The Alchemy of Growth -

What is the formula?

GROWTH IN AUTOMOTIVE &

ASSEMBLY - EXTRANET

Vinzenz Schwegmann
March 23, 1999
Growth creates wealth for shareholders, brings new jobs to the community and
unleashes creative energy in the organization that pursues it. Yet so many
companies are unable to achieve and sustain it. Only the exceptional few. What
is it that keeps them on the fast track? There is a formula, it turns out - though
its more hard work than magic. Its contained in The Alchemy of Growth, a
special research initiative by McKinsey & Company. Read about it in our client-
only website.
INTRODUCTION

The Alchemy of Growth

The transformative power of growth is akin to the alchemy of old. Always a

mystery, alchemys magical blend of science, philosophy, art, and spirituality
held secrets that even its practitioners found difficult to penetrate. Still, they
were all drawn to its alluring aim: To transform the everyday into the exalted.
The pursuit of corporate growth seems to prompt a similar reaction. Managers
are excited by growths promise, by the generous rewards it offers. But unlike
the alchemists, they often hesitate to act, feeling under pressure to take care of
todays business problems and sometimes uncertain about where to begin. This
was the starting point for The Alchemy of Growth, a special research initiative by
McKinsey & Company, aimed at helping our clients in their search for growth.
Over the course of three years, we attempted to find a pattern that could explain
the success of fast-growing companies. Analyzing over 600 recent growth-
related engagements in the firm and digging deeply into the workings of 30 fast-
growing companies willing to participate in the research, we arrived at some
very interesting conclusions. There is no magic formula, of course, but there is a
formula.
We have condensed our findings for this site integrating some examples from
the automotive and assembly industries to make the message more meaningful
to you. We hope you will travel around a bit in our space. We also heartily
recommend the book "The Alchemy of Growth", written by three of our
consultants, Mehrdad Baghai, Stephen Coley and David White.

1. THE CHALLENGE: KEEPING THE PIPELINE FULL

Growth is not an option for companies these days, it is a necessity.

Globalization, technology, consumerization - they are all working in concert to
make product life cycles shorter and managements job harder. In an
environment like this, just staying even is a challenge. We calculated, for
example, that German automakers will have to collectively grow around 7.6%
per year (estimate) simply to achieve an employment level in 2000 equal to the
one they had in 1995.
But growth is important for other, more felicitous reasons as well. Growth
unleashes benefits beyond the economic:
! It revitalizes organizations and invigorates the people within them,
creating energy, a sense of purpose, and the glow of being on a
winning team, and

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 ! It has a positive catalytic effect on the general business community,
with one companys growth spurring the growth of other
companies, those that supply it, complement it and compete with it.
Growth is also the key to sustainable profitability, as a survey of ours in the
worldwide automotive supply industry confirms: While fast-growing
companies tripled shareholder value between 1988 and 1996, slower-growing
companies actually saw it decline. The same correlation between growth and
profitability can be seen for worldwide producers of machinery and electronic
equipment:
Profitability Sales Growth
(1990 94) (1990-94)

Most successful 13.0% 11.7%

Moderately successful 4.4% 2.0%

Less successful -3.8% -4.9%

Yet despite the overwhelming attractiveness of growth, few succeed in capturing

and sustaining it over long periods of time: We found that of ten companies that
outperformed their industry's growth rate in recent years, only one was able to
maintain that edge for a period of ten years. And these were already the top
performers in their industry!
The problem? Companies tend to be so preoccupied with managing the crises of
their current businesses that they neglect to keep the pipeline full of business-
building initiatives. The result is that when existing growth engines begin to
falter, as they invariably do, there are not enough new ones ready to roll out to
take their place. This lack of focus on growth is widespread in the machinery
and electronics industry, where nearly 40% of companies we surveyed reported
they were still primarily concerned with restructuring, not growth.
Indeed, times have been tough for many in the automotive and assembly
industries. But does this mean that there is nothing with which to fill the
pipeline? That profitable growth is no longer possible in mature industries like
these?
Not so, if you look more closely. One European manufacturer of industrial
fasteners, for example, has consistently grown nearly 15% per year over the last
decade, while earning at above average levels - and all this in a comparatively
low-tech, basic industry. Companies like this also faced existence-threatening
pressures like those felt for example by many automotive suppliers:
! Demanding customers the globalizing automakers who have
more leverage as they reduce their field of suppliers and expand,
! More volatile demand, as growth shifts away from Triad markets to
emerging ones in distant lands,

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 ! Innovations in materials, design processes, and electronic
technologies, which make rapid adaptation, if not further
innovation, essential, and
! More discriminating investors, who are focused on rising
shareholder value as a prerequisite for access to capital markets.
Part of the reason managers get swallowed up by their day-to-day problems and
continuously postpone organizing for growth is that they lack a systematic
approach to it. In The Alchemy of Growth, we have attempted to fill this gap.
We offer a way of thinking and talking about growth that helps managers at all
levels balance the competing demands of running existing businesses and
building new ones. We call it the three horizons of growth. Weve observed
it, and weve tested it out. It works. Read more about it ahead.

2. CONCEPT: THE THREE HORIZONS OF GROWTH

What complicates managements task when it comes to growth is that the risks
and opportunities change as a business progresses through the development
pipeline. For this reason, we broke down the growth process into three more
manageable phases, or horizons, each of which represents a different period in
the creation and development of a business i.e., embryonic, emergent, and
mature.

The growth challenge concurrent

management across 3 time horizons
Value

Horizon 3
Create options for
future businesses
Horizon 2
Build momentum
of emerging new
businesses

Horizon 1
Defend and extend
current core
businesses

Time

Exhibit 1

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The three-horizon concept has proved a powerful learning tool helping
companies to develop growth strategies and communicate them to managers.

Horizon 1 Horizon 2 Horizon 3

Defend and extend core Build emerging Create options for future
businesses businesses businesses
Horizon 1 contains the Horizon 2 contains Horizon 3 is the domain
businesses that generate businesses on the rise: of embryonic businesses -
profits and cash flow fast-moving, options for pursuing
today. These businesses entrepreneurial future opportunities,
may still have some ventures that may or some of which will prove
growth potential but, may not be generating successful and contribute
eventually, they will profits in the short significant profits in the
flatten out or decline. term. They need long term. They are
They provide the skills continuing investment more than ideas: they are
and resources for growth. to finance rollouts. real activities and
But they are expected investment. They are
to become significant rarely proven
profit generators over opportunities, but they
the medium term. need to be promising and
to have the support of
management without
committing too much
capital or other
resources.

Management challenge

Shore up competitive Build capabilities and Identify and nurture

positions and unlock fuel growth in new options.
remaining potential in businesses.
the core businesses.

Management must be active in all three horizons at the same time in order to
ensure that the maturation process does not stall and interrupt growth farther
down the line. Such concurrent management of horizons should not be
confused with short-, medium- and long-term planning, however.

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This is what the three horizons could look like for a locking system supplier:
Horizon 1 Horizon 2 Horizon 3

Door locks and fittings Locking systems: Door modules

as single components central locking system
with remote control

...or a European heavy truck manufacturer:

Horizon 1 Horizon 2 Horizon 3

Quality improvements Truck rental New solutions e.g.,

combining truck/rail
Process reengineering Used car restoration
Frequent-driver
Realign service Telematics
programs
network
Truck financing,
leasing

...or a world-class automaker:

Horizon 1 Horizon 2 Horizon 3

Triad growth in existing New products for Latin Plastic car for Chinese
markets: 300,000 to 4 million America market
(+8%)
Sales target for minivan: Explore alternative drives
Non-Triad growth: 100,000 400,000 units
to 1 million (+11%) with
focus on SE Asia Two-seater

Fast-growing companies should not just manage growth at the corporate level,
but follow the idea of the three horizons throughout the organization. Ideally,
each division, business unit, functional department, manufacturing site, product
line, research lab and sales territory should be managing its own set of horizons.
In short, every leader should have three horizons to manage.

3. SELF-DIAGNOSTIC: HOW HEALTHY ARE OUR HORIZONS?

Successful growth starts with an honest assessment of the contents of the

pipeline. Managers throughout the organization must look in the mirror and ask
themselves how healthy their array of developing businesses is. Where are the
gaps? Where are the bulges?
While there are a few exceptions, our research shows that the vast majority of
companies are not the picture of health when it comes to growth horizons. But

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the good news is that an accurate diagnosis is the first step in the cure. Knowing
where the strong and weak points are in the pipeline enables management to set
its priorities and direct their resources to where it really counts.

How would you rate your company or organizational

unit?

in HORIZON 1...

No Yes
Are your core businesses generating sufficient
earnings to allow you to invest in growth?
Do you have a strong performance orientation to
push profits higher in the next few years?
Is your cost structure competitive with that of the
rest of your industry?
Has your operating performance been stable?

Has your market share grown?

Is your company reasonably well protected from

new competition, technologies, or regulations that
could change the rules of the game?

in HORIZON 2...

No Yes
Do you have any new businesses capable of
creating as much economic value as the current
core businesses?
Are these new businesses gaining momentum in
the marketplace?
Is your company comfortable making substantial
investments to accelerate new business growth?
Is there mounting investor confidence in these
businesses?
Are the new businesses attracting entrepreneurial
talent to your organizations?

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in HORIZON 3...

No Yes
Does your leadership team set aside time to think
about growth opportunities and industry
evolution?
Have you developed a rich portfolio of options for
reinventing existing businesses and creating new
ones?
Are these ideas very different from those on the list
last year? Three years ago? Five years ago?
Are you developing effective ways to turn these
ideas into new businesses?
Have the ideas been made tangible in concrete,
measurable first steps?

If you answered "yes" to all questions, youre in great shape. If not, weigh your
answers to arrive at a general diagnosis of healthy ( ) or unhealthy (X).

Do you see yourself in any of these patterns?

Horizon 1 Horizon 2 Horizon 3

1. Under siege X X X

2. Losing the right to grow X

3. Running out of steam X X

4. Inventing a new future X X

X X

5. Generating ideas but not new X

businesses
6. Failing to seed for the future X

This is what they look like in more detail:

1. Under siege, the first and worst pattern. Here, core businesses are
underperforming, threatened by competitors, or facing imminent
decline. Little is happening in the pipeline, meaning not enough strong
new businesses to take up the slack.

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 2. Losing the right to grow. Excessive focus on growth can be just as bad
as not enough. Some companies lose the right to grow when they
become obsessed with new businesses and take their eyes off the core
businesses that must be there to finance them.
3. Running out of steam. These companies are fixated on the present,
which can easily happen when working on a major cost-cutting and
efficiency-building program. Even world-class companies can fall into
this trap.
4. Inventing a new future. This pattern is most common in start-up
companies, whose business is not yet generating expected earnings.
Large companies can also fall victim here if discontinuities restructure
the market, such as e-commerce is doing in a wide range of industries.
5. Generating ideas but not new businesses. This happens when
otherwise healthy companies expend great energy exploring new ideas,
but stop short of actively developing them. High-tech companies
sometimes have this problem, as do companies that are working on
their first major growth charge.
6. Failing to seed for the future. Companies may fuel profitable growth
for years, but unless they are producing a continuous stream of new
options, growth will sooner or later stall.

Achieving balance does not mean having the same number of initiatives in each
horizon. The low-hit-rate associated with horizon 3 options means that a large
number are usually needed to yield even one successful horizon 2 business.
Similarly, not all horizon 2 businesses will make it into horizon 1. Given this
attrition, a balanced portfolio across the three horizons produces a development
pipeline that looks more like a funnel than a cylinder.
More telling than mere numbers of initiatives per horizon is the way that skilled
growth companies allocate investment spending across the horizons. Most of the
growth-sustaining companies we studied commit at least one-third to two-thirds
of their new investment spending to horizon 2 and 3 initiatives.
The optimal allocation for your industry will depend on the pace of change, the
degree of uncertainty, your managerial and financial capacities, and last but not
least, the expectations of your shareholders.

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Here are profiles of four competing automakers viewed within the context of the
three horizon patterns for the period 1996 through 2000:

Company A Company B Company C Company D

Horizon 1: Growth in 10% 20% 25% 5%
core regions with
existing products

Horizon 2: 12% 32% 4% 50%

Growth in new
regions/new segments

Horizon 3: high medium low low

Investments in
alternative-fuel
technologies

Pattern: Generating Failing to seed Running out of Inventing a new

ideas but not for the future steam future
new businesses ( X) ( X X) (X X)
( X )

Action required: Nurture Fund Enter new Improve

Horizon 2 projects to businesses, operating
businesses, seed options, e.g., via ex- performance
e.g., "US- e.g., in port, product to build
style" cars alternative portfolio growth base
drives, expansion
Move best alternative Invest in
options to materials, Seed future, future, e.g.,
Horizon 2, concept cars e.g., by with multi-
e.g., car for developing brand
China, new cars strategy
concept cars

4. APPROACH: KICKSTART AND SUSTAIN GROWTH

4.1. Laying the foundation

Growth should not always be a companys highest priority. Some companies are
simply not prepared for it. When this is the case, the first step is laying and
maintaining - a solid foundation of operational excellence, competitive strength,
and sustainable cash flow.

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This means first earning the right to grow by:
! Achieving superior operating performance. Growth-sustaining
companies are outstanding operators, usually market share leaders
and low-cost producers. They recognize that operational excellence
is indispensable to healthy growth.
! Divesting strategically to free-up managerial and financial capacity
for new growth. Prune businesses from your portfolio that divert
management and resources from your central aims.
! Building shareholder confidence. Credibility with shareholders
must be earned through strong operating results and a sound
corporate strategy both of which must be effectively
communicated. They hold the key to financial freedom.
Many automotive suppliers that were underperforming the market in 1991 have
worked hard to earn their right to grow. By 1996, they had pulled themselves up
so successfully that they were approaching the performance of industry leaders,
for example, in:
! Sales growth Top companies turned in a 3-year sales growth rate
of 16.1% in 1991, compared to only 5.1% for the less successful
companies. But by 1996, this gap had narrowed to less than one
percent i.e., 9.9% versus 9.1%.
! Return on sales Here top performers declined from 9.1% to 5.5%,
while the formerly lagging companies raised theirs from 0.5% to
4.1%.
! Customer complaints - Top performers reduced customer
complaints from 240 (ppm) to 202 in this period, while less
successful cut their rate by more than 75%, from 4800 to 1135.

Efforts to simultaneously decrease time, cost and defects, such as our design-to-
market program, can help companies in all segments of the automotive and
assembly sector earn the right to grow e.g., through:
! Optimal product differentiation, eliminating unprofitable variation
and concentrating on that which customers are willing to pay for,
! More rapid innovation through smaller steps, so as to regularly
take in and react to customer feedback,
! More cost-competitive products through simpler design and more
stable processes,
! Product maturity at mass production to essentially eliminate costly
post-freezepoint changes,

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 ! Shorter development times through simpler processes and
reduction of interfaces, and
! More efficient product development, concentrating resources on
fewer projects to avoid dilution of efforts.

The physical state of a company in its preparation for growth is one thing. Its
mental state is another. What is also indispensable for a solid foundation is the
strong resolve to grow. This means:
! Securing senior management commitment. It may take a year or
two and some personnel changes - to get the team rallied around
growth. Without shared commitment at this level, however, a
concerted growth initiative is almost surely doomed.
! Raising the bar. Setting difficult, stretch growth targets wakes
people up to managements seriousness. In the automotive supply
industry, the difference in company ambition and results is clear:

Foreign Market Share

Achieved (1994-97) Planned (1997-2000)
Global leaders 4.9% 8.4%
Less active globalizing 1.1% 2.1%
companies

Compound Annual Growth

Achieved (1994-97) Planned (1997-2000)
Innovators 19.2% 24.0%
Non-Innovators 4.5% 17.0%

! Removing organizational barriers. Sometimes company culture

and its systems get in the way of kickstarting growth. Recognizing
and removing such barriers sends an unequivocal signal to all in the
organization.

4.2. Searching for opportunities

Creating a real growth strategy is only possible when managers are able to see
businesses in new ways and evaluate opportunities with their hearts as well as
their minds.

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Expand the mind: "What is possible?"
! Every organization has its orthodoxy, which dictates what is and
what is not possible.
! Challenging the orthodoxy helps people see and evaluate ingrained
beliefs, opening the door to more expansive thinking.
! Thinking too broadly about growth, however, can blur
uniqueness in a company, as Harvard Business School professor
and consultant Michael Porter puts it. Some caution must therefore
be exercised in expanding strategic options.

Legitimize passion!

! Passion must be a part of any search for opportunities.

! People devote energy to ideas they believe in and care about.
! Dont waste precious time on projects that arouse little enthusiasm.
If you cant generate excitement about it, shelve it.

Explore the Seven Degrees of Freedom

The Seven Degrees of Freedom is an analytical template to help managers

uncover hidden opportunities for growth. It looks like this:

The Seven Degrees of Freedom Existing

customers

Existing
products and vs
services

vs
Existing
value delivery
system New customers
Innovation of
Existing products and
vs services
industry
structure

Existing Innovation
vs of value
geography
delivery system

Existing vs Improvement
competitive of industry
arena structure
Expansion
Current into new
business vs
geographies

Moves into new

competitive
arenas

Exhibit 2

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1. How could we increase sales to the same customer with the same
product mix? Companies that sustain growth are adept at finding new
ways to expand sales of existing products to existing customers. They
use traditional tools to increase the frequency or quantity of purchase
and cross-sell products. They also use sophisticated direct marketing
techniques and find profitable ways to reward customer loyalty.
2. How could we extend the business by selling existing products to
new customers? Focusing on a target market can be a very effective
strategy. But it can blind companies to other possibilities. Identifying
and pursuing new customer groups can unlock attractive growth
opportunities. Demographic patterns and socioeconomic trends may
point to pockets of latent demand.
3. How could we grow by introducing new products and services?
A deep understanding of customer needs can enable companies to
extend existing products or services, as well as create new ones to meet
or stimulate demand. In mature industries, it is much harder to come
up with truly innovative ideas that customers will appreciate. But it
can be done, as shown below for the automotive supply industry:

Relative focus on:

Existing New Compound Operating
products products Annual growth income as % of
(1997-2000) (1997-2000) (1994-97) Sales (1994-97)
Innovator 43% 57% 19.2% 5.8%
Non- 69% 31% 4.5% 2.7%
Innovators

And sources of innovation are far from exhausted, especially in

comfort, safety and smart technologies, where unit growth between
1996 and 2005 is projected as follows:

Navigation systems (+ 650%)

ABS brake systems (+ 130%)
Airbags (+ 160%)
Air conditioning (+ 97%)
Theft protection (+ 34%)

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4. How could we expand sales by developing better delivery systems for
customers? This may include the development of new channels, such as
direct sales, electronic channels or new distributors. The revolution of
e-commerce, for example, is clearly something no company can afford
to ignore. This is not, however, to undervalue the benefits of
reengineering existing systems.
5. How and where could we expand into new geographies?
Global expansion is one of the most powerful options for growth, but it
is also one of the most difficult. Assuming a company is operationally
fit, international growth can allow companies to replicate their
success formula many times over, while leveraging their costs over a
broader base. It is increasingly used as a strategy in the automotive and
assembly sector:
! Globalization is a driver for profitable growth in the automotive
supply business:

Return on Sales Annual Growth

(1994-97) (1994-97)
Global leaders 6.6% 16.5%

Less active globalizing 3.6% 8.9%

companies

! Automakers are cranking up production primarily in emerging

markets:
Annual Growth (%) Production Increase Expected Share of Total
from 1997 to 2003 Volume in 2003
Eastern Europe 8. 6 7.6

South America 5.2 6.3

Asia/Pacific 3.8 12.2

NAFTA 1.0 27.7

Western Europe 0.9 28.5

Japan -2.0 16.4

Rest of world 1.0 1.3

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 ! But globalization is not all glory. Even top companies have had
major defeats here:
Failure Mode Example Alternative solutions
Going native at expense European automaker - Exporting own strength
of core value/brand building Detroit-style - New brands
Plant closed
Major investments Asian automakers $400 - Flexible, small-step
without stable market million Canadian auto tactics
position plant
Plant closed
Lack of solid local supply Japanese car plants in U.S. - Bringing proven
base Importing steel/paint suppliers
from Japan, difficult - Industry park solutions
education of U.S.
suppliers
Inability to manage Some European - Help to build local pride
political and regulatory automakers in Asia - Get commitment
changes Long lead times, frequent
withdrawals

6. How much could we grow by changing the industry structure?

Many of the most successful growth companies pursue opportunities of
this kind, usually by means of mergers, acquisitions, or alliances:
! Automotive supply - Mergers and acquisitions rose from 35
worldwide in 1993 to 116 in 1996. The number of mega-suppliers,
those with sales of more than $5 billion, increased accordingly, from
16 in 1992 to 50 in 1996.
! OEMs - In 1960 there were 42 independent OEMs in the Triad, but
only 16 by 1996. Many expect a final number of only 5 to 7.

7. What opportunities are there outside existing industry boundaries?

Despite the difficulty of doing this well, most successful growth
companies have succeeded here. Some created value through vertical
integration simply because the industry was attractive, others because
they had to brook a gap in the value-added chain or found themselves
in a new market as their industry converged with another. Especially
in automotive supplies, the dominant growth strategy is vertical
integration, where suppliers add value in assembly, R&D or product
integration.
! Component Specialists - High R&D contribution
Annual growth (1994-97): 9.3%
Characteristics: Important suppliers of components that can be
either integrated into systems and modules or are critical stand-
alone components for OEM

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 Typical products: compressors, chassis components, transmission
cases, crankshafts
! Commodity Supplier - Low vertical integration
Annual growth (1994-97): 6.9%
Characteristics: Traditional supplier with mature, standardized
products
Typical products: Screws, fittings
! System Developer - High integration, but low assembly
contribution
Annual growth (1994-97): 14.0%
Characteristics: Developers of entire systems with unique
functionality
Typical products: Brake systems, navigation systems, locking
systems
! Integrated Partner - High integration in all dimensions
Annual growth (1994-97): 19,5%
Characteristics: Suppliers of broadest range of integration tasks
Typical products: Axle modules, integrated front-end modules.

Once the foundation is laid and broad directions for growth have been identified
through the Seven Degrees, the process of growth can actually begin.

4.3. Building Staircases to Growth

Forging ahead full steam is usually not the most advisable course. There are
tremendous market uncertainties to deal with and in all likelihood, some major
capability gaps. Masters at growth deal with these problems by building
staircases, as shown below:

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 Generic growth staircase

Secure growth Test business Replicate proven Manage for

options model business model profitability

Source and secure Test commercial Realize growth

options for future viability of potential through
growth business concept business-building
Maximize growth
initiatives
potential by
unlocking
incremental
growth, then
manage value in
decline

Exhibit 3
In other words, they take a measured, step-wise approach, where each step must
make money and add capabilities. It goes like this:
! Secure growth options through intensive search, whether through
your own R&D, a pilot program, a test market, a small acquisition, a
minority investment in a start-up or potential acquisition, a foothold
abroad, an export sales force or some other avenue.
! Test business models to confirm direction. Here the aim is to
develop a market-based understanding of what works, to discover
which capabilities are critical and to assess whether and how much
commercial potential there is.
! Replicate proven business model to secure your market position. If
the model proves commercially viable, replicate and extend the
staircase: as growth accelerates, more investment will be required.
! Manage for profitability to ensure operational superiority. No tree
and no business - grows forever. In this stage, the key is extracting
value from cost reduction, incremental extension and continuous
renewal.

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4.4. Securing Advantage through Capabilities

Traditional operating skills, such as marketing, IT management, product design

and manufacturing, are essential to success, but they are not the only capability
sustained growth companies use to their advantage. They also have learned to
leverage three other classes of resources:
! Privileged assets. These are hard-to-replicate assets that give
companies a distinct competitive advantage e. g., a particularly
strong distribution network, brand or reputation, customer data
base, infrastructure and intellectual property.
! Growth-enabling skills. Skills in mergers and acquisitions,
alliance-building and risk management and other non-operating
capabilities can be usefully applied across market and business unit
boundaries.
! Special relationships. When a company has special relationships
with customers, suppliers or connected individuals in business and
government, it can mean an entr to otherwise inaccessible
opportunities.
Lasting competitive advantage comes only when companies take and keep
control of the critical capabilities for each step of the staircase. Opportunities
that are less critical can be outsourced or controlled by others. Keeping control
of the staircase longer run means more: Creating a bundle of distinctive
capabilities. As each new capability is added, the advantage becomes
increasingly difficult to replicate.

4.5. Winning through execution

Building a successful staircase requires overcoming both the uncertainty of the

marketplace and the resistance, intended or not, of the rest of the organization.
This requires a company to:
! Adapt the business model. What turns a good model into a
blockbuster business is often the willingness to adapt. Successful
entrepreneurs may launch a business quickly, but tend to do it in a
measured way, focusing more on learning than on planning. Setting
milestones to force answers to these questions can facilitate this
process:
How does the model work best in the marketplace? Pilots can
provide valuable feedback, but performing one in every aspect of
a model is prohibitively expensive. The scope of a pilot must
therefore have a sharp focus.

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 How far can growth potential be stretched? Once a company has
learned and adapted to the market, the next challenge is assessing
its growth potential of additional steps to the staircase.
How can we jump to new staircases? The replication of the
business model usually yields rich insights about other potential
staircases. Horizon 2 activities, for example, tend to generate
Horizon 3 options in its wake. The management challenge is to
capture and act on them without distracting the roll-out process.
! Protect a new staircase. Big companies tend to eat their young.
People in Horizon 1 businesses are especially hostile when new
ventures threaten to cannibalize their base. Fledgling businesses also
have different management needs. Senior management must
therefore make a special commitment to their young, to:
Shelter and feed them. Many large, innovative companies
protect new staircases by "cocooning" them from the corporate
body. This allows the start-up the freedom it needs, while
providing it with valuable resources at the same time. This
creates a small company environment that fosters creativity,
focus, and empathy.
Exempt them from Horizon 1 management systems.
Mechanisms for running a largely predictable Horizon 1
operation suit neither the demands of fast-growing Horizon 2
businesses, nor the open-ended nature of Horizon 3 projects.
New staircases may be better built when managers do not have to
meet these more rigid planning and budgeting standards.

4.6. Managing by Horizon

To sustain growth, companies must institutionalize the process of business

building, providing differentiated systems for each horizon in these three areas:
! Talent management. Without the support of talented people, even
brilliantly crafted strategies and inspiring visions soon lose their
edge. Not surprisingly, the talents required to effectively manage
the different horizons vary significantly. Because they also seldom
come together in one person, it makes sense to look for people who
best exemplify these three different types:
Horizon 1 - The operators, those with in-depth functional and/or
industry expertise, as well as strong drive to achieve in a
conventional sense. Companies can best motivate these managers
using straightforward rewards and penalties for short-term
performance.

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 Horizon 2 The business builders, who are entrepreneurial by
nature - comfortable with ambiguity and change. These are big
picture people who know how to make tough decisions fast. To
get and keep managers like these, they must have the freedom to
act and the opportunity to earn major cash and equity bonuses.
Horizon 3 - The visionaries, the most unconventional of the
three. These are people often motivated strongly by recognition
of their ideas, although financial rewards are not unimportant.
Not a few wish to try their entrepreneurial skills as well. They
require the most intellectual freedom the company can manage to
give them.

An immediate injection of outside talent of all three kinds is usually

necessary to generate the energy required for a successful kickstart
to growth.

! Performance management. While targets must make sense as a

whole for the company, they must be differentiated by horizon to
encourage the right behavior for each.
Horizon 1 Short-term, bottom-line results, as measured by
earnings, cash flow, return on invested capital, costs and/or
productivity
Horizon 2 - Growth and capital productivity, as measured by
revenue growth, market share, new customer acquisitions,
earnings, capital investment efficiency, expected net present value
Horizon 3 Pay-off size and probability of success, as measured
by progress to milestones, option valuation, rate of conversion
from idea to business launch, number of initiatives.

4.7. Organizing for sustained growth

How to balance the advantages of scale against those of smallness is a classic

organizational dilemma. For successful growth companies, decisions are clearly
weighted toward the small, although they do tend to centralize broadly
applicable special services, such as merger and acquisition skills. In particular,
sustained growth companies we observed tend to make a regular habit of:
! Creating small communities in order to increase organizational
flexibility and foster a feeling of personal ownership e.g., by
Splitting the organization into independent operating companies

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 Organizing by team or project group, especially in network-
based businesses and those with very large plants
Spinning off small units, usually sharing ownership with a
partner having special capabilities.

! Shaping new communities. Effectively managing the portfolio of

activities in the three horizons can mean an almost constant
reshaping of the corporate structure. Despite the benefits of smaller
communities, many of the best growth opportunities may still lie in
the no man's land between business units - requiring their individual
capabilities, yet outside of their basic strategic focus. In cases like
this, top management can graft an undernourished activity closer to
the corporate center as a division or a group in its own right or carve
it out of an existing business.

! Connecting communities. Many shared services can be justified by

economies of scale. It is especially critical - and common among
sustained growers - for corporate headquarters to develop and offer
growth-enabling and other non-operating skills. Having expertise
in-house tends to encourage people to pursue acquisitions more
freely, while increasing cost-efficiency. Top growth companies also
work to connect individual communities with each other through
idea-sharing events and other mechanisms. These are useful forums
through which to exchange both ideas and capabilities for the overall
benefit of the company. Here are some connection projects in the
automotive supply industry:

Those carrying out projects with customers or suppliers

(1997 average)
Pre-production Post-production None

Innovators 58% 26% 16%

Non-Innovators 36% 26% 37%

With customers only With customers and suppliers

(in % of R&D teams) (in % of R&D teams)
Commodity Suppliers 31% 13%
Component Specialists 19% 25%

System Developers 20% 28%

Integrated Partners 21% 36%

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Maintaining organizational conviction and momentum to grow can be a
daunting task. The challenges are certainly there! The trick is to keep people
inspired about meeting them. In this website, we described some of the ways
through which high-growth companies managed to do this. But of course, this is
meant only to give you an overview. Interested? What about your company?
Give us a call and well arrange a first discussion. The Alchemy of Growth.
It can make a difference.

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