.

1. THE CHALLENGE: KEEPING THE PIPELINE FULL Growth is not an option for companies these days, it is a necessity. Globalization, technology, consumerization - they are all working in concert to make product life cycles shorter and managements job harder. In an environment like this, just staying even is a challenge. We calculated, for example, that German automakers will have to collectively grow around 7.6% per year (estimate) simply to achieve an employment level in 2000 equal to the one they had in 1995. But growth is important for other, more felicitous reasons as well. Growth unleashes benefits beyond the economic: ! It revitalizes organizations and invigorates the people within them, creating energy, a sense of purpose, and the glow of being on a winning team, and 2

It has a positive catalytic effect on the general business community, with one companys growth spurring the growth of other companies, those that supply it, complement it and compete with it.

Growth is also the key to sustainable profitability, as a survey of ours in the worldwide automotive supply industry confirms: While fast-growing companies tripled shareholder value between 1988 and 1996, slower-growing companies actually saw it decline. The same correlation between growth and profitability can be seen for worldwide producers of machinery and electronic equipment:
Profitability (1990 94) Most successful Moderately successful Less successful 13.0% 4.4% -3.8% Sales Growth (1990-94) 11.7% 2.0% -4.9%

Yet despite the overwhelming attractiveness of growth, few succeed in capturing and sustaining it over long periods of time: We found that of ten companies that outperformed their industry's growth rate in recent years, only one was able to maintain that edge for a period of ten years. And these were already the top performers in their industry! The problem? Companies tend to be so preoccupied with managing the crises of their current businesses that they neglect to keep the pipeline full of businessbuilding initiatives. The result is that when existing growth engines begin to falter, as they invariably do, there are not enough new ones ready to roll out to take their place. This lack of focus on growth is widespread in the machinery and electronics industry, where nearly 40% of companies we surveyed reported they were still primarily concerned with restructuring, not growth. Indeed, times have been tough for many in the automotive and assembly industries. But does this mean that there is nothing with which to fill the pipeline? That profitable growth is no longer possible in mature industries like these? Not so, if you look more closely. One European manufacturer of industrial fasteners, for example, has consistently grown nearly 15% per year over the last decade, while earning at above average levels - and all this in a comparatively low-tech, basic industry. Companies like this also faced existence-threatening pressures like those felt for example by many automotive suppliers: ! ! Demanding customers the globalizing automakers who have more leverage as they reduce their field of suppliers and expand, More volatile demand, as growth shifts away from Triad markets to emerging ones in distant lands,

Innovations in materials, design processes, and electronic technologies, which make rapid adaptation, if not further innovation, essential, and More discriminating investors, who are focused on rising shareholder value as a prerequisite for access to capital markets.

Part of the reason managers get swallowed up by their day-to-day problems and continuously postpone organizing for growth is that they lack a systematic approach to it. In The Alchemy of Growth, we have attempted to fill this gap. We offer a way of thinking and talking about growth that helps managers at all levels balance the competing demands of running existing businesses and building new ones. We call it the three horizons of growth. Weve observed it, and weve tested it out. It works. Read more about it ahead.

2. CONCEPT: THE THREE HORIZONS OF GROWTH What complicates managements task when it comes to growth is that the risks and opportunities change as a business progresses through the development pipeline. For this reason, we broke down the growth process into three more manageable phases, or horizons, each of which represents a different period in the creation and development of a business i.e., embryonic, emergent, and mature.

The growth challenge concurrent management across 3 time horizons

Value

Horizon 3 Create options for future businesses Horizon 2 Build momentum of emerging new businesses Horizon 1 Defend and extend current core businesses Time

Exhibit 1

The three-horizon concept has proved a powerful learning tool helping companies to develop growth strategies and communicate them to managers.

Horizon 1 Defend and extend core businesses Horizon 1 contains the businesses that generate profits and cash flow today. These businesses may still have some growth potential but, eventually, they will flatten out or decline. They provide the skills and resources for growth.

Horizon 2 Build emerging businesses Horizon 2 contains businesses on the rise: fast-moving, entrepreneurial ventures that may or may not be generating profits in the short term. They need continuing investment to finance rollouts. But they are expected to become significant profit generators over the medium term.

Horizon 3 Create options for future businesses Horizon 3 is the domain of embryonic businesses options for pursuing future opportunities, some of which will prove successful and contribute significant profits in the long term. They are more than ideas: they are real activities and investment. They are rarely proven opportunities, but they need to be promising and to have the support of management without committing too much capital or other resources.

Management challenge Shore up competitive positions and unlock remaining potential in the core businesses. Build capabilities and fuel growth in new businesses. Identify and nurture options.

Management must be active in all three horizons at the same time in order to ensure that the maturation process does not stall and interrupt growth farther down the line. Such concurrent management of horizons should not be confused with short-, medium- and long-term planning, however.

This is what the three horizons could look like for a locking system supplier:
Horizon 1 Door locks and fittings as single components Horizon 2 Locking systems: central locking system with remote control Horizon 3 Door modules

...or a European heavy truck manufacturer:

Horizon 1 Quality improvements Process reengineering Realign service network Horizon 2 Truck rental Used car restoration Telematics Truck financing, leasing Horizon 3 New solutions e.g., combining truck/rail Frequent-driver programs

...or a world-class automaker:

Horizon 1 Triad growth in existing markets: 300,000 to 4 million (+8%) Non-Triad growth: 100,000 to 1 million (+11%) with focus on SE Asia Horizon 2 New products for Latin America Sales target for minivan: 400,000 units Two-seater Horizon 3 Plastic car for Chinese market Explore alternative drives

Fast-growing companies should not just manage growth at the corporate level, but follow the idea of the three horizons throughout the organization. Ideally, each division, business unit, functional department, manufacturing site, product line, research lab and sales territory should be managing its own set of horizons. In short, every leader should have three horizons to manage.

3. SELF-DIAGNOSTIC: HOW HEALTHY ARE OUR HORIZONS? Successful growth starts with an honest assessment of the contents of the pipeline. Managers throughout the organization must look in the mirror and ask themselves how healthy their array of developing businesses is. Where are the gaps? Where are the bulges? While there are a few exceptions, our research shows that the vast majority of companies are not the picture of health when it comes to growth horizons. But 6

the good news is that an accurate diagnosis is the first step in the cure. Knowing where the strong and weak points are in the pipeline enables management to set its priorities and direct their resources to where it really counts.

How would you rate your company or organizational unit?

in HORIZON 1...
No Are your core businesses generating sufficient earnings to allow you to invest in growth? Do you have a strong performance orientation to push profits higher in the next few years? Is your cost structure competitive with that of the rest of your industry? Has your operating performance been stable? Has your market share grown? Is your company reasonably well protected from new competition, technologies, or regulations that could change the rules of the game? Yes

in HORIZON 2...
No Do you have any new businesses capable of creating as much economic value as the current core businesses? Are these new businesses gaining momentum in the marketplace? Is your company comfortable making substantial investments to accelerate new business growth? Is there mounting investor confidence in these businesses? Are the new businesses attracting entrepreneurial talent to your organizations? Yes

in HORIZON 3...
No Does your leadership team set aside time to think about growth opportunities and industry evolution? Have you developed a rich portfolio of options for reinventing existing businesses and creating new ones? Are these ideas very different from those on the list last year? Three years ago? Five years ago? Are you developing effective ways to turn these ideas into new businesses? Have the ideas been made tangible in concrete, measurable first steps? Yes

If you answered "yes" to all questions, youre in great shape. If not, weigh your answers to arrive at a general diagnosis of healthy ( ) or unhealthy (X).

Do you see yourself in any of these patterns?

Horizon 1 1. Under siege 2. Losing the right to grow 3. Running out of steam 4. Inventing a new future X X X X 5. Generating ideas but not new businesses 6. Failing to seed for the future Horizon 2 X X X X Horizon 3 X X X X

This is what they look like in more detail: 1. Under siege, the first and worst pattern. Here, core businesses are underperforming, threatened by competitors, or facing imminent decline. Little is happening in the pipeline, meaning not enough strong new businesses to take up the slack.

2. Losing the right to grow. Excessive focus on growth can be just as bad as not enough. Some companies lose the right to grow when they become obsessed with new businesses and take their eyes off the core businesses that must be there to finance them. 3. Running out of steam. These companies are fixated on the present, which can easily happen when working on a major cost-cutting and efficiency-building program. Even world-class companies can fall into this trap. 4. Inventing a new future. This pattern is most common in start-up companies, whose business is not yet generating expected earnings. Large companies can also fall victim here if discontinuities restructure the market, such as e-commerce is doing in a wide range of industries. 5. Generating ideas but not new businesses. This happens when otherwise healthy companies expend great energy exploring new ideas, but stop short of actively developing them. High-tech companies sometimes have this problem, as do companies that are working on their first major growth charge. 6. Failing to seed for the future. Companies may fuel profitable growth for years, but unless they are producing a continuous stream of new options, growth will sooner or later stall.

Achieving balance does not mean having the same number of initiatives in each horizon. The low-hit-rate associated with horizon 3 options means that a large number are usually needed to yield even one successful horizon 2 business. Similarly, not all horizon 2 businesses will make it into horizon 1. Given this attrition, a balanced portfolio across the three horizons produces a development pipeline that looks more like a funnel than a cylinder. More telling than mere numbers of initiatives per horizon is the way that skilled growth companies allocate investment spending across the horizons. Most of the growth-sustaining companies we studied commit at least one-third to two-thirds of their new investment spending to horizon 2 and 3 initiatives. The optimal allocation for your industry will depend on the pace of change, the degree of uncertainty, your managerial and financial capacities, and last but not least, the expectations of your shareholders.

Here are profiles of four competing automakers viewed within the context of the three horizon patterns for the period 1996 through 2000:

Company A Horizon 1: Growth in

core regions with existing products 10%

Company B
20%

Company C
25%

Company D
5%

Horizon 2:
Growth in new regions/new segments

12%

32%

4%

50%

Horizon 3:
Investments in alternative-fuel technologies

high

medium

low

low

Pattern:

Generating ideas but not new businesses ( X ) Nurture Horizon 2 businesses, e.g., "USstyle" cars Move best options to Horizon 2, e.g., car for China, concept cars

Failing to seed for the future (  X) Fund projects to seed options, e.g., in alternative drives, alternative materials, concept cars

Running out of steam ( X X) Enter new businesses, e.g., via export, product portfolio expansion Seed future, e.g., by developing new cars

Inventing a new future (X  X) Improve operating performance to build growth base Invest in future, e.g., with multibrand strategy

Action required:

4. APPROACH: KICKSTART AND SUSTAIN GROWTH

4.1. Laying the foundation

Growth should not always be a companys highest priority. Some companies are simply not prepared for it. When this is the case, the first step is laying and maintaining - a solid foundation of operational excellence, competitive strength, and sustainable cash flow.

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This means first earning the right to grow by: ! Achieving superior operating performance. Growth-sustaining companies are outstanding operators, usually market share leaders and low-cost producers. They recognize that operational excellence is indispensable to healthy growth. Divesting strategically to free-up managerial and financial capacity for new growth. Prune businesses from your portfolio that divert management and resources from your central aims. Building shareholder confidence. Credibility with shareholders must be earned through strong operating results and a sound corporate strategy both of which must be effectively communicated. They hold the key to financial freedom.

Many automotive suppliers that were underperforming the market in 1991 have worked hard to earn their right to grow. By 1996, they had pulled themselves up so successfully that they were approaching the performance of industry leaders, for example, in: ! Sales growth Top companies turned in a 3-year sales growth rate of 16.1% in 1991, compared to only 5.1% for the less successful companies. But by 1996, this gap had narrowed to less than one percent i.e., 9.9% versus 9.1%. Return on sales Here top performers declined from 9.1% to 5.5%, while the formerly lagging companies raised theirs from 0.5% to 4.1%. Customer complaints - Top performers reduced customer complaints from 240 (ppm) to 202 in this period, while less successful cut their rate by more than 75%, from 4800 to 1135.

Efforts to simultaneously decrease time, cost and defects, such as our design-tomarket program, can help companies in all segments of the automotive and assembly sector earn the right to grow e.g., through: ! ! ! ! Optimal product differentiation, eliminating unprofitable variation and concentrating on that which customers are willing to pay for, More rapid innovation through smaller steps, so as to regularly take in and react to customer feedback, More cost-competitive products through simpler design and more stable processes, Product maturity at mass production to essentially eliminate costly post-freezepoint changes,

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! !

Shorter development times through simpler processes and reduction of interfaces, and More efficient product development, concentrating resources on fewer projects to avoid dilution of efforts.

The physical state of a company in its preparation for growth is one thing. Its mental state is another. What is also indispensable for a solid foundation is the strong resolve to grow. This means: ! Securing senior management commitment. It may take a year or two and some personnel changes - to get the team rallied around growth. Without shared commitment at this level, however, a concerted growth initiative is almost surely doomed. Raising the bar. Setting difficult, stretch growth targets wakes people up to managements seriousness. In the automotive supply industry, the difference in company ambition and results is clear:
Foreign Market Share Achieved (1994-97) Global leaders Less active globalizing companies 4.9% 1.1% Planned (1997-2000) 8.4% 2.1%

Compound Annual Growth Achieved (1994-97) Innovators Non-Innovators 19.2% 4.5% Planned (1997-2000) 24.0% 17.0%

Removing organizational barriers. Sometimes company culture and its systems get in the way of kickstarting growth. Recognizing and removing such barriers sends an unequivocal signal to all in the organization.

4.2. Searching for opportunities

Creating a real growth strategy is only possible when managers are able to see businesses in new ways and evaluate opportunities with their hearts as well as their minds.

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Expand the mind: "What is possible?" ! ! ! Every organization has its orthodoxy, which dictates what is and what is not possible. Challenging the orthodoxy helps people see and evaluate ingrained beliefs, opening the door to more expansive thinking. Thinking too broadly about growth, however, can blur uniqueness in a company, as Harvard Business School professor and consultant Michael Porter puts it. Some caution must therefore be exercised in expanding strategic options.

Legitimize passion!
! ! ! Passion must be a part of any search for opportunities. People devote energy to ideas they believe in and care about. Dont waste precious time on projects that arouse little enthusiasm. If you cant generate excitement about it, shelve it.

Explore the Seven Degrees of Freedom

The Seven Degrees of Freedom is an analytical template to help managers uncover hidden opportunities for growth. It looks like this:

The Seven Degrees of Freedom

Existing customers Existing products and services Existing value delivery system Existing industry structure Existing geography Existing competitive arena Current business vs vs Expansion into new geographies vs vs vs New customers vs

Innovation of products and services

Innovation of value delivery system

Improvement of industry structure

Moves into new competitive arenas

Exhibit 2

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1. How could we increase sales to the same customer with the same product mix? Companies that sustain growth are adept at finding new ways to expand sales of existing products to existing customers. They use traditional tools to increase the frequency or quantity of purchase and cross-sell products. They also use sophisticated direct marketing techniques and find profitable ways to reward customer loyalty. 2. How could we extend the business by selling existing products to new customers? Focusing on a target market can be a very effective strategy. But it can blind companies to other possibilities. Identifying and pursuing new customer groups can unlock attractive growth opportunities. Demographic patterns and socioeconomic trends may point to pockets of latent demand. 3. How could we grow by introducing new products and services? A deep understanding of customer needs can enable companies to extend existing products or services, as well as create new ones to meet or stimulate demand. In mature industries, it is much harder to come up with truly innovative ideas that customers will appreciate. But it can be done, as shown below for the automotive supply industry:
Relative focus on: Existing New products products (1997-2000) (1997-2000) Innovator NonInnovators 43% 69% 57% 31% Compound Annual growth (1994-97) 19.2% 4.5% Operating income as % of Sales (1994-97) 5.8% 2.7%

And sources of innovation are far from exhausted, especially in comfort, safety and smart technologies, where unit growth between 1996 and 2005 is projected as follows: Navigation systems (+ 650%) ABS brake systems (+ 130%) Airbags (+ 160%) Air conditioning (+ 97%) Theft protection (+ 34%)

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4. How could we expand sales by developing better delivery systems for customers? This may include the development of new channels, such as direct sales, electronic channels or new distributors. The revolution of e-commerce, for example, is clearly something no company can afford to ignore. This is not, however, to undervalue the benefits of reengineering existing systems. 5. How and where could we expand into new geographies? Global expansion is one of the most powerful options for growth, but it is also one of the most difficult. Assuming a company is operationally fit, international growth can allow companies to replicate their success formula many times over, while leveraging their costs over a broader base. It is increasingly used as a strategy in the automotive and assembly sector: ! Globalization is a driver for profitable growth in the automotive supply business:
Return on Sales (1994-97) Global leaders Less active globalizing companies 6.6% 3.6% Annual Growth (1994-97) 16.5% 8.9%

Automakers are cranking up production primarily in emerging markets:

Annual Growth (%) Eastern Europe South America Asia/Pacific NAFTA Western Europe Japan Rest of world Production Increase from 1997 to 2003 8. 6 5.2 3.8 1.0 0.9 -2.0 1.0 Expected Share of Total Volume in 2003 7.6 6.3 12.2 27.7 28.5 16.4 1.3

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But globalization is not all glory. Even top companies have had major defeats here:
Failure Mode Going native at expense of core value/brand Major investments without stable market position Lack of solid local supply base Example European automaker building Detroit-style Plant closed Asian automakers $400 million Canadian auto plant Plant closed Japanese car plants in U.S. Importing steel/paint from Japan, difficult education of U.S. suppliers Some European automakers in Asia Long lead times, frequent withdrawals Alternative solutions - Exporting own strength - New brands - Flexible, small-step tactics

- Bringing proven suppliers - Industry park solutions

Inability to manage political and regulatory changes

- Help to build local pride - Get commitment

6. How much could we grow by changing the industry structure? Many of the most successful growth companies pursue opportunities of this kind, usually by means of mergers, acquisitions, or alliances: ! Automotive supply - Mergers and acquisitions rose from 35 worldwide in 1993 to 116 in 1996. The number of mega-suppliers, those with sales of more than $5 billion, increased accordingly, from 16 in 1992 to 50 in 1996. OEMs - In 1960 there were 42 independent OEMs in the Triad, but only 16 by 1996. Many expect a final number of only 5 to 7.

7.

What opportunities are there outside existing industry boundaries? Despite the difficulty of doing this well, most successful growth companies have succeeded here. Some created value through vertical integration simply because the industry was attractive, others because they had to brook a gap in the value-added chain or found themselves in a new market as their industry converged with another. Especially in automotive supplies, the dominant growth strategy is vertical integration, where suppliers add value in assembly, R&D or product integration. ! Component Specialists - High R&D contribution Annual growth (1994-97): 9.3% Characteristics: Important suppliers of components that can be either integrated into systems and modules or are critical standalone components for OEM 16

 Typical products: compressors, chassis components, transmission cases, crankshafts ! Commodity Supplier - Low vertical integration Annual growth (1994-97): 6.9% Characteristics: Traditional supplier with mature, standardized products Typical products: Screws, fittings ! System Developer - High integration, but low assembly contribution Annual growth (1994-97): 14.0% Characteristics: Developers of entire systems with unique functionality Typical products: Brake systems, navigation systems, locking systems ! Integrated Partner - High integration in all dimensions Annual growth (1994-97): 19,5% Characteristics: Suppliers of broadest range of integration tasks Typical products: Axle modules, integrated front-end modules.

Once the foundation is laid and broad directions for growth have been identified through the Seven Degrees, the process of growth can actually begin.

4.3. Building Staircases to Growth

Forging ahead full steam is usually not the most advisable course. There are tremendous market uncertainties to deal with and in all likelihood, some major capability gaps. Masters at growth deal with these problems by building staircases, as shown below:

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Generic growth staircase

Secure growth options Test business model Replicate proven business model Manage for profitability

Source and secure options for future growth

Test commercial viability of business concept

Realize growth potential through business-building initiatives

Maximize growth potential by unlocking incremental growth, then manage value in decline

Exhibit 3 In other words, they take a measured, step-wise approach, where each step must make money and add capabilities. It goes like this: ! Secure growth options through intensive search, whether through your own R&D, a pilot program, a test market, a small acquisition, a minority investment in a start-up or potential acquisition, a foothold abroad, an export sales force or some other avenue. Test business models to confirm direction. Here the aim is to develop a market-based understanding of what works, to discover which capabilities are critical and to assess whether and how much commercial potential there is. Replicate proven business model to secure your market position. If the model proves commercially viable, replicate and extend the staircase: as growth accelerates, more investment will be required. Manage for profitability to ensure operational superiority. No tree and no business - grows forever. In this stage, the key is extracting value from cost reduction, incremental extension and continuous renewal.

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4.4. Securing Advantage through Capabilities

Traditional operating skills, such as marketing, IT management, product design and manufacturing, are essential to success, but they are not the only capability sustained growth companies use to their advantage. They also have learned to leverage three other classes of resources: ! Privileged assets. These are hard-to-replicate assets that give companies a distinct competitive advantage e. g., a particularly strong distribution network, brand or reputation, customer data base, infrastructure and intellectual property. Growth-enabling skills. Skills in mergers and acquisitions, alliance-building and risk management and other non-operating capabilities can be usefully applied across market and business unit boundaries. Special relationships. When a company has special relationships with customers, suppliers or connected individuals in business and government, it can mean an entr to otherwise inaccessible opportunities.

Lasting competitive advantage comes only when companies take and keep control of the critical capabilities for each step of the staircase. Opportunities that are less critical can be outsourced or controlled by others. Keeping control of the staircase longer run means more: Creating a bundle of distinctive capabilities. As each new capability is added, the advantage becomes increasingly difficult to replicate.

4.5. Winning through execution

Building a successful staircase requires overcoming both the uncertainty of the marketplace and the resistance, intended or not, of the rest of the organization. This requires a company to: ! Adapt the business model. What turns a good model into a blockbuster business is often the willingness to adapt. Successful entrepreneurs may launch a business quickly, but tend to do it in a measured way, focusing more on learning than on planning. Setting milestones to force answers to these questions can facilitate this process: How does the model work best in the marketplace? Pilots can provide valuable feedback, but performing one in every aspect of a model is prohibitively expensive. The scope of a pilot must therefore have a sharp focus.

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 How far can growth potential be stretched? Once a company has learned and adapted to the market, the next challenge is assessing its growth potential of additional steps to the staircase. How can we jump to new staircases? The replication of the business model usually yields rich insights about other potential staircases. Horizon 2 activities, for example, tend to generate Horizon 3 options in its wake. The management challenge is to capture and act on them without distracting the roll-out process. ! Protect a new staircase. Big companies tend to eat their young. People in Horizon 1 businesses are especially hostile when new ventures threaten to cannibalize their base. Fledgling businesses also have different management needs. Senior management must therefore make a special commitment to their young, to: Shelter and feed them. Many large, innovative companies protect new staircases by "cocooning" them from the corporate body. This allows the start-up the freedom it needs, while providing it with valuable resources at the same time. This creates a small company environment that fosters creativity, focus, and empathy. Exempt them from Horizon 1 management systems. Mechanisms for running a largely predictable Horizon 1 operation suit neither the demands of fast-growing Horizon 2 businesses, nor the open-ended nature of Horizon 3 projects. New staircases may be better built when managers do not have to meet these more rigid planning and budgeting standards.

4.6. Managing by Horizon

To sustain growth, companies must institutionalize the process of business building, providing differentiated systems for each horizon in these three areas: ! Talent management. Without the support of talented people, even brilliantly crafted strategies and inspiring visions soon lose their edge. Not surprisingly, the talents required to effectively manage the different horizons vary significantly. Because they also seldom come together in one person, it makes sense to look for people who best exemplify these three different types: Horizon 1 - The operators, those with in-depth functional and/or industry expertise, as well as strong drive to achieve in a conventional sense. Companies can best motivate these managers using straightforward rewards and penalties for short-term performance.

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 Horizon 2 The business builders, who are entrepreneurial by nature - comfortable with ambiguity and change. These are big picture people who know how to make tough decisions fast. To get and keep managers like these, they must have the freedom to act and the opportunity to earn major cash and equity bonuses. Horizon 3 - The visionaries, the most unconventional of the three. These are people often motivated strongly by recognition of their ideas, although financial rewards are not unimportant. Not a few wish to try their entrepreneurial skills as well. They require the most intellectual freedom the company can manage to give them.

An immediate injection of outside talent of all three kinds is usually necessary to generate the energy required for a successful kickstart to growth.

Performance management. While targets must make sense as a whole for the company, they must be differentiated by horizon to encourage the right behavior for each. Horizon 1 Short-term, bottom-line results, as measured by earnings, cash flow, return on invested capital, costs and/or productivity Horizon 2 - Growth and capital productivity, as measured by revenue growth, market share, new customer acquisitions, earnings, capital investment efficiency, expected net present value Horizon 3 Pay-off size and probability of success, as measured by progress to milestones, option valuation, rate of conversion from idea to business launch, number of initiatives.

4.7. Organizing for sustained growth

How to balance the advantages of scale against those of smallness is a classic organizational dilemma. For successful growth companies, decisions are clearly weighted toward the small, although they do tend to centralize broadly applicable special services, such as merger and acquisition skills. In particular, sustained growth companies we observed tend to make a regular habit of: ! Creating small communities in order to increase organizational flexibility and foster a feeling of personal ownership e.g., by Splitting the organization into independent operating companies 21

 Organizing by team or project group, especially in networkbased businesses and those with very large plants Spinning off small units, usually sharing ownership with a partner having special capabilities.

Shaping new communities. Effectively managing the portfolio of activities in the three horizons can mean an almost constant reshaping of the corporate structure. Despite the benefits of smaller communities, many of the best growth opportunities may still lie in the no man's land between business units - requiring their individual capabilities, yet outside of their basic strategic focus. In cases like this, top management can graft an undernourished activity closer to the corporate center as a division or a group in its own right or carve it out of an existing business.

Connecting communities. Many shared services can be justified by economies of scale. It is especially critical - and common among sustained growers - for corporate headquarters to develop and offer growth-enabling and other non-operating skills. Having expertise in-house tends to encourage people to pursue acquisitions more freely, while increasing cost-efficiency. Top growth companies also work to connect individual communities with each other through idea-sharing events and other mechanisms. These are useful forums through which to exchange both ideas and capabilities for the overall benefit of the company. Here are some connection projects in the automotive supply industry:
Those carrying out projects with customers or suppliers (1997 average) Pre-production Innovators Non-Innovators 58% 36% Post-production 26% 26% None 16% 37%

With customers only (in % of R&D teams) Commodity Suppliers Component Specialists System Developers Integrated Partners 31% 19% 20% 21%

With customers and suppliers (in % of R&D teams) 13% 25% 28% 36%

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Maintaining organizational conviction and momentum to grow can be a daunting task. The challenges are certainly there! The trick is to keep people inspired about meeting them. In this website, we described some of the ways through which high-growth companies managed to do this. But of course, this is meant only to give you an overview. Interested? What about your company? Give us a call and well arrange a first discussion. The Alchemy of Growth. It can make a difference.

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