Achieving Growth in Low Growth Markets - AIMCAL Growth in Low Growth Markets AIMCAL Fall Conference...

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Achieving Growth in Low Growth Markets

AIMCAL Fall ConferenceOctober, 2004

Frank PerkowskiBusiness Development [email protected]

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Today’s Agenda

Breakthrough concepts, new space. Adjacent segments

Improved Quality

Expanded Services

Improved Service Delivery

Line Extensions

Product Improvements

Improved Quality

Expanded Services


Line Extensions


New ProductApplication

New Services

Increased Product Functionality

Niche Marketing


New Services


Niche Marketing

Strategic Alliance / Joint Development

Expansion intoAdjacent Markets

Integrated Customer Solutions

BreakthroughProduct Concepts





Maturity Stage

Growth Stage

Development Stage

Successful Implementations

Current Growth Dynamics

New Strategies are Required

Making the Change

Company Market Growth Approach Result

General Motors

Auto Production and Assembly

Created new "OnStar" service business that leveraged company's installed customer base

$1 billion in new revenue within five years. Launching pad for new businesses

Johnson Controls

Car Seat Assembly

Expanded product line to provide integrated solutions that solve customer problems

Grew from minor foam supplier to major integrator of interior auto components for US industry

UPS Package Shipping

Leveraged existing systems to expand into related businesses and profitable service offerings

Since 1999, created a $3 billion service business with earnings growth rate of 15%

Virgin Low Cost Airline

Built and leveraged its brand and image across different markets and product segments

Grew from start-up to a 29 division $6 billion company at average growth rate of 12% over 35 years

More Examples of Companies Growing Significantly in Low Growth Markets

Economic Drivers

Provide Integrated Solutions

Segment Customer

Base

Product Line Gaps

Share of Wallet

Areas of Customer Opportunity

Economic Drivers


Segment Customer

Base

Product Line Gaps

Share of Wallet

Areas of Customer Opportunity

Market demand declines

Competitors introme-too product

Product improvements introduced

Competitors reduce priceVolumes

decline

Temporary share increase

Alternatives become available

Production costs increase

Customers reduceconsumption

Market prices decline

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Changing Dynamics Have Made Historic Growth Strategies Obsolete

• Brand and product proliferation• Over investment and availability of new global

suppliers• Mega retailers and customer buying groups• Educated consumers with higher expectations• Channel developments and disintermediation• Electronic commerce and communications

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Slower Growing Markets Create a Vicious Cycle

Market demand declines

Competitors introme-too product

Product improvements introduced

Competitors reduce priceVolumes

decline

Temporary share increase

Alternatives become available

Production costs increase

Customers reduceconsumption

Market prices decline

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Traditional Growth Strategies Are Less Effective in Maturing Markets

• Lower prices via cost reduction

• M&A

• Product Improvements

• Channel Development

• Service Enhancements

• Competitors match, reduced loyalty, commoditization

• 70% fail, synergies usually do not materialize, competitive response

• No proprietary R&D, limited customer value, substitutes

• Competitors already established, market saturated

• Competitors match, become expected, higher costs

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Different Growth Strategies Should be Employed When Markets Mature


Improved Quality

Expanded Services


Line Extensions


Improved Quality

Expanded Services


Line Extensions



New Services


Niche Marketing


New Services


Niche Marketing









Maturity Stage

Growth Stage

Development Stage

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Emerging Trends Will Present New Challenges and OpportunitiesGlobalization

- Lower cost foreign suppliers- Overseas opportunities more accessible- New high growth markets

Substitutes- Lower cost / more effective electronic communication

media- Film / synthetic /composite / nonwoven materials offer

increased functionality for demanding applications

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… And Require the Development of New SolutionsTechnology

- Digital printing growth requires new substrates, coatings, and coordination with other suppliers

- Print technology developments and applications require more uniform substrates and investment

- Coating / barrier / developments have created increased functionality and new applications

Demographics- Aging population means different requirements- Higher living standards and lifestyle changes translate

to new / different applications- New business formats will generate different needs

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Many Companies Have Adopted Practices that Discourage Growth

• Over-expanding with investments that do not provide a competitive / unique advantage

• Assuming that low cost production will result in above average returns

• Assuming that future needs will be similar to those in the past

• Selling what can be easily made versus what the customer will need in the future

• Thinking too narrowly about core competence • Under-estimating the significance of hidden and intangible

assets• Creating cultures that discourage true innovation

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Why is it Important for Companies to Realize Above Average Growth?

• Translates to higher valuations that provide above average shareholder returns

• Attracts the best employees and capital investment

• Creates a virtuous circle that promotes continuous improvement

• Ensures stable organizations that provide jobs and enrich communities

But…….. Growth alone (without higher margins) is not the solution!

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Success in Other Industries

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Other Companies Have Successfully Implemented New Growth Strategies

• Even the “worst” industries have winners and losers

• Companies in weak or low growth industries have succeeded by leveraging market dynamics and finding unique new opportunities (Southwest Airlines, GM Onstar, GE Medical, Virgin, Clarke American, UPS)

• Company success is mostly determined by internal, management factors versus external, market related factors

Research by Bain & Co. shows that about 70% of a company’s performance is controlled by internal, management factors versus external / market factors

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The Most Successful “Non Traditional”Growth Approaches

• Expand into related products and services• Develop a breakthrough efficiency improvement• Leverage customer relationships / access to

expand into new businesses• Leverage a unique competence or capability and

apply to new area• Focus directly on providing customer solutions

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Many Companies Have Successfully Implemented these Strategies

Company Market Growth Approach ResultAir Liquide Industrial

GasesApply technical expertise to expand into services and fix customer problems

10% / 14% annual growth in revenue / income from 1996-2001

American Standard

Bathroom Fixtures

Significantly improved efficiencies of its declining core business which allowed it to profitably expand into related segments

Increased earnings by 14% / year over ten years while growing stock price from $4 to $75

Cardinal Health

Wholesale Drug Distribution

Expansion into adjacent markets and services

$25 billion in market creation over 5 years

Clarke American

Check Printing Leveraged customer access to provide new bank services

Enlarged target market from $1.8 billion to $14 billion. Grew business by 70% in 5 years in declining market

GE Medical Systems

Medical Imaging Equipment

Expanded into related service businesses that leveraged core expertise

Grew from one division and $4 billion in sales to 3 segments with $8.5 billion in sales

Some Examples of Companies Growing Significantly in Low Growth Markets

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The Best Growth Solutions For You Depend on Particular Circumstances

Company Market Growth Approach Result

General Motors

Auto Production and Assembly

Created new "OnStar" service business that leveraged company's installed customer base

$1 billion in new revenue within five years. Launching pad for new businesses

Johnson Controls

Car Seat Assembly

Expanded product line to provide integrated solutions that solve customer problems

Grew from minor foam supplier to major integrator of interior auto components for US industry

UPS Package Shipping

Leveraged existing systems to expand into related businesses and profitable service offerings

Since 1999, created a $3 billion service business with earnings growth rate of 15%

Virgin Low Cost Airline

Built and leveraged its brand and image across different markets and product segments

Grew from start-up to a 29 division $6 billion company at average growth rate of 12% over 35 years

More Examples of Companies Growing Significantly in Low Growth Markets

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Making The Change

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A Key First Step is Trying to Figure Out How To Get Started

Which Oppes to Pursue

Process for

How to Increase Success Probability Core Competencies and Unique Cibitors Sig

ortunitiIdentifying Opportunities

apabilities

Organizational Enablers and Inh nificant Risks and Mitigating Actions

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Growth Companies Have a Few Things in Common

Common Element BenefitGrowth plans are based on in-depth understanding of customer needs

Better solution to business problems helps customer be more successful

Leverages hidden / intangible assets Provides a more complete, unique solution that leverages existing capabilities

Growth initiatives built on a strong core business

Expands successful methods while making the base business stronger

Create a unique / meaningful market position

Competitors cannot easily duplicate

Entire organization mobilized behind strong leadership

Customers receive consistent messages and well executed programs

Successful Growth Initiatives Have Common Elements

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Factors that Determine Successof Growth Initiatives

Strong core business

Organizational Enablers and Inhibitors

Growth idea meets success requirements

Idea can be repeated / expanded

Effective management processes and capabilities

Business is healthy and sustainable

Customer profit, unmet need, related to core

Builds on existing strengths and processes

Entrance / exit process, capabilities

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Key Requirements for Successful Growth

1. Must change to customer orientation2. Must build off existing core business3. Must develop broad consensus within

organization on strengths, weaknesses, and core competencies

4. Must develop reasonable expectations and objectives

5. Must be driven from top

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The Switch to a Customer Focus Changes the Perspective

FROM TO• View your business from a

product lens• Creating growth using traditional

tools (products, factories, personnel)

• Thinking of company size as a growth inhibitor

• Relying on blockbusters to change your market

• Worrying that growth programs will cannibalize the base business

• Focusing on small margin improvements

• Studying customers and the drivers for their business

• Creating growth based on hidden assets (market position, information, relationships, access)

• Thinking of company size as a multiplier of opportunities

• Implementing incremental moves that are creative and solution oriented

• Implementing growth programs that reinforce the base

• Expanding your focus to incorporate market arenas that are 5-10 times larger than your current space

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Changing the Focus from“Asset Based” to “Customer First”

ProductsAssets Methods Channels

MethodsChannelsCustomer Need

Typical Industry “Asset Base” Orientation

Required “Customer First” Orientation

Products Assets

Customer Need

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Uncovering Customer Growth Opportunities

Economic Drivers


Segment Customer

Base

Product Line Gaps

Share of Wallet

Areas of Customer

Opportunity

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The Probability For Success Is Related to Distance From the Core


Core

30-40%

20-30%

0-20%

Close - in

Strongly related

Common Thread

Adjacency Distance Factors

•Customers•Competitors

•Cost Structure•Channels

•Capabilities

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Look Before You Leap When Expanding Beyond Your Core

Requirements for Successful Moves

into Adjacent Areas

Robust Profit / Market

Dynamics

Potential for Leadership Economics

Strong Relationship to

Existing Core

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It is Critical to Pick One Area of Focus With the Best Potential

Core

New Channels

Support Services

New Services

New Geography

New Products

New Customers

Direct / Indirect

New Businesses

E-Commerce

Re –Segmentation

New Markets

New Applications

Substitutes

Breakthrough

Regional

Global

Integrated Solutions

White Space

New Value Proposition

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Hard Assets are Rarely the Most Important Ingredient for Growth

Successful growth initiatives leverage hidden and intangible assets

Customer Relationships

Information Corporate Identity

Strategic Real Estate

Market Networks

Access to Buyers Market Understanding

Intellectual Property

Value Chain Position

Product Installed Base

Interaction History / Process

Technical Know-How

Corporate Competency

Market Position User Community

Customer Insight Software & Systems

Brand Equity Information Portal / Access Point

Third Party Networks

Expert Reputation / Authority

By product Information

Deal Flow / Access

Hidden / Intangible Assets

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Characteristics of Successful Growth Initiatives

“The most successful growth initiatives are implemented by companies with strong core businesses in weak markets”

– Chris Zook, Beyond the Core

The most common characteristics of successful growth: 1. Based on a strong core business2. New markets have the right characteristics:

- indicate the potential for leadership economics- have a robust profit pool- are strongly related to the core business

3. Employ a repeatable formula that relates to the organization’score competence

4. Companies have business processes / capabilities that are adaptable

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Implement a Systematic Growth Process1. Diagnose the problem – Understand the current situation2. Define objectives – What does success look like?3. Understand capabilities and constraints – What are my core

competencies?4. Identify the best opportunities – What options best satisfy

success criteria?5. Avoid roadblocks – Identify and address potential obstacles6. Take short-term actions – Gain experience and position

yourself for success7. Develop plans – Ensure the pieces fit8. Execute – Manage, focus, regulate, control.

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“75% of all Growth Initiatives Fail”

The major reasons for failed growth initiatives include the following:

1. Organizational barriers 2. Poor linkage to core business and

competencies3. Lack of a compelling value proposition4. Growth initiative does not satisfy key selection

criteria5. Lack of required capabilities and organizational

support

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Key Issue is Not Lack of Opportunities but Making the Right Selection

Hidden Assets

Adjacent Segments

Strategic Alliances

Reseg- mentation of

Markets

Services Customer Intimacy

Traditional Intangible Assets

Related Equipment / Supplies

Equipment / Material Suppliers

Global Customers

Supply Chain Management

Product / Service Bundling

Customer Relationships

Alternative / Related Materials

Complem- entary Paper Grades

Specific Industry Segments

Machine Maintenance / Operations

Reorganize around Key Processes

Strategic Real Estate

Paper Converting

Paper Converters / Processors

Large / Small Business

Equipment Leasing

Integrated Solutions

Enterprise Networks

Complem- entary Goods / Services

Supply / Value Chain Partners

End Use Applications

Production Management Services

Growth Enabling Support

Information Solution vs. Material Focus

Logistics Services

Non- Product Focus

Examples of Growth Opportunity Sources for North American P&P Companies

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Short-Term Actions Can be Taken Before You Begin

1. Implement the planning process -- Collect facts, focus, define goals, develop contingencies

2. Innovate -- process, service, product

3. Develop customer orientation -- Solve one nagging customer problem

4. Re-define core competencies -- Apply existing capabilities in a new way

5. Take small actions / calculated risks

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In Conclusion……

1. What obstacles are preventing your company from moving forward?

2. What actions can you take today to grow your business?

3. Just do it!

“Helping Companies Grow their Business”

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