Topics:   Corporate Governance,Strategy

Topics:   Corporate Governance,Strategy

May 14, 2019

Ray Gilmartin on How to Build a Sustainable Growth Business

May 14, 2019

What course of action does the board take when the company’s growth stalls, changes implemented by the CEO are not working, and the board does not agree on future steps?

At the 2018 Summit Director & Officer Training Conference in Park City, Utah, Raymond V. Gilmartin, the former chair, president, and CEO of Merck & Co. who is now an NACD board member, described the typical response of boards in this situation and offered a better solution.

What Boards Do

Gilmartin described the scenario as “the director’s dilemma,” explaining that in this day and age of rapid change, every board will eventually face the challenge of the company becoming outdated, resulting in stagnant growth. What happens when a company faces this dilemma?

All too often, management blames the issues on external factors, failures in marketing and sales execution, or products that need to be reformulated and refreshed. The CEO moves to fix the identified weaknesses by revising assumptions, replacing the sales and marketing leadership, and refocusing research and development efforts. Despite these changes, growth remains below expectations, institutional investors become critical of management and the board, and activist investors move to take control.

The board is then left with one choice. They replace the CEO with an outsider to bring new perspective. New perspective, however, typically results in massive change. The new CEO often proposes high-risk transformation—such as a major restructuring or large acquisitions—to turn growth around. If done incorrectly, these actions consume rather than create value. The important question to consider, Gilmartin explained, is did the board have a lower-risk alternative available? With only one company in 10 succeeding at sustaining growth, a better understanding of the process of creating new growth is vital.

What Boards Should Do

If a leadership shakeup isn’t the solution, then what is? Drawing on concepts from Clayton Christensen, a Harvard Business School professor and expert on disruptive innovation, Gilmartin described the path out of stagnancy through five key decisions:

  1. What products should we develop? New products and ideas are discovered by using a “jobs to be done” approach. Rather than perform traditional market segmentation based on customer attributes, companies should segment the market by the jobs to be done. The nature of the market is that customers “hire” products to perform certain tasks. Therefore, if companies can develop products that customers want to hire, they will achieve far greater growth.
  2. How can we beat the competition? Disruptive innovation, not sustaining innovation, is the way to climb ahead in the market. What’s the difference between the two? Sustaining innovation offers high-end customers better performance through incremental or breakthrough technology by leveraging the existing capabilities and business model. This type of innovation is most successful for companies starting from a strong market position. Contrast this with disruptive innovation, which requires new capabilities, enabling technology, and an innovative business model. However, this type of innovation is successful against everyone, including market leaders.
  3. How can we get the details of a winning strategy right? The strategy development process for sustaining innovation is a deliberative one, which is systematic and scripted. This type of strategy development, however, does not work for disruptive innovation. Gilmartin recommends a “discovery-driven” process, where the company quickly launches a product to market and dynamically adjusts its strategy over time.
  4. How should we finance the new venture? Gilmartin described a difference between “good money” and “bad money” for start-ups. Good money is patient for growth but impatient for profit, meaning growth doesn’t usually materialize as quickly as expected, but costs and overhead must be kept low. Contrast this with bad money, which is impatient for growth and patient for profit, resulting in large losses from big spending on artificially inflated growth. Inevitably, new-growth ventures based on bad money shut down in tough times.
  5. What is the best organizational structure for the new venture? The organizational structure for the new venture should be based on the selected business model and organizational capabilities. The elements of a business model are a value proposition, resources to deliver the value proposition, processes to transform resources, and the profit formula. Organizational capabilities are developed through recurrent tasks done successfully while executing the business model. Therefore, although sustaining innovation leverages the existing capabilities and business model in the existing organization, disruptive innovation requires new capabilities, a new business model, and the creation of a new business unit.

After considering these five key decisions, Gilmartin explained that it is important for the CEO and board to agree on their roles in the innovation process. He proposed the following:

  1. the CEO manages the creation of new growth, and the board oversees the process of creation;
  2. the CEO and board agree on what theories to follow when creating new growth;
  3. the CEO identifies and eliminates organizational impediments for the new venture; and
  4.  the CEO and board should ensure that new ventures take priority over core businesses when allocating time and attention.

Gilmartin concluded by saying that the process of creating successful, sustainable growth relies on these decisions, and that boards who consider the message and questions he shared will find greater success as they return to the path of growth.

This recap of Gilmartin’s presentation was summarized by Christian Hildebrandt, a Master’s candidate in accounting at Brigham Young University Marriott School of Business.

Comments

Julie PittsMay 14, 2019

Great content and reminders on CEO and board roles concerning sustainable growth.