1. Smart Growth Ed Hess Professor of Business Administration Batten Executive-in-Residence Hesse@darden.virginia.edu www.EDHLTD.com Leading Edge Executive Forum London September 6, 2012

2. GOALS Discuss the science of business growth Discuss the historical role of technology in creating growth Explore the future role of technology in creating growth Growth or Austerity is a FALSE choice: technology can enable both simulataneously 2

3. 10 YEARS OF RESEARCH 3

4. MY THEMES To be a high performance global business of the future one must have two world-class competencies: Human Capital and Technology Capital 4

5. MY THEMES Technology diminishes the competitive advantage of size and scale Technology diminishes the power of the mass production business model Technology enables the mass collaboration and mass customization business model 5

6. LEADING EDGE TECHNOLOGY BASED ORGANIZATIONS One can see these themes playing out today in the quant hedge funds like Renaissance Technologies, LLC One can see these themes playing out today in military special ops and the intelligence community Technology based “new growth” companies: Amazon, Google, SalesForce.com 6

7. TRADITIONALLY The fields of strategy, finance & economics have dominated growth thinking: Sustainable competitive advantage Unique products or services Japanese production model or High value - add niche model Growth is a linear reductionist production model ROI, ROA, EVA, IRR 7

8. WHAT IS SMART GROWTH? Research-based : What we really know about growth and how it occurs What do the following disciplines say about growth ? Neoclassical, new growth, industrial, ecological, and behavioral economics; strategy, finance, OB, OD, innovation, biology & complexity theory 8

9. 7 SMART GROWTH FINDINGS 1)Growth is not a linear reductionist process 2)Biology & complexity theory model growth better than economics, finance, and business disciplines 3)Consistent growth is rare 4)Consistent organic growth is learning-based 5)Growth requires the Right Mindsets, System & Processes 6)High employee engagement & customer-centricity drive growth and innovation 7)Growth is behavioral- financial results come from behaviors 9

10. WHY IS CONSISTENT GROWTH SO HARD? Individuals are hard-wired to be anti-growth: Cognitive Blindness & Cognitive Dissonance The reasons organizations exist are anti-thetical to growth: To produce reliable, predictable, standardized results with low variance and low risks 10

11. DNA OF GROWTH Most consistent high growth companies Do not sell unique products or services Do not have the best talent Do not have visionary leaders Are not the most innovative Do not have the lowest costs Do not have complex diversified strategies 11

12. HPOS: 30 YEARS OF RESEARCH The “best” 8 studies: 1982, Peters &Waterman, The Search for Excellence 1994, Collins & Porras, Built to Last 1997, DeGeus, The Living Company 2000, O’Reilly & Pfeffer, Hidden Value 2001, Collins, Good to Great 2003, Joyce, et. al., What Really Works 2007, Hess, The Road to Organic Growth 2009, Simon, Hidden Champions 12

13. 9 CONSISTENT FINDINGS The “Not so secret sauce”: 1)Simple focused strategy- an “elevator pitch” business model 2)Structures that enable entrepreneurial behavior- “Small company soul in a large company body” 3)Higher purpose than shareholder value/profit- Money is not enough 4)Culture of relentless constant improvement- better, faster, cheaper 5)High employee engagement- an implied social contract – an accountable “family” 13

14. 14 6)Customer centricity – Inside the customer- 7)Humble passionate value-based leaders 8)Execution & service champions- excellence everyday every way by everyone enabled by technology- TECHNOLOGY LEADERS in Their industry 9)An Internal aligned self-reinforcing System that enables, motivates, and rewards desired behaviors 9 CONSISTENT FINDINGS (CONT.)

15. GROWTH IS Growth is a dynamic iterative ziz-zag feedback-double loop learning process Growth is a bottom-up & top-down process Growth results from experimental learning Growth requires constructive inquiry, critical thinking, diversity of views, a tolerance for failure, permission to speak freely Growth requires flexibility, adaptability, speed, and organizational agility and ambidexterity 15

16. FORMULA FOR GROWTH Growth = Mindsets + System + Processes A Growth Mindset : Individuals & Organizationally An internal enabling System linking in a consistent seamless self- reinforcing manner strategy, structure, culture, leadership behavior, HR policies & processes, measurements, & rewards to drive growth BEHAVIORS 16

17. GROWTH PROCESSES Dynamic strategy making Ideation Opportunity exploration- what if Customer co-creation “Learning Launches”: Business’s scientific method Growth Portfolio creation & management 17

18. THE COMMON GROWTH PROGRESSION* Geographical expansion Sell complementary products to existing customers Expand to new customer segments Add complementary services Cost efficiencies Technological productivity in supply chain, logistics, & manufacturing Strategic acquisitions (small) Move to solutions selling * McKinsey and Hess Research Projects 18

19. TECHNOLOGY’S HISTORICAL ROLE IN CREATING GROWTH 1) Driving efficiencies & productivity Manufacturing Supply chain JIT Inventory Logistics & distribution 2) Providing financial & performance data to manage variances 19

20. TECHNOLOGY IS THE COMPETITIVE ADVANTAGE AT Wal-Mart UPS Google Sysco Paccar ADP Walgreen Amazon 20

21. TECHNOLOGY HAS Decreased response times Decreased the importance of physical proximity Increased the reach of every business Decreased the power of physical & financial scale Destroyed the false choice of size v. niche player Democratized business globally Given customers more power Changed the velocity of product lifecycles Made mass speedy customization possible 21

22. TECHNOLOGY NOW IS A GROWTH ENGINE WHY? Technology is moving from the “back of the house” to the “front of the house”: Technology now makes scenario planning ( 40+ years old) and knowledge management ( 30 + years old) and organizational learning ( 40+ years old) realizable 22

23. TECHNOLOGY CAN DRIVE Growth Experimentation Evidence-based management Analytics into dynamic strategy making, marketing, customer engagement, and human capital recruitment, training, and engagement Technology can make employee and customer co-creation realizable on a broad scale 23

24. TECHNOLOGY ENABLES 1)A Learning Culture – A data-driven decision system at all levels 2)Early warning risks management systems 3)Mass collaboration with customers 4)Open innovation 5)Higher employee engagement 6)Destruction of business silos 7)Agility, adaptability, and makes speed a competitive differentiator 24

25. THE ROLE OF THE CIO Prediction: In great growth companies of the future, the CIO will report directly to the CEO. Technology is a growth engine- both top-line & bottom-line Ladies & Gentlemen: Start Your Engines ! 25