Business Book of the Week

The alchemy of growth

by Mehrdad Baghai, Stephen Coley and David White Orion Business, pounds 20

THE COMPUTER industry is known for its ability to give those operating in it the thrills and spills of a roller-coaster ride. But even by those standards, the experience of the US company Compaq in the early Nineties looks extreme. A 25 per cent sales rise in 1990 became a 9 per cent fall in 1991 and operating income halved. The company slashed 12 per cent of its workforce and replaced the chief executive and co-founder, Rod Canion.

His replacement, Eckhard Pfeiffer, led a drastic restructure - reducing costs, speeding product development and extending the product line to compete with the "clones" of IBM-compatible personal computers that had transformed its marketplace. According to Mehrdad Baghai, Stephen Coley and David White, the three McKinsey & Co management consultants who are the authors of The Alchemy of Growth, Mr Pfeiffer was "earning the right and building his team's resolve to grow".

Citing his introduction of a "performance culture" making managers strictly accountable and highly rewarding high performers, they credit him with an impressive turnaround by the end of 1992 - so creating the conditions for a growth curve that saw sales rise 45 per cent and net income grow at 58 per cent a year between 1992 and 1996. The graphic story is seen as an illustration of how companies lose the ability to grow. "The right and the resolve to grow are preconditions for success in the pursuit of growth," say Baghai, Coley and White.

But it is not that simple. The authors cite Reynolds & Reynolds, a company facing increasing competition at the low-margin end just as it focused on more valuable products and systems. A new chief executive concentrated on a handful of customer markets and built "leadership positions" in them to stabilise operating income. Managers talk of this need to concentrate on several things at once as "keeping balls in the air".

But since the authors are management consultants, they have developed a concept, "the three horizons of growth". This is a "three-stage pipeline" seen as useful in allowing distinctions between the "embryonic, emergent and mature phases of a business's life cycle".

Horizon 1 involves extending and defending core businesses - and is seen as vital for generating the cash resources for growth. Horizon 2 covers building emerging businesses - the fast-moving, entrepreneurial ventures in which a concept is taking root or growth accelerating. Horizon 3 contains "the seeds of tomorrow's businesses - options on future opportunities".

The problem is that, though the three horizons pay off over different time frames, when they pay off has little to do with when they require management attention.Accordingly, the authors say, managers must deal with them all concurrently.

This is a typical consultants' attempt to mystify what is fundamentally obvious. Any manager who had the time to think would believe he or she had to pay attention to coming up with ideas at the same time as ensuring that existing business chugged along as well as possible.

But in throwing light on the mechanics of growth, the book is likely to prove highly valuable. Indeed, most people are so convinced that growth is "a good thing" that they have forgotten that not all growth is profitable.

The McKinsey team point to how Nokia in the Eighties diversified into a whole range of industries only to come unstuck. Significantly, the company's spectacular growth in recent years has come through concentrating on a particular market and coming up with innovative ways of serving it.