1. Thinking Differently About Growth The 5 th Annual CFO Rising Conference & Expo Las Vegas October 25, 2010 Ed Hess Professor of Business Administration Batten Executive-in-Residence Hesse@darden.virginia.edu www.EDHLTD.com

2. THE DNA OF GROWTH

3. RESEARCH FINDINGS 5 research projects The Organic Growth Index ( “OGI”) The Characteristics of High Organic Growers (“HOGS”) The Challenges of Managing Private Company High Growth The Myths of Growth The Risks of Growth

4. U.S. GROWTH MENTAL MODEL All Growth is Good Bigger is Always Better “Grow or Die” Public Companies : Continuous Linear Growth These beliefs are NOT supported by empirical data or business reality.

5. THE REALITY OF GROWTH Growth can be good; growth can be bad- it depends Bigger is not always better Growth is not a requirement for every business but improvement is Continuous linear growth is rare

6. OGI INDEX RESULTS Purpose of the OGI Financial Model is to illuminate high organic growth companies and “screen” out companies that produce material non-organic growth earnings through accounting games, non-core earnings, serial acquisitions, financial engineering, etc.

7. FINDINGS Less than 10% of companies studied over several 5 year periods qualify as HOGs Less than 3% of companies studied 1996-2006 qualified as HOGs For years 2001-2006, of the 4031 public companies, only 276 qualified as HOGs Of those 276 companies only 35 had market caps greater than $10B 5 other confirming studies

8. WHAT ELSE DO WE KNOW? Few companies show any predictable patterns of growth Growth is only weakly correlated to profits Earnings growth rates are largely unpredictable Growth/Innovation is NOT a linear mechanistic smooth linear process

9. GROWTH IS Change Messy Hard People dependent in most cases Mistakes & failures Antithetical to the goals of a corporation: predictability, consistency, standardization, reliability, and no variance

10. CHARACTERISTICS OF HOGS My hypotheses: Unique products/services The best talent Visionary, charismatic leaders Superior innovation Cost superiority by outsourcing/offshoring Sophisticated diversified strategies

11. HOGS My findings: None of the above were necessary or even common Simple focused strategies Humble passionate operators Execution champions High employee engagement Constant improvement DNA Master learners and copiers

12. RESEARCH CONCLUSIONS Growth is much more than a strategy- it is a SYSTEM Growth is Experimental Learning Growth requires the right Leadership, Culture, & Processes Growth results from a 2 X 2 X 4 Growth Portfolio Customer Centricity & High Employee Engagement are Growth Enablers

13. RESEARCH CONCLUSIONS Growth/Innovation Killers: “ROI-tis” Group think Arrogance Legacy mental models/cognitive blindness Penalizing mistakes Short-termism Product -centricity

14. RISKS OF GROWTH Growth can stress people, processes & controls Growth can dilute culture and customer value proposition The question is how much growth creates these risks Toyota & Starbucks examples Growth Risks Audit

15. PRIVATE COMPANY RESEARCH FINDINGS Growth changes everything Growth is evolutionary - waves of change Growth requires more and better processes Preconditions to Growth 4Ps of Growth: Planning, Prioritization, Processes & Pace The 4 Ways to Grow The Entrepreneur Must Grow, Too ! The Difficulty in Building a Management Team