The Physics of Business Growth: Mindsets, System & Processes

1. The Physics of Business Growth: Mindsets, System & Processes Grant Thornton CEO Forum May, 2012 Ed Hess Professor of Business Administration Batten Executive-in-Residence Hesse@darden.virginia.edu www.EDHLTD.com

2. What Do We Know? The DNA of HPOs- We know the “secrets” Growth results from behaviors NOT strategies Growth results from experimental learning HPOs build 2 X 2 X 4 X 1 Growth Portfolios HPOs distance the competition in bad markets and tough times Great growth companies are great learning companies

3. A Growth Inhibitors • Individuals : Corporations: • Cognitive blindness Failure to experiment • Cognitive dissonance Standardization/No variance • Legacy thinking Short-termism • Hiring & promotion biases Low employee engagement • Arrogance ROE-it is • Fear of failure Punishment of mistakes • Product centricity • Group think

4. 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

5. HPOs Sysco UPS Starbucks Southwest Airlines Best Buy Tiffany Costco USMC San Antonio Spurs McKinsey Room & Board Ritz Carlton Outback Walgreen Chick-fil-A Levy Restaurants SAS McDonalds Corning Danaher

6. 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- the DNA of growth 5. High employee engagement- an implied social contract – an accountable “family”

7. 9 Consistent Findings (cont.) 6. Customer centricity & closeness- Being better is more important than being bigger 7. Humble passionate operators who are values-based leaders- devaluation of elitism 8. Execution & service champions- excellence everyday every way by everyone 9. An Internal aligned consistent self-reinforcing System ( strategy, culture, structure, HR policies, leadership behavior, measurements, rewards, communications) that enables, motivates, and rewards desired behaviors

8. Notice What Is Missing • Diversified complex best strategies • Unique products or services • Visionary or charismatic leaders • Lowest costs • Most innovative • Best talent

9. Why So Rare? • Short-termism: mentality, tenure, comp • Easier to be external facing • Focus on financial metrics not behaviors • Alignment is hard to create and maintain • Hypocrisy • Leaders fail to role model desired behaviors

10. Common Growth Progression 2 Studies: McKinsey & Hess • Geographical expansion • Complimentary products to existing customers • New customer segments w/existing products • Complimentary services for existing customers • Cost efficiencies • Technology productivity in creation &delivery • Small strategic acquisitions • Move from selling products to selling solutions • All of the above continuously

11. Darden Growth/Innovation Model New S Curves (5) (3) (1) (2) (7) (4) (6) • An Enabling Internal Growth System • Strategic Ideation • Ideation Communication and Evaluation Processes • Learning Launches • LL Project Tracking and Portfolio Management System • A Growth Initiatives Portfolio • Growth Portfolio Management/Review Process

12. 2 X 2 X 4 X 1 Growth Portfolio • HPOs create and continually manage a diversified portfolio of growth initiatives: • 2: both short-term & long-term initiatives • 2: both top-line & bottom line initiatives • 4 Ways to Grow: • Improvements: better, faster & cheaper • Innovations: something new • Scaling: doing more of what works • Strategic acquisitions

13. 4 Key Growth Processes • Strategic Reframing: Illuminating & challenging your underlying assumptions “givens” about your industry, business model, customers, distribution channels • What If : Imagining the possibilities • Customer Experience Mapping: A granular charting of every step in a customer or channel distributor experience - “in their shoes” • Learning Launch Experiments: Uncovering and testing key CV and execution assumptions to generate better data to make investment decisions

14. Questions For You? • Do you have a culture of constant improvement? • Do you have a values-based stewardship leadership model? • Do you have a highly engaged workforce? • Have you defined the right behaviors to drive growth? • Do you measure and reward the right behaviors?

15. Questions For You? (cont.) Are you structured to maximize growth behaviors? Is being better & faster part of every employee’s job and measurements? Do you- the leaders- spend meaningful time listening to customers and line employees? Do you have an experimental learning process? Do you proactively review quarterly your Growth Portfolio?