Putting Runs on the Board, One at a Time

Rather than swinging for the fences, smart outfits thrive on a consistent stream of singles and doubles, explains management guru Ram Charan

Author and consultant Ram Charan has advised some of the biggest, blue-chip names on Wall Street, companies like General Electric (GE ), Dupont (DD ), and Verizon (VZ ). So his insights about the nature of growth, the conditions that foster it, and how to cultivate them must apply only to the upper reaches of Corporate America, right?

Not so fast, says Charan. His client roster may be studded with big names, but his focus remains very much on the small details -- as you might expect of a man whose business education began at his father's knee in the family shoe store in India. No matter if a business is large or small, says Charan, the principles that underwrite survival and success differ not a jot from Wall Street to Main Street: innovation, communication, and reasoned, rational choices about where best to put your resources to work.

That's the message of Charan's latest book, Profitable Growth Is Everyone's Business (Crown Business, $22). He recently talked with BusinessWeek Online's Edward Popper. Edited excerpts of their conversation follow:

(For more of Charan's thoughts, see BW Online's book excerpt, "10 Tools of Profitable Revenue Growth"):

Q: You describe an effective strategy as hitting singles and doubles. What do you mean by this, and is it the most productive approach?


For profitable growth, you have to hit both singles and doubles, and then you will also hit some home runs. What people are doing is waiting for the home runs -- but they don't do the batting, so they're not going to hit the home runs.

The idea here is that if you're growing at 2% per annum, by doing small and simple things -- like introducing a new product or coming up with a new idea for a customer -- you might only increase your revenue profitability one more point. But moving from 2% to 3% growth is a huge improvement.

You can accomplish it through better pricing. You can accomplish it through a better sales force. You can accomplish it by getting more market share out of providing better service. These are all singles and doubles.

Q: What does better pricing mean in this context?


That you're giving value to the customer. That he's willing to pay a better price, a higher price. It doesn't mean a price reduction, but increasing the value in some way, so the customer benefits and you benefit. Offering more doesn't mean it's more expensive for you. Because now...you're putting innovation in, and that innovation is what's going to get you a better price, and better market share at a lower cost. That's what will differentiate you.

Q: So, basically, all companies that succeed, be they large outfits or small ones, are first and foremost innovation machines?


They have to be. If they don't create ideas and continuous improvement or innovation, they will disappear. For example, you have Intel (INTC ), which was nowhere in 1978, but it was an innovation machine. There were companies, in those days, that were not innovation machines. They disappeared.

Q: Let's say you have a business and come up with three ideas, all with with home-run potential, would you recommend pursuing all three at once?


You must evaluate the risks and resources available to develop them. If all three ideas are very risky and are going to consume all the resources, then...keep looking for a balance of singles, doubles, and home runs. By the way, it's very unlikely that you'll see three consecutive home runs.

Q: A large portion of your book has to do with marketing issues. How does your book differ from other books that focus on marketing?


Most companies don't have what I call "up-front marketing" skills -- the skills necessary to identify precisely which customers to go after, what would be the value proposition for those customers, and therefore, what's the shape of the products and services you're going to have? More importantly, how do you link with the people who develop those products. If you take these four items and pull them together, you have a fantastic engine of growth.

Q:How can a small business develop this communication, which you say is a vital ingredient of success?


In a small company, informality is a very important idea. So, for example, in a small company you allow everybody in your meetings to suggest ideas. Listen to them, shape them. Since it's a small company, you can have a daily conversation [about growth ideas], and people will learn how to come to the point quickly.

In this conversation, you could include customers, who can say what's on their minds. Every week, you could have three or four customers, who are noncompetitive with each other, talk on the phone with your executives and tell them what they think and what's happening. Customers love to do that, and if you do it properly, you can be evergreen about what's happening in the marketplace.

Q: You said if you do it "properly." Please explain?


First, to take that example, you don't have customers who compete against each other in the same meeting. Second, you conserve their time by asking the right questions. And third, you listen to their ideas in a way that lets you constructively understand the specificity of their thinking.

Q: Do you recommend that all small companies put higher-ups in more direct contact with the customers?


Without question. The better the higher-ups know the customer, the better they're going to grow the company.

Q: Do you think small companies, as they grow, need to guard against developing internal bureaucracy?


Yes. They've got to be very careful not to create...a hierarchy that blocks information. The key is selecting people [for promotion] who believe in information transfer, and who aren't insecure so they block information.... Once you select the person [for advancement], no incentive is going to change behavior. An insecure person is an insecure person, and insecure people hoard information and will not let it travel.

Q: You describe both good and bad growth. Can you explain the difference.


Good growth is profitable and uses capital wisely. Bad growth is really not profitable and consumes a lot of capital. A lot of companies make investments and grow, but they don't show growth in profit. There have been major retailers that have gone through bankruptcy. For years, their profits were declining, but they still opened stores. So you see that they were expanding their businesses, but their profits did not go up.

Q: Many of the examples in your book focus on larger companies. Does your strategy also apply to small businesses?


It absolutely applies. Growth is the juice of life, and the No. 1 issue for most companies in the U.S. So the idea is that the principles and tools that I've laid out are very applicable, no matter what the size of your company. If you have a million-dollar company, chances are you can see a lot of runway for growth, if your ways of making money and growing your business are unique.

If your way of making money and growing the business differs from [competitors], then you can grow the business through getting some of their market share. Or if you have a unique new idea that creates a new demand, you can go in and create your own market.

Starbuck's (SBUX ), for example, initially had one store in the Northwest. The owner caught onto the fact that people wanted to socialize, people wanted to indulge, and that there were no Italian-style cafés with reasonable prices in America. So it was very small, only one store, but the management could see what people wanted, and that there was a huge amount of growth opportunity available. Mapping what opportunities are transparent and visible, over a two-year period, will stimulate how you can grow your business.

Q: What strategies are useful for an entrepreneur trying to defend market share from a larger invader?


The first thing that every small business has do is simplify the word, strategy. Its a high-falutin' word. Strategy simply means...what are the five or six things you are going to do, the combination of which is going to get you ahead?

It means [deciding] what products and services to sell, targeted to which customers, and what's the value proposition for those customers. But in doing that, you also have to think about your pricing and your costs.

If this combination differs from your bigger competitors, you aren't only defending [your market share], you're going on the attack, and can take...market share from the bigger competitors. Those are the most important things and they usually come from blocking and tackling -- the simple things that you deliver to the customer better than the big guy, 100% of the time.

For example, your response time is two hours, where the big guy's is two days. That's blocking and tackling. You don't make a customer wait 10 minutes while you answer the phone. A customer can reach someone at the smaller company faster, quicker, and sharper than at a big company, to get a problem resolved.

Q: You place a lot of importance on what you define in as "segmentation." Could you describe this in more detail?


Segmentation is intuitive, and people are very good at it. But they should focus on the way they serve their customers, and how the formula they use to make money is different from their competitors. That's the second tool that's very, very important.

The example I give in the book is Cross (ATX ), the pen manufacturer.... The product, physically, is a pen. If I go and buy a Cross pen and pay $30, am I buying a pen for writing purposes? I can buy a dollar pen which may write better, but if I buy a Cross pen, I have this wonderful pen in my pocket that fits in with my image.

Now, one class of need is evident in the person who buys a Cross pen for his own personal use and pays a ton of money for it. The buyer is making a statement of how he or she values himself or herself. [Such a pen] is the same product that somebody buys to give to his daughter as a graduation gift. It's the same product that a company buys in dozens or by the gross, puts their company emblem or insignia on, and then gives as a gift to visitors or to the sales force.

It's the same product [in each of the above cases], but there are three segments. You have to decide which segment is more appealing to you and your company to pursue. This is a very important skill for finding growth.

Q: What goes into that decision?


First, you look at the opportunity in each segment. Second, what's the competitive pattern [in each segment]? And third, if you're going [into that market], because you're small, can you make headway and identify a different way to go ahead?

Cross has done a very good job segmenting. Over the years, they built their image, and now they recognize that there's a huge market for gifts given by companies to their sales forces and visitors. Cross is now broadening their production categories from pens to include accessories that go with the pens. So that there's a bigger, fuller package, and people are not bored when they get Cross products as gifts. [Cross] has really created growth in that way.

Before it's here, it's on the Bloomberg Terminal.