Michael Treacy is author of Double-Digit Growth and founder and CEO of GEN3 Partners. Mr. Treacy will be presenting a session on growth and strategy at the Global Institute for Leadership Development.

LC: How do you define growth and apply it to a company’s strategy?

MT: There are three types of growth that are important: Growth in top line, which is revenue; growth in the bottom line, which is net income; and growth in the middle line, which is gross profit dollars, and to me it’s that third one—gross profit dollars—the most important measure of growth, because it’s a direct measure of how much value your customer thinks you’re adding to the process. Some level of growth is essential just to sustain an organization, because without growth, it’s hard to reinvest in the business and without reinvestment, it’s hard to sustain. Without growth, it’s hard to create momentum in the marketplace that gives your customers the confidence that it’s worth investing their dollars in you and your products and services. And, it’s very difficult to bring about innovation in an organization. Without growth and without the new opportunities that growth brings about, people are very reluctant to give up their current role, current position, and current way of operating. It becomes very hard to innovate.

LC: Can you give me an example, Mr. Treacy, of an organization that actually defined growth and was able to follow through on that plan?

MT: Well, there are countless examples of very successful growth firms, and some are very famous, like Wal-Mart and Dell; others are far less known, like perhaps Mohawk Industries, a very large player in the (carpet) business, or Paychex, very large player doing payroll services for small employers. But these are all firms that in all the cases, as well as in approximately 8 percent of the S&P 1,000 are firms, that are able to grow at double-digit rates for more than three or four years in a row. In all of those firms, what they do is have a dual focus: One focus is around “what’s the plan?,” the other focus is around building the discipline to be able to grow.

LC: Could you talk about those two areas more?

MT: Sure. To distinguish the plan from the discipline, let me do it by analogy: Imagine a very heavy man, let’s say more than 350 pounds, that decides to visit his doctor because family and friends are bothering him and bugging him about his weight and how it’s affecting his health. So, in the ten minutes that a doctor these days would allot to a patient like that, they would have a conversation about diet and exercise. They might also discuss more radical surgical approaches to controlling weight, but basically it would be a diet and exercise conversation. The patient would leave, ideally, with a plan for changing his diet, with a plan for starting some simple exercise, and graduating from there. The patient goes back to the doctor three months later, and still weighs 350 pounds, and the reason is because he left the doctor’s office with a plan, but he did not leave with a discipline. And so there was nothing that insured that day in, day out, the plan was going to become a reality. So, organizations that are very effective at growth do have a plan. They’ve thought through how profitable growth can be achieved: what customers, what segments, what kind of value proposition to deliver, how to cover a market—all the details and complexities that go into making a cash register ring—but the other thing they’ve got is a real focus on discipline. And, what discipline translates into is having talent on board that knows how to make it happen. It has to do with having information, so that revenue is as diagnosable and controllable as cost, and it has to do with having a management control routine that allows you to, month-by-month, evaluate progress on your growth objectives, diagnose where there are issues, adjust the plan, and take remedial action, much the way we do that today around profitability and cost.

LC: Can you tell us more about where specifically organizations have failed in these efforts to not only diagnose the issues, but to follow through on them, and to have the discipline to achieve growth?

MT: If you look at what the vast majority of companies do when they decide they have a growth challenge, they go into a planning exercise (they might do that with the assistance of an outside consulting firm, like a Bain, a BCG, or McKinsey), or they might just do it on their own. Basically, there’s a general belief that “if I’m not growing, the problem must be my plan,” that “where I’m looking for growth is part of the problem.” And indeed, you know, bigger plans can help yield better growth, but by and large, firms are disappointed with their ability to execute against that plan, and make that plan a reality, precisely because of the issue of discipline.

Now, when it comes to the plan itself, it turns out that there are lots of very complex ways to analyze opportunities for growth in the market. I have a very simple way that tends to cut through a lot of the nonsense and get to some very basic issues. So, for example: There are five, and only five sources of revenue growth. So, let’s focus the plan around those five sources.

Source number one is base retention. One way to grow your business is to stop shrinking your business, and virtually every company experiences some level of loss of customers, year-over-year. It’s typically called “churn,” and so if you can reduce your level of customer churn, that’s a way of increasing your growth rate. There are many important ways that companies can do that, not with a focus on customer loyalty, but with a focus on delivering a better value.

The second way you grow is the first thing people think about and it’s the hardest way to grow: to grow marketshare, because to do so, not only do you have to win, but somebody else has to lose, and most people, most companies and most competitors don’t lose very gracefully. But growing marketshare is the second source of revenue growth, and in order to win that game, you have to have really compelling customer value. In a contest where both parties have about the same value proposition, the only winner is the customer, because they’ll play Peter against Paul to get a better rate, a better price, and of course, any fool can be a value leader—you can take value from shareholders in the form of profit, and hand it to customers in the form of a discount, and voilà, you’re the “value leader.” So, the marketshare game is a complex one, but if you have compelling value with one, you can play and win it.

The third way to grow—the third source of revenue in your plan—is actually the easiest way to grow: market positioning. Simply show up in markets that themselves are growing, and let your boats float along with everybody else’s. Surprisingly, very few firms spend a lot of time either examining whether there are faster growing segments of the market they should be addressing, or doing anything about it once they’ve run this analysis. The better firms, like Johnson & Johnson, are constantly re-evaluating their portfolio businesses, getting out of low-growth markets, and moving into higher-growth markets as one way of driving growth.

Those three approaches of base retention, share gain, and market positioning are what every core business unit should be thinking about how to improve. The fourth way you grow a business—a fourth source of revenue, and the fourth (possible) plan—is adjacent growth. “How do I take the core capabilities that I’m really good at and use them to give me immediate and practical advantage in another market in another business?” Now, I might be going against different competitors, serving different customers, in an entirely different market, but I’m using and leveraging advantages I’ve gotten from my core business. It’s a risky strategy. The majority of efforts of this form fail. Typically they fail because they were predestined to fail—the analysis was done poorly as to whether the company really had an immediate practical advantage.

The fifth source of revenue—the fifth element of the plan, and one that I advise the majority of firms to forget about (but you see a small number of firms succeed this way, and I’ll offer it for completeness) is simply to grow in new and unrelated marketplaces and businesses. To do this, you have to be a dramatically above-average investor, and there are very few of those people around. There are some people, like Warren Buffett, Gerry Schwartz, and others who have grown their businesses very successfully, simply by being really cagey and smiley.
So, I come to the plan. The plan needs to be built around the five sources of revenue. And, the question to be asked is “what are we going to do to drive improved performance in each of those five areas?”

LC: What is your advice to help emerging leaders to better understand how they can work with customer expectations, and their team and organization to innovate and provide growth for their company?

MT: Well, two or three things. Most efforts at innovation in organizations are a waste, and the reason they’re a waste is because of the logical chain of events that has to occur before that innovation actually translates into value for customers—the links are so long and so risky that the value of that innovation is very low, when you discount for risk. So, let me use, as an example, one of my favorites: customer relationship management. Now, not so much the theory of it, because the theory is kind of interesting, but the practice of it, and the practice of it is that most CRM systems are in one of two forms: They’re either the form that is essentially a sales force reporting system, or they’re a form that’s a call center information management system.

Let’s take the former. The sales force reporting system. So, the sales reps are conditioned to kind of put all their account information into this CRM system, so that it’s all there. Some would consider that an innovation. The challenge I have is that I don’t understand how it drives any better value to customer, and if it isn’t driving better value to customer, even indirectly, I can’t see the linkage, and then I don’t understand why it’s an innovation. I don’t understand why that’s helping the company to grow and flourish in the marketplace. Now, people have sat down and explained it all to me, but boy, it’s a very long-linked logic to get from a CRM implementation to value in the marketplace for customers. So, the first thing I would say for emerging leaders is that a serious-minded and cynical re-evaluation of innovation initiatives can lead to a conclusion that the vast majority of CRM initiatives can be stopped without any apparent damage to the organization.

LC: In closing, are there any other words of wisdom—words of advice you’d like to give to emerging leaders who are basically senior executives, CEOs and other emerging leaders in the world who will be developing and learning at GILD in your area of growth and strategy?

MT: Well, the basic advice I would give on growth is simply this: If your organization—at whatever level you’re managing—is challenged by growth, the challenge is not in the marketplace. The reason you’re challenged by growth isn’t because the market isn’t growing, it’s not because of competitor activity, it’s because of you. The challenge of growth is in the management of the marketplace. And if you’re going to fix your growth problems, you start by fixing your management team. Because the right team of people around the table will always be able to grow the organization, and the wrong team with the best plan will lose every single time.