12 BLUE OCEAN STRATEGY

The Magazine of the Rotman School of Management

Fall 2005

GTrhoe wth
Issue

Roger Martin on Our
Embedding Design
Into Business BIGGEST

Also, Adrian Slywotzky, Issue Ever!
Jim Balsillie, and
Blue Ocean Strategy

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Contents

Fall 2005

Features Departments

4 Embedding Design Into Business 3 From the Dean
28
To generate meaningful benefits from design, firms must first change the way they CEO’s Corner:
operate along five key dimensions. by Roger Martin 40 Jim Balsillie

8 Interview with a Growth Guru 50 Questions for:
David Birch
Adrian Slywotzky talks about demand innovation, the ‘no-growth-zone’, and why all 52
industries hold the potential for sustained growth. by Karen Christensen Point of View:
54 George Stalk
12 Blue Ocean Strategy: How to Create Uncontested Market Space
57 Point of View:
and Make the Competition Irrelevant William Buxton
Companies with ‘blue ocean strategies’ enjoy untapped market space, demand cre- 60
ation, and highly-profitable growth. Here’s how. by Renée Mauborgne and W. Chan Kim Point of View:
62 Laurence Booth
18 A Tale of Two Gazelles
66 Point of View:
How two Canadian companies managed to create value and jobs, enjoy double-digit 76 David St. Germaine (MBA ’05)
growth, and leave the competition in their dust. by Nick Palmer and Jennifer Hildebrandt
79 Questions for:
24 Creating Opportunity in an Age of Uncertainty 81 Martha Amram
84
Rita Gunther McGrath discusses ‘marketbusting moves’, the skills of entrepreneurial 85 Live@Rotman:
leadership, and how to get growth initiatives underway in your organization. 101 Conference on Business & Society
by Karen Christensen
News Briefs
30 Overchoice:Why Variety Can Backfire
Live@Rotman:
Manufacturers often assume that ‘variety is good’, but too much product assort- Life-Long Learning 2005
ments can negatively impact consumer choice and brand share. by Dilip Soman and
John Gourville Alumni Profiles

36 China vs. India:The Race to Growth Alumni Capsules

Two experts give their views on the contrasting ways in which China and India Reunion Round-up
are developing. by Tarun Khanna and JonathanWoetzel
Class Notes
42 Think Globally, Act Locally: Policy Responses to Offshoring
Upcoming Events
Offshoring presents Canada with a choice: adapt and thrive, or hide behind a protec-
tionist barrier and face slow decline. by Daniel Trefler

46 Effectively Supporting Growth

Three stakeholder groups give their views on supporting rapid growth firms.
by Rebecca Reuber and Eileen Fischer

Rotman Magazine Fall 2005 Rotman magazine is published three times per year for alumni and friends
of the Joseph L. Rotman School of Management, University of Toronto.
Editor: Karen Christensen Subscriptions are available for $99 per year.To subscribe, go to
Contributors: Steve Arenburg, Laurence Booth,Willam Buxton, Eileen Fischer, www.rotman.utoronto.ca/subscribe
Matthew Fox, Jennifer Hildebrandt, Roger Martin, Ken McGuffin, Nick Palmer,
Rebecca Reuber, Dilip Soman, David St. Germaine, George Stalk, Jack Thompson, All rights reserved.
Daniel Trefler, Heather Ullman, Chris Zook To submit a change of address, please contact us at:
Design: Ove Design & Communications Ltd. Rotman Magazine, Joseph L. Rotman School of Management
Cover: Leigh Beisch 105 St. George Street,Toronto, ON M5S 3E6
Photography: Jim Allen, Matthew Fox, Ken McGuffin, Dario Ruberto Tel: 416-978-0240 Fax: 416-978-1373
All rights reserved. E-mail: [email protected] Web: www.rotman.utoronto.ca

Rotman Magazine Fall 2005 • 1

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From the Dean: Roger Martin

The Growth Issue

Your company needs it; your shareholders demand it;
and your career can suffer if you don’t drive it: it’s
growth, and as a wise person once said, “like yardwork,
it’s the job that’s never done.”

The number one issue on the minds of stuck in it, in Interview with a Growth choice: either adapt to the opportunities
CEOs today, growth used to be a pretty Guru, on page 8. presented by offshoring and thrive, or hide
straightforward proposition: create a great behind a protectionist barrier and face
new product or service; expand the Most of today’s competition occurs in slow decline, in Think Globally, Invest
market for it globally; possibly acquire environments where industry boundaries are Locally: Responding to the Rise of
related companies; keep costs down while well-defined, and the rules of the game are Offshoring, on page 42.
raising prices; lather, rinse and repeat. known – what INSEAD professors Renée
Unfortunately, these ingredients no longer Mauborgne and W. Chan Kim call ‘red Elsewhere in this issue, we profile two
represent the recipe for sustained growth, oceans’; but this is not a place where growth impressive Canadian growth stories –
and as a result, a whopping 75 per cent of thrives. They encourage the discovery of Workbrain and Mountain Crest
today’s growth initiatives fail. ‘blue oceans’, defined by untapped market Liquors – in A Tale of Two Gazelles on
space and demand creation, in Blue Ocean page 18; we talk to the man who coined the
Creating new growth is hard. Firms Strategy, on page 12. term ‘gazelles’, small business guru David
looking for significant, sustained growth Birch, on page 40; Research in Motion’s
need to find new platforms for it, which The keys to growth, according to Jim Balsillie occupies our CEO’s Corner
entails drawing heavily on the creative and Columbia Business School Professor Rita on page 28; Rotman Professor Rebecca
analytical skills of their human capital to Gunther McGrath, are ‘marketbusting Reuber and Schulich School of Business
create business designs that capture addi- strategies’ that redefine profit drivers and Professor Eileen Fischer compare the
tional value for customers. employ entrepreneurial leadership skills. views of three sets of stakeholders in
She talks about Creating Growth in an Effectively Supporting Growth, on
In this issue of Rotman Magazine, we Age of Uncertainty, on page 24. page 46; and renowned business strategist
tackle growth from a number of perspec- George Stalk gives his views on the
tives in an effort to help you navigate Product variety is almost universally emerging powerhouse that is the Chinese
through what has become an increasingly thought to be a good thing. But Rotman economy on page 50.
murky quest. Professor of Marketing and Corus Chair
in Communication Strategy Dilip Soman Identifying and leveraging the resources
Design principles can create rewarding and Harvard Professor John Gourville for new growth doesn’t happen overnight.
experiences for customers and provide the show that this is not always the Most business people have spent years
key to earnings growth. But before firms case, in Overchoice: Why Variety Can learning to create growth the old fash-
can jumpstart their growth engines via Backfire, on page 30. ioned way; what they haven’t spent much
design, they first have to change the way time thinking about is how to leverage
they operate along five key dimensions. China and India, the two fastest-grow- relationships, design principles, networks
I describe these in Embedding Design ing economic powerhouses on the planet, and information to create new value for
Into Business, on page 4. are taking very different paths to prosper- customers and investors.The result of this
ity. Harvard Professor Tarun Khanna and type of innovation is not just economic
One of today’s foremost authorities on McKinsey Director Jonathan Woetzel growth, but growth of the human spirit as
growing business in slow-growth markets, argue for, and against, their diverse well: it reinforces curiosity and risk-tak-
best-selling author Adrian Slywotzky approaches in China and India: The ing, and the idea that there is always
was chosen by IndustryWeek as one of the six Race to Growth, on page 36. something new around the corner. If only
most influential people in management you know where to look.
today, alongside Peter Drucker, Bill Offshoring is both a threat and an
Gates, Andy Grove, Jack Welch, and opportunity for Canada, says J. Douglas and
Michael Porter. He talks about the “no- Ruth Grant Canada Research Chair in
growth-zone”, and why so many firms are Competitiveness and Prosperity Daniel
Trefler. He argues that Canada faces a

Rotman Magazine Fall 2005 • 3

DEmebseidgdning

into Business

by Roger Martin

4 • Rotman Magazine Spring/Summer 2005

Photo of Roger Martin: © 2005, Peter Sibbald. All Rights Reserved. Firms everywhere are realizing they can jump-start
growth by becoming more design-oriented. But to
generate meaningful benefits from design, they will
first have to change the way they operate along five
key dimensions.

Roger Martin

The topic of design is as hot as a pistol these ing’ is a permanent position with a set of portray jobs and tasks as ‘ongoing’ and ‘per-
days. Everywhere you look, there are cover tasks that are considered ongoing, without manent’, when in fact, the majority of
stories, conferences – you name it, if it’s finite duration: managing the annual work life is naturally a set of projects, each
related to design, people are talking about advertising plan; setting marketing budg- with its ebbs and flows. Many managers
it. Firms look wistfully at the stupendous ets; coordinating with sales; reporting complain that because they are constantly
growth that the iconic iPod has provided quarterly on share trends to the CEO, etc. ‘fighting fires’, they can’t seem to get their
previously-stagnating Apple Computer, The vice-president of marketing is ‘real jobs’ done; but I would argue that they
and are hopeful that design can help them rewarded primarily for fulfilling these have a skewed sense of reality, and that the
create their own version of the iPod and ongoing responsibilities consistently and fire-fighting they are called upon to do is
restart their growth engines. adroitly. By and large, colleagues mirror probably more ‘real’ than the set tasks asso-
this flow of work life. ciated with their ‘real job’.
Unfortunately, it’s not as simple as hir-
ing a Chief Design Officer and declaring In design shops, the work flow is radi- Style of Work
that design is your top corporate priority. cally different, consisting primarily of
To generate meaningful benefits from projects with defined terms. Designers are Traditional firms have a style of work that is
design, firms will have to change in funda- used to being assigned to a given project consistent with the ongoing, permanent
mental ways to operate more like the with a specific deadline; when the deadline tasks that characterize their flow of work
design shops whose creative output they comes and the project is completed, it dis- life. Roles tend to be carefully, if not
covet. To get the full benefits of design, appears from sight, and the designer moves rigidly, defined, with clear responsibilities
firms must embed design into – not append on to other projects, each with its own for each individual laid out and economic
it onto – their business. fixed duration. Designers get used to mix- incentives linked tightly to those responsi-
ing and matching with other designers on bilities. Individuals are typically much more
Design organizations vary significantly ad hoc teams that are created with a spe- adept at describing ‘my responsibilities’
from traditional firms along five key dimen- cific purpose in mind. They view their than they are at describing ‘our responsibil-
sions: flow of work life; style of work; careers as an accumulation of projects, ities’. They are inclined to work away at
mode of thinking; source of status; and rather than a progression of hierarchical these responsibilities, refining and honing
dominant attitude. Left unchecked, the job titles – i.e. manager, director, AVP,VP, outputs before sharing a complete, finalized
stark contrast between traditional firms and SVP, EVP, and CEO. ‘product’ with the appropriate individuals.
design shops on these attributes will For example, the SVP of marketing will be
impede any attempt by traditional firms to Dropped into a traditional setting with inclined to toil away on the annual market-
become more ‘design-oriented’. a ‘permanent job’ defined by the perform- ing plan, refining and adjusting it until it is
ance of an ongoing set of tasks, a designer ‘perfect’, and only then presenting it to the
Flow of Work Life will feel completely alienated from his or CEO, who will hopefully agree.
her ‘normal’ way of operating. Indeed, it
In traditional firms, the flow of work life is could be argued that traditional firms actu- In a design shop, the style of work is
organized around permanent jobs and ally fool themselves by attempting to much more collaborative. While there is
ongoing tasks. ‘Vice-president of market-

Rotman Magazine Fall 2005 • 5

likely some hierarchy within teams, projects through observation that something actu- deductively. But their reasoning processes
are typically assigned to groups rather than ally works – and deductive – proving went well beyond the inductive and deduc-
to individuals.A design team is mandated to through reasoning from principles that tive: they imagined what a chair of the future
come up with a design solution together – something must be. For example, a retailer could look like, and how that chair could for-
explicitly not as individuals. And throughout may study the cost structure of all of its ever change the way users would think about
the process, the team is expected to interact outlets to determine which has the best office chairs. Could they prove any of it in
with the client by bringing them into the cost position in order to set, inductively, a advance? No. In fact, when users first saw
design collaboration. cost target for the whole chain. Or a con- the chair, it received a decidedly chilly
sumer packaged goods firm can use its reception — but only because it looked like
Because of this collaborative atmos- engrained theory – i.e. ‘build market share no other chair they had ever seen.
phere, the work style also tends to be iterative and profits will follow’ – to deduce the
– the opposite of waiting until something is appropriate action in a given situation. In short order, users warmed to
‘right’. This involves prototyping, honing However, any form of reasoning or argu- the Aeron chair, because Stumpf and
and refining through multiple iterations with mentation outside these two forms is at a Chadwick had indeed created a product
the client. Architect Frank Gehry is minimum discouraged, and at the extreme, that no consumer could have described,
famous for this style. When his first design exterminated.The challenge is always, “Can but that nonetheless met their unarticu-
for a project goes public, it is typically you prove that?”, and to prove something in lated needs and sought to be better than
greeted with a firestorm of protests for its anything that came before it. Despite bear-
ing a price tag double the prevailing level
The source of status and pride in for a high-end ergonomic office chair,
design organizations derives from the Aeron became the best-selling office
solving ‘wicked problems’ – problems chair of all time and a must-have for
with no definitive formulation or boardrooms everywhere. Among other
solution, whose definition is open accolades, it won the award for the best
to multiple interpretations. design of its decade. None of this would
have happened without the design shop
inadequacies on a number of dimensions– a reliable fashion means using rigorous sensibilities that fostered Stumpf and
making clients, users and observers inductive or deductive logic. Chadwick’s abductive reasoning.
extremely nervous, because they generally
work in organizations in which nothing sees Designers use and value inductive and Source of Status
the light of day until it is ‘right’. They can’t deductive reasoning too, inducing patterns
imagine that Gehry is only beginning, and through the close study of users and deduc- The primary source of status in traditional
that even though he is a brilliant visionary, he ing answers through the application of firms is the management of big budgets
wants to get valuable feedback for the next design theories. However, they also encour- and large staffs. When executives have the
iteration (which won’t be final either, by the age and highly value a third type of logic: occasion to boast about themselves,
way.) Indeed,‘final’ only emerges many iter- abductive reasoning. As described by Darden they are inclined to refer to the number of
ations into the future. School of Business Professor Jeanne people for whom they have direct respon-
Liedtka, abductive reasoning is the logic sibility and/or the bottom line that they
When traditional firms hire designers, of what might be. Designers may not be deliver each year – i.e., “I run a 5,000 per-
their managers often find designers disap- able to prove that something is or must be, son organization and our bottom line this
pointing because, like Gehry, they bring but they nevertheless reason that it may be – year will be $700 million.” And of course,
them prototypes for feedback instead of final and this style of thinking is critical to bigger is always better!
products. Unfortunately for the designers, the creative process.
these firm managers think they are seeing a In a design shop, one would be hard-
final product, and when judged by that stan- When Bill Stumpf, head of his own pressed to find someone bragging about big
dard, the product is patently sub-standard Minneapolis-based design shop, and Don budgets or large staffs. If anything, the brag-
and the designer is considered incompetent. Chadwick, head of his own design shop in ging would be about how small and elite the
Santa Monica, designed the award-winning shop is. The source of status and pride in
Mode of Thinking Aeron chair for Herman Miller, they had design organizations derives from solving
lots of detailed consumer research from ‘wicked problems’ – problems with no
Traditional firms utilize and reward the use which to apply inductive reasoning and definitive formulation or solution, whose
of two kinds of logic: inductive – proving robust sets of design principles to consider definition is open to multiple interpreta-
tions.This reality is confirmed from looking
around the office of any star designer: desks,
credenzas and shelves likely display the
world’s best designs – the ones that have
solved the most difficult design challenges in
the most elegant fashion. Designers become

6 • Rotman Magazine Fall 2005

known for their great solutions, whether it
be the Apple mouse, the Bilbao Guggenheim
Museum, or the Nike swoosh. These
designers enjoy the highest status inside
their firms and across their industries, and as
a result, everyone in the design field seeks to
earn status through tackling and solving
wicked problems.

Dominant Attitude shops. There are reasons why even leading tasks. They will be more inclined to assign
international design shops are tiny by cor- their best and brightest to tackle ‘wicked
The dominant attitude in traditional firms is porate standards. However, given today’s projects’, which will signal that solving
to see constraints as the enemy and budgets design-centric environment, traditional wicked problems is a very high status activ-
as the drivers of decisions. The common firms can – and should – make subtle but ity. And by recognizing these issues
argument is, “We can only do what we have important changes in their values to embed explicitly as ‘wicked problems’, the firm –
the budget to do.” If only budget constraints and meaningfully exploit design, rather and those assigned to tackling the problems
could be relieved, these managers seem to than append it as nothing more than the lat- – will be more inclined to recognize that
imply, so much more would be possible. As a est management fad. abductive logic and iterative/collaborative
result,‘budget constraints’ are pegged as the processes are necessary, given the wicked-
reason why a product’s packaging is cheap- The linchpin of the required change ness of the problem at hand.
looking, it is late to market, or its range is lies with ‘wicked problems’. Traditional
too narrow. ‘The budget’ – arch enemy of firm values result in assuming away wicked Firms that truly want to embed
the traditional firm manager – simply makes problems as the product of immutable con- design into their fundamental operations
it impossible to do any better. straints with which the firm must live: need to wade into – not avert their eyes
managers avoid working on wicked prob- from – wicked problems. The response to
By contrast, in design shops the dom- lems because status comes from elsewhere, these problems must be “bring it on,”
inant mindset is, “there is nothing that and concentrating on ongoing tasks crowds rather than “nothing can be done.” Wading
can’t be done.” If something can’t be done, out working on and thinking about wicked into wicked problems using the approach
it is only because the thinking around problems. Even if a wicked problem is described here will provide the catalyst to
it hasn’t yet been creative and inspired taken on in a traditional firm, the lack of introducing key design shop characteris-
enough. For Buckminster Fuller, appreciation of both abductive reasoning tics into a traditional firm. And as some of
the problem of buildings getting propor- and iterative/collaborate work make it less today’s most successful firms have shown,
tionally heavier, weaker and more likely that it will be tackled productively. infusing an organization with design prin-
expensive as they got larger in scale was ciples can pay big dividends in terms of
not an intractable problem: it was only If instead, traditional firms recognize value creation.
intractable until he designed the geodesic that wicked problems represent their
dome, which gets proportionally lighter, biggest opportunities for value creation, This article appeared in BusinessWeek Online in August 2005,
stronger and less expensive as it gets they will be spurred to see that tackling following a profile of Roger Martin (‘Meet the Innovation
larger in scale. them requires a project-based approach – Gurus: The Academic’) in BusinessWeek’s Special Report,
and that the important role of projects in ‘Get Creative: How to Build Innovative Companies’
For design shops, constraints are never firm life must not be ignored, but rather (August 1, 2005).
the enemy. On the contrary, they serve to protected from the tyranny of ongoing
increase the challenge and excitement-level
of the task at hand. In fact, given the source
of status in these organizations, constraints
actually increase the level of a problem’s
‘wickedness’, making its potential solution
that much more rewarding. Hence design-
ers are disinclined to say, “That simply
cannot be done,” or, “We don’t have the
budget for that”. Instead, they are inclined
to say: “Bring it on!”

The Journey from Appending
to Embedding

It is both unrealistic and unproductive to
think that traditional firms will ever trans-
form themselves completely into design

Rotman Magazine Fall 2005 • 7



Interview with a

rowth

Guru:

Adrian Slywotzky

by Karen Christensen

Best-selling author Adrian Slywotzky – one of today’s foremost authorities on grow-
ing business in slow-growth or no-growth markets – talks about demand innovation,
the ‘no-growth-zone’, and why all industries hold the potential for sustained growth.

Karen Christensen: What is the ‘no growth cent per year down to one or two per cent
zone’, and why are so many companies per year. It involves reaching the top of the
stuck in it? famous ‘S Curve’; the business might be
very profitable, but year-over-year volume
Adrian Slywotzky: In a nutshell, it’s a mar- and revenue growth is maybe one or two
ket where the combination of reduced per cent. Companies get stuck in this zone
product innovation and saturation of func- because they’ve done such a good job of
tionality causes a decline over time, from meeting customers functionality needs
growth rates of between eight and 15 per with their products, and because in many

Rotman Magazine Fall 2005 • 9

industries, the new product pipeline is a KC: Why are truly differentiating new- company to change its thinking. It started
fraction of what it used to be. For example, product breakthroughs becoming so rare? to move beyond viewing itself as a provider
in the chemical industry in the 1930s and of gas by asking, ‘how can we help our cus-
40s, major new product innovations hap- AS: Particularly with food, grocery, and tomers run their businesses better?’ It
pened at a rate of 20 per decade; today, it’s many technology products, you see breath- started helping its customers by taking a lot
down to one per decade. taking proliferation going on, with of industrial gas management processes off
hundreds of variations of a single product. their hands, basically outsourcing them so
KC: You advocate ‘demand innovation’. Some of these are meaningful, but many are that these firms could concentrate on what-
What is the idea, in brief? not; they irritate the customer by providing ever their base business was. As a result,
too many choices that aren’t important, customers were able to run their produc-
AS: It’s about looking at the market not only serving only to clog the channel and tion processes better; AL helped them
through the lens of your product or service, increase complexity. We talked earlier co-generate energy in certain industries,
but also through the lens of the customer’s about the importance of first doing a great and do a better job of running the supply
total economic equation by asking, ‘what job in meeting the functionality needs of chain for hazardous materials.
does my customer have to pay to search out your customer. If you haven’t done that yet,
my product, to evaluate it, buy it, and use that should be your focus; if you have, you By shifting its mental gears in this way,
it?’ It’s not unusual to find that for every should move on to the next set of ques- Air Liquide went from around nine per
dollar you receive from a customer, that tions, which are not around, ‘how can we cent of its revenue being from services in
customer spends between eight and 15 dol- make a better widget?’, but ‘how can we 1993 to about 23 per cent today. As a
lars around the purchase, usage and improve our customer’s convenience, result, in a very mature market, it has
application of the product. Demand innova- reduce their hassle, and save them time and achieved double-digit revenue and profit
growth. This is an almost extreme case
For every dollar you receive from a of selling a pure commodity to very big,
customer, that customer likely spends tough customers – like BASF, Texas
between eight and 15 dollars around Instruments, and Unilever – and yet by
the purchase, usage and application re-thinking what their function was, they
of your product. created a very different outcome for them-
selves. This example represents a very
tion is about recognizing that the customer money?’ Customers are hungry for this important point: demand innovation is not
needs a lot more than just product function- kind of differentiation, yet firms spend less about forgetting technical skills.Your tech-
ality. It entails asking, ‘how can we, as time on this than on product variations. It’s nical skills and your R&D skills are still
suppliers, help our customer reduce their time to reallocate these resources. extremely important: what it’s about is cre-
costs, their capital, and their cycle times, ating an additional muscle – what we might
and improve their yields and their profits?’ KC: What are some of your favourite refer to as ‘customer economics expertise’.
However, before you get to ask any of these examples of demand innovation in action? This requires people who are as sophisti-
questions, you first have to get an ‘A+’ on cated in understanding their customers’
the basic product, service or functionality AS: It’s a toss up between Johnson income statements, balance sheets and
that you provide. Demand innovation actu- Controls, in the automotive business, and activity chains, and the politics of the deci-
ally makes it more important to have Air Liquide, in the industrial gas busi- sion-making process, as they are about
operational excellence in your base busi- ness. I’ll say Air Liquide (AL), because it science and technology.
ness. If you’ve already achieved that was in the worst possible scenario to be a
excellence, then you’ve earned the right to demand innovator.As an industrial gas busi- KC: Describe what you mean by “evolv-
ask these additional questions. Another ness, it had very little opportunity for ing a product offer into a system offer.”
characteristic of demand innovation is that product innovation, yet it housed a tremen-
it requires extending the conversation with dous amount of technical expertise. When AS: Johnson Controls did this brilliantly.
the customer beyond the purchasing agent, it surveyed its customers ten years ago, They started out providing automotive seat
to the engineers, the designers, the plant they had two responses: number one , ‘we components, but evolved to provide the
managers, and the business decision makers didn’t know you had any of that R&D sub-modules that put those components
in your customer’s organization. expertise’; and number two, ‘so what? together, and eventually, to delivering the
What does it do for me?’. This forced the entire seat. Because of this integration,
OEMs were able to reduce the total cost of
a seat from around $450 to $350. Johnson
Controls went on to do the same kind of
thing for doors and instrument panels, so
instead of saying to a customer, ‘I can sell
you six or seven separate components’,

10 • Rotman Magazine Fall 2005

they could say, ‘I can sell you a sub-assem- those savings and reinvest them in the cus- a complex system in which one person
bly OR the whole seat OR the whole door.’ tomer side and the R&D side. A second buys, another person influences, and a third
This made it much easier and more cost- approach involves moving to China. If can veto purchases, so having the skill set to
effective for the assembler, who could their customers are located in China, manage the whole process becomes very
concentrate on the things that matter most many good demand innovators are moving important in creating this kind of growth.
to their end customer, like fit and design. their operations there, because a plant in
Guangdong is not going to be the same as KC: In your opinion, which industries
KC: What is involved in “de-averaging and a plant in Detroit or Munich. The third show the greatest potential for sustained
re-segmenting a firm’s customer base”? approach is a bit more prospective. Today, growth?
people often buy from Chinese manufac-
AS: The reality is that not all customers turers because of low cost and high AS: Opportunities for demand innovation
are ready to buy into this kind of value quality; but in several years, I think you actually cut across most industries. The
proposition. In the real world, maybe 25 will see the emergence of competitors only areas where I would issue a note of
to 30 per cent will entertain a conversa- from China who will compete not just on caution are those that are already growing
tion about buying systems instead of these levers, but also on high technology. very rapidly due to natural market growth
components, or working with their sup-
pliers to improve their economics. Some Being able to look at customers from a
customers are still only interested in the systemic point of view, understanding
best quality, assuming that the price is rea- what their costs, processes and economics
sonable; while others are only interested are, is key.
in the lowest possible price. De-averaging
and re-segmenting your customer base Think – in a collapsed time frame – about – like pharmaceuticals and technology.Very
entails ensuring that you have offerings the evolution of Toyota and Honda, from often, people get so excited about growth
for each group of customers. For those being cheap and high quality to being at that they don’t spend enough time thinking
interested in price only, you have to make the forefront of technology now, produc- about what to do ‘when the music stops’ –
sure that your business model is low cost ing hybrid cars ahead of the rest of the when that natural growth rate slides down
enough to be effective for them. At the market. I believe that within a few years, from 15 to around two per cent. Natural
other end of the spectrum are customers we will see some of the leading Chinese high-growth industries face significant chal-
that will work with you to design a better manufacturers getting very good at playing lenges in creating value growth unless they
system or approach to their business. It the demand innovation game. make the kind of transition we’ve talked
takes very different kinds of people to about. At the same time, in my research,
interact with these disparate customers: a KC: What are the key skills required to I’ve seen companies in two per cent growth
traditional salesperson won’t work for successfully tackle demand innovation? industries – like cheque printing and auto-
demand innovation, but for the low-price motive – practice demand innovation and
focused customers, that’s just what you AS: We’ve talked about some of them create profitable growth of 14 to 15 per
need.The good news is that, as competent already: being able to look at your cus- cent. So overall, I’m optimistic, and I actu-
suppliers develop these skills, the propor- tomer not just as a purchasing agent you ally believe that the pressure created by
tion of customers who are interested in sell to, but as an individual business, or in globalization will get good companies to
buying more sophisticated offerings goes the consumer world, an individual family, embrace demand innovation even sooner
up over time. It’s already happened in the and asking, ‘what are their economics? than they would have otherwise.
automotive industry. What are the steps that they have to go
through to buy and use our product or Adrian Slywotzky is the author of six books, including How
KC: How do China and other emerging service? And what’s wrong with that pic- to GrowWhen Markets Don’t and The Profit Zone: How Strategic
markets fit into the demand innovation ture? How could it be better?’ Being able to Business Design Will Lead You to Tomorrow’s Profits. Based in
equation? look at customers from a systemic point of Boston, he is the managing director of Mercer Management
view, understanding what their costs, Consulting, Inc., a global consulting firm focusing on
AS: There are three ways to answer that. processes and economics are, is key. There growth in changing markets.
First, many demand innovators are seeing is also a large amount of political skill
that they can add value in one of two involved, because in many of these cases,
places: at the customer connection end of you’re not talking about a single buyer, but
the value chain, or at the R&D end. So
they’re working hard to have as much as
possible of their manufacturing done in
China, and as much of their back office
work done in India, so that they can take

Rotman Magazine Fall 2005 • 11

Blue OceannOScSSettatrnrartaaSetgrttayeHeteBgoglguyyweyOtocBeaClnureSeatratetOegUycneBclouaennOtecseStaentdrSatMrattaeergkgyeBytluSeBpOalcuecaeen

W. Chan Kim and Renée Mauborgne

by Renée Mauborgne and W. Chan Kim

Too many companies are caught in ‘red oceans’, racing to build a defensible position
within their existing industry order. Companies with ‘blue ocean’ strategies, on the
other hand, enjoy untapped market space and highly-profitable growth.

A one time accordion player, stilt-walker, a level of revenues that took Ringling tial for growth. Alternative forms of
and fire-eater, Guy Laliberté is now CEO Bros. and Barnum & Bailey more than entertainment cast an increasingly long
of Cirque du Soleil, one of Canada’s 100 years to attain. shadow. Children cried out for PlayStations
largest cultural exports. Created in 1984 by rather than a visit to the traveling circus.
a group of street performers, Cirque’s pro- What makes this rapid growth all the Partially as a result, the industry was suf-
ductions have been seen by almost 40 more remarkable is that it was not achieved fering from steadily decreasing audiences
million people in 90 cities around the in an attractive industry, but rather in a and, in turn, declining revenue and
world. In less than 20 years, it has achieved declining industry in which traditional profits. From the perspective of competi-
strategic analysis pointed to limited poten-

12 • Rotman Magazine Fall 2005

SOcetarnaStrtateeggy By: Blue Oceanand MaStrategy Blue Ocean

lue Ocean Strateke the Competitiotion-based strategy, then, the cir-

n Icus industry appeared unattractive.
rrelAnother compelling aspect of Cirque
Strategy Blue Blue Ocean Strate

Ocean Strategy Blue Ocean

evadu Soleil’s success is that it did not win by
nttaking customers from the already-shrinking the industries not in

circus industry, which historically catered to existence today.This is the unknown

children. Instead it created uncontested new market space. In the red oceans, industry irrelevant because the rules of the game are

market space that made the competition boundaries are defined and accepted, and waiting to be set.

irrelevant by appealing to a whole new the competitive rules of the game are It will always be important to swim

group of customers: adults and corporate known. Here, companies try to outper- successfully in the red ocean by outcompet-

clients prepared to pay a price several times form their rivals to grab a greater share of ing rivals. But with supply exceeding

as great as traditional circuses for an existing demand. As the market space gets demand in more industries, competing for a

unprecedented entertainment experience. crowded, prospects for profits and growth share of contracting markets will not be suf-

Cirque du Soleil succeeded because it are reduced. Products become commodi- ficient to sustain high performance.

realized that to win in the future, companies ties, and cutthroat competition turns the Companies need to go beyond competing:

must stop competing with each other. The red ocean bloody. to seize new profit and growth opportuni-

only way to beat the competition is to stop Blue oceans, in contrast, are defined by ties, they also need to create blue oceans.

trying to beat the competition. untapped market space, demand creation,

To understand what Cirque du Soleil and the opportunity for highly-profitable The History of Blue Oceans

has achieved, imagine a market universe growth. Although some blue oceans are Although the term ‘blue oceans’ is new,

composed of two sorts of oceans: red oceans created well beyond existing industry their existence is not.They are a feature of

and blue oceans. Red oceans represent all the boundaries, most are created from within business life, past and present. Look back

industries in existence today. This is the red oceans by expanding existing industry 100 years and ask yourself, “How many of

known market space. Blue oceans denote all boundaries. In blue oceans, competition is today’s industries were then unknown?”

Rotman Magazine Fall 2005 • 13

The answer: many industries as basic as All this suggests that the business envi- Value innovation places equal emphasis
automobiles, music recording, aviation, ronment in which most strategy and on value and innovation.Value without inno-
petrochemicals, health care, and manage- management approaches of the 20th century vation tends to focus on value creation on an
ment consulting were unheard of, or had evolved is disappearing. As red oceans incremental scale, something that improves
just begun to emerge. Now turn the clock become increasingly bloody, management value but is not sufficient to make you stand
back only 30 years. Again, a plethora of will need to be more concerned with blue out in the marketplace. Innovation without
multibillion-dollar industries jumps out – oceans than the current cohort of managers value tends to be technology-driven, market
mutual funds, cell phones, gas-fired elec- is accustomed to. pioneering, or futuristic, often shooting
tricity plants, biotechnology, discount beyond what buyers are ready to accept and
retail, express package delivery, minivans, The Cornerstone of Blue Ocean Strategy: pay for. In this sense, it is important to dis-
snowboards, coffee bars, and home Value Innovation tinguish between value innovation as
videos, to name a few. Just three decades opposed to technology innovation and mar-
ago, none of these industries existed in a In our research we found a consistent and ket pioneering. Our research shows that
meaningful way. common pattern for creating and captur- what separates winners from losers in creat-
ing blue oceans. Whether it was Ford in ing blue oceans is neither bleeding-edge
Now put the clock forward 20 years – 1908 with the Model T; GM in 1924 with technology nor ‘timing for market entry’:
or perhaps 50 years – and ask yourself how cars styled to appeal to the emotions; value innovation occurs only when compa-
many now unknown industries will likely CNN in 1980 with real-time news 24/7; nies align innovation with utility, price, and
exist then. If history is any predictor of the or Compaq, Starbucks, Southwest cost positions. If they fail to anchor innova-
future, again, the answer is many. Airlines, or Cirque du Soleil – the tion with value in this way, technology
approach was consistent across time. innovators and market pioneers often lay the
There are several driving forces behind eggs that other companies hatch.
a rising imperative to create blue oceans. What consistently separated winners
Accelerated technological advances have from losers was their approach to strategy. Value innovation is a new way of think-
substantially improved industrial produc- Companies caught in red oceans followed ing about and executing strategy that
tivity, allowing suppliers to produce an a conventional approach, racing to beat results in a break from the competition.
unprecedented array of products and serv- the competition by building a defensible Importantly, it defies one of the most
ices. The result is that in increasing position within the existing industry commonly accepted dogmas of competi-
numbers of industries, supply exceeds order. The creators of blue oceans, sur- tion-based strategy: the value-cost trade-off.
demand. The trend toward globalization prisingly, didn’t use the competition as It is conventionally believed that companies
compounds the situation. As trade barriers their benchmark; instead, they followed a can either create greater value to customers
between nations and regions are dismantled different strategic logic that we call value at a higher cost or create reasonable value at
and as information on products and prices innovation. Rather than focusing on beating a lower cost. Here, strategy is seen as mak-
becomes instantly and globally available, the competition, they focused on making ing a choice between differentiation and low
niche markets and havens for monopoly the competition irrelevant by creating a cost. In contrast, those that seek to create
continue to disappear. While supply is on leap in value for buyers and their com- blue oceans pursue differentiation and low
the rise as global competition intensifies, pany, thereby opening up new and cost simultaneously.
there is no clear evidence of an increase in uncontested market space.
demand worldwide, and statistics even
point to declining populations in many Figure One: Red Ocean vs. Blue Ocean Strategy
developed markets.
Red Ocean Strategy Blue Ocean Strategy
The result has been accelerated com-
moditization of products and services, Compete in existing market space. Create uncontested market space.
increasing price wars, and shrinking profit
margins. Recent industry-wide studies on Beat the competition. Make the competition irrelevant.
major American brands reveal that for major
product and service categories, brands are Exploit existing demand. Create and capture new demand.
generally becoming more similar, and as
they become more similar, people increas- Make the value-cost trade-off. Break the value-cost trade-off.
ingly select based on price. People no longer
insist, as in the past, that their laundry deter- Align the whole system of a firm’s Align the whole system of a firm’s
gent be Tide; nor will they necessarily stick activities with its strategic choice of activities in pursuit of differentiation
to Colgate when Crest is on sale, and vice differentiation or low cost. and low cost.
versa. In overcrowded industries, differenti-
ating brands becomes harder in both
economic upturns and downturns.

14 • Rotman Magazine Fall 2005

The creation of blue oceans is about The Four Actions Framework eliminate and reduce their investments in
driving costs down while simultaneously factors that an industry competes on. The
driving value up for buyers. This is how a To reconstruct buyer value elements in craft- result is mounting cost structures and com-
leap in value for both the company and its ing a new value curve, we have developed plex business models. The second two
buyers is achieved. Because buyer value the four actions framework, which involves four factors, by contrast, provide you with
comes from the utility and price that the key questions to challenge an industry’s insight into how to lift buyer value and cre-
company offers to buyers, and because the strategic logic and business model: ate new demand. Collectively, they allow
value to the company is generated from 1. Which of the factors that the industry you to systematically explore how you can
price and its cost structure, value innovation reconstruct buyer value elements across
is achieved only when the whole system of takes for granted should be eliminated? alternative industries to offer buyers an
the company’s utility, price, and cost activi- 2. Which factors should be reduced well entirely new experience, while simultane-
ties is properly aligned. It is this ously keeping your cost structure low. Of
whole-system approach that makes the cre- below the industry’s standard? particular importance are the actions of
ation of blue oceans a sustainable strategy. 3. Which factors should be raised well eliminating and creating, which push com-
Blue ocean strategy integrates the range of a panies to go beyond value maximization
firm’s functional and operational activities. above the industry’s standard? exercises with existing factors of competi-
4. Which factors should be created that the tion. Eliminating and creating prompt
We have spent the past decade devel-
oping a set of analytical tools in an attempt industry has never offered?
to make the formulation and execution of The first question forces you to consider
blue ocean strategy as systematic and eliminating factors that companies in your
actionable as competing in the red waters industry have long competed on. Often
of known market space. Following are the
principles for formulating and executing Value innovation is achieved only when
blue ocean strategy. the whole system of a company’s utility,
price, and cost activities is properly
The Strategy Canvas aligned. It is this whole-system approach
that makes blue oceans sustainable.
The strategy canvas is both a diagnostic and
an action framework for building a com- those factors are taken for granted, even companies to change the factors themselves,
pelling blue ocean strategy. First, it captures though they no longer have value or may hence making the existing rules of competi-
the current state of play in the known market even detract from it. Sometimes there is a tion irrelevant.
space, which allows you to understand where fundamental change in what buyers value,
the competition is currently investing, the but companies that are focused on bench- The Eliminate-Reduce-Raise-Create Grid
factors the industry currently competes on in marking one another do not act on, or even
products, service, and delivery, and what cus- perceive, this change. A third important tool is what we call the
tomers receive from the existing competitive eliminate-reduce-raise-create grid, which pushes
offerings on the market. The second question forces you to companies not only to ask all four questions
determine whether products or services in the four actions framework, but also to act
To fundamentally shift the strategy can- have been over-designed in the race to on all four to create a new value curve. By
vas of an industry, you must begin by match and beat the competition. Here, com- driving companies to fill in the grid with the
reorienting your strategic focus from com- panies over-serve customers, increasing actions of eliminating and reducing as well as
petitors to alternatives, and from customers to their cost structure for no gain. raising and creating, the grid gives companies
non-customers of the industry.To pursue both four immediate benefits:
value and cost, you should resist the old The third question pushes you to • It pushes them to simultaneously pursue
logic of benchmarking competitors in the uncover and eliminate the compromises
existing field and choosing between differ- your industry forces customers to make, and differentiation and low costs to break the
entiation and cost leadership. As you shift the fourth helps you to discover entirely value-cost trade-off;
your strategic focus from current competi- new sources of value for buyers and create • It immediately flags companies that are
tion to alternatives and non-customers, you new demand and shift the strategic pricing focused only on raising and creating
gain insight into how to redefine the prob- of the industry. and thereby lifting their cost structure and
lem the industry focuses on and thereby often overengineering products and serv-
reconstruct buyer value elements that reside By pursuing the first two questions (of ices – a common plight in many companies;
across industry boundaries. Conventional eliminating and reducing), you gain insight • It is easily understood by managers at any
strategic logic, by contrast, drives you to into how to drop your cost structure vis-à- level, creating a high level of engagement
offer better solutions than your rivals to vis competitors. Our research has found that in its application; and
existing problems defined by your industry. managers rarely systematically set out to

Rotman Magazine Fall 2005 • 15

Figure Two: Cirque du Soleil’s Eliminate-Reduce-Raise-Create Grid That’s the tagline of Southwest Airlines, or
at least it could be.What could Southwest’s
Eliminate Raise competitors say? Even the most proficient
Star performers Unique venue ad agency would have difficulty reducing
Animal shows the conventional offering of lunches,
Aisle concession sales seat choices, lounges, and hub links, with
Multiple show arenas standard service, slower speeds, and
higher prices into a memorable tagline. A
Reduce Create good tagline must not only deliver a clear
Fun and humor Theme message but also advertise an offering
Thrill and danger Refined environment truthfully, or else customers will lose trust
Multiple productions and interest. In fact, a good way to test the
Artistic music and dance effectiveness and strength of a strategy is to
look at whether it contains a strong and
• Because completing the grid is a challeng- frequent point-to-point departures. By authentic tagline.
ing task, it drives companies to robustly focusing in this way, Southwest has been
scrutinize every factor the industry com- able to price against car transportation. It Conclusion
petes on, forcing them to face the range doesn’t make extra investments in meals,
of implicit assumptions they make uncon- lounges, and seating choices. By contrast, Cirque du Soleil and Southwest Airlines
sciously in competing. Southwest’s traditional competitors invest have created blue oceans in very different
in all the airline industry’s competitive business situations and industrial contexts.
Characteristics of a Good Strategy factors, making it much more difficult However, their strategic profiles share the
for them to match Southwest’s prices. same characteristics: focus, divergence,
When expressed through a value curve, an Investing across the board, these companies and a compelling tagline. These three cri-
effective blue ocean strategy has three com- let their competitors’ moves set their own teria guide companies in carrying out the
plementary qualities: focus, divergence, and agendas. Costly business models result. process of reconstruction to arrive at a
a compelling tagline. Southwest Airlines cre- breakthrough in value both for buyers and
ated a blue ocean by breaking the trade-offs Divergence for themselves.
customers had to make between the speed
of airplanes and the economy and flexibility When a company’s strategy is formed Of course, there is no such thing as
of car transport. To achieve this, Southwest reactively as it tries to keep up with a risk-less strategy. Strategy will always
offered high-speed transport with frequent the competition, it loses its uniqueness. involve both opportunity and risk, be it
and flexible departures at prices attractive to Consider the similarities in most airlines’ a red ocean or a blue ocean initiative. But
the mass of buyers. meals and business-class lounges. On the at present, the playing field is dramatically
strategy canvas, therefore, reactive strate- unbalanced in favour of tools and analytical
By eliminating and reducing certain gists tend to share the same strategic profile. frameworks to succeed in red oceans.
factors of competition and raising others in Indeed, in the case of Southwest, the value As long as this remains true, red oceans
the traditional airline industry, as well as by curves of the company’s competitors are will continue to dominate companies’
creating new factors drawn from the alter- virtually identical and therefore can be sum- strategic agendas, even as the business
native industry of car transport, Southwest marized on the strategy canvas with a single imperative for creating blue oceans takes
was able to offer unprecedented utility for value curve. In contrast, the value curves of on new urgency.
air travelers and achieve a leap in value with blue ocean strategists always stand apart.
a low-cost business model. Its value curve Southwest, for example, pioneered point- Renée Mauborgne is the INSEAD Distinguished Fellow and
differs distinctively from those of its com- to-point travel between mid-size cities; a professor of strategy and management at INSEAD. W.
petitors in the strategy canvas, and its previously, the industry operated through Chan Kim is The Boston Consulting Group Bruce D.
strategic profile is a typical example of a hub-and-spoke systems. Henderson Chair and a professor of strategy and interna-
compelling blue ocean strategy. tional management at INSEAD. Reprinted by permission of
Harvard Business School Press from Blue Ocean Strategy: How
to Create Uncontested Market Space and Make the Competition
Irrelevant. Copyright 2005 by the Harvard Business School
Publishing Corporation; all rights reserved.

Focus Compelling Tagline

Looking at Southwest’s profile, we can see A good strategy has a clear-cut and com-
at once that the company emphasizes only pelling tagline. “The speed of a plane at
three factors: friendly service, speed, and the price of a car – whenever you need it.”

16 • Rotman Magazine Fall 2005

†AIM, the chevron logo and all associated trademarks are trademarks of A I M Management Group Inc., used under licence.
*Knowing Pays, TRIMARK and all associated trademarks are trademarks of AIM Funds Management Inc.

An annual report doesn’t always reveal the full details
of a company or the strength of its business. AIM Trimark
isn’t inclined to invest your hard-earned money based
solely on what an annual report says. Instead, we dig
deeper: researching competitors; interviewing customers;
and assessing the company and its management team
up close, to make sure that it looks as good in person as
it does on paper. Because the more we know, the better
investment decisions we make. Ask your financial advisor
about AIM Trimark.

ATale of

Gatwzoelles
by Nick Palmer and Jennifer Hildebrandt

‘Gazelles’ – companies with a minimum of $100,000 in revenues that
grow at least 20 per cent per year over a four-year period – are found in
all sectors of the economy. Meet two such Canadian growth machines.

Every successful company has a story to “We were fortunate to meet a CEO who Entering the market
tell, and every story traces its genesis to an needed our skills, even though we weren’t
idea. In the case of Workbrain, that idea experts in the workforce management The growth of Workbrain is particularly
was to market software that would enable software industry,” concurs now-CFO impressive considering the economic cli-
large companies to manage their work- Chapman – although he does concede that mate in which it began. “We raised $20
forces more efficiently.The idea took hold, his and Debow’s dedication to their school million ending in April of 2001, just as the
a market was identified, and in 1999, a work may have suffered. “We probably lost technology market crashed all around us,”
company was launched. a few GPA points.” says Chapman, “and by the fourth quarter
of 2001, we were generating cash from
Today, with 15 consecutive quarters of Though Chapman and Debow didn’t our operations.”
revenue growth under its belt and offices in have any extensive experience in the field
Toronto, Los Angeles, Atlanta, Melbourne of software technology, Ossip and his part- The first product offering launched in
and London, Workbrain is a success story ners did. Searching for an opening in the the fall of 2001, “about two weeks after
by any measure, with a customer roster workforce management market, they found September 11,” says Ossip. “At the time we
that includes British Airways, L’Oreal, a niche that Ossip, the CEO and president were talking to a lot of transportation com-
Weyerhaeuser and Lowe’s Companies. of Workbrain, felt could be exploited. “We panies, so it was a challenge.Then we went
To hear three principals of the company tell conducted a study that asked: Overall, do through the Gulf War, the recession, and
it, theirs is a story of discipline, resilience and most employees work for small companies the SARS episodes. We faced a continuous
a focus on human capital. And the Rotman stream of challenges.”
MBA program didn’t hurt them, either.
“Growing a business has been like climb-
Laying the foundations ing a mountain.There really isn’t a single
week that I can think of where we said,
During the Christmas break of 1999, ‘Wow, everything is just coasting along.’
Daniel Debow (JD/MBA’00) was prepar- While you’re climbing this mountain, you
ing to start his final semester at the Rotman have to think through every grip-hold
School, when David Ossip approached strategically – and occasionally, you look
him with a proposal: Ossip and the prospec- down and see that you’re pretty far up.”
tive management team of Workbrain were
looking for startup capital, and they wanted – David Ossip
someone to help them put together a busi-
ness plan. Debow took the job, bringing or large companies? And we found that the How does a company deal with the
fellow Rotman student Matthew majority work for large ones. Then we inevitability of the unforeseen? Debow
Chapman (MBA ’00) on board with him. looked at the competitive landscape of the says, “While I was a student, David
workforce management solutions industry, Pecaut, who used to run The Boston
Says Debow, now Workbrain’s vice and the low end of the market was very Consulting Group in Canada, was at the
president of corporate development, “We competitive; but the high end – serving Rotman School speaking. He had this great
were hired while we were still in school, large organizations – had a great deal quote that we often use around here, which
and basically we spent our last semester of potential. We set out to become the is, ‘You have to be generally correct, but
writing the business plan cooperatively dominant provider of consolidated, inte- not specifically incorrect.’
with David and the other founders.” It grated workforce management solutions
turned out to be a windfall of practical for large organizations.” Debow adds, “The general opportunity
experience, he adds. “It was this great that we saw existed; and the general
immediate application of the toolkit that
we were developing in the MBA program:
what kind of organization would we design?
What should the financial model look like?
How would we raise money? All these
things fell into place pretty quickly, and all
the way through, we were talking to our
professors about what we were doing.”

Rotman Magazine Fall 2005 • 19

approach we took to solving it was carried Getting the right people on the bus and feel comfortable with. The other type
out. The idea was to start by penetrating actually looks at the problem and drills
the market with one functional application, Every company boasts of a competitive down into the details to fully understand
and then add new applications on top of it. edge, whether it’s being first-to-market, what is going on – and then develops a
Investing early on in a technological having superior operational efficiency, or solution and approach to tackle it.”
platform enabled us to build a scalable busi- access to capital. ForWorkbrain, it seems to
lie in doing the ‘dirty work’. Debow This latter group, naturally, is what
Workbrain tries to attract. From an initial
We try to find growth opportunities group of six, the company has grown to
where other firms don’t want to solve close to 600 employees. “We are probably
the problems.These are complex, the fastest growing software firm in
difficult, nasty problems. Canada,” says Ossip.

ness. Did we know ahead of time the exact explains. “We try to find growth opportuni- Of all the companies that claim to value
sequence and timing with which each step ties where other firms don’t want to solve their people,Workbrain might be one of the
would occur? No. And more importantly, the problems.These are complex, difficult, most sincere. Debow recalls the planning
how could we predict SARS, or 9/11? How nasty problems: time and labour calcula- stages, when Rotman Dean Roger Martin
could we predict all the things that affected tions, such as how to automate scheduling was helping in an advisory role [Martin is
our business as we grew?” in extremely dynamic workforce unions, now Chairman of Workbrain’s Board]:
and ensuring compliance in a complex reg- “Right from the start, he asked us, ‘What is
That unpredictability has been a posi- ulatory environment.” your competitive advantage going to be?’
tive feature for Chapman. “What keeps me One of the things we said – kind of naively,
motivated is knowing that this organization Ossip believes that there are two types but it was true – was that we were going to
will be different six months from now, and of individuals out there. “When approached try and hire people who were smarter, more
then another six months from then, we’ll with a problem, the first type goes off and energetic, more focused – just a different
look back and it will have changed all over they try and summarize the problem into calibre of person to bring to bear on the
again.That keeps it interesting.” an abstract that they can then understand kind of problems we’d be solving.”

Debow recognizes that this isn’t what is
traditionally seen as a long-term, sustainable
advantage. “You can’t just say,‘we’re going to
have better people’– but it is unquestionably

Growing in a no-growth industry:
Mountain Crest Liquors

by Jennifer Hildebrandt

Manjit Minhas is president of Mountain Jennifer Hildebrandt: How have you Manjit Minhas, president of Mountain Crest Liquors
Crest Liquors, Canada’s fastest-growing managed to attain such impressive
wholesale distributor of spirits, wines and growth in a zero-growth [beer] market?
liquors. She and her partner/brother
Ravinder decided to shake up the ‘old boys’ Manjit Minhas: We opened up the beer
at Molson and Labatt by entering the side of our business in Alberta two years
beer market in 2002. She talks here about ago, and since then, we’ve captured 10 per
her growth strategies and why the compe- cent of the market share. In Manitoba, our
tition is quivering in its collective boots, as sales jumped from zero to seven per cent of
Mountain Crest’s sales grow at 50 per cent the market in just six months. Our success
per year in the zero-growth beer industry. in Alberta (with our flagship Mountain

20 • Rotman Magazine Fall 2005

part of what makes for a great company.And Photo: John Hryniuk
it is something we continually invest a heck
of a lot of time, management attention, and From left, Daniel Debow, David Ossip, and Matthew Chapman.
resources in. We go over the top – every-
body says it – but this has resulted in a Chapman puts it another way: “How tive ones, because we can’t do everything.”
culture where people are very ‘can-do’. Our can we grow to capitalize on what we Adding to that challenge, Workbrain
customers tell us on a regular basis that they know is a tremendous market opportu-
choose us because of the people we hire, not nity, within the financial constraints of went public in 2003 – a time when few
just for our technology. generating cash from operations? That’s Canadian software companies were doing
been our philosophy for the last four so. Chapman details how getting a listing on
“This year we did a comprehensive on- years: essentially looking at all our growth the Toronto Stock Exchange affected
campus recruiting program.We went to six opportunities and picking the most attrac- the mindset at Workbrain. “We did a pretty
or eight different campuses across North good job, I think, of getting the discipline of
America to get the best and the brightest
undergrads. We recruited against some of
the biggest names in the tech business – and
we won most of our cross-offers.This com-
ing year, we’re ramping up our MBA
recruiting program, and Rotman is a key
target school for us.”

Ossip adds, “The mantra is that ‘you
don’t have to know everything before you
come to work here’. Rather, you have to
have the desire and the capability to learn.”

Growing publicly

“The growth problem that we have is not
‘where to grow’ or ‘how to grow’, it’s
more about deciding ‘what don’t we do’,”
says Debow.

Crest Classic Lager, and eight other cially one that offered a better price than MM: Every case of beer we sell takes away
brands) and Manitoba (with our flagship most of the mainstream products available. market share from one of our competitors,
brand Minhas Creek Classic Lager, and five so as you can imagine, they have tried to
other brands) can be attributed both to Moving into Ontario with Lakeshore undercut us, and have been throwing their
market conditions and to the receptiveness Creek Classic Lager, we are taking a differ- weight around with consumers, retailers
of consumers to value-priced products. ent approach, because this province is so and government bodies. For instance, it
While these provinces are very different, in much bigger – there are more players, and took us two years just to get a listing to sell
each case we set out with a simple plan: to the consumer base is much more diverse. our beer in Ontario. After two years of
provide consumers with high quality beer Our Ontario strategy will have even more trying to make inroads with various govern-
at fair prices. With the Manitoba market, promotions and an advertising campaign ment officials, we were finally granted a
we were able to apply the lessons we focused on print and television.The images listing for one product: Lakeshore Creek
learned in Alberta and open with big pro- and messages, specifically for TV, are very Classic Lager. But it’s a start, and it proves
motions to create ’buzz’ and demand for ‘grassroots’: in the commercials, we have that persistence pays off. Many others have
our products from the beginning. people from all walks of life toting our slo- given up chasing the Ontario beer market
gan, “Damn Good Beer”. We are not about because of the same barriers we have faced,
When you’re starting out, you’re selling cottage life or the frat-boy lifestyle. and I’ll admit there were times when I won-
always afraid to spend money – especially We don’t focus solely on the 25-35 male dered if this market was worth the time,
on a large scale – because you are unsure of demographic, because that would be too frustration and money. However, since
the return, and your cash flow is restricted. restrictive: all kinds of people over the age Ontario represents 40 per cent of Canada’s
We were fortunate that the marketplace in of 19 enjoy drinking beer. population, it really is too lucrative to
Manitoba was ‘untouched’ in terms of new ignore, and selling our products here is an
players in the beer market, so consumers JH: How has your competition reacted to important part of our growth strategy.
were very receptive to a new beer – espe- your growth?

Rotman Magazine Fall 2005 • 21

a public company in advance of going pub- If people are going to go spend seven fig- trol their share prices. What we do control
lic, so that the organization was ready. And ures on a product, they want to know who’s are the financial results that, on average and
yet there are still organizational changes behind it, and whether they’re going to be over time, impact share prices. So we try to
that happen when suddenly there’s a stock around for the long term. So one of the remain focused on generating those finan-
price for people to watch, and there are most important benefits of going public has cial results, and our belief is that the share
price will follow. We never specifically say,
One of the most important benefits of ‘we want our share price to be X’. By stick-
going public has been that people can ing firmly to this philosophy, hopefully we
easily look up our financial statements can avoid some of the distractions and
and understand that we’re very fiscally errors that other companies have made.”
prudent, and we plan to be around for
the long haul. Future growth

quarterly earnings for people to focus on, been that people can easily go to the Web Once a company has achieved a certain
and there’s a lot more transparency in the and look up our financial statements and level of success, the trick is finding a way to
company’s operations.” understand that we’re very fiscally prudent, sustain growth. Looking into his crystal
we have an extremely strong and clean bal- ball, Ossip says, “What I see happening in
A definite advantage came with the ance sheet, and yes, we plan to be around the workforce management market is an
new exposure. “As a private company try- for the long haul.” opportunity similar to what the CRM
ing to sell mission-critical enterprise industry faced in the late 90s. At that time,
software systems to Fortune 1000 compa- When asked if the management team there were a lot of independent companies
nies, the reaction to us was, ‘What’s a has a stock price target in mind, Chapman doing components of what would become
Workbrain? I’ve never heard of these guys.’ says, “Our view is that companies don’t con- CRM. So the opportunity, and the chal-
lenge, is: how can Workbrain become the
dominant provider in the workforce man-
agement spectrum?”

“The general market for workforce
management solutions is large and growing
in a multi-billion dollar sense worldwide,”

JH: What are some of the main chal- Once you start growing, managing the isn’t always fair. Being so young, I haven’t
lenges of rapid growth? employee base that is required to move into developed the same kind of connections as
different markets and products adds some of my competitors, but I’m working
MM: Managing cash flow is the first chal- another dimension to your organization. on it. Some of our larger competitors have
lenge that comes to mind, especially when We currently have 17 people across professional lobbyists on retainer, whose
you aren’t willing to take on any debt. Canada. As an entrepreneur, it can be hard sole job is to make sure the rules ‘go their
learning to ‘let go’ and not micromanage way’. We have considered hiring a lobbyist
everyone. However, you can only work so just to make sure that we are informed,
many hours in a day, so you learn to because once something is proposed in gov-
empower and trust your staff. We involve ernment, it is almost too late.
our people in everything – strategy, mar-
keting and product development – which We are sometimes caught blindsided by
has lead to rich collaborations and a what the big breweries are trying to get
stronger company. I am proud to say that passed, and usually these rules are not in our
we have yet to lose a single employee. Our favour. For example, in Manitoba recently, it
employees are part of our family and are is alleged that some of the breweries were
key to our growth. trying to get the government to increase
taxes on value-priced beers – the category
Being a very up-front person, the that our products fall under. Basically, we
political side of the beer industry was for- were the only business that would have been
eign to me. It’s been a challenge for us to affected. When we heard about the pro-
make sure we stay cognizant of the ‘poli- posal, we alerted the media about the
ticking’ taking place, and to accept that it potential tax increase; Manitobans were not

22 • Rotman Magazine Fall 2005

says Debow, “and there are different parts class at Rotman; there is no return without Mountain Crest Liquors:
of that broader market that we’re address- risk.” In fact, Roger Martin helped instill Keys to Growth
ing, segment by segment.” that philosophy in his two graduates. “He
wanted to support a couple of his students • Competitive analysis: Find out what
On the near horizon is Workbrain 5, in a new venture – but only if we were the competition is doing, analyze each
the next generation of Workbrain’s soft- committed to building a truly great com- element of it, and do the exact opposite.
ware solution. “It’s coming out in the pany – one of the best in the world at Offer unique products that fill a niche that
second half of 2005,“ says Chapman. whatever it is we do.” hasn’t yet been exploited.
“Literally hundreds of our people are spend-
ing all their time on it right now, from a Perhaps it is fitting to end with a ques- • Unique regional products:
research and development perspective as tion about Workbrain’s beginnings: did In each market we sell a different brand,
well as from an overall operational-readi- Debow and Chapman receive extra school because we believe that each province
ness perspective.” credit for their work on Workbrain’s busi- and state is unique. We tweak our recipes
ness plan? according to each area’s drinkers.
One senses a definite air of confidence
about Workbrain’s senior management “We didn’t get any credit,” admits • Craft-brewed (small batch sizes):
team as they look to the future. Indeed, Debow. “We should have figured out a way This produces a high quality, consistent
they have never lacked ambition. Says to get this thing involved with credit, and brew. In order to get customers, we have
Debow, “That goes back to one of the goals David actually suggested trying to do that. to ‘steal’ them away from another com-
of the business, which was not to be the But we never got around to it.” pany, so it’s critical to sell a product that’s
best in Canada, but the best in the world. better than the rest.
People need to think big. We would sit Ossip’s rejoinder: “My only comment
around and say, ‘Why not us? If all these is that Roger should have taught the guys • Focus on popular products:
other companies can grow to be giants, we the value of options back then.” Lakeshore Creek Brewing Co. brews
have great people, we have the money, the beer for the general population, not
capital, the same access to customers – we by Nick Palmer dark ales or heavy beers for the few
can do it, too.’” who like them.

Great success always involves great • Identify unique markets: The eth-
risk, says Debow. “That’s one of the first nic restaurant market is a billion-dollar
lessons they taught us in corporate finance industry that is growing at 23 per cent
per year. We produce a beer called
happy that beer prices would be going up, banks. In watching our cash flow, we have Rani Indian Lager specifically for this
and the bill was rebutted. maintained a strategy of keeping low over- market niche.
head – no fancy buildings, no excessive
JH: Having started out with small staffing or marketing. We are effective but • Third-person public relations: I can
amounts of capital and no debt, have you lean, with a strong focus on a telling our tell you that my beer is great and my
been cautious in your growth strategy? story to the media and anyone else who company is great, but it means a lot
will listen. more when it comes from a third person –
MM: Absolutely. My brother and I started a journalist/reporter, even a person on
in the spirit side of the liquor business JH: Do you foresee a time when you the street.
when I was 19 years old [five years ago] would take on debt to help with your
with only $10,000 from our combined sav- growth strategy? • Inclusive management style:
ings.We have had to be extremely cautious Empower employees, because it invokes
with our operating cash flow and have MM: At this point, no. I believe it is a bless- creativity and a sense of accomplishment.
expanded in small steps to ensure that our ing to be able to fund your own venture We don’t waste our time analyzing every
growth could be supported. When we and maintain full control over it. My idea that every person has: employees
opened in Alberta, we experienced strong brother and I are very conscious of where have the freedom to make deals and act
success with our sales and cash flows, but we spend money, where our returns are on new ideas.
wanted to make sure that we didn’t spread coming from, and taking calculated risks.
ourselves too thin as our business pro- When you maintain full control, you can • Ongoing vision or goal: It’s critical to
gressed. Furthermore, we wanted to focus on every aspect of your business – know where you want to go and how you
maintain control over our business, so we from products, to sales, operations and intend to get there, and to review and
chose not to go to outside investors or business development. revise your goals often. It sounds very sim-
ple, but when you don’t have a goal, it’s
very hard to reach it. Ours is to own 10
per cent of Canada’s beer market.

- Manjit Minhas, President of
Mountain Crest Liquors

Rotman Magazine Fall 2005 • 23

Creating

Opportunities
in an age of
Uncertainty

An interview with Rita Gunther McGrath

The author and Columbia professor discusses
‘marketbusting’, entrepreneurial leadership, and how to
get growth initiatives underway in your organization.

by Karen Christensen

Karen Christensen: In MarketBusters, tle on a common unit of business.The profit
you talk about the importance of ‘redefin- drivers in that industry are those few key
ing profit drivers’. What does this entail? business elements that drive profitability
with a given unit of business. So in insur-
Rita Gunther McGrath: The first important ance, for instance, profits are largely
concept here is the ‘unit of business’, which determined by how many claims are
is what an organization literally sells; so incurred, resulting in a key driver called a
product companies sell a unit of a product, ‘loss ratio’, which is the ratio of claims
lawyers sell a billable hour, and so forth. against revenues. Improve the profit driv-
Over time, most players in an industry set- ers, and you improve your performance.

24 • Rotman Magazine Fall 2005



Redefining profit drivers involves one tion chain’. For instance, a firm might use needs to consistently practice five behav-
of two processes: either redefining your digital intelligence technologies to make an iours for the organization to feel
unit of business, or using operational excel- experience in the chain ‘smarter’, and comfortable moving into less-certain areas
lence to radically improve the performance thus easier, more convenient or more other than its core business:
you can get from your profit drivers. user-friendly. An example would be • Establish a compelling playing field
Mexican cement company Cemex was ExxonMobil’s Speedpass, which allows
able to redefine its unit of business from you to pay without human contact at their (or ‘ballpark’): People have to know
‘tons of material’ (such as ready-mix con- filling stations. Amaranth wireless is using where they can be innovative and where
crete) to a more service-oriented unit, digital technologies to improve the way you not. They have to be able to focus. They
which was ‘material delivered within a dis- order food in restaurants and beer in ball have to know what their limits are and
tinct delivery window’. By the way they parks – in the first case, decreasing wait how they should be competing. Consider
leverage their delivery infrastructures, times, and in the second, offering in-seat the clarity and power of UPS’ “synchro-
computer retailers such as PC Connection delivery when you place an order from nizing commerce” vision, or IBM’s “on
have been able to create far better profit your cell phone. demand” strategy – everyone in the com-
pany can have a share in making these
New businesses need an entirely ‘ballparks’ a reality.
different kind of discipline, one suited • Clear paths: Any new venture will face
to learning and discovery. internal and external obstacles, and one
of the key tasks of a leader is to help proj-
driver performance than conventional retail- Secondly, radically change your prod- ect teams anticipate and then overcome
ers can attain. PC Connection, for instance, uct offering in such a way that you can split these obstacles. Typical internal obstacles
locates its warehouses near overnight ship- apart previously homogenous segments and concern the resistance of those whose
ping locations, which means they can offer carve out one that will be unusually loyal to positions of power will be affected, or
next-day service on most in-stock items – you. This is usually done by adding-in ele- who are jealous. Typical external obsta-
even if you call as late as 1:00 am. ments that a particular segment values, and cles concern the skepticism of customers
eliminating things that they don’t care or ecosystem partners whose support is
KC: What is a ‘marketbusting move’? about. My favourite example at the moment essential. Someone has to do the work of
concerns hotels focused on the business overcoming these barriers.
RGM: It’s a strategic move that delivers the class customer, such as the Wingate Inn • Create commitment: It’s an old saying,
following results: or Ameri-Suites chains. They’ve added but it’s true – people will follow your
1. A two per cent (gain or loss) change in conveniences like free, fast Internet access behaviour. Entrepreneurial leaders spend
and all-you-can eat quick breakfast buffets. a lot of time asking ‘what’s new?’ and
market position (typically volume share) They’ve also eliminated the amenities of making sure it gets on their agenda. And
of an incumbent as a result of their move many full service hotels, like room service they don’t let the day-to-day operational
or the moves of another player; and an on-site restaurant. For business trav- issues drive innovation out of sight;
2. Ten per cent or more annual growth in elers, it’s a winning combination. You have • Create an entrepreneurial climate:
sales or shipments over at least two to be careful though, as one of our clients The culture of an organization will also
years from new entry by an innovator; realized: on a weekend with his wife in New influence how innovative it is.We’ve found
3. Annual sales or shipment growth five York to attend fancy dinners and Broadway two issues to be essential: first, impose
per cent greater than the growth in the shows, he was inadvertently booked into appropriate discipline. One of the biggest
underlying market by an incumbent. one of these hotels – and let me tell you, she mistakes we see over and over again is that
It’s worth noting that Ian [Wharton wasn’t happy about it! people will manage a new venture with
Professor Ian C. MacMillan] and I also the same practices they use to manage an
studied companies that tried and failed – KC: You have said that successful execu- established business. Wrong! New busi-
which is why we include a chapter on tives learn to master uncertainty nesses need an entirely different kind of
implementation at the end of the book. “through the skills of entrepreneurial discipline, one suited to learning and dis-
leadership.” Talk a bit about these skills. covery. So we recommend tools such as
KC: Give a couple of examples of options reasoning and discovery-driven
market-busting strategies. RGM: Ian and I focused a great deal on this planning to tackle resource-allocation and
in our first book, The Entrepreneurial planning tasks.
RGM: First, change your customer’s overall Mindset. Essentially, we argued that a leader
experience by improving their ‘consump- Second, build confidence. People can’t
learn whole new skill sets overnight. So
one of your tasks as a leader is to give
them increasingly challenging assign-
ments to build the skills they need to feel

26 • Rotman Magazine Fall 2005

comfortable doing new things.The people RGM: That’s one of those ‘it all depends’ and phone lines (remember the early days
strategy is crucial – after all, why should questions. I think you need to do some of of AOL?),AND a stable public backbone of
someone leave a safe position to do some- both – you need incremental improve- computers, AND a killer application in the
thing new, unless the rewards for doing ments to keep your core business healthy. form of e-mail. Web searching followed
that are pretty substantial? Also, people often forget that you can be shortly, and industries based on the Web
• Prune where needed: Finally, a less- just as innovative and growth-oriented by could take off. So I’d be very reluctant to
pleasant but essential job is what we call improving a service portion of your busi- make specific predictions. One area I think
‘pruning’.This entails shutting down busi- ness as you can by introducing a new is interesting is energy – battery technol-
nesses that are going nowhere – we call product. eBay’s prodigious growth, for ogy and more sophisticated fuel, for
them the ‘living dead’ – as well as trim- example, is all about service innovation – example.Another is health care, which is an
ming end-game activities from your much of it incremental. On the other industry crying out for technological solu-
portfolio. The boss has to do this person- hand, just doing the incremental stuff will tions to excessively complex services.
ally, and it has to be explained to people leave you eventually at risk when the
so that the underlying reasons are under- underlying model you are working with KC: What are the first steps to getting a
stood. This is seldom thought of as changes. EMC, the computer storage growth initiative underway?
‘entrepreneurial’, but it really is, because company, grew for years with a fantastic
the resources for innovation are often product strategy. Unfortunately, once RGM: I always recommend doing two
frozen in dead-end activities. competitors caught up with cheaper prod- things. First, define what success would
ucts that were nearly as good, they found look like. What is the strategic intent or
KC: What is the link between the cus- themselves caught short.The big push they aspiration that you are trying to achieve?
tomer experience and growth? needed next was to develop more of a You need real clarity around that. Next, I

RGM: It is sad, but true: most customers The first step is to define what success
don’t give a hoot about what their vendors would look like.What is the strategic
are trying to sell them; all they care about intent or aspiration that you are trying to
is getting their needs met. Fail to meet achieve?You need real clarity around that.
those needs and create experiences in
which customers are willing to enter into, solutions orientation, which is the now- suggest that executives take a good hard
and you simply won’t achieve growth. successful thrust their CEO Joe Tucci is look at their agendas. If they are serious
Firms that are growing tend to be those pursuing. So I think you always need to be about growth, it will be number one, two
that have figured out how to give customers looking at that big growth initiative that is or three on every agenda, and mentioned at
a superior experience in some way – whether somewhere in between today’s business every meeting they hold. I then suggest that
it’s Progressive Insurance making it less and a ‘blue sky’ venture. they look at what kinds of projects would
burdensome to have an auto accident, or be good and which would not be so good,
Finnish elevator manufacturer Kone help- KC: Looking forward, which industries with different ‘screening’ mechanisms for
ing its customers avoid downtime through a show the best potential for sustained different levels of uncertainty. The next
superior call-out and service capacity. and impressive growth? step is to have a portfolio of activities that
push the growth agenda forward, a portfo-
KC: What is an ‘opportunity register’? RGM: Probably the ones that don’t exist lio that is managed at a strategic level. It
yet! Actually, pundits are notoriously bad at doesn’t hurt to create a core group of true
RGM: Essentially, it’s a catalog of ideas. We predicting where the next ‘sweet spot’ in believers as well, to cascade the growth
recommend that companies keep a register terms of industries will be, because rapid theme throughout the organization.
that they can build on and refer back to. growth industries are usually a product of
Often, terrific ideas pop up before their multiple interacting contingencies. The Rita Gunther McGrath is an associate professor of manage-
time. If you keep an inventory and go back Internet, for instance, didn’t become inter- ment at Columbia Business School. She is the co-author,
to it regularly, you’re much less likely to esting until there was a common navigation withWharton Professor Ian C. MacMillan, of Market Busters:
miss out.Also, you want a rich inventory of system (‘www’) AND a friendly interface 40 Strategic Moves That Drive Exceptional Business Growth
possible opportunities to choose from when (remember Mosaic?), AND ubiquitous (Harvard Business School Press, 2005).
you do get some free resources to invest. access points in the form of multiple PC’s

KC: Are you a fan of incremental improve-
ments, or should firms always have at least
one major growth initiative underway?

Rotman Magazine Fall 2005 • 27

CEO’s Corner: Jim Balsillie

Managing Constant Growth

by Karen Christensen

Research in Motion Ltd. Chairman and co-CEO Jim Balsillie talks about his
approach to leadership, RIM’s expansion into emerging markets, and why
inputs are so much more important than outputs.

Karen Christensen: To what do you content or complacent. Thankfully, we’re forecasts for business planning purposes,
attribute RIM’s explosive growth? oriented that way: we have a culture of but I’m much more focused on the efforts
growth, where people want to grow, so it’s we put into the customer experience, or
Jim Balsillie: I would say it’s the result of a not like pulling teeth. In many respects, when our next upgrade is coming along,
combination of factors that all converged at growth is self-reinforcing: our people want and how these aspects are being managed
the same time. First, the desire of busi- opportunities, they want challenges, and in the company. Focusing on the things we
nesses to re-engineer their processes and they want to try new things. If you support have some control over helps me sleep
get at their data was a great sort of ‘macro all these things, growth feeds itself. better at night!
force’; we had a technical solution that was
compelling and architecturally sound to KC: Your quarterly results often surpass KC: BlackBerry represents virtually all of
CIOs; and carriers became very skilled at analysts’ expectations. Why is this? your revenue. Are you worried about
addressing this market as a channel partner ‘putting all your eggs in one basket’?
to us. So it was a combination of forces. JB: I encourage a tremendous focus on the
fundamentals. I firmly believe that the out- JB: Fund managers may want well-diversi-
KC: What are some of the biggest chal- comes ‘will be what they will be’, and that fied portfolios, but I don’t know that they
lenges you and your team have faced in the only thing we can control is the inputs. want well-diversified companies.You create
managing growth? So we choose to focus on input fundamen- a paradox if you say that you want focus,
tals like the products we make; the quality but you also want diversification. Sure, we
JB: The challenges are constant, because of our go-to-market sales efforts and part- do put our eggs very heavily in one basket,
our growth has been constant.We’ve pretty nerships; and the quality of the service that there’s no doubt about that; but I don’t see
much grown at 100 per cent compounded people experience afterwards. The truth any change to that forthcoming, because it’s
per annum, year-over-year for 13 years, so is, these are the only elements you can totally working for us.

I encourage a tremendous focus on the KC: By promoting the BlackBerry as a
fundamentals. I firmly believe that the ‘platform’, some say RIM risks upset-
outcomes ‘will be what they will be’, ting Microsoft [and being dealt a fate
and that the only thing we can control similar to Netscape’s when its browser
is the inputs. posed a threat to Microsoft]. Does this
concern you?
we don’t know anything else. Ours is an truly control, and you must accept what
environment of ‘controlled chaos’, where the outputs will be once it’s all said and JB: We actually cooperate with Microsoft
the status quo is never the order of the day; done. Obviously we want good results, but strategically in a whole bunch of ways. The
there is constant change, so the key thing is we know we can’t control them, so we truth is, there are all kinds of platforms out
to continue to push ahead and never get don’t think too much about them. We do there in the world of business, so it’s pretty
normal for something to evolve into being
a platform structure if it’s relevant. You
have lots of platforms in your life: your TV
is a platform for watching shows; your
stereo is a platform for music. We are a

28 • Rotman Magazine Fall 2005

middleware packet-routing platform, sure; KC: What is RIM’s approach to growth in doing. It takes a while to really get a carrier
and our product has been and will continue emerging markets like China and India? productive, but some pop out of the gate
to be compatible with Microsoft. faster than others. In addition to South
JB: We are very focused on emerging mar- Africa, Singapore and Australia have been
A lot of people look at different spaces kets. We’re launching about 100 new really good for us; and we’re seeing some
in our sector, and try to forward or back- carriers around the globe this year, so this is great momentum coming out of India.
ward integrate into them; but I don’t think a big, multifaceted part of our life. Of These initiatives all go according to their
our sector lends itself to thoughtful forward course, there are lots of issues that go along own path a little bit. It all depends on how
integration by an application company or with it – lots of localization, traveling, and aggressive we are, how ripe the market is,
backward integration by a switcher-carrier – in-market programs – it’s all very exciting how well a region’s processes are working
it’s just not a natural beneficial evolution of for us. In some cases, it evolves an exten- – it’s a plurality of factors. But we’re com-
the marketplace. Of course, customers ulti- mitted to each of these markets as part of
our long-term strategy.
We do put our eggs very heavily in one
basket, there’s no doubt about that; but KC: What is the biggest lesson other
I don’t see any change to that forthcom- firms can learn from RIM?
ing, because it’s totally working for us.
JB: The best advice I could give someone
mately speak with their wallets, but that’s sion of customers we already know, who wants to grow their business is to let
one of the reasons our product has been so or global partnerships where they have go of the obsession with outcomes, and to
well received: it’s technically sound, and we other carriers, but there are plenty of new let go of habits and pre-ordained percep-
bring it to market in a way that makes IT initiatives too.We’re focusing on China and tions. Simply put your head down and do
managers happy. Wireless data is incredibly India, of course, but the Middle East, the best you can, every day, and come what
important to the marketplace right now, and Russia, and Eastern Europe also hold may. Like I said before, all you can control
I think will be for a long time, because tremendous promise.We recently launched is the inputs, so in my opinion, that’s all you
there’s a big productivity equation on it. in South Africa, and it’s really taking off. should focus on. I try not to obsess about
Also, in the whole ecosystem, we are very There are lots of opportunities in lots of specific outcomes, and that’s what I encour-
harmonious with all the players. We’re places, and you’ve got to pursue them all age around here – the idea that ‘we should
unthreatening, and that matters a lot. fully and completely, so that’s what we’re only focus on things we can control; so let’s
make sure our heads are there.’

OVERchoice

Why Variety Can Backfire

by Dilip Soman and John T. Gourville

Companies often assume that when it

comes to product offerings, ‘variety is

good’. But product assortments differ

Dilip Soman JohnT.Gourville in type – which can negatively impact

consumer choice and brand share.

30 • Rotman Magazine Fall 2005

For years, companies have expanded their individuals and families, selling more cars In one particularly compelling demon-
product lines in an attempt to better meet and increasing its share of the SUV market stration of the phenomenon, consumers in
the needs of target customers. Typically, in the process.The same should be true in a an upscale grocery store encountered a tast-
they do so by adding new flavours, package between-store choice context, where vari- ing table on which were either 24 flavours
sizes, formulations, features, and options. ety or selection has been shown to be a key of jam, or a subset of six of those flavours.
As a result, whereas The Coca-Cola factor in choosing one store over another. While a slightly larger percentage of shop-
Company once sold a single formulation With these store-level benefits in mind, pers stopped to sample the jams when there
of cola, it now sells over ten, including researchers have begun looking at ways to were 24 as opposed to six flavours (60 per
Classic Coke, Diet Coke, Caffeine-Free increase or to maintain a consumer’s per- cent vs. 40 per cent), a much smaller per-
Diet Coke, and Cherry Coke. ception of store variety while reducing centage of those who sampled from the 24
actual variety. jams went on to make a purchase (three per
It has long been believed that, given cent vs. 30 per cent).
diversity in tastes, product variety is bene- A complementary perspective from
ficial to consumers, and that a wider which to view assortment size involves the To make sense of these conflicting
assortment will logically better-meet their rational choice principle of ‘regularity’. perspectives, we propose that product
varied preferences than a narrower assort- Regularity dictates that the probability of assortments can differ not only in size, but
ment. However, research is now calling this choosing an alternative from a choice set also in type. We introduce the concept
‘variety-is-good’ belief into question: in
cases where choice deferral is an option, Adding an attractive alternative to what
adding a second attractive alternative to had been a one-alternative ‘consideration
what had been a one-alternative ‘considera- set’ has been shown to increase the
tion set’ has been shown to increase the frequency of not making a choice.
frequency of not making a choice. And
for at least one online grocer, decreasing should never increase with the addition of of ‘assortment type’ and differentiate
assortment by 20 to 80 per cent across another alternative to that choice set. In a between alignable assortments and non-
product categories increased revenues by between-brand choice context, this implies alignable assortments.
11 per cent. These results speak to the that increasing the size of one brand’s
potential negative impact of product assortment should never serve to increase Assortment Alignability
assortment on consumer choice – an effect the market share of a competing brand
we refer to as ‘overchoice’. whose assortment remains stable. More for- We define an ‘alignable assortment’ as a set
mally, if Brand A and Brand B each start out of brand variants that differ along a single,
Assortment Size and Consumer Choice by offering one alternative in a particular compensatory dimension, such that each
product category, Brand B should never lose variant has a specific quantity of that attrib-
Research shows that consumers benefit share by adding a second variant to the mar- ute. Examples would be several bottles of
from a wide product assortment in several ket.While not as strong a claim as ‘variety is Advil-brand ibuprofen that vary in tablet
important ways. First, a wider assortment good’, regularity dictates that increasing count; air conditioners that vary in cooling
increases the likelihood that a consumer variety should never be bad for a brand. capacity; and milk that varies in fat content.
will find exactly what he or she is looking Such assortments require tradeoffs within a
for.Thus, she is more likely to find a pair of Evidence to the Contrary: Overchoice single attribute, such as the quantity, capac-
jeans that fits when selecting from among ity, or amount of an ingredient.
20 different sizes than when selecting from Recent research calls these claims into ques-
among ten. Second, due to satiation, tion. Across a series of studies, researchers In contrast, we define a ‘non-alignable’
curiosity, or fluctuating requirements, an found that subjects’ preferences for a ‘no- assortment as one in which the brand
individual consumer will often seek variety choice option’ (i.e., the decision to defer variants vary along multiple, non-compen-
within and across consumption occasions. choice until later) increased significantly with satory dimensions, such that while one
As a result, a selection of ten different the addition of a second attractive alternative alternative possesses one desirable feature,
styles of beer better meets the variety- to what had been a one-alternative choice a second alternative possesses another
seeking tendencies inherent in some beer set. For example, subjects presented with desirable feature, with these features being
drinkers than a selection of three. one answering machine deferred choice ‘all or nothing’ in nature. Laptop comput-
42 per cent of the time, while subjects pre- ers that differ in configuration, with one
In a between-brand choice context, sented with a second equally attractive having a CD-Rom drive, the second a
this ‘variety is good’ premise suggests that a answering machine deferred choice 58 per floppy drive, and a third having a zip drive,
manufacturer stands to gain market share cent of the time. would constitute such a non-alignable
by adopting a ‘larger assortment strategy’. assortment: to obtain one feature (e.g., a
By offering both a two-door and a larger-
four-door model of its Explorer sport
utility vehicle, for instance, Ford Motor
Company can meet the needs of both

Rotman Magazine Fall 2005 • 31

zip drive), one must give up another fea- needs to rent a vehicle to move his belong- gle, compensatory dimension or across
ture (e.g., a CD-Rom drive). Other ings from one apartment to another, these multiple, non-compensatory dimensions.
examples would include restaurant entrees same three alternatives might be evaluated
(e.g., salmon vs. steak vs. lasagna) and col- on the single dimension of cargo capacity, The Impact of Assortment Alignability
lege majors (e.g., biology vs. philosophy), rendering the assortment alignable.
where choosing one alternative delivers a Similarly, consider colours of paint. A con- When one option is better than another in
level of features not available in another. sumer deciding between three shades of all essential respects, there is no conflict,
Unlike alignable assortments, non- yellow may focus on the single dimension and choice is easy. However, when each
alignable assortments require tradeoffs of ‘ability to brighten up a room’, resulting option has significant advantages and disad-
across attributes. in an alignable assortment. But another vantages, people often experience conflict
consumer deciding between light yellow that makes choice aversive and compels
Several aspects of this categorization and dark blue may consider tradeoffs such them to delay their decision and seek addi-
are worth noting. First, the categorization tional information or options.Thus, people
takes place at the level of the assortment,
and not at the level of the attribute. In other It comes down to whether consumers
words, the alignability of an assortment are being asked to make tradeoffs
depends on the makeup of the alternatives within a single, compensatory
within that assortment. Thus, the attribute dimension or across multiple,
‘warranty’ can result in an alignable assort- non-compensatory dimensions.
ment if all alternatives within the
assortment possess a warranty of a specific as ‘ability to brighten up a room’ versus are more likely to defer choice when con-
length (e.g., 24 months vs. 36 months ‘ability to hide dirt’ versus ‘wear’, resulting flict is high than when conflict is low.
vs. 60 months). But ‘warranty’ can also in a non-alignable assortment.
contribute to the non-alignability of the In one study, subjects presented with
assortment if one alternative within These examples suggest that assort- larger assortments reported greater levels
the assortment has a warranty and the ment type, while obvious in many cases, of frustration with the choice process and
others do not. can depend upon the goals of the decision greater levels of regret and lower satisfac-
maker (as in the case of the three cars) or tion with their chosen item than did
Second, the desired benefits of a con- on the alternatives in the choice set (as in subjects presented with smaller assortments.
sidered assortment may play a role in that the case of the paints). In the end, however,
assortment’s classification as alignable or it comes down to whether consumers are Just as consumers defer choice rather
non-alignable. Consider three automobiles being asked to make tradeoffs within a sin- than choose from alternatives that entail
– a two-seat sports car, a mid-sized sedan, conflict, they may opt out of a brand
and a minivan. For most individuals, this that entails conflict and into another
grouping would represent a non-alignable brand that does not; if Brand B offers an
assortment, requiring consumers to trade- assortment that fosters high conflict and
off sportiness and image for passenger Brand A does not, consumers may avoid
capacity and safety. However, if a consumer the Brand B alternatives and choose a
Brand A alternative.

Assortment type contributes to this
conflict, with a non-alignable assortment
fostering far greater conflict than an
alignable assortment, and with this conflict
increasing with assortment size. First, con-
sider an alignable assortment. Alternatives
within an alignable assortment vary along a
single dimension that is continuous and
compensatory in nature, allowing for a
within-attribute, low-risk tradeoff between
alternatives. In choosing between an auto-
mobile that gets 24 MPG and another that
gets 28 MPG, for instance, a consumer need

32 • Rotman Magazine Fall 2005

only know her relative preference along the For non-alignable assortments, how- The conflict inherent in making a choice
single attribute ‘fuel economy’. While the ever, the tradeoffs between variants are no from a non-alignable assortment should be
decision weight for the attribute ‘fuel econ- longer one-dimensional and low risk. A much greater than from an alignable
omy’ may be in question, the ordering of non-alignable assortment requires a con- assortment and should increase with
alternatives on that attribute should be sumer to make tradeoffs both within and assortment size.
straightforward, regardless of assortment across attributes. In choosing between lap-
With these points in mind, in a
For non-alignable assortments, the trade- between-brand choice setting, assortment
offs between variants are no longer one- type will moderate the effect of assortment
dimensional and low risk. A non-alignable size on brand choice. Specifically, assort-
assortment requires a consumer to make ment size should positively impact brand
tradeoffs both within and across attributes. choice in the case of an alignable assort-
ment, but negatively impact brand choice
size. Additionally, the tradeoff between top computers, for instance, a consumer in the case of a non-alignable assortment.
alternatives in an alignable assortment is needs to assess her preference for a floppy
incremental in nature – i.e., in most cases, drive, her preference for a zip drive, and Managerial Implications
the absolute difference between a car that her relative preference for a floppy drive
gets 24 MPG and a car that gets 28 MPG is versus a zip drive. Additionally, given the It is becoming clear that an increasingly
relatively minor.These factors – comparison discrete nature of the features in this large assortment can negatively impact
on a single dimension and the incremental choice set, the tradeoffs between these consumer choice and brand share. Further,
nature of the tradeoff – combine to mini- alternatives will be ‘all-or-nothing’ – to if an assortment forces consumers to make
mize the conflict inherent in the assortment. get one option, you must give up another. choices that have the potential for regret or
that force them to process large amounts of
information, this negative impact of variety
can occur in assortment sizes that are quite
small in number, clearly within the range of
many existing product assortments. In light
of these effects, managers should be aware
of the moderating effect of assortment type

Continued on page 34

FindingYour Profit Zone

by Chris Zook and Alistair Corbett

Chris Zook Alistair Corbett

Ninety per cent of companies have failed to two ways: winning profitable new cus- bilities they could develop into external
achieve sustained, profitable growth over tomers in the core product lines by finding businesses. The next step is to seek ideas
the past decade, and only one in five growth ways to provide better value to customers and input from all sources: from
initiatives succeeds. Growth is tough, than competitors – and being able to customers, suppliers, employees; and to
because many competitors are pursuing the deliver it profitably; or deepening the rela- study competitors.
same opportunities. This is well illustrated tionship with existing customers, offering
in a recent Bain & Company survey of additional, profitable, products or services. Redefining your core business is some-
the three-year plans of large companies: times both necessary and advantageous. If
most mature industries grow at approxi- The average strong business typically your core business is truly in decline, you
mately three per cent per year; but our has 80 to 110 possible ‘adjacent moves’ must seek new markets. Nokia is often
survey showed that companies typically aim surrounding it at any one time. The key quoted as the ultimate example of this – a
to grow revenues at twice the rate of their to identifying them is to systematically company that switched from being a forest
industry, and grow profits twice as fast. track them. Most companies don’t even products company to a high-tech cell phone
Clearly, not all of them can succeed. consider some of the potential growth manufacturer. But this comes with a warn-
vectors – additional products or services, ing: statistically, Nokia’s success is the
The best growth comes from strength- new customer segments, new distribution exception to the rule. The odds of success
ening a company’s core business, in one of channels, new geographies, internal capa- for these endeavours is frighteningly low.

Continued on page 34

Rotman Magazine Fall 2005 • 33

on consumer choice and develop strategies decision making process. At one point, for its offerings. In recent years, Procter &
to deal with it. instance,Titleist used a very simple inter- Gamble has taken to rationalizing its prod-
active program to lead people through the uct lines in many packaged-good categories.
Several strategies come to mind. One golf ball choice process, asking a series of While done primarily for operational rea-
would be to increase the perceived questions, such as, “Do you hit most of sons (i.e. to reduce stockouts and increase
alignability of any given assortment your shots in the fairway?” and “How far do turnover), such a strategy could also
through ‘feature bundling’. For instance, you hit your drive?”, and would recom- increase demand for P&G alternatives
rather than promote its home computers mend which of its ten or so golf balls within those categories.
solely on their features and specifications, would best meet the needs of the golfer.
Dell promotes them in a ‘good, better, Consumer Reports magazine often provides In the end, any strategy that reduces
best’ type of arrangement, effectively similar templates to help people deal with the conflict inherent in a brand’s assort-
turning a large, non-alignable assortment non-alignable assortments, such as which ment, whether it be a reduction in the
into a more manageable, alignable assort- cellular telephone plan to choose or number of non-alignable alternatives
ment. Some car companies have also whether to lease or buy a car. offered, a reduction in possible regret, a
chosen to do this, as when Honda offers simplification of information processing, or
an increasingly outfitted DX, LX, and EX Third, a marketer could reduce the a reduction in the underlying non-alignabil-
version of its popular Accord sedan. Such potential for regret by instituting a liberal ity, should help to decrease the negative
bundling of features should make con- exchange policy. Money-back guarantees effects of overchoice.
sumer decision making easier and reduce could serve the same purpose. Interestingly,
the potential for regret, providing a while such policies are broadly used in Dilip Soman is the Corus Chair in Communication Strategy
rationale for bundling beyond that of tradi- practice to encourage sales, we would and a professor of Marketing at the Rotman School
tional price discrimination. argue that these policies will be signifi- of Management. John T. Gourville is an associate
cantly more effective in the case of professor of Marketing at Harvard Business School. For a
Second, one could simplify the cogni- increasing non-alignable assortments than copy of their complete paper on this topic e-mail
tive effort required to make a given increasing alignable assortments. [email protected]
choice. This might be done through a
strategic simplification of information Finally, a manufacturer could simply
presentation. Some manufacturers have recognize the potential shortcomings of a
opted to lead the consumer through the large, non-alignable assortment and reduce

(continued) chasing power and their distribution scale; Beware of succumbing to ‘adjacencies
they would improve the store format gone wild’: once you start mapping adja-
And often if a company tries too hard to and product offerings (including the cencies, it is easy to be seduced by all the
develop new businesses to replace the core, President’s Choice brand). Procter & wonderful growth opportunities and
it under-invests and misses growth Gamble has recently found an interesting to underestimate the challenges in
opportunities within. formula to reinvigorate growth from its pursuing them – internally and externally.
existing brands: they studied intensely how Anheuser-Busch spent years developing
About two thirds of successful, sus- customers use their products and found new its Eagle Snack Food business, which
tained-growth companies have one or two ways to provide value, leading to CrestWhite seemed like a natural complement to beer
powerful, repeatable formulas. For Strips and numerous other innovations. (and Frito-Lay was making huge profits) –
instance, Nike has a simple repeatable for- but it ultimately failed. Far worse than the
mula. They started with basketball shoes Meeting customer needs isn’t always losses and write-offs incurred by Eagle, the
and Michael Jordan.Then they expanded enough to guarantee growth.A great exam- company lost focus on its core beer market,
into basketball apparel and other equip- ple is Dewar’s Scotch Whisky. In 1965, underperformed during that period and
ment. Next, they entered other sports – they discovered they had a very attractive missed the emergence of the premium beer
running, golf, and soccer, starting out each core set of customers, all aged around market in the U.S. Companies would do
time with shoes and a star (Tiger Woods 20 -30, and they focused on meeting their well to remember that the best opportunities
in golf), then expanding into apparel (golf needs. In 1975, they discovered they had a typically lie within their core business.
clothing) and equipment (clubs and the different target age group – all aged 30 -40.
now unmistakeable Nike golf ball.) For A decade later they discovered another tar- Chris Zook is a Boston-based director at Bain & Company,
many years, Loblaws had a simple, repeat- get age group – all aged 40 -50.They did a where he heads the firm’s global strategy practice, and the
able formula: they would drive organic fabulous job of marketing to this target cus- author of Profit From the Core and Beyond the Core: ExpandYour
growth through larger new format stores; tomer base, but it didn’t grow. Now their Market Without Abandoning Your Roots. Alistair Corbett is a
they would acquire grocery chains in differ- aging customer base is shrinking, and they partner in Bain & Company’s Toronto office.
ent geographies and integrate them.And all are finally looking for new customers.
the time, they would increase their pur-

34 • Rotman Magazine Fall 2005

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China

and

India

The Race
to Growth

Which has the better approach
to economic development:
China or India?
Two experts weigh in.

36 • Rotman Magazine Fall 2005

India’s Entrepreneurial Advantage

China has shackled its independent
businesspeople. India has empowered them.

by Tarun Khanna

China and India have followed radically argued that these approaches differ on two These differences have an impact on
different approaches to economic develop- dimensions. First, the Chinese govern- the types of companies that succeed and,
ment. China’s resulted from a conscious ment nurtures and directs economic I would argue, on entrepreneurialism.
decision; India more or less happened upon activity more than the Indian government Let’s look first at what kinds of compa-
its course. Is one way better than the other? does. It invests heavily in physical infra- nies thrive. China trumps India when it
There is no gainsaying the fact that China’s structure and often decides which comes to industries that rely on ‘hard’
growth has rocketed ahead of India’s, but companies – not necessarily the best – infrastructure (roads, ports, power) and
the conventional view that the Chinese receive government resources and listings will do so for the foreseeable future. But
model is unambiguously the better of the on local stock markets. By contrast, since when it comes to ‘soft’ infrastructure
two is wrong in many ways; each has its the mid-1980s the Indian government has businesses – those in which intangible
advantages. And it is far from clear which become less and less interventionist. The assets matter more – India tends to
will deliver the more sustainable growth. second dimension is foreign direct invest- come out ahead, be it in software,
ment. China has embraced it; India biotechnology, or creative industries
Together with Yasheng Huang of remains cautious. such as advertising.
MIT’s Sloan School of Management, I have
Continued on page 38

China:The Best of All Possible Models

China has quickly built industries
large enough to drive its economy.

by Jonathan R.Woetzel

Finding fault with China’s approach to eco- some point. Government officials essen- local ones what to do. Because most local
nomic development is easy: cyclical tially have the power to decide which companies were state-owned 20 years ago,
overcapacity, state-influenced resource companies grow. Volkswagen was hooked up with a state-
allocation, and growing social inequalities owned company.
are just a few of its shortcomings. But In achieving the objective of growth,
it’s hard to see how any other model this policy has been tremendously success- You might argue that this development
could have given the economy such a pow- ful. China has quickly built industries large model has thwarted entrepreneurship. But
erful kick-start. enough to drive its economy. Take the auto there weren’t any entrepreneurs in the
industry, now an important contributor to industry at the time.There were no private
The Chinese government manages the the manufacturing sector. Only 20 years companies that could partner with
development of enterprises with a view to ago, China had no auto industry to speak Volkswagen, let alone compete with it.
driving economic growth. You can be a of. To get started, the government decided The government simply said, “We want
small entrepreneur in China, but if you that in a high-scale, high-tech industry, China to modernize. We want the Chinese
want to be big you will have to get money some foreign company – in this case, economy to grow. We don’t have the
from a government-affiliated source at Volkswagen – had to come in and show companies we need to make that happen,

Rotman Magazine Fall 2005 • 37

Thus manufacturing companies whose The Indian government’s lower level
just-in-time production processes rely on of intervention in capital markets and
efficient road and transport networks fare its decision not to regulate industries
poorly in India. But businesses that are that lack tangible assets (software,
unconstrained by shortages of generators biotech, media) has created room
and roads flourish. Soft assets underpin for entrepreneurs.
even the Indian car industry. Unlike China’s
car sector, which has expanded as a result of capital to start a software company; you do ogy, however, Biocon emerged from pure
big capital investments from multinational for a big steel plant. entrepreneurial effort, as did Infosys
companies, India’s has succeeded on the Technologies in software. Similarly, hun-
back of clever designs that make it possible The Indian government’s lower level of dreds of smaller versions of companies such
to produce cheap indigenous models. India intervention in capital markets and its deci- as Infosys and Wipro Technologies have
actually sends China high-value-added sion not to regulate industries that lack no government links, unlike so many of
mechanized and electronic components tangible assets (software, biotech, media) China’s successful companies.
whose production depends more on know- have created room for entrepreneurs.
how than on infrastructure. Entrepreneurial activity is fueled both by Although India’s stock and bond mar-
incumbent (often family-owned) enter- kets are hardly perfect, they do on the
Moreover, many hard-asset companies prises and by new entrants.The former use whole support private enterprise. Here
in China exist because the government fun- cash flows from diverse existing businesses too, entrepreneurialism has played a part,
nels money to them. The government can to invest in newer ventures. In biotechnol- even improving India’s institutional frame-
do this because it intervenes in domestic
capital markets. In India there is no such
government intervention. Hence successful
companies tend to cluster in industries
where capital constraints are less of an
issue. You don’t need a deep reservoir of

so we’re prepared to do what it takes to Trade Organization, and with new com- Local officials have GDP growth as a politi-
create them.” petitors proliferating, the automotive cal-performance target, so many of them
industry is heading into a classic price war look for the biggest investments they can
Local, privately-owned automakers that only the fittest will survive.This is pre- make to push along the regional economy.
such as Chery Automotive and Geely cisely what happened in the consumer Like stock market investors pursuing the
Automotive are beginning to thrive. A electronics industry, where competition led latest speculative fad, they have created a
generation of entrepreneurs has put to to the emergence of successful Chinese lemming effect, with lots of unsound
good advantage the skills and training that companies that operate globally. I think that investments, whether in aluminum
the foreigners provided, so that Chinese in five or ten years’ time, at least a third of smelters, residential real estate, or TV fac-
companies now put together cars of reason- the Chinese auto industry will be com- tories. The outcome tends to be waves of
able quality much more cheaply than pletely private – nothing to do with the overcapacity as investments are made right
foreign automakers can.At present, domes- current state players. And this will all have up to – and sometimes way beyond – the
tic players benefit from the price umbrella started with the state saying, “We want to point where it is patently obvious that the
that the foreign ones provide. But these build a car industry.” economics cannot justify them.
smaller fry are now making cars for
But remember that the essential mech-
The Chinese government manages the anism of economic reform in China has
development of enterprises with a view been the encouragement of competition
to driving economic growth. among provinces and municipalities. Until
the 1980s, there was no such thing in China
$2,000, which means that any company Looking at industry more broadly, as a national company. Everything was
that has high cost structures will eventually inefficiencies and cyclicality have resulted local. There was no single legal entity that
suffer. With lower tariffs on the way from the fact that many funding decisions operated more than five kilometers from its
because of China’s accession to the World are driven at the local-government level. headquarters.With the removal of internal
trade barriers, local entrepreneurs and
their government backers invested to build
scale and attack neighbouring markets.Yes,

38 • Rotman Magazine Fall 2005

work. Take the Bombay Stock Exchange shortage of homegrown entrepreneurial reform the institutions that support free
(BSE), founded about 130 years ago and talent. But indigenous companies have a enterprise and economic growth. And the
until recently the most inefficient entity much tougher time, hindered as they are by fact that many domestic investments still
imaginable. It has become radically more inefficient capital markets, a banking sys- are not allocated through sensible pricing
efficient in the past decade as a result of the tem notorious for bad loans, and the fact mechanisms means that China wastes many
competing efforts of an enterprising former that local officials rather than market forces of its resources. Productivity and long-
bureaucrat named R. H. Patil. With tech- largely decide who receives funding. term economic growth, as we all know,
nological inputs from around the world and thrive on competition, which is all too
some fancy footwork to dodge entrenched China and India both have the ability to often stifled by government intervention.
interests at the BSE, in 1994 he started a keep growing in their own very different
rival institution, the state-of-the-art ways for a decade or so. The Chinese gov- When the two countries are com-
National Stock Exchange of India, which ernment’s intervention in the economy – pared, it is easy to forget that India began
now has more business. In China, by con- including the decision to welcome foreign its economic reforms more than a decade
trast, the government tries to make stock direct investment – has brought a material later than China did. As India opens up fur-
markets successful by command, with pre- improvement in the standard of living that ther to foreign direct investment, we might
dictably little to show for its efforts. There India hasn’t enjoyed. It may also be that well discover that the country’s more lais-
has been little competition indeed between each country has chosen the path best sez-faire approach has nurtured the
the Shanghai and Shenzhen exchanges. suited to its own historical circumstances. conditions that will enable free enterprise
But the pros and cons of these two develop- and economic growth to flourish more eas-
Good hard infrastructure and the ment models should be studied, and it is ily in the long run.
Chinese government’s decision to welcome fair to ask whether China’s approach will
foreign investment make it reasonably easy hamper its future economic development. Tarun Khanna is the Jorge Paulo Lemann professor at
for multinationals to do business in China, Harvard Business School. Reprinted with permission from
and since they bring their own capital and Prof. Huang and I believe that the pres- the McKinsey Quarterly.
senior talent, they do not have to rely heav- ence of so many self-reliant multinational
ily on local institutions. China has no companies has partly relieved the Chinese
government of pressure to develop or

this does lead to overcapacity and price nationals account for only 15 per cent of efficient market, the government is no
wars. But over time, all that cyclicality also fixed-asset investment, so they don’t drive doubt worse at allocating funds. But China
leads to shakeouts that the most competi- the economy to a very great extent. China is not an efficient market, and the Indian
tive enterprises survive. must rely on its own domestic financial model – essentially one with relatively lit-
resources to finance growth.As a result, the tle investment funding, whether by the
That has certainly been the story in country’s capital markets are being devel- government or the private sector – could
consumer electronics, where the top three not have achieved as much growth for the
Chinese economy as the approach China’s
China must rely on its own domestic government actually took. The Indian
financial resources to finance growth. model might not be adequate for India’s
economy either: the country’s family-
players in personal computers control 50 oped. And the government is fixing the owned businesses and other private
per cent of the domestic market, and in banks through tough higher reserve mar- investors may be good at deciding what
beer, where the top ten own 30 percent. gins, branch-level changes in performance makes a sound investment for them, but
Interestingly, it is not the foreign compa- management and incentives, and more flex- they have not spent enough money to drive
nies but the locals that tend to be the ible risk-based pricing. the kind of growth seen in China. It would
winners of the consolidation wars.The beer not surprise me at all to see investment in
industry is a case in point: most foreign Ultimately, you have to ask whether India rise dramatically as foreign and
brewers, unprepared for tough domestic the inefficiencies of the Chinese approach domestic investors alike begin to recognize
competition and rapid consolidation, outweigh what it has achieved for the econ- its potential going forward.
entered and exited in the 1990s. omy overall.The answer, I think, is no.The
government still controls most of the coun- Jonathan Woetzel is a director in McKinsey’s Shanghai
Moreover, I don’t believe that foreign try’s financial resources and has been office. Reprinted with permission from the McKinsey
direct investment is linked to the develop- reasonably good at allocating them – that’s Quarterly.
ment of China’s capital markets or to a why the economy has grown so fast.
reform of the banking system. Multi- Compared with the private sector in an

Rotman Magazine Fall 2005 • 39

Questions for: David Birch

Attracting and
Sustaining ‘Gazelles’

Small business expert David Birch on why the ‘worst’ industries have the best growth
prospects, where and why to start a business, and, of course, ‘gazelles’.

Karen Christensen: After starting out as a would suddenly look like a gazelle; but it is important. Places that boast a lot of high-
rocket scientist, you switched gears to certainly true that gazelles can become growth companies likely also have a lot of
apply the lessons of particle physics to the very large. In other words, gazelles can great research universities in the vicinity.
world of small business. How are the two remain gazelles as they get larger, but I A skilled labour pool is also key – people
related? don’t think you’d ever have a General who understand computers, technology,
Motors suddenly transform into a gazelle. and biotech. Airports are important. At
David Birch: For me, ‘it’s all particle Andy Grove did an incredible job at one point, on our list of the fastest-grow-
physics’, if you will. After starting out as a Intel. You can hardly describe Intel as a ing places in the U.S., nine of the top 10
physicist [David’s early career was spent small company, but it’s always been a had hub airports. Being a ‘nice place to
working on the Hubble Space Telescope and
the Mariner space program at NASA], I I define a gazelle as a company with a
decided to use that same lens to think about minimum of $100,000 in revenues in a
the economy. I built up a database of about base year that manages to grow at least
35 million companies, which included each 20 per cent over a four-year period.
individual company in the U.S. I also did this
for Canada, Sweden, and the UK. It allowed
me to study economies one particle at a
time in much the same way a physicist stud-
ies matter one particle at a time.

KC: Some years back, you conferred the gazelle. Only a tiny percentage of gazelles – live’ is important, in a generic sense – the
name ‘gazelles’ on fast-growing com- three per cent – can maintain that level of ability to get outdoors, play tennis, or
panies, and it’s been widely adopted. growth over a 16-year period.They tend to hike – and as a result, places like Tucson,
What exactly is a ‘gazelle’? drop off the list very quickly. The few that Phoenix and Denver do well in attracting
do make it – like Microsoft, Wal-Mart these companies. Finally, something that’s
DB: I define a gazelle as a company with a and Intel – become fabulously successful, important, but difficult to measure, is an
minimum of $100,000 in revenues in a base and they remain gazelles for life. ‘entrepreneurial culture’: some places
year that manages to grow at least 20 per are more prone to revere a Ted Turner
cent over a four-year period. That's a tough KC: Every region of the world would or a Richard Branson, while others
thing to do – it’s accomplished by only three love to attract more gazelles. What view them as disruptive to the social
per cent of all companies. In Europe, they makes an area rife for the development order and reject them. Entrepreneurs
now have The Birch Index, which they use to of these growth machines? want to be loved, and they will go where
rank the continent’s 500 fastest-growing they are accepted.
companies, and they use this measure, too. DB: You first have to understand the
It’s become much more widespread than I transformation that is occurring in the KC: It’s been said that the greatest
ever would have imagined. economy: value today comes from knowl- opportunities for growth lie in industries
edge, so places that will grow – and that aren’t working properly. Do you
KC: Is it possible for large, established companies that will grow – will do so believe this? If so, which industries are
firms to display ‘gazelle-like’ charac- because of their effective use of knowl- rife for growth?
teristics? edge – not low labour or energy costs.
What places will flourish in such a cli- DB: The answer is yes: the best opportuni-
DB: It’s very unlikely that a large company mate? First of all, universities are ties are in the ‘worst’ sectors, and the

40 • Rotman Magazine Fall 2005

toughest opportunities for growth are in about managing people in a human Wal-Mart. As part of my research, I’ve got-
the ‘best’ sectors. It’s not true that the high resources sense, but getting them to fol- ten to know his family a little bit. For 30
tech, computer-based industries produce low you down a path. It’s about treating years, they lived on bread and water: today,
the largest number of growth companies, people like human beings, getting them individual Waltons are five of the top 10
percentage-wise. In fact, cement is one of involved in the process – not conning wealthiest Americans on the Forbes 400
the hottest sectors in the U.S., along with them into doing something they don’t ranking. Put them together, and they dwarf
plastics, rubber, sheet metal bending, tex- want to do, but motivating them to share Warren Buffett and Bill Gates. If a per-
tiles, and steel. One of the fastest-growing your desire to accomplish something. I son could achieve a fraction of what these
companies in the U.S. is Nucor – a steel don’t think anyone teaches that in any two have done, they’d be doing the world a
company. In the older sectors, the large business school. great service.
companies are doing quite poorly, which
gives younger, more innovative companies In the U.S., lots of business schools KC: What are you up to these days?
a much better chance to succeed. When use Accounting as a ‘filter course’ for
you look at industries that are doing well, undergraduates moving from a State DB: Ten years ago, the Swedish
the question is, who wants to compete school to graduate school: I can’t think of Foundation for Small Business
against IBM or Dell? Whereas it’s easy to anything less applicable to entrepreneur- Resarch (FSF) and The Swedish
compete against U.S. Steel. Just look at all ship than Accounting: there are five National Board for Industrial and
the small airlines that have emerged amidst million people in the U.S. who can keep Technical Development (NUTEK)
the flounderings of the larger ones. By and score for me – if I can come up with an set up the NUTEK prize for entrepre-
large, gazelles don’t pay too much attention idea, sell it, and get people to follow me. neurial research, and I was the inaugural
to the general economy: if you’ve got winner. I remain quite involved in that
something everybody wants, you’re pretty KC: What’s your take on emerging mar- program; it’s a group that advises the
immune to the business cycle. kets like China? European economy on entrepreneurship
and growth. I had the privilege of handing
KC: What are the most important skills DB: It’s absolutely terrifying. A colleague out this year’s award in a ‘Nobel-style’
required to create growth? of mine, Paul Reynolds, has been meas- ceremony in Stockholm. I’m also a boat
uring levels of entrepreneurship in 35 builder – I’m in Boston Harbour sitting in
DB: I taught at Harvard and MIT for sev- countries. The Chinese are now starting my boat right now. I’m about halfway
eral years, and I’m sorry to say that the 100 million companies a year. One hun- through a degree in naval architecture.
three most important skills for creating dred million! In the U.S., we only have 16
gazelles are not even taught in business million in total. India is also starting 100 KC: What advice do you have for people
schools. The first is product vision.You’ve million companies a year.We clearly are no thinking of starting up a business?
got to have a concept of a product or serv- longer in the lead in North America – by
ice that nobody else is offering, like any stretch of the imagination – in terms DB: Your ‘next big thing’ should be some-
Branson and Grove did. You’ve got to be of where the energy and entrepreneurship thing you’re really interested in. The
able to ‘see the future’, and conceive of is coming from. It’s coming from China, classic example is Debbie Fields; she
something that isn’t already being offered. and increasingly, India and other places. would make cookies and go out into the
No business school that I know of teaches Vietnam has also become active and street and walk around trying to sell them.
how to do that. Second is sales. I can’t find vibrant. But China is so huge – their per That’s how Mrs. Fields Cookies got
a single course called ‘Sales’ on any busi- capita rate of corporate formation is 50 started. It’s no more complicated than
ness school curriculum, yet it is the single per cent greater than our per capita rate; that: Debbie loved to make cookies.
most important skill that an entrepreneur and their capita is three or four times big- Starting a company is very difficult. The
needs to have. It’s an anomaly! I was ger. We will all be working for Chinese risks and anxiety are enormous. The only
recently working with someone who is companies before long. business you should start is one in which
creating the curriculum for a new business you have a huge interest, or else you won’t
school aimed at entrepreneurs. I asked KC: What individuals or companies have the persistence to stick with it. Never
him, ‘why don’t you have a course called have the greatest lessons to teach about get into something because it’s a logical
Sales?’ and he said, ‘Oh David, they would growth? path: get into something because you’re
never approve that.’ fanatically interested in it.
DB: Andy Grove is a consummate genius in
The third key skill is getting people to terms of growing a company – I’d put him David Birch has taught on the faculties of Harvard and
follow you. Once you have an idea, and way ahead of Bill Gates. The way he went MIT and is renowned for his pioneering research on
you learn how to sell, you’ve got to con- about growing his company is fascinating. small business.
vince a group of people to go along with He’s written two books – Only the Paranoid
you and work 60 to 70 hours a week to Survive is great, very instructive. The other
make your vision into a reality. It’s not person I’d point to is Sam Walton of

Rotman Magazine Fall 2005 • 41

Think Invest

Globally

Locally:

Responding to the
Rise of Offshoring

by Daniel Trefler

Offshoring – the practice of
outsourcing abroad – has
raised the stakes in the global
competition game, making it
all the more important for DanielTrefler
Canada to adopt productivity-
enhancing domestic policies.

42 • Rotman Magazine Fall 2005

When I set out to study offshoring, I in their sourcing possibilities. Despite the flip side, Canadian architects and engineers
thought it would make sense to have some disruption being wrought by Chinese are providing their expertise to customers
of the research done by an Indian consult- imports, academic research makes it crystal from Sao Paulo to Shanghai.
ing firm. A Web search quickly turned up clear that the rise of China brings net bene-
the perfect partner. Not surprisingly, the fits to Canada – provided that the Canadian And now for the facts about service off-
firm had a London-based front end – it is a service sector is able to penetrate Chinese shoring.We had better start by confronting a
fact of the industry that many customers markets. Further, the rise of China means myth: the fact is that service offshoring is
prefer to work through a Western interme- that Canadians will need to care even more small potatoes. In 2004, Canada exported
diary. The job was quoted at $63,000 – generously for our most disadvantaged, $40 billion in offshored services and
about a tenth of what a Canadian manage- because the working poor will bear the imported $45 billion. This is only a fraction
ment consulting firm would charge, but brunt of the Chinese offshoring onslaught. of the nearly half trillion dollars in exports
still much too rich for my academic budget. that leave this country annually. Further,
What follows is a reality check on the despite the hoopla about competition from
In the end, I did the research myself, hysteria surrounding the rise of offshoring. I Indian service providers, the fact is that 85
but this experience taught me two things. focus primarily on the IT revolution that has per cent of the business services that we
purchase from abroad are purchased from
Offshoring brings remarkable OECD countries. Only 15 per cent come
opportunities to us all, and therein from poorer countries like India.
lies the paradox: it is both a threat
and an opportunity. What is not a myth is that in recent
years, service offshoring has grown explo-
First, you can outsource just about anything allowed services to be traded on an unprece- sively. At its current clip, it will double
– from which I conclude that all of our jobs dented scale and which is allowing low-cost within a decade and account for one out of
are threatened. Second, that the big money countries to compete head-on with some of every five dollars of exports. Further, our
in outsourcing goes to the business analysts Canada’s most sophisticated companies.The purchases of services from low-income
who help OECD customers communicate key message is a confirmation of the recom- countries are growing even faster. Purchases
their needs to business process outsourcers mendations of Dean Roger Martin’s from India, China and Brazil are growing
in low-cost countries. I conclude from this Ontario Task Force on Competitiveness, between 25 and 50 per cent a year! So while
that offshoring brings remarkable opportu- Productivity and Economic Progress, of current levels of service offshoring – espe-
nities to us all, and therein lies the paradox: which I am a member. In particular, the cially from low-income countries – are low,
it is both a threat and an opportunity. building blocks for globally-competitive the growth of offshoring is truly spectacular.
Canadian firms are domestic policies that
Two trends in particular scream out encourage continual investments in upgrad- Canada’s Weak Offshoring Strategy
for our attention. The first is the rapid ing and innovation by individuals and firms.
growth of traded services such as back- Service offshoring makes use of the most
office IT support that are innovative, The Rise of Service Offshoring: dynamic modern technologies, and thus has
technology-intensive and employ high- Myths and Projections implications for the corporate innovation
paid, white-collar workers. In the past, it strategies at the heart of Canada’s competi-
was unheard of for countries like India The recent spectacular increase in global tiveness policies. Will Canadian firms be
to export high value-added services; trade volumes poses significant challenges crowded out of the most innovative lines of
but nowadays it’s common to find Indian to businesses, who must adjust to a new business? Judging by the popular press,
software programmers customizing level of competition. But this alone does Canada is a powerhouse exporter of busi-
sophisticated software applications for not call for a complete rethinking of ness services. Studies by the United
businesses worldwide. This fundamentally Canada’s trade policy.What does pose new Nations and KPMG touting Canadian
alters the way we must think about inno- policy dilemmas is the rise of service off- successes have caught the media spotlight.
vation-based corporate strategy and shoring – the use of workers located abroad Unfortunately, these studies are misleading.
public policy. to provide sophisticated services to local
customers. Examples include the use of Figure One on page 44 shows service
The second extraordinary develop- Indian workers to provide back-office serv- offshoring by country, with Canada ranked
ment is the rise of China as the world’s ices for Canadian banks and radiological just thirteenth in 2002 – down from ninth
manufacturer. Many, if not most, Canadian assessments for Canadian hospitals. On the in 1995. Even more disturbing is that
firms have yet to wake up to this sea change Canadian firms are increasingly positioning
themselves at the lower end of the value
chain. Figure Two on page 44 shows that
Canada accounted for a whopping 56 of the
513 new call centres set up worldwide in
2002-2003. Unfortunately, call centre

Rotman Magazine Fall 2005 • 43

Figure One: Canada – Sick Man of the OECD? to buy Chinese goods, and as we demand
more of this currency, it rises in value.

16% Eventually, theYuan would rise so much in
value that Chinese wages would no longer

14% be so overwhelmingly competitive. (This is
Share of the World’s Service Offshoring (Exports)
United States
United Kingdom

Germany
France

Netherlands
India
Japan
Italy

Ireland
Austria
Spain
Singapore
Canada
China
Sweden
12% similar to the problem Canada faces as its

currency strengthens.)
10% In real life there are things China can

8% do to slow this process down, but it can-

6% not keep the Yuan undervalued forever.
This is an ironclad law. Countries such as

4% Germany in the 1960s, Japan in the

2% 1970s, and Korea in the 1990s ran afoul of

0% the comparative advantage police. They
ran huge trade surpluses that threatened

to destroy North American manufactur-

ing. Over time, however, their currencies

strengthened to the point where these

countries ceased being low-cost produc-

employees produce some of the lowest ironclad economic law of comparative ers. In this context it is important to

value-added in the service offshoring busi- advantage prevents any one country from remember that in 1960, Japan had a highly

ness. In contrast, Canada accounted for ever dominating world trade. Second there skilled and disciplined labour force that

only 42 of the 1,336 high value-added proj- are institutional reasons to doubt the speed was paid 10 per cent of Canadian wages.

ects set up worldwide over the same at which this scenario will unfold. Japan in 1960 was, from the limited per-

period. High valued-added projects include spective of offshoring, not that different

IT service centres and regional headquar- 1. The Ironclad Law of from China today. Yet Japan never was

ters. Thus, global companies are looking Comparative Advantage able to dominate world manufacturing.

outside of Canada when it comes to setting In the most alarmist scenarios about China Why? Because it succumbed to the com-

up platforms from which to export high and India, these countries will soon have an parative advantage police by steadily

value-added business services. Something absolute advantage in producing all goods revaluing theYen.

must be done about Canada’s weak corpo- and services. With their low wages, what The same will eventually happen to

rate strategy in the offshored business prevents them from exporting everything China. It does not matter that they have

services sector. and importing nothing? If they import hundreds of millions of citizens ready to

nothing, they will be giving their goods work for next to nothing. If we buy too

The 64,000 Job Question: away for free. I doubt they would agree to much from them, their currency will rise

Wither India and China? this. In addition, Canadians will need Yuan to the point where their lowYuan-denomi-

Behind the anxiety about service offshoring

is a sense that OECD countries are in dan-

ger of being overtaken by China and India Figure Two: Export-oriented FDI Projects Worldwide, 2002-2003

as the places from which to export business

services. In the most alarming scenario, Country Low Value Added Country High Value Added
these countries have an infinite capacity to
absorb OECD technologies and manage- Total 513 Total 1,336
ment strategies, to improve on them, and India 60 India 168
ultimately, to compete head-to-head with Canada 56 UK 144
OECD countries. In this scenario, China UK 43 USA 108
and India – with their newly acquired high- China 30 China 102
Ireland 29 Singapore 79

tech status – will continue to have low Germany 20 Germany 57

wages for skilled labour and will use this Australia 19 Australia 53

advantage to create an economic jugger- Singapore 16 China & UK 51

naut that crushes all OECD countries. USA 15 Ireland 48
There are two reasons why this argu- China & HK 2 Canada 42

ment is fundamentally flawed. First, the

44 • Rotman Magazine Fall 2005

nated wages are completely offset by a ris- the corporation against the needs of improve quickly, even over a quarter-cen-
ing currency. It does not matter that investors outside the corporation. tury time horizon.
Chinese workers are paid four Yuan an Figure Three illustrates this point with a
hour, unchanged over the next hundred graph that I predict will eventually earn the These two arguments – that the com-
years. If theYuan strengthens, Chinese dol- Nobel Prize for its originator, Daron parative advantage police are ready and
lar-denominated wages will rise. Like the Acemoglu of the Canadian Institute willing to ticket China and India and that
Mounties, the comparative advantage for Advanced Research (CIAR). Each good institutions evolve only glacially –
police always get their man. dot is a country; countries with the good suggest that we should not panic about the
institutions just listed lie to the right of the downside of offshoring.Yes, it is absolutely
2. Institutions and Good Governance scatter plot. (The measure of good institu- true that extraordinary things are happen-
tions comes from the World Bank’s World ing in India and China. But it is not true that
The comparative advantage police eventu- Investment Report, 2004.) These countries these developments will destroy the
ally ticket any country that exports without Canadian economy.

Figure Three: Institutions Matter USA Think Globally and Invest Locally
11 Canada
The rise of service offshoring to low-cost
10 countries presents Canada with a choice: it
can insulate itself from global competitive
National Income (Log GDP Per Capita) 9 pressures, thus protecting its firms and
workers in the short run. However, just as
8 China the high tariffs that insulated Canada before
India 1989 retarded Canadian productivity
growth, so too will future attempts at insu-
7 lating Canada from the adverse effects of
offshoring. In addition, insulating policies
6 R2 = 0.71 will likely encourage foreign countries to
Zaire deny us market access – and considering
that Canada is a major exporter of traded
5 services, insular policies are about as useful
-2.8 -1.8 -0.8 0.3 1.3 2.3 as a blowdryer in an igloo.

National Institutions (World Bank ‘Rule of Law’) The right response to the offshoring
threat/opportunity is domestic framework
importing. However, it remains possible also have high levels of income (as meas- policies that promote competitiveness. We
that China and India will focus their ured by GDP per capita). In short, good must pressure Canadian firms to be more
exports on high-tech goods and services, institutions are the handmaidens of eco- competitive by forcing them to face the new
leaving Canadians to tailor the suits of visit- nomic success. offshoring challenge. At the same time, we
ing Chinese business executives. What must support Canadian firms and workers by
prevents this? Good institutions. Fortunately for Canada – and discour- providing a climate that encourages invest-
agingly for India and China – there are ment and innovation. The right policies
Current thinking about innovation- virtually no countries that have moved rap- would encourage productivity-enhancing
based, long-term growth emphasizes the idly up the line in FigureThree.The process investments both by individuals (e.g., in
crucial role of institutions, which include: of institutional change is glacial. Only a human capital) and by firms (e.g., in R&D
• protecting investors from preying politi- very small number of countries, such as and advanced technologies).
Hong Kong, have been able to rapidly
cians and bureaucrats; improve their institutions. Institutions are In the end, the appropriate public pol-
• providing a fully-functioning legal frame- beginning to be reformed in China and icy response to offshoring boils down to
India, but it is unlikely that they will this: think globally, invest locally.
work for arm’s-length transactions; and
• balancing the needs of innovators inside Daniel Trefler is the J. Douglas and Ruth Grant Canada
Research Chair in Competitiveness and Prosperity and a
professor of Business Economics at the Rotman School of
Management. For a copy of his complete paper on this topic,
send an e-mail to [email protected]

Rotman Magazine Fall 2005 • 45

Rebecca Reuber Eileen Fischer

Effectively

GrowthSupporting
by Rebecca Reuber and Eileen Fischer

Owners of rapid-growth firms are often skeptical of assistance offered
by external resource providers. Governments can help by developing
a network-based approach to policy initiatives.

Firms that grow very rapidly – often defined 1. External resource providers such Perspective #1: Rapid Growth Firms as
as having a sales growth rate of at least 20 as venture capitalists, bankers and con-
per cent per year for four consecutive years sultants, whose beliefs can influence Lucrative Opportunities
– are a phenomenon that is attracting con- both rapid-growth firm owners and
siderable and growing interest from both the policy makers seeking advice; Investors, bankers and consultants can be
private and public sectors. These firms can seen as three distinct groups of external
provide high returns for investors and 2. Government policy makers, whose resource providers.While there are differ-
become lucrative clients of consultants and beliefs influence the programs, poli- ences among these groups, we have found
banks, while governments tend to focus on cies, and allocation of public resources that there were many more commonalities
their value as job creators. (if any) targeted towards rapid growth in terms of their perspectives on rapid
firms; and growth firms.
How, if at all, can we effectively sup-
port rapid growth firms? In search of 3. Founders of rapid growth firms, In a study we conducted, external
answers, we began with the premise that whose beliefs about growth have direct resource providers readily acknowledged
three principal groups or ‘communities of consequences for the ways in which that management is a key ingredient for
practice’ are knowledgeable about – and they manage their firms. rapid growth. However, this group felt
have a vested interest in the success of – that lack of management skills was not
rapid growth firms: necessarily an obstacle, since outside man-
agers or advisors could readily be brought
in to replace founders who lacked the
requisite skills.

46 • Rotman Magazine Fall 2005

Indeed, not surprisingly, external was developing, special services targeted are all doing something to advance their
resource providers viewed themselves as toward rapid growth firms. learning.” As this comment suggests, public
‘very useful’ for rapid growth firms. In policy advisors tended to view mentoring
addition to money, they felt they could pro- Perspective #2: Rapid Growth Firms as a from business peers as a reasonable substi-
vide management with insights the firms Breed to be Cared for and Cloned tute for external resource providers in at
themselves could not generate. They often least some cases.
viewed themselves as essential to the suc- Public policy advisors from both federal
cess of rapid growth firms. and provincial levels of government could The public policy advisors we talked to
readily justify the necessity of ongoing believed they could provide assistance to
According to one of our subjects, one attention to, and support of, rapid growth rapid growth firm owners, as evidenced by
characteristic of a firm that will grow rap- firms, given their strong belief that such public initiatives at both levels of govern-
idly “is that they know they cannot do it all firms are ‘engines of the economy’. As one ment. For instance, picking up the idea that
themselves. They look for help. The lead subject said, “These firms create high value- outside advice could come from peers, one
people need to know the industry well and added jobs, are innovators, achieve higher subject reported on the results of a focus
be able to run the company well in the early growth in sales and profits, are high R&D group that a government agency had done
stages. Alternatively, they need to know performers, are more likely to make capital with rapid growth firm owners. “Brokering
their limitations and be anxious to bring in investments, and are export oriented.” of [mentors] was probably the most critical
the right management to run the company.” thing government could do. I will give the
Evidently, the rugged individualism stereo- Not all public policy advisors were so example of a young entrepreneur who
typically associated with entrepreneurs is unquestioning of the virtues of rapid wanted to manufacture guitars. He had
sometimes considered an impediment to growth. Another participant noted, for
rapid growth.
Not surprisingly, external resource
As a group, external resource providers viewed themselves as ‘very
providers tended to believe that govern- useful’ for rapid growth firms. In addi-
ments should, as one said, “get out of the tion to money, they felt they could
way and stay out of the way.” For some, this provide management with insights the
meant that they should not attempt to offer firms themselves could not generate.
any assistance, while for others, it meant
that they should minimize the interferences instance, that many of these firms do not found a new material and manufacturing
of bureaucracy, thereby creating a more have profit performance that is matched to technology that would allow him to make
hospitable business climate. One venture their sales growth. really inexpensive guitars. He wanted to
capitalist put it this way: “I am not sure gov- meet with a the founder of a firm that
ernment should have direct involvement in Public policy advisors were neither makes and sells drums and cymbals all over
rapid growth firms. I would prefer to have dismissive of external resource providers the world; all he wanted was an introduc-
government set general policies to encour- nor convinced that they were an absolute tion on the phone, so he could arrange to
age venture investment, technical training, necessity.The view that they can be helpful, meet with the guy, to pick his brain and ask
research and development, etc.”The notion but may not always be necessary, was stated him questions. Maybe in his mind the drum
that governments had any constructive role by one of our subjects: “I have met a few and cymbals guy could make connections
to play – much less a critical one – was not entrepreneurs who know everything for him. This kind of mentoring role is
evident amongst this group. and who really don't need to have any out- extremely important.”
side information from anybody else. But
External resource providers all recog- I haven't met many like that. Regardless Facilitating peer relationships among
nized that many rapid growth firms fail, and of whether or not they are open to a board rapid growth firm owners was not the only
often in spectacular ways. Nonetheless, of advisors or to a professional, they are initiative these public policy advisors were
they viewed these firms as a desirable target seeking out information and knowledge in undertaking, however. One of our subjects
market because of the potential upsides one way or another: they may be doing a lot had invested considerable resources in a
associated with them. As one banker told of reading or going to a Chamber of report that would identify unique success
us, “Two years ago, we had nine people Commerce gathering, getting information factors associated with rapid growth firms,
dedicated to nothing but these kinds of high from other business owners, etc., but they based on the premise that this would help
growth companies and helping with either
quasi-equity or venture capital-type invest-
ments.Today we have 61.”

Perhaps most telling was that all of the
venture capitalists in our study viewed
themselves as specialists in identifying these
firms. And each of the consultants had, or

Rotman Magazine Fall 2005 • 47

other firms to prosper. He was also con- and access to capital were necessary, but growth firms – as “invaluable” sources of
sidering ways in which the government they clearly viewed them as insufficient. relevant and useful advice.
could influence business school curricula
so that graduating students would be more Like the two other groups, they One of our subjects phrased his beliefs
prepared to develop and manage rapid believed that managing these firms requires in the form of a message to external
growth firms. experience, industry knowledge, and lead- resource providers: “Those of you who are
ership. Beyond these skills, however, supplying services to companies, whether
More than merely feeling they could owners stressed another quality which had they be ‘gazelles’ or not, are using the
be helpful, both the federal and provincial to do with seeing the potential for growth euphemism of, ‘How can I help them?’ But
public policy advisors we spoke to felt they and ‘making it happen’. In stressing the I think what you’re really asking is, ‘How
had to be involved. This was evident in the importance not only of skills and knowl- can I make money from them?’ For those of
fight for survival of two units devoted to edge, but of this ‘vision’ or ‘disciplined you in venture capital companies, how
rapid growth firms described by two of our imagination’, rapid growth firm owners many of you are saying, ‘How can I give a
subjects. They noted that, in a time of gov- seemed to reject the notion that a firm with fair value for their business?’You’re not say-
ernment cutbacks, they had thus far rapid growth potential could necessarily be ing that. You’re saying ‘How do I buy in
managed to convince senior officials to con- recognized a priori, and targeted at an early cheaply, perhaps even before they recog-
tinue funding these units, which suggests stage for assistance or support by either nize their real value?’ For these reasons,
that this was regarded by key members of governments or external resource there’s a high degree of mistrust. Now [that
the government as something of a necessity. providers. That is, founders believe that no my business has grown larger] I’m hearing
one except the founders themselves can from so many people that would like to
Perspective #3: Rapid Growth Firms as ‘cause’ rapid growth to happen. ‘help me’, or buy in at low rates, or give
an Act of Disciplined Imagination me advice that I may or may not need.”
The owner-managers we spoke to
Perhaps not surprisingly, the founders of viewed external resource providers as Compared with external resource
rapid growth firms that we spoke to a necessity for some purposes – such as providers, firm owners tended to view gov-
stressed ‘management qualities’ over all the provision of financing – and in ernment as‘low risk’ service providers. But
others as the distinguishing characteristic of these instances, as “unavoidable irritants.” an underlying theme within this group was
rapid growth firms. They did not dispute One described how, for example, long- that firms could never rely on governments
that unique products, growing markets, term strategic plans were unrealistic as for assistance. Firm owners might be will-
guides to action, but were necessary to ing to take what the government offered,
placate funders. but they needed to be able to function
without looking to governments for help,
Firm owners gave the impression that and without counting on them to create a
they were skeptical about what resources, more favorable business climate.
other than capital, outsiders could provide.

Firm owners gave the impression
that they were skeptical about what
resources – other than capital –
outsiders could provide.

Some simply believed that those with the The firm owners we studied did not
vision required to manage a rapid growth value growth for its own sake. One gave
firm would be resistant to outside help; voice to the rationale behind the ambiva-
others stressed that at times they needed lence toward growth that he and his
the help of, for example, accountants or partners felt: “We’ll only continue [to
lawyers, but found them to be, at best, grow] at this pace if we must, so as not to
“mixed blessings.” Because of the value they miss key windows of opportunity.
placed on management quality, and, in par- Otherwise, our business strategy calls for a
ticular, on experience, firm owners viewed more sedate pace.We call it ‘aggressive but
their peers – other owners of other rapid manageable’ growth.”

48 • Rotman Magazine Fall 2005