Operations Management homework help

110  Harvard Business Review January–February 2012

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How the Growth Outliers Do It Few companies manage to prosper over the long term. Those that do are both more stable and more innovative than their competition. by Rita Gunther McGrath

Steady, predictable growth is what ev-ery big company strives for and what investors prize above all else. Recently some colleagues and I conducted re-search to � nd out just how di� cult it is to achieve. To start, we asked a simple question: How many publicly traded companies with a mar- ket capitalization of at least US$1 billion grew by 5% each year for � ve years ending with 2009? We combed the enormous database of Capital IQ. (We selected the 5% threshold because global annual GDP growth averaged about 6% during that period. And note that we were looking for steady perfor- mance, not compound annual growth.) The answer surprised us: Only 8% of the 4,793 companies in our sample grew their revenues by at least 5% year after year, and only 4% achieved a net income growth of at least 5% in each of the � ve years.

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Thinking that perhaps we’d chosen an unfair period, given that the Great Recession started in 2008, we repeated the study for the previous five years. The numbers were higher—15% and 7%, re- spectively—but the odds still seemed to be stacked against steady growth.

We then wondered what the results would look like if we did a 10-year scan. The answer: Only 10 of the 2,347 companies that qualified across that entire period grew their net income by 5% in all 10 years, and only five grew both revenues and net income every year.

The contrast between what investors and observ- ers expect and what the vast majority of companies deliver struck us as important. The data suggest a need to rethink our assumptions about corporate performance. Steady, consistent growth is difficult to achieve even at modest rates, never mind by the double digits that corporate leaders are fond of promising. (And no “normal” period in which to as- sess company performance seems to exist: Any five- year period we could have chosen included unex- pected events in the economy and the environment that would have caused some among our sample to drop out.) We recognize, of course, that luck plays a part in strategic success and—as some advertise- ments caution in disclaimers—that past success does not predict future performance. However, the outli- ers we found—those that defied the odds by achiev- ing steady growth for 10 years running—turned out to have interesting traits in common, some predict- able and some surprising.

What the Outliers Are Not The companies revealed by our study (see the ex- hibit “The Growth Outliers”) don’t match up well with some conventional ideas about growth. One school of thought in strategy says that a company’s growth rate will be determined largely by the indus- try it’s in. This didn’t seem to hold. Our outliers are in wildly different industries, including pharmaceu- ticals, beer, construction, and banking. All outper- formed their industry. Moreover, most of them are in very competitive industries, without the protections that patents or trade secrets provide.

Similarly, we tend to assume that the larger a company gets, the harder it is to sustain growth. That didn’t hold, either: The outliers were not small relative to the full pool of companies we analyzed. By number of employees, the largest is Actividades de Construcción y Servicios (ACS), a Spanish con-

struction company, with nearly 140,000 people. The smallest, FactSet Research Systems, a U.S.-based financial research company, employs more than 4,000. Market cap also varied widely above our $1 billion threshold.

We might have expected to find consistently higher growth rates in fast-growing markets, but that wasn’t true, either. No single geographic region dominates the outlier group, which represents both high-growth emerging economies and mature econ- omies. Nor did the degree to which the companies had globalized seem to be a factor. Although Infosys and ACS both planned from the beginning to focus on overseas opportunities, Yahoo Japan conducts business almost entirely in Japan, HDFC Bank oper- ates only in India, and Atmos Energy focuses on the U.S. market. Tsingtao Brewery earns 50% of its reve- nue from exports, but it didn’t venture outside China to manufacture until 2007. Krka Group is mainly a regional player, manufacturing generic pharmaceu- ticals throughout Eastern Europe.

Conventional wisdom also suggests that growth slows as companies age. But we saw no such effect in this group. More than half the outliers were estab- lished in their current form after 1980, but the two oldest date from 1903 and 1906. All the companies have performed well throughout major shifts in globalization, underlying technology, and business practices.

One might think that companies started by entre- preneurs would have an edge, but that seems untrue as well. Although two of our outliers (Infosys and FactSet) were indeed start-ups, with founders who maintained a strong presence throughout our study period, others (Indra Sistemas, ACS, Atmos, Krka) were the product of mergers and consolidations, and still others (Cognizant, HDFC, Yahoo Japan) were spun out of or funded by existing organizations.

Once we’d established that exogenous factors such as industry, geographical position, and age didn’t explain the outliers’ growth rates, we turned to the next, more qualitative phase of our project. We attempted to learn what these companies did have in common, using archival research and inter- views. In addition, we compared each one with its top three competitors—according to Hoover’s, to avoid selection bias—to determine whether differ- ences in competitive behavior might offer some ex- planations. The outliers turned out to share a lot of practices that, although unsurprising in themselves, add up to an intriguing, counterintuitive profile:

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HOW tHe GrOWtH Outliers DO it

Although these companies are nimble and adap- tive, their leadership, strategy, and values are very stable.

Rapid Adapters The growth outliers do a tremendous amount of ex- perimentation and innovation. They develop and deploy new technologies, move into new markets, explore new business models, and even open up new industries. They take on acquisitions and ag- gressively seek input from people and organizations quite unlike their own. They rapidly adjust and re- adjust resources and are comfortable moving execu- tives and other employees from one role to another.

They make small bets early and diversify their portfolios. These companies take what we call an options-oriented approach to new markets. They tend to move earlier than competitors into spaces that appear attractive, making small initial investments and following up with more-substantial ones—or getting out—as the opportunity warrants. They are likely to pursue a constant stream of rela- tively small initiatives.

HDFC’s history of entering new growth markets is illustrative. In 1998 HDFC joined the Cirrus inter- bank network so that Mastercard holders worldwide could use its ATMs. In 2001 it became the first bank in India to launch an international debit card, in as- sociation with Visa. It introduced various credit card innovations, including a card specifically for farm- ers, and then reached an agreement with Tata Pipes to offer the farmers credit. In contrast, ICICI Bank, a key competitor, didn’t even begin to explore regular debit cards until 2000. HDFC moved early and built from initial success in other new markets as well, including telebanking, mobile banking, and foreign exchange services. Indeed, the only market in which a competitor seems to have beaten it is rural India, where the State Bank of India was well established.

Unlike their competitors, outliers appear to make fewer big, high-risk bets—which is also consistent with an options orientation. When we compared Indra with its rival BAE, for instance, we found that both had made acquisitions and divestitures during the study period, but most of Indra’s acquisitions were under $100 million, whereas most of BAE’s were much higher, including its $4.5 billion acquisi- tion of Armor Holdings, in 2007.

Finally, the outliers had diverse but related port- folios, with enough variety to enable investment in their core businesses even as they explored new al- ternatives. When one segment went into decline, an- other could be leveraged. Indra, for example, used acquisitions to move from the defense industry into computer systems design and financial software solutions. Through subsequent acquisitions it built and maintained a formidable solutions portfolio that didn’t depend on one business model or end market. Even the single-product outliers, Tsingtao Brewery and Yahoo Japan, honored this principle: Tsingtao diversified geographically, and Yahoo Japan diversi-

Idea in Brief Only a tiny percent- age of large companies reliably grow the bot- tom line year after year. Those that do share certain characteristics.

On the one hand, they’re built for innovation. They enter new markets before competitors do; they’re good at experi- mentation; they hold everyone accountable for new ideas; and they can move on a dime.

On the other hand, they’re extremely stable. Chief execu- tives have come up through the company; strategy and organizational structure stay consistent for long stretches; client retention is unusually high; and the corporate culture is strong and unchanging.

Those characteristics may seem contradictory, but stability appears to be what makes innovation—and steady growth—possible.

The growth outliers rapidly adjust and readjust resources and are comfortable moving executives and other employees from one role to another.

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fied by selling into new segments and offering new services.

They’re active acquirers. The outlier compa- nies appreciate the value of acquisitions for build- ing new capabilities and getting into new markets quickly. And they have a better-than-average record of making those acquisitions work. For example, In- dra expanded its capabilities and accessed new ge- ographies by acquiring a strategic consultancy, Eu- ropraxis, in 2001; a Portuguese IT company, CPC-IS, in 2002; and an Australian IT company, Interscan, in 2007. Tsingtao has been heavily involved in domes- tic and foreign M&A deals since its privatization in the early 1990s, which is credited with helping it to somewhat consolidate the highly fragmented Chi- nese beer market. ACS used several major acquisi- tions in 2002, 2005, and 2007 to consolidate its po- sition and gain access to new markets. FactSet was

actually criticized for some of its activity: It spent $92 million on acquisitions in 2005, when the com- pany’s net income was only $72 million. Nonetheless, it continues to acquire companies to broaden the of- ferings it can provide to its customers.

They manage major resource allocations centrally. At many companies, resources are held hostage at the divisional or business-unit level. When one division is under threat, or an opportunity falls between units, the company can’t respond ef- fectively because incumbent executives resist. But at outliers, decision making with respect to major stra- tegic challenges appears to be centrally coordinated.

They have processes that support speed and flexibility. Outliers favor adaptability over pure efficiency, even though it occasionally leads to less- than-perfect outcomes. Their strategy adjustments and resource allocation shifts are more likely to oc- cur quarterly than annually, as are their promotions and personnel evaluations. This allows them to be more responsive to changes in the environment than companies with rigid annual processes.

They build innovation into everyday op- erations. At many traditional companies, the most powerful people run the large, well-established lines of business, and growth-oriented innovation is man- aged by a separate, less powerful group. Innovation at the outliers tends to be better integrated. It’s men- tioned prominently in recruitment materials, mar- keting messages, and employee communications. It’s also built into the company’s resource allocation and promotion processes. Every year at Infosys, for example, the senior executive team asks each unit to name two big things it is going to do that will dramat- ically move the business forward in real time—and to go public with those intentions. Yahoo Japan has identified four major growth strategies; its managers are regularly asked to identify the next set of promis- ing opportunities in those areas, and resources are

The Growth Outliers Infosys Information technology HeadquarTers India Founded 1981 MarkeT Cap $31.9B

Yahoo Japan Internet search and navigation HeadquarTers Japan Founded 1996 MarkeT Cap $20.3B

HDFC Bank Banks and credit unions HeadquarTers India Founded 1994 MarkeT Cap $16.5B

ACS Commercial and heavy construction HeadquarTers Spain Founded 1983 MarkeT Cap $15.5B

Cognizant Information technology HeadquarTers U.S. Founded 1994 MarkeT Cap $13.3B

Market Cap fIgUreS: CapItal IQ aS of JanUary 22, 2010

outliers favor adaptability over pure efficiency, even though it occasionally leads to less-than-perfect outcomes.

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How tHe GrowtH outliers Do it

liberally allocated to the best ideas that emerge from their discussions.

Champions of Stability As noted, the outliers are unusually stable as well as highly flexible. Their changes are evolutionary, and their adaptations are rapid. We saw little evidence among them of the kinds of wrenching change that many companies experience.

They focus management attention on cul- ture and shared values. We found (as have others who study high-performing organizations) that the outliers on our list pay close attention to values, cul- ture, and alignment. What does that mean in prac- tice? We saw significant investments in creating an appropriate corporate culture, in employee training, and in executive development among these compa- nies. Infosys, for example, is famous for its Global Education Center, the largest dedicated corporate- education facility in the world, with the capacity to train 14,000 students at any one time. A recent MBA thesis examining the culture of HDFC Bank found that in employee surveys the bank scored high on organizational effectiveness, employee engagement, and a supportive environment.

They avoid dramatic divestitures. Our graduate- school researchers looked hard for in- stances in which growth outliers exited segments or canceled major projects. Nevertheless, they un- covered almost no instances of sudden, disruptive exits—a finding that surprised us. These companies tend to reallocate resources gradually rather than to dramatically divest or restructure. They use industry evolution as an opportunity to leave old businesses and enter new, higher-growth segments.

Cognizant, for instance, made nine strategic ac- quisitions but no divestitures during the period of our study. The company, a 1994 spin-off of Dun & Bradstreet, began by offering straightforward tech-

The Growth Outliers Tsingtao Brewery Beer HeadquarTers China Founded 1903 MarkeT Cap $7.2B

Indra Sistemas Information technology HeadquarTers Spain Founded 1993 MarkeT Cap $3.7B

Krka Group Pharmaceuticals HeadquarTers Slovenia Founded 1954 MarkeT Cap $3.2B

nology services. Over the years, it moved into pro- fessional consulting services and differentiated itself with a strong industry focus and colocation of its teams with clients. It shifted technology and people from low-growth businesses such as plain-vanilla business process outsourcing to people-intensive, high-touch businesses such as complete, complex software solutions. This shift occurred without the wholesale downsizing that Satyam Computer Ser- vices and other competitors experienced.

They hold on to their talent. One of the im- plications of executing transformations without wrenching change is that talented employees are less likely to have their careers cut short unnecessarily. Like Cognizant, the other outliers are slow to down- size, and their habit of gradually moving resources into new businesses means that emerging leaders have new places to go. The head of strategy for In- fosys, describing an evolutionary path similar to Cognizant’s, makes this point: “When we decide to get out of something, we slow down on allocating re- sources to it. It finds its way to insignificance in a pe- riod of time. You don’t need to chop it off—you need to let it live its life. Since we are in a talent business, it’s easy for us to repurpose the leadership and the talent.” The recognition that talent needs a place to go is complemented by a commitment to employee training. The combination probably explains why senior managers nearly always come from inside the company.

They don’t change high-level strategies quickly. Our study period was a tumultuous time: It included the burst of the dot-com bubble, the tragedy of 9/11, the global housing and credit bub- bles, the introduction of the euro, wars in Iraq and Afghanistan, the explosion of the internet as a ve- hicle for commerce, and the Great Recession of 2008. Even so, the outliers’ strategies remained remark- ably stable. Our interviews with their leaders are

Factors That Did Not Explain Steady Growth

Industry position Age of firm Geography Emerging vs developed economy Ownership structure Global footprint

FactSet Research Systems Information collec- tion and delivery HeadquarTers U.S. Founded 1978 MarkeT Cap $3.0B

Atmos Energy Natural gas distribution and marketing HeadquarTers U.S. Founded 1906 MarkeT Cap $2.6B

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peppered with references to a few clear and simple strategic priorities, to the importance of building culture and developing talent, and to leveraging core capabilities.

At Tsingtao Brewery, after the sudden death of its hard-driving president Peng Zuoyi in 2001, sub- sequent leaders committed to following through on his international expansion strategy. When ACS was founded, in 1983, its CEO expressed his com- mitment to making it Spain’s most profitable public construction company; that strategy is still in place. Atmos Energy is now executing the strategy crafted in 1997 by a former CEO, leveraging efficiency in its regulated business and driving growth in its unreg- ulated businesses. FactSet’s strategy statement has not changed at all since the company’s founding in 1978, despite radical shifts in underlying technol- ogies and an explosion of information relevant to key clients.

They have a reliable customer base. Outli- ers’ relationships with their clients are remarkably

stable as well—probably because their gradual stra- tegic shifts allow them to change as their customers change. FactSet’s client retention rate reached 92% in 2011. Analysts have observed that both Infosys and Cognizant have strong client retention. Cogni- zant reported a 90% client satisfaction rate in a re- cent survey, and Infosys reported a 95% retention rate in a recent interview with us. To some extent this stability also characterizes outliers’ relation- ships with suppliers—though our findings here were less consistent.

They keep their senior leadership stable. At all 10 companies on our list, the top executive had been promoted internally; there were no white knights or outside-the-industry saviors. Interest- ingly—and consistent with the findings of other researchers over the years—these chief executives generally kept a low profile. They were respected, known to have made major contributions, and somewhat visible in the press, but not charismatic (or narcissistic). The five leaders we had the pleasure of meeting in person were all low-key, courteous, and attentive.

Through our research we learned that the values, cultural norms, strategies, capabilities, customer relationships, and leadership of the growth outli- ers remain consistent over time. These organiza- tions invest seriously in corporate values, which their leaders back up through meaningful symbolic actions. Within this stable context, however, a tre- mendous amount of experimentation and innova- tion occurs.

Our conclusion is that this seeming paradox is a feature, not a bug: Stability is what enables these companies to innovate and to maintain steady growth. Coupled with transparent values, it al- lows employees to feel confident about taking the risks that experimentation requires. Strong values help maintain ethical standards. Continual small changes keep an organization from becoming stale. Management continuity permits the building of in- formal internal networks, which are known to be a factor in successful innovation. The result is a high- performing organization that delivers consistent results over a reasonably long period in the face of environmental volatility.

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rita gunther Mcgrath is a professor at Columbia Business School. Her research focuses on strategy and

innovation in volatile environments.

“Ever get the feeling you’ve done this job in a previous economy?”

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