Professional Documents
Culture Documents
Staircases To Growth
Staircases To Growth
Staircases
Buiiding materials 17
Gillette US 1985-95
Branded consumer products
Hindustan Lever India 1990-95 22
Consumer products, part-owned by Uniiever I -SO
Sara Lee US 1977-95 10
Diversified branded packaged goods 122
Fila Italy 1988-95
Sportswear and casual apparel
Diversified Hutchison Wharnpoa Hong Kong 1986-95 J9
Globally diversified congiomerate i 25
Lend Lease Australia 1980-95
Property and financial services 1 21
Samsung Korea 1975-95 ^ . 30
Highly diversified conglomerate - largest chaebol NA
Energy Enron US 1988-95 ' 'J_
Gas and IPP
Burmah Castrol UK 1986-95 ; 'J_
Specialized lubricants I IS
Newfield Exploration U5 1991-95 75
Upstream oil and gas I 24
Tejas Gas US 1988-95 55
Natural gas pipelines
Note: In addition to our case research on the companies listed, we have also examined selected aspects
of the impressive performance histories of Columbia/HCA, The Home Depot, and Wells Fargo.
there" would typically be "not by big bold leaps but by a series of measured
steps." Each step makes money in its own right; each is a step up in that it
adds new institutional skills that better prepare the company to open up -
and take advantage of - opportunities; and each is a step roughly in the
direction of a broader vision of where the company wishes to be.
When these companies look back at what they have achieved, they see not
steps zigzagging all over the place but a distinctive pattern or "footprint" in the
: Sales (CAGR%)
Company Country Growth Total returns to shareholders (CAGR%)
Industry of origin period
Staircase of initiatives
Successful growers adopt a bifocal perspective which emphasizes both near
term and long term: vision and tactics. Even though they plan within a clear
strategy, they are not slaves to a mechanistic process for projecting a medium-
term budget. Many low-growth companies are.
The focus on near-term steps takes advantage of the fact that, each time a
company builds new skills, new opportunities open up. It means managers
are able to move fast enough to exploit opportunities early, before competitors
move in or conditions change. It also encourages managers to behave as
entrepreneurs rather than bureaucrats, avoiding excessive deliberation and
"paralysis by analysis." This does not mean they act imprudently but, simply,
that they act.
While great growers are focused on immediate steps, they are not capricious.
They act with informed opportunism toward a clear vision of the kind of
company they are building. The Walt Disney Company (Disney), for example,
requires its groups to articulate five-, ten-, and fifteen-year directional
plans. Enron, the Texas-based gas company, moves quickly to maximize
opportunities for its rapidly evolving gas businesses - originally toward its
vision of becoming "the world's first gas major," and now with the aim of
"creating energy solutions worldwide."
To achieve their aspirations, companies like these use a similar pattern over
and over. The first step secures an option on an opportunity. If it shows
promise, next steps test the concept further and help accumulate the con-
fidence and skills for more steps. After a few years the concept is replicated
and extended as the strategy gains momentum. Later, replication is
accelerated to take full advantage of the successful formula.
Belarus,
I Salzburg (Austria), Slovenia,
Hungary, Czech
Croatia,
Poland,
EUROPE l^„°dli"9 Gmunden, Slovak Republic Romania, and
Vienna and Klagenfurt, Switzerland
St Polten and Dornbirn
Graz (Austria)
(Austria) Further
(Austria)
Indonesian
ASIA PACIFIC Indonesia
operations
and Papua
J Fiji and New Guinea
New Zealand,
[Build Australian franchise
further Australian
through acquisition
Australia acquisitions
and consolidation
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Having learned about the Austrian market from Vienna and Graz, and about
the benefits of consolidation from its Australian acquisitions, CCA decided to
go further. Between 1987 and 1991, it bought eight contiguous Austrian
franchises, consolidating operations and achieving economies of scale. In
1988, it stepped into two countries adjoining its home market - Fiji and New
Each step built CCA's skills and confidence, and strengthened its reputation
in The Coca-Cola Company's eyes. All three became critical as CCA moved
into the next stage of growth, extending its formula into other adjoining -
but undeveloped - markets: Hungary and the Czeeh and Slovak Republics,
and Indonesia and Papua New Guinea. Lacking modern production,
distribution, and marketing skills, and with low per capita consumption, these
markets offered tremendous potential.
By 1994 - now in nine countries, with 250 million consumers - CCA began
moving into more and more contiguous markets: Belarus, Slovenia,
Ukraine, Croatia, Switzerland, Poland, Romania, and new regions of
Indonesia. In all, CCA is now in 16 countries, with a total potential market of
368 million people.
Enron has followed a similar model. In 1985 the company identified the
potential in independent private power generation (IPP), but its capability
was limited to some gas reserves, a pipeline network, and conventional gas
contracting skills. Enron secured an option in IPP by acquiring the rights to
operate a small, gas-fired cogeneration plant
Successful growers adopt a '" ^exas m 1986 J h e company buih a bigger
bifocal perspective which P^^"^ ^" ^^"^^ '^' f° '7'"g y^^'" ^""ft
emphasizes both near term and '^' '^tH'^' ^^^ ''^^'^''' ^^"^ertook three
long term: vision and tactics ^In' 1990-91,
0 0 0 ! ' the
? ' 'company
''" ^ ' its' first
took T ''^'?"
truly
big step by developing Teeside in the UK, the
world's largest combined-cycle gas turbine plant. With its international
reputation cemented by the project, and with skilled specialists on its staff,
Enron expanded into India, Indonesia, Germany, China, Guatemala, and the
Philippines - becoming a worldwide force in IPP.
limited and your skills poor. The companies in our sample teach valuable
lessons about how to view opportunities and abilities in order to break
through these perceived constraints.
No single strategy can offer a complete view of how to grow, and any approach
that overemphasizes one strategy also oversimplifies the manager's challenge.
Given that each company brings to growth a unique position and exposure to
different kinds of opportunity, there must be many possible strategies for
each to consider.
That is certainly the view taken by successful growers: they believe neither
their industries nor circumstances prevent them from considering oppor-
tunities along various paths. Indeed, companies in similar positions in a given
industry may see their options very differently and pursue strikingly different
courses. We have seen the best companies consider seven distinct strategic
degrees of freedom - and use most of them (Exhibit 3).
iVIaximization
• of existing
Existing customers
products versus
" and
Existing services Attraction
\ia\ue • of new
" delivery versus customers
system
Existing Innovation of
- industry versus • products and
structure services
Innovation of
Existing versus I-value delivery
" geography system
Expansion
Current. versus • into new
business geographies
Step-outs intc
L new competitive
arenas
wider choice) and cheaper (because of its buying power, efficient logistics,
and capital productivity). In financial services, Charles Schwab pioneered
the discount brokerage industry in the US after deregulation in the mid-
1970s - offering price-sensitive customers fast, accurate execution of share-
trading orders at substantially lower cost than full-service competitors.
Schwab has continued to innovate with improvements to its delivery system
such as automated telephone trading, personal computer trading, and, most
recently, Internet trading.
In India, Arvind Mills has redesigned the value-delivery system for jeans.
Arvind, the world'sfifth-largestdenim manufacturer, found Indian domestic
denim sales limited because jeans were neither affordable nor widely
available. At $20 to $40 a pair they were beyond the reach of the mass market,
and existing distribution systems reached
too few towns and villages. In 1995, Arvmd c r i
, , „ r jT-r j^.vuiv Successful companies recognize
introduced i?M7 ana Tw/-a ready-to-stitch kit ., , ^- i A • • ^.u
r. . . ,A • • • . the potential in redesigning the
of leans components (denim, zip, rivets, ,^. . u -L.- u
1 *u u A <. u\ A / u \ c/c TI business system by which a
leather brand patch) priced at about $6. It , , -^ . At- A
A- . u <- A^u .u uAnnn. -i u product or service IS dehvered
distributed them through 4,000 tailors, whose
self-interest motivated them to market the
kits to create demand for sewing services. Rufand Tuf are now the largest-
selling jeans in India by far, driving sales in Arvind's main product, denim,
and netting the company a potentially powerful consumer brand.
5. Improving industry structure. Improving industry structure is a degree
of strategic freedom frequently exercised by great growers, because it involves
growth close to the core, that is, in similar geographies and types of business.
At its simplest, this can mean buying businesses to be improved on a stand-
alone basis, and some types of greenfield capacity expansion. Both
can change an industry's cost and capacity dynamics. European industrial
companies such as Jefferson Smurfit and CRH use this path, as do US
consumer goods companies ConAgra and Sara Lee, specialty manufacturer
Federal Signal, and high-tech innovator Thermo Electron.
Multiple acquisitions enable companies to create economies of scale -
CCA found this with its franchises in Austria and Australia. Again, it is a
course that can add up to influence the competitive dynamic of a whole
industry, as Columbia/HCA's consolidation of the US hospital sector
illustrates. Founded in 1987, Columbia/HCA's principal strategy has been to
acquire, and often merge, hospitals in adjacent regions. Ten years later, it
owns 343 hospitals, 135 outpatient surgeries, and 200 home health agencies,
making it the largest healthcare services provider in the US. The same kinds
of economic benefit could of course be achieved with alliances and joint
ventures, removing the need to acquire the assets outright. Some industries
can also be reshaped by influencing regulation.
7. Stepping out into new business arenas. Many successful growers grow
by competing in new arenas. They seek opportunities vertically along their
industry chain, orfindareas of their existing operations in which to specialize.
Enron vertically integrated from gas pipelines into gas-fired power
generation. State Street Boston, on the other hand, started as a bank but
spotted a chance to specialize, as already
Truly great cotnpanies - those f. T
that are able to sustain growth - ^^^^ing, and mformation services to pension
pursue growth along several of ^"^ "^"^"^^ f""^^-
these paths, often simultaneously „ , . . , .
Other companies step into new busmesses to
which they can apply established skills. Sara
Lee has entered a range of consumer brand businesses from pantyhose to
hot dogs. Federal Signal, which started in signs and signals, is now a leader in
specialty vehicles too, including fire engines and street sweepers. Charles
Schwab stepped from discount brokerage into the mutual fund agency
business, defined contribution pension funds,financialadvisory services and,
most recently, direct selling of insurance.
It is clear that truly great companies - those that are able to sustain growth -
pursue growth along several of these paths, often simultaneously. Many, such
as Disney, use all seven degrees of freedom. (See the boxed insert, "Disney's
use of seven degrees of strategic freedom.")
Resourcing processes to generate ideas
Recognizing the strategic degrees of freedom available for growth is
important, but not enough. Companies still have to identify specific oppor-
tunities. To do so, they pour resources and senior management time into
generating ideas. In this way they produce so many that competitors are left
exhausted from the effort of keeping up. Not all ideas will work, but one
could be the next big opportunity.
In other environments, the processes are more organic but the focus on
generating opportunities is the same. Opportunities present themselves to
the Hong Kong-based Li Ka Shing group, which includes Hutchison
Whampoa, through the extraordinary network of contacts Li has cultivated.
The process has been under way since the late 1970s. Li built the China
Hotel in Guandong in 1980 before China opened up, then donated HK$85O
million the following year to build Shantou University. He met Deng
Xiaoping in 1986 and maintained contact after the Tiananmen Square protest
in 1989. The same year Li contracted China Aviation to launch the Asiasat I
satellite for StarTV. He also shares business interests with government
enterprises such as CITIC and Cosco. The resulting contacts have opened
opportunities that account for much of the several billion dollars he has
committed to the mainland.
1 Business-specific |
core competences
— Acquisition
, Growth-enabling j — Financing, risk management, and deal structuring
competences — Regulatory management
— Capital productivity enhancement
Capability — Brands
platform '•
L . __ , i — Networks
. Privileged , — Intellectual property
i assets — Infrastructure
— Information
— Licenses
Special — Access-conveying
relationships — Capability-complementing
The
right to
grow
Stretch
targets and Expansive
values mindset
Commit
to growth
Reinforcing /
systems / Opportunity
and / Cultivate Build pipeline
Incentives /entrepreneurship^ growth engines
Commit to growth
Earn the right Began by securing shareholder support for 5-year turnaround program
Executed short-term program to ramp up results
Raise the bar Set vision to be world's premier entertainment company
Set tough targets (eg, "20/20" - 2 0 % pa growth and 20% ROE)
Embrace expansive Redefined image as integrated entertainment company, not exclusively
mindset theme parks or films. Committed to creativity
Emphasized unlocking value of latent assets (eg, film library) and driving
synergies (eg, merchandising spin-offs from animated characters from
Mickey Mouse to Roger Rabbit
The number of years in each horizon will vary The right balance for any particular company,
among industries. In slowly evolving, capital- of course, depends on the industry and the
intensive basic materials sectors such as pulp company's starting position. Companies
and paper or chemicals, the tail of the first whose growth has stalled must pay particular
horizon may be five or ten years out. Hyper- attention to initiatives to kickstart growth in
evolutionary software, electronics, or Internet the short term. Companies with sound core
businesses may see their third horizon as close businesses but few long-term options may pay
as five years away. more attention to horizons two and three,
particularly if their industries are changing
The challenge is to balance today's efforts quickly. Neither type, however, can afford to
across all three time horizons in proportions ignore any of the three.
appropriate to industry context. Managing
the tensions inherent in simultaneously
recognized in 1992 that larger gold companies would need to know as much
aboutfinancingas they do about metallurgy." Barrick has used gold bonds -
which index interest to the gold price - tofinancenew mines, offloading some
of the risk of developing a mine. Li Ka Shing makes his capital go further
and shares risk through clever deal structuring. He reduced the initial funding
needs of StarTy for instance, by securing upfront payment from founder
advertisers while deferring StarTV's payments to program suppliers, both in
return for sharing the potential upside.
Established distribution networks T- n • i • i J •• i n
, , ., • <- • u 1 Fmally, exceptional capital productivity skills
enable their owners to piggyback ,/ \ . , •,
. . . . <.. 1 + enable great growers to make commercial
new products into the market r • . .i. . .^
.1 ... .•. successes of projects that other companies
at lower cost than competitors ., • T • u • i
might reject. Increasing the incremental
productivity of capital investment, not only
increases returns on individual projects but also expands capacity and
resources for further growth. Hindustan Lever's exceptional success in Indian
consumer goods markets - it is the country's largest packaged goods
manufacturer - is partly due to its ability to achieve sales revenues per dollar
offixedassets that are double those of the Unilever company worldwide.
But great growers shift their attention from what they have to what they need,
and go out and get it. Consider Bombardier. It won its position of the fourth-
largest aerospace manufacturer in the world - dominating the market in
smaller regional aircraft - by assembling and then developing the skills it
needed in just ten years. It started in 1986 by acquiring Canadair. In the late
1980s, it launched improved versions of its Challenger business jet. In 1989, it
bought Shorts Brothers. Shorts, the nacelle manufacturer for the Fokker 100,
was a technical leader in composite materials and had underutilised manu-
facturing capacity. In 1992, Bombardier added 51 percent of de Havilland,
another Canadian aircraft maker that brought with it a state-of-the-art paint
shop and a marketing and salesforce with access to 60 commercial aircraft
customers in 22 countries. When the com-
Ti, ,. • .^ pany launched its first regional jet it was from
Many•' nmanagers
°
setting
u ^^
out to
4^u
^ \ , , .r u J i . •.•
an already established market position,
grow face a gap between the ^ ^
abilities they have and those o -i i c ui J .u i.
., J <. <. ^4.- Similarly, Samsung assembled the where-
they need to net opportunities •. i . • . , •
•^ ^^ withal to enter the semiconductor business
from scratch. It is a story of capability build-
ing that is daring in terms of size and strategic risk. Having studied the idea's
potential in 1982, the company established an R&D centre in California the
following year to collect technology information, recruit engineers, train
Korean staff, and conduct initial product and process development. It also
hired fresh, high-calibre Korean engineers from US high-tech companies. It
licensed design technology from Micron Technology and process technology
from Sharp, and then acquired the latest equipment, sending more than
70 engineers to the suppliers for training. Samsung also retained Japanese
technical consultants and retired engineers to "moonlight" in technology
transfer and troubleshooting. In 1986, the company also joined an R&D
consortium with LG and Hyundai to conduct new basic research. Between
1987 and 1994, it invested more than $4 billion in facilities and another $300
million in product development.
In this way the company gradually closed the gap on competitors. It was four
years behind Japanese rivals in entering the 64Kb DRAM market, but it
launched its 256Mb DRAM chips in 1994 at the same time as industry
leaders did. While the jury is still out on whether Samsung will earn exciting
returns - it depends on your view of the industry's cyclical character and the
cost of the company's capital - there is no debate about the remarkable speed
and effectiveness with which the company accumulated the skills for a world-
class semiconductor business.
One key to putting together skills is to combine them in bundles that are
tough for competitors to copy, because if competitors can imitate them, you
cannot protect the value of your businesses. At Disney it is the combination
of competences (animation, financial management, and theme park
operation), privileged assets (cartoon characters, brand names, and resort
properties), and special relationships (with promotional partners, enter-
tainment talent, and the Florida government)
that distinguish it.
Theflexibilityto cut short
. , , <. ^u • u an unsuccessful series of
A company need not possess strengths in all ^ . ^^ ^- r ^
c I • • i • ^u • steps IS an attractive feature
areas ofa business-just in the areas lmpor- r.u . • i
, .. ,• ^ A- 4.- • u ot the staircase approach
tant to making money. Growers distinguish
between attributes that garner value and those
that are simply necessary to play the game. Enron became a world leader in
international private power generation because it saw that profit did not depend
on construction and operation skills, but on deal structuring and risk allocation.
So in the early years it was unimportant that the company was not distinguished
at building and operating power stations, because instead it was good at
coordinating and negotiating fuel supply contracts, electricity sales contracts,
financing packages, government guarantees, and construction contracts - skills
few utility competitors possessed. Operating skills, on the other hand, could be
acquired through tender.
Such flexibility provides one of the main advantages of the staircase approach.
Over the medium term, it is possible for companies to transform their range of
skills and business portfolio with limited risk. Indeed, it is a recurring theme
among our sample ofcompanies: they evolve their businesses over relatively
short periods by pursuing options their new skills have opened up.
Disney's evolution
Planned lines
Disney communities
Resorts Institute
Hotel vacations THEME PARKS
development - ' Animal
I EuroDisney Kingdom,
Disney
Disney-MGM America
Studios
' Tokyo Disneyland LIVE ENTERTAINMENT
EPCOT
I Walt Disney World ' Baseball
I Hockey
Disneyland Live theater
BROADCASTING
- I ABC TV
J K-CAL TV network
Disney
channel FILMED ENTERTAINMENT
Miramax
Hollywood acquisition
pictures
- ' Touchstone films, MERCHANDISING,
Motion pictures MUSIC, AND PUBLISHING
home video
J Television Software
shows Hollywood development
Animated records
Direct
feature films
mail
' Disney
I Book publishing stores
I Music publishing
I Character licensing
Animation