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."
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.
The business landscape has changed markedly over the past two years, so dusting off a previously concocted growth strategy may not be a viable way forward for many companies. Competitors, for example, may be in far different positions today — some may have disappeared, others may have retooled or refocused, and still others emerged from nowhere.
Janice DiPietro, national managing partner at executive services firm Tatum, urges finance executives and their fellow managers to survey the competition as a first step to identifying growth opportunities. She suggests some critical questions to consider:
• Which company is gaining market share?
• Which company has pricing power?
• Which is bundling products and services in new ways?
• Which is creating buzz?
• Which is the marginal player? Is it you?
• Are you increasing your R&D budget?
• What innovative new products and services have you brought to market?
Armed with that analysis, you can begin to chart your next moves. — K.O'S.