I have always believed that growth is at the heart of great companies. And I am not alone – regularly achieving profitable growth is consistently ranked as the top priority of American business leaders. Many achieve it, only to have trouble sustaining it. Effectively maintaining profitable growth is increasingly difficult.
How difficult?
Over the past 40 years the average profitability of U.S. companies, measured as asset-weighted return on assets, has steadily declined, from nearly 5 percent to half a percent. Returns for the bottom 10 percent of companies have plummeted, but life at the top isn’t easy either; churn there has been increasing. Meanwhile, more and more companies that want to be leaders instead find themselves stuck in the middle.
Breaking out of the middle requires CEOs to constantly tackle new threats and opportunities, and to be willing to recalibrate their businesses regularly to achieve growth. This is an era of financial crisis and recession threats combined with significant change. Many companies are hunkering down and avoiding risk. Some, looking to grow through new product development or acquisitions, have failed to maintain quality in their core business and have suffered as a result. But there are still paths to success, provided CEOs at growth companies navigate four fundamental changes: the importance of China and other developing markets, the aging of populations around the world, the rise in commodity prices, and the transformational effects of technological advances.
To maintain performance and ensure quality in a company’s primary business – whether product or service - the challenge is to execute against strategic objectives despite marketplace conditions that are not only different from what executives originally envisioned but that are still evolving. Recalibrating execution requires three capabilities:
- Sensing the need to change – knowing when to act.
- Shaping the organization to respond to growth opportunities and challenges – knowing what to do.
- Scaling the organization in response to rapid demand fluctuations – knowing how much flexibility to create.
Applying the three capabilities in the face of the four fundamental shifts will enable companies to become what I call “growth-intelligent” businesses. Here are some thoughts and examples on how these skills can be put into action:
Sensing
Sensing is a way to capture accurate and timely marketplace data. At Deloitte, we are always enhancing our ability to scan for new developments that affect our various businesses and the clients we serve. With respect to emerging markets and trends, for example, we want to track global demand patterns and economic signals, identify emerging market disruptors, leverage extended networks to improve market intelligence, and grasp what the markets value and at what price points.
Take commodities. Effective sensing means tracking demand patterns for current and substitute commodities and developing contingency plans with the aid of methods such as scenario planning. Deloitte is helping utilities to advance smart grid infrastructure that will improve their ability to monitor and shape future demand for coal, natural gas, and other fuels.
As technology advances proliferate and gain traction, companies will have to be very good at identifying and understanding new features, functions, and capabilities. Harnessing these new tools to improve sensing capabilities will be essential to adjusting execution to achieve established strategic objectives.
Shaping
As developing countries join the ranks of major national markets, it is critical for businesses to avoid replicating business models formulated solely for the developed-market context. At Deloitte, we augment existing expertise and know-how with specific on-the-ground capabilities to better shape our business models to individual markets.
Another element of business that needs to be effectively shaped for success is the workforce. To handle the effects of aging populations, we need to focus on older consumers, adjusting our talent models to align with the needs of an aging workforce – sourcing, career paths, part-time options – and create new opportunities as a business community to ignite worker passion. Many companies are adopting healthy-living programs for their employees. We use a “lattice” rather than a “ladder” approach to careers, which has opened up more varied pathways to growth and development for our professionals and enabled us to foster quality performers and performance.
Shaping also applies to addressing the changes in commodity markets that affect supply chains. These can make it necessary to rethink product design, packaging design, sourcing, manufacturing, and distribution processes with an eye towards reducing commodity costs and localizing efforts. (All this is a lot of work, I know. It’s also worth it.)
Scaling
Scaling is especially relevant to emerging markets. To achieve proper scaling in emerging markets, companies should consider leveraging the assets and resources of other organizations to rapidly build capabilities to handle volume changes and volatility. Joint ventures with other firms in several developing countries can also help to spread risk and enable fast growth as needed.
In an era of shifting demographics, it is imperative to amplify recruiting efforts, increase talent mobility and flexibility options, and rapidly scale new products aimed at aging populations. Effective scaling also requires using new technologies to provide less capital intensive platforms such as cloud computing, and collaborating to achieve expansion through extended network and relationships.
Mastering growth intelligence
Make no mistake about it; the shifts described here are all underway, and primed to make an impact. CEOs must be ready for them. Mastering the sensing, shaping, and scaling capabilities is essential to effectively recalibrate execution, maintain quality in the company’s core business and deliver on strategies amid challenging conditions. CEOs who can find the opportunities and cope with the threats inherent in today’s marketplace can avoid the category of poor performers as well as an extended stay in the mediocre middle.
Joe Echevarria is CEO of Deloitte LLP. He joined the Deloitte U.S. Firms in 1978 and became an audit partner in 1988. Since that time, he has held a wide range of leadership positions, most recently U.S. Managing Partner — Operations. Before that, Echevarria served in a number of leadership roles such as Regional Managing Partner of the Southeast Audit Practice, Audit Partner in Charge of Florida, and Audit Partner in Charge of South Florida. He represents the organization's commitment to leading the profession and setting the standard of audit excellence.