CEOs: Don’t Settle For Growth

“Growth without profit is a complete waste of time!”

Perhaps it was the fact that he was pounding on his desk with a crutch that made Bruce Greenwald’s lecture so memorable. In the summer of 2004, Greenwald, Robert Heilbrunn Professor of Finance and Asset Management at Columbia Business School and one of the leading authorities on value investing, was angry.

He was angry because he’d recently broken his leg in a nasty fall. And he was angry because the world seemed to have forgotten that not all types of growth are created equal; in fact, he was pounding into our collective memories that some growth can actually be counter-productive.

With the hyper-competitive nature of business today, this lesson has never been more relevant.

Every CEO is obsessed with growth. In fact, in a recent study by KPMG growth was cited as the most important focus for their company’s well-being over the next three years. They push their teams to discover untapped market opportunities, create breakthrough new products, launch great marketing campaigns, enhance their channel strategy, make acquisitions, optimize their pricing, expand their sales team and — when they’re alone — often hope and pray that the investments they’re making are going to pay off.

Here’s the catch: not all types of growth are created equal.

The logic is simple but often overlooked. If a CEO creates growth in a manner that can be replicated, the benefit will likely be short-lived because the competition can seize on the fact that the leader has done much of the heavy lifting: identifying a greenfield opportunity, paving the way to get there, creating market awareness, and figuring out what to do to unlock the potential. Competition can then run the same play, do it more efficiently, take market share, and create significant pressure on margins.

Therefore, the quest for growth isn’t enough. CEOs need to focus on sustainable, profitable growth. Value investing, the philosophy that focuses on identifying investment opportunities that avoid market hysteria and have durable competitive advantage, ensures that investments are not made in reaction to a hot trend (we need a wearable device!) or that require a large amount of risk without knowledge on potential return (we’ve got to bet bigger on our core business by acquiring more scale!).

We believe companies should embrace one of the key tenets of value investing; namely, that the key to truly valuable growth is for a business to identify its uniquely compelling core (the assets that are most differentiating and most valuable to the market), to invest against the core and build competitive barriers around it. This approach helps to make choices about where to invest time, energy and capital, helps determine what to kill, and serves as the inspiration for growth.

Patagonia’s famous Black Friday campaign, “Don’t Buy This Jacket,” was part of an initiative they launched in 2011. As part of the program, they asked consumers to think twice before buying anything, and to sign up for their initiative, Common Threads, which allows customers to recycle used Patagonia clothing to be refurbished and reused. The ad could be deemed a success or a failure — it led to a 30% revenue increase (success), but certainly did not slow purchases of jackets (failure?).

A compelling example of a company that has identified and invested against its core is Patagonia. Outdoor apparel companies all lean on the consumer promise of exceeding quality: high performance, built for the extreme. Patagonia’s promise is to build products that last — so that consumers can have fewer, but longer-lasting things. This commitment to do better by consumers and the environment is deeply embedded into the organization. From their “Ironclad Guarantee” on their products to becoming a certified B-Corporation in 2012, Patagonia continues to invest in their mission in products that are made with the environment in mind. The results of their commitment to transparency and environmentalism have tripled profits since 2008.

“I know it sounds crazy, but every time I have made a decision that is best for the planet, I have made money. Our customers know that — and they want to be part of that environmental commitment.” — Yvon Choinard, founder of Patagonia

Applying it to Innovation

From the very start at Fahrenheit 212, we’ve drawn on the core tenets of value investing as inspiration for the way we develop innovation strategies. Our approach is designed to help our clients identify their uniquely compelling core, plot a strategy that will enable them to leverage it as the focal point for their innovation, and serve as the springboard for innovations that will deliver the sustainable, profitable growth our clients need.

Compelling and Unique

Often times companies that are looking for a new strategy to drive their growth focus on two key inputs: the category and the consumer. It’s an entirely logical approach. And it’s a great start; but it’s not enough. To drive growth you absolutely need to understand the category in which you’re operating, the emerging growth opportunities within the category, and the competitive dynamics. And you need to understand your current and target consumers. However, if you base your strategy entirely on the potential represented at the intersection, you’ve got the recipe for growth without advantage because the competitors can lay equal claim to the opportunity.

Therefore, to bring advantage to growth, you need to assess two additional factors simultaneously: the channel and the company.

By incorporating these into the mix — understanding the unique challenges/opportunities available in the channel and the unique assets your company can deliver — you create a combination the competition can’t match.

In essence, you’ve created a strategic fingerprint that is both compelling to the market (consumers and channel partners) and unique within the competitive landscape. As such, it’s designed to drive growth born of market appeal — and the potential for sustainable profit — driven by your unique ability to deliver it. It is a strategic analysis that we do for every client at Fahrenheit 212 to ensure we deliver growth that is also uniquely differentiated. We call this the Four Cs. They aim to bring together the following considerations:

Consumer insight: Who are they; What do they want that they aren’t getting today?

Category insight: What category do we play in today? How would we define the category moving forward? Where are the unique opportunities for growth?

Channel insight: What are the pain points or opportunities that exist in the channel today? How can we think about new channel models that will provide competitive advantage?

Company insight: What is uniquely defensible that we can leverage?

Within our Four C model, we synthesize the insights, data, and opportunities into a unified strategic core that solves for these four critical areas and provides a foundation that is compelling to the market and unique to the company with which we are working. As such, it becomes the mechanism for making critical choices, establishes a clear value proposition for the business, and provides the inspiration for the development of innovation that will win in the short, medium and long-term.

Growth that creates synergies with the core — like the products and services that Apple launched between the iPod and the iPad — is based on a strategic system that ensures each new innovation builds upon the strength of the one that came before it. This creates operational efficiency, leverages the inherent strength of the ecosystem (IP, brand, distribution, consumer base, etc.) and helps reinforce competitive differentiation. The benefit is significant. But as Apple has shown over the course of the last decade, the entire value of the system really comes into view when the network effect is in full swing.

Solving for all Four Cs simultaneously is never easy. However, when you can crack the code, you have the basis for truly valuable growth that would even make Professor Greenwald smile.