Radical strategies for profitable growth

European Management Journal Vol. 16, No. 3, pp. 253–261, 1998 1998 Elsevier Science Ltd. All rights reservedPergamon

Printed in Great Britain0263-2373/98 $19.00 + 0.00PII: S0263-2373(98)00002-4

Radical Strategies forProfitable GrowthPETER DOYLE, University of Warwick, UK

History suggests that the success of many of today’smost admired companies is likely to prove illusory.All too often their current performance is not basedon superior competitiveness and is not sustainable.Companies exhibiting high growth can bedescribed as following one of three paths: radical,rational or robust growth strategies. Only the lastoffers competitive advantages which have thecapacity to endure and to create long-term share-holder value. This paper explores and illustrates thecharacteristics of robust companies and contraststhem with those pursuing radical and rationalgrowth strategies. 1998 Elsevier Science Ltd. Allrights reserved

The central task of managers is to develop growthstrategies which provide shareholder value. The aimof this paper is to explore what types of marketingstrategies are most likely to create sustainable returnsfor shareholders. The study is based on a sample of36 companies that have been singled out by the busi-ness and financial press at different times for the suc-cess of their strategies. Over the longer period it willbe observed that some of these companies proved tobe much more successful than others. Some of thecompanies that pursued radical growth strategiesproved to be very temporary indeed in their achieve-ments. The objective here is to analyse such differ-ences and to compare the features of sustainable andnon-sustainable growth strategies.

Managers and the business press commonly haveshort time horizons. Companies which achieve a yearor two’s high sales and profit growth are hailed ascorporate superstars, lauded for their business acu-men and held up as icons to their more ploddingcompetitors. But such judgements can easily be dem-onstrated as ill-considered and superficial. Forinstance 750 UK directors were asked in a recent sur-vey, to give an example of a company today pursuinga successful radical growth strategy (MarketingSociety Annual Conference, 1996). The three mostpopular choices were Microsoft, Virgin and DirectLine. A second question asked what companies theywould invest in now if they were obliged to hold theshares until their retirement. The leading choices

European Management Journal Vol 16 No 3 June 1998 253

were Marks & Spencer, Shell and Unilever. Finally,they were asked what companies were pursuing theradical growth strategies a decade earlier – around1987. In other words, who were yesterday’s equiva-lents of Microsoft, Virgin and Direct Line? Not sur-prisingly, this proved a more difficult question forthem to answer. Researching the business pressshowed that the three most quoted successes of thelate 1980’s were Saatchi & Saatchi, Ratners andPoly Peck.

The results of this survey were first, the three ques-tions generated completely different sets of compa-nies. While today’s radical growth companies wereobserved with awe, very few experienced managerswould wish to invest in them long term! The compa-nies seen as offering the best long-term shareholdervalue were pursuing anything but radical growthstrategies – continuity rather than revolution charac-terized their approach to the marketplace. Second,virtually all of the companies highlighted a decadeearlier for their radical growth strategies had disap-peared or were in serious financial difficulties. Sucha finding echoes the follow-ups on the famous Petersand Waterman study of 36 excellent companies(Peters and Waterman, 1982) which found a veryhigh proportion of these ‘stars’ had quickly run intosevere financial problems (Makridakis, 1996).

The 3 R’s of Strategy

An analysis of the different growth strategies pur-sued by companies suggests that they can begrouped into three types which can be termed: rad-ical, rational and robust growth strategies. These dif-fer in the rates of growth they offer, the value theycreate for customers and in the sustainability of theirperformance (Figure 1). Radical growth strategies cangenerate exceptional performance but they tend to beshort-lived. The main reason is that companies pur-suing such strategies do not focus on creatingsuperior customer value either through better pro-ducts or lower costs. As a result they do not generatecustomer loyalty and hence sustainable cash flows.

RADICAL STRATEGIES FOR PROFITABLE GROWTH

Figure 1 Alternative Growth Strategies

Rational growth strategies are based on innovationswhich do create superior value for customers but thelonger-term weakness of such strategies is that theydo not create entry barriers so that competitors cancatch-up or leap-frog the pioneer. Robust strategiesare the only sustainable growth strategies. Like therational strategy they provide genuinely superiorcustomer value but they are more sustainable. Thissustainability is based upon the company’s networkof relationships with internal and external stake-holders. Such networks allow the company to con-tinually update its strategy, build customer loyaltyand, over time, create brands which act to provideentry barriers against competitors. Because robustcompanies tend to be larger and more mature thanthe other two types of company their growth ratesare lower. Exponential growth rates are never sus-tainable for a long period – a company growing at20 per cent a year would soon be bigger than theentire market in which it could operate. The chal-lenge of the entrepreneurs who start with rationalgrowth policies is to transform their businesses intorobust forms. In today’s rapidly changing and hyper-competitive environment, without such a transform-ation entrepreneurial successes tend to be short-lived.

Key Strategic Principles

To understand the forces determining the sus-tainability of a strategy, it is useful to review the keyprinciples. The basic principle determining success ina market-based economy was set out by Adam Smithover 200 years ago – for firms to grow and make aprofit they have to develop a strategy and organis-ation to meet the needs of customers. Companies thatmeet customer needs efficiently can prosper; thosethat do not, disappear. But these early works on eco-nomics and marketing understated the dynamic nat-ure of markets – what satisfies customers today willnot satisfy them tomorrow. A rapidly changingenvironment: new technologies, new global competi-tors, changing demographics and life styles, createnew needs and new solutions to these needs. Conse-quently what is regarded as an excellent computer,car or service level now will be quickly obsoleted bythe interplay of changes in consumer expectationsand new, innovative products and services fromcompetitors. Consequently continued success

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depends upon adapting to the needs of consumerswhich continually change as a result of the rapidlyevolving market environment. From this the keyprinciples of strategic management emerge (Figure2).

Strategy Must Fit the Environment

Companies succeed as long as they are meeting theneeds of today’s customers efficiently. Newcomerssuch as Microsoft or BSkyB have established strongmarket positions and generated substantial share-holder value because they have come up with newproducts and services which brilliantly capitalize onthe opportunities created by new developments incomputers and communications. Long-establishedcompanies such as McDonalds, Coca-Cola andMarks & Spencer continue to succeed because theyhave adapted their products and market positioningto today’s environment.

Successful Strategies Erode

Business is Darwinian in nature – the success of mostcompanies is temporary. The average public-quotedcompany lasts only for 40 years. Once IBM and Gen-eral Motors dominated their industries just as clearlyas Microsoft, McDonalds and BSkyB do today. Wool-worth’s was once the world’s largest internationalretailer, Britain’s Alfred Herbert was the largestmachine tool manufacturer and BSA led the motorcycle market. These companies disappeared becausethey kept a good strategy too long. In a marketenvironment which is rapidly changing nothing failslike success. Nothing is more certain than that afirm’s current products, technology, distributionchannels and market positioning will become obsol-ete.

Effectiveness is More Important Than Efficiency

In Drucker’s famous aphorism, ‘efficiency is doingthings right; effectiveness is about doing the rightthings’ (Drucker, 1973). Efficiency is about reducingcosts through downsizing, consolidation and re-engineering; effectiveness is about innovationthrough new product development, new business

Figure 2 Key Strategic Principles


concepts and new processes. History shows thatinnovation always dominates low cost. Companiesthat lack the culture and skills to innovate cannotcompensate by offering yesterday’s answers at lowcost. Innovations normally start by offering a qualityadvantage but are usually soon competitive on priceas well.

Speed and Decisiveness

The speed and turbulence of environmental changetoday has created corresponding rewards for firmsthat can act rapidly and decisively. Firms that canreact to customers’ needs quickly and have fast newproduct development processes obtain higher aver-age prices, find it easier to create competitive advan-tage, gain market share and build brands. They alsohave lower costs (Stalk and Hout, 1990). In elec-tronics, for example, a six month delay in introducinga new product was found to cut its lifetime profitsby 32 per cent – far exceeding the likely losses fromcost overruns or quality problems (Reinertsen, 1993).But strategic success depends upon more than speed,it also requires the decisive commitment of resources.The evidence suggests that fast innovators fail to earnthe rewards and achieve lasting market positionsunless they commit substantial marketing and pro-motional resources to aggressively build marketacceptance. Without this decisive commitment, theywill be caught up and overtaken by competitors thatfollow in their slipstream.

Organisation is More Vital Than Strategy

However radical and successful an innovation is, intoday’s rapidly changing environment any suchbreakthrough provides only a temporary advantage.Consequently sustainable performance dependsupon the firm’s ability to continuously change byshedding current strategies and replacing them withnew concepts. This in turn depends upon the invest-ments management has made to build a sustainingand innovation-orientated network of relationshipswith employees, financiers, suppliers, customers andsociety as a whole. It is this ‘organisational architec-ture’ – the quality and depth of the firm’s relation-ships with its stakeholders and their commitment toit, which determines the firm’s ability to continu-ously, innovate and hence sustain its competitiveadvantage (Kay, 1993).

Radical Growth Strategies

The type of growth strategy most admired in thebusiness press is termed radical growth strategies.Figure 3 summarises their forms, characteristics andsome companies (mainly UK examples) which are orhave pursued such strategies. These companies


Figure 3 Radical Growth Strategies

receive attention because they can attain truly aston-ishing rates of growth. For example, in the space oftwo years WPP transformed itself from an obscuremanufacturing business to the world’s largest adver-tising agency. Ratners did the same in jewelleryretailing and Blue Arrow in employment services.There are three forms of radical growth strategy:acquisition-led; marketing department-led and PR-led. The characteristics of all three are explosivegrowth, the lack of focus on creating genuine qualityor cost advantage for customers and, as a result, non-sustainable performance. For instance of the elevencompanies in Figure 3, only one – Virgin, is still per-forming satisfactorily, six have disappeared altog-ether, and four have gone, or are going through,acute financial crises.

To understand the structural weaknesses of radicalgrowth strategies it is useful to review the most com-mon managerial objectives. Virtually all manage-ments have two basic goals: financial, and marketshare or growth objectives. Financial performance isnecessary to satisfy shareholder and creditor inter-ests; market performance is necessary to secure jobsand provide for future profits. The problem for man-agers is that these goals partly conflict, for examplelower prices, more advertising and a broader productrange will normally increase sales but can easilyreduce profits, and vice versa (Figure 4).

This conflict is even more apparent when the timedimension is added. While every decision has con-flicting effects – a good effect and a bad effect, thepositive effects on market performance tend to bemuch slower than the negative effects on financial

Figure 4 Marketing and Conflicting Business Objec-tives


performance. Lasting market share positions dependupon offering customers superior value but it cantake a decade or more to build the organisational andmarketing infrastructures from which superiorbrands, products and service systems can be offered.Unfortunately the investments in brand support,training and development necessary to build suchinfrastructures hit profits immediately. The result isthat all managements have a choice between a rela-tive focus on a long-run market share building strat-egy and a focus on high short-run profit perform-ance. The former emphasises understandingcustomers needs and developing solutions whichgive them genuinely superior value. This is the policypursued over a long period by such companies asMarks & Spencer, Toyota, Sony, Federal Express andDisney. In contrast financially focused companieslook inwards at asset management and budgets tocontrol costs, expenses and margins. Well-knownexamples include Hanson Trust, GEC and BTR.While marketing strategies take years to bear fruit,by contrast, short-run financial improvements can bebrought about very quickly. By raising prices, cuttingcosts and rationalising products and assets dramaticshort-run turnarounds in cash flow and earnings areeasily achievable (Doyle, 1994). Nearly all radicalgrowth strategies focus on such short-term resultsand most are financially-driven.

Acquisition-Led Strategies

Acquisition-led strategies are the most common formof radical growth strategy. This is how WPP, Ratnersand Blue Arrow achieved their passing global leader-ship. Unlike M & S, Toyota, Sony, FedEx and Disneywhich built their strong market positions by pains-takingly improving the quality of their offers yearafter year and so attracting new customers and build-ing stronger relationships with current ones, acquisi-tive growth works by buying customers and assets.The attractions of acquisition-led strategies to West-ern managers are three. First, they work dramaticallyfast. Whereas it took Marks & Spencer 60 years toachieve market leadership in the UK by internalgrowth, Ratners did it on a global scale in fewer thansix. Second, it appears easy – no skills other than fin-ancial acumen are required! With little expertise inadvertising, armed only with an MBA and anaccountant’s qualification, Martin Sorrell was able toconstruct the world’s largest advertising business.Third, they are not dependent on the culture of theorganisation and the quality of its network. Becausegrowth is purchased its achievement is not depen-dent upon the commitment and knowledge of thestaff and the trust and relationships built among cus-tomers, suppliers and other stakeholders.

Unfortunately acquisition-led strategies suffer twocrippling problems. First, the evidence is overwhelm-ing that the great majority fails to create value forshareholders. In the long-run around two-thirds gen-


erate lower capital gains and dividends than theindustry average. The more spectacular the growththe greater appears the probability of value destruc-tion (The Economist, 1997). Second, not surprisingly,since the objective is size rather than quality they donot create superior customer value. In general, com-panies that grow by acquisition end up with a ragbagof overlapping brands, none of which has criticalmass. Managers lack the knowledge to deal with thenew marketing and operational problems thatexplosive growth creates. Saddled with the debtincurred to make the acquisitions many of these com-panies quickly succumb when their sales and earn-ings forecasts prove too optimistic for the realities ofthe markets in which they have entered.

Marketing Department Strategies

In some consumer goods companies strategy hasbeen driven by marketing managers. Unfortunatelyin the current competitive environment the market-ing function rarely has control over the real levers ofcompetitive advantage. Today customer satisfactiondepends less on traditional brand management andmore on to-the-minute delivery performance, seam-less IT interfaces, co-design of systems and multi-level multifunction supplier–customer partneringwhich are either controlled by other functions ordepend upon close cross-functional co-operation(Mac Hulbert and Pitt, 1996). Some marketing man-agers cannot adapt to these changes and havefocused on those instruments over which they stillhave control – advertising, packaging, line extensionsand trading-up policies.

Pepsi Cola spent $500 million on advertising andpackaging in an abortive attempt to relaunch thebrand in 1996. The key differential advantage wasthat the can was now painted blue rather than red!Line extensions were another growth strategypushed by the marketing department. By 1997Procter & Gamble was offering consumers a choiceof 52 varieties of Crest toothpaste. But perhaps themost characteristic marketing department strategy ofthe last decade was product differentiation and trad-ing-up customers. This was based on the observationthat the aggregate demand curve for a product orservice was made up of a series of segment demandcurves of varying elasticities. So charging a singleprice, say £3 (see Figure 5) left a considerable con-

Figure 5 Marketing Department Strategies


sumer surplus. During the 1970s and 80s marketingmanagers learned how to exploit and procure theconsumer surplus by launching differentiated brandsfor each segment and then trying to trade-up con-sumers from low price entry brands to premiumpriced versions. So brands at say £7 and £10 wouldbe launched alongside the base £3 brand. Forexample, United Distillers which had the JohnnieWalker Red Label scotch whisky at £10, then addeda Black Label at £20, a Gold Label at £60, a Blue Labelat £120, and so on. American Express added to itsGreen Card, Gold Cards and Platinum at substantialpremiums. Such marketing strategies became ubiqui-tous in the 70s and 80s. They were often surprisinglysuccessful in boosting profits since the differencesbetween base and premium versions were oftenpurely cosmetic. Even the chief executive of UnitedDistillers was bemused at the success of this strat-egy, remarking

‘We have massive amounts of research which show thatpeople cannot tell the difference between one scotch andanother. Though they swear total allegiance to one productand would never dream of drinking Brand X, in blind tas-tings brand X is more often than not what they select(Financial Times, 1993).’

PR-Led Strategies

These strategies seek growth through the exploitationof public relations. In these companies publicrelations is regarded as the key function in the busi-ness. In the past Saatchi & Saatchi and today the Vir-gin organisation are good examples. Such companiesmarket conventional products and services in anunconventional way. Often they depend on the char-isma of the leader, for example Maurice Saatchi orRichard Branson, to grab the interest of press and TV.Successful PR strategies obtain great media attentionmuch more economically than relying on advertising.Editorial publicity normally also has much more per-ceived reliability than paid-for media.

Ultimately, however, PR-led strategies tend to be‘found-out.’ While marketing or PR can get con-sumers to try the product or service they are notgoing to achieve loyalty unless performance andvalue match the best competitors. In most marketscustomers are ultimately rational and image isrelated to performance. Studies of consumer behav-iour overwhelmingly suggest a basic underlyingmodel (Engel et al., 1995):

It = a + O`i = 0

bi + 1Rt 2 i + et

The image (I) of a product or service at time t, is alinear lagged function of its real value to the cus-tomer (R), with an error term, e. Image is a functionof reality – consumers are rarely irrational over thelonger run. Over time customers learn which pro-


ducts meet their needs and which do not offer goodquality. Advertising and PR essentially act on the lagin this equation. For quality products advertising andPR can reduce the lag in the recognition of thereality – they can help build a successful brand imagemore quickly. For weak products a creative com-munications campaign can temporarily hide theproblem by drawing in new customers – but ulti-mately consumer experience will erode the imagebringing it into line with its reality. Brands such asMercedes Benz, British Airways or Sony have greatimages because they offer products and serviceswhich offer excellent value in quality, performanceand reliability. Communications plays a relativelyminor role. Brands such as Lada, British Rail andAmstrad have weak images because they haveweak products.

During the 1990s all three forms of radical growthstrategies have proved vulnerable to the new com-petitive climate. Figure 6 illustrates the problem.Most markets are characterised by a range of com-petitive brands, some competing as discount brands,others as regular and some as premium brands. Onechange has been consumers’ willingness to tradedown from heavily marketed premium brands toregular or discount brands. Consumers are increas-ingly unwilling to pay substantial price premiums forproducts whose only differentials are advertising,packaging and PR. Even Coke and Pepsi, brandsonce perceived as unassailable, saw their marketshares in UK supermarkets drop by 28 per cent in1995 alone as consumers switched to cheaper ownlabel. Even more fundamental has been the develop-ment of new generation competitors which have fun-damentally reconfigured the industry value chain tooffer genuine and major competitive advantage(Doyle, 1995). One type may be termed price-valuecompetitors: these offer high quality products atprices substantially below the traditionally pos-itioned brands. They achieve this by re-engineeringnot only their own operations but also the costs oftheir entire channel. Total costs are reduced by 30 percent or more. Direct Line, Daewoo and Wal-Mart areexamples of such new competitors. The other typesof competitor are termed quality-value companies;here the integrated value chains are restructured toprovide higher quality rather than low prices.

Figure 6 Pitfalls of Today’s Marketing and PRStrategies


Figure 7 Rational Growth Strategies

Examples are Marks & Spencer, the Lexus Division ofToyota and Body Shop. All of these companies haveeliminated functional boundaries to commit to genu-ine value creation.

Rational Growth Strategies

Rational growth strategies find innovative solutionsto offering customers significantly better products,lower prices or both. Figure 7 shows the main fea-tures of this strategy and gives examples of compa-nies who are, or who have, grown by such means.Rational growth is sounder than radical growthbecause it offers genuinely superior performance.These companies do it by exploiting strategic win-dows in the form of new technology, new marketsegments, new channels of distribution, or all three.The problem with rational growth strategies is thatthey are not sustainable and consequently do notoffer long-term shareholder value.

The example of Direct Line illustrates the strengthsand weaknesses of rational growth strategies. Until1986 motorists in the UK bought car insurancethrough the thousands of independent brokers. Thelarge insurance companies which did the underwrit-ing had little knowledge or contact with the ultimatecustomers. The result was a system which was highcost, offered poor consumer service and had ineffec-tively marketed products (Figure 8). In 1985 a newcompany, Direct Line entered the market with a com-pletely innovative approach. Brokers were eliminatedand the new company advertised in press and TVdirectly to motorists. Supported by sophisticated IT,Direct Line staff were able to offer instant insurance

Figure 8 Rational Growth Strategies — Direct Line


over the phone and respond immediately to prob-lems and claims. By offering better service, high visi-bility and taking 40 per cent out of system costsDirect Line catapulted itself to market leadership andtransformed the industry.

Unfortunately, like other rational growth strategiesDirect Line’s tremendous innovation does not appearto have been the basis for sustainable performance.Like others who transformed the cost structure oftheir industries, the natural strategy was to use thecost advantage to target price-sensitive customers.Unfortunately price-sensitive customers are, bydefinition, not loyal. When competitors copied theDirect Line innovation, customers shopped aroundfor the lowest quotation. Because of its customer baseof price-sensitive customers, the company soon hadthe highest defection rate in the industry. The onlyway to maintain market share was then to seek newcustomers, which given the high cost of acquiringnew customers, soon led to a dramatic erosion ofDirect Line’s profits.

Rational growth strategies then provide break-through customer value but are generally quicklycopied, even leap-frogged by new competitors.Further, they do not create loyal customers, which asall the recent work on relationship marketing demon-strates, does not provide a basis for long-term profits.New customers are expensive to acquire in invest-ment, time and promotion. They rarely break-evenuntil they have been on the books for several years.Loyal customers, on the other hand, are the real basisfor healthy profits — they do not have high mainte-nance costs, they tend to spend more, they becomeless price sensitive and they act as effective word-of-mouth advertising for the company. Hence, retainingcustomers, not acquiring them is the key to long-termprofitability (Reichheld, 1995). A company thatbecomes dependent on new customer acquisition tomaintain market share is in a very vulnerable pos-ition. Unless rational growth companies transformthemselves into robust businesses they do not last.

Robust Growth Strategies

Companies pursuing robust strategies (Figure 9)appear to base their development upon four prin-

Figure 9 Robust Growth Strategies


ciples. First, strategy is built around delivering thelong-term superior value which will encourage loy-alty among its customers. Second, they recognise thatin today’s rapidly changing and globally competitiveworld no specific advantage is sustainable for verylong. Third, this implies that learning and the abilityto continuously innovate is the only basis for sus-tainable growth (Baghai et al., 1996). An organis-ation’s ability to continually learn and innovatedepends upon the knowledge, co-operation and com-mitment embedded in its network of relationshipswith customers, employees, suppliers and otherstakeholders. These assumptions contrast sharplywith those of the radical and rational growth compa-nies.

Figure 10 places this form of growth in a broader con-text. A company’s potential for profitable growthover any time period is constrained by three pillars.One is its industry advantage – some industries con-sistently exhibit higher growth and profitability thanothers. For example of the Fortune 500’s twelve mostprofitable companies in the world, normally at leasthalf are pharmaceutical companies. In other indus-tries, low entry barriers, fierce competition andpowerful customers limit the opportunities for sus-tained profitable growth (Porter, 1980). A second fac-tor affecting potential is the company’s strategicassets – inherited or monopoly advantages giving itspecial opportunities in the industry. These includestrong brand names, for example McDonalds andJohnson & Johnson’s current growth is in part theresult of brand investments made long ago. Licensesmay also convey advantage. British Airway’s per-formance has benefited greatly from its control of thescarce landing slots at Heathrow, the world’s busiestinternational airport, obtained when BA was priv-atised. Industry advantages and strategic assetsemphasise that high performance is not necessarilythe result of good management – luck plays animportant role! The third pillar is the company’s corecompetencies – its unique technical skills and knowl-edge that allow it to offer customers superior value.These might be special skills in branding and market-ing grocery products (e.g. Procter & Gamble), techni-cal know-how in certain areas facilitating an edge ininnovating (e.g. 3M) or supply chain managementexpertise offering the ability to give exceptional qual-

Figure 10 Determinants of a Firm’s Performance


ity and value in a retail context (e.g. Marks &Spencer).

What locks these three pillars together is the long-term investment that some companies make inorganisational networks which creates a configur-ation that can create sustained competitive advantagethrough repeated improvement and innovation. It isthe company’s network of internal and externalrelationships which permits the consistency and com-mitment of its strategy, systems and people. It is thefailure to make this investment which accounts forthe temporary nature of the radical and rationalbased strategies. A well-built organisation has threekey outputs: strategy, systems and the quality andloyalty of its people.

Strategy – a Dynamic Customer-Focus

All the companies that show robust growth focusconsistently on solving customer problems – they arecustomer-led rather than financially-led. This is evi-denced first in listening to customers. From the topdown – directors to shop floor, everyone is involvedin talking with customers about their needs andproblems. This focus naturally encourages them tobe innovative, after all innovation is best defined asmeeting customer needs that are not currently beingmet. Identifying current or emerging problems is themost effective launching pad for the innovativeorganisation (Kim and Mauborgne, 1997). The thirdfeature of strategy is a commitment to quality: they allunderstand that this is the basis for creating customerloyalty and needs to be guaranteed. Finally allemphasise the long-run nature of their businesses:investment decisions do not need to be justified interms of their immediate pay-off; if the investment isnecessary to make the business competitive in thelong-run, it must be made.

Systems – an Effective Organisation

A customer-orientation is wishful thinking withoutthe technology and systems to provide effective sol-utions. Today competitive advantage is more andmore located in the firm’s IT and systems, its supplychain management expertise and in the network ofpartnerships it has with suppliers, customers andother industry players. Effective systems provide thebasis for the firm’s communications, its quality con-trol, its efficiency and sources of innovation. Radicaland rational growth orientated companies are vul-nerable because they rarely have effective integratedsystems. It takes decades to build the world-class sys-tems possessed by companies such as Toyota,Procter & Gamble or Marks & Spencer. Without thesesystems companies cannot create the basic core pro-cesses covering operations, innovation and customersupport which are the foundations of sustainablegrowth. A fundamental feature of robust growth


companies is the priority they attach to investmentand development of systems.

People – Commitment and Capabilities

Robust companies attach the highest priority todeveloping the capabilities and commitment of theirpeople. Unlike radical and rational growth compa-nies they appreciate that size or a strategic break-through are not the basis for sustainable perform-ance. Capabilities depend on selection and trainingand robust businesses are normally marked by thecontinuing investments they make in developing ahighly-skilled workforce. Capabilities need to bematched by a commitment to use these skills forachieving the firm’s goals. Competitive pay andparticularly personal recognition are carefullydesigned to encourage motivated staff. Studies alsoemphasise the importance of leadership in communi-cating the organisation’s goals and creating a desireto beat the competition and achieve industry leader-ship (Hamel and Prahalad, 1994). Finally these com-panies are increasingly process rather than func-tionally driven. Even highly skilled and motivatedpeople, if allowed to operate in functional or depart-mental ghettos, will not be effective. Robust compa-nies understand that trust has to be built betweenmarketing, engineering and front-line staff so thateffective team-based efforts go into building the realvalue added processes of operations, innovation andcustomer support.

Figure 11 summarises the organisational differencesbetween robust, radical and rational growth compa-nies. Robust companies have a long-term horizonwhile radical and rational businesses expect immedi-ate breakthroughs. The latter do not see the need forinvestment in their organisational infrastructures – inlong-term strategy, systems and staff, since theresults are outside their time perspective. While theyprioritise short-term financial and sales targets,robust companies look at continuing indicators ofunderlying customer loyalty, quality and incrementalinnovation. The IT and supply chain systems of rad-ical and rational companies tend to be rudimentaryand channel members are seen as competitors ratherthan partners. The focus is on cost, financial controlsand exploiting assets. Robust companies such as 3M,

Figure 11 Robust Strategies — Characteristics


Mars and Toyota prioritise developing effective sys-tems and partnership arrangements whichstrengthen their core processes. Finally the longer-run outlook of robust companies leads to the devel-opment of a different relationship with their staff.They have a much greater incentive to invest in theirskills, build a shared vision for the future andempower them in decision-making processes.

Building Robust Strategies

Given that radical and rational growth strategies areconspicuously unsuccessful in generating long-runshareholder value, it seems odd that all companiesdo not aim at developing robust growth strategies.One reason for the comparative rarity of robust strat-egy is management’s desire for the quick fix. Westernmanagement and financial markets have very short-term horizons, they expect poor performing compa-nies to be turned around quickly and certainly do notwant to see significant net investment in companieswith weak margins. Such career expectationstogether with the prevalence of bonuses based onannual profit targets all motivate managers to go forthe fast buck rather than lay the foundations forgrowth in the generations ahead. A second reason isthat many managers do not know how to developthe organisational relationships which make sus-tained growth possible. Many of the top managers inindustry have narrow functional expertise, often inaccountancy, and limited experience of successfulgrowth companies. They simply lack the experienceand knowledge to provide the vision and leadershipcompanies need to compete in today’s global mar-kets.

A past legacy of eroding market shares, redundanciesand the distrust between management and workforcewhich characterise so many companies also makes itchallenging to build the necessary trust and confi-dence among the firm’s stakeholders. Creating arobust strategy is a greater leadership challenge thanthat required in businesses pursuing radical orrational growth. Leaders in these companies, buoyedby the glamour and media attention that a few yearsexceptional industrial performance brings often seemto believe that the key strategic principles do notapply to them – ‘we are different,’ they say. A fewyears later faced with declining margins, increasingcompetition and disappearing customers they learnthat there are no short cuts to building world-classbusinesses.

How should managers go about building robustgrowth strategies? First it is important for them tounderstand the fundamental distinction betweenrationalisation and transformation. Rationalisation isthe short-term turnaround of a failing company achi-eved by reducing assets, raising prices and cuttingcosts. Usually such actions can very quickly boost


profits, but they do little, indeed they are often coun-terproductive, to building the firm’s long-run com-petitiveness. Yet rationalisation is seductive to manyof today’s managers since it earns the applause of themedia, the approval of the stock market and earnsbig bonus payments for the managerial team. Unfor-tunately rationalisation, as companies such as Han-son, BTR, GEC, British Leyland and many otherslearned, destroys stakeholder organisational relation-ships and with it the skills and commitment to achi-eve innovation, customer value and growth.

Transformation is about putting in place a long-termstrategy to achieve robust growth. It means focusingfirst on creating a clear strategy built around cus-tomers, innovation and quality. Second, it requiresinvesting in the systems which will enable the com-pany to possess world-class core processes in oper-ations, innovation and customer support. Third, itmeans prioritising building the skills and commit-ment among the people who work for and with thecompany. Such objectives require a completely differ-ent type of leadership from that for company ration-alisation.

Where radical and rational growth strategies areabout gaining new customers, robust companiesfocus on retaining their existing customers. Theyknow that if current customers are happy, word-of-mouth will guarantee new customers. In general thelonger customers are retained by a company, themore they spend, the less price sensitive they becomeand the lower the costs of serving them. By contrastnew customers are normally expensive to acquire interms of research, advertising and selling. It oftentakes two or three years for a new customer to break-even. This ability to deliver the quality and inno-vation which results in high customer retention is thereal source of the financial strength of robust compa-nies.

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PETER DOYLE, War-wick Business School,University of Warwick,Coventry, CV4 7AL, UK.

Peter Doyle is Professorof Marketing and Stra-tegic Management at theUniversity of Warwick.He specialises in corpor-ate consulting andresearch in the fields of

strategy and international business. He is Directorof Warwick Business School’s MBA Programme andChairman of its Executive Programmes. He hasacted as consultant to many international businesseslike Shell, IBM, BP and ICI, and advised pro-fessional bodies including the UK’s Cabinet Office,Institute of Chartered Accountants and the Pacific-Asian Institute of Management.

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