Ready,
Set, Grow?
Deciding how (and when) to reinvigorate growth
now ranks as a CFO's biggest challenge.
Kate O'Sullivan
CFO Magazine
May 1, 2010
Cutting. Tightening. Restricting. Limiting. Scrutinizing. Postponing.
And, of course, laying off. Those activities have dominated corporate
life for the past two years as companies have endured the endless
economic winter known as the Great Recession. Many CFOs now say,
however, that a change of season is upon us. Instead of hunkering
down they are lifting their heads, studying the horizon, and thinking
about expansion, not contraction.
But determining when and how to move from a conservative, defensive
position to a more aggressive, growth-oriented stance may be the
single biggest challenge facing finance executives today. The
economic signals are decidedly mixed, and while CFO optimism is
on the rise, as measured by the most recent quarterly Duke University/CFO
Magazine Global Business Outlook Survey, CFOs are wary of ramping
up too quickly to seize opportunities that may not materialize.
In fact, while companies differ in their renewed quest for growth,
they all share one trait: caution. With GDP growth expected to
hover in the low single digits for at least several years, and
with consumer spending blunted by lingering unemployment, growth
will likely spring from improved execution and a very careful
reading of customer needs.
That's as it should be, says Edward Hess, a professor at the
University of Virginia's Darden School of Business and the author
of Smart Growth, a new book that studies the way in which successful
growth companies approach innovation and expansion. "Don't
look at growth in terms of large bets," he says. "Look
at growth as multiple small experiments that are cheaply made
to see what resonates with customers. Don't bet the ranch."
But what about the theory of risk and reward, and the fear
that by taking only incremental steps a business will lose ground
to bolder competitors? Hess argues that the big moves that make
headlines don't necessarily result in sustained growth. In fact,
they may be counterproductive. "Many companies that have
been great growth companies for 20 years have not done anything
innovative," he says. "They've continued to evolve and
move out from their core. They add new products, services, and
things their customers want."
That view resonates with finance executives charting growth strategies
today. Most are sticking close to their core: investing in the
existing business to achieve incremental improvements and gain
market share; making trade-offs within the business to focus on
the highest-potential projects; changing their pricing strategy
and product mix to better meet changed customer needs and demands;
and looking to expand in new geographic markets or product lines
— but only ones in which they already have a secure foothold.
Some are also considering carefully vetted strategic acquisitions.
Are you ready to focus on growth? If so, your fellow CFOs suggest
that you:
Cultivate What You Have While it may not be glamorous,
spending wisely on the existing business can strengthen a company's
brand and build its market share. "In the current environment,
you don't have the luxury of investing huge dollars with long
rollouts and being wrong," Hess says. "You've got to
hit lots of singles and doubles by looking at improvements to
existing products and services."
Brad Richmond, CFO at Darden Restaurants, the $7.2 billion restaurant
chain, agrees. "Right now I'm probably not going to make
the bigger bets," he says. "I'm going to play the higher-probability,
more-near-term moves, but I'm still going to keep growing the
business."
For example, the company, which owns and operates such brands
as Olive Garden, Red Lobster, and The Capital Grille, has begun
renovating nearly 700 Red Lobster restaurants at a cost of $350,000
per location. Darden, which is also completing a similar overhaul
of its Longhorn Steakhouse chain, rigorously tested different
investment levels — high investment in an exterior remodel
with low investment in interior design, and vice versa, and all
permutations in between — before arriving at the $350,000
solution. The remodel initiative is part of a broader brand positioning
to boost same-restaurant sales, a strategy that Richmond says
is "the most profitable kind of growth you can have because
you don't have to create a whole new infrastructure."
For Gary Shell, finance chief at EMS Technologies, a midsize
maker of mobile technology for the logistics and aviation industries,
growth in the short term will come from a thorough integration
of the three businesses the company acquired during a buying binge
that began in late 2008. "We're going to try to wring out
every possible thing we can from fitting those businesses together
before we invest heavily in some new opportunity," he says.
Increased marketing and sales spending, for example, should help
the company cross-sell its broader product line.
The company will also invest in new product development, but
Shell plans to watch competitors carefully to determine just how
much to spend, and when. "We're a leader in the aviation
market, and as the recovery continues, I expect competitors to
try to take share away from us," he says. "That will
spur us to invest more to maintain our competitive edge."
Pick Your Spots CFOs have always framed growth in terms
of trade-offs — limited resources mean that not every great
idea can be pursued — but that balancing act is more delicate
in these early days of recovery.
Judy Schmeling, finance chief at HSNi, which sells home goods,
apparel, and other products through its television network, Website,
and catalog division, says that although the company's largest
division recently closed a record-breaking quarter, she's still
proceeding with caution. "While I want everyone to share
in the enthusiasm, you also need to contain it," she says.
"You don't want spending to get out of control. But we are
investing in areas that make sense for us, particularly in innovation."
Last year the company unveiled an iPhone app and invested in
its Website, updating the checkout process and adding product
ratings and customer wish lists. HSNi also made a large investment
in its television network by upgrading to a high-definition format,
and experimented with new marketing efforts such as mailing targeted
catalogs, a successful initiative that the company will expand
this year.
To offset that spending, however, HSNi delayed infrastructure
investments in its offices and decided to continue to use existing
sets for some television programs, rather than doing its usual
total refresh.
Meet the Customer Halfway Before investing a penny, however,
CFOs may want to begin with a little research. "A key step
in moving from cost-cutting to growth is to talk to your customers
about their needs," Hess says. "How can you help them
make money or save money?" Such an analysis may reveal that
customers' needs have changed during the recession; the company
that moves first and fastest to meet those new requirements could
find a new avenue for growth.
At Coach, the $3.3 billion handbag and accessories company, one
of the few advantages of being in the retail business during the
recession was the ability to quickly gauge its impact on customers.
"You get your report card every day," says CFO Mike
Devine. "You're able to see in real time how the consumer
is operating and responding to the product and the economy in
general." Coach saw traffic into its stores slowing in the
fall of 2008, and that December suffered what Devine dubs "the
Christmas that never came."
Coach quickly took action. Having enjoyed several strong years
as the luxury-handbag market boomed along with the economy, the
retailer had been able to increase its average handbag price from
$208 in 2003 to $337 by the beginning of 2009. That price point
soon became a liability as the economy soured, however, and customers
stopped buying.
Coach sought new materials to use in products and negotiated
better prices with materials suppliers. The company's designers
created new bags and accessories that incorporated less-expensive
materials, like canvas rather than leather, and launched a marketing
campaign around the new line, openly promoting the lower price
in e-mails to customers.
By summer 2009, the average bag price had dropped to $289, but
handbag sales, which had slipped from nearly 60% of sales to 50%,
were edging back to normal. "That really helped reinvigorate
growth," says Devine.
Even as it boosted sales by tinkering with its product mix, Coach
still faced another challenge — its two primary markets,
the United States and Japan, which together make up more than
90% of the company's business, remained mired in recession. "We
realized that while there were things we could do to affect U.S.
consumer spending, we were unlikely to immediately return to 2007
spending levels," says Devine. "For us to become a growth
company again, we were going to need to intensify our focus on
international growth."
As a result, Coach is expanding its presence in China, where
it had some $30 million in sales in fiscal 2008 but very little
brand awareness — just 8% of Chinese consumers knew about
Coach, versus 72% in the United States. When sales in China grew
to $50 million in 2009, "we became confident that the Coach
brand could really resonate there as China's middle class grew
by leaps and bounds," says Devine. The company hired more
staff locally, increased the number of New York–based staff
overseeing the international business, and launched marketing
campaigns in China. Coach also bought its distributor in the region.
This year, Devine says he expects revenue in China to double.
Next up, Western Europe, where the market is more competitive
but where the Coach brand has made inroads in recent years as
more European shoppers have traveled to the United States.
Companies that have already gone global may find that they can
do it again, this time with a focus on new markets and a more
granular view of customer needs. German manufacturing giant Siemens,
for example, is exploring new industries and new technologies
in its push for growth. "The single biggest growth area for
us is in the renewable-energy space," says finance chief
Joe Kaeser, who adds that although the economic cycle has taken
a modest toll on the sector, "we see the business getting
a lot of advantage from the sustainability and environmental discussions
going on around the world."
Siemens is also focusing on developing products tailored to the
specific needs of individual developing markets, says Kaeser.
"It's important to find demand locally. It's not about exporting
a product to an emerging market and then getting the check. It's
about engineering solutions in those respective countries."
Kaeser gives the example of a trip to an Indian hospital by a
Siemens executive who was touting the benefits of the company's
new MRI machine. The doctor he met with acknowledged that he might
be interested in buying such a device, but brought the Siemens
senior executive into a large room where 60 women were about to
deliver babies. Instead of a new MRI, he said, what would be really
helpful would be some technology to monitor all of the women's
progress and determine which patient needed a doctor's help first.
"This is just one example of how unique local requirements
can help shape market solutions," says Kaeser. "Don't
provide an American or a German solution to India; they need an
Indian solution. That's how growth happens."
Go Shopping For companies with comfortable cash balances,
the time could also be right for an acquisition, though not necessarily
a splashy, headline-making deal. "Good growth companies,"
says the Darden School's Hess, "tend to make acquisitions
that are small and very strategic, like the acquisition of a technology
or product or customer segment or geographic segment." Cisco
Systems is a veritable poster child for that strategy, and Hess
says it is a model more companies should follow: deals that are
relatively inexpensive and therefore lower risk "are wise
now."
At HSNi, "we've built up a substantial cash position and
we are looking at possible opportunities to take advantage of
the weak environment to acquire some businesses that make sense
for us," says Schmeling. Vetting those targets properly is
one of her top concerns, however, and the process looks to be
a lengthy one, as she and her business-development and strategy
groups search for targets that will prove to be both an excellent
fit and a very good value.
Richmond of Darden Restaurants says an acquisition isn't in the
company's plans at the moment, although he is keeping an eye on
potential targets. "There are lots of great valuations out
there," he says, "but I don't know if that makes for
great deals." He does acknowledge the possible need to make
a purchase eventually to continue to grow over the long term,
but says it will likely be another restaurant chain that Darden
can bring under its umbrella — not a food supplier, restaurant
technology provider, or other peripheral acquisition.
Whether by improving and adjusting existing products, bringing
products into new markets, or buying new customer segments or
technology, finance chiefs are testing a variety of growth strategies
to determine what will work in an environment marked by caution.
It's challenging, to be sure, but many say they welcome the chance
to focus on expansion. In fact, with uncharacteristic optimism,
many insist that their businesses will find a way to grow despite
lingering macroeconomic malaise.
"The world has got more opportunities than issues right
now. We need to make sure our organization looks at the opportunities
and doesn't complain about the issues," says Siemens's Kaeser.
"If global GDP is down by 2%, that means that 98% of GDP
is intact. Unless you have 100% market share, why complain about
GDP being down by 2% or 3%?"
Kate O'Sullivan is senior editor for strategy at CFO.
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