Setting The Course For Growth: CEO Perspectives - Forbes

04 /Setting the Course for Growth: CEO PerspectivesAhead: confidence built on plans for efficient growthCEOs surveyed feel confident aboutthe economy, their industries and theircompanies over the next three years. “Myeconomic models suggest that we will still bein the growth phase for the next three years,however, we will probably be nearing the endof the recovery. It all comes down to whathappens with the labor market and wages. Ifmuch of the low participation is cyclical thenwages won’t rise too much and inflationwill not be an issue. If the low participationis structural then we have a smaller supplyof labor and wage price pressures will driveinflation and rates higher which will impact thelength of the growth cycle,” says ConstanceHunter, KPMG’s chief economist in itsAlternative Investments Practice.Michael R. Odell, President and CEO ofautomotive aftermarket service and retail chainPep Boys, sounds even more measured: “Weassume that the economy is going to stayat status quo. We’re not expecting anythingto get worse, we’re not expecting things toget a lot better, which means it’s a fight formarket share.” Making managing throughthis recovery even more complex for CEOsis a varied landscape, with the economyrebounding unevenly across the UnitedStates. As a result, many CEOs operateacross up and down areas. Such sentimentsmay be behind CEOs’ citing a few years outas the time when they expect to record thegreatest profits.FIGURE 1How do you feel about prospectsfor growth over the next three years?(compared to last year)More ConfidentSame Level4%41%55 %Less ConfidentOverall, the KPMG study reveals that CEOsare in growth mode, as growth decisivelytrumps efficiency as more important tocompanies’ well-being, with 78 percent ofCEOs expecting to increase headcount overthe next three years.The KPMG CEO study reveals that even asCEOs prioritize growth, they continue to focuson efficiency. Many of the growth strategiesand programs that CEOs are undertaking areexecuted while keeping an eye on savings.For example, the transformation of operatingmodels, which are being undertaken in someform by 76 percent of companies, accordingto their CEOs, is influenced mostly by financialand efficiency-based factors. The success ofoperating model transformation is measuredby financial metrics as well. Reducing coststructure is among the top five strategicpriorities. That approach changes in the caseof companies with revenues over 10 billion,which tend to rely more on non-financialmetrics for designing and measuring growthstrategies.Healthcare giant WellPoint is prioritizinggrowth based on the belief that national scaleand local market density will continue to becentral to achieving higher membership forECONOMYFIGURE 2FIGURE 39%Which is more imporant to yourcompany’s overall well-being?How do you expect your organization’sheadcount to change in the nextthree years?32%59 %Increase 25% or moreOverall focuson growth72%8%Increase 11-25%21%25%Increase 6-10%MY INDUSTRY28%12%24%Increase 5% or less12%Stay the same26%62%MY COMPANYOverall focuson operationalefficienciesDecrease up to 5%6%%Decrease 6-10% 3Decrease 11-25%1%

PG&E: Driving Operational EfficienciesPG&E is aggressive about both growth and efficiency. Thecompany is investing about 6 billion a year in infrastructure,its highest rate of investment ever. In a regulated industry,growth is driven by capital investment. The risk to that growthis that capital investments lead to higher rates charged to thecustomers. In a low-growth economy like today’s, operationalefficiencies have to be driven in order to counterbalancethe increase in costs associated with the capital investment.“We’re aggressive on growth, but we’re also aggressive onoperational efficiencies to counterbalance that, so we canmaintain a strong focus on affordable bills for our customers,”says PG&E’s CEO, Anthony F. Earley Jr.To achieve higher efficiencies PG&E has a very aggressivecontinuous improvement program. Each business unit startswith extensive benchmarking of processes in relation to thebest in the industry. PG&E used to be in the fourth quartile, butis now, on average, in the high third quartile, moving acrossinto the second. The target is to get to the first, which Earleytranslates into 500 million to 1 billion of savings opportunities.

06 /Setting the Course for Growth: CEO PerspectivesAhead: confidence built on plans for efficient growth (cont.)GROWTH VS. EFFICIENCYQ&A With Stephen Lis, Leader, Management Consulting Practice, KPMG LLPWhen we asked CEOs what was more important, growth or efficiency, three-fourths saidgrowth. Is it possible to have both? Growth and efficiency are not contradictory. It’s hardto get both at the same time, but it is definitely not impossible. While CEOs are increasinglylooking at growth strategies to drive value creation, they are still investing in infrastructure,the operating environment, and the back office and support functions. That investment isfocused on positioning the operating environment and infrastructure to support growth as wellas drive efficiency.CEOs use measurements related to efficiency and cost-cutting. Are these measurementsgrowth-related? Traditional measurement systems are historical, looking at past performanceand typically focused on efficiency, cost, capital utilization, etc. Very little in the measurementsystem today is forward-looking. Simply put, the measurement systems have not caught upto the agenda of growth. They tend to lack key indicators and predictive insights on wheregrowth opportunities may exist. However, technologies are beginning to emerge that providegreater insights into customer sentiment, behavior and opportunities for growth.What are some examples of such predictive, growth-generating measurements? A lot ofattention is being paid to analytics predicting customer behavior. Another area of interestis analyzing customer engagement and satisfaction, and how to enhance both. Suchmeasurements can help decide which areas have the greatest growth potential and howto position the organization (both marketing and sales as well as delivery and service) tomaximize growth. These new uses of technology for predictive measurement have gainedfavor as we’ve also begun to see the emergence of the chief marketing officer function.Surveys indicate that marketing organizations are starting to get more technology investmentthan IT organizations themselves.health plans and higher profitability. “We willmaintain a lean mindset, but we will not do soat the expense of investing in the business forthe long term,” says CEO Joseph R. Swedish.(See sidebar, PG&E: Driving OperationalEfficiencies, page 5.)Tamara L. Lundgren, president and CEOof Schnitzer Steel, spends considerabletime on improving efficiency by reviewingthe company’s operating model with herexecutive management team. “The resultsinclude our decisions to streamline our sharedservices division, combine administrativefunctions within operations and adjust ouroperating model to ensure that we arepositioned to extract synergies across ourentire business platform, which extendsfrom the sourcing and processing of scrapmetal to the manufacturing of finished steel,”she says.Across the board growth strategies are split,with half of CEOs classifying their growthstrategies as conservative and the other halfas aggressive. In line with this balance, amajority of CEOs surveyed (84%) are pursuingmoderate growth strategies, divided roughlyin half between moderately aggressive andmoderately conservative.Beth Mooney, CEO of KeyBank, is pursuinga moderate growth strategy relative tothe industry. “We are pursuing a growthstrategy that is better than peer averagebut doesn’t put us in a position for the nextdownturn of having taken risks that wewill pay the price for,” says Mooney. “Ourindustry has to remember that when andif there is another recession or bubble, youhave to prove that you built a businessmodel that can survive it without causinginvestors volatility.”The KPMG study reveals that growthstrategies are largely U.S.-focused. Infact, almost a quarter of CEOs surveyed(23%) believe that their internationaloperations will require less time or energy,with the biggest group (37%) saying thatinternational operations will get the sametime and attention as other priorities. Just10 percent say that international operationswill require more time and energy.

Whirlpool: Balance Built on ExperienceMajor home appliance giant Whirlpool Corporationhas a balanced, multipronged approach to coveringall the bases of growth, built upon the company’s 100years of experience. “Our growth plans include organicgrowth through innovation, growth beyond our coreproducts and geographic expansion,” says CEO Jeff M.Fettig. Whirlpool is also on track to become the majorityshareholder of Hefei Sanyo, a Chinese home appliancemaker, to accelerate its growth in the emerging Chinesemarket.The company recently announced a 40 millionexpansion of its small-appliance manufacturingoperation in Greenville, Ohio, that would add 400 jobsover the next four years, and it is also launching anew marketing campaign for the Maytag brand. Thecompany is investing heavily in innovation, includingsmart appliances. The plan is to grow revenue by 5percent to 7 percent. True to the balance of achievingboth growth and efficiency, Whirlpool aims to increaseits operating margin by 8 percent.

08 /Setting the Course for Growth: CEO PerspectivesAhead: confidence built on plans for efficient growth (cont.)In addition, in looking at domestic andinternational operations to drive growth overthe next three years, a far greater number ofCEOs surveyed tab domestic expansion asthe priority. That’s not surprising when youconsider the reinvestment in manufacturingin the U.S. and the general steadiness of theU.S. economy when compared with othereconomies.direct-selling beauty company, derives 85percent of its business outside the U.S.,and 75 percent of its revenues come fromemerging markets.Currently, the majority of CEOs surveyed(67%) are pursuing organic growth, anda third are evenly split between organicgrowth and acquisitions. The biggestcompanies stand out, with a 50/50 splitA look at where CEOs intend to invest capital between purely organic growth andreveals that investing within the U.S. takesstrategies based evenly on organic growthpriority over international investing, according and acquisitions.to the survey. Technology sector CEOs put aAs one example, Schnitzer Steel has amuch greater emphasis on expanding bothgrowth strategy based on organic growthin the U.S. as well as in emerging markets,and acquisitions. Organic growth anticipatesfollowed by CEOs in automotive.both top-line growth and continuing marginOf course, the scope and direction of growth expansion. Since 2008, the company hasstrategies varies by company and its statemade 11 acquisitions in its metals recyclingof development. The growth strategy ofbusiness and 16 acquisitions or greenfieldWhirlpool, a century-old appliance maker,developments in its auto parts business.includes a major international component in“Acquisitions and greenfield developmentsChina. (See sidebar, Whirlpool: Balance Built will remain key drivers of our growth,on Experience, page 7) Avon, a 128-year-old as they have been in the past,” saysLundgren.FIGURE 4How would you characterize your overall growth strategy?6%Very aggressive44%Moderately aggresive40%Moderately conservative10%Very conservativeFIGURE 5How would you characterize your overall growth strategy?Today32%In 3 years42%Evenly split betweenorganic growth andM&A/JV67%53%Mostlyorganic growth1% 5%MostlyM&A/JV

Setting the Course for Growth: CEO PerspectivesM&A activity should be picking up in thenear future, according to the survey results.Looking ahead to three years from today,more CEOs surveyed (42%) plan to bepursuing strategies based on both organicand M&A-based growth.“Organizations are holding on to massiveamounts of cash, interest rates haveremained at historic lows, and consumerconfidence is rising. These positiveeconomic indicators point to a generalfeeling of optimism in the corporate arena,”says Dan Tiemann, KPMG’s transactionsand restructuring lead for the Americas.“When a target that complements anorganization’s growth strategy becomesavailable, pursuing M&A presents anattractive opportunity for corporate playersto create long-term equity value for theirstakeholders.”Of course, pursuing M&As is, first andforemost, a question of fit. Celgene, abiopharmaceutical company focused ondeveloping products for the treatmentof cancer and immune-inflammatorydiseases, has completed multiple strategicpartnerships. CEO Robert Hugin makesno future predictions and stresses theimportance of synergies when decidingabout acquisitions or partnerships. “Wedon’t have a target for what we plan to dogoing forward this year or in future years[in terms of deals],” he says. “Having astrong internal research capability givesus insights into programs that wouldproduce synergies to produce disruptivetechnologies and life-enhancing therapies inthe interest of patients, healthcare systemsand economies worldwide.”“Executives are turning their attention todeals that bring revenue and cost synergiesto their organizations,” adds Tiemann, “andthey are willing to pay a premium for thosetargets. Otherwise, buyers are willing towait on the sidelines for the right target tobecome available that will effectively andefficiently integrate with their organization.”“/ 09Ideally, this three-year time horizon for increased M&A activitywould align to a period in which there is greater certaintyaround business tax reform—an item that survey respondentsidentified as having relatively high possible impact on theircompanies. We’re seeing that the current uncertain outlook forreform is particularly challenging for companies undertakingM&A transactions today. It casts a shadow over the tax outlookfor the target company’s operations as well as the opportunitiesfor tax-efficient integration of the combining businesses, bothof which make pricing deals today more difficult.– Lisa MaddenNational Practice Leader, KPMG Mergers & Acquisitions Tax.”

10 /Setting the Course for Growth: CEO PerspectivesStaying relevant among disruptionsThe concern about staying relevantis running high among CEOs. Themajority worry about the relevance oftheir products three years from now, areconcerned about current competitorstaking business away and are wary of newentrants. When asked whether she is moreconcerned about existing competitors ornew entrants, Sheri McCoy, CEO of Avon,said simply: “Both.”Staying abreast of competitors andconsumers over the next three years willrequire new approaches and often differenttools than it did in the past. Competitionhas become industry-agnostic in the sensethat a company from any industry caninfluence overall consumer behaviors andexpectations. It thus benefits CEOs toobserve all new entrants. This approach canbe illustrated by the example of WellPoint’sSwedish. Despite operating in healthcare,which is among the most disrupted andidiosyncratic industries, he carefully studiesnew entrants in other industries looking fornew consumer trends they are introducing.(See sidebar at right, WellPoint: Puttingthe Consumer at the Center.) KeyBank’sMooney is also very alert to the waves thattechnology companies can make in herindustry. (See sidebar, KeyBank: Banking onSafety, page 13.)FIGURE 6How concerned are you about the following?about competitors taking90% concernedbusiness away of products/services three years72% relevancefrom now59% new entrants disrupting business modelOne important way to stay relevantis to listen to consumers. Indeed, theKPMG study shows that more interactionwith customers and clients is a toporganizational priority for CEOs. In the eraof the digitally savvy customer, the idea ofbeing customer-centric has taken on newmeaning.

Setting the Course for Growth: CEO PerspectivesWellpoint: Putting the Consumerat the CenterHealth insurance giant WellPoint’s CEO, JosephR. Swedish, stands out in how he thinks about thecompetition by looking beyond his own industry. Hebelieves that companies like Amazon.com and Uber, acar-ordering service, have changed the way customersthink about services. Translating these new entrants’strategies into his field, he notes that “the ACA hasshifted healthcare’s center of gravity toward thecustomer—and so must we.“We need to put the end-consumer at the center ofeverything, and these end-consumers calibrate theirexpectations of us against the likes of Amazon andUber,” he adds. Exponential advances in digital healthtechnology will significantly change how customersaccess and consume healthcare. This meansemploying new technologies and new business modelsin the healthcare industry. “We need to innovate toremain relevant and to defend our business againstuntraditional new entrants that may disrupt ourindustry,” says Swedish./ 11

12 /Setting the Course for Growth: CEO PerspectivesStaying relevant among disruptions (cont.)This new approach is based on utilizing datapertaining to customer information, saysLinda Imonti, Principal, National BusinessIntelligence Leader/West Advisory leader inAdvisory Services at KPMG. (See sidebar,The Power of Information.) “Organizationsunderstand that if they analyze thecustomer, gaining further understandingin how to attract, acquire, manage andretain customers in a meaningful way, thecompany creates a more satisfied customerand thus an impact on the top line,” saysImonti. Pep Boys is one example of a smart“use of Customer Data Segmentation (Seesidebar, Pep Boys: Know Your Customer,page 14.)KPMG’s Hunter points out that many ofthese new customers are members ofthe millennial generation, and the shifts inattitudes they bring with them are muchmore significant than in the previousgenerations of baby boomers or Gen X’ers.“It’s going to require better understandingof how the customers are different andwhat their needs might be,” says Hunter.Over the past few years, manufacturers have seen an explosionof new technologies and innovative developments in materialsscience, advanced manufacturing and synergistic operatingmodels. With this sea change, manufacturers the world over arenow starting to take stock of the more complex world that theyare operating in and use that insight to redefine ‘the art of thepossible,’ fundamentally transforming the way manufacturerscompete and succeed.”– Jeff DobbsGlobal Chair, Industrial Manufacturing andPartner with KPMG in the U.S.THE POWER OF INFORMATIONQ&A with Linda Imonti, National Business Intelligence Leader/WestAdvisory leader in Advisory Services at KPMGWhat is the best defense against competitors, either existing competitorsor new market entrants? One of a company’s greatest defenses againstcompetitors, and how they’ll stay in a position of competitive advantage, isbeing an information-driven organization. Information will drive a level ofpotential innovation, speed to market and customer interaction in a way thatwe haven’t had the ability to do in the past. The key is to create informationthat allows you to not only see historically but to provide predictiveinformation. When you utilize predictive information, you enable futurecompetitive positioning.Are CEOs aware of the importance of data analytics? There’s been afundamental shift in understanding of the value of data. In previous years,data was really viewed as a technology asset. Today, companies recognizethat it’s not simply the data that’s an asset, it’s the information they gleanfrom that data. The right information is the asset.Does the data live in various pockets of the organizations or is it utilizedenterprise- wide? The power comes from data when the dots areconnected. Going forward, organizations do understand the benefits ofbeing an information-centric and intelligent enterprise. The CEO has a verylarge role in making this happen. When it’s an enterprise-wide culture toutilize information to make business decisions, that’s where the powercomes in. That’s where you get and maintain the competitive edge.

Keybank: Banking On Safety“I see more competitive disruptors onthe landscape than I’ve ever seen,” saysKeyBank’s CEO, Beth Mooney. WhileKeyBank has a group of banks it competeswith, Mooney is very aware that technologycan result in new entrants into banking.“Does Google figure out how to own thewallet? Does Wal-Mart figure out how toreally bank everybody?” wonders Mooney.Companies are attempting to use some newtechnologies to bypass

growth through acquisitions. When asked to look at their growth strategy over the next three years, 53 percent expect their priority will be organic growth, with 42 percent indicating that it will be an even split between organic and inorganic growth through acquisitions. Strong Focus on Growth Seventy-two percent say that the focus