Setting a Course for Growth

Within the next few years, energy and utility companies will be operating in
a more disaggregated, multinational industry. The demands of this new market
will drive companies to transform into larger, more dynamic and better-focused
organizations. Market-driven corporate structures will replace today’s largely
regulatory-driven ones. Companies will need to optimize their use of assets
and resources and meet the diverse demands of competitive and regulated businesses
in multiple geographies. One of the key requirements to be a leader in this
newly forged industry structure will be the ability to focus on and fully exploit
competencies that support growth.

As companies turn their attention to growth, they confront critical questions
about how to successfully execute growth strategies. Earlier in this book we
overviewed a recent IBM study. (See 2004 IBM survey cited in “Prioritizing Growth,”
page 8.) Based on that, a growth framework that emphasizes the best practices
of successful growers in other industries emerges. Companies that wish to achieve
strong long-term growth must excel in all three vital strategic disciplines:
course, capability and conviction.

The Winning Formula

Course: The Paths to Growth Are Many

Clear strategic direction is fundamental to success, yet its formulation and
adaptation generates divergent ideas and vigorous debate. To learn what works,
we examined the growth records of more than 60 companies. Our goal was to determine
what strategic principles are associated with their success. This review suggested
that the shaping and adapting of a successful course could be largely attributed
to superior application of four principles.

1. Develop a Point of View on the Future

Successful growers have a clear point of view on where their industry is headed.
Regulations change; customers exhibit new aggregate patterns of behavior; new
or disruptive technologies proliferate and new competitors arise; and successful
growers have a point of view on how to exploit these changes. That said, they
recognize they are not clairvoyant and revisit their point of view periodically.

Successful growers use a number of levers to put this principle into action.
They:

  • Understand the forces that have an impact on the industry and how they shape
    its future;
  • Demand and recognize insights from the business units and senior management
    on where value will be created;
  • Acknowledge areas of uncertainty and continually reassess the point of view;
    and
  • Create internal forums for industry and strategic discussion that are independent
    of operational reviews.

2. Continuously Evolve the Product-Market Portfolio

Successful growers evolve their product-market portfolio on an ongoing basis.
Even seemingly rock-steady firms exhibit a level of restless change behind the
scenes. While they stay grounded by understanding their true strengths, they
seek new opportunities to leverage their capabilities. To bring this principle
to life, they:

  • Take an expansive, customer-based view of markets not limited by current
    definitions of product and service categories;
  • Understand the potential and respect the limits of the company’s capabilities;
  • Realign the portfolio based on the attractiveness of opportunities and their
    fit with capabilities;
  • Consider alliances, acquisitions and divestitures, if necessary, and build
    the ability to execute and integrate transactions; and
  • Develop an external new business network, and over time formulate an internal
    venture capital capability.

3. Develop a Competitive Model

Bold industry-level visions notwithstanding, successful growers keep a sharp
eye on their competitive proposition and how it is working on the ground, market
by market, deal by deal. They:

  • Use customer, competitive and technology insights to create compelling value
    propositions;
  • Define the ways they can beat competitors in delivering and capturing value;
    and
  • Influence the environment through active participation in industry groups,
    regulatory and legislative processes and research consortia to shift the game.

4. Create and Sustain Multiple Growth Initiatives

No matter how successful, every strategy has a limited shelf life.

Successful growers sustain the growth quest by developing multiple growth initiatives,
allowing the company to draw from a portfolio of options. Chosen initiatives
must comprise a consistent, mutuallyreinforcing whole and cannot be simply an
aggregation of disconnected projects. Successful growers:

  • Create multiple, mutually-reinforcing growth initiatives sufficient to achieve
    growth goals;
  • Build management systems to nurture initiatives through development stages,
    each with different needs; and
  • Maintain ongoing focus on cost and asset management to create funding for
    growth initiatives.

Capability: The Paths to Growth Rest on Strengths

Whichever growth path a company chooses, it is vital to align the operational
model with the capabilities that are the sustaining foundation of the overall
strategy.

As Table 1 shows, each major growth path requires a different set of capabilities.
Successful growers develop their capabilities methodically, harnessing process,
organizational and technological elements to create an ingrained, repeatable
strength. To develop and align their capabilities, leaders in growth:

  • Define operational models and capabilities against chosen growth strategies;
    identify required changes as strategies evolve; and close gaps;
  • Overcome the inertia of existing power structures to realign the model where
    necessary; and
  • Consider alliances and acquisitions if necessary to develop timely capabilities.

Building effective capabilities can drive growth that outpaces industry performance.
Figure 1 illustrates one example: Companies in this industry that develop strong
innovation capabilities and align them with their product and innovation strategy
consistently outperform their peers.

Conviction: Are You for Real?

Course and capability are necessary, but not sufficient conditions for successful
growth. A company must also demonstrate conviction to growth in both word and
action. Growth requires constant change, but this change can be wrenching and
organizations often resist it.

Successful growers develop a culture that embraces change and identifies leaders
with the passion to make it stick. When setbacks occur, these companies have
the resilience to bounce back. To drive this conviction deep into the organization,
they:

  • Create an inspiring purpose and ambitious goals;
  • Communicate a believable and consistent growth strategy to employees and
    investors;
  • Establish an effective system of metrics and incentives against market and
    capability initiatives;
  • Foster a culture of honest, fact-based debate on strategy and performance,
    and create management forums and processes to support it; and
  • Stay alert to organizational impediments and act quickly to unblock them.

Putting It Together

We have examined each of the three C’s – course, capability, conviction – individually.
How do successful growers put them together in practice? What happens when they
become disjointed or diverge?

Hit the High C’s

In our work, we found that successful growers not only score higher on the
three C’s in aggregate, they score higher on each of the three C’s, with a far
lower variation in performance than other companies (see Figure 2). This finding
suggests one reason why growth is often so difficult: to succeed, businesses
– like triathletes – need to excel in all three areas of the game, all the time.

Course, capability and conviction are equally important to achieving and sustaining
growth over the long term. In the short term, a smart strategy may be able to
compensate for weak capabilities – but any success it achieves will be fleeting.
Neither will a superior combination of strategy and capability lead to growth
if the organization does not believe the commitment is real, or if management
is unable to convert its intent into corresponding action.

Consider the legacy of AT&T Wireless. Early in the wireless industry’s development,
the company set a course for robust growth by aggressively buying spectrum to
establish a broad presence across the U.S. market and build its brand. The company
recognized that its superior network coverage offered the potential for rate
plans without roaming charges. Its launch of the U.S. market’s first “national
onerate” plan drove rapid share gains.[1] Over time, the strong sense of conviction
that AT&T Wireless had inherited from its founding entity, McCaw Cellular, waned.
Increasing control from AT&T corporate and a series of leadership changes depleted
the company’s entrepreneurial spirit, prompted the departure of employees and,
eventually, undermined the company commitment to its course.

It had developed one of the most effective strategies in the industry but would
ultimately fall short in the areas of capability and conviction. Despite positioning
itself for strong growth and building significant market share, it failed to
fully develop corresponding capability (network and customer service capacity)
to support the increased volume. It fell behind competitors in building out
adequate coverage to support a genuinely national service, instead remaining
dependent on other providers for coverage in key markets. When quality began
to suffer and complaints mounted, AT&T Wireless was unprepared to respond.[2]

By 2003, AT&T Wireless, at this point an independent company spun off from
AT&T, had suffered declining growth and negative shareholder return over the
period. As a result, by 2004, AT&T Wireless was an acquisition candidate (and
completed a merger with Cingular Wireless late in 2004).

Align the 3C’s

To be effective, the three C’s must also be developed and aligned in an integrated
manner. Procter and Gamble exemplifies a successful approach to this alignment.

In the late 1990s, based on its strengths in branding, innovation and go-to-market
capability with global scale, P&G decided to pursue a new course. It moved to
steadily shift its portfolio away from staid categories like food and toward
categories like beauty and healthcare that offered higher returns on innovation
and global scale. P&G realized that winning in these markets would require a
fast pace of product introduction and sought to streamline the organization
to strengthen this capability. In 1999, it launched the Organization 2005 initiative,
which shifted authority from country general managers to newly created business
units that would drive new innovations globally.[3] While this realignment was
central to its goal of enabling faster deployment of innovation, it altered
the company’s longestablished management structure in fundamental ways. Now,
five years later, the radical shift appears to have been successful.

P&G also realized that to meet its growth goals, it needed to drive a greater
number of product introductions than it could generate in its own labs. To accomplish
this, it adopted an explicit course of driving half its innovations from ideas
sourced outside the company and created a network of external partners that
included contributions from academia and even competitors. Making this happen
required conviction to change a proud R&D culture that valued its unique capability,
most clearly demonstrated by P&G’s new R&D leader, who explicitly stated that
the best ideas need not come from within the company.[4]

Recent developments show the fruits of this conviction. When P&G reinvented
the cleaning category with the introduction of Swiffer in 2001, the success
owed much to technology licensed from a Japanese competitor.[5] P&G management
has since broken new ground in exploiting its own technology in new ways by
forming a joint venture with competitor Clorox to commercialize technologies
it developed. These instances are a far cry from its previous “go-it-alone”
R&D culture.

The results of these changes speak for themselves. Not only did P&G outperform
its industry during the decade, achieving annualized shareholder return of 15
percent over the period, it has also corrected missteps and accelerated its
growth in each of the last three years. While remaining an iconic leader in
its industry, behind the scenes, the P&G of today is very different – in terms
of portfolio and organization – than the P&G of a decade ago.

Evolve the 3C’s

No competitive model is successful forever. Sooner or later, every growth path
runs its course and needs reinvention. Successful growers not only align the
three C’s to begin with, they also evolve them over time.

Another successful grower, global telecom leader Vodafone, demonstrates this
well. In the 1990s, it sought to project its “mobile only” business model on
a global scale, pursuing an aggressive, acquisition-led course by acquiring
established players in mature markets and newer entrants in developing markets.
At the same time, it divested businesses obtained through acquisition that did
not fit with its mobile-only strategy. To execute its strategy, Vodafone developed
strong capabilities to identify and execute large global acquisitions. It successfully
drove financial integration and controlled costs, earning it the respect of
the investment community. This, in turn, translated into higher valuations,
providing currency for subsequent acquisitions.[6] The results? Vodafone enjoyed
a very successful decade, boasting almost 50 percent compound annual growth
rate and 16 percent annualized shareholder return.

But the game has changed and Vodafone is in the midst of evolving its model
significantly around each of the three C’s, adapting its course from conquest
to consolidation. It now seeks to exploit the global scale it has built to create
greater global leverage of technology, procurement, and customers. The new course
requires new capabilities, and Vodafone is integrating its technology platform
across markets as well as converging its phone models to better leverage clout
with suppliers.

Despite struggling to overcome barriers, management is seeking to replace the
company’s deal-making focus with an operations focus and has communicated resolve
to see the changes through.

Conclusion

To successfully grow, utilities will need to escape the geographic and regulatory
boundaries that have constrained – and protected – them in the past, presenting
executives with profound challenges. But these challenges are not without precedent.
The experience of successful growth companies in other industries (some of which,
such as telecommunications, have undergone similar radical regulatory and structural
change) can be instructive and provide guidelines for pursuit of growth initiatives.

Successful growers set the right course – or growth direction – by forming
a clear point of view on the future, evolving their productmarket portfolio
without being limited by geographical or historical boundaries, building a competitive
model to win and pursuing reinforcing initiatives to sustain growth. They truly
understand their capability – based on realistic assessments of strengths and
limitations – and evolve the operational model to support the growth strategy.
Successful growers also build organizationwide conviction for growth plans that
translate intent into living, breathing action on the front line.

A new world is opening for energy and utility companies, both more complex
and perilous, but also more exciting and rewarding. This world will cultivate
scale, efficiency and innovation, rewarding the best-prepared and hardest-working
with value beyond anything achievable in past years. Companies that can manage
a balanced portfolio of regulated and unregulated assets under a growth agenda
based on the 3C’s will be well positioned to reap the rewards of competition
– and define a leading role in this new world.

Endnotes

  1. Richman, Dan. “The Fall of AT&T Wireless.” Seattle Post-Intelligencer. Sept.
    21, 2004.
  2. Ibid.
  3. “Moody’s downgrades long-term rating of Procter & Gamble (Senior to Aa3)
    – Confirms short-term rating at prime-1 – Outlook stable.” Moody’s Investor
    Service Press Release. Oct. 19, 2001.
  4. “P & G – How A.G. Lafley is revolutionizing a bastion of corporate conservatism.”
    BusinessWeek. July 7, 2003.
  5. “Japan proves new-product gold mine for P&G.” Nikkei Weekly. July 12, 2004.
  6. “Vodafone posts £4bn profit.” BBC News Online. May 29, 2001.