issue 1 - Roland Berger

The formula for growth DOSSIER #01
between 1991 and 2003. These “profitable growers”
(see diagrams beginning p.18) have achieved the business
equivalent of squaring the circle. They exploit
economies of scale and scope without having to cope
with the disadvantages that often threaten large organizations.
Among these disadvantages are:
p At the administrative level: complexity and the
creation of hierarchies;
p At the technical level: incompatible processes,
systems and structures;
p At the cultural level: disintegration tendencies.
To complicate matters, the era of global competition
does not allow any time for consolidation periods anymore.
“The game has changed: The classic V-curve—
first trimming down, then growing—is outdated,” warns
Burkhard Schwenker, CEO of Roland Berger Strategy
Consultants. Schwenker says that some formulas have
proven successful in avoiding the risk of growth and
link-up disadvantages. This includes decentralization of
rapidly grown organizations as well as creating clearly
defined areas of responsibility and flat hierarchies.
Also, Schwenker considers a modular and flexible infrastructure
in equipment and IT a key factor so businesses
can quickly react to changed conditions. Finally, the
employees in all areas must be encouraged to be
proactively committed to the company.
COMPANIES HAVE NO CHOICE other than to grow
because margins shrink in saturated markets and, if revenues
remain constant, profits shrink along as well.
Thus, increased earnings require growth in sales. It is a
situation that forces a company’s hand but also opens
up new opportunities. For profitable growth produces its
own momentum, continuously generating new growth.
The generation of free cash flow is a prerequisite. “Such a
flow is created when a corporate group intelligently
improves its cost base and establishes competitive
structures without damaging its core,” write the authors
of a study titled “Finding the formula for growth,” by
Roland Berger Strategy Consultants. Funds released can
flow into the expansion of business activities. This creates
new scale advantages, which, to close the circle, lead to
exceptional operating performance and new cash flows.
SO HOW IS IT FEASIBLE to initiate that kind of a
growth algorithm? Companies wanting to increase their
value continuously according to this formula need to
make a series of simultaneous adjustments. Besides an
ability to grow, the willingness to do so is also fundamental.
Companies capable of growth are those that
have sufficient liquidity as well as suitable products and
structures with which to set out along and successfully
manage an expansion-oriented course. The willingness
to grow brings softer factors into play, such as attitudes,
corporate culture, acceptance of change and a
desire to innovate—or, in other words, trust and confidence
in one’s own capabilities. Put this way, growth
becomes a management function.
BOTH PREREQUISITES, the capability and the willingness
to grow, are exhibited by Nestlé. With 250,000
employees and $74 billion in sales, the world’s largest
food company is fully focused on new markets. It’s an
absolute necessity for Nestlé since the core business is
increasingly coming up against growth ceilings. While
the Swiss company still earns 90 percent of its revenue
from foodstuffs and water, profit margins are stagnating—not
least because of the collective purchasing
power of discount stores. “It was clear that items like
tomato sauce and noodles would not produce any new
value in the long term,” says Nestlé CEO Peter Brabeck-
Letmathe about the interim result of the company’s
strategic reorientation. “I had to identify business sectors
that could create new growth.” The small but highend
pharmaceutical products unit was significantly
expanded, for example. With an EBIT margin of more
than 30 percent, the business unit has outstanding
earning power. It is supported primarily by the US subsidiary
Alcon, purchased in 1977, that specializes in contact
lens care and eye medication.
NESTLÉ IS PINNING even higher hopes on the nutrition-based
business sector that is developing healthenhancing
foodstuffs. One prototype is the LC1 yogurt
that is designed to strengthen the immune system.
Consumers knowledgeable about nutrition are willing to
pay up to 40 percent more for such products. It should
think: act 25