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Reader Profile

Gary Plaster, Senior Vice President
Jerry Alderman, Vice President
Charter Consulting

Editor's note: Each month, we ask a Directors & Boards reader to comment on critical issues facing directors today. If you'd like to participate in this section in the future, please email Scott Chase.

What are CEOs focused on?

After years of focus on cost reduction and efficiencies, the corporate agenda has clearly shifted. We recently completed a survey with The University of Chicago Graduate School of Business where 75% of the CEOs surveyed responded that profitable growth is their top priority.

Achieving profitable growth is tricky business; consider the following recent example at Ford Motor Company. On Tuesday, January 24, 2006, Ford announced the closure of 14 factories and elimination of 30,000 jobs. In all, Ford reduced their automotive production capacity by 1.2 million units or 26% of total capacity. Some people might attribute this problem to cost, but other factors played as large or larger roles. Listen to what Bill Ford, Jr., had to say on the day of the announcements: “Selling what you have rather than what customers want doesn’t make sense. It used to be that you’d build it and they’d buy it. But that’s wrong, that’s antiquated. Now it will be that if they will buy it, we will build it.” Bill Ford, Jr., clearly “gets it” and has his work cut out from him in transforming Ford into a customer-centric rather than a supply-centric organization. What is so ironic is that it was Henry Ford, the founder of Ford Motor Company, who so famously said when discussing the Model T in 1908, “Customers can have any color they want as long as it is black.” If you want to know if things change in business, just ask the Ford family.

How can companies deliver on their profitable growth promises to shareholders?
During the past five years we have witnessed time and again three key success factors rise above all others in successful initiatives: 1) quantify customer value, 2) take an “outside-in” approach, and 3) use a rigorous process. Taken together these three key success factors form the backbone of an overall approach called Customer Value Creation. We have recently published a book about this insightful and proven approach entitled, “Beyond Six Sigma, Profitable Growth through Customer Value Creation.”

Why is quantifying customer value so important?
Delivering value to customers is why companies exist and is clearly the fundamental building block of profitable growth. That said, value creation and value delivery has been more art than science throughout the history of business. The reason so many companies rely more on qualitative measures of value than actual financial data is because capturing the information necessary to quantitatively express value delivered to customers has not been possible until recent years. However, with the advent of tools such as the Internet, ERP, CRM and Business Intelligence companies are now starting to develop a more robust and quantitative understanding of customer value creation. The knowledge advantage this creates is allowing companies to build approaches to profitable growth that are not based on rhetoric but rather on financial data. The data based approach is winning!

How does taking an “outside-in” approach improve the odds of success?
To establish the proper context for driving profitable growth, companies need to develop an “outside-in” perspective…start with the customer. Like any good personal relationship, you have to an understanding for and see things through the other person’s eyes. However, in business, it is more complex as there are numerous relationships to manage and many different stakeholders to satisfy. The former CEO of ITT, Harold Geneen, was quoted as saying, “You read a book from the beginning to end. You run a business the opposite way. You start with the end, and then you do everything you must to reach it.” Only by taking an “outside-in” customer approach can a company create context around what needs to be done to drive profitable growth.

The problem is that most companies believe they create more value for the customer than their competitors. What they do not acknowledge is their own overconfidence bias. Dr. Kanheman, the distinguished professor from Princeton, recently won a Nobel in Economics for his work that in part demonstrated that people in all walks, especially business, are overconfident in their knowledge and ability. Executives will often fail due to a certain information bias rather than drive to the real truth or facts. By taking an “outside-in” customer approach you create a non-biased understanding of how you create value for customers over and above what is available to that customer form other competitors or substitutes.

Why is it important to have a profitable growth process?
If we have learned nothing else during the past 20 years of continuous improvement, we have learned that by applying rigorous process, such as the Six Sigma process “DMAIC” (i.e. define, measure, analyze, improve, control), we achieve repeatability and language from which the organization learns and improves. Without DMAIC or some other improvement process the organization is continuously reinventing the wheel. Continuous improvement works whether it is applied to process cost reduction or profitable growth enhancement. In the example of Ford discussed earlier, it is Toyota and Nissan who are taking the share of what continues to be a growing automotive industry. Nissan and Toyota are effectively using their deeply engrained culture of rigorous process and continuous improvement to create advantages beyond cost. Their continued improvement in market facing processes has given them a customer knowledge advantage that they are successfully leveraging into profitable growth.

What can directors and board members do to help ensure shareholder expectations for growth are achieved?

The three questions that directors should get comfortable with before endorsing growth plans are 1) can the business quantify the value it intends to deliver to customers?, 2) do customers agree?, and 3) what is the process for learning and continuous profitable growth improvement? In the words of Michael Porter, “in order to create advantage you have to do something different.” By developing a rigorous and repeatable approach to profitable growth, setting the proper context by using an “outside-in” perspective and quantifying value, your company will be doing something different than its competitors and will achieve its shareholder profitable growth expectations.

© Charter Consulting
A division of Technology Solutions Company

Gary Plaster is Senior Vice President with Charter Consulting, Chicago, IL. Plaster is former Partner with Grant Thornton LLP, serving as the National Managing Partner of Strategy practice and the firm's Chief Strategy Officer. Plaster is the co-author of "The Road to Success: How to Manage Growth," published by Wiley. He has a BS in industrial engineering and a masters in finance from the University of Wisconsin.

Jerry Alderman is Vice President with Charter Consulting, Chicago, IL. Alderman is a former executive with Boise Cascade and served as a naval officer on nuclear submarines. He is the co-author of "The Road to Success: How to Manage Growth," published by Wiley. Alderman is a frequent speaker at the University of Chicago where he also received his masters degree in business.