A R T I C L E www.hbr.org

MarketBusting Strategies for Exceptional Business Growth

by Rita Gunther McGrath and Ian C. MacMillan

Included with this full-text Harvard Business Review article:

1 Article Summary The Idea in Brief—the core idea The Idea in Practice—putting the idea to work

2 MarketBusting: Strategies for Exceptional Business Growth

12 Further Reading A list of related materials, with annotations to guide further exploration of the article’s ideas and applications

Product 9408

MarketBusting Strategies for Exceptional Business Growth

The Idea in Brief The Idea in Practice You can’t outperform rivals if you compete Redefining your unit of business, boosting performance on key metrics, and improving custom- the same way they do. To be king of the ers’ performance are just three market-busting strategies. Consider these additional moves: jungle, not copycat, you must spur substan- fers’ competitiveness. Participating lend- tial new growth—quickly, profitably, and Work faster. You’ll need less working capital ers—not consumers—pay transaction fees safely. and use assets more effectively. to LendingTree. During 2001–2002, the com- How? With deceptively simple moves. Rede- Example: pany’s sales skyrocketed 74%. fine your unit of business—what you bill American Home Mortgage Holdings is one customers for—to reflect what customers of the most rapid service providers in the Improve your customers’ cash flow. You’ll value. Then boost your performance on key mortgage lending industry. By integrating make them more profitable and efficient, metrics. Mexican cement company Cemex its systems with large refinancers such as and they’ll do more business with you. shifted its unit of business from cubic yards Fannie Mae and Freddie Mac, it can make Example: of cement to delivery window: the right deals and move cash in record time. By Software giant SAS, by adjusting its deci- amount of concrete delivered when needed. originating and selling mortgage loans sion-support applications in response to Then it reoriented its information systems, through its Web site, it gives customers 24- customers’ needs for improved operations, logistics, and delivery infrastructure to im- hour access to interest rates and product helps customers make better decisions prove truck utilization—a key metric for de- terms and enables them to lock in interest faster. And with low employee turnover livery businesses. For instance, it developed rates, obtain credit reports, and prescreen rates, its employees develop long-term re- digital systems enabling real-time adjust- their own qualifications. Result? More refi- lationships with customers, discovering ments to trucks’ destinations. nancing deals sealed more quickly. how to best help them. Results? A 98% cus- Also improve customers’ performance. tomer-retention rate and projected growth Reduce your assets. You’ll improve perfor- UPS handles shipping and repair for laptop of more than 20% in 2005. mance on key metrics related to asset utiliza- makers—freeing these customers from em- tion—such as economic value added (EVA) ploying expensive maintenance staff, and Reduce your customers’ assets. They’ll and return on assets (ROA). getting laptops back in owners’ hands be more loyal to your firm and boost your

VED. quickly. The service enhances notebook Example: profitability. makers’ productivity and lowers their costs. serves many notebook- Example: And it delights PC owners. producing customers as a contract manu- GE’s locomotive division decided to change facturer and design partner. It thus uses its Market-busting moves catch rivals off its unit of business and sell haulage con- assets invested in manufacturing more ef- ALL RIGHTS RESER guard, leaving them scrambling to catch tracts, not locomotives, to railroads. This en- fectively than any one company could do TION. up. The payoff? Dramatic, sustained abled railroad customers to take locomo- A in-house. Quanta’s 2002 sales exceeded $4 OR growth—even in mature or commoditized tives off their balance sheets—streamlining billion—a stunning figure for a relatively re- ORP businesses. Once-regional Cemex, for ex- their assets and delighting their CFOs. cent start-up. ample, generated $7.17 billion in revenues in 2003 and is now the world’s third-largest Improve consumers’ personal ready-mix concrete business.

OL PUBLISHING C productivity. When you make something complex more convenient for consumers, they reciprocate by buying more or paying you more. BUSINESS SCHO D R

A Example: V Mortgage broker LendingTree makes the process less onerous for consumers. Through Web-based technology, it links consumers to networks of mortgage providers—giving consumers more choices and improving of- OPYRIGHT © 2005 HAR C

page 1

A company can’t outperform its rivals if it competes the same way they do. Reconceive your business’s profit drivers, and you can change from copycat to king of the jungle.

MarketBusting Strategies for Exceptional Business Growth

by Rita Gunther McGrath and Ian C. MacMillan

If company leaders were granted a single wish, their own unit of business or key metrics. Once their most frequent request would surely be we started to look at new growth through this for a reliable way to create new growth busi- lens, we found success stories in industries that nesses. Business practitioners’ overwhelming had been written off as hopelessly commod- interest in this subject, which we as academics itized or strategically unattractive. In a few share, prompted us to undertake a major cases, the companies we studied succeeded so study of successful growth moves initiated by well at redefining their profit drivers that they established companies in several industries. had transformed their industries. We looked at a wide range of strategic ap- proaches to growth—everything from low- Building a Better Model risk, incremental changes to high-risk, disrup- It’s hard to imagine two businesses more ma- tive ones. In the course of our three-year study, ture than ready-mix concrete and reinsurance. we became intrigued by an approach that lay Both industries have been around for more somewhere between those two extremes. At a than 100 years, and competition in both has high level, this strategy is about redefining devolved: The companies offer standardized profit drivers. At a practical level, it involves products and play by well-established rules. making several deceptively simple moves: Yet in both industries, we identified compa- Some companies reconfigured their unit of nies that were enjoying sustained and impres- business—what they bill customers for—to sive growth because they had redefined their more closely match the customers’ needs. profit drivers or changed their unit of business Some companies focused on different key and key metrics. metrics than their competitors did, and, in Let’s start with concrete. The problem with doing so, created a better business design. Still ready-mix concrete is that it’s highly perish- other companies helped customers change able; it begins to set when a truck is loaded, OPYRIGHT © 2005 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. BUSINESS SCHOOLOPYRIGHT © 2005 HARVARD PUBLISHING CORPORATION. C

harvard business review • march 2005 page 2

MarketBusting

and the producer has only limited time to get maintain out-of-date legacy computer systems it to its destination. In Mexico—as in many as well as control and accounting procedures. other rapidly urbanizing countries—traffic, This maintenance responsibility ties up capital weather, and unpredictable construction labor and hampers competitive effectiveness. make it incredibly hard to plan deliveries accu- Swiss Reinsurance Company (Swiss Re) rec- rately. So a construction contractor might have ognized an opportunity to help insurance com- concrete ready for delivery when the site isn’t panies solve this problem. The solution was in ready or, worse, expensive work crews at a a product called “administrative reinsurance,” standstill because the concrete hasn’t arrived. or Admin Re. With this offering, Swiss Re Lorenzo Zambrano, who became CEO of changed its unit of business. It now handles the Mexican company Cemex in 1985, decided the administration of the life insurance and that there had to be a better way to run this health insurance policies no longer sold by its business. Cemex, like all traditional cement clients. Swiss Re administers the policies using companies, sold concrete by the cubic yard. proprietary business processes, sometimes But Zambrano’s customers didn’t particularly with help from administrative partners. value cubic yards of concrete. They rightly con- This new service has freed up capital and sidered concrete a commodity product. What human resources for Swiss Re’s clients, while they did value (and what Zambrano had the also allowing them to eliminate legacy com- good sense to start selling) were deliveries—in puter systems. These benefits show up in the other words, the right amount of concrete de- insurers’ key metrics—the numbers that ana- livered just when it was needed. To figure out lysts use to judge the insurers’ performance. how to accomplish this goal, Cemex staffers The benefits flow back, in turn, to Swiss Re. In studied how FedEx, pizza delivery companies, the seven years since it started to offer Admin and ambulance squads worked. Eventually, Re, the company has taken on 4.5 million pol- they developed digital systems that allowed icies, making this service one of its fastest- Cemex to adjust, in real time, where trucks growing business lines. were bound. They learned to optimize delivery patterns across a whole region; customers who The Language of Growth unexpectedly needed concrete could be served, Before we get into the how of reexamining often by shipments that had unexpectedly your unit of business and the associated key been postponed by other customers. metrics—or those of your customers—let’s Cemex can now deliver concrete within make sure we’re clear on what we’re talking hours—sometimes even minutes. It can accept about. As industries emerge and evolve, most unlimited change orders. It can help customers players eventually settle on a common unit of anticipate demand and cash-flow require- offering. Lawyers sell units of time (billable ments. Cemex, once a regional company oper- hours), consumer-goods producers sell bars of ating in Mexico, is now the third-largest ready- soap and boxes of cereal, airlines sell passen- mix concrete business in the world, with plans ger trips, and so on. These are all units of busi- to capture the number two spot. In 2003, it ness—the fundamental basis for transactions generated $7.17 billion in revenues from about between buyers and sellers. Rita Gunther McGrath (rdm20@ 30 countries, primarily because of its aggres- Associated with each is a set of measures— columbia.edu) is an associate professor sive acquisition and transformation of firms in we call them key metrics—that can be used to of management at Columbia Univer- emerging economies. assess how well a firm is doing with respect to sity’s Graduate School of Business Now let’s consider the world of reinsurance its profitability drivers. Thus, key metrics for in New York. Ian C. MacMillan providers. They sell backup policies to insur- law firms involve the percentage of total bill- ([email protected]) is the ance companies so the latter can then cover able hours actually billed, average hourly Fred R. Sullivan Professor of Entrepre- customers they might otherwise have needed charges per employee, and administrative costs neurial Management at the University to decline. Many of the reinsurance compa- per unit of revenue. Key metrics for consumer- of Pennsylvania’s Wharton School in nies’ customers share a problem. Some types goods producers include asset and inventory Philadelphia. They are the coauthors of of primary insurance—life insurance, for exam- turnover, working capital ratios, average mar- MarketBusters: 40 Strategic Moves ple—can remain active for decades. And even gins, and product utilization. Key metrics for That Drive Exceptional Business after they stop selling a particular product, in- airlines include costs per passenger mile flown Growth, forthcoming from Harvard surance companies need to support existing and seat yield. You get the idea. Business School Press. policies. As a result, they’re often forced to It’s often possible to grow a business by harvard business review • march 2005 page 3

MarketBusting

doing one of two things for your company (or egy was so powerful because the company for your customers): changed its focus from the sale of a commodity Change your unit of business so it more to the sale of something customers really cared closely reflects the value created for customers. about. In short, the unit of business shifted You will probably also want to change how you from cubic yards to the delivery window. This measure the effectiveness of your perfor- was a simple change in one sense. But Cemex mance. then oriented its information, logistics, and de- Dramatically change your performance on livery infrastructure around the delivery-win- existing key metrics in a way that uniquely fa- dow concept, creating far-reaching changes in vors your company. the company and eventually throughout the To go back to our examples, Cemex’s strat- industry. Swiss Re also added a new unit of

MarketBusting Strategies When we did research on organizational •a 2% change in market share within a We identified five MarketBusting strate- growth, we wanted to understand a range of year; gies. This article looks in-depth at one of strategies that would support organic, profit- • 10% or more annual growth in sales or them—redefining profit drivers by reconfig- able growth. We decided to call these strategies shipments over at least two years; uring a unit of business or refocusing on dis- MarketBusters. In order to qualify as an exem- • or annual sales or shipment growth 5% tinctive key metrics that drive growth. All plar of MarketBusting, a business needed: greater than the growth in the overall market. five strategies are described briefly below.

Lens Strategy Description Example Customers Transform Dramatically change how customers meet their needs. Coinstar ($176 million in revenues) the customer’s converts loose change for custom- experience. ers—conveniently. It has placed about 10,000 change-conversion machines in easy-to-find locations, such as supermarkets.

Products and Transform your Compare your product and service attributes with Procter & Gamble’s battery-powered services offerings. those of your competitors. Sort attributes into three SpinBrush offers consumers the ex- categories: basic, discriminating, and energizing. perience of using an electric tooth- ved. Figure out how changes would give you leverage brush—for the price of a high-end eser over rivals. manual brush. rights r Key metrics Redefine Identify the fundamental thing you charge custom- Air Products installs industrial your business’s ers for—your unit of business—and the key metrics gas generators on customers’ sites profit drivers. used to measure how profitably you’re selling it. rather than shipping liquefied gas Change one or both to better meet customers’ needs. in tankers.

Industry Anticipate and If a major industrywide shift is in the works, you can: As Internet usage took off, Sealed

dynamics exploit industry provoke disruptive change; capitalize by being first Air Corporation anticipated demand ublishing Corporation. All changes. to implement change or by seeing its implications for new packaging solutions. The more clearly than competitors can; or exploit second- company captured substantial ad- order effects. vantages by being quick to respond.

Tectonic Create a radically These opportunities are major shifts, not just prod- Subway noted consumers’ compet- opportunities new offering. uct or market extensions. And they’re notoriously ing desires for low-calorie meals and vard Business School P difficult to identify if you’re an established company. fast-food convenience. In response, Watch what entrepreneurs in your space are doing it has created the “healthy fast food” in regard to creating new products and services, concept, helping to drive its 2003 and see if you can leapfrog or acquire them or their revenues to $468 million. technologies. pyright © 2005 Har Co harvard business review • march 2005 page 4

MarketBusting

business to the traditional product portfolio of power structure, incentive system, sales force, the reinsurance industry—creating services to and so on—is built around the old unit of busi- free up clients’ capital and resources. (For an ness. Change the unit and the company capa- overview of all the approaches to growth we bilities that go with it, and you can create a observed in our research, see the sidebar “Mar- barrier to entry that lasts for a long while, ketBusting Strategies.”) though not indefinitely. In one study, we found that even easily imitated banking products A Profitable Alignment were not actually copied for 12 to 18 months, Changing your unit of business, or radically even though their competitive threat was changing your key metrics, can be a powerful clearly visible to all the players in the industry. engine for growth, particularly for early mov- ers. If you can figure out quickly how to help Eight Moves for Growth improve a customer’s core performance—as We’ve identified eight moves companies can both Cemex and Swiss Re did—the constraints make to redefine their profit drivers and real- that tied you down in the past can melt away. ize low-risk growth. You can begin to price your products based on Change your unit of business. We’ve already their value to your customers, not according to seen how rethinking the unit of business low-margin commodity pricing. You can be helped Cemex spark an upheaval in the global more proactive; your business and your incen- ready-mix concrete industry. Similar thinking tives will be aligned with what your customers is taking place in a host of other industries. care about. In the best case, you can create More often than not, companies are moving new shareholder value for your company be- away from selling a pure product and toward cause you are expanding the pool of problems selling a product–service mix or even a pure Easily imitated banking that your company can address. service. From a competitive point of view, a change Privately held Madden Communications, products weren’t copied in the unit of business can be difficult for rivals once a conventional printing house, used to for 12 to 18 months— to respond to because it often comes as a sur- make its money by printing promotional mate- prise. Consider the medical-imaging-equip- rials for companies. In 1988, then-salesman Jim even though their threat ment industry. Let’s say a maker of imaging Donahugh visited a target supermarket to see equipment figures out that customers, such as his company’s materials on display. Madden’s was visible to all the hospitals, don’t really care about the machines displays were nowhere to be seen, nor could industry players. themselves; customers care more about the Donahugh find them at several other super- creation and interpretation of the images the markets he subsequently visited. Eventually, equipment produces. Now consider the advan- Donahugh and his bosses discovered that this tage the equipment maker can gain if it can fig- was not at all unusual. Operating on thin mar- ure out how to move from selling machines to gins, the supermarkets often didn’t or couldn’t selling imaging and interpretation services. If take the time to display promotional materials the company can execute this move effectively, properly. Donahugh also found that Madden’s customers will pay for what they value—the customers, primarily packaged-goods compa- image and what it means to them. The equip- nies, often over-ordered promotional materi- ment maker can also improve customers’ key als as a hedge against running short. Money metrics by eliminating the costs associated was being wasted on printed materials that with owning and maintaining the machines. were displayed badly or not at all. The company can implement value-based pric- Today, Madden’s customers no longer buy ing, not commodity pricing, and the customer individual print jobs. Instead, they hire the will realize improved performance. Competi- company to print promotional materials and tors still operating under the old model won’t manage the distribution and installation of even see the threat—how can they when their those materials on-site. Madden now focuses competitive analysis is likely to involve only on a few large customers who are happy to pay equipment sales? The new business doesn’t more for the enhanced service. Conventional even register with them. printing companies have found it difficult to Even if competitors do figure out what respond to Madden’s move, because the new you’re up to, it takes them time to respond. Ev- business depended on new capabilities, includ- erything about an established business—its ing the capacity to connect with customers at a

harvard business review • march 2005 page 5

MarketBusting

senior level. Madden’s revenues grew from $10 cash-flow velocity, so much the better. million in 1990 to $133 million in 2004, in an In recent years, it has become extremely industry that many had come to regard as popular for U.S. home owners to refinance hopelessly mature. their mortgages as interest rates have dropped Retain your unit of business, but radically and real estate values have risen. American improve your key metrics, particularly pro- Home Mortgage Holdings (AHMH) figured ductivity. You don’t always need to do some- out a way to take advantage of this boom. It fo- thing as radical as overturn the way your in- cused intensely on speeding up the refinancing dustry does business. Sometimes you can cre- process, building systems that made it one of ate dramatic growth by doing what you do the most rapid service providers in the indus- right now—but much more productively. Dig- try. The company works closely with large refi- itization has helped many companies do this. nancing companies, such as Fannie Mae and Lamons Gasket Company is a good exam- the government-owned Freddie Mac. Because ple. An $80 million subsidiary of MetalDyne, AHMH’s systems interact with those of the Lamons manufactures and distributes static other providers, it can guarantee credit compli- sealing solutions for the petrochemical, refin- ance, place deals, and move cash quickly. The ing, nuclear, OEM, and pulp and paper indus- more deals it closes in shorter time, the higher tries. It sells more than 100,000 standard and its cash-flow velocity. AHMH works fast by special-order products, including gaskets, pack- using automated systems and by doing a lot of ings, nuts, bolts, and screws. Until recently, its customer-related business electronically. It simply figuring out what customers wanted to originates and sells mortgage loans through its buy and getting the right items to them was a Web site, which gives customers 24-hour access horribly inefficient process at Lamons. Cus- to product terms and interest rates. Customers Improving cash-flow tomers would phone or fax in an order, and a can lock in interest rates, check the status of customer service representative would have to pending applications, obtain credit reports, cal- velocity is akin to a translate the information into Lamons’s part culate financing affordability, and prescreen Monopoly player passing numbers and format. The average order cost their own qualifications. less than $500 but took 30 to 60 minutes to get AHMH didn’t reinvent the financing busi- “Go” more frequently— into the system. This level of inefficiency was ness. It simply recognized an opportunity and devastating to Lamons’s profits and costly to aggressively focused on one way to benefit thereby collecting his or customers as well, since they were spending from it. As a result, the company is forecasted her $200 more often. the same 30 to 60 minutes to get the order to grow at 28% a year and is expected to con- right. tinue to produce above-average operational Then Lamons built an e-commerce Web results. site, and customers’ ability to find, order, and Dramatically improve your asset utiliza- pay for goods improved radically. The com- tion. For a lot of companies, the most impor- pany’s productivity improvements added to its tant key metric is return on assets. The idea is bottom line considerably. Customers were so that you should be adding economic value (of- pleased by their own productivity gains that ten expressed in terms of EVA) or, at a mini- they drove up Lamons’s market share. Cus- mum, providing a return on the funds tied up tomer retention rates also went up—which is in capital (often expressed in terms of ROA). If particularly vital to a business whose strategy you can reduce the assets tied up in your oper- depends on serving large numbers of small re- ations, your key metrics around asset utiliza- peat customers. tion will improve. Do this for yourself, and Improve your cash-flow velocity. In some you’ll make shareholders happy. Do this for industries, companies can create powerful your customers, and they’ll be happy; they’ll growth engines by figuring out how to work reward you, and ultimately your shareholders faster—much faster. Improving cash-flow ve- will reap the benefits. locity is akin to a Monopoly player passing Consider the two ways in which Quanta “Go” more frequently—thereby collecting his Computer (a Taiwanese company founded in or her $200 more often. The higher your cash- 1988 by entrepreneur ) reduced flow velocity, the less working capital you asset intensity both for itself and its customers. need, and the more effectively you can use First, it serves many notebook-producing cus- your assets. If you can also improve customers’ tomers (Apple, , Gateway, Sie-

harvard business review • march 2005 page 6

MarketBusting

mens) as a contract manufacturer and design a way to make a complex process more conve- partner, which means it spreads its assets in- nient, it may be able to grow the business. vested in manufacturing more effectively than Most people can readily recite the things that any one company could do in-house. Second, even well-intentioned companies do that drive Quanta helps its customers reduce their asset them crazy. Banks and insurance companies intensity because they’re using Quanta to man- force you to get information from third parties ufacture some, preferably all, of the compo- before they will do business with you; service nents they need. In this way, Quanta has effec- desks run you through the “press 1, press 2” tively played a two-way game of reducing asset voice-mail gauntlet; retail establishments sub- intensity. Its sales in 2002 exceeded $4 billion. ject you to the same checkout delays whether Improve your customers’ performance. As you are buying a truck full of stuff or just a we showed in the Swiss Re example, another single item; and so on. Solve the irritations, powerful application of key-metrics analysis is and customers will gratefully reciprocate by to focus on your customers. Helping your cus- increasing your sales volumes or paying you tomers improve their performance generates more. a more robust, profitable, loyal base of clients Just as AHMH figured out how to accelerate who are more willing and able to buy from refinancing, mortgage broker LendingTree fig- you. To the extent that your system is critical ured out how to make the process less onerous to or embedded in the way customers do busi- for consumers. In contrast to the AHMH ness, you can also achieve a certain amount of model, in which the company itself is a mort- competitive sustainability. gage broker, LendingTree uses Web-based For instance, package-delivery firm UPS has technology to link networks of mortgage pro- begun to branch out from its core business into viders in order to give consumers more choices an array of services designed to help customers and improve the competitiveness of offers. It improve their key metrics. Under the rubric sends requests to its network of lenders, who “synchronizing commerce,” UPS performs a va- return bids. Consumers can also use the service riety of services that go well beyond picking up to choose from a list of mortgages, credit cards, and delivering packages. Last spring, certified and home-equity, auto, and personal loans. UPS technicians started doing repair work on LendingTree’s model empowers borrowers by laptops. (Most of them have eight to making lenders apply to them, rather than ten years experience repairing notebooks, making the borrowers apply to the lenders. Toshiba officials have said.) As Mark Simons, a Participating lenders pay transaction fees to general manager of Toshiba’s digital products LendingTree. Consumers do not pay a service division, told one trade publication: “Moving a fee. From 1998 through 2001, LendingTree pro- unit around and getting replacement parts cessed more than five million credit requests consumes most of the time…The actual ser- and generated $10 billion in transaction vol- vice only takes about an hour.” By taking over ume. In 2003, it was acquired by InterActive both the shipping and the repair aspects of PC Corporation—an acquisition inspired no doubt servicing, UPS eliminates steps in the process, by LendingTree’s 74% sales increase from 2001 removes the need for PC makers to employ a to 2002. maintenance staff, integrates the repair and Help improve your customers’ cash flow. shipping activity, and, most important, reduces As we’ve seen, if you can help your customers the time that a broken PC is not in the hands become more profitable and efficient, it only of its owner. makes sense for them to do more business Not only does the process outsource a te- with you. The software company SAS Institute dious chore for the notebook makers (thus im- grew rapidly because it was able to help cus- proving their productivity, asset utilization, tomers make better decisions faster, ulti- and so on), it also increases end-user customer mately improving their cash-flow velocity. SAS satisfaction, thereby creating value for all three adjusted many of its decision-support applica- parties. tions in response to customers’ needs for im- Improve your customers’ personal produc- proved operations, and that responsiveness tivity. What asset productivity is to a commer- has turned it into a strategic partner for many cial customer, convenience and time-savings of its customers. are to a consumer. Whenever a company sees SAS has one of the lowest employee turn-

harvard business review • march 2005 page 7

MarketBusting

Prospecting Questions

The following queries can help you determine how best to change your unit of business or key metrics in the pursuit of sustainable, low-risk growth.

Change your unit of business. • Can you speed up receipts from Improve your customers’ key • Can you charge for what you offer your customers? metrics. in a different way? • Can you generate cash before you • What numbers are your customers • Can you incur costs and make pay- have to incur costs? seeking to achieve? (Be explicit.) ments in a different way? • Can you speed up your customers’ • What outcomes are your custom- • Can you charge customers for ordering cycles? ers measuring? what they might value rather than • Can you get paid more frequently • What are your customers’ key ratios? for what you traditionally provide? over the lifetime of a contract? • Can you think of ways to help cus- • Can you create better incentives • Can you automate the payment tomers improve their financial, for your people by changing the stream so that manual delays operating, and investment ratios? unit of business? don’t hold up cash coming in? • Can you help your customers hit • Would some other way of charg- • Can you make sure that your in- their desired market-share, cash- ing for what you sell be easier for voicing mechanisms are easy for flow, EBITDA, revenue-growth, you or easier to explain to your your customers to respond to, so and profit numbers? customers? you don’t create additional pay- • Can you help your customers bet- ment delays? ter understand what really drives Improve your productivity • Could you offer customers elec- success in their businesses? metrics. tronic-payment options to speed • Can you use the five REs (remove, them up? Improve your customers’ replace, reduce, redesign, redis- • Have you explored technologies personal productivity. tribute) to dramatically enhance such as direct deposit or lockboxes • Can you find ways to help custom- your productivity? to speed payments? ers’ staffers improve their produc- • Can you dramatically enhance tivity on the job… your productivity by deploying Improve your asset utilization. • …and in their private lives? new technology? • Can you reduce the asset intensity • Can you leapfrog your competi- of your business by outsourcing Help improve your customers’ tion in productivity? Look espe- some activities to specialists? cash flow. cially for situations in which the • Can you eliminate the need to • Can you help customers get cash competition’s resources are al- own certain assets? earlier and pay out cash later? ready committed to something • Can you utilize assets owned by • Can you help customers get better else, such as integrating a large someone else, as needed? margins from their customers? merger. • Can you use assets more effec- Improve your customers’ asset • Can you eliminate time-wasting, tively—for instance, by extending utilization. repetitive activities to enhance the time of day in which they are • Can you reduce customers’ assets? your productivity? Can you figure used or by using remote electron- • Can you help customers use assets out how to eliminate transaction ics to operate them? more productively? costs (such as internal reviews and • Can you pool your assets with • Can you help customers reduce approvals) by automating some of those of other firms and reduce their fixed-asset burden by taking your internal control practices? the asset intensity for the whole on their assets and charging them group? for usage? Improve your cash-flow velocity. • Can you change fixed assets to • Could you eliminate or reduce in- variable assets by, for instance, es- ventory? tablishing utilization contracts • Might you delay payments to others? with suppliers for certain services?

harvard business review • march 2005 page 8

MarketBusting

over rates in its industry, so long-standing em- that product? If you sell a unit of time, could ployees really know, and know how to help, you instead sell the outcome that the cus- their customers. The company boasts a 98% tomer wants? A good general guideline is to customer retention rate, and SAS has enjoyed try to align your unit of business with some a long track record of solid profits. It has a bal- performance outcome that is relevant to ance sheet free of debt and a projected annual your customer. growth rate of more than 20%. Getting at current key metrics is usually Reduce your customers’ asset intensity. very straightforward. If you don’t already out- We often say to businesspeople, “You should line them in your annual report, the analysts know your customers’ balance sheets better who cover your industry will be able to tell you than they do.” If you can find ways to reduce or what they are. It’s often useful to create a table improve customers’ utilization of their assets, with the basic financial performance parame- you may profit from their increased loyalty to ters of your business and, if you have the data, your firm. For instance, GE’s locomotive divi- those of the top competitors in your industry. sion decided to change its unit of business and Identify obstacles to change. What’s keep- sell haulage contracts, not locomotives, to rail- ing you from changing to a new unit of busi- roads. This allowed the railroads that signed ness or from achieving higher performance on up for contracts to take their locomotives off the key metrics associated with an existing their balance sheets—much to the delight of unit of business? In this part of the process, their CFOs. you want to remove the blinders that exist when you’ve been competing in the same way Putting These Ideas to Good Use for a long time. A number of devices can help As we said at the outset, redefining your com- you gain a fresh perspective. Three have pany by changing your unit of business or proven particularly useful in our work. your key metrics can be among the lowest-risk First is a well-known technique from the routes to growth. Why? Because you already quality movement, popularized in Japan as the have a lot of the necessary information—you Five Whys exercise. For every metric, ask your- don’t need to invent whole new markets, and self, “Why can’t we improve?” for five levels of you have interactions with customers that can answers. If you can get to a root cause, you can give you the data you need. The sidebar “Pros- often conceive of ways to overcome it. If one pecting Questions” provides detailed ques- root cause is affecting several key metrics, you tions to think about for each of the eight can dramatically improve your effectiveness by moves described above. But before you drill addressing it. To illustrate how this works, let’s down with that level of specificity, you will simulate how Cemex might have derived the need to carefully consider what your unit of core capabilities it needed by using the five business is, what it could become, which key whys. Let’s assume that the company has com- metrics offer the most leverage, and so forth. pared its key metrics with those of top U.S. To assist in that process, we suggest an ap- firms and is unhappy with its truck utilization, proach that we’ve used with clients. (If you a key metric for delivery businesses. happen to have a few underutilized MBAs • Why are our truck-utilization ratios so low hanging around, they can do some of the ana- compared with those of ready-mix cement lytical work.) firms in the United States? Because we have Identify your unit of business and associ- much wider delivery windows. ated key metrics. It should be easy to deter- • Why do we have wider delivery windows? mine what your current unit of business is. Because the trucks often get stuck in traffic, What do you charge for? When you send cus- and the clients are often not ready for the pour. tomers invoices, what do you bill for? Try to • Why can’t we send a second truck when spell it out in the simplest terms possible: “We the first truck is stuck in traffic or send the first make money by billing our customers or cli- truck to another destination when the client ents for ______.” isn’t ready? Because we have no way to tell the Next, be critical. Does what you sell really two truck drivers to change their destinations. reflect the value you create for customers? If Besides, the second truck could get stuck in the you sell a product, could you redefine it to same traffic. reflect the benefits or services yielded by • Why can’t we set up mobile communica-

harvard business review • march 2005 page 9

MarketBusting

tions between plants and trucks, so that more redistribute assets? People tend to resist these than one plant can dispatch trucks to avoid traf- types of questions, so our rule is that there has fic jams? This still wouldn’t handle cases where to be strong, highly substantiated reasons to the customer is not ready to pour. say no to any of these questions. Persevere— • Why can’t we have a communications cen- you may be thrilled by the creativity that per- ter that plants, trucks, and customers can call if sistence provokes. they are delayed? This center could coordinate A third way to gain perspective is to do all deliveries, redirecting trucks to sites that are some benchmarking—but not necessarily ready for a pour. Hmmm—let’s think about against your direct competitors. It’s useful to that. benchmark against firms that have successfully The second technique is our variation of the transformed a particular metric through better five whys, which we call the Five REs exercise. business practices. Thus, we saw Cemex bench- The idea is to look at all the key metrics that mark its delivery function against FedEx. represent costs and assets and probe them Groups like the Conference Board and the Cor- ruthlessly. The five REs are: porate Executive Board can help you identify • Remove. Why incur a cost at all? Why not best-in-class performers for the metrics you remove it entirely from your cost base? want to explore. Toshiba, mentioned earlier in this article, has Review the key customer segments you handed off expensive repair costs to UPS. Ev- serve. The next challenge is to apply the tech- eryone wins. niques described above to your customers. • Replace. If you can’t remove a cost, can The questions you want to consider are you lower it by substituting a less-expensive whether you might benefit by developing a product or service? For instance, companies different unit of business for a particular set of have sometimes used voice-recognition systems customers, whether those customers might in place of expensive human operators, and benefit if they developed a different unit of manufacturers of sodas and candies have used business, or whether you can help them with corn syrup in place of sucrose. their key metrics. • Reduce. If you can’t replace the cost, can Assess the need for new capabilities and you reduce it instead? Lamons Gasket reduced the potential for internal resistance. Typi- the labor intensity of its ordering system by cally, a significant shift in your business design switching to an interactive online system. Alter- also implies major shifts in your capabilities. natively, can you reduce the price you are pay- Cemex, for instance, had to add new skills in ing? telecommunications, programming, and sys- • Redesign. If you can’t reduce the amount tem administration. As you go through this as- you need to spend on a scarce resource, can sessment, you’re bound to run into resistance you redesign your business to use it more effi- from senior managers; they aren’t likely to em- ciently? There are many ways companies can brace a change that will require the company economize on technical or service resources. to develop totally different skill sets. So it’s For instance, law firms may complement ser- worth thinking about how to deal with the vices from their expensive lawyers with ser- politics of changing a business before you find vices from less costly paralegals; hospitals may yourself stalled by internal opposition. replace some physicians with nurse practitio- Decide on a marketing and communica- ners; software companies may encourage cus- tions plan. How can you convey the value of tomers to use self-help Web sites or phone ser- your new approach to your customers and vices rather than rely on costly help-desk your internal constituencies? And who needs technicians. to be part of the communications process? • Redistribute. If you can’t redesign, can you Make sure you consider which audiences are redistribute costs over more units? Quanta, for important, in which sequence, and with what instance, has built a formidable advantage by types of communication. The idea is not to spreading its production and design costs over spend endless hours agonizing but to make many notebook manufacturers. sure that when you do make a move, it is deci- Once you have attacked major cost ratios in sive and clearly conveyed to critical constitu- this way, ask the same questions about assets. encies. Remember, too, that analysts who are Can you remove, replace, reduce, redesign, or used to looking at your company one way may

harvard business review • march 2005 page 10

MarketBusting

need to be educated on a more appropriate set vious first and move aggressively to take ad- of metrics to use. vantage of it, and others simply don’t. Use this • • • strategy to spark creative changes in your unit The approach we’ve described can be an easy of business or your metrics, and you, too, will path to substantial, quick, profitable, low-risk find seeds of quick, low-risk growth. growth. The beauty of it is that your people already know the business, the customers, and Reprint R0503E the products. Indeed, after we’ve employed Harvard Business Review OnPoint 9408 this methodology with clients, we often hear To order, see the next page them say, “Well, that should have been obvi- or call 800-988-0886 or 617-783-7500 ous.” Sure—except that some firms see the ob- or go to www.hbr.org

harvard business review • march 2005 page 11

MarketBusting Strategies for Exceptional Business Growth

Further Reading ARTICLES Marketing Myopia Co-opting Customer Competence by Theodore Levitt by C.K. Prahalad and Venkatram Harvard Business Review Ramaswamy July 2004 Harvard Business Review Product no. 7243 January–February 2000 Product no. R00108 To ensure sustainable market-busting growth, focus on satisfying your customers’ needs— The authors describe another market-busting not on your company’s need to sell products. strategy: inviting customers to co-create value Ask, “What business are we really in?” If the rail- with you. In a market where technology-en- roads had understood that they were in the abled customers now engage in active dia- transportation business—not the railroad logue with companies—a dialogue that cus- business—they might still be growing today. tomers control—business must include To avoid the railroads’ fate, think imaginatively consumers in the value-creation process. How about your business, even if your market is ex- to make your customers co-creators of the panding. Don’t assume there’s no competi- value you offer? Engage them in ongoing dia- tive substitute for your industry’s major prod- logue about value. Mobilize customer com- uct: there is—and it might well come from munities, such as user groups. Co-create per- outside your industry. sonalized experiences with customers. An online florist, for example, could let customers design their own floral arrangements. You may also need to revise traditional ap- proaches to pricing and billing, since greater access to information will give customers un- precedented bargaining power.

To Order

For reprints, Harvard Business Review OnPoint orders, and subscriptions to Harvard Business Review: Call 800-988-0886 or 617-783-7500. Go to www.hbr.org

For customized and quantity orders of reprints and Harvard Business Review OnPoint products: Call Frank Tamoshunas at 617-783-7626, or e-mail him at [email protected]

page 12