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Radical strategies for profitable growth
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European Management Journal Vol. 16, No. 3, pp. 253–261, 1998 1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain S0263-2373(98)00002-4 0263-2373/98 $19.00 + 0.00
Radical Strategies for Profitable Growth PETER DOYLE, University of Warwick, UK History suggests that the success of many of today’s most admired companies is likely to prove illusory. All too often their current performance is not based on superior competitiveness and is not sustainable. Companies exhibiting high growth can be described as following one of three paths: radical, rational or robust growth strategies. Only the last offers competitive advantages which have the capacity to endure and to create long-term shareholder value. This paper explores and illustrates the characteristics of robust companies and contrasts them with those pursuing radical and rational growth strategies. 1998 Elsevier Science Ltd. All rights reserved The central task of managers is to develop growth strategies which provide shareholder value. The aim of this paper is to explore what types of marketing strategies are most likely to create sustainable returns for shareholders. The study is based on a sample of 36 companies that have been singled out by the business and financial press at different times for the success of their strategies. Over the longer period it will be observed that some of these companies proved to be much more successful than others. Some of the companies that pursued radical growth strategies proved to be very temporary indeed in their achievements. The objective here is to analyse such differences and to compare the features of sustainable and non-sustainable growth strategies. Managers and the business press commonly have short time horizons. Companies which achieve a year or two’s high sales and profit growth are hailed as corporate superstars, lauded for their business acumen and held up as icons to their more plodding competitors. But such judgements can easily be demonstrated as ill-considered and superficial. For instance 750 UK directors were asked in a recent survey, to give an example of a company today pursuing a successful radical growth strategy (Marketing Society Annual Conference, 1996). The three most popular choices were Microsoft, Virgin and Direct Line. A second question asked what companies they would invest in now if they were obliged to hold the shares until their retirement. The leading choices European Management Journal Vol 16 No 3 June 1998
were Marks & Spencer, Shell and Unilever. Finally, they were asked what companies were pursuing the radical growth strategies a decade earlier – around 1987. In other words, who were yesterday’s equivalents of Microsoft, Virgin and Direct Line? Not surprisingly, this proved a more difficult question for them to answer. Researching the business press showed that the three most quoted successes of the late 1980’s were Saatchi & Saatchi, Ratners and Poly Peck. The results of this survey were first, the three questions generated completely different sets of companies. While today’s radical growth companies were observed with awe, very few experienced managers would wish to invest in them long term! The companies seen as offering the best long-term shareholder value were pursuing anything but radical growth strategies – continuity rather than revolution characterized their approach to the marketplace. Second, virtually all of the companies highlighted a decade earlier for their radical growth strategies had disappeared or were in serious financial difficulties. Such a finding echoes the follow-ups on the famous Peters and Waterman study of 36 excellent companies (Peters and Waterman, 1982) which found a very high proportion of these ‘stars’ had quickly run into severe financial problems (Makridakis, 1996).
The 3 R’s of Strategy An analysis of the different growth strategies pursued by companies suggests that they can be grouped into three types which can be termed: radical, rational and robust growth strategies. These differ in the rates of growth they offer, the value they create for customers and in the sustainability of their performance (Figure 1). Radical growth strategies can generate exceptional performance but they tend to be short-lived. The main reason is that companies pursuing such strategies do not focus on creating superior customer value either through better products or lower costs. As a result they do not generate customer loyalty and hence sustainable cash flows. 253
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depends upon adapting to the needs of consumers which continually change as a result of the rapidly evolving market environment. From this the key principles of strategic management emerge (Figure 2).
Strategy Must Fit the Environment Figure 1
Alternative Growth Strategies
Rational growth strategies are based on innovations which do create superior value for customers but the longer-term weakness of such strategies is that they do not create entry barriers so that competitors can catch-up or leap-frog the pioneer. Robust strategies are the only sustainable growth strategies. Like the rational strategy they provide genuinely superior customer value but they are more sustainable. This sustainability is based upon the company’s network of relationships with internal and external stakeholders. Such networks allow the company to continually update its strategy, build customer loyalty and, over time, create brands which act to provide entry barriers against competitors. Because robust companies tend to be larger and more mature than the other two types of company their growth rates are lower. Exponential growth rates are never sustainable for a long period – a company growing at 20 per cent a year would soon be bigger than the entire market in which it could operate. The challenge of the entrepreneurs who start with rational growth policies is to transform their businesses into robust forms. In today’s rapidly changing and hypercompetitive environment, without such a transformation entrepreneurial successes tend to be short-lived.
Key Strategic Principles To understand the forces determining the sustainability of a strategy, it is useful to review the key principles. The basic principle determining success in a market-based economy was set out by Adam Smith over 200 years ago – for firms to grow and make a profit they have to develop a strategy and organisation to meet the needs of customers. Companies that meet customer needs efficiently can prosper; those that do not, disappear. But these early works on economics and marketing understated the dynamic nature of markets – what satisfies customers today will not satisfy them tomorrow. A rapidly changing environment: new technologies, new global competitors, changing demographics and life styles, create new needs and new solutions to these needs. Consequently what is regarded as an excellent computer, car or service level now will be quickly obsoleted by the interplay of changes in consumer expectations and new, innovative products and services from competitors. Consequently continued success 254
Companies succeed as long as they are meeting the needs of today’s customers efficiently. Newcomers such as Microsoft or BSkyB have established strong market positions and generated substantial shareholder value because they have come up with new products and services which brilliantly capitalize on the opportunities created by new developments in computers and communications. Long-established companies such as McDonalds, Coca-Cola and Marks & Spencer continue to succeed because they have adapted their products and market positioning to today’s environment.
Successful Strategies Erode Business is Darwinian in nature – the success of most companies is temporary. The average public-quoted company lasts only for 40 years. Once IBM and General Motors dominated their industries just as clearly as Microsoft, McDonalds and BSkyB do today. Woolworth’s was once the world’s largest international retailer, Britain’s Alfred Herbert was the largest machine tool manufacturer and BSA led the motor cycle market. These companies disappeared because they kept a good strategy too long. In a market environment which is rapidly changing nothing fails like success. Nothing is more certain than that a firm’s current products, technology, distribution channels and market positioning will become obsolete.
Effectiveness is More Important Than Efficiency In Drucker’s famous aphorism, ‘efficiency is doing things right; effectiveness is about doing the right things’ (Drucker, 1973). Efficiency is about reducing costs through downsizing, consolidation and reengineering; effectiveness is about innovation through new product development, new business
Figure 2
Key Strategic Principles
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concepts and new processes. History shows that innovation always dominates low cost. Companies that lack the culture and skills to innovate cannot compensate by offering yesterday’s answers at low cost. Innovations normally start by offering a quality advantage but are usually soon competitive on price as well.
Speed and Decisiveness The speed and turbulence of environmental change today has created corresponding rewards for firms that can act rapidly and decisively. Firms that can react to customers’ needs quickly and have fast new product development processes obtain higher average prices, find it easier to create competitive advantage, gain market share and build brands. They also have lower costs (Stalk and Hout, 1990). In electronics, for example, a six month delay in introducing a new product was found to cut its lifetime profits by 32 per cent – far exceeding the likely losses from cost overruns or quality problems (Reinertsen, 1993). But strategic success depends upon more than speed, it also requires the decisive commitment of resources. The evidence suggests that fast innovators fail to earn the rewards and achieve lasting market positions unless they commit substantial marketing and promotional resources to aggressively build market acceptance. Without this decisive commitment, they will be caught up and overtaken by competitors that follow in their slipstream.
Organisation is More Vital Than Strategy However radical and successful an innovation is, in today’s rapidly changing environment any such breakthrough provides only a temporary advantage. Consequently sustainable performance depends upon the firm’s ability to continuously change by shedding current strategies and replacing them with new concepts. This in turn depends upon the investments management has made to build a sustaining and innovation-orientated network of relationships with employees, financiers, suppliers, customers and society as a whole. It is this ‘organisational architecture’ – the quality and depth of the firm’s relationships with its stakeholders and their commitment to it, which determines the firm’s ability to continuously, innovate and hence sustain its competitive advantage (Kay, 1993).
Figure 3 Radical Growth Strategies
receive attention because they can attain truly astonishing rates of growth. For example, in the space of two years WPP transformed itself from an obscure manufacturing business to the world’s largest advertising agency. Ratners did the same in jewellery retailing and Blue Arrow in employment services. There are three forms of radical growth strategy: acquisition-led; marketing department-led and PRled. The characteristics of all three are explosive growth, the lack of focus on creating genuine quality or cost advantage for customers and, as a result, nonsustainable performance. For instance of the eleven companies in Figure 3, only one – Virgin, is still performing satisfactorily, six have disappeared altogether, and four have gone, or are going through, acute financial crises. To understand the structural weaknesses of radical growth strategies it is useful to review the most common managerial objectives. Virtually all managements have two basic goals: financial, and market share or growth objectives. Financial performance is necessary to satisfy shareholder and creditor interests; market performance is necessary to secure jobs and provide for future profits. The problem for managers is that these goals partly conflict, for example lower prices, more advertising and a broader product range will normally increase sales but can easily reduce profits, and vice versa (Figure 4). This conflict is even more apparent when the time dimension is added. While every decision has conflicting effects – a good effect and a bad effect, the positive effects on market performance tend to be much slower than the negative effects on financial
Radical Growth Strategies The type of growth strategy most admired in the business press is termed radical growth strategies. Figure 3 summarises their forms, characteristics and some companies (mainly UK examples) which are or have pursued such strategies. These companies European Management Journal Vol 16 No 3 June 1998
Figure 4 Marketing and Conflicting Business Objectives
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performance. Lasting market share positions depend upon offering customers superior value but it can take a decade or more to build the organisational and marketing infrastructures from which superior brands, products and service systems can be offered. Unfortunately the investments in brand support, training and development necessary to build such infrastructures hit profits immediately. The result is that all managements have a choice between a relative focus on a long-run market share building strategy and a focus on high short-run profit performance. The former emphasises understanding customers needs and developing solutions which give them genuinely superior value. This is the policy pursued over a long period by such companies as Marks & Spencer, Toyota, Sony, Federal Express and Disney. In contrast financially focused companies look inwards at asset management and budgets to control costs, expenses and margins. Well-known examples include Hanson Trust, GEC and BTR. While marketing strategies take years to bear fruit, by contrast, short-run financial improvements can be brought about very quickly. By raising prices, cutting costs and rationalising products and assets dramatic short-run turnarounds in cash flow and earnings are easily achievable (Doyle, 1994). Nearly all radical growth strategies focus on such short-term results and most are financially-driven.
Acquisition-Led Strategies Acquisition-led strategies are the most common form of radical growth strategy. This is how WPP, Ratners and Blue Arrow achieved their passing global leadership. Unlike M & S, Toyota, Sony, FedEx and Disney which built their strong market positions by painstakingly improving the quality of their offers year after year and so attracting new customers and building stronger relationships with current ones, acquisitive growth works by buying customers and assets. The attractions of acquisition-led strategies to Western managers are three. First, they work dramatically fast. Whereas it took Marks & Spencer 60 years to achieve market leadership in the UK by internal growth, Ratners did it on a global scale in fewer than six. Second, it appears easy – no skills other than financial acumen are required! With little expertise in advertising, armed only with an MBA and an accountant’s qualification, Martin Sorrell was able to construct the world’s largest advertising business. Third, they are not dependent on the culture of the organisation and the quality of its network. Because growth is purchased its achievement is not dependent upon the commitment and knowledge of the staff and the trust and relationships built among customers, suppliers and other stakeholders. Unfortunately acquisition-led strategies suffer two crippling problems. First, the evidence is overwhelming that the great majority fails to create value for shareholders. In the long-run around two-thirds gen256
erate lower capital gains and dividends than the industry average. The more spectacular the growth the greater appears the probability of value destruction (The Economist, 1997). Second, not surprisingly, since the objective is size rather than quality they do not create superior customer value. In general, companies that grow by acquisition end up with a ragbag of overlapping brands, none of which has critical mass. Managers lack the knowledge to deal with the new marketing and operational problems that explosive growth creates. Saddled with the debt incurred to make the acquisitions many of these companies quickly succumb when their sales and earnings forecasts prove too optimistic for the realities of the markets in which they have entered. Marketing Department Strategies In some consumer goods companies strategy has been driven by marketing managers. Unfortunately in the current competitive environment the marketing function rarely has control over the real levers of competitive advantage. Today customer satisfaction depends less on traditional brand management and more on to-the-minute delivery performance, seamless IT interfaces, co-design of systems and multilevel multifunction supplier–customer partnering which are either controlled by other functions or depend upon close cross-functional co-operation (Mac Hulbert and Pitt, 1996). Some marketing managers cannot adapt to these changes and have focused on those instruments over which they still have control – advertising, packaging, line extensions and trading-up policies. Pepsi Cola spent $500 million on advertising and packaging in an abortive attempt to relaunch the brand in 1996. The key differential advantage was that the can was now painted blue rather than red! Line extensions were another growth strategy pushed by the marketing department. By 1997 Procter & Gamble was offering consumers a choice of 52 varieties of Crest toothpaste. But perhaps the most characteristic marketing department strategy of the last decade was product differentiation and trading-up customers. This was based on the observation that the aggregate demand curve for a product or service was made up of a series of segment demand curves of varying elasticities. So charging a single price, say £3 (see Figure 5) left a considerable con-
Figure 5
Marketing Department Strategies
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sumer surplus. During the 1970s and 80s marketing managers learned how to exploit and procure the consumer surplus by launching differentiated brands for each segment and then trying to trade-up consumers from low price entry brands to premium priced versions. So brands at say £7 and £10 would be launched alongside the base £3 brand. For example, United Distillers which had the Johnnie Walker Red Label scotch whisky at £10, then added a Black Label at £20, a Gold Label at £60, a Blue Label at £120, and so on. American Express added to its Green Card, Gold Cards and Platinum at substantial premiums. Such marketing strategies became ubiquitous in the 70s and 80s. They were often surprisingly successful in boosting profits since the differences between base and premium versions were often purely cosmetic. Even the chief executive of United Distillers was bemused at the success of this strategy, remarking ‘We have massive amounts of research which show that people cannot tell the difference between one scotch and another. Though they swear total allegiance to one product and would never dream of drinking Brand X, in blind tastings brand X is more often than not what they select (Financial Times, 1993).’
PR-Led Strategies These strategies seek growth through the exploitation of public relations. In these companies public relations is regarded as the key function in the business. In the past Saatchi & Saatchi and today the Virgin organisation are good examples. Such companies market conventional products and services in an unconventional way. Often they depend on the charisma of the leader, for example Maurice Saatchi or Richard Branson, to grab the interest of press and TV. Successful PR strategies obtain great media attention much more economically than relying on advertising. Editorial publicity normally also has much more perceived reliability than paid-for media. Ultimately, however, PR-led strategies tend to be ‘found-out.’ While marketing or PR can get consumers to try the product or service they are not going to achieve loyalty unless performance and value match the best competitors. In most markets customers are ultimately rational and image is related to performance. Studies of consumer behaviour overwhelmingly suggest a basic underlying model (Engel et al., 1995):
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ducts meet their needs and which do not offer good quality. Advertising and PR essentially act on the lag in this equation. For quality products advertising and PR can reduce the lag in the recognition of the reality – they can help build a successful brand image more quickly. For weak products a creative communications campaign can temporarily hide the problem by drawing in new customers – but ultimately consumer experience will erode the image bringing it into line with its reality. Brands such as Mercedes Benz, British Airways or Sony have great images because they offer products and services which offer excellent value in quality, performance and reliability. Communications plays a relatively minor role. Brands such as Lada, British Rail and Amstrad have weak images because they have weak products. During the 1990s all three forms of radical growth strategies have proved vulnerable to the new competitive climate. Figure 6 illustrates the problem. Most markets are characterised by a range of competitive brands, some competing as discount brands, others as regular and some as premium brands. One change has been consumers’ willingness to trade down from heavily marketed premium brands to regular or discount brands. Consumers are increasingly unwilling to pay substantial price premiums for products whose only differentials are advertising, packaging and PR. Even Coke and Pepsi, brands once perceived as unassailable, saw their market shares in UK supermarkets drop by 28 per cent in 1995 alone as consumers switched to cheaper own label. Even more fundamental has been the development of new generation competitors which have fundamentally reconfigured the industry value chain to offer genuine and major competitive advantage (Doyle, 1995). One type may be termed price-value competitors: these offer high quality products at prices substantially below the traditionally positioned brands. They achieve this by re-engineering not only their own operations but also the costs of their entire channel. Total costs are reduced by 30 per cent or more. Direct Line, Daewoo and Wal-Mart are examples of such new competitors. The other types of competitor are termed quality-value companies; here the integrated value chains are restructured to provide higher quality rather than low prices.
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The image (I) of a product or service at time t, is a linear lagged function of its real value to the customer (R), with an error term, ⑀. Image is a function of reality – consumers are rarely irrational over the longer run. Over time customers learn which proEuropean Management Journal Vol 16 No 3 June 1998
Figure 6 Pitfalls Strategies
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over the phone and respond immediately to problems and claims. By offering better service, high visibility and taking 40 per cent out of system costs Direct Line catapulted itself to market leadership and transformed the industry.
Figure 7
Rational Growth Strategies
Examples are Marks & Spencer, the Lexus Division of Toyota and Body Shop. All of these companies have eliminated functional boundaries to commit to genuine value creation.
Rational Growth Strategies Rational growth strategies find innovative solutions to offering customers significantly better products, lower prices or both. Figure 7 shows the main features of this strategy and gives examples of companies who are, or who have, grown by such means. Rational growth is sounder than radical growth because it offers genuinely superior performance. These companies do it by exploiting strategic windows in the form of new technology, new market segments, new channels of distribution, or all three. The problem with rational growth strategies is that they are not sustainable and consequently do not offer long-term shareholder value. The example of Direct Line illustrates the strengths and weaknesses of rational growth strategies. Until 1986 motorists in the UK bought car insurance through the thousands of independent brokers. The large insurance companies which did the underwriting had little knowledge or contact with the ultimate customers. The result was a system which was high cost, offered poor consumer service and had ineffectively marketed products (Figure 8). In 1985 a new company, Direct Line entered the market with a completely innovative approach. Brokers were eliminated and the new company advertised in press and TV directly to motorists. Supported by sophisticated IT, Direct Line staff were able to offer instant insurance
Figure 8
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Rational Growth Strategies — Direct Line
Unfortunately, like other rational growth strategies Direct Line’s tremendous innovation does not appear to have been the basis for sustainable performance. Like others who transformed the cost structure of their industries, the natural strategy was to use the cost advantage to target price-sensitive customers. Unfortunately price-sensitive customers are, by definition, not loyal. When competitors copied the Direct Line innovation, customers shopped around for the lowest quotation. Because of its customer base of price-sensitive customers, the company soon had the highest defection rate in the industry. The only way to maintain market share was then to seek new customers, which given the high cost of acquiring new customers, soon led to a dramatic erosion of Direct Line’s profits. Rational growth strategies then provide breakthrough customer value but are generally quickly copied, even leap-frogged by new competitors. Further, they do not create loyal customers, which as all the recent work on relationship marketing demonstrates, does not provide a basis for long-term profits. New customers are expensive to acquire in investment, time and promotion. They rarely break-even until they have been on the books for several years. Loyal customers, on the other hand, are the real basis for healthy profits — they do not have high maintenance costs, they tend to spend more, they become less price sensitive and they act as effective word-ofmouth advertising for the company. Hence, retaining customers, not acquiring them is the key to long-term profitability (Reichheld, 1995). A company that becomes dependent on new customer acquisition to maintain market share is in a very vulnerable position. Unless rational growth companies transform themselves into robust businesses they do not last.
Robust Growth Strategies Companies pursuing robust strategies (Figure 9) appear to base their development upon four prin-
Figure 9
Robust Growth Strategies
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ciples. First, strategy is built around delivering the long-term superior value which will encourage loyalty among its customers. Second, they recognise that in today’s rapidly changing and globally competitive world no specific advantage is sustainable for very long. Third, this implies that learning and the ability to continuously innovate is the only basis for sustainable growth (Baghai et al., 1996). An organisation’s ability to continually learn and innovate depends upon the knowledge, co-operation and commitment embedded in its network of relationships with customers, employees, suppliers and other stakeholders. These assumptions contrast sharply with those of the radical and rational growth companies. Figure 10 places this form of growth in a broader context. A company’s potential for profitable growth over any time period is constrained by three pillars. One is its industry advantage – some industries consistently exhibit higher growth and profitability than others. For example of the Fortune 500’s twelve most profitable companies in the world, normally at least half are pharmaceutical companies. In other industries, low entry barriers, fierce competition and powerful customers limit the opportunities for sustained profitable growth (Porter, 1980). A second factor affecting potential is the company’s strategic assets – inherited or monopoly advantages giving it special opportunities in the industry. These include strong brand names, for example McDonalds and Johnson & Johnson’s current growth is in part the result of brand investments made long ago. Licenses may also convey advantage. British Airway’s performance has benefited greatly from its control of the scarce landing slots at Heathrow, the world’s busiest international airport, obtained when BA was privatised. Industry advantages and strategic assets emphasise that high performance is not necessarily the result of good management – luck plays an important role! The third pillar is the company’s core competencies – its unique technical skills and knowledge that allow it to offer customers superior value. These might be special skills in branding and marketing grocery products (e.g. Procter & Gamble), technical know-how in certain areas facilitating an edge in innovating (e.g. 3M) or supply chain management expertise offering the ability to give exceptional qual-
Figure 10
Determinants of a Firm’s Performance
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ity and value in a retail context (e.g. Marks & Spencer). What locks these three pillars together is the longterm investment that some companies make in organisational networks which creates a configuration that can create sustained competitive advantage through repeated improvement and innovation. It is the company’s network of internal and external relationships which permits the consistency and commitment of its strategy, systems and people. It is the failure to make this investment which accounts for the temporary nature of the radical and rational based strategies. A well-built organisation has three key outputs: strategy, systems and the quality and loyalty of its people.
Strategy – a Dynamic Customer-Focus All the companies that show robust growth focus consistently on solving customer problems – they are customer-led rather than financially-led. This is evidenced first in listening to customers. From the top down – directors to shop floor, everyone is involved in talking with customers about their needs and problems. This focus naturally encourages them to be innovative, after all innovation is best defined as meeting customer needs that are not currently being met. Identifying current or emerging problems is the most effective launching pad for the innovative organisation (Kim and Mauborgne, 1997). The third feature of strategy is a commitment to quality: they all understand that this is the basis for creating customer loyalty and needs to be guaranteed. Finally all emphasise the long-run nature of their businesses: investment decisions do not need to be justified in terms of their immediate pay-off; if the investment is necessary to make the business competitive in the long-run, it must be made.
Systems – an Effective Organisation A customer-orientation is wishful thinking without the technology and systems to provide effective solutions. Today competitive advantage is more and more located in the firm’s IT and systems, its supply chain management expertise and in the network of partnerships it has with suppliers, customers and other industry players. Effective systems provide the basis for the firm’s communications, its quality control, its efficiency and sources of innovation. Radical and rational growth orientated companies are vulnerable because they rarely have effective integrated systems. It takes decades to build the world-class systems possessed by companies such as Toyota, Procter & Gamble or Marks & Spencer. Without these systems companies cannot create the basic core processes covering operations, innovation and customer support which are the foundations of sustainable growth. A fundamental feature of robust growth 259
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companies is the priority they attach to investment and development of systems.
People – Commitment and Capabilities Robust companies attach the highest priority to developing the capabilities and commitment of their people. Unlike radical and rational growth companies they appreciate that size or a strategic breakthrough are not the basis for sustainable performance. Capabilities depend on selection and training and robust businesses are normally marked by the continuing investments they make in developing a highly-skilled workforce. Capabilities need to be matched by a commitment to use these skills for achieving the firm’s goals. Competitive pay and particularly personal recognition are carefully designed to encourage motivated staff. Studies also emphasise the importance of leadership in communicating the organisation’s goals and creating a desire to beat the competition and achieve industry leadership (Hamel and Prahalad, 1994). Finally these companies are increasingly process rather than functionally driven. Even highly skilled and motivated people, if allowed to operate in functional or departmental ghettos, will not be effective. Robust companies understand that trust has to be built between marketing, engineering and front-line staff so that effective team-based efforts go into building the real value added processes of operations, innovation and customer support. Figure 11 summarises the organisational differences between robust, radical and rational growth companies. Robust companies have a long-term horizon while radical and rational businesses expect immediate breakthroughs. The latter do not see the need for investment in their organisational infrastructures – in long-term strategy, systems and staff, since the results are outside their time perspective. While they prioritise short-term financial and sales targets, robust companies look at continuing indicators of underlying customer loyalty, quality and incremental innovation. The IT and supply chain systems of radical and rational companies tend to be rudimentary and channel members are seen as competitors rather than partners. The focus is on cost, financial controls and exploiting assets. Robust companies such as 3M,
Figure 11
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Mars and Toyota prioritise developing effective systems and partnership arrangements which strengthen their core processes. Finally the longerrun outlook of robust companies leads to the development of a different relationship with their staff. They have a much greater incentive to invest in their skills, build a shared vision for the future and empower them in decision-making processes.
Building Robust Strategies Given that radical and rational growth strategies are conspicuously unsuccessful in generating long-run shareholder value, it seems odd that all companies do not aim at developing robust growth strategies. One reason for the comparative rarity of robust strategy is management’s desire for the quick fix. Western management and financial markets have very shortterm horizons, they expect poor performing companies to be turned around quickly and certainly do not want to see significant net investment in companies with weak margins. Such career expectations together with the prevalence of bonuses based on annual profit targets all motivate managers to go for the fast buck rather than lay the foundations for growth in the generations ahead. A second reason is that many managers do not know how to develop the organisational relationships which make sustained growth possible. Many of the top managers in industry have narrow functional expertise, often in accountancy, and limited experience of successful growth companies. They simply lack the experience and knowledge to provide the vision and leadership companies need to compete in today’s global markets. A past legacy of eroding market shares, redundancies and the distrust between management and workforce which characterise so many companies also makes it challenging to build the necessary trust and confidence among the firm’s stakeholders. Creating a robust strategy is a greater leadership challenge than that required in businesses pursuing radical or rational growth. Leaders in these companies, buoyed by the glamour and media attention that a few years exceptional industrial performance brings often seem to believe that the key strategic principles do not apply to them – ‘we are different,’ they say. A few years later faced with declining margins, increasing competition and disappearing customers they learn that there are no short cuts to building world-class businesses. How should managers go about building robust growth strategies? First it is important for them to understand the fundamental distinction between rationalisation and transformation. Rationalisation is the short-term turnaround of a failing company achieved by reducing assets, raising prices and cutting costs. Usually such actions can very quickly boost European Management Journal Vol 16 No 3 June 1998
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profits, but they do little, indeed they are often counterproductive, to building the firm’s long-run competitiveness. Yet rationalisation is seductive to many of today’s managers since it earns the applause of the media, the approval of the stock market and earns big bonus payments for the managerial team. Unfortunately rationalisation, as companies such as Hanson, BTR, GEC, British Leyland and many others learned, destroys stakeholder organisational relationships and with it the skills and commitment to achieve innovation, customer value and growth. Transformation is about putting in place a long-term strategy to achieve robust growth. It means focusing first on creating a clear strategy built around customers, innovation and quality. Second, it requires investing in the systems which will enable the company to possess world-class core processes in operations, innovation and customer support. Third, it means prioritising building the skills and commitment among the people who work for and with the company. Such objectives require a completely different type of leadership from that for company rationalisation. Where radical and rational growth strategies are about gaining new customers, robust companies focus on retaining their existing customers. They know that if current customers are happy, word-ofmouth will guarantee new customers. In general the longer customers are retained by a company, the more they spend, the less price sensitive they become and the lower the costs of serving them. By contrast new customers are normally expensive to acquire in terms of research, advertising and selling. It often takes two or three years for a new customer to breakeven. This ability to deliver the quality and innovation which results in high customer retention is the real source of the financial strength of robust companies.
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Financial Times (1993) Blending genius and magic, 16 March, p. 18. Hamel, G. and Prahalad, C.K. (1994) Competing for the Future: Breakthrough Strategies for Seizing Control of Your Future and Creating the Markets of Tomorrow. Harvard Business School Press, Boston, MA. Kay, J. (1993) Foundations of Corporate Success. Oxford University Press, Oxford. Kim, W.C. and Mauborgne, R. (1997) Value innovation: the strategic logic of high growth. Harvard Business Review 75, 102–115. Mac Hulbert, J. and Pitt, L. (1996) Exit left centre stage? the future of functional marketing. European Management Journal 14, 47–60. Makridakis, S. (1996) Factors affecting success in business: management theories/tools versus predicting changes. European Management Journal 14, 1–20. Marketing Society Annual Conference (1996) Radical strategies for profitable growth, 20 November, London. Peters, T.J. and Waterman, R.H. (1982) In Search of Excellence: Lessons from America’s Best-run Companies. Harper and Row, New York. Porter, M.E. (1980) Competitive Strategy: Techniques for Analysing Industries and Competitors. Free Press, New York. Reichheld, F.E. (1995) The Loyalty Effect: Hidden Force behind Growth, Profits and Lasting Value. Harvard Business School Press, Boston. Reinertsen, D.G. (1993) The search for new product killers. Electronics Business July, 62–66. Stalk, G. and Hout, T.H. (1990) Competing Against Time: How Time-based Competition is Reshaping Global Markets. Free Press, New York. The Economist (1997) Why too many mergers miss the mark, 4 January, pp. 59–60.
PETER DOYLE, Warwick Business School, University of Warwick, Coventry, CV4 7AL, UK. Peter Doyle is Professor of Marketing and Strategic Management at the University of Warwick. He specialises in corporate consulting and research in the fields of strategy and international business. He is Director of Warwick Business School’s MBA Programme and Chairman of its Executive Programmes. He has acted as consultant to many international businesses like Shell, IBM, BP and ICI, and advised professional bodies including the UK’s Cabinet Office, Institute of Chartered Accountants and the PacificAsian Institute of Management.
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Radical Strategies for Profitable Growth PETER DOYLE, University of Warwick, UK History suggests that the success of many of today’s most admired companies is likely to prove illusory. All too often their current performance is not based on superior competitiveness and is not sustainable. Companies exhibiting high growth can be described as following one of three paths: radical, rational or robust growth strategies. Only the last offers competitive advantages which have the capacity to endure and to create long-term shareholder value. This paper explores and illustrates the characteristics of robust companies and contrasts them with those pursuing radical and rational growth strategies. 1998 Elsevier Science Ltd. All rights reserved The central task of managers is to develop growth strategies which provide shareholder value. The aim of this paper is to explore what types of marketing strategies are most likely to create sustainable returns for shareholders. The study is based on a sample of 36 companies that have been singled out by the business and financial press at different times for the success of their strategies. Over the longer period it will be observed that some of these companies proved to be much more successful than others. Some of the companies that pursued radical growth strategies proved to be very temporary indeed in their achievements. The objective here is to analyse such differences and to compare the features of sustainable and non-sustainable growth strategies. Managers and the business press commonly have short time horizons. Companies which achieve a year or two’s high sales and profit growth are hailed as corporate superstars, lauded for their business acumen and held up as icons to their more plodding competitors. But such judgements can easily be demonstrated as ill-considered and superficial. For instance 750 UK directors were asked in a recent survey, to give an example of a company today pursuing a successful radical growth strategy (Marketing Society Annual Conference, 1996). The three most popular choices were Microsoft, Virgin and Direct Line. A second question asked what companies they would invest in now if they were obliged to hold the shares until their retirement. The leading choices European Management Journal Vol 16 No 3 June 1998
were Marks & Spencer, Shell and Unilever. Finally, they were asked what companies were pursuing the radical growth strategies a decade earlier – around 1987. In other words, who were yesterday’s equivalents of Microsoft, Virgin and Direct Line? Not surprisingly, this proved a more difficult question for them to answer. Researching the business press showed that the three most quoted successes of the late 1980’s were Saatchi & Saatchi, Ratners and Poly Peck. The results of this survey were first, the three questions generated completely different sets of companies. While today’s radical growth companies were observed with awe, very few experienced managers would wish to invest in them long term! The companies seen as offering the best long-term shareholder value were pursuing anything but radical growth strategies – continuity rather than revolution characterized their approach to the marketplace. Second, virtually all of the companies highlighted a decade earlier for their radical growth strategies had disappeared or were in serious financial difficulties. Such a finding echoes the follow-ups on the famous Peters and Waterman study of 36 excellent companies (Peters and Waterman, 1982) which found a very high proportion of these ‘stars’ had quickly run into severe financial problems (Makridakis, 1996).
The 3 R’s of Strategy An analysis of the different growth strategies pursued by companies suggests that they can be grouped into three types which can be termed: radical, rational and robust growth strategies. These differ in the rates of growth they offer, the value they create for customers and in the sustainability of their performance (Figure 1). Radical growth strategies can generate exceptional performance but they tend to be short-lived. The main reason is that companies pursuing such strategies do not focus on creating superior customer value either through better products or lower costs. As a result they do not generate customer loyalty and hence sustainable cash flows. 253
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depends upon adapting to the needs of consumers which continually change as a result of the rapidly evolving market environment. From this the key principles of strategic management emerge (Figure 2).
Strategy Must Fit the Environment Figure 1
Alternative Growth Strategies
Rational growth strategies are based on innovations which do create superior value for customers but the longer-term weakness of such strategies is that they do not create entry barriers so that competitors can catch-up or leap-frog the pioneer. Robust strategies are the only sustainable growth strategies. Like the rational strategy they provide genuinely superior customer value but they are more sustainable. This sustainability is based upon the company’s network of relationships with internal and external stakeholders. Such networks allow the company to continually update its strategy, build customer loyalty and, over time, create brands which act to provide entry barriers against competitors. Because robust companies tend to be larger and more mature than the other two types of company their growth rates are lower. Exponential growth rates are never sustainable for a long period – a company growing at 20 per cent a year would soon be bigger than the entire market in which it could operate. The challenge of the entrepreneurs who start with rational growth policies is to transform their businesses into robust forms. In today’s rapidly changing and hypercompetitive environment, without such a transformation entrepreneurial successes tend to be short-lived.
Key Strategic Principles To understand the forces determining the sustainability of a strategy, it is useful to review the key principles. The basic principle determining success in a market-based economy was set out by Adam Smith over 200 years ago – for firms to grow and make a profit they have to develop a strategy and organisation to meet the needs of customers. Companies that meet customer needs efficiently can prosper; those that do not, disappear. But these early works on economics and marketing understated the dynamic nature of markets – what satisfies customers today will not satisfy them tomorrow. A rapidly changing environment: new technologies, new global competitors, changing demographics and life styles, create new needs and new solutions to these needs. Consequently what is regarded as an excellent computer, car or service level now will be quickly obsoleted by the interplay of changes in consumer expectations and new, innovative products and services from competitors. Consequently continued success 254
Companies succeed as long as they are meeting the needs of today’s customers efficiently. Newcomers such as Microsoft or BSkyB have established strong market positions and generated substantial shareholder value because they have come up with new products and services which brilliantly capitalize on the opportunities created by new developments in computers and communications. Long-established companies such as McDonalds, Coca-Cola and Marks & Spencer continue to succeed because they have adapted their products and market positioning to today’s environment.
Successful Strategies Erode Business is Darwinian in nature – the success of most companies is temporary. The average public-quoted company lasts only for 40 years. Once IBM and General Motors dominated their industries just as clearly as Microsoft, McDonalds and BSkyB do today. Woolworth’s was once the world’s largest international retailer, Britain’s Alfred Herbert was the largest machine tool manufacturer and BSA led the motor cycle market. These companies disappeared because they kept a good strategy too long. In a market environment which is rapidly changing nothing fails like success. Nothing is more certain than that a firm’s current products, technology, distribution channels and market positioning will become obsolete.
Effectiveness is More Important Than Efficiency In Drucker’s famous aphorism, ‘efficiency is doing things right; effectiveness is about doing the right things’ (Drucker, 1973). Efficiency is about reducing costs through downsizing, consolidation and reengineering; effectiveness is about innovation through new product development, new business
Figure 2
Key Strategic Principles
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concepts and new processes. History shows that innovation always dominates low cost. Companies that lack the culture and skills to innovate cannot compensate by offering yesterday’s answers at low cost. Innovations normally start by offering a quality advantage but are usually soon competitive on price as well.
Speed and Decisiveness The speed and turbulence of environmental change today has created corresponding rewards for firms that can act rapidly and decisively. Firms that can react to customers’ needs quickly and have fast new product development processes obtain higher average prices, find it easier to create competitive advantage, gain market share and build brands. They also have lower costs (Stalk and Hout, 1990). In electronics, for example, a six month delay in introducing a new product was found to cut its lifetime profits by 32 per cent – far exceeding the likely losses from cost overruns or quality problems (Reinertsen, 1993). But strategic success depends upon more than speed, it also requires the decisive commitment of resources. The evidence suggests that fast innovators fail to earn the rewards and achieve lasting market positions unless they commit substantial marketing and promotional resources to aggressively build market acceptance. Without this decisive commitment, they will be caught up and overtaken by competitors that follow in their slipstream.
Organisation is More Vital Than Strategy However radical and successful an innovation is, in today’s rapidly changing environment any such breakthrough provides only a temporary advantage. Consequently sustainable performance depends upon the firm’s ability to continuously change by shedding current strategies and replacing them with new concepts. This in turn depends upon the investments management has made to build a sustaining and innovation-orientated network of relationships with employees, financiers, suppliers, customers and society as a whole. It is this ‘organisational architecture’ – the quality and depth of the firm’s relationships with its stakeholders and their commitment to it, which determines the firm’s ability to continuously, innovate and hence sustain its competitive advantage (Kay, 1993).
Figure 3 Radical Growth Strategies
receive attention because they can attain truly astonishing rates of growth. For example, in the space of two years WPP transformed itself from an obscure manufacturing business to the world’s largest advertising agency. Ratners did the same in jewellery retailing and Blue Arrow in employment services. There are three forms of radical growth strategy: acquisition-led; marketing department-led and PRled. The characteristics of all three are explosive growth, the lack of focus on creating genuine quality or cost advantage for customers and, as a result, nonsustainable performance. For instance of the eleven companies in Figure 3, only one – Virgin, is still performing satisfactorily, six have disappeared altogether, and four have gone, or are going through, acute financial crises. To understand the structural weaknesses of radical growth strategies it is useful to review the most common managerial objectives. Virtually all managements have two basic goals: financial, and market share or growth objectives. Financial performance is necessary to satisfy shareholder and creditor interests; market performance is necessary to secure jobs and provide for future profits. The problem for managers is that these goals partly conflict, for example lower prices, more advertising and a broader product range will normally increase sales but can easily reduce profits, and vice versa (Figure 4). This conflict is even more apparent when the time dimension is added. While every decision has conflicting effects – a good effect and a bad effect, the positive effects on market performance tend to be much slower than the negative effects on financial
Radical Growth Strategies The type of growth strategy most admired in the business press is termed radical growth strategies. Figure 3 summarises their forms, characteristics and some companies (mainly UK examples) which are or have pursued such strategies. These companies European Management Journal Vol 16 No 3 June 1998
Figure 4 Marketing and Conflicting Business Objectives
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performance. Lasting market share positions depend upon offering customers superior value but it can take a decade or more to build the organisational and marketing infrastructures from which superior brands, products and service systems can be offered. Unfortunately the investments in brand support, training and development necessary to build such infrastructures hit profits immediately. The result is that all managements have a choice between a relative focus on a long-run market share building strategy and a focus on high short-run profit performance. The former emphasises understanding customers needs and developing solutions which give them genuinely superior value. This is the policy pursued over a long period by such companies as Marks & Spencer, Toyota, Sony, Federal Express and Disney. In contrast financially focused companies look inwards at asset management and budgets to control costs, expenses and margins. Well-known examples include Hanson Trust, GEC and BTR. While marketing strategies take years to bear fruit, by contrast, short-run financial improvements can be brought about very quickly. By raising prices, cutting costs and rationalising products and assets dramatic short-run turnarounds in cash flow and earnings are easily achievable (Doyle, 1994). Nearly all radical growth strategies focus on such short-term results and most are financially-driven.
Acquisition-Led Strategies Acquisition-led strategies are the most common form of radical growth strategy. This is how WPP, Ratners and Blue Arrow achieved their passing global leadership. Unlike M & S, Toyota, Sony, FedEx and Disney which built their strong market positions by painstakingly improving the quality of their offers year after year and so attracting new customers and building stronger relationships with current ones, acquisitive growth works by buying customers and assets. The attractions of acquisition-led strategies to Western managers are three. First, they work dramatically fast. Whereas it took Marks & Spencer 60 years to achieve market leadership in the UK by internal growth, Ratners did it on a global scale in fewer than six. Second, it appears easy – no skills other than financial acumen are required! With little expertise in advertising, armed only with an MBA and an accountant’s qualification, Martin Sorrell was able to construct the world’s largest advertising business. Third, they are not dependent on the culture of the organisation and the quality of its network. Because growth is purchased its achievement is not dependent upon the commitment and knowledge of the staff and the trust and relationships built among customers, suppliers and other stakeholders. Unfortunately acquisition-led strategies suffer two crippling problems. First, the evidence is overwhelming that the great majority fails to create value for shareholders. In the long-run around two-thirds gen256
erate lower capital gains and dividends than the industry average. The more spectacular the growth the greater appears the probability of value destruction (The Economist, 1997). Second, not surprisingly, since the objective is size rather than quality they do not create superior customer value. In general, companies that grow by acquisition end up with a ragbag of overlapping brands, none of which has critical mass. Managers lack the knowledge to deal with the new marketing and operational problems that explosive growth creates. Saddled with the debt incurred to make the acquisitions many of these companies quickly succumb when their sales and earnings forecasts prove too optimistic for the realities of the markets in which they have entered. Marketing Department Strategies In some consumer goods companies strategy has been driven by marketing managers. Unfortunately in the current competitive environment the marketing function rarely has control over the real levers of competitive advantage. Today customer satisfaction depends less on traditional brand management and more on to-the-minute delivery performance, seamless IT interfaces, co-design of systems and multilevel multifunction supplier–customer partnering which are either controlled by other functions or depend upon close cross-functional co-operation (Mac Hulbert and Pitt, 1996). Some marketing managers cannot adapt to these changes and have focused on those instruments over which they still have control – advertising, packaging, line extensions and trading-up policies. Pepsi Cola spent $500 million on advertising and packaging in an abortive attempt to relaunch the brand in 1996. The key differential advantage was that the can was now painted blue rather than red! Line extensions were another growth strategy pushed by the marketing department. By 1997 Procter & Gamble was offering consumers a choice of 52 varieties of Crest toothpaste. But perhaps the most characteristic marketing department strategy of the last decade was product differentiation and trading-up customers. This was based on the observation that the aggregate demand curve for a product or service was made up of a series of segment demand curves of varying elasticities. So charging a single price, say £3 (see Figure 5) left a considerable con-
Figure 5
Marketing Department Strategies
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sumer surplus. During the 1970s and 80s marketing managers learned how to exploit and procure the consumer surplus by launching differentiated brands for each segment and then trying to trade-up consumers from low price entry brands to premium priced versions. So brands at say £7 and £10 would be launched alongside the base £3 brand. For example, United Distillers which had the Johnnie Walker Red Label scotch whisky at £10, then added a Black Label at £20, a Gold Label at £60, a Blue Label at £120, and so on. American Express added to its Green Card, Gold Cards and Platinum at substantial premiums. Such marketing strategies became ubiquitous in the 70s and 80s. They were often surprisingly successful in boosting profits since the differences between base and premium versions were often purely cosmetic. Even the chief executive of United Distillers was bemused at the success of this strategy, remarking ‘We have massive amounts of research which show that people cannot tell the difference between one scotch and another. Though they swear total allegiance to one product and would never dream of drinking Brand X, in blind tastings brand X is more often than not what they select (Financial Times, 1993).’
PR-Led Strategies These strategies seek growth through the exploitation of public relations. In these companies public relations is regarded as the key function in the business. In the past Saatchi & Saatchi and today the Virgin organisation are good examples. Such companies market conventional products and services in an unconventional way. Often they depend on the charisma of the leader, for example Maurice Saatchi or Richard Branson, to grab the interest of press and TV. Successful PR strategies obtain great media attention much more economically than relying on advertising. Editorial publicity normally also has much more perceived reliability than paid-for media. Ultimately, however, PR-led strategies tend to be ‘found-out.’ While marketing or PR can get consumers to try the product or service they are not going to achieve loyalty unless performance and value match the best competitors. In most markets customers are ultimately rational and image is related to performance. Studies of consumer behaviour overwhelmingly suggest a basic underlying model (Engel et al., 1995):
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ducts meet their needs and which do not offer good quality. Advertising and PR essentially act on the lag in this equation. For quality products advertising and PR can reduce the lag in the recognition of the reality – they can help build a successful brand image more quickly. For weak products a creative communications campaign can temporarily hide the problem by drawing in new customers – but ultimately consumer experience will erode the image bringing it into line with its reality. Brands such as Mercedes Benz, British Airways or Sony have great images because they offer products and services which offer excellent value in quality, performance and reliability. Communications plays a relatively minor role. Brands such as Lada, British Rail and Amstrad have weak images because they have weak products. During the 1990s all three forms of radical growth strategies have proved vulnerable to the new competitive climate. Figure 6 illustrates the problem. Most markets are characterised by a range of competitive brands, some competing as discount brands, others as regular and some as premium brands. One change has been consumers’ willingness to trade down from heavily marketed premium brands to regular or discount brands. Consumers are increasingly unwilling to pay substantial price premiums for products whose only differentials are advertising, packaging and PR. Even Coke and Pepsi, brands once perceived as unassailable, saw their market shares in UK supermarkets drop by 28 per cent in 1995 alone as consumers switched to cheaper own label. Even more fundamental has been the development of new generation competitors which have fundamentally reconfigured the industry value chain to offer genuine and major competitive advantage (Doyle, 1995). One type may be termed price-value competitors: these offer high quality products at prices substantially below the traditionally positioned brands. They achieve this by re-engineering not only their own operations but also the costs of their entire channel. Total costs are reduced by 30 per cent or more. Direct Line, Daewoo and Wal-Mart are examples of such new competitors. The other types of competitor are termed quality-value companies; here the integrated value chains are restructured to provide higher quality rather than low prices.
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The image (I) of a product or service at time t, is a linear lagged function of its real value to the customer (R), with an error term, ⑀. Image is a function of reality – consumers are rarely irrational over the longer run. Over time customers learn which proEuropean Management Journal Vol 16 No 3 June 1998
Figure 6 Pitfalls Strategies
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over the phone and respond immediately to problems and claims. By offering better service, high visibility and taking 40 per cent out of system costs Direct Line catapulted itself to market leadership and transformed the industry.
Figure 7
Rational Growth Strategies
Examples are Marks & Spencer, the Lexus Division of Toyota and Body Shop. All of these companies have eliminated functional boundaries to commit to genuine value creation.
Rational Growth Strategies Rational growth strategies find innovative solutions to offering customers significantly better products, lower prices or both. Figure 7 shows the main features of this strategy and gives examples of companies who are, or who have, grown by such means. Rational growth is sounder than radical growth because it offers genuinely superior performance. These companies do it by exploiting strategic windows in the form of new technology, new market segments, new channels of distribution, or all three. The problem with rational growth strategies is that they are not sustainable and consequently do not offer long-term shareholder value. The example of Direct Line illustrates the strengths and weaknesses of rational growth strategies. Until 1986 motorists in the UK bought car insurance through the thousands of independent brokers. The large insurance companies which did the underwriting had little knowledge or contact with the ultimate customers. The result was a system which was high cost, offered poor consumer service and had ineffectively marketed products (Figure 8). In 1985 a new company, Direct Line entered the market with a completely innovative approach. Brokers were eliminated and the new company advertised in press and TV directly to motorists. Supported by sophisticated IT, Direct Line staff were able to offer instant insurance
Figure 8
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Rational Growth Strategies — Direct Line
Unfortunately, like other rational growth strategies Direct Line’s tremendous innovation does not appear to have been the basis for sustainable performance. Like others who transformed the cost structure of their industries, the natural strategy was to use the cost advantage to target price-sensitive customers. Unfortunately price-sensitive customers are, by definition, not loyal. When competitors copied the Direct Line innovation, customers shopped around for the lowest quotation. Because of its customer base of price-sensitive customers, the company soon had the highest defection rate in the industry. The only way to maintain market share was then to seek new customers, which given the high cost of acquiring new customers, soon led to a dramatic erosion of Direct Line’s profits. Rational growth strategies then provide breakthrough customer value but are generally quickly copied, even leap-frogged by new competitors. Further, they do not create loyal customers, which as all the recent work on relationship marketing demonstrates, does not provide a basis for long-term profits. New customers are expensive to acquire in investment, time and promotion. They rarely break-even until they have been on the books for several years. Loyal customers, on the other hand, are the real basis for healthy profits — they do not have high maintenance costs, they tend to spend more, they become less price sensitive and they act as effective word-ofmouth advertising for the company. Hence, retaining customers, not acquiring them is the key to long-term profitability (Reichheld, 1995). A company that becomes dependent on new customer acquisition to maintain market share is in a very vulnerable position. Unless rational growth companies transform themselves into robust businesses they do not last.
Robust Growth Strategies Companies pursuing robust strategies (Figure 9) appear to base their development upon four prin-
Figure 9
Robust Growth Strategies
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ciples. First, strategy is built around delivering the long-term superior value which will encourage loyalty among its customers. Second, they recognise that in today’s rapidly changing and globally competitive world no specific advantage is sustainable for very long. Third, this implies that learning and the ability to continuously innovate is the only basis for sustainable growth (Baghai et al., 1996). An organisation’s ability to continually learn and innovate depends upon the knowledge, co-operation and commitment embedded in its network of relationships with customers, employees, suppliers and other stakeholders. These assumptions contrast sharply with those of the radical and rational growth companies. Figure 10 places this form of growth in a broader context. A company’s potential for profitable growth over any time period is constrained by three pillars. One is its industry advantage – some industries consistently exhibit higher growth and profitability than others. For example of the Fortune 500’s twelve most profitable companies in the world, normally at least half are pharmaceutical companies. In other industries, low entry barriers, fierce competition and powerful customers limit the opportunities for sustained profitable growth (Porter, 1980). A second factor affecting potential is the company’s strategic assets – inherited or monopoly advantages giving it special opportunities in the industry. These include strong brand names, for example McDonalds and Johnson & Johnson’s current growth is in part the result of brand investments made long ago. Licenses may also convey advantage. British Airway’s performance has benefited greatly from its control of the scarce landing slots at Heathrow, the world’s busiest international airport, obtained when BA was privatised. Industry advantages and strategic assets emphasise that high performance is not necessarily the result of good management – luck plays an important role! The third pillar is the company’s core competencies – its unique technical skills and knowledge that allow it to offer customers superior value. These might be special skills in branding and marketing grocery products (e.g. Procter & Gamble), technical know-how in certain areas facilitating an edge in innovating (e.g. 3M) or supply chain management expertise offering the ability to give exceptional qual-
Figure 10
Determinants of a Firm’s Performance
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ity and value in a retail context (e.g. Marks & Spencer). What locks these three pillars together is the longterm investment that some companies make in organisational networks which creates a configuration that can create sustained competitive advantage through repeated improvement and innovation. It is the company’s network of internal and external relationships which permits the consistency and commitment of its strategy, systems and people. It is the failure to make this investment which accounts for the temporary nature of the radical and rational based strategies. A well-built organisation has three key outputs: strategy, systems and the quality and loyalty of its people.
Strategy – a Dynamic Customer-Focus All the companies that show robust growth focus consistently on solving customer problems – they are customer-led rather than financially-led. This is evidenced first in listening to customers. From the top down – directors to shop floor, everyone is involved in talking with customers about their needs and problems. This focus naturally encourages them to be innovative, after all innovation is best defined as meeting customer needs that are not currently being met. Identifying current or emerging problems is the most effective launching pad for the innovative organisation (Kim and Mauborgne, 1997). The third feature of strategy is a commitment to quality: they all understand that this is the basis for creating customer loyalty and needs to be guaranteed. Finally all emphasise the long-run nature of their businesses: investment decisions do not need to be justified in terms of their immediate pay-off; if the investment is necessary to make the business competitive in the long-run, it must be made.
Systems – an Effective Organisation A customer-orientation is wishful thinking without the technology and systems to provide effective solutions. Today competitive advantage is more and more located in the firm’s IT and systems, its supply chain management expertise and in the network of partnerships it has with suppliers, customers and other industry players. Effective systems provide the basis for the firm’s communications, its quality control, its efficiency and sources of innovation. Radical and rational growth orientated companies are vulnerable because they rarely have effective integrated systems. It takes decades to build the world-class systems possessed by companies such as Toyota, Procter & Gamble or Marks & Spencer. Without these systems companies cannot create the basic core processes covering operations, innovation and customer support which are the foundations of sustainable growth. A fundamental feature of robust growth 259
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companies is the priority they attach to investment and development of systems.
People – Commitment and Capabilities Robust companies attach the highest priority to developing the capabilities and commitment of their people. Unlike radical and rational growth companies they appreciate that size or a strategic breakthrough are not the basis for sustainable performance. Capabilities depend on selection and training and robust businesses are normally marked by the continuing investments they make in developing a highly-skilled workforce. Capabilities need to be matched by a commitment to use these skills for achieving the firm’s goals. Competitive pay and particularly personal recognition are carefully designed to encourage motivated staff. Studies also emphasise the importance of leadership in communicating the organisation’s goals and creating a desire to beat the competition and achieve industry leadership (Hamel and Prahalad, 1994). Finally these companies are increasingly process rather than functionally driven. Even highly skilled and motivated people, if allowed to operate in functional or departmental ghettos, will not be effective. Robust companies understand that trust has to be built between marketing, engineering and front-line staff so that effective team-based efforts go into building the real value added processes of operations, innovation and customer support. Figure 11 summarises the organisational differences between robust, radical and rational growth companies. Robust companies have a long-term horizon while radical and rational businesses expect immediate breakthroughs. The latter do not see the need for investment in their organisational infrastructures – in long-term strategy, systems and staff, since the results are outside their time perspective. While they prioritise short-term financial and sales targets, robust companies look at continuing indicators of underlying customer loyalty, quality and incremental innovation. The IT and supply chain systems of radical and rational companies tend to be rudimentary and channel members are seen as competitors rather than partners. The focus is on cost, financial controls and exploiting assets. Robust companies such as 3M,
Figure 11
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Mars and Toyota prioritise developing effective systems and partnership arrangements which strengthen their core processes. Finally the longerrun outlook of robust companies leads to the development of a different relationship with their staff. They have a much greater incentive to invest in their skills, build a shared vision for the future and empower them in decision-making processes.
Building Robust Strategies Given that radical and rational growth strategies are conspicuously unsuccessful in generating long-run shareholder value, it seems odd that all companies do not aim at developing robust growth strategies. One reason for the comparative rarity of robust strategy is management’s desire for the quick fix. Western management and financial markets have very shortterm horizons, they expect poor performing companies to be turned around quickly and certainly do not want to see significant net investment in companies with weak margins. Such career expectations together with the prevalence of bonuses based on annual profit targets all motivate managers to go for the fast buck rather than lay the foundations for growth in the generations ahead. A second reason is that many managers do not know how to develop the organisational relationships which make sustained growth possible. Many of the top managers in industry have narrow functional expertise, often in accountancy, and limited experience of successful growth companies. They simply lack the experience and knowledge to provide the vision and leadership companies need to compete in today’s global markets. A past legacy of eroding market shares, redundancies and the distrust between management and workforce which characterise so many companies also makes it challenging to build the necessary trust and confidence among the firm’s stakeholders. Creating a robust strategy is a greater leadership challenge than that required in businesses pursuing radical or rational growth. Leaders in these companies, buoyed by the glamour and media attention that a few years exceptional industrial performance brings often seem to believe that the key strategic principles do not apply to them – ‘we are different,’ they say. A few years later faced with declining margins, increasing competition and disappearing customers they learn that there are no short cuts to building world-class businesses. How should managers go about building robust growth strategies? First it is important for them to understand the fundamental distinction between rationalisation and transformation. Rationalisation is the short-term turnaround of a failing company achieved by reducing assets, raising prices and cutting costs. Usually such actions can very quickly boost European Management Journal Vol 16 No 3 June 1998
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profits, but they do little, indeed they are often counterproductive, to building the firm’s long-run competitiveness. Yet rationalisation is seductive to many of today’s managers since it earns the applause of the media, the approval of the stock market and earns big bonus payments for the managerial team. Unfortunately rationalisation, as companies such as Hanson, BTR, GEC, British Leyland and many others learned, destroys stakeholder organisational relationships and with it the skills and commitment to achieve innovation, customer value and growth. Transformation is about putting in place a long-term strategy to achieve robust growth. It means focusing first on creating a clear strategy built around customers, innovation and quality. Second, it requires investing in the systems which will enable the company to possess world-class core processes in operations, innovation and customer support. Third, it means prioritising building the skills and commitment among the people who work for and with the company. Such objectives require a completely different type of leadership from that for company rationalisation. Where radical and rational growth strategies are about gaining new customers, robust companies focus on retaining their existing customers. They know that if current customers are happy, word-ofmouth will guarantee new customers. In general the longer customers are retained by a company, the more they spend, the less price sensitive they become and the lower the costs of serving them. By contrast new customers are normally expensive to acquire in terms of research, advertising and selling. It often takes two or three years for a new customer to breakeven. This ability to deliver the quality and innovation which results in high customer retention is the real source of the financial strength of robust companies.
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PETER DOYLE, Warwick Business School, University of Warwick, Coventry, CV4 7AL, UK. Peter Doyle is Professor of Marketing and Strategic Management at the University of Warwick. He specialises in corporate consulting and research in the fields of strategy and international business. He is Director of Warwick Business School’s MBA Programme and Chairman of its Executive Programmes. He has acted as consultant to many international businesses like Shell, IBM, BP and ICI, and advised professional bodies including the UK’s Cabinet Office, Institute of Chartered Accountants and the PacificAsian Institute of Management.
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