growththe - american marketing association · reach a similar conclusion in a spring 1999 sloan...

M M N o v e m b e r / D e c e m b e r 2 0 0 3 ❘ 15

Feedingthe

GrowthStrategy

Corporate leaders are feeling the squeeze

between pressure by equity markets for sustained

earnings growth and the shrinking growth oppor-

tunities in their saturated and hotly contested

markets. This squeeze is being worsened by

recent stock market events, which have slowed

growth by stock swap acquisitions and precluded

accounting manipulations that artificially grow

earnings. This puts organic growth close to the

top of the personal agendas of most CEOs.

Will CEOs get much help from marketing in

resolving their organic growth dilemma? The

growth gurus, including Clay Christensen,

Richard Foster, Gary Hamel, and C.K. Prahalad,

are dismissive. In their views, marketing is too

close to the immediate demands and require-

ments of current customers and competitors to

Marketing must play a larger role incorporate growth discussions.

B Y G E O R G E S . D A Y

16 ❘ M M N o v e m b e r / D e c e m b e r 2 0 0 3

contribute breakthrough sources of growth. At the same time,new organizational forms are subordinating marketing’s tradi-tional functional role in the innovation process.

I challenge this restrictive view because it is not in theorganization’s best interest to have marketing performingbelow potential. Rather, I believe good marketing practice canenhance fast-paced growth.

Why Grow?The growth imperative is shaped by four forces that

impinge on top management by imposing constraints andrequiring challenging objectives. (See Exhibit 1.) Bonuses arebeing linked to the focus on shareholder value creation, andthe market clearly rewards companies that deliver profitablegrowth.

The achievement of these superior returns is constrainedby demanding customers and intensifying competition. Mostmanagers bemoan that there is too much of everything (exceptcustomers) in their markets. Intensifying competition for thesescarce customers puts continuing pressure on margins and

limits opportunities for profitable differentiation. Meanwhilecustomers play rivals against each other in search of price con-cessions and have become less loyal.

In the face of slow growth markets, how do companiesachieve a high rate of superior growth in total returns toshareholders? In their book Creative Destruction (Currency,2001), Richard Foster and Sara Kaplan make a compelling casethat only substantial or discontinuous innovations deliversuperior shareholder value. They also contend that more than90% of all innovations are “incremental,” meaning they arenecessary for continuous improvement but don’t change thecompetitive balance. W. Chan Kim and Renée Mauborgnereach a similar conclusion in a Spring 1999 Sloan ManagementReview article, finding that 14% of a sample of 100 businesslaunches classified as value innovations (“offering fundamen-tally new and superior buyer value in existing marketsor…enabling a quantum leap in buyer value to create newmarkets”) generated 38% of total revenues and 61% of totalprofits. While their point is that the performance of valueinnovators greatly exceeds that of companies that focus onmatching or beating competitors, it also reinforces the needfor breakthrough or discontinuous innovation in both prod-ucts and business models.

Technology plays a dual role in the quest for superiorreturns. On one hand disruptive technologies frequently offerperformance that the current customers can’t readily use, withlower profits than a business can support. The reluctance ofincumbents to pursue these innovations provides an openingfor new entrants. On the other hand, sustaining technologiesoffer performance improvements for existing customers andhelp established firms maintain their lead by delivering supe-rior value. Is marketing equipped to help top managementfend off attacks from disruptive technologies while capturingthe value from sustaining technologies?

Obstacles to InvolvementAs the growth trajectory accelerates, the marketing func-

tion becomes steadily less significant. This is partly becausethe innovative organizational arrangements needed to managethe uncertainties of a discontinuity tend to subordinate allfunctions. But the main reason is that the skill sets needed toinitiate and manage an array of discontinuous growth strate-gies have been migrating from marketing to other parts of the organization.

Effective marketing can contribute to a firm’s growth through better anticipation of market

opportunities and calibration of risks, a tighter linkage of technological possibilities with

market concepts, and faster adjustment to shifting market needs and competitive moves. But

while marketing is central to a firm’s growth, it runs the risk of being marginalized in important decisions that chart a

growth path. This article explores ways to help marketers play a larger role in strategic discussions about growth.

EXECUTIVEbriefing

Focus onShareholder

Value

IntensifyingCompetition

GrowthImperative

AcceleratingTechnological

Change

• Shorter life cycles

• Discontinuitiesand disruption

• Less loyaltyand more churn

• Changing requirements

• Eroding advantages

• Saturated markets

• Too much of everything

DemandingCustomers

■ Exhibit 1The growth imperative

This is not a healthy development because the strategy dia-logue becomes unbalanced. When internal or technology con-siderations are predominant, the voice of the customers willnot be clearly heard and the ability to match customer needswith technological possibilities is compromised. Before we canpropose a more assertive role for marketing we need to assesseach of these reasons more deeply.

Functional myopia. The myopia of successful firms in gen-eral, and marketing in particular, was revealed most clearly byClay Christensen in his book The Innovator’s Dilemma (HarvardBusiness School Press, 1997). He asked, “Why are firms reluc-tant to participate actively in potentially disruptive technolo-gies that initially attack low-priority peripheral markets?” Heconcluded that mental models that guide how managers makechoices are strongly shaped by their intimate familiarity withexisting customers’ needs and may lead them to under-appre-ciate that the “disruptive” technology may offer different ben-efits that are highly valued by non-customers. They may alsobe misled because of the initial inadequacies in the perform-ance of the disruptive technology and may underestimate thepotential for improvement.

The tendency to fixate on serving and retaining currentcustomers is reinforced by rewards and incentives thatemphasize short-run market share and profitability. Even thestrategy development process is culpable here because theemphasis on competitive benchmarking and competitiveadvantages leads managers to assess what their competitorsare doing and resolve to do it better. As a result, the sales andmarketing groups are quick to match competitive moves and

react to demands from important customers. One healthcareand beauty aid maker found that almost 95% of all its devel-opment projects were package changes, line extensions, andother incremental improvements. Because they were deemedurgent, they crowded out resources for next-generation orplatform projects with longer term payoff.

This portrait particularly indicts the sales and marketingfunctions in firms with a dominant sales and/or product ori-entation. It is surely overdrawn as a characterization of mar-ket-driven organizations. Their culture, capabilities, and con-figuration equip them to better anticipate threats and opportu-nities from outside their served market.

Organizational subordination. Two examples of innova-tive organizational designs will give a flavor of how leadingcompanies are coping with a proliferation of new technologiesand market opportunities, while getting greater productivityfrom their innovation processes. Both are designed to takeadvantage of cross-functional team coordination enabled byadvances in network technologies. Their net effect, however, isto shift the organizational power balance from the functionalgroups toward process-based teams. A related consequence isthat traditional marketing tasks are being dispersed through-out the enterprise.

Procter & Gamble is leading the move away from the tradi-tional R&D model that’s self-sufficient and resource-intensiveto a more fluid and open “Connect & Develop” approach. Theobjective is to better connect the 150 technologies, 8,000researchers, 600 external partners, and 5 global business unitsand improve access to technologies developed outside thecompany. The elements are recognizable: a global technologycouncil to figure out how to leverage all the technology, anInnovationNet that hosts 600 Web sites for global projectteams and captures business-building insights, numerouscommunities of practice, search and information tools for min-ing the scientific literature and global patent data on the Web,and an array of external partnerships. As the schematic inExhibit 2 shows, although consumer insights have manysources and uses, their use does not rely on marketing as thegatekeeper. Marketing research does play a crucial role in thiscomplex web by describing consumer problems and latentneeds that the Connect & Develop network can address.Global firms such as IBM, Citicorp, ABB, and Coca-Cola areevolving toward opportunity-based designs that have two lev-els. The foundation level consists of the business units that dothe day-to-day work, deliver current results, and house theenabling resources in functional, product, industry, or geo-graphic units. On top there are focused “opportunity units,”catalyzed by entrepreneurs from within the firms, who areauthorized to mobilize these resources to pursue break-through opportunities in global accounts that cut across geog-raphies or require integrated solutions from several businessunits. These opportunistic teams combine deep customerknowledge with insights into what is feasible with the firm-wide resource base and prospective technologies and are


1

Consumerinsights

R&Dlabs

Tradepartners

Jointdevelopment

Virtualnetworks

VCs

Alliances

Contractlabs

Researchinstitutions

Suppliers

Employees

Customerteams

■ Exhibit 2From R&D to Connect & Develop

Source: Larry Huston, VP innovation, Procter & Gamble.


given incentives to pursue these non-traditional opportunitieswithout (too much) resistance from their functional or geo-graphic superiors. While the opportunities are likely to bespotted by the sales and marketing groups, the project teamand its leader can be located anywhere. Long gone are thedays where the sales force “owns” the customer or the mar-keting function is the sole source of market insights.

Strategic RequirementsDiscontinuous growth strategies require a different

approach than is appropriate for the incremental growth strategies driven by marketing and sales. Some of these differences can be seen in the contrast of the growthstrategies arrayed along the continuum displayed inExhibit 3.

Penetrate the served market. Most of theseapproaches are in the spirit of continuous improve-ment or kaizen marketing. Because the direct rivals inthe market are watching each other closely, and look-ing for the same edges, the gains are incremental andoften short-lived.

SoBe (South Beach Beverage Company) has becomea leader in the new-age soft drink market by position-ing itself as a healthy refreshment and employing eachof these penetration and expansion strategies. The com-pany used “innovative imitation” to learn from rivalssuch as AriZona Beverage Co., Snapple BeverageCorp., and Mistic Brands, Inc. It didn’t do this just tocopy them but to find out what to avoid. It also exploit-

ed three converging trends: the emphasis on healthier foodsand beverages, the growing acceptance of natural or holistictreatments, and the aging of the baby boomer segment. Theirbrand attitude was quite irreverent, which further helped themstand out from the rivals. Growth was further accelerated byline extensions such as herbal tonics that took them toward theneutraceuticals market. SoBe’s initial market success made iteasier to improve its distribution quality and allowed the com-pany to enter new geographic markets.

Widen the business scope. The more the growth strategyis a discontinuous departure from the current strategy, thegreater the reward—at the cost of increased risk over a longer

time horizon. In the middle of the continuum are strategiesthat edge the firm outward from the served market but staywithin familiar territory. These strategies are often motivatedby two related questions: (1) How can we leverage or extendour existing competencies into adjacent markets? And (2)Which of the functions that our customers perform couldwe perform better? General Electric has used these ques-tions to great effect to guide the evolution of the companyinto services.

The Aircraft Engine Business Group now sells “power bythe hour” with a package of engines, servicing, certification,and financing alternatives and a commitment to deliver theright engine to an aircraft when the airline needs it. A vari-ant of this strategy is to leverage the brand equity into newmarkets where the brand meaning gives it permission to par-ticipate. Sony, Disney, and Virgin have taken this path withsome success.

This strategic trajectory can be accelerated by the conver-gence of supportive trends. Thus FedEx found opportunitiesin global components handling that emerged from trends inglobalized freight flow, outsourcing demands, and Internetavailability. Trends may emerge from fringe markets.Snowboarding, microbreweries, and extreme sports havebecome popular with wider audiences. Another kind oftrend convergence comes from bottlenecks in trade flows

In the face of slowgrowth markets, how docompanies achieve a high rate ofsuperior growth in total returns to shareholders?

Incremental Growth

Initiatives

Penetrate/ExpandServed Market

Expand the Business Scope

Reshape the Industry

• Extend the line

• Reduce defections

• Innovative imitation

• Exploit shifts inneeds/demographics

• Expand geography

• New channels

• Reconfigure the value chain

• Seek adjacentmarkets

• Look for trend convergence

• Leverage brand equity

• Find a new value profile

• Anticipate valuemigration

• Redefine the served market

• Exploit technologicaldiscontinuities

Increasing Rewards

Greater Risks/LongerTime Frames

DiscontinuousGrowth

Strategies

■ Exhibit 3Sources of growth

and efforts to eliminate them. Thus 3M foresaw the need forhospitals to improve patient record retrieval and developed aHealth Information Systems business in response.

Create discontinuous growth strategies. The intent ofthese strategies is to reshape the industry and grab an earlylead. The rewards are high, but so are the risks. The risks offailure will be even higher if the organization is unable toaccept the uncertainty and long payback periods. Because dis-continuous innovations may take years to come to fruition,the organizational processes and incentives must encouragetrial-and-error learning and accept interim failures. Thisrequires a holistic skill base that combines deep insights intomarkets, industry forces, and technological trajectories.

The requisite skills are more likely to be found in corporatedevelopment, R&D, top management, consultants, or special-ized alliance partners. While the marketing function may notplay a significant role, market research is an essential ingredi-ent. There is a misguided belief that neither marketing normost customers are likely to comprehend what is possiblebecause it is outside their experience. But a balanced appraisalof a discontinuity requires an imaginative understanding ofcustomer latent needs, problems, and behaviors.

Discontinuous growth strategies fall into two broad cate-gories. The first exploits a technological discontinuity. Whilenanotechnology, intelligent materials, smart sensors, digitalimaging, and the myriad of breakthroughs in genomics andproteomics promise revolutionary changes, it’s often hard toknow in advance if there will be a disruption.

The second type of discontinuity sees new ways to delivercustomer value through creative strategic thinking but doesn’tdepend on a technological breakthrough. This may meanbreakthrough business designs such as Wal-Mart in discountretailing, Starbucks in coffee, and IKEA in furniture. Thesestrategies redefine the customer’s needs and served market.

Thus Callaway innovated with the Big Bertha to helpgolfers hit the ball more easily rather than simply improvingon the existing club designs. Bloomberg came to the fore inonline financial services by redefining the buyer for data ter-minals as the trader and analyst, rather than focusing on theIT manager. While the former wanted features-rich terminalswith tailored analytical screens, the latter wanted standard-ized systems at the best possible price. Bloomberg thus joineda host of innovators who have disrupted existing industriesby challenging conventional practice and thinking.

Balance risks and rewards. The widespread aversion todiscontinuous growth strategies is a natural fallout of thebeliefs that the potential rewards will come too far in thefuture at too high a risk. Both beliefs have point and weight,especially in light of the recent experience with Internet-based“change the game” start-ups. But these beliefs impose coststhat need to be understood and contained. For example, whilethe actual rewards may be realized far in the future, the equitymarkets account for them in their expectations of (suitablydiscounted) earnings. If the firm is viewed as mired in slow-

growth markets, vulnerable to emerging technologies, andlacking a compelling story about its future growth thrust, thestock price will surely suffer.

Risk aversion may have more crippling consequences.Certainly the probability of success goes down sharply whenthe business ventures beyond incremental initiatives in famil-iar markets. But this should not be an excuse for passivity. It’shealthier to properly calibrate the risks and then seek creativeways to reduce the risk exposure. Guidance on these issuescan be found in the matrix in Exhibit 4 that contrasts the prob-ability of success of different growth paths and helps calibratethe risks of unfamiliar markets and technologies.

Within this matrix there are also some less obvious insightsinto how to contain risks. Starting with the diversification cellwhere the prospects are most dismal, and even acquisitionshave a poor track record, the imaginative strategist can findopportunities to learn. These could be exploratory acquisitionsintended to learn about the market, internal venture groupsthat build capabilities with emerging markets and technolo-gies via licenses, or minority equity stakes in start-ups. Theobjective is to shift the discontinuous innovation into a marketor product development initiative where the risks are morepalatable. The amount at stake can be managed with jointventures, fast-to-market/fast-to-fail prototypes, intensive com-petitive monitoring, and ambidextrous organizationalarrangements that have more tolerance for ambiguity. Here’s


New toCompany

Product

Present

New ProductDevelopment

P(S) =.40 – .55

Diversification

a) Internal innovationsP(S) =.05 – .15

b) AcquisitionP(S) =.35 – .45

Market Development

a) Internal innovationsP(S) =.25 – .30

b) Joint ventureP(S) =.45 – .50

Incremental

P(S) =.60 – .75

Line extensions

Market Expansion

End–Use Market

Present New to Company

P(S) = Probabilities of Success

■ Exhibit 4Balancing risk and reward along the growth path

where marketing should play a crucial role by orchestratingmarket probes and watching competitive moves. What are theprospects that marketing is ready for this challenge?

The Role of MarketingDiscontinuous growth strategies that expand the business

scope or reshape an industry are a different game with unfa-miliar rules for most firms. Those that excel have superiorstrategic imagination, staying power, and ambidextrous organ-izations that can understand and contain the sizeable risks.

The eventual success of a breakthrough innovation alsorequires an informed marketing input to the strat-egy dialogue. Before marketing can make thiscontribution, there must be broader acceptance ofthe view of marketing as put forth by FredWebster in his January/February 2002 MarketingManagement article “Marketing Management inChanging Times.” An organizational orientationthat ensures the primacy of a market perspective,a strategic management responsibility for defin-ing and articulating the eventual value proposi-tion, and a functional specialty with expertise inmarket sensing and demand stimulation must allbe in place simultaneously.

In marketing’s broadest sense, it performs threeroles in improving the prospects for corporategrowth through expanding the business scope, exploiting emerg-ing technologies, or adopting breakthrough business models:

• Navigation through effective market sensing and sharing ofinformation, and early anticipation of market opportunities.

• Articulation by refining and renewing the core value propo-sition in light of emerging opportunities. The main issuehere is to link technological possibilities with valid marketconcepts and then specify the mechanisms for taking thenew product or service offering to the market. This requiresa willingness to challenge the prevailing mindset in theindustry and overcome the constraints of tradition thatmake incremental innovations the comfortable way to grow.

• Orchestration by providing the essential “glue” for a coher-ent market-driven whole. This last role for marketingensures that the new business model or product offeringcontinues to be aligned with the emerging market andadapted to shifting requirements and competitive moves.

Marketing has the expertise and the inclination to performthese three roles. However this expertise has been honed in themore predictable setting of incremental innovation and is notsufficient to cope with long time frames and high uncertainty.So what specifically can be done to augment and redirect theexisting capabilities to strengthen the role of marketing?

Sensing at the periphery. Discontinuous opportunities sig-nal their arrival long before they bloom into full-fledged com-mercial success. The signal-to-noise ratio, however, is initially

low so one has to work hard to appreciate the early indicators.These weak signals usually come from the periphery, wherenew competitors are making inroads and unfamiliar businessmodels or technologies are used. Here marketing can play arole by widening its peripheral vision beyond the currentlyserved market.

There are many ways to amplify the weak signals. A goodplace to start is to identify the major trends and uncertaintiesand then consider the consequences of trend convergence andinteraction as FedEx did with its global supply chain initia-tive. Much can be learned from competitive intelligence that

expands the set of competitors to include those with relevantpatents or expandable technology platforms and alliances inrelated markets. This analysis should be informed by anunderstanding of the latent needs of customers—those needsthat are evident but not yet obvious—and the ability of com-petitors to satisfy these needs. An expanded market scanshould seek out lead users and study precursor products fromother geographic areas or related markets.

These diverse sources of market information flowing fromthe periphery create white noise that may obscure the weaksignals. To fully appreciate the implications there must be anopenness to a diversity of viewpoints, a willingness to chal-lenge entrenched mental models, and an organizational cli-mate that encourages continuous experimentation and accepts“well-intentioned failure.”

Containing market risks. Emerging technologies and dis-ruptive innovations are usually both a threat and an opportu-nity. Firms must decide whether to embrace the innovation,ignore it, or simply watch and wait for the picture to clear.Each path carries its own risks, and the challenge for market-ing is to calibrate these risks and devise strategies for manag-ing them.

The first question is whether the potential disruption isaimed at the present market or opens up new market oppor-tunities for the firm. The answer is seldom clear––witness theearly confusion over the impact of online banking before itbecame evident that it was less a disruptive innovation andmore of a channel augmentation. At this stage it’s crucial to


The tendency to fixateon serving and retaining currentcustomers is reinforced by rewardsand incentives that emphasize short-run market share and profitability.


monitor competitive moves, undertake focused market tests,and keep lots of options open.

Most successful discontinuous growth strategies follow ahalting development path, marked by stop-and-go metamor-phoses, before emerging from a series of market experimentswith a feasible application. This requires a probe-and-learnprocess of successive approximations and accumulating learn-ing. The path to market of fiber optics and cellular phoneswas guided by probes with immature versions of these prod-ucts, learning from these probes, and trying again in differentmarket segments.

Often the biggest risks come from exaggerating the likelypace of adoption of a disruptive innovation because theinvestment commitments needed to serve a large marketopportunity raise the stakes. Many telecom firms have cometo grief because the vaunted demand for 3G wireless deviceshas been slow to materialize. How can and should marketingcalibrate and contain these risks? The starting point is with thefactors that will facilitate and inhibit growth, including barri-ers to adoption, competitive retaliation, customer perceptionsof benefits, and “tipping points” on features and prices. Is itpossible to accelerate adoption by reconfiguring the product,finding a more attractive target segment, or devising morecompelling offers? Or is it better to delay?

Viewing the target market coherently. The lengthysequence of decisions that culminates in a commitment to adisruptive innovation spans the entire organization. The quali-ty of the collective decisions will be improved if they areinformed by a shared understanding about which segments totarget and how the customer requirements can be met. Thisrequires that everyone involved focus first on the needs ofcustomers and not the product. It is a truism that prospectivecustomers can’t envision dramatically different products orbusiness models. However, they can be eloquent about theirneeds, problems, usage situations, and changing require-ments—but only if the right questions are asked.

There are many ways to achieve this congruency andcoherence across the organization. Perhaps the most effectiveway is to require that all the key members of the developmentteams visit customers as a group, rather than rely on a thirdparty to filter the signals from the market. These insights needto be wedded to insightful segmentation and a clear under-standing of the influence processes within the decision-mak-ing units of the target customers.

This raises a recurring issue over where the marketingcapability for exploring the frontier of the market should behoused. This is an important aspect of the broader questionof how to create an ambidextrous organization. Many firmshave tried to house the capability in new-venture units.Performance has been patchy because these units reside atthe periphery of the company and are remote from its corestrengths.

A better approach is for marketing to accept an expansionof its role to include discontinuous growth possibilities, while

continuing to perform a lead role with incremental growth.Then it will be well positioned to help the CEO satisfy the cor-porate growth imperative. ■

About the AuthorGeorge S. Day is Geoffrey T. Boisi professor of marketing andco-director of the Mack Center for Managing TechnologicalInnovation, Wharton School, University of Pennsylvania. Hemay be reached at [email protected].

Appraising the Risk Matrix

This matrix has many sources, including long-buried

consulting reports by firms such as A.T. Kearney, the

extensive literature on the economic performance of

acquisitions and alliances, and numerous post-audits of

new product initiatives. The wide ranges in probabilities

absorb some of the variability in the definitions of “new-

ness” and “success,” as well as the simplifying conse-

quences of clumping into four cells the growth strategies

that belong on a continuum.

We have tried to consistently define success as the

achievement of the objectives that were used to justify

the investment in the growth initiative. These estimates

have been extensively validated in interviews with con-

sultants and senior managers.

In deference to the saying that “all generalizations includ-

ing this one are false,” there are several qualifications to

keep in mind. The probabilities do not apply to fast-mov-

ing consumer goods (where incremental innovations

have high long-run failure rates) or ethical pharmaceuti-

cals and don’t distinguish whether “new to the company”

is also “new to the world.” Also new markets mean new

customers and not new geographies.

growththe - american marketing association · reach a similar conclusion in a spring 1999 sloan...

Documents