This excerpt is taken from chapter 6 of Branded Male: Marketing to Men by Mark Tungate. From the publisher: "Branded Male discusses the evolution of the male consumer and the efforts of marketers to tap into the underdeveloped male market. Using a typical modern male's weekday as a template, the book considers all the opportunities for marketing to him and the best ways to exploit these opportunities. Through this template, Branded Male examines male-centered branding in areas as diverse as cars, restaurants, technology, fashion and grooming, bars, gyms and books. Tungate also traces the evolution of the male consumer over the course of the past years, providing insight into how marketing experts have successfully targeted men."
ATTACKING MR JETSET
In Europe, many travelers are beginning to ask themselves whether flying is really the most efficient solution. Security phobia has turned most airports into Kafkaesque labyrinths, with Heathrow topping the list of travelers' least-loved hubs. Interminable check-ins, brusque security staff, the indignity of forced shoe removal and the injudiciously applied liquid ban are all encouraging consumers to snub airports -- at least for short-haul destinations.
The alternative is Europe's growing network of high-speed rail services. With tickets growing more affordable and technology advancing apace -- trains now travel at up to 330 km/h -- gliding is becoming hipper than flying. In July 2007, seven of Europe's high-speed train operators formed an alliance called RailTeam, whose goal is to offer seamless rail transport across the continent (www.railteam.eu). At the time of writing, the service links France with the UK, Holland, Belgium, Switzerland, Germany and Austria. By 2010 it expects to carry 25 million customers and serve 65 cities. It is estimated that actual travel now accounts for 20 per cent of the flying experience, so for trips of a short to moderate length, the train makes more sense. With security kept to a minimum, business travelers can use the time they would have spent in a queue tapping away at their laptops while verdant countryside zips past their window.
One of the main brands to benefit from this rail revolution is Eurostar, which in November 2007 opened its new terminal at St Pancras International. The station served a newly operational stretch of high speed rail line that cut journey times between London and Paris to two hours and fifteen minutes -- and between London and Brussels to just over an hour and fifty minutes.
Eurostar UK marketing director Greg Nugent can list numerous reasons why the train is better than the plane, concern over climate change being one of them. 'Business people are well-informed and the debate about emissions certainly won’t have escaped them. Many will opt for the train to reduce their carbon footprint, perhaps at the prompting of their employers. In general, though, they just hate being seen as out of date.'
Eurostar has created a program called Tread Lightly, which aims to reduce carbon emissions by 25 per cent per customer by 2012. But this is by no means the first time the rail service has attacked air travel.
In 2002, it embarked on an initiative to 'relaunch' the Eurostar brand with a campaign that directly targeted business travelers. At the time, there were already several factors in Eurostar’s favor. The business world was tightening its belt after 9/11, with restrictions on travel expenditure. The image of flying was still wobbly, with residual paranoia about possible terrorist attacks. Eurostar was seen as relatively stress- and hassle-free compared to flying, and punctuality was at an all-time high -- an obvious plus for the business community.
At the same time, however, Eurostar was being forced to compete with low-cost airlines. Many business travelers were locked into frequent flyer programes that delivered air miles. Worse than that, they considered Eurostar 'basic and functional' compared to the VIP service they were used to getting on long-haul business travel. Overseas trips were so linked to the executive lifestyle that some passengers felt that flying conferred status -- to fly for work was to have arrived. ('Eurostar -- How Mr JetSet made Eurostar. mean business', IPA Effectiveness Awards, 2006.)
Greg Nugent recalls: 'When I came to work at Eurostar, it had very little experience in targeting business travelers. I felt they shouldn't be too much of a problem to reach because they were easy to spot and had obvious needs. We worked with a psychologist called John Armstrong to identify exactly what they got out of flying. Among several insights, we found that they felt flying on business gave them some sort of elite status, while secretly admitting that it was boring and stressful.'
Business travelers demand special treatment. They do not like to be associated with tourists -- in fact, they like to remain as far away from the herd as possible -- and they demand certain comforts that help them work more efficiently either during or at the other end of their journey. But Nugent and his team unearthed another insight, which is that business travelers are not just business travelers.
'Looking at a crop of advertising campaigns at the time, we realized that business people were essentially being treated like idiots. They were all lumped into this Wall Street, hard-nosed executive category and they were expected to blindly buy into that. It was always the guy sitting on a plane in his shirt and tie being served a glass of champagne, or punching the air after sealing a deal.'
Internally, this character was referred to as 'Lufthansa Man'. He later morphed into 'Mr JetSet'.
'We wanted to target the intelligent business traveler. After all, business people are just people. Yes, many of them will work on their way to a meeting -- but often, on the way home, they've loosened their ties and are getting stuck in to a good book, or a magazine, or a DVD. They're not the one-dimensional work machines you see in most of the advertising aimed at them. We felt that somebody like David Brent [the clueless boss in the TV series The Office] would take the plane just because he thought it was cool. But the more informed traveler would opt for the train.'
Eurostar wanted to build a reputation around its business service, which includes stylish lounges, efficient online booking and a frequent travelers' program. Nugent adds: 'We worked on getting the experience right first, because if we'd just relied on the media, the campaign would not have succeeded. There has to be a very strong element of word-of-mouth.'
Nevertheless, the print advertising campaign devised by Eurostar and its agency TBWA London was a key element. It featured an obnoxious cartoon character called Mr JetSet, who retained his fixed grin and self-satisfied demeanor despite the privations of flying. His catchphrase was, 'I came by plane, you know.' Other captions included: 'With no space for his laptop, Mr JetSet can demonstrate his mental agility'; and '35 missed calls only prove to Mr JetSet how important he is.' A closed check-in gave Mr JetSet ample opportunity to bellow about how crucial it was that he made his meeting. Each of the posters asked: 'Fed up with flying? Fly Eurostar.'
In this way, the business traveler was practically shamed into choosing the train instead of the plane for reaching Paris or Brussels. Eurostar saw a subsequent sharp increase in the sales of business class tickets.
While airlines are clearly safe from the challenge of rail on most routes, high speed trains are now criss-crossing Europe -- just as bullet trains are streaking across Japan, China and South Korea. The United States has long languished behind -- but airport misery, rising petrol prices and traffic congestion have brought the issue to the fore. The wait on the platform could be lengthy, however. 'U.S. passenger trains chug along at little more than highway speeds -- slowed by a half-century of federal preference for spending on roads and airports,' moaned The Chicago Sun-Times. It observed that although Congress is considering a six-year Amtrak funding bill, the measure proposes US$100 million in first-year grants, 'paltry considering that California alone needs US$40 billion for a mammoth bullet train project that would link San Francisco and Sacramento with Los Angeles and San Diego' ('Still on training wheels', 7 September 2007).
In the United States and around the world, Mr JetSet will remain a familiar figure in the well-appointed executive lounges that are his natural habitat. But the Eurostar experience in the UK demonstrates that he is developing a conscience -- and that marketing to him requires more imagination than it did in the past.
BRANDING TOOLKIT
- Business travelers are enthusiastic airport shoppers.
- They expect a luxurious travel experience.
- This includes sophisticated in-flight entertainment.
- In-flight marketing initiatives should add to their experience.
- Sleep, privacy and legroom remain important marketing tools.
- Frequent flyers are becoming concerned about their 'carbon footprint'.
- In Europe and parts of Asia, the train is threatening the plane.
- Business people are tiring of the 'inhumanity' of air travel.
This excerpt is taken from chapter 6 of Branded Male: Marketing to Men by Mark Tungate (c) 2008. Published by Kogan Page Ltd.
The following excerpt is taken from Divide or Conquer: How Great Teams Turn Conflict into Strength by Diana McLain Smith. This chapter examines the the Steve Jobs/John Sculley breakup at Apple in the 1980s, a conflict that nearly destroyed the company. From the publisher: "Smith shows us how to build work relationships that are flexible and strong enough to survive the toughest challenges. This book will break the myth that relationships are too mysterious to decode and too difficult to change. It offers powerful tools that can help anyone, from new recruits to CEOs."
The Life and Death of a Relationship
More than 20 years have passed since Steve Jobs and John Sculley's much-publicized breakup at Apple. Yet it still serves as a cautionary tale. In two short years, their celebrated camaraderie turned into an antagonism so great it escalated hostilities between divisions, put the firm at risk of a takeover, and sent Steve Jobs into a 12-year exile, from which the firm has only recently recovered. How these leaders went from soul mates to adversaries in such a short time shows how relationships, even those touted as a perfect match, can self-destruct under pressure, leaving a firm to pay the formidable price of a failed relationship.
When the Jobs and Sculley relationship fell apart, most people chalked it up to personalities: Jobs was too volatile, Sculley too cautious. Others cited circumstances: mounting competitive pressures put otherwise kindred spirits at odds. Still others said their chemistry wasn't right: they may have seemed the perfect match, but Sculley was way too corporate, Jobs too iconoclastic. While each explanation holds merit, all overlook the most intriguing and instructive aspect of what happened: the way their relationship developed over time.
Only by understanding how relationships form, develop, and die can you see why people form ill-fated matches, why certain personalities clash, and why some relationships break down so quickly and completely under pressure. And only by understanding how relationships form, develop, and die do you stand a chance of altering the course a relationship takes. By looking closely at how the Jobs and Sculley relationship developed over the course of three stages, we can extract timeless lessons about the life and death of a relationship--and its impact on the firm.
Stage 1: How a Relationship Forms
When someone joins a team, everyone spends a good deal of time defining their formal roles in relation to each other. In some cases, they'll spend anywhere from weeks to months negotiating everything from tasks to responsibilities to financial rewards to decision rights. Unbeknownst to all involved, as these negotiations unfold, another deal is being struck: people are also defining their informal roles by signaling to each other through their interactions the emotional responsibilities they'll each assume, the psychological rewards they'll each need, and the interpersonal rights they'll each claim.
It is the interplay between these two deals that sets the foundation of a relationship. By paying attention to both deals, you're much more likely to get a relationship off to a good start. Conversely, as the Jobs and Sculley relationship shows, when you ignore the informal deal you strike, you're much more likely to get into trouble, and you're much more likely to be stunned and amazed when you do.
The Story: The Perfect Match
When Steve Jobs and John Sculley first met at a January 1983 dinner following a private preview of Apple's new Lisa computer, their mutual attraction was obvious to everyone. One Apple chronicler, Frank Rose, tells the story of that midwinter evening in New York:
After an hour or so they went downstairs, where Sculley's limousine was waiting to take them to the Four Seasons for dinner. It was a car that seemed as big as an airplane, with a bar and a TV and a driver named Fred, all on call twenty-four hours a day.... They swept down Park to Fifty-Second ... and pulled up at the discreetly canopied entrance to the Four Seasons. Sculley led them into the travertine anteroom, up the stairway to the reservations desk, past the enormous Picasso stage curtain, and into the stark opulence of the Pool Room.Over dinner the unlikely chemistry between Jobs and Sculley became readily apparent. Despite their obvious differences in age and background--Sculley was strictly Ivy League and corporate, having graduated from Brown University and the Wharton School and having spent most of his professional life at Pepsi; Jobs, seventeen years his junior, had dropped out of Oregon's funky little Reed College during his freshman year--they somehow clicked. It was almost as if each tapped something unrealized in the other. There was a cool, crisp professionalism to Sculley that Jobs respected, a utopian fervor to Jobs that Sculley found intriguing. Sculley was a man who knew how to run a multimillion-dollar enterprise. Jobs was a kid who proved he could change the world. Put them together....
Earlier that same day, the differences between Sculley and Jobs were as apparent as their affection was at dinner. While Jobs was jumping up and down with enthusiasm for his spanking-new product, Sculley held back. He was looking at the product through the eyes of a corporate executive at the helm of a traditional company in an industry where winning depended more on cost efficiencies and marketing know-how than on product innovation. Says Rose:
...he didn't take to it wholeheartedly. He was cautious. He had reservations. He wasn't sure that this new technology, dazzling as it was, would have much impact at a big corporation like Pepsi, because it didn't have the IBM logo. No one ever got fired, the saying went, for buying an IBM.
To this side of Sculley, Steve Jobs gave no notice. All he saw was a savvy, ingenious marketer, whom he alone described as "very charismatic." After all, Sculley was the one who had revived the Pepsi Generation campaign in the late sixties, spurring unprecedented growth for the next six years. By 1978, Pepsi Cola was surpassing Coke in sales for the first time in the firm's eighty-year history. Perhaps at Apple, Sculley could do the same thing--invent the Apple Generation. That would certainly advance Jobs's vision of changing the world by resetting the balance of power between the individual and the institution. One person, one computer: that was his motto. Since Apple's inception, he'd dreamed of bringing power to the people, as the saying from the sixties went. Only, he was going to do it by putting an Apple computer in the hands of every person. With Apple cofounder Steve Wozniak gone and CEO Mike Markkula anxious to move on, the decision whether to hire Sculley was largely up to Jobs. And it looked to him as if Sculley had all the right stuff.
Two months later, the deal was done. In April 1983, Sculley accepted the offer to join Apple as its new president and passed up the once-in-a-lifetime opportunity to succeed his mentor, Donald Kendall, as chairman of PepsiCo. To make the jump more palatable, Apple agreed to give the forty-four-year-old Sculley a $1 million salary along with a promised $1 million bonus, a $1 million severance package (in case things didn't work out), an option to buy 350,000 shares of stock, a $2 million loan to buy a Tudor-style house in the California hills, and $1.3 million for Sculley's Greenwich (Connecticut) home to save him the trouble of selling it.
Although no small amount in 1983, the money is not what sealed the deal. Nor was it the opportunity to lead a company that was growing at a breakneck pace. No, what sealed the deal was the bond they'd forged out of their mutual attraction to power. For Sculley, Jobs held the awe-inspiring power to change the world; for Jobs, Sculley held the key to unbounded corporate power. It was a heady match, says Frank Rose, seducing them both and preoccupying everyone else:
For weeks they had been gazing worshipfully at each other, finishing each other's sentences, parroting each other's thoughts. It was as if they were on a perpetual honeymoon which they had to share with a great many unruly children.... The summer honeymoon between Steve and John was the talk of the company. The two were inseparable. John was listening and learning, and the person he was learning from was Steve.... He seemed so in awe of Steve--his brashness, his charm, his charisma--that he saw everything through Steve's eyes.... But the infatuation wasn't one-sided. It was almost like a father-son relationship in which the two adopted each other.
But theirs wasn't just any father-son relationship. As Sculley later wrote: "I felt that part of my role was to nurture Steve from a prince to a king, so he would someday be able to run the company he cofounded." That first summer, they were so absorbed with each other that they failed to see what those around them feared most--that their father-son indulgences might demolish a useful, if delicate, balance of power within the firm. Says Rose:
In the original triumvirate--Scotty [Mike Scott] as president, [Mike] Markkula as chairman, and Jobs as visionary--Jobs's brash enthusiasms had been leavened by Scotty's stern hand and Markkula's persuasive manner.... Sculley's arrival changed all that. John made Steve his partner, not realizing that Steve had never been a partner in running Apple before. Suddenly there were no restraints. Sculley unleashed him, and Steve unleashed what was an astonishing spectacle. People began to liken it to Godzilla being let out of his cage.
But Sculley saw no trace of a monster in the hyperkinetic Jobs. He didn't understand there was a reason no one had ever granted Jobs unchecked access to power. Nor did he see what he later came to believe: that Jobs was often "stubborn, uncompromising and downright impossible." All he saw was a prince entitled to inherit the throne of the kingdom he'd cofounded. Similarly, Jobs didn't see in Sculley what others saw: a cautious leader unlikely to make the bold moves that were second nature to Jobs. Nor did he see what he later came to believe: that Sculley wasn't really a leader but a "manager," preoccupied with control and unwilling to provide Jobs the support he needed. At the time, all he saw was a powerful, supportive benefactor committed to helping him realize his dreams.
What the Story Teaches Us
The one characteristic that marks the beginning of all relationships headed for trouble is obliviousness to the informal side of a relationship. Like most executives, those negotiating Sculley's entry into the firm focused on business matters. They discussed ideas for growing the business; they debated how Apple's technology might change the world; they talked roles and responsibilities; they negotiated compensation. And in the end, they came up with a deal so full of potential upside and so buffered against downside risk that Sculley couldn't refuse.
What they didn't do was take a close look at the relationship between Sculley and Jobs. Sure, everyone could see the two were enamored with each other, but no one questioned why they'd clicked so quickly and so completely. While some found their instant intimacy unsettling and others worried that each was not seeing the other for who he really was, no one could say why or do much about it. All they could do was chalk it up to chemistry and leave it at that.
Most of us do the same thing. When people click or clash, we chalk it up to chemistry and leave it at that. But it is possible to identify and analyze the seemingly mysterious ingredients that go into the makings of a relationship. As this book shows throughout, given the right tools, it is possible to understand what happens when a relationship forms and anticipate what might happen next. For now, let's look more closely at what happened with Jobs and Sculley in this first stage.
Understanding what happens when a relationship forms. We all bring to relationships our own characteristic ways of interacting with others given our behavioral repertoires. Built out of experience, these repertoires are organized around key themes, such as power, conflict, control, or success. When we negotiate the informal terms of a relationship, these themes give rise to patterns of interaction, through which we signal to each other:
- the emotional responsibilities we'll assume ("I've gotta help this guy!") and those we'll reject ("No way I'm doing that!")--regardless of formal roles.
- the interpersonal rights we'll claim ("You can't treat me that way!") and those we'll relinquish ("Don't worry about it")--regardless of any formal deal.
- the psychological rewards we'll want to receive ("Just once I wish she'd give me a pat on the back!") and those we'll be willing to give ("You did a great job. Thanks.")--regardless of financial rewards.
When people first meet, their themes intersect to give rise to distinctive patterns of interaction. Acting like DNA, these themes shape the way a relationship's patterns of interaction evolve over time, defining the formal and informal sides of a relationship. One strand of DNA defining the relationship between Sculley and Jobs was a shared preoccupation with power, leading each of them to see in the other a form of power he coveted. Before Sculley joined Apple in the spring of 1983, the effusive Jobs saw in the more cerebral Sculley the corporate power he needed to change the world. Dazzled by the limousine, the chauffeur, and the opulence of the Pool Room, Jobs paid little attention to Sculley's more reserved, controlled side. To Jobs, the "charismatic" Sculley must have seemed more thoughtful than controlled, more sophisticated than reserved. And given how low-key Sculley acted, it must have been hard to imagine that he'd ever pose much of a threat. As to how Sculley made it to the top of a highly competitive--some might say cutthroat--firm like Pepsi, Jobs apparently gave little thought, perhaps assuming it was due to his marketing talents. All Jobs saw was a perfect match.
Similarly, Sculley saw in Jobs a brilliant visionary with the power to change the world. Like Jobs, Sculley paid little attention to the behaviors he later found so unacceptable, even though they too were evident right from the start. Jobs's jumping up and down at the unveiling of Lisa, his unpredictable emotional outbursts, his caustic ridicule of Apple's competitors all must have seemed part of an otherwise attractive package--rough edges that could be smoothed out over time. Just how that smoothing out would occur, well, that too was assumed rather than anticipated. All Sculley saw was an opportunity to do more than sell sugared water for the rest of his life. With Jobs's help, he was going to change the world.
Anticipating what might happen next. Two themes in Jobs's and Sculley's repertoires not only failed to form a matching set, they downright clashed: Jobs's well-known disdain for institutional authority (you could say he built the firm and its products upon this disdain), and Sculley's corporately honed preference and talent for institutional control (to which his tenure at Pepsi was a tribute). As Frank Rose recounts:
[Sculley] liked to tinker with structure. Maybe it was his architectural training, maybe just his natural cast of mind, but he was always thinking about how things fit together. Jobs's thinking tended to be more intuitive, emotional, and visionary; Sculley was more a systems man, rational and analytical. Form and process were what interested him.
Had anyone paid attention to these differences, they might have given more thought to how they might play out over time. As it was, no one asked what might happen should Sculley seek to impose the kind of corporate controls at Apple he'd imposed at Pepsi. Nor did they ask what might happen should Jobs bristle under that control. Intent on finding a seasoned executive to counterbalance and contain Jobs's more intuitive, even impulsive leadership style, Apple's board didn't think through how all this counterbalancing and containing would occur.
Nor did they anticipate the events their relationship might set in motion or the effect those events might have on the firm's delicate balance of power.
Excerpted from DIVIDE OR CONQUER: HOW GREAT TEAMS TURN CONFLICT INTO STRENGTH by Diana McLain Smith by arrangement with Portfolio, a member of Penguin Group (USA), Inc., Copyright (c) Diana McLain Smith, 2008.
The following excerpt is Chapter 1 from The Granularity of Growth: How to Identify the Sources of Growth and Drive Enduring Company Performance by Patrick Viguerie, Sven Smit, and Mehrdad A. Baghai. Patrick and Sven are both Directors at McKinsey & Company, and Mehrdad also has a history at the company, but is now Managing Director of Alchemy Growth Partners and coauthor of The Alchemy of Growth.
From the jacket description:
Divided into three comprehensive parts, each section of this book is devoted to one of the key decisions you'll need to make in order to drive and sustain granular growth at scale.I) Your growth ambition: Sustaining superior value creation in the long run requires companies to choose either to grow or to go. If you choose to grow, here's where you'll learn how granularity allows you to gain real insight into the sources of growth and enables robust growth benchmarking relative to one's peers.
II) Your growth direction: Moving your portfolio in pursuitof growth is more common and less risky than you think and is where real value is derived. Here, you'll become familiar with a new framework that provides a rigorous basis for setting your growth strategy and deciding on growth initiatives over multiple horizons.
III) Your growth architecture: To wire your organization for growth, you must enable it to make more granular growth choices while maintaining the benefits of scale. Here you'll discover an approach for ensuring your organizational model is consistent with your granular growth strategy.
A granular
world
"It's a small world after all"
Song at a Disneyland ride
of their markets
industries have mature segments, and most mature industries have
granular growth pockets
vary enormously from market to market
PEOPLE TEND TO TALK about growth in sweeping terms. Terms such as "growth industry" and "mature industry"--while catchy and convenient--are loaded, imprecise, and often downright wrong. One of the most important empirical findings from our research is that there's no such thing as a growth industry. The real definition of a growth market exists at a level much deeper than industry. Most so-called "growth" industries have sub-industries or segments that aren't growing, and most "mature" industries and geographies have at least a few sub-industries or segments that are growing rapidly.
The histogram in Figure 1.1 illustrates this well. In Europe, telecommunications is generally regarded as a mature industry. Yet telecom companies show wide variations in their portfolio growth rates because there are broad differences in the growth of their underlying markets.
Wireless grows more quickly than wireline does, for example, and even within wireless and wireline there are significant variations. Wireless is growing more slowly in western Europe than in eastern Europe. Within wireline, broadband internet is experiencing rapid growth and voice is declining. In addition, the degree of exposure to fast-growing markets outside Europe varies from company to company. So within the European telecom industry as a whole, different companies have made different portfolio choices that have given them different levels of exposure to growth segments and countries.
The same variability is evident in apparently high-growth sectors too. If we take a representative set of large high-tech companies, for instance, and calculate the weighted average growth rate of the market segments that each company participates in, we find that the results range from -6 to 34 percent. Clearly, what looks like a growth industry to some looks mature to others.
If we revisit the set of growth giants we described in the Introduction, we can see that even when they don't operate in what we would consider to be growth industries or markets, they still outperform their industry peers. Figure 1.2 shows how well the growth giants do in some of the industries where we have the largest samples: high-tech, retail and wholesale, healthcare, media and entertainment, consumer goods, financial institutions, and electric power and natural gas (EPNG). In every case, the growth giants outclass their competitors in market growth: in EPNG, for instance, they have an edge of 2.2 percentage points over the industry as a whole.
So what does this tell us? One message is that there is hope for companies seeking to grow in seemingly mature industries. They don't have to abandon their entire business in search of a new one with a better growth rate, even if they could. Instead, they need to look deeper into their current industry and businesses in order to identify pockets of potential growth, and then focus their time and resources on these faster-growing and more profitable segments.
This is where granularity comes in.
Why granularity matters
Granularity isn't a term traditionally used in business. We've borrowed it from the world of science and engineering, where it is used to refer to the size of the components within a larger system. If we take what we might call a non-granular (or "coarse-grained") view of the system, what we might see is the system as a whole or perhaps the larger sub-systems within it. In a granular (or "fine-grained") view of the system, on the other hand, we might see some of the individual small components that go to make it up.
To make this more concrete, imagine we are looking at Google Earth. It shows a sequence of pictures from a satellite camera as it zooms in on the Earth from space. The first image we see is the whole planet. As the magnification increases and the field of view narrows, a continent comes into focus. Next we see the outline of an individual country, then a city, and finally a street or building. Before our eyes, the image of the Earth is progressively becoming more and more granular.
So why have we decided to apply the idea of granularity to business, and specifically to growth?
As we mentioned in the Preface, we want to get away from the broad-brush terms in which business opportunities are often described. Using the idea of granularity helps us cut through generalizations about industries ("Pharmaceuticals is a high-growth industry") and markets ("China is where the action is") to reveal a much more nuanced view of the world.
Second, we believe that if the texture of markets is granular, then so too should be the way that companies operate. This poses a challenge for corporations that structure their organizations and activities in an aggregated way. We are not arguing against scale. Rather, we are arguing that scale should not come at the expense of granularity.
For us, then, granularity conveys two important and related ideas: first, a fine-grained understanding of markets and growth opportunities and, second, a sharply focused, precise, and detailed way to manage discrete initiatives and activities across the corporation. We believe that applying both these ideas greatly increases a company's chance of success in identifying and pursuing growth opportunities. Our aim in this book is to show you how you can "de-average" both your view of your markets and your organization and the way in which you make choices and allocate resources--all while seeing both the forest and the trees.
In this chapter, we look at the granularity of markets. We come back to what this implies for your company's organization in part III.
Levels of granularity
A company formulating its growth strategy needs to develop insights into trends, future growth rates, and market structures at much greater depth than the aggregate industry level. Insights into sub-industries, segments, categories, and micro-markets are the building blocks of portfolio choices. They are indispensable for companies seeking to make the right decisions about where to compete.
All of which poses a practical question: when you make these decisions, what level should you be looking at to get the insights you need? How deep should you go? We'll now introduce a framework to help you find the answer.
To find out how granular strategic decisions need to be with respect to particular markets, we carried out a systematic analysis of how market selection correlates with company growth. There is already a well-developed academic literature on the relationship between industry choice and profitability.(1) We have applied a similar methodology to look at how industry choice affects top-line growth, while making a few key changes to the analysis.
What we set out to test is the extent to which industry growth rates are correlated with company-specific organic growth rates. First, we took the sample of companies we described in the Introduction and stripped out M&A from each company's reported top-line revenue. We did this to control for the fact that different companies in the same industry use M&A in very different ways and see very different effects on their top-line growth rates. Since buyers and sellers are usually both from the same industry, the decision to be a buyer (or a seller) is specific to the company, and not a function of the industry growth rate.
Removing inorganic growth from the equation is only the first step. It is even more important to make sure that the correlation tests are performed at the right level of granularity. The only way to establish the impact of the decisions executives make about market selection and portfolio commitments is to examine the level at which these decisions are actually made--a level far deeper than that of industry.
Let's start by looking at the six levels of granularity that we have identified, as illustrated in Figure 1.3.
Granularity level G0
The Earth--or, in our context, the global marketplace--is the highest level of aggregation with the least granularity: the ultimate segment of one. The world economy is growing by roughly 6.2 percent a year in nominal terms. By 2005, its total output had reached $81.5 trillion. This is the global pie.
Granularity level G1
If we want to investigate why some companies grow at a rate that is faster or slower than about 6 percent, the first step is to divide up the economy. The Global Industry Classification Standard (GICS) carves it up into 24 broad industry groups ranging from telecommunications services to energy to biotech. These sectors have an average market size of $3.5 trillion. If you plot sector growth and company growth, as we have done in Figure 1.4, no obvious correlation can be seen.
Each point on the graph represents a company, and each vertical set of points represents a sector. The vertical spread for any set of points thus shows the variation in company growth rates within that sector.
In fact, at this level of aggregation, the growth of sectors explains only about 14 percent of total company organic growth. This is because the growth rate of different sectors runs in the range of 2 to 16 percent, whereas the spread of growth at individual companies is much broader, ranging from -13 to 48 percent. This reinforces our point that talk of growth industries is meaningless.
Granularity level G2
Frankly, decisions at the G1 level (such as whether to be in telecommunications, energy, or biotech) are not within the ambit of most companies, so we need not dwell on them here. To get to a deeper level of granularity, we can break down the 24 groups into 151 industries by using other readily available GICS statistics. For instance, the "food, beverages, and tobacco" group breaks down into the component industries "food," "beverages," and "tobacco." The resulting G2 segments have an average size of roughly $500 billion--much more granular than the G1 sectors, but still fairly large.
We found that a typical large company in our database has at least two significant G2 industries in its portfolio, by which we mean that the industry concerned contributes at least 10 percent or more than $1 billion to the company's revenue.
This level of granularity is not yet fine enough, though, to give us the information we need to start making portfolio decisions. At the G2 level, differences in companies' portfolio exposure explain little more of the variation in organic top-line growth than they did at the G1 level.
Granularity level G3
Each industry can then be divided up again both by sub-industry and by market (country or region). Within the food industry, for instance, two examples of sub-industries might include frozen foods or savories, oils, and dressings.
In analyzing companies' performance we found that it was usually possible to reach the G3 level of granularity by taking the finest level of data that companies report to the markets. Provided we have access to enough information, we can zoom in on individual sub-industries in individual
markets: frozen foods in China, say.
At this G3 level, the world market contains thousands of segments ranging in size from $1 billion to $20 billion. Our analysis shows that the growth rates of these segments explain over 60 percent of a typical company's organic top-line growth. In other words, at the G3 level, market selection becomes more important than a company's ability to beat the market, and portfolio composition is the chief factor determining why some companies grow and others don't.
Granularity level G4
Sometimes it is possible to use proprietary databases and internal company data to dig deeper than the level at which companies normally report. The definition of the G4 level of granularity varies slightly from industry to industry, but, in essence, it's the level of categories within sub-industries (such as ice cream within frozen foods) or customer segments within a broad product or service category (such as weight-conscious snackers). The G4 level is important: it represents the minimum level of granularity at which companies need to operate when setting growth priorities and making decisions about resource allocation.
At the G4 level of granularity, the world economy contains millions of growth pockets that range in value from $50 million to $200 million. In our analysis, we found that the selection of G4 segments often did even more to explain a company's organic growth than the selection of G3 segments did. The G4 level of information goes well beyond that routinely available to the stock markets. It is the level at which the real resource allocation decisions should be made.
Granularity level G5
This is a view of the world at the level of individual customers and transactions--the ultimate segment of one, numbering many billions. Although some companies have developed systems that permit highly personalized interactions with individual customers, few, if any, are able to allocate resources at this level of granularity. For most companies, most of the time, G5 will be a level too far.
Now let's apply the levels of granularity to a specific case: the aging megatrend. We start with a health warning.
Handle megatrends with caution
The term "megatrend" is often used to describe major global forces that are expected to have wide-ranging impact. As we write, megatrends are a hot topic and many people claim it's vital to ensure your company is addressing them. However, most discussions of megatrends take place at a very broad and superficial level. That may be fine for financial commentators on TV or casual dinner-party chat, but it's not much use if you happen to be the CEO of a large company trying to make decisions about where to compete or how to allocate resources.
To exploit a megatrend successfully, you need to tap into insights that are far more specific. Take the example of aging, often cited as a megatrend that will generate demand. It is frequently held responsible for the growth of the healthcare industry, for instance. Many people believe it will transform other industries such as financial services and retail over the next ten to
twenty years.
Let's analyze this megatrend at progressive levels of granularity. This should help us answer the question: would I choose to exploit the aging megatrend, and if so, where and how? G0 and G1. At the global level, the impact of aging remains small in comparison with other forces, such as rising GDP per capita or population changes (Figure 1.5). Overall, we estimate that aging will reduce global GDP by 0.1 percent a year. If we then look at a single country--Italy, say--we see that aging has less impact here than on the world as a whole: it reduces Italian GDP by just 0.03 percent a year.
G2. If we now look at the industry level, it's clear that the impact of aging varies by industry. Our analysis of the impact of aging on Italian markets reveals an interesting picture (Figure 1.6).(2) Healthcare, housing, and energy are likely to derive the greatest benefit from an aging population, with demand increasing by a compound annual growth rate of between 0.2 and 0.3 percent between now and 2020. Conversely, apparel, furniture, and cars are all likely to suffer a drop in demand of more than 0.1 percent a year, while games, toys, and sports will be hit hardest, with an annual decline of 0.4 percent.
G3. At the sub-industry level, we again find that the impact of aging varies. Take the Italian healthcare industry, which is expected to grow as a result of aging. Although the various sub-industries all reflect this upward trend, the degree of impact varies: for instance, "pharmacy" is expected to grow faster, at about 7 percent a year, than "health-related goods and services," at only 3 percent.
G4. To begin to spot real differences in the relative impact of aging on growth, we need to get down to the G4 category level. Within pharmaceuticals, for instance, aging is likely to have a positive effect on some drug categories (such as anti-hypertensives and calcium antagonists) and a negative effect on others (such as beta-blocking agents).
You get the idea: setting your growth direction requires you to move freely between the different levels of granularity while keeping your overall destination in view. Companies often describe their growth direction to the market at a G2 or G3 level, but specific granular strategies need to be put into action at the G4 and G5 level.
In this chapter, we've seen that companies searching for growth will find little help in analyses of industries and megatrends, which are usually pitched at too high a level to offer any real insight. In order to identify growth opportunities, you need to dig down well below the industry level. Applying the idea of granularity to your own company and markets will help you to determine the level at which the most valuable and actionable insights are to be found.
The notion of granularity adds an interesting twist to the diversification debate. Because so much of the action is at the G4 level, it's hard to argue that only investors can and should diversify by themselves. Investors can diversify at G2 level, and sometimes at G3, but not at G4. That is management's responsibility.
But how can management fulfill this responsibility? Is it possible to make decisions at this level of granularity in a large company without creating intolerable and counterproductive levels of complexity? Over the next three chapters, we'll show you that it is, and explain how you can do it.
NOTES
1 R. Schmalensee, "Do markets differ much?" American Economic Review, 1985, volume 75, number 3, pp. 341-51; R. P. Rumelt, "How much does industry matter?" Strategic Management Journal, 1991, volume 12, number 3, pp. 167-85; A. M. McGahan and M. E. Porter, "How much does industry matter, really?" Strategic Management Journal, 1997, volume 18, pp. 15-30.
2 Our analysis breaks down the forecast of retail consumption by category into demographic factors (change in age mix and net change in population) and other factors including rising GDP per capita. It assumes that nonconsumption components of GDP such as investment, taxation, and social support are constant at 2003 percentages. Future savings behavior is extrapolated from trends over the past four years. Demographic forecasts factor in organic effects such as life expectancy, births, and deaths as well as net immigration. The study examines how organic age-mix variation changed consumption preferences across ages between 1990 and 2005. It cross-checks the estimates with actual 2005 consumption and applies observed preferences to consumption forecasts by sector through 2020. Immigrants are assumed to be less wealthy than the native population.
