Getting Others to Embrace Risk

Getting Others to Embrace Risk

Why aren't companies hiring? Why aren't homes selling, despite bargain pricing? Why is growth and innovation in some industries so sluggish?

Americans have a well-earned reputation for risk-taking, but these days we are something of a timid lot. Our reluctance to stick our collective neck out has everything to do with the psychology of motivation — specifically, how we think about the goals we pursue. The problem, in a nutshell, is simply this: when making decisions, lately many of us have been focused much more on what we have to lose than on what we might gain.

Whenever we see our goals — whether they are organizational or personal — in terms of what we have to lose, we have what's called a prevention focus. Prevention motivation is about obtaining security, avoiding mistakes, and fulfilling responsibilities. It's about trying to hang on to what you've already got and keep things running smoothly, and it isn't at all conducive to taking chances.

If, instead, we see our goals in terms of what we might gain, we have what's called a promotion focus. Promotion motivation is about getting ahead, maximizing your potential, and reaping the rewards. It's about never missing an opportunity for a win, even when doing so means taking a leap of faith.

In the last decade, researchers in psychology and management departments across the country have conducted hundreds of studies showing that promotion and prevention motivations lead to different strengths and weaknesses, and very different strategic approaches. The promotion focus on potential gain leads to speed, creativity, innovation, and embracing risk, while the prevention focus on avoiding loss leads to accuracy, careful deliberation, thoroughness, and a strong preference forthe devil you know.

The recent recession, coupled with financial and health care reform, have left American businesses (and individual Americans) focused far more on keeping what they've got than boldly going where they've never gone before. People don't want to rock the boat at a time when consumers (and jobs) are harder to find, and when risk feels like recklessness. Unfortunately, they forget that without organizational innovation and growth, no business (and no job) will be safe for long.

If you've got great, forward-thinking ideas, and their reception has been lukewarm at best, you are probably wishing your boss, your coworkers, or your clients were a bit more comfortable with risk. There are really only two solutions: get them to adopt the promotion mindset (the harder option in the current climate), or use the right language to work with their prevention mindset instead. You may be thinking of your great idea as an opportunity for gain, but you can always reframe it as an opportunity for avoiding loss.

To persuade the prevention-minded person to take a risk, recent research by psychologists Abigail Scholer, Xi Zou, Ken Fujita, Steve Stroessner, and E. Tory Higgins suggests that you should emphasize how a course of action can keep your company (or your client) safe and secure — how it will help them to avoid making a terrible mistake. A new venture isn't a chance to get in front of the pack, but a way to not fall behind. ("Everyone is moving in this direction. It's inevitable. We could lose market share if aren't prepared for the future.")

Matching a pitch to the listener's current motivation is the key to effective persuasion. Research shows that even the most timid, prevention-minded person among us will gladly take a risk, once you help him understand why it would be a greater risk not to.

The Strategic Pivot: Rules for Entrepreneurs and Other Innovators

Silicon Valley culture is built around great pivots — a sudden shift in strategy that turns a mediocre idea into a billion-dollar company.

Groupon began not as a local coupon business, but as a platform for collective action. Pay Pal started back in 1999 as a way to "beam" money between mobile phones, Palm Pilots, and pagers. Twitter was born from a stalled podcasting startup.

At the Stanford d.school, the ability to pivot is essential to the process we teach in our Launchpad course, an introduction to entrepreneurship in which each student launches a real company, taking it from an idea to revenue in 10 weeks. Even in that extremely short timeframe, abrupt turns are inevitable. The ground rules for fluidly shifting course — or, when needed, radically altering direction — apply equally well to start-ups outside the classroom, as well as to innovative ventures within established companies.

Here are our five rules for executing a successful pivot:

1. Have an idea compost pile.

To get to a great product or service, you need to work from great insights about your customers. If your current start-up is going down the tubes because your idea isn't resonating with customers, you don't have to throw everything away. Keep the insights about your customers that you gained along the way, angel investor Michael Dearing — who co-teaches Launchpad — tells students. Some of the best insights may come from understanding why your current idea isn't delighting them. Accepting the metaphor of composting ideas makes it easier to accept the perceived cost of failure, Dearing says.

2. Know your customers, not just their statistics.

The user-centered design process we teach at the d.school focuses on developing empathy for your customers. This is much more than just understanding statistics, data, and click-through rates. You need to know them well enough to understand what's important to them, what they care about, and how your product fits into their world. One of the teams in our class developed a product for police that makes duty gear more comfortable. Through their social networks, they found a few officers they could spend time with, getting a better understanding of their lives and jobs that went far beyond technical or ergonomic specs for a product. When you know your customers so well you can see your product through their eyes, you'll have an intuitive sense for when it's time to pivot.

3. Fail earlier, more cheaply, and more often.

Failing early and often is a Silicon Valley cliché. But the key is to fail as cheaply as possible. Perry's first company, Atlas Snowshoes, failed every weekend. He'd build prototypes for new designs out of the materials he had on hand, and then try them out on weekend adventures with friends. Broken straps and cracked frames would leave him hiking out of the woods with unhappy companions in knee-deep snow. But those early, cheap failures meant that by the time he went to manufacture his product, he knew how to keep the same thing from happening to customers.

Getting time with your customers before you go to market is cheap. Show them a prototype and find out if they'll use it. Test your product or service by making it quickly with post-its, paper or a quick technology hack before you ever write a line of code. PowerPoint can substitute for an interface; a $20 Google Adwords buy will tell you a lot about driving traffic. An early pivot is exponentially cheaper than a late one.

4. Build a customer-focused culture, not a product-focused one.
A pivot can seem obvious from the top, but to those who've been executing a product that's changing direction it can be frustrating. To execute a successful shift, you need your team on board. One way to do that is to build a culture focused on making customers happy. If your team believes that pleasing your customers — by any means and over the long term — is more important than executing your current idea, it will be easier for them to accept change.

5. Don't survive mediocrity.

WorkerExpress started out as a text message-based way for homeowners to schedule hourly construction workers. But the market founders Joe Mellin and Pablo Fuentes had hoped for just wasn't there. The company wasn't in imminent danger of failing and could have limped along, but Mellin and Fuentes made the decision to pivot. In the research they'd done for their original idea they found a new direction: they realized that large contractors who need temporary help on job sites don't have any great options. In the midst of one of the largest construction droughts in American history, they managed to build a booming web-based platform.

Lots of companies find themselves in a similar spot. The key is confronting the fact that it's time to re-evaluate. If you don't have a single die-hard fan of your product — let alone the thousands you'd need to take off — it's time to pivot into something your customers are passionate about.

Nine Things Successful People Do Differently

Nine Things Successful People Do Differently

Why have you been so successful in reaching some of your goals, but not others? If you aren't sure, you are far from alone in your confusion. It turns out that even brilliant, highly accomplished people are pretty lousy when it comes to understanding why they succeed or fail. The intuitive answer — that you are born predisposed to certain talents and lacking in others — is really just one small piece of the puzzle. In fact, decades of research on achievement suggests that successful people reach their goals not simply because of who they are, but more often because of what they do.

1. Get specific. When you set yourself a goal, try to be as specific as possible. "Lose 5 pounds" is a better goal than "lose some weight," because it gives you a clear idea of what success looks like. Knowing exactly what you want to achieve keeps you motivated until you get there. Also, think about the specific actions that need to be taken to reach your goal. Just promising you'll "eat less" or "sleep more" is too vague — be clear and precise. "I'll be in bed by 10pm on weeknights" leaves no room for doubt about what you need to do, and whether or not you've actually done it.

2. Seize the moment to act on your goals. Given how busy most of us are, and how many goals we are juggling at once, it's not surprising that we routinely miss opportunities to act on a goal because we simply fail to notice them. Did you really have no time to work out today? No chance at any point to return that phone call? Achieving your goal means grabbing hold of these opportunities before they slip through your fingers.

To seize the moment, decide when and where you will take each action you want to take, in advance. Again, be as specific as possible (e.g., "If it's Monday, Wednesday, or Friday, I'll work out for 30 minutes before work.") Studies show that this kind of planning will help your brain to detect and seize the opportunity when it arises, increasing your chances of success by roughly 300%.

3. Know exactly how far you have left to go. Achieving any goal also requires honest and regular monitoring of your progress — if not by others, then by you yourself. If you don't know how well you are doing, you can't adjust your behavior or your strategies accordingly. Check your progress frequently — weekly, or even daily, depending on the goal.

4. Be a realistic optimist. When you are setting a goal, by all means engage in lots of positive thinking about how likely you are to achieve it. Believing in your ability to succeed is enormously helpful for creating and sustaining your motivation. But whatever you do, don't underestimate how difficult it will be to reach your goal. Most goals worth achieving require time, planning, effort, and persistence. Studies show that thinking things will come to you easily and effortlessly leaves you ill-prepared for the journey ahead, and significantly increases the odds of failure.

5. Focus on getting better, rather than being good. Believing you have the ability to reach your goals is important, but so is believing you can get the ability. Many of us believe that our intelligence, our personality, and our physical aptitudes are fixed — that no matter what we do, we won't improve. As a result, we focus on goals that are all about proving ourselves, rather than developing and acquiring new skills.

Fortunately, decades of research suggest that the belief in fixed ability is completely wrong — abilities of all kinds are profoundly malleable. Embracing the fact that you can change will allow you to make better choices, and reach your fullest potential. People whose goals are about getting better, rather than being good, take difficulty in stride, and appreciate the journey as much as the destination.

6. Have grit. Grit is a willingness to commit to long-term goals, and to persist in the face of difficulty. Studies show that gritty people obtain more education in their lifetime, and earn higher college GPAs. Grit predicts which cadets will stick out their first grueling year at West Point. In fact, grit even predicts which round contestants will make it to at the Scripps National Spelling Bee.

The good news is, if you aren't particularly gritty now, there is something you can do about it. People who lack grit more often than not believe that they just don't have the innate abilities successful people have. If that describes your own thinking .... well, there's no way to put this nicely: you are wrong. As I mentioned earlier, effort, planning, persistence, and good strategies are what it really takes to succeed. Embracing this knowledge will not only help you see yourself and your goals more accurately, but also do wonders for your grit.

7. Build your willpower muscle. Your self-control "muscle" is just like the other muscles in your body — when it doesn't get much exercise, it becomes weaker over time. But when you give it regular workouts by putting it to good use, it will grow stronger and stronger, and better able to help you successfully reach your goals.

To build willpower, take on a challenge that requires you to do something you'd honestly rather not do. Give up high-fat snacks, do 100 sit-ups a day, stand up straight when you catch yourself slouching, try to learn a new skill. When you find yourself wanting to give in, give up, or just not bother — don't. Start with just one activity, and make a plan for how you will deal with troubles when they occur ("If I have a craving for a snack, I will eat one piece of fresh or three pieces of dried fruit.") It will be hard in the beginning, but it will get easier, and that's the whole point. As your strength grows, you can take on more challenges and step-up your self-control workout.

8. Don't tempt fate. No matter how strong your willpower muscle becomes, it's important to always respect the fact that it is limited, and if you overtax it you will temporarily run out of steam. Don't try to take on two challenging tasks at once, if you can help it (like quitting smoking and dieting at the same time). And don't put yourself in harm's way — many people are overly-confident in their ability to resist temptation, and as a result they put themselves in situations where temptations abound. Successful people know not to make reaching a goal harder than it already is.

9. Focus on what you will do, not what you won't do. Do you want to successfully lose weight, quit smoking, or put a lid on your bad temper? Then plan how you will replace bad habits with good ones, rather than focusing only on the bad habits themselves. Research on thought suppression (e.g., "Don't think about white bears!") has shown that trying to avoid a thought makes it even more active in your mind. The same holds true when it comes to behavior — by trying not to engage in a bad habit, our habits get strengthened rather than broken.
If you want change your ways, ask yourself, What will I do instead? For example, if you are trying to gain control of your temper and stop flying off the handle, you might make a plan like "If I am starting to feel angry, then I will take three deep breaths to calm down." By using deep breathing as a replacement for giving in to your anger, your bad habit will get worn away over time until it disappears completely.

It is my hope that, after reading about the nine things successful people do differently, you have gained some insight into all the things you have been doing right all along. Even more important, I hope are able to identify the mistakes that have derailed you, and use that knowledge to your advantage from now on. Remember, you don't need to become a different person to become a more successful one. It's never what you are, but what you do.

Capability Maturity Model® for Business Development (BD-CMM)

Capability Maturity Model® for Business Development (BD-CMM)

The BD-CMM is designed to guide Business Development (BD) organisations in selecting high-priority improvement actions based on the maturity of their current practices.  Its benefit is in narrowing the scope of improvement activities to those key practices that provide the most effective way to improve the organisation’s current BD performance. BD-CMM creates a vision of excellence capable of guiding major process improvement in BD. It provides its users with a framework, path, and guide for achieving dramatic process improvements in their organisations.                                                                                 Capability Maturity Model® for Business Development (BD-CMM) Image content based on the public copy of the Capability Maturity Model® for Business Development  which can be found at the following address http://www.bd-institute.org/publications.html. Users report: • Enhanced effectiveness and efficiency. • Improved predictability. • More accurate projections of revenue. • Increased control. • More precise understanding of business development costs. • Improved management visibility into business development. The model’s scope encompasses the full BD life cycle and organizational components, including marketing, sales, sales account management, proposal development, and others engaged in the BD enterprise. The model acknowledges the interdependence of all the different components and that success is dependent on teamwork. Using the BD-CMM allows organisations to work towards developing increasing maturity levels in a step-by-step manner, as indicated in this table. The attainment of higher levels of maturity leads to excellence and sustained competitive advantage. By concentrating on a focused set of practices and working aggressively to implement them, organisations can make lasting gains in their performance and competitiveness. Footnote: Levels 1 and 2 represent immature capability. Level 3 represents mature capability. Levels 4 and 5 represent advanced capability. Most companies are found to be at level 1 or 2 when subjected to a BD-CMM appraisal, which often comes as both a surprise and an incentive to introduce structured improvements to improve their maturity level.

Seven Personality Traits of Top Salespeople

Seven Personality Traits of Top Salespeople

If you ask an extremely successful salesperson, "What makes you different from the average sales rep?" you will most likely get a less-than-accurate answer, if any answer at all. Frankly, the person may not even know the real answer because most successful salespeople are simply doing what comes naturally.

Over the past decade, I have had the privilege of interviewing thousands of top business-to-business salespeople who sell for some of the world's leading companies. I've also administered personality tests to 1,000 of them. My goal was to measure their five main personality traits (openness, conscientiousness, extraversion, agreeableness, and negative emotionality) to better understand the characteristics that separate them their peers.

The personality tests were given to high technology and business services salespeople as part of sales strategy workshops I was conducting. In addition, tests were administered at Presidents Club meetings (the incentive trip that top salespeople are awarded by their company for their outstanding performance). The responses were then categorized by percentage of annual quota attainment and classified into top performers, average performers, and below average performers categories.

The test results from top performers were then compared against average and below average performers. The findings indicate that key personality traits directly influence top performers' selling style and ultimately their success. Below, you will find the main key personality attributes of top salespeople and the impact of the trait on their selling style.

1. Modesty. Contrary to conventional stereotypes that successful salespeople are pushy and egotistical, 91 percent of top salespeople had medium to high scores of modesty and humility. Furthermore, the results suggest that ostentatious salespeople who are full of bravado alienate far more customers than they win over.

Selling Style Impact: Team Orientation. As opposed to establishing themselves as the focal point of the purchase decision, top salespeople position the team (presales technical engineers, consulting, and management) that will help them win the account as the centerpiece.

2. Conscientiousness. Eighty-five percent of top salespeople had high levels of conscientiousness, whereby they could be described as having a strong sense of duty and being responsible and reliable. These salespeople take their jobs very seriously and feel deeply responsible for the results.

Selling Style Impact: Account Control. The worst position for salespeople to be in is to have relinquished account control and to be operating at the direction of the customer, or worse yet, a competitor. Conversely, top salespeople take command of the sales cycle process in order to control their own destiny.

3. Achievement Orientation. Eighty-four percent of the top performers tested scored very high in achievement orientation. They are fixated on achieving goals and continuously measure their performance in comparison to their goals. 

Selling Style Impact: Political Orientation. During sales cycles, top sales, performers seek to understand the politics of customer decision-making. Their goal orientation instinctively drives them to meet with key decision-makers. Therefore, they strategize about the people they are selling to and how the products they're selling fit into the organization instead of focusing on the functionality of the products themselves.

4. Curiosity. Curiosity can be described as a person's hunger for knowledge and information. Eighty-two percent of top salespeople scored extremely high curiosity levels. Top salespeople are naturally more curious than their lesser performing counterparts.

Selling Style Impact: Inquisitiveness. A high level of inquisitiveness correlates to an active presence during sales calls. An active presence drives the salesperson to ask customers difficult and uncomfortable questions in order to close gaps in information. Top salespeople want to know if they can win the business, and they want to know the truth as soon as possible.

5. Lack of Gregariousness. One of the most surprising differences between top salespeople and those ranking in the bottom one-third of performance is their level of gregariousness (preference for being with people and friendliness). Overall, top performers averaged 30 percent lower gregariousness than below average performers.

Selling Style Impact: Dominance. Dominance is the ability to gain the willing obedience of customers such that the salesperson's recommendations and advice are followed. The results indicate that overly friendly salespeople are too close to their customers and have difficulty establishing dominance.

6. Lack of Discouragement. Less than 10 percent of top salespeople were classified as having high levels of discouragement and being frequently overwhelmed with sadness. Conversely, 90 percent were categorized as experiencing infrequent or only occasional sadness.

Selling Style Impact: Competitiveness. In casual surveys I have conducted throughout the years, I have found that a very high percentage of top performers played organized sports in high school. There seems to be a correlation between sports and sales success as top performers are able to handle emotional disappointments, bounce back from losses, and mentally prepare themselves for the next opportunity to compete.

7. Lack of Self-Consciousness. Self-consciousness is the measurement of how easily someone is embarrassed. The byproduct of a high level of self-consciousness is bashfulness and inhibition. Less than five percent of top performers had high levels of self-consciousness.

Selling Style Impact: Aggressiveness. Top salespeople are comfortable fighting for their cause and are not afraid of rankling customers in the process. They are action-oriented and unafraid to call high in their accounts or courageously cold call new prospects.

Not all salespeople are successful. Given the same sales tools, level of education, and propensity to work, why do some salespeople succeed where others fail? Is one better suited to sell the product because of his or her background? Is one more charming or just luckier? The evidence suggests that the personalities of these truly great salespeople play a critical role in determining their success.

The Duality of Growth

Growing the business of today and the business of tomorrow

When credit tightened and revenue declined during the recession, companies worked to extract value from efficiency and austerity. In many cases, those sources of value have been wrung dry. Now, companies are once again turning to growth.

Companies often approach growth as one of two opposite extremes:

• Execute better and deliver more from the existing business
• Charter a team of big thinkers to look deep into the future

We believe both of these approaches to growth are likely to fall short of expectations. Instead, companies can apply the same discipline to growth that they have brought to the cost side of the equation. A new view of growth can help companies set better growth targets, identify new opportunities, balance investments and risk and carry strategies into action with a clear eye toward expectations.

The duality of growth demands that companies fortify and expand the business as it exists today while simultaneously creating the business as it will exist in the future. This is not simply a temporal difference. The business of today and business of tomorrow are separated by uncertainty as well. This uncertainty introduces risk, impedes decision making and often causes companies to mistake discussion for strategy. This duality requires companies to execute now and consider future risks and opportunities while anticipating changing needs in leadership and capabilities.

When a company plots an executable growth strategy, it must address four major questions:

• What is the appropriate growth target?
• Where and how should we look for growth?
• How should we align our growth portfolio?
• How can we execute on this plan?

Establishing the right growth target requires clarity and bold leadership

Generating sustainable growth is difficult and requires bold leadership. And leadership has a way of feeling and sounding bolder when it paints in broad strokes. That’s why company growth objectives are often simple and capricious: “We will double last year’s rate of growth,” or “we will achieve double-digit increases.”

Even when they move beyond inspirational pronouncements, leaders may choose arbitrary growth targets. They often benchmark against organizations they see as peers or try to use industry averages as a stalking horse.

There’s more science to it than that. To be realistic and workable, a growth target should emerge from the interplay between internal and external factors and expectations. Externalities may include the industry’s overall momentum, investor expectations, the state of the economy, the intensity of competition and wild cards such as regulation, innovation or disruption. From within, a company should take into account its state of lifecycle maturity, its culture and talent, the resources available, its risk tolerance and its own innovation capabilities. These inputs create the context that helps determine whether a company can produce superior performance to create additional value by surpassing investors’ growth expectations. One can readily determine how much of current share price is based on expected future growth. We don’t need to cover the science and math here – Mark Sirower, a Principal in Deloitte Consulting LLP’s strategy practice, has written extensively about value in his book The Synergy Trap

A sophisticated growth strategy departs from the orthodoxy of core, adjacent, new

Much has been written about growth in terms of the core and moving into adjacent or new spaces. There’s certainly nothing wrong with these classifications – in fact, we firmly believe in them as a useful way to think about some aspects of growth. But we find those perspectives insufficient because they fail to account for uncertainty. And they do not address the complexity of creating growth in current and future businesses.

As we outlined earlier, the duality of growth means finding ways to grow the business of today while also finding growth that will create the business of tomorrow – and to fit both together. Leaders need to figure out how to scale and integrate tomorrow’s potential business back into today’s existing operations.

A comprehensive view looks at growth options along a continuum: In building the business of today, companies will typically turn to key areas of focus such as customer retention, pricing optimization and improvements to existing offerings. Moving along the scale toward choices that carry higher uncertainty and lie farther from existing operations, companies will likely start building the business of tomorrow by designing new offerings, intruding into new markets and geographies and creating entirely new business lines for entirely new customer sets.

Figure 1 below depicts the growth levers as they progress from the greater certainty of today’s core business to the greater uncertainty of the new businesses of tomorrow.

Growth Levers
Figure 1

Click graph to enlarge

Few companies employ every one of these tactics at once. Yet in choosing from among them, many risk a cognitive dissonance. The greater opportunities may lie at the distant end of the uncertainty curve, yet comfort may induce a company to invest more heavily in familiar near-term growth strategies that may carry less overall potential.

It is useful to understand the range of levers to pull, but crafting the full strategy rests in knowing how to apply those choices to specific markets and offerings. As pictured in Figure 2, each axis measures a degree of “newness” – newness of customers and markets along one side and newness of products and business models along the other.

Where existing offerings meet existing customers at the lower left, companies are engaging in core growth with relatively little uncertainty. Where entirely new offerings meet non-consumers at the upper right, growth is more uncertain. In between lays the realm of adjacent offerings and markets that aren’t new to the world, but are new to a particular company.

Sources of Growth
Figure 2

Click graph to enlarge

Combining these two axes yields seven distinct boxes, each of which is a potential growth strategy. Where growth strategy may once have been a dartboard, this model turns it into a marksman’s target. Applying this discrete lens allows a company to employ Cell Based Growth^TM. Cell Based Growth^TM produces growth insights for individual “cells” where opportunities may lie (say a particular segment of the core business or application of a disruptive technology in brand new segment).

Using the Cell Based view, a company can match its capabilities, opportunities and risk tolerance with specific levers – then allocate effort among those levers to balance “company of today” growth with “company of tomorrow” growth, control risk exposure and more closely achieve shareholder expectations.

Balancing a growth portfolio requires both a near- and long-term view

Look again at those seven boxes and imagine them empty. To construct the growth portfolio that most suits a company, its leaders must make clear choices about where to invest time, capital and other resources. A leader should take the overall growth target – for example 10 percent – and deconstruct it to identify which initiatives will produce the required growth.

Company A might walk a conservative line, targeting 5 percent growth from existing products and markets, then dividing the remaining 5 percent among the mid-range strategies in adjacent spaces. Alternatively, Company B might begin with the same 10 percent goal and weight its strategy more toward new products or new markets, inhabiting the upper right of the graph and embracing the higher potential upside – and higher risk – that come with the territory. This idea of a targeted growth portfolio isn’t new, but this “duality of growth” lens adds more specific rigor to the ways in which companies seek and achieve that balance.

Where should a company place its investments? Matching new offerings with new markets offers the potential of a high-energy combination. But trying to break into new markets with old offerings can make it harder to edge out well-entrenched incumbent competitors. And investing in a new business model without finding new customers invites the risk of an insufficient payoff. A solution to this “high risk, high reward” approach rests in strategic options.

We have seen that no one effectively predicts the future. Michael Raynor, a Director in Deloitte Consulting LLP’s strategy practice, has written extensively about uncertainty, risk and the value of options in his book The Strategy Paradox². He asserts the future is inherently unknowable and it’s likely most readers agree. Companies that embrace this view need Strategic Flexibility^TM to perform effectively in an uncertain future.

Strategic Flexibility allows a company to make commitments in the core business (perhaps building a new plant to increase capacity) and take strategic options to create the future business while managing risk (perhaps taking an equity position in a potentially disruptive new technology). This approach allows companies to adapt their core to changing regulations and market conditions without relying exclusively on long-term predictions. And if the new business part of the playing field is where a company wishes to end up, it controls for risk without strangling growth.

Managing a growth portfolio that spans both new and future businesses requires thoughtful governance and understanding of a company’s culture. A company may elect to treat its new growth plans – the ones that involve new offerings, new markets, or both – as separate from the rest of the business. In some cases, a “firewall” approach can benefit both the existing core business (by insulating it from new risks) and the growth-oriented operations (by freeing them from legacy structures that may not fit their mandates).

However a company chooses to structure its growth portfolio, the broader point remains – viewing it in a structured way enables not only a more rational identification of growth areas, but also a more effective way to assign priority to each of them. Companies can iterate and refine concept development and evaluation – meaning that their opportunities are not found over time but shaped.

Now go do it

Planning growth this way requires a diligent eye on the external world, but it’s largely an internal process. Moving from strategy planning to strategy execution does not eliminate the need to focus on the duality of today and tomorrow.

Where the growth plan focuses on core offerings and markets, the imperative is to enhance and extend what a company is already doing. In some cases, that can take as much creativity and innovation as creating something entirely new.

Where growth is aimed at new frontiers, it’s time to be a pioneer – willing to explore, disrupt, create and leave the familiar behind. Building the business of tomorrow may require consolidation to build scale, or divestiture to free capital for new uses. It may alter the pace with which a business phases in – or phases out – component operations for the most effective use of resources.

To take a growth plan from theory to execution, an organization must recognize the duality that both joins and separates today and tomorrow. First, a company must identify the capabilities it needs and either build or obtain them. For each growth lever a company has decided to pursue, there may be an entirely separate set of required capabilities. Organizations must then define the leadership and talent required to pursue these opportunities. Exploring uncharted territory requires different skills, experiences and inclinations from driving incremental improvements to the things an organization does already.

Finally, different metrics are required to measure success. While traditional metrics such as growth rate, market share and time to market may be appropriate for business-of-today initiatives, non-traditional metrics such as growth rate above market, percentage of revenue from first-to-market launches and time to break-even may be better predictors of success when entering new spaces. By taking what we call a Cell-Based approach to growth strategies, companies can identify the key opportunities and measures in each part of the business – whether today or tomorrow – and build the required capabilities to grow effectively.

Although many organizations have invested considerable resources in defining and improving processes around quality, cost, or efficiency, growth and innovation are too often viewed as a “black box.” This is a mistake. Setting a clear target, identifying the right growth levers, apportioning investments amongst them and managing growth with programmatic, repeatable rigor are the keys to opening this black box and building the foundation for sustainable, long-term growth.

Growth’s Triple Crown

When it comes to exceptional performance, the best companies don’t make trade-offs: They break them

Over the last two years, the general economy has righted itself and profits have rebounded strongly. Corporate cash balances are at an all-time high in many sectors, and shareholders have been rewarded for staying the course through the turbulence of the recent past. At long last, it seems, growth is back on the corporate agenda.

It is tempting, because it is easy, to succumb to the notion that as companies grow they will see a decline in either or both of their profitability and shareholder returns. But what if it were possible to avoid those trade-offs? What if we could find and learn from those companies that have delivered not only superior growth but also league-leading profitability and shareholder returns at the same time? In other words, what does it take to win growth’s “triple crown”?

Who would be king?

Baseball and horse racing provide two popular analogues. Baseball batters with the greatest number of home runs, runs batted in (RBIs) and highest batting average in a year are triple crown winners. In U.S. horse racing, the triple crown goes to the 3-year-old thoroughbred that wins the Kentucky Derby, the Preakness Stakes and the Belmont Stakes in the same year.

Triple crown winners are rare and, in fact, increasingly so. The last hitter to win a triple crown was Carl Yastrzemski with the 1967 Boston Red Sox, 45 years ago. (In the 45 years prior to The Yaz’s achievement there had been six triple crown winners.) Affirmed took the last horse racing triple crown in 1978. (In the previous 33 years there had been five.)

Part of what makes triple crown winners so special is that the events one must win to capture them demand not merely different, but often contradictory skills. Hitting home runs demands swinging for the fence, which often leads to strikeouts and a lower average; RBIs require putting the ball in play on demand—when runners are on base—in ways that get runners across the plate even if it gets you out, which reduces your home run total and your average; and a strong batting average might mean hard line drives (fewer home runs!) that result in the runner on first getting forced out at second (lower RBI total!). As for horse racing, for 3-year-old thoroughbreds the 1¼, 1 3/16 and 1½ miles of the Derby, the Preakness and the Belmont, respectively, are different enough that victory in any one of them often requires specialization at that distance.

Whether or not you’ve won the triple crown in baseball or horse racing is entirely unambiguous. But when it comes to corporate performance, as regular readers of this space will appreciate, identifying exceptional outcomes is not a straightforward undertaking. Unlike triple crowns in sports, we are not interested in performance over a single year. And when picking any particular period of time—five, ten, or some other number of years—we cannot help but make arbitrary choices that threaten to materially bias our results. If we want to find companies that have been truly remarkable on any measure of performance over time, we need to draw from the largest sample possible, which means making comparisons across different industries, different eras and different periods of time.

In the service of that objective, our sample consists of over 22,000 companies that traded on a U.S. exchange at any time between 1966 and 2008. However, when looking at so many companies over different lengths of time over more than four decades it turns out that systematic variance in company performance is very high and, at the same time, quite “sticky” at the high and low ends of the spectrum. This means that companies can deliver eye-popping results for a seemingly significant period of time even though it remains practically impossible to separate out the contribution of luck from that of company-level attributes.

To compare companies from such a diverse population we built a regression model for each performance measure. This regression allows us to predict what each company’s performance “should have been.” In each year, a company’s actual performance will typically deviate from this predicted value, falling either above it (a positive residual) or below it (a negative residual). The sum of these residuals is a company’s raw R-score (for “residual”).

We cannot, however, simply compare raw R-scores, since companies with longer life spans will have systematically higher R-scores simply by virtue of having more of them. To correct for this, we ran a series of simulations to determine what the expected R-score is for companies with different numbers of observations.

This allowed us to compute a “corrected R-score” for every company: a single measure for each of revenue growth, profitability (as measured by return on assets, or ROA), and total shareholders returns (TSR) that allows us to compare performance among all companies.

Given our particular interest in how to break the performance trade-offs that often accompany the pursuit of growth, we have focused first on those companies that fall into the top decile for growth, and then identified companies that also fall into the top decile along one or both of the other two performance measures. For convenience, we refer to the four categories as “G” (top decile for growth), “GR” (top decile for growth and ROA), “GT” (growth and total shareholder returns), and “GRT” (the triple crown winners).

In order to facilitate a more tractable examination of the profile and behaviors of firms with different performance profiles, consider for now only those that have at least ten years of data and that were going concerns in 2008 with at least $1 billion in revenue. This leaves us with 1,116 companies, of which 118 are at least great growers. (Statistical analysis suggests that this sample is representative of the full population.)

As shown in Figure 1, 55 percent of the great growers in that sample (66 of 118) delivered on more than just growth, consistent with the notion that, over the long run, growth cannot be an end in itself, but should drive, or at least be associated with, some form of value creation. At the same time, those firms that delivered on growth only are the single largest group, implying that delivering on more than one dimension is a genuine challenge

Some descriptive statistics shed light on the profile of the companies that fall within each of our four categories. Intriguingly, there is no meaningful difference in the age or size (in 2008) of the companies in each of our four categories. The bubble chart below provides a sense of the observed performance by category. Note that ROA, TSR and growth rates for the GRT firms are higher than for any of the other categories, suggesting that not only is it possible to do well on multiple dimensions of performance simultaneously, it is possible to do very well. For although all the companies in this sample are in the top decile for their relevant performance measures, once a company clears that top decile cutoff, there is literally no theoretical limit to how high they can go.

Statistical analysis reveals no significant differences among any of the categories on growth, which is to be expected since our sample is made up of companies that reached at least the ninth decile in growth for the total population. Intriguingly, neither is there any significant difference between GR and G firms on ROA or TSR. The GRT and GT firms, however, outperform the G firms on both ROA and TSR as indicated in the table below.

Other features of our sample are somewhat counterintuitive. For example, the average ROA of our GR firms is lower than the ROA for our GT firms. How can companies that have higher ROA on average (the GT companies) fail to meet the cutoff for top decile ROA when they perform better than the GR firms? We see the same effect on individual firms within categories: some G and GR firms have TSR values that are higher than some GT companies, yet they do not make the cutoff for top decile TSR performance.

The answer lies in the importance of our controls, especially industry effects, on company ROA and TSR. Some industries have systematically higher TSR and ROA, and so companies in those industries must deliver better absolute performance in order to achieve a similar relative ranking.

With this in mind, perhaps the two most fascinating observations about performance differences by category are these: First, GRT firms achieve the highest raw and corrected levels of performance across all three measures. In other words, our triple crown winners do not “just” clear the top decile hurdles, ceding highest honors to “specialists” in each category. Rather, they finish at the top.

Second, the firms that fail to achieve ninth decile performance on multiple measures do not “just miss” on the other measures, they miss by a mile. The G firms, for instance, do not achieve ninth decile on growth and then eighth decile on other measures; they are in the sixth and third deciles for TSR and ROA.

It is important to note that we cannot claim a causal relationship between being in the triple crown category (our GRT firms) and the magnitude of their performance along each dimension. To do that, we would have to show that superior performance along all three dimensions was a consequence of clearing the ninth decile hurdle in each. However, at the risk of mixing metaphors, these findings suggest that GRT firms are rather like an Olympic triathlon champion with times for each stage (swim, bike, run) that would have earned them the gold in those individual events.

With individual event champions (G, GR and GT firms) doing so poorly on other dimensions, and GRT firms doing so well on all three, it’s just possible that instead of trade-offs among multiple dimensions of performance there is instead a positive feedback loop. Could it be that, beyond market share and influence with customers and suppliers, growth can create self-perpetuating momentum, the kind that draws to a company the best people, the most promising opportunities, and enthusiastic customers? That enthusiasm in turn might drive profitability, making possible the sort of reinvestment in R&D and people that over time establishes a daunting lead over one’s competition. The resulting growth might drive strong shareholder returns, creating a currency for growth, starting the cycle anew. Call this the “performance synergy hypothesis.”

Elements of trade-off-free growth

In an attempt to identify some of the possible differences in behavior among our performance categories that might be associated with their performance over time, we looked at the total growth achieved by every firm in our sample that was generated through acquisition and through merger activity.

The box plots below illustrate the distribution of total growth driven by each of these behaviors. A regression analysis reveals what is not immediately evident in a visual representation of the data: that GRT and GT firms generate on average about 40 percent and 25 percent less, respectively, of their growth from M&A than the pure growth companies, despite, recall, having entirely comparable rates of lifetime growth. GR and G firms are not materially different from each other.

These findings are in many ways consistent with both the conventional wisdom and the academic research on M&A. It is not uncommon to hear the refrain that acquisitions—especially larger ones—are systematically associated with lower profitability and lower shareholder returns for the acquiring firm. What we observe is that triple crown winners generate a mere 7 percent, on average, of their lifetime growth from M&A, while pure growth firms—which fail to deliver exceptional TSR or ROA performance—derive on average 46 percent of their growth from dealmaking. GT firms—companies with strong shareholder returns but less impressive profitability—split the difference, with an average of 22 percent of their growth coming from such sources

There are any number of interpretations for these data, but in our view they are consistent with the view that merger activity does not necessarily improve profitability, and often erodes it. And although few executives are likely to go into a deal intending to sacrifice their firms’ profitability or their shareholders’ wealth, it is noteworthy that so many G firms manage to do so consistently.

(The relatively high percentage of growth from M&A by the GR firms warrants explanation: there are only four companies in this category, and the range of growth from M&A is from 0 percent to 148 percent, with the high end of that range driven by a very large and dominant company competing in a highly regulated industry.)

Geographic expansion shows the opposite trend, with GRT firms deriving on average 40 percent of their growth in this way, about 16 percent more than pure growth companies; the other three categories are no different from each other. This suggests to us that successful geographic expansion delivers growth that is surprising to shareholders (contributing to the superior TSR – the “T” in GRT) and can be done in ways that are consistently profitable (the “R”). GR, GT and G companies tend to exploit geographic growth far less, at 19 percent, 26 percent, 24 percent of their total growth, and apparently less effectively, given their lower levels of overall profitability.

Beyond their standalone impact, are there any synergies between these two growth levers? That is, is there any relationship between the degree of geographic expansion and M&A activity within firms by performance category? Statistically, the answer is “no”: firms within each category appear to pursue their geographic expansion and M&A-driven strategies largely independently of each other. Consequently, while definitive conclusions are elusive, it would appear that among companies achieving significant growth, there is little evidence that their international expansion is fueled by cross-border acquisitions. Again, this is at least consistent with credible academic research that while M&A generally is fraught with risk, cross-border M&A is an entirely different sort of difficult – one that the top performing firms do not appear actively to seek out, and might even avoid.

Cisco Systems: An archetypal triple crown winner

Averages and general tendencies are helpful but can be somewhat blood-less. To bring to life the contours of a triple crown winner, consider Cisco Systems. Founded in 1984 and going public on the Nasdaq exchange in 1990, Cisco is widely regarded as having enjoyed a dynamic and highly successful quarter century.

Cisco provides a useful starting point for understanding the defining attributes of a company that has performed well over time because not only does it clear our statistically defined benchmarks for superior performance, its performance has been impressive by even merely intuitive standards of excellence.

So how did Cisco do it? The definitive explanation remains to be written, but we can offer a few observations that illustrate some common features of a triple crown winner.

First, Cisco has generated 46 percent of its growth from geographic expansion, very near the average for the GRT category and higher than in the other great grower categories. Cisco has pursued its geographic expansion in a systematic manner by capturing significant (>25 percent) market share in the markets it has entered. A perhaps defining element of its success has been its tendency to expand the geographic footprint of its R&D and manufacturing functions as well. In effect, Cisco has globalized as a company, rather than merely seeking customers beyond its home base in the United States. And, consistent with our observation that geographic expansion and M&A strategies seem to be independent of each other, Cisco’s geographic expansion seems to have been largely organic: rarely has an acquisition been a driver of growth in new regions.

New products, however, are another story. Much has been written about Cisco’s M&A prowess, and with good reason. However, for all the attention Cisco’s deal-making gets, the company has generated about 6 percent of its growth from M&A, despite having done over 150 deals between 1993 and 2008. The acquired companies were generally small compared to Cisco’s revenue at the time of acquisition and tended to be privately held companies built around a single technology. This implies rather strongly that the success of its acquisitions seems to be in what it does with them, not what they are upon being acquired.

Finally, perhaps one of the most well-documented findings on corporate performance is the negative impact of diversification. Clearly, when viewed from the perspective of its products and markets in the early 1990s, Cisco has diversified significantly: new products, new geographies, even entirely new businesses. Yet it seems to have avoided the “diversification discount.” How?

One possible answer is the gradual nature of its transformation over the years. The company’s primary focus for growth seems always to have been on strengthening and expanding its core business, both domestically, by targeting new customers for its existing products, and in new geographies.

The company has simultaneously stayed ahead or abreast of the rapidly advancing innovation curves in its various product markets by spotting trends and, where necessary, making relevant acquisitions. The result has often been an astute move into adjacent markets that have had clear linkages to its core business, often where the company has had brand permission and could easily leverage its core capabilities.

Ascending the throne: A CoDE for growth

It is always worth exploring whether there are any meaningful commonalities among firms that have a shared and remarkable performance profile. The value of identifying the specific actions or even general rules that increase one’s chances of performing similarly would be extraordinary.

As is seemingly unavoidably the case, however, the unifying themes that emerge tend to be rather high level. For even though Cisco’s experience is representative of triple crown winners generally, there are many more unique aspects to each triple crown winner’s story than there are shared ones. The dynamic nature of the challenges and opportunities faced by different companies at different times makes it challenging to have a formula-based approach to growth.

Within these constraints, our efforts to identify useful common characteristics has surfaced three recurring, if not universal, themes.

First, clarity in vision seems essential, if not in jump-starting growth, then certainly in avoiding the many distractions that can derail long-term success. Firms that grow profitability while creating shareholder value rarely pursue a single-minded dedication to one market, one segment or one technology. These firms can enjoy material growth but typically end up seeing their growth stall and their profitability erode. At the other extreme, firms that press growth but sacrifice value or profits have frequently diversified too much. The triple crown winners, in classic Goldilocks fashion, very often end up diversifying in material ways, and the sorts of transformations that characterize Cisco are far from uncommon.

One characteristic that allows these companies to strike the right balance seems to be a clear and compelling vision that is communicated broadly and shared widely across levels and functions. This vision helps triple crown winners to look beyond the constraints of their existing business without being distracted by every passing flashy bauble.

Second, disciplined resource allocation is a defining feature of triple crown winners. This discipline manifests itself in some unsurprising ways: a rigorous and multidimensional assessment of the merits of each new opportunity. At the same time, part of this rigor serves to compartmentalize resources in ways that ensure resources flow to strategically differentiated opportunities. In other words, not all dollars are created equal: triple crown winners invest consistently in the business of today and the businesses of tomorrow – both those that are extensions of current capabilities and those that expand the company’s competency footprint.

Finally, there is a common emphasis on excellence in execution across all functions. There is little evidence that strengths in any one area can compensate for weaknesses in others. It would appear that breaking trade-offs among growth, profitability and shareholder returns also requires breaking trade-offs in execution: triple crown companies are typically nimble and committed, efficient and effective, long-term thinkers and short-term obsessed.

In the end, triple crown companies share the following attributes:

• Clarity of vision
• Disciplined resource allocation
• Excellence in execution

And that is our growth CoDE. It might not win you the Derby, Preakness and Belmont, but it just might get your company that much closer to exceptional value creation. 

Source: Deloitte