The Quest For Growth Is Driving CEOs

Few managerial afflictions are more threatening to a CEO’s tenure than a “failure to grow” diagnosis.

So therefore it’s unsurprising that growth, once again, topped the priority list in Gartner’s 2017 CEO survey. Yet most executives at America’s largest companies are struggling to fulfill their growth ambitions. Take the consumer packaged goods industry, for example: the category saw $35 billion in net growth, none of which was captured by the 25 largest firms. Yesterday’s flagship brands risk becoming tomorrow’s ghost ships if their managers cannot develop the solutions that people buy. [1]

Growth shortfalls are not for lack of effort or talent or spending. But in an environment of relentless change, global competition, diminishing barriers to entry and fragmented media, the formulas that have worked in the past—M&As to juice the topline and freshen the portfolio of brands and solutions, financial engineering to bolster margins or even mass advertising to dominate the airwaves and capture share of mind and wallet—have lost power.

Which leads to the question we’ve been carrying around the past several years and posing to the executives with whom we work: Why does this company exist?

“There is only one valid definition of business purpose: to create a customer.”—PETER DRUCKER

The answer to this question—a company’s purpose—acts as a set of lenses to discern what executives actually see in the external world and how they process the inputs, typically shining a bright light on a pervasive innovation killer. And unsurprisingly, most CEOs respond with the same malignant answer we’ve come to expect since the early 1980s: “Maximizing shareholder value.”

While no single choice can plausibly make or break innovation performance, awarding strategic primacy to shareholder value nearly always seals a low-growth fate. To highlight just one, demonstrably self-destructive behavioral consequence: 80 percent of corporate finance officers report that they would cut investments in marketing, R&D, innovation, and elsewhere if necessary to hit quarterly earnings targets, even if these near-term cuts promised to harm long term value creation.[2]

In embracing shareholder value maximization, executives seem to be willfully disabling their innovation and growth apparatus. The mechanics of operation are straightforward: when executives attach themselves to share price, they immerse themselves in the synthetic reality of stock market expectations. In doing so, they separate themselves from the real economy in which customers buy and use products—the real world in which people actually live.

So, what’s a growth-friendly, innovation-healthy answer to “the question?” As is so often the case with fundamental questions of management, Peter Drucker can help us.

In The Practice of Management, Drucker emphasized, “There is only one valid definition of business purpose: to create a customer.” To create a customer is to create value for them by providing a product or service that enables progress and desired experiences.

Take the story of Airbnb, a gold standard of innovation of the 21^st century. As a new college graduate in San Francisco, co-founder Brian Chesky could barely afford his own rent—let alone find the fees to attend a local design conference. When he realized that all the hotels in the area were sold out, he came up with the idea to rent out three air mattresses in his apartment to conference attendees in order to fund his own conference attendance. While an air mattress in his apartment was probably a less attractive option than a hotel room by traditional measures, Chesky was solving a problem (albeit in a cozier, more casual way).

This is how the innovation winners of today are getting to a more productive answer to the question about core purpose. They reframe it into the “customer creation” construct, posing the challenge in terms of the progress they are enabling in customers lives.

At the micro level of the product or service offering, this is precisely what successful innovations do: they enable customers to make progress and to create desired experiences. Scott Cook, the founder of Intuit, notes that constructing the right data that actually tracks customer benefit and progress is rarely the data that is readily available. Scott also was an early board member at Amazon, where he recalled that developing the software to monitor prices on thousands of items across hundreds of competitive websites was not easy—but because it mattered to Amazon shoppers to know that they were getting low prices, this was the data that the company needed and was what they invested in.

The lesson: if you want to grow and innovate, focus on creating customers, not managing earnings.

Maximizing shareholder value is a mantra that has diminished the vitality of corporations. Even the poster child of the shareholder value movement, GE’s Jack Welch, experienced a thorough conversion of his convictions with the benefit of hindsight. Looking back in 2009, he dubbed the unwavering pursuit of shareholder value, “the dumbest idea in the world … Your main constituencies are your employees, your customers and your products.” [3]

Chief executives and public company directors can begin to solve their growth deficit by answering “Why does this company exist?”, framing their answer in clarifying actionable measurable dimensions of customer progress. The answer should serve as a North Star for priority setting, resource allocation, and performance incentives.

A clear, compelling purpose also powerfully energizes the creativity resident in all organizations—and this happens for two reasons. First, a sense of purpose revitalizes our imaginations to solve worthy challenges. Second, focus requires constraints and, as most creatives have come to learn, boundary conditions actually enhance creative output.

In short, there is plenty of innovation effort and expense. But, guided by an empty purpose, it predictably fails. Energized by a compelling purpose, however, corporate innovators can retake the path to profitable organic growth.

[1] Taddy Hall, Rob Wengel, and Eddie Yoon; The Nielsen Breakthrough Innovation Report, 2016

[2] John Graham, et al; Value Destruction and Financial Reporting Decisions; Financial Analysts Journal (2006)

[3] Financial Times (March 12, 2009)