Thinking Differently About Growth

1. Thinking Differently About Growth The 5th Annual CFO Rising Conference & Expo Las Vegas October 25, 2010 Ed Hess Professor of Business Administration Batten Executive-in-Residence Hesse@darden.virginia.edu www.EDHLTD.com

2. The DNA of Growth

3. Research Findings • 5 research projects • The Organic Growth Index ( “OGI”) • The Characteristics of High Organic Growers (“HOGS”) • The Challenges of Managing Private Company High Growth • The Myths of Growth • The Risks of Growth

4. U.S. Growth Mental Model • All Growth is Good • Bigger is Always Better • “Grow or Die” • Public Companies : Continuous Linear Growth • These beliefs are NOT supported by empirical data or business reality.

5. The Reality of Growth • Growth can be good; growth can be bad- it depends • Bigger is not always better • Growth is not a requirement for every business but improvement is • Continuous linear growth is rare

6. OGI Index Results • Purpose of the OGI Financial Model is to illuminate high organic growth companies and “screen” out companies that produce material non-organic growth earnings through accounting games, non-core earnings, serial acquisitions, financial engineering, etc.

7. Findings • Less than 10% of companies studied over several 5 year periods qualify as HOGs • Less than 3% of companies studied 1996-2006 qualified as HOGs • For years 2001-2006, of the 4031 public companies, only 276 qualified as HOGs • Of those 276 companies only 35 had market caps greater than $10B • 5 other confirming studies

8. What Else Do we Know? • Few companies show any predictable patterns of growth • Growth is only weakly correlated to profits • Earnings growth rates are largely unpredictable • Growth/Innovation is NOT a linear mechanistic smooth linear process

9. Growth Is • Change • Messy • Hard • People dependent in most cases • Mistakes & failures • Antithetical to the goals of a corporation: predictability, consistency, standardization, reliability, and no variance

10. Characteristics of HOGS My hypotheses: Unique products/services The best talent Visionary, charismatic leaders Superior innovation Cost superiority by outsourcing/offshoring Sophisticated diversified strategies

11. HOGS My findings: None of the above were necessary or even common Simple focused strategies Humble passionate operators Execution champions High employee engagement Constant improvement DNA Master learners and copiers

12. Research Conclusions • Growth is much more than a strategy- it is a SYSTEM • Growth is Experimental Learning • Growth requires the right Leadership, Culture, & Processes • Growth results from a 2 X 2 X 4 Growth Portfolio • Customer Centricity & High Employee Engagement are Growth Enablers

13. Research Conclusions Growth/Innovation Killers: “ROI-tis” Group think Arrogance Legacy mental models/cognitive blindness Penalizing mistakes Short-termism Product -centricity

14. Risks of Growth • Growth can stress people, processes & controls • Growth can dilute culture and customer value proposition • The question is how much growth creates these risks • Toyota & Starbucks examples • Growth Risks Audit

15. Private Company Research Findings • Growth changes everything • Growth is evolutionary - waves of change • Growth requires more and better processes • Preconditions to Growth • 4Ps of Growth: Planning, Prioritization, Processes & Pace • The 4 Ways to Grow • The Entrepreneur Must Grow, Too ! • The Difficulty in Building a Management Team