On The Alchemy Of Growth

I recently finished reading the Alchemy of Growth – Practical Insights For Building The Enduring Enterprise – by Mehrdad Baghai, Stephen Coley and David White. This book was referenced during a recent CIO conference I attended.

Below are key excerpts from the book that I found particularly insightful:

1- “Growth’s transformative power is akin to the alchemy of old. Always a mystery, alchemy’s magical blend of science, philosophy, art, and spirituality held secrets that even its practitioners found difficult to penetrate. Still, they were all drawn to its alluring aim: to transform the everyday into the exalted. The pursuit of corporate growth has prompted a similar reaction in the field of management. Although excited by growth’s promise, executives are uncertain about how to capture it. Feeling ill equipped to lead a growth charge, many seek a approach that shows them how they can actually attain and sustain growth. This book is addressed to them. It attempts to arm business leaders for growth by laying out a proven practical framework for the holistic management of a growing enterprise. The ideas and approaches suggested here are applicable to businesses and business units of all sizes, in all locations. They are intended to provide guidance to all levels of business leadership.”

2- “Our research makes it clear that very few companies sustain above-average growth for their industry year after year. Indeed, some of the companies we studied have already suffered slowdowns, and we fully expect more to do so. But these setbacks do not detract ft-om the lessons to be learned from the sustained phases of growth; indeed, they serve to reinforce the need for new approaches to help executives keep growth going. Our own approach has been specifically developed to help companies grow throughout the business cycle – not only sailing through the upswings, but also maintaining growth during the downturns.”

3- “Horizon 1 encompasses the businesses that are at the heart of an organization – those that customers and stock analysts most readily identify with the corporate name. In successful companies, these businesses usually account for the lion’s share of profits and cash flow. Horizon 1 businesses are critical to near-term performance, and the cash they generate and the skills they nurture provide resources for growth. They usually have some growth potential left, but will eventually flatten out and decline. Without the support of a successful horizon 1, initiatives in horizons 2 and 3 are likely to stagnate and die. Management’s primary challenge in horizon 1 is to shore up competitive positions and capture what potential remains in the core businesses. Even when these are mature, continuing innovation can incrementally extend their growth and profitability. Traditional sales force stimulation programs, product extensions, and marketing changes can aim contribute. Restructuring, productivity enhancement, and cost reduction measures will also help maintain healthy performance for as long as possible.”

4- “Horizon 2 comprises businesses on the rise: fast-moving, entrepreneurial ventures in which a concept is taking root or growth is accelerating. The emerging stars of the company, these businesses are attracting investors’ attention. They could transform their company, but not without considerable investment. Though substantial profits may be four or five years away, they have customers and revenue, and may already generate some profit. More important, they are expected to become as profitable as horizon 1 businesses in time. Horizon 2 initiatives are usually characterized by a single-minded drive to increase revenue and market share. They need continuing investment to finance rollouts or otherwise accelerate the expansion of the business. In a few years, horizon 2 initiatives should complement or replace a company’s current core businesses. They may represent either extensions of these businesses or moves in new directions. Horizon 2 is about building new streams of revenue.That takes time and demands new skills. Without horizon 2 businesses, a company’s growth will slow and ultimately stall. A good growth company needs to have several of these emerging businesses “on the boil,” working to convert promising ideas into future earnings generators.

5- “Horizon 3 contains the seeds of tomorrow’s businesses – options on fiiture opportunities. Although embryonic, horizon 3 options are more than ideas; they are real activities and investments, however small. They are the research projects, test-market pilots, alliances, minority stakes, and memoranda of understanding that mark the first steps toward actual businesses, even though they may not produce profits for a decade, if ever. Should they prove successful, they will be expected to reach horizon 1 levels of profitability. A company that thinks it has a promising horizon 3 just because it compiles a long list of whiteboard ideas at a management retreat is fooling itself. Without deliberate initiatives to develop good ideas into horizon 3 opportunities, a company’s long-term growth prospects will fade. The options in horizon 3 are rarely proven opportunities, but they need to be promising and to have the support of management. Building successful businesses means seeding numerous options. Some will fail for internal reasons; others will fall victim to shifting industry winds. Most will never grow to become successful new businesses. Given these odds, a great deal of horizon 3 activity is needed to cover the multitude of possible futures. A company’s goal should be to keep he option to play without committing too much capital or other resources. The challenge is to nurture promising options while ruthlessly excising those with diminishing potential.”

6- “The three horizons can be used to promote growth in three ways. First, as a diagnostic tool, the three horizons can help managers assess the prospects for growth at any level in an organization and reveal possible gaps in the volume and consistency of new profit sources. Second, as a language, the three horizons approach offers a coherent way to communicate with employees and investors. Its simple terminology makes it easier for both groups to understand and discuss corporate priorities.”

7- “An excessive focus on growth can be just as much a problem as because they have failed to fill their business creation pipeline. others lose the right to grow when they become obsessed with new businesses. The novelty of these opportunities can be so exciting that managers take their eyes off horizon 1, forgetting that it must be maintained in order to provide the financial capacity to drive growth.”

8- “Another troublesome pattern occurs when companies have strong horizon 1 businesses and lots of ideas in horizon 3, but few people working to turn these ideas into real businesses. No matter how exciting the ideas may be, horizon 2 will remain empty until businesses are built. A company can find itself in an insidious situation as promising horizon 3 options lull it into a false sense of security. To complicate matters, these options can also inflate market expectations for growth far beyond the company’s capacity to meet them. As the gap between market expectations and the company’s actual growth widens, a steep fall in stock price becomes more likely.”

9- “If there are no hard and fast numbers to determine ideal balance across the three horizons, how should you define it? The standard is simple: balance means having the next engine of growth ready when it is needed. Applying the standard, however, is far from simple. The definition of balance varies from company to company. Consider the following factors: Pace of industry evolution…Degree of uncertainty…Managerial and financial capacity…Shareholder expectations.”

10- “Pruning the portfolio of businesses through divestment creates capacity for growth. Although a business unit may still be earning adequate profits, these must be weighed against the opportunity costs of management distraction and competition for resources. Management attention and other resources are often more productively focused on growth opportunities than on businesses with limited potential…Shedding unsatisfactory businesses has the added benefit of signaling strategic intent to both stock markets and employees. Conversely, not pruning increasingly irrelevant businesses can send mixed messages about a company’s direction and resolve to grow.”

11- “In our work, we have looked for ways to open managers’ eyes to hidden opportunities. To this end, we have developed a tool that we call the “seven degrees of freedom.” By systematically addressing each degree of freedom in turn. managers can learn to think more broadly about growth opportunities in their businesses.  1. How could we increase sales to the same customers with the same product mix? 2. How could we extend the business by selling existing products to new customers? 3. How could we grow by introducing new products and services? 4. How could we expand sales by developing better delivery systems for customers? 5. How and where could we expand into new geographies? 6. How much could we grow by changing the industry structure through acquisitions or alliances? 7. What opportunities are there outside existing Industry boundaries?”

12- “Companies are right to be cautious about pursuing growth initiatives. But to let due caution prevent them considering unusual ideas is foolish. Collins and Porras strike the right balance: “We’re not saying that evolutionary progress equals wanton diversification…. Nor are we laying that the concept of ‘stick to the knitting’ makes no sense. The real question is: What is the ‘knitting’ in a visionary company?””

13- “Whether the process is top-down or bottom-up is beside the point. It is not just the breadth of involvement that matters. but the breadth of the search. In the end, whatever the process used and resources deployed, finding attractive opportunities is always as much art as science.”

14- “Executives who want to develop horizon 3 options into core profit engines face two big problems: market uncertainty and gaps in their skills, assets, and relationships. We have found that successful growers typically address these problems by taking not bold leaps, but a series of measured steps. Each step takes them a little closer to their ultimate :es money in its own right, and adds capabilities that prepare them for further opportunities. When these growers look back on what they have achieved, they see not a chaotic zigzag but a distinctive staircase pattern.”

15- “No formula can substitute for managerial iudement. Even so analysis of more than 100 growth staircases reveals a consistent pattern. Virtually all successful staircases proceed in four phases: seeding the initial growth options; testing the the business model; replicating and extending the business; and managing for profitability.”

16- “Even when there is strong capability building at each step, migrating an idea from a horizon 3 option to an emerging horizon 2 enterprise and on to a horizon 1 core business is tricky. The advantage of taking many small steps rather than a few big leaps is that it helps companies manage the risks that arise on two fronts. First, market uncertainty makes it impossible to predict the success of a business: for every great idea, there are many that will fail. Second, new businesses call for capabilities that a company does not yet have; without them, the promise these businesses hold out will not be realized.”

17- “A broader definition of capability is required that includes all resources useful in gaining competitive advantage. In addition to operational skill, our definition of capability includes three other classes of resources: privileged assets, growth-enabling skills, and special relationships.”

18- “Only by differentiating their management systems across the three horizons can corporations avoid the barriers to growth that most systems inadvertently perpetuate.If all managers are evaluated purely on the profitability of their businesses – a good measure of horizon 1 performance – they will have little appetite for building horizon 2 enterprises. If some leadership time is not systematically reserved for building fledgling businesses, the needs of the core business will consume all managers’ days and nights, and they simply will not have a free moment to build horizons 2 and 3.”

19- “Horizon 1 operators: Deep functional and/or industry expertise Strong drive to hit targets and meet plans consistently, Discipline; Horizon 2 Business builders: Entrepreneurial desire to create, Comfort with ambiguity,  Top-line-focused, sharp decision makers ; Horizon 3 Visionaries: Champions, Unconventional thinkers”

20- “Our research indicates that about three-quarters of the companies that sustain high growth and high shareholder returns make acquisition a critical component of their growth strategies. They frequently acquire other companies – often up to five a year – to further the development of their growth staircases.”

Regards,

Omar Halabieh

The Alchemy of Growth

On Only The Paranoid Survive

I recently finished reading Only The Paranoid Survive by Andrew S. Grove.

Below are excerpts from the book that summarize the key points presented by the author:

1- “Business success contains the seeds of its own destruction. The more successful you are, the more people want a chunk of your business and then another chunk and then another until there is nothing left. I believe that the prime responsibility of a manager is to guard constantly against other people’s attacks and to inculcate this guardian attitude in the people under his or her management.”

2- “We all need to expose ourselves to the winds of change. We need to expose ourselves to our customers, both the ones who are staying with us as well as those that we may lose by sticking to the past. We need to expose ourselves to lower-level employees, who, when encouraged, will tell us a lot that we need to know. We must invite comments even from people whose job it is to constantly evaluate us and critique us, such as journalist and members of the financial community. Turn the tables and ask them some questions: about competitors, trends in the industry and what they think we should be most concerned with. As we throw ourselves into raw action, our senses and instincts will rapidly be honed again.”

3- “A strategic inflection point is when the balance of forces shifts from the old structure, from the old ways of doing business and the old ways of competing, to the new. Before the strategic inflection point, the industry simply was more like the old. After it, it is more like the new. It is a point where the curve has subtly but profoundly changed, never to change back again.”

4- “Of all the changes in the forces of competition, the most difficult one to deal with is when one of the forces become so strong that it transforms the very essence of how business is conducted in an industry.”

5- “When an industry goes through a strategic inflection point, the practitioners of the old art may have trouble. On the other hand, the new landscape provides an opportunity for people, some of whom may not even be participants in the industry in question, to join and become part of the action.”

6- “When a strategic infection point sweeps through the industry, the more successful a participant was in the old industry structure, the more threatened it is by change and the more reluctant it is to adapt to it. Second, whereas the cost to enter a given industry in the face of well-entrenched participants can be very high, when the structure breaks, the cost to enter may become trivially small.”

7- “I suspect that the people coming in are probably no better managers or leaders than the people they are replacing. they have only one advantage…the new managers come unencumbered by such emotional involvement and therefore are capable of applying an impersonal logic to the situation.”

8- “As these questions to attempt to distinguish signal from noise: 1) Is your key competitor about to change? 2) Is your key complementor about to change? 3) Do people seem to be “losing it” around you?”

9- “I call the divergence between actions and statements strategic dissonance. It is one of the surest indications that a company is struggling with a strategic inflection point.”

10- “Ideally, the fear of a new environment sneaking up on us should keep us on our toes. Our sense of urgency should be aided by our judgement, instincts and observations that have been honed by decades spent in the business world. The fact is, because of our experience, very often we managers know that we need to do something. We even know what we should be doing. But we don’t trust our instincts or don’t act on them early enough to take advantage of the benign business bubble. We must discipline ourselves to overcome our tendency to do too little too late.”

Regards,

Omar Halabieh

Only The Paranoid Survive

On Built To Last

I recently finished reading Built To Last by James C. Collins and Jerry I. Porras.

This book is about visionary companies – ones that are built to last. These companies are defined by the authors as “”Visionary companies are premier institutions – the crown jewels – in their industries, widely admired by their peers and having a long track record of making a significant impact on the world around them. The key point is that a visionary company is an organization – an institution.”

The objectives of this book are best summarized by the following excerpt: “In a nutshell, we had two primary objectives for the research project: 1) To identify the underlying characteristics and dynamics common to highly visionary companies (and that distinguish them from other companies) and to translate these findings into a useful conceptual framework. 2) To effectively communicate these findings and concepts so that they influence the practice of management and prove beneficial to people who want to help create, build, and maintain visionary companies.”

A great follow-up read to Collin’s Good to Great. Jim reveals what makes visionary companies tick, their culture, their core values and their audacious goals. The in-depth research and objective analysis are to be commended. Particularly the approach of comparing each of the companies discussed to their main respective competitor. This comparison helps anchor and exemplify the ideas presented. Furthermore, the call for continuous improvement and stimulating progress is stressed as a caution for visionary companies from falling behind (which some already have). A must read!

Below are excerpts from the book that I found particularly insightful:

1) “Built to Last, it turns out, is not fundamentally about building to last. It is about building something that is worthy of lasting – about building a company of such intrinsic excellence that the world would lose something important if that organization ceased to exist.”

2) “…Visionary companies distinguish their timeless core values and enduring purpose (which should never change) from their operating practices and business strategies (which should be changing constantly in response to a changing world). This distinction has proven to be profoundly useful to organizations amid drastic transformation.”

3) “In a nutshell, we had two primary objectives for the research project: 1) To identify the underlying characteristics and dynamics common to highly visionary companies (and that distinguish them from other companies) and to translate these findings into a useful conceptual framework. 2) To effectively communicate these findings and concepts so that they influence the practice of management and prove beneficial to people who want to help create, build, and maintain visionary companies.”

4) “…The continual stream of great products and services from highly visionary companies stems from them being outstanding organizations, not the other way around.”

5) “In short, a highly visionary company doesn’t want to blend yin and yang into a gray, indistinguishable circle that is neither highly yin nor highly yang; it aims to be distinctly yin and distinctly yang – both at the same time, all the time.”

6) “Profitability is a necessary condition for existence and a means to more important ends, but it is not the end in itself for many of the visionary companies. Profits is like oxygen, food, water, and blood for the body; they are not the point of life, but without them, there is no life.”

7) “…I firmly believe that any organization, in order to survive and achieve success, must have a sound set of beliefs on which it premises all its policies and actions. Next, I believe that the most important singly factor in corporate success is faithful adherence to those beliefs…Beliefs must always come before policies, practices, and goals. The latter must always be altered if they are seen to violate fundamental beliefs.”

8) “If an organization is to meet the challenges of a changing world, it must be prepared to change everything about itself except [its basic] beliefs as it moves through corporate life…The only sacred cow in an organization should be its basic philosophy of doing business.”

9) “Indeed, the drive for progress is never satisfied with the status quo, even when the status quo is working well. Like a persistent and incurable itch, the drive for progress in a highly visionary company can never be satisfied under any conditions, even if the company succeeds enormously.”

10) “Big Hairy Audacious Goals…A BHAG should be so clear and compelling that it requires little or no explanation…A BHAG should fall well outside the comfort zone…A BHAG should be so bold and exciting in its own right that it would continue to simulate progress even if the organization’s leader disappeared before it had been completed…A BHAG has the inherent danger that, once achieved, an organization can stall and drift in the “we’ve arrived” syndrome…A company should be prepared to prevent this by having follow-on BHAGs…Finally, and most important of all, a BHAG should be consistent with a company’s core ideology.”

11) “…here are five basic lessons for stimulating evolutionary progress in a visionary company…Give it a try – and quick…Accept that mistakes will be made…Take small steps…Give people the room they need…Mechanisms – build that ticking clock.”

12) “The essence of a visionary company comes in the translation of its core ideology and its own unique drive for progress into the very fabric of the organization – into goals, strategies, tactics, policies, processes, cultural practices, management behaviors, building layouts, pay systems, accounting systems, job design – into everything the company does.”

13) “Lessons of alignment for CEOs, Managers, And Entrepreneurs: Paint the Whole Picture…Sweat the Small Stuff…Cluster, Don’t Shotgun…Swim in You Own Current, Even if You Swim Against the Tide…Obliterate Misalignments…Keep the Universal Requirements While Inventing New Methods”

14) “…as you walk away from reading this book, we hope you will take away four key concepts to guide your thinking for the rest of your managerial career, and to pass on to others. The concepts are: 1) Be a clock builder – an architect – not a time teller. 2) Embrace the “Genius of the AND.” 3) Preserver the core/stimulate progress. 4) Seek consistent alignment.”

15) “Building a visionary company is a design problem, and great designers apply general principles, not mechanical lock-step dogma. Any specific how-to will almost certainly become obsolete. But the general concepts – adapted of course, to changing conditions – can last as guiding principles well into the next century.”

Regards,

Omar Halabieh

Built To Last