Number 14

Mercer Management Journal

Making New-Growth Initiatives Work

Adrian J. Slywotzky and Richard Wise
After the Boom and Bust
A prescription for recovery in telecommunications
Simon E. Glynn and João Baptista

Stop Thrashing Your Suppliers

Focus on value and profits, not just cost, in the sourcing process
Matthew Anderson, David Bovet, and Grégory Kochersperger

Driving Change Through Advocacy

The executive-advisor connection
Ron A. Carucci and William Pasmore

Profitable Retailing in a Zero-Sum Game

Growth through powerful value propositions
Kevin Mundt, Eric Almquist, and Jacques César

Creating a Just-in-Case Supply Chain

for the Inevitable Next Disaster
Joseph Martha and Eric Vratimos
Making New-Growth Initiatives Work
By Adrian J. Slywotzky and Richard Wise

Next-generation opportunities are different from the core business.

They require different metrics and skills, a thorough understanding of
customers’ priorities, and a genuine commitment, not just fair-weather
promises, from the top. While no single formula will fit all companies,
analysis of firms that have succeeded in new growth suggests a set of
guidelines from which managers can learn.

M ost senior managers know intuitively that relying on the inspired efforts of a few mav-
erick managers to find and nurture new-growth opportunities is a recipe for stagnation.
The odds of success are long, even for the best ideas, and in most companies the number of
talented mavericks can be counted on one hand. Putting the whole burden of change on their
shoulders will only produce frustration for the mavericks and stagnation for the company.

Success in creating new growth again and again lies in developing a systematic, organiza-
tional capability to identify, shape, and nurture new-growth initiatives. And that responsibili-
ty lies with the CEO and the entire senior management team.

Of course, achieving that goal isn’t easy. Most senior managers who recognize the urgency of
new growth get hung up on a series of thorny issues:

TCreating innovative new-growth initiatives without losing discipline

and focus on the core business

TReconciling the pressure for short-term earnings with multiplying

requests for seed funding

TSupporting innovative thinkers and risk takers without signaling

neglect of the core business

TSorting out the opportunities that could truly move the stock price
from those that are likely to produce only marginal improvements

TFinding the time to guide and coach new-growth teams without

neglecting the other burning issues on the agenda

Managing these tensions is a long-term discipline rather than a problem to be solved once
and for all. No single set of formulas will fit all companies. However, examining the practices
of firms that have successfully fostered new-growth initiatives suggests a number of guide-
lines from which other companies can learn. Here are the principles we would urge senior
executives to study and apply.

Adrian J. Slywotzky and Richard Wise are vice presidents of Mercer Management Consulting.
They are both based in Boston. Their new book, How to Grow When Markets Don’t,
will be published next spring by Warner Business Books. They can be reached at
adrian.slywotzky@mercermc.com and rick.wise@mercermc.com.

20 Making New-Growth Initiatives Work Mercer Management Journal

Make operational excellence in the core business your cornerstone.
It may sound like a paradox, but having an efficient, profitable core business based on high-
quality products and services gives you the license from customers to go further in solving
their problems. It also gives you the funds to support new-growth initiatives. The core busi-
ness helps open the door to other customer needs that involve using products more effec-
tively: No product sale, no surrounding needs to serve.

Cardinal Health, based in Dublin, Ohio, is an outstanding growth innovator that has never let
up on operational excellence in its core business of distributing drugs to pharmacies, hospi-
tals, and managed care providers. Even as it pursued new businesses such as pharmacy
management, reimbursement services, and contract drug packaging over the past decade,
Cardinal was steadily consolidating and improving its distribution centers.

In 1994, Cardinal had forty distribution centers with average annual center sales of $125 mil-
lion. Today, it operates only 24 centers with average annual sales of $900 million, well above
the industry average of $450 million.

Every dollar saved on distribution costs becomes a dollar available for new-growth invest-
ment. This relentless focus on efficiency has allowed Cardinal to stay profitable and fund
new growth (Exhibit 1). Moreover, the value that Cardinal provides to customers in its core
transaction helps grant access to many of its upstream and downstream businesses.

Exhibit 1 Cardinal Health was able to pursue new ...by improving the
growth opportunities... core business.
1991 2001
Revenue $1.2 billion $38 billion
EBIT $35 million $1.6 billion
Market value $3.4 billion $33.1 billion Pharmaceutical distribution
market share
Revenue and
earnings mix 19% 4% 22% 29%
48%

25%
27%
100% 100% 81%

52% 49% 32%

12%
Revenue EBIT Revenue EBIT 1991 2001
Cardinal
Pharmaceutical distribution
McKesson
Other products and services AmerisourceBergen
Others
Source: Compustat, company data, W.R. Hambrecht and Co.

By making core business excellence a cornerstone of growth, senior managers can alleviate
concerns about losing momentum and discipline as people get excited by the sexy new-
growth concepts. Just watch out for the trap at the other extreme: using the focus on core
operations as an excuse to defer any serious focus on new growth. This can easily become a
permanent state of mind. While there is always some improvement or change to be man-
aged in the core business, improvements must be managed simultaneously with efforts to
pursue new growth, not at the expense of such efforts.

www.mercermc.com/mmj Making New-Growth Initiatives Work 21

Treat growth as a discipline to be pursued at all levels throughout the company.
Companies that treat growth as the purview solely of a corporate strategy or business devel-
opment group rarely create meaningful, serial growth. While their participation is important,
such groups by themselves may lack sufficient funds or operating experience to spearhead
serious new growth. Innovative growth also needs to include operating managers as part of
their day-to-day interaction with customers and the marketplace.

At Cardinal, there is no corporate unit in charge of growing new businesses. Instead, every-
one at the company from CEO Robert Walter on down makes growth the central concern of
every day’s decisions, and every manager knows that growth is a critical component of his or
her report card.

Cardinal imposes growth standards Cardinal managers focus on two dimen-

sions: absolute growth and relative growth.
that hold managers responsible for The absolute rate of growth supports over-
the success of their business. all financial health, generates profits to
reinvest in the business, and helps attract
and motivate the best talent. The relative rate of growth is important because Cardinal com-
petes in the fast-growing healthcare sector. Growing at a high absolute rate while trailing the
overall market’s growth rate would not be acceptable at Cardinal, because it would mean
that Cardinal’s offerings were viewed as mediocre or less relevant by customers. Over time,
the company would lose ground.

How does Cardinal get harried operating managers to focus on growth strategy? By imposing
a standard that holds them responsible for the success of their businesses. Managers know
that they can’t perform on the metrics of absolute and relative growth without a relentless
focus on growth strategy. Of course, they also realize that building new businesses and
achieving growth targets provide the critical funds they need to invest in future growth
opportunities. As a result, Cardinal has grown faster than the healthcare distribution market
by over 50% annually, not including acquisitions.

Managing growth is demanding and scary. It’s also creative and energizing. Don’t hoard the
experience at the top executive level. Instead, distribute both the responsibility and the
opportunities to grow as widely as possible through your organization. That’s how unexpect-
ed champions can emerge from the ranks.

Develop many small maverick ideas, not a few large ones.

A culture of growth alone is not enough. Someone has to come up with the breakthrough
ideas and translate them into real offerings. In addition, bad ideas have to be killed quickly,
before they consume significant time and money. How can senior managers unleash broader
creativity to fuel next-generation growth while keeping new initiatives from running amok?

Part of the answer lies in devolving authority and responsibility for growth to the operating
managers closest to the action. Another part of the equation is illustrated by an approach to
grass-roots innovation taken by Milwaukee-based Johnson Controls. During the 1990s, the
firm shifted its focus from assembling automobile seats, a commodity product, to providing
auto makers with integrated interior modules and, more recently, with complete cockpits.
Thus, it moved from simply providing a high-quality product to addressing auto manufac-
turers’ needs to reduce the risk and complexity of vehicle design and improve efficiency in
vehicle assembly (Exhibit 2).

22 Making New-Growth Initiatives Work Mercer Management Journal

Exhibit 2 Johnson Controls’ “innovation machine” has helped the company expand from auto
seating into complete cockpits.

Content per vehicle

Occupant protection $1300+

Interior ventilation

Doors
$600

Seats

1992 2002

Return on invested capital

Instrument panel 10.2%

5.5%

Headliners / other

1990 2001

Source: Company data, Compustat, Mercer analysis

Johnson Controls encourages people to spend time pursuing unconventional paths of

inquiry, but also imposes a staged evaluation process with the goal of “failing fast” on bad
ideas. Jim Geschke, vice president and general manager of electronics integration, describes
the innovation process this way:

“We have an innovation machine. The front end has a robust series of gates to go through.
Early on, we’ll have many ideas and spend a little money on each of them. As they get more
fleshed out, the ideas go through a gate to decide whether to continue or stop. A lot of ideas
get filtered out, so there are far fewer items and the spending on each goes up.” (In simple
terms, the gate consists of a cross-functional team, based within the business unit, which
meets periodically to discuss new ideas and review the progress of every initiative. The team
makes the crucial funding decisions.)

“Several months later, each idea will face another gate,” Geschke continues. If the idea passes,
that means it’s a serious idea that we are going to develop. Then the spending goes way up,
but the number of ideas goes way down. By the final gate, you need a credible business case
in order to be accepted. At a certain point in the development process, we take our idea to
customers and ask them what they think. Sometimes they say, ‘That’s a terrible idea, forget
it.’ Other times, they say, ‘That’s fabulous, I want a million of them.’”

Johnson Controls’ innovation process does not start with a customer survey, focus group, or
other formal customer feedback. It does not have to. The company’s engineers are working
on site with customers constantly and receiving continual insights from end-user research.
Being steeped in customer needs means that virtually every new-growth initiative has some
basis in customer reality.

The company gives staff the latitude to push a project as far as it can go, even when cus-
tomer demand is not obvious. “Homelink was an example of this,” Geschke explains. “It was
a product that no one asked for. But we recognized that in today’s vehicles, the beautiful,

www.mercermc.com/mmj Making New-Growth Initiatives Work 23

highly integrated interiors are very harmonized, yet you’ve got this ugly appendage, the
garage door opener, clipped on the visor. We saw an opportunity there and developed
Homelink, which is seamlessly integrated into the visor or the overhead console and is
compatible with every garage door opener developed over the past thirty years. It was a
significant challenge for us, and no customer asked for it. We spent a few million dollars
and hoped that the auto makers would bite.”

They did. Homelink is now available on more than 150 different vehicle models from a wide
range of auto makers.

“Another example is our digital compass,” Geschke says. “We did some end consumer
research, and the consumers said, ‘I’m not interested in the feature, and if I was I’d go to
Kmart and stick it on the windshield and be done with it.’

At Johnson Controls, having an “But there were a couple of champions within

the company who responded, ‘Trust me, this is
idea turned down is not viewed going to work. People are going to like it.’ And
as a career setback. The key is they were right. We do millions of compasses
to “fail fast.” now. So we have a bit of a tolerance for maver-
ick thinking. If there is an individual or two
with an absolute passion for a new product, they can force things through the system a little bit.”

Having an idea turned back at a gate is not viewed as a catastrophe or career setback. Indeed,
it is expected in most cases. “We learn a lot from failing,” Geschke explains. “So if you don’t
pass the gate, that’s not viewed as a miss, that’s viewed as a hit, because now we know what
not to do. In telematics, we embarked on an ambitious plan and in the process learned that
we couldn’t pull it off. So we retrenched, retooled, and came out with something dramatically
different. Now we have a new telematics approach that is being embraced in the market-
place, partly because of the failure we experienced on the first one.

“We embrace failure in general, and we encourage people to fail fast,” he concludes. “The key
is to fail before the consequences are severe.”

Is the Johnson Controls system for innovation the best one? Not for every business. You need
to tailor gatekeeping techniques to the economic and marketplace realities of your own
industry. Examine your industry, your markets, and your customers, and then develop an
informed sense of the breadth of new-growth opportunities available. Then create a process
finely tuned to encourage and support the right number of maverick ideas, winnowing them
as needed to focus on those with real profit potential. Your new-growth process is every bit
as important to your company’s future as your manufacturing process or your financial
analysis process, and it deserves the same kind of attention.

Shift resources from product and technology innovation to customer and business innovation.
Most CEOs will tell you that growth is one of their top three priorities. Yet in terms of the
time and energy they actually spend on various activities, growth usually ends up fifth or
sixth. And most spend hardly any time on nurturing new forms of growth.

That’s because new growth is hard. It involves leading the organization, the board, and even
investors in uncomfortable change. New-growth initiatives deserve resources commensurate
with their importance. Most large companies spend hundreds of millions, if not billions, of

24 Making New-Growth Initiatives Work Mercer Management Journal

dollars on product R&D without any certainty as to which part of that R&D will turn into rev-
enue and when. By contrast, most new-growth initiatives are starved for funding, subjected to
onerous budget reviews and held to impossibly high standards of certainty about their pay-
back potential. Since companies can’t afford to invest willy-nilly, senior managers should
consider devoting 10-15% of their product innovation budget to customer innovation instead.
Air Liquide is a great example of how a century-old, tradition-bound supplier of industrial
gases was able to make this shift.

Air Liquide: a wake-up call from customers

Air Liquide, based in Paris, had always excelled at technical innovation, but by the late 1980s
and early 1990s, revenues and operating income were stagnating and technical innovation
was leading nowhere—until it was unleashed in a way that helped improve customers’
systems economics.

What spurred a shift in thinking was Air Liquide’s first customer survey in 1989. Asked to rate
Air Liquide’s extensive research and development efforts, customers overwhelmingly said
they did not appreciate the remote, ivory tower culture of innovation that Air Liquide consid-
ered to be its core asset. The survey results reverberated among the army of engineers, scien-
tists, and technically trained managers. “Customers would have had the same perception of
us had we done no R&D at all,” says Jean-Renaud Brugerolle, vice president of marketing.

And why shouldn’t they? R&D was carried out centrally and focused on three main areas:
new process improvements in Air Liquide’s own operations, new production methods, or
new applications. Of the two customer-facing activities, the new production methods were
yet to become fully commercialized and had had little customer exposure, whereas the new
applications were often invented in a vacuum, not taking into account how they might
impact potential customers’ overall manufacturing processes. Clearly, Air Liquide and its
customers were not on the same page.

As it happens, technological prowess alone would not move the company back to growth,
but it did provide the seed for a new crop of opportunities.

That seed came from a new gas production method. In the early 1990s, Air Liquide launched
technology that allowed a smaller gas production facility to reside on the customer’s site,
instead of large centralized plants. On-site production was less capital-intensive, and
products could be customized for individual customers.

One important side effect of on-site production was a higher level of ongoing interaction
between customers and Air Liquide staff. The on-site teams soon discovered that their
industrial customers had a variety of pressing needs that Air Liquide might be able to
address, needs such as minimizing risk, improving quality, reducing emissions, and improv-
ing their supply chain systems. Because of a company reorganization that gave more auton-
omy to local teams, on-site staff now had the authority and the mandate to act on new
opportunities to help customers in a variety of ways. Air Liquide began to realize that all of
its R&D and production knowledge, which it had struggled to turn into meaningful product
differentiation, was relevant to customers’ industrial processes.

The company gradually expanded from its core commodity gases to offer a set of new serv-
ices ranging from gas management contracts to performance guarantees, chemicals man-
agement and consulting, supply chain management, clean energy alternatives, environmen-

www.mercermc.com/mmj Making New-Growth Initiatives Work 25

tal consulting, and licensing of software tools and systems. By seizing these new opportuni-
ties, Air Liquide has expanded its potential markets, gained a greater share of customers’
wallets, and improved customer loyalty.

The financial results have also been impressive. From 1996 to 2001, Air Liquide has seen a
10% average annual growth in revenue, a 14% growth in operating income, and a 9% growth
in market value (Exhibit 3). Investors value Air Liquide at a premium: In 2001, Air Liquide’s
market value was more than 1.5 times higher than the average market value of its top com-
petitors and 25% higher than its closest competitor.

Exhibit 3 Air Liquide shifted from dead-end technical innovation to wide-open

customer innovation.

14%

12

10 Operating income
3-year
rolling 8
compound
annual Initial
growth 6 introduction Revenues
rate of value-added
4 services
Services
become
2 strategic
focus
0
1987-90 '88 -91 '89 -92 '90 -93 '91 -94 '92 -95 '93 -96 '94 -97 '95 -98 '96 -99 '97 -00 '98 -01

GM: The buck stops here

New-growth initiatives also require active, ongoing commitment by senior managers, who
must be willing to visibly support the new business with their time, personal coaching, and
political capital. The acid test is whether they are willing to have parts of the organization
bear the pain of supporting the new initiative in some important way.

Comprehensive support from senior management was invaluable to the development of

General Motors’ OnStar business. OnStar offers services such as one-button access to direc-
tions and route planning; alerts to the central information center of airbag deployment;
remote door-unlock capabilities; and remote engine diagnostics monitoring. It now has
more than two million subscribers.

Many initiatives have senior executive champions in the early, heady days when a new busi-
ness is all promise and no one has had to make any tough decisions or allocate scarce dol-
lars and talent. Few can point to the kind of ongoing commitment that the OnStar project
got from GM senior management, including CEO Rick Wagoner, Vice Chairman Harry Pierce,
and Ron Zarrella, head of GM North America. Their commitment was manifested in three ways:

TA willingness to provide significant funds to build the business over an

extended number of years and in the face of significant competing demands

26 Making New-Growth Initiatives Work Mercer Management Journal

 TThe conviction to disrupt activities of the core business on OnStar’s behalf,
notably by interceding in vehicle development schedules, sacrosanct territory
at GM, in order to accelerate factory installation of OnStar components

TThe generosity to provide a large amount of their own time and personal contacts for
advice and introductions on behalf of the business. For instance, when GM decided to
approach other carmakers about installing OnStar on their vehicles, Jack Smith, for-
mer CEO of GM, opened the door by calling his friend Hiroshi Okuda of Toyota, whom
he’d met years before when the two companies collaborated on a production facility.
Once Toyota signed on, selling the concept to other auto makers became easier.

If you’re a top executive, every move you make or don’t make is loaded with symbolic and
psychological importance for everyone in your company. Do you want to get serious about
new growth? Then take meaningful, visible steps to nurture your new-growth initiatives.
Talk about them, and back up the talk with time, energy, and money.

Organize to suit the needs of the new business as much as the core business.
Next-generation opportunities are often materially different from the core business, with
different economics, capital structures, and methods of capturing value. To succeed, these
businesses need to be understood and structured in this light.

This might seem obvious, but most companies have spent considerable time and effort cre-
ating common metrics, rewards, titles, pay grades, and organizational structures in order to
better align their organizations. The last thing senior managers want to do is open up the
Pandora’s box of exceptions. However, form must follow function, and different business
structures make sense for initiatives that are different from the core operations.

John Deere Landscapes (JDL), which operates over two hundred outlets for landscapers to
buy both landscaping and sprinkler products, has thrived in part because it is separate from
the parent Deere & Company. Managing the relationship between parent and offspring rep-
resents an ongoing challenge for Dave Werning (who heads the landscapes business) and the
Deere team, as they master the differences between the economics of distribution and those
of manufacturing. The financial hurdle rates set for JDL are currently the same as those for
Deere’s other divisions. In time, they will need to be adjusted; but for now, since JDL is
growing quickly, the pressure to meet targets that may not be realistic is minimal.

Werning, John Jenkins (president of the Commercial and Consumer Equipment Division) and
CEO Robert Lane also must work hard to keep the JDL business separate from the equipment
business. JDL was launched with a tacit agreement among the three executives: There is a wall
between JDL and the rest of Deere that contains a one-way window. Werning and his lieu-
tenants can look into Deere and borrow ideas and resources, but the reverse cannot happen.
At least during its initial growth phase, JDL is insulated from the financial, strategic, and
administrative pressures of the parent company.

The one-way window works in small but important ways. JDL prides itself on its entrepre-
neurial mindset, in contrast to some big-company processes found within Deere. “We find
we can sometimes do things like buying computers cheaper than our parent company,”
Werning says, “and saving every penny is essential for a startup. So I try to maintain sepa-
rate systems for things like purchasing, human resources, and other administrative tasks.
I’m proud of the fact that I sit in chairs that were originally bought in 1991. They were

www.mercermc.com/mmj Making New-Growth Initiatives Work 27

owned by Deere, which was planning to scrap them. I said, ‘We’ll take them; they’re fully
depreciated.’ That’s the way a distribution company has to be run.”

In some cases, insulating JDL may be a matter of survival. The debate over co-locating dealers
with JDL outlets is an example. It’s tempting for Deere management to push JDL to create
new store branches in locations that work for Deere dealers but would not work for JDL.
That would amount to hijacking JDL’s business in an attempt to benefit the core business.
Adapting that strategy could cripple or even kill JDL.

So far, they’ve resisited the temptation; the one-way window is intact. How the relationship
will evolve as the offspring grows remains to be seen. But for now, the sanctity of the one-
way window has given JDL and Werning an important margin of grace within which to
explore a new way of doing business. It’s a lesson in the importance of thinking through
and respecting the structural requirements of your new-growth initiative rather than
trying to shoehorn it into the mold of other corporate divisions.

Use selective acquisitions and alliances to catalyze growth

Many companies that decide to pursue new-growth opportunities try to do it entirely with
homegrown resources. In terms of staff, responsibility is often passed to strong performers
who are already stretched thin or to people who have been passed over for other opportuni-
ties and may be mediocre performers. In terms of hard assets, companies often try and
make do with what they already own rather than looking outside the company. While it is
important to save money and use available assets when possible, most new-growth busi-
nesses require people and assets that differ from the core business in some important way.
Selective acquisitions can fill this gap.

Just as it is crucial to develop the right organizational structure and incentive systems for
new ventures, the same is true of the asset system. When Deere wanted to enter the land-
scape materials distribution business, it did not develop its own product line and add it to
existing dealer locations. Such an effort would have taken a lot of time and resources while
resulting in an inferior distribution network.

Instead, the company acquired two large distributors that immediately gave JDL scale and
desirable locations in its new business. Then, as previously discussed, JDL was able to borrow
skills and resources of the parent company when appropriate. Using this formula, Werning
and his team have assembled the asset base required for the new business to succeed, one
that takes the best of Deere and combines it with assets and resources from outside the
company.

Johnson Controls’ 1996 acquisition of Prince, a supplier of vehicle interior systems and compo-
nents, is another example of how to fill an important gap. An environment that promoted
innovation at Prince complemented the culture that Johnson was building in its automotive
business, and Prince’s product line helped Johnson rapidly expand the scope of its offerings.

Johnson continues to look for good ideas from outside by partnering with leading companies
from complementary industries to develop new products. This approach saves resources for
both firms while speeding the time to market. Started as a way to help build scale and
scope rapidly in the electronics segment of the business, the approach is now part of all
product areas.

28 Making New-Growth Initiatives Work Mercer Management Journal

Questions for managers
Every organization that is preparing to embark on T Are we prepared to enter into critical alliances
a new-growth effort ought to answer the follow- as needed to provide the capabilities and
ing set of questions before taking off. resources needed by the new business?

T Does the new business have a clearly defined
offering with a well-developed customer propo-
sition, value capture mechanism, and basis for
strategic differentiation?
T Is there a clearly committed and talented day-
to-day leader for the new business?
T Are we ready to support the new business unit
with its own profit and loss statement and an
off-site location?
T Are we willing to authorize a significant level
of budget authority once the initial concept is
proven financially sound?

T Will the senior management team invest their
precious time, resources, and political clout to
support the new business?
T Are there ten high-quality people we are will-
ing to send to staff the new business?
T Are we willing to hire additional key senior
team members as needed to support the
new business?
T Are we prepared to develop and apply to the
new business a set of different performance
metrics and a different compensation formula
than those used in the core business?
If you can’t answer “yes” to every item above,
you may want to cancel your new-growth initia-
tive for now. Use the “no” items as the heart of
your to-do list over the coming months.c

A word of caution about acquisitions and partnerships. Unlike traditional acquisitions,

which are often focused on cost savings or synergies with the core business, the acquisi-
tions that matter most in the new-growth context are those that speed development, bring
in required skills, open doors to strategic markets, and otherwise improve the odds of suc-
cess for your new-growth initiative. Keep profitability in mind when making acquisitions,
but in the context of a new business that may take extra time to bear fruit.

Adapted for your own expedition

To achieve new growth outside the core business, keen insight and a great business design
are important. But the most demanding work is executing the plan. And time is of the
essence, because the value that a new initiative can create depends on speed to market.

Executing new-growth strategies will never be easy. That’s true by definition, since a new-
growth initiative is a discovery expedition into unknown territory. The precise methods you
should use to develop the business are ones that you will discover as you travel, and they
will be different for every company. The general principles presented here are gleaned from
our study of companies that have created new growth, as well as others that ended up on
the rocks. Only you can decide where these principles should take your company.c

www.mercermc.com/mmj Making New-Growth Initiatives Work 29