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By Ellen Pearlman
Strategic Thinkers:
Mehrdad Baghai, Sven Smit, and Patrick Viguerie Credentials:
Baghai is managing director of Alchemy Growth Partners, an advisory firm in Sydney and co-author of The Alchemy of Growth; Smit is a director in McKinsey's Amsterdam office and the global knowledge leader of the firm's Strategy practice; Viguerie is a director in McKinsey's Atlanta office and leads the firm's Strategy practice in the Americas. Big Idea:
By identifying micro-segments of customers, regions and products a company can uncover where the best growth opportunities lie. Article: "Is Your Growth Strategy Flying Blind?" published by the Harvard Business Review, May 2009.
"The devil is in the details" is an old saying that focuses attention on the need to do things thoroughly. But in today's information-obsessed, fast-paced culture, the small details can sometimes be overlooked in favor of the big picture.
I'm sure none of you think that there's any shortage of data being produced for the executives at your organization. In fact, it's fair to assume that plenty of money and time have gone into creating business dashboards that provide timely business intelligence for the top management team. And yet, three strategists believe that your firm's best growth opportunities are probably being missed.
In "Is Your Growth Strategy Flying Blind?" published by the Harvard Business Review, Mehrdad Baghai, Sven Smit, and Patrick Viguerie make the case for taking a microscopic look at your markets and performance in order to develop more effective growth strategies. "Companies can get a much more accurate picture of their growth prospects by digging deeply into micromarkets (typically ranging from $50 million to $200 million in value) than by looking at the divisions commonly used for measuring, organizing, and managing," the authors say.
All of this has been made possible by the innovations on the Internet and in communications and information technology. But while technology has made it feasible to build greater granularity into business intelligence, many companies still rely on aggregated data. Excessive aggregation, the authors say, leads to "unrealistic performance targets, misinformed priorities, and misdirected leadership efforts."
So how can companies benefit from a granular approach? The authors provide several examples. For instance, one large European multinational manufacturer of personal-care products drilled down into its revenue growth forecasts by country and discovered that of its three divisions (hair care, personal hygiene and organics) organics, its three-year old group, had the lowest overall growth rate but was responsible for over 48 percent growth in Germany, where sustainability is an important issue for customers. The fine slices of insight the company unearthed demonstrated which areas held the best opportunities for more investment and where they should consider disinvestment.
In another case a construction equipment and services company was facing flat growth as its key markets matured. The company has four main divisions, but looking at the division numbers didn't shed any knowledge about which market segments were most promising or which should be exited. So this company used a "heat map" to break their market share and market growth levels into very fine detail. The map cut the business into geographic, customer, and product slices and enabled the firm to identify nearly 4,000 pockets of their business. The map enabled them to quickly see which areas of their business had the potential to meet or exceed the company's growth expectations of six percent and which didn't. Ultimately the company used the insight they received from this detailed analysis to discover that their fast-growing pockets-that currently yield very little in revenue-had the potential to yield more than $10 billion in revenue.
In addition to using the heat map method for getting a true picture of market potential, companies also can use a benchmarking approach-that the authors named a "growth MRI"-to get a better view of their performance. With this tool, the authors say, firms can get a handle on the relationship between shareholder-value creation and three growth components: market momentum, market share gains, and M&A. The authors studied this relationship in 400 companies and found that top performance in one of the growth components was associated with "greater shareholder-value creation than average performance across all three." Of particular importance, the authors found, was calculating a company's "net growth rating." The authors do this by subtracting the numbers of components with bottom-quartile performance from the number of components with top-quartile performance.
To bring more clarity to this method, the authors note the example of a large, diversified multinational. At the corporate level, they note, the company has a net growth rating of zero (a "good" performance). By looking at the company's geographic performance, they find that two of its five regions rate as "good"; another as "great"; but two rate "poor". The authors point out that the overall average "good" performance of the company "masks the distribution of performance in the organization." Moreover, if the data is cut again across the company's sixteen lines of business they find even greater variation: five are "poor", one is "great", and ten are "good".
The "real power" of this MRI approach, the authors say, comes when you "push the analysis to several hundred or even a thousand cells." Looking at growth data this closely can uncover the specific areas that will benefit from more investment and those that are a drag on future growth and should be divested. Most companies that rely on aggregated or consolidated data, never get such a clear snapshot of their growth performance.
Moving to such a precise way of looking at performance has implications too for an organization. It can influence how a business is organized, the number of business units that are needed, and how many layers of management are needed to run it all. And while some executives may think an approach like this is just too time consuming, the authors say that using tools like the "growth MRI" can actually save time since it brings issues that need attention to light immediately, allowing the business unit and the CEO to deal with it quickly and effectively. Armed with this type of data "the quality of discussion is greatly improved," the authors say.
Better information is the holy grail of many organizations, and it is up to the IT team to deliver it. The goal is not more data; it's greater insight from the information that is delivered.
Reprinted by permission of Harvard Business Review. Excerpted from "Is Your Growth Strategy Flying Blind?" Copyright (c) 2009 Harvard Business School Publishing Corporation; All Rights Reserved.
Also of interest:
Book: The Granularity of Growth: How to Identify the Sources of Growth and Drive Enduring Company Performance by Patrick Viguerie, Sven Smit and Mehrdad Baghai, published by Wiley, March 2008. Understanding and capturing corporate growth opportunities.
Article: Mapping Your Competitive Position by Richard A. D'Aveni, published by Harvard Business Review, November 2007. Creating a price-benefit positioning map helps you see, through your customers' eyes, how your product compares with its competitors.
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