While the U.S. GDP grew at a robust 3.6% average through the second half of the 20th century, the world’s largest economy has averaged just 2.2% growth (adjusted for inflation) since 2009, and U.S. growth forecasts for 2016 stand at less than 2%. Meanwhile, the world’s recent boom regions (China, Brazil, and India) have either flamed out or noticeably cooled.
Under such tepid conditions, CEOs might believe they cannot significantly alter their company’s trajectory. Yet even in this era of stubbornly slow growth, chief executives can put their company on a whole new footing. They can literally reshape its destiny with a historic reset of P&L performance.
Granted, focusing on profitability in times of slow growth is not a novel idea. The problem is, few companies are doing it well. Our scan of the S&P 500 found that companies that channeled their energies into large-scale, integrated transformation programs generated 78% market cap growth between 2010 and 2015, while companies pursuing fragmented serial transformations achieved only 26% market cap growth over the same period, as compared to the overall S&P average of 55%. This suggests CEOs can turn an average company into a shining star, even in the midst of slow growth. It starts with thinking big.
The best formula for building a CEO legacy in a slow growth economy may be Rapid Earnings Expansion—a transformative, singularly ambitious initiative targeting a minimum two- or three-fold increase in EBITDA. Here—based on the experience of a global consumer goods company that once lagged behind its peers in operating margin—are 5 keys to success.
1. Set an audacious target. Commit to make your company a star performer whose earnings will significantly outpace market expectations within 18 months. If your target does not strain the credulity of your people, it is too timid. After all, your first task upon becoming CEO is to command the company’s full attention. At the global consumer goods company we served, for example, the CEO and executive team committed to exceeding analysts’ consensus gross earnings forecasts by 37% within two years.
2. Make the target non-negotiable. Your next task is to show them you mean it. Incorporate your target into the company’s forecast. This commitment sends a clear message that management believes the target is attainable, and makes the pursuit of your rapid earnings expansion a no-excuses endeavor.
3. Establish a single source of truth. Allow no part of your P&L initiative to create its own mission or metrics. Require all to align to a single objective: fulfillment of your audacious target. This avoids the trap of pursuing disconnected serial transformations that deliver no discernible boost to your bottom line.
4. Enforce shared accountability. If any action team credibly demonstrates it cannot find a practical way to meet its portion of the companywide target, the unmet share is not taken out of the program’s scope. Rather, it is added to the targets of other teams. The overarching goal must be met.
5. Drive to the bottom line. The gains from fragmented cost-saving programs often seem to evaporate somewhere on the way to the company’s bottom line. In contrast, a comprehensive and tightly integrated CEO-driven program allows for clear accountability and transparent tracking all the way to forecast fulfillment.
By applying these keys, the global consumer goods company achieved its bold earnings target and was quickly seen as a clear leader among its peers, earning a dramatic and sustained 50% rise in stock price.