Many opportunities for revenue growth go unrecognized and unexploited, argues Jeanne M. Liedtka, professor of business administration at the University of Virginia's Darden School of Business and former director of The Batten Institute, which has just completed a study of corporate innovation and organic growth. Liedtka talked with Business Finance about the study, which was based on interviews with leaders in large, mature organizations who have succeeded at growing the revenues of their businesses well above the market growth rate.
Business Finance: How did you identify the people in your study?
Jeanne M. Liedtka: We reached out to all of our alumni, recruiters, and all of the business contacts that we have at the Darden school. We were looking for the unsung heroes; we were tired of reading about Steve Jobs and Jack Welch. As we surveyed the literature on organic growth, we found that no one was talking to the large numbers of managers who work in organizations who are not CEOs, business development specialists, or R&D specialists, but who have had significant success in helping to grow their business. We wanted to learn as specifically as possible what kinds of approaches and techniques they were using.
BF: What did you find out?
JML: We found out that there were enormous opportunities out there that were going unnoticed. They didn't show up because competitors had changed, or customers changed what they wanted, or anything external; they were latent opportunities to create better value for customers that had just gone unrecognized before.
So we asked ourselves the next question: Why are these managers able to find what other people can't? It turned out to be a function of a couple of different things, but the bottom line is that these were people who thought like entrepreneurs, and so in many ways were able to reframe the existing industry norms in ways that allowed them to see opportunities for better value creation. They were deeply connected to their customers in a primary way, not because they read a lot of market research reports and not because they segmented them, but because they literally followed them home and observed them. They viewed all customers not through the lens of "How do we sell them more of our products?" but "How do we make their lives better by doing what we, as an organization, are good at doing?"
BF: Do any examples spring to mind?
JML: One of the leaders at Pfizer consumer products observed customers closely and realized that the company marketed its products as if people had access to their medicine cabinets all the time. It sold things in big bottles and large quantities, when in fact that's not always what people are looking for in over-the-counter health-care products. People sometimes find that they're living out of their car or out of their briefcases; what they need is the ability to create a portable medicine cabinet customized to their own needs.
So they talked Walgreens into giving them just a few shelves in four stores, and they created prototypes of small sizes of their products and some little plastic medicine cabinets. Pfizer just sold the business to Johnson & Johnson; they estimated it was worth maybe $500 million in the end, all in sales that don't cannibalize on the big sizes.
In our experience, these leaders pursue growth in a very experimental fashion, rather than doing a lot of analysis or a big study to create a business case. Instead they place small bets, fast.BF: So they were bypassing the traditional analysis?
JML: What we find with the growth of leaders is that they're forced to end-run the corporate systems and processes that are generally controlled by people in finance, legal, and HR. There's an inherent tension between the kind of systems and processes aimed at getting you control over an existing business, and the kind of systems and processes you need to grow new business in a much more uncertain environment.
We sometimes refer to the "designated doubters" in corporations, and these are often people in finance. They have a responsibility to make very sure that corporate and stockholders' money is spent well; the idea is that "before we make any investment we want you to prove to us holistically and analytically that it's a good investment." And that makes a lot of sense at one level, but when you're entering areas of uncertainty, the data you've got to work with is not very good. You're extrapolating from the past into a new kind of future.
And so we find the phenomenon of growth gridlock; the growth leader locks heads with the designated doubters and gets caught up in a process which is mostly about making presentations to boardrooms and trying to convince the finance people with what everybody acknowledges is not very good data. Some growth leaders don't even try to do that; they find a very low-cost experiment that they can conduct without going through the traditional processes, and then when they've gotten some real data to demonstrate that the idea can succeed, they go back and ask for money to ramp it up.
BF: How can a CFO open a path for this kind of creativity?
JML: Instead of insisting that managers bring you big ideas and prove them with data that doesn't exist, the trick is to uncover at a grass roots level managers' ability to work with small ideas that they think might be big. Corporations often inadvertently push their managers into making riskier investments then they need to. They tell them "only bring us big ideas; if it's small is not likely to move the needle." Well, the reality is that if an idea is big, chances are someone has thought of it already.
It isn't as though we can ask organizations to throw out all of the systems for control and predictability, because of course they still need to meet quarterly earnings. What you have to do is to create, on the side, a "bubble" where you can do these small bets fast, learn quickly, and protect those businesses from the mature business for a while until you're able to test their attractiveness.