CHAPTER TWELVE

Hitting the Bull’s-Eye

I WILL END this book where I began, in search of the holy grail of business: long-term profitable growth. I noted at the outset that sustained corporate growth has proven to be an elusive quest, as 87 percent of Fortune global 100 companies have been unable to even modestly outperform the market over successive decades.¹

The problem derives from the inexorable effect of product lifecycles, which erode the sales of all products over time. Unless companies can consistently renew their product and service portfolios to maintain market appeal, their growth, profitability, and even survival are at risk.² For example, Nokia and Blackberry are just two of many examples of companies whose once popular products ultimately suffered steep sales declines, without adequate replacements to renew growth. To add to the challenge, product life cycles are shortening across most industries as emerging information technologies continue to streamline product-development processes and replace physical products with digital substitutes.

In the previous three chapters, I presented a number of concepts and techniques to promote the development of meaningfully differentiated products. But I also cautioned that industry incumbents often have great difficulty disrupting themselves and wind up being bested by entrepreneurial newcomers. Nonetheless, long-term profitable growth is possible. Just look at high-performing companies like Amazon, Apple, FedEx, Johnson & Johnson, and Starbucks. What can we distill from management best practices that can guide more companies to beat the odds against sustained growth?

Figure 12.1 connects the key themes set forth in this book. Resembling a bull’s-eye, the three outer rings establish the requirements for effective corporate leadership: abiding by an appropriate corporate mission, committing to the strategic imperatives for growth, and continuously reinforcing brand equity. As explained below, these management imperatives drive desired business outcomes—the ability to attract and retain customers and competitive resilience—which in turn enables a company to hit the target of long-term profitable growth.

Figure 12.1   Strategic imperatives for long-term profitable growth

Corporate Mission

As a starting point, a business must establish an appropriate overarching corporate ideology that inspires the organization and provides strategic clarity to all stakeholders on the purpose and priorities of the enterprise. A credible, meaningful, and actionable corporate mission is increasingly important as market environments become ever more dynamic. In every enterprise, new products will come and go, innovative technologies will emerge, customer preferences will shift, management fads will evolve, and new executives will rise up to leadership roles. Despite this dynamism, the core purpose and values underlying the corporate mission of companies that succeed over the long term provide the glue that holds the organization together as it grows, decentralizes, diversifies, expands globally, and develops workplace diversity.³

Unfortunately, CEOs often lose touch with the founding corporate vision and instead orient management priorities primarily toward meeting short-term business performance outcomes, like quarterly earnings-per-share targets or near-term sales quotas. As I noted in chapter 3, the problem with such a corporate mindset is that it conflates outcomes with strategy, promoting a decision-making approach in which companies often lose their business—and sometimes even their moral—compass.

For example, a succession of CEOs at Hewlett-Packard (HP) have recently sought to restore growth with ill-considered acquisitions or by propping up short-term profits with R&D cutbacks. The consequence has undermined the company’s legacy of technology-driven product superiority and notably failed to restore profitable growth. It is hard to recognize in HP today the clarity of the founders’ vision—The HP Way—which cofounder David Packard defined as “a core ideology…which includes a deep respect for the individual, a dedication to affordable quality and reliability, a commitment to community responsibility, and a view that the company exists to make technical contributions for the advancement and welfare of humanity.”⁴ Hewlett-Packard’s revenue and profit growth have underperformed its industry peers for more than a decade, as the company has fallen behind in key technologies driving sector growth (e.g., mobile computing and cloud computing), resulting in ongoing waves of corporate downsizing.⁵

Volkswagen (VW) is another example of a company that strayed from what should have been an enduring corporate mission to attract and retain satisfied customers by consistently designing vehicles with superior performance and value. Prior to his resignation, CEO Martin Winterkorn signaled that his top priority was to establish VW as “the world’s most profitable, fascinating, and sustainable automobile manufacturer.” Winterkorn set extremely ambitious growth targets in an obsessive drive to overtake Toyota and GM as the top-selling automaker, and was well known for his mercurial aversion to performance shortfalls. As one industry analyst put it, “[Winterkorn] doesn’t like bad news. Before anyone reports to him, they make sure they have good news.”⁶

It is not hard to see how such a management mindset promoted a toxic corporate culture in which the ends justified whatever means were deemed necessary to achieve the CEO’s stipulated business outcomes. Volkswagen’s resulting widespread fraud over bogus emissions test results has wound up undermining every aspect of the CEO’s corporate mandates. In the wake of this scandal, Volkswagen has become unprofitable, demoralized, and the antithesis of a sustainable automobile manufacturer.⁷

Contrast the falls from grace of HP and VW with the corporate missions and managerial focus of companies like Apple, Amazon, and Starbucks, which continue to enjoy profitable growth. Each of these companies has put customers at the center of their corporate mission and has remained committed to their founding ideologies in both good times and bad.

For example, Steve Jobs’s original corporate mission for Apple was “to make a contribution to the world by making tools for the mind that advance humankind.”⁸ Neither Jobs nor his successor, Tim Cook, ever articulated the objectives of becoming the world’s most profitable or highest-valued company. Rather, those were the outcomes of Apple’s ongoing focus to create beautiful, technologically advanced, easy-to-use products that enrich the lives of consumers, consistent with the company’s founding vision.

As another example, Howard Schultz’s founding vision for Starbucks was to “inspire and nurture the human spirit, one person, one cup, and one neighborhood at a time.” This corporate vision has served as a North Star, guiding Starbucks to create a distinctive and superior customer experience, driving rapid global growth during Schultz’s first stint as CEO and again, when he returned to turn around the company after a successor had strayed off course.

As a final example of an enduring commitment to a guiding corporate vision, in his first letter to Amazon shareholders in 1997, Jeff Bezos dedicated his company to “continue to focus relentlessly on our customers and to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.”⁹

Bezos has faithfully abided by his founding vision and has led Amazon to achieve the best financial performance of any publicly traded corporation during his tenure as CEO, increasing total shareholder returns by over 20,000 percent.¹⁰ In 2015, Amazon achieved a new milestone: the fastest company ever to exceed $100 billion in sales.

Companies with the best track record of delivering long-term profitable growth have achieved this outcome by executing effective strategies, guided by a customer-centric core mission that creates value for all stakeholders—customers, employees, suppliers, shareholders, and the broader communities in which the enterprise operates. Thus an appropriate corporate mission is the logical starting point for achieving the holy grail of business.

Two additional observations are in order to reinforce the importance of an enduring corporate mission, which clearly articulates a company’s purpose, values, and core ideology.

North Star or Lip Service?

Of course, virtually every corporation has a corporate mission statement that pushes the right buttons. Hewlett-Packard today continues to affirm its commitment to meaningful innovation, customer loyalty, profit, and growth, even though it has struggled to deliver on any of these aspirations over the past decade.¹¹ Prior to its bankruptcy, General Motors strived to “develop distinctively designed, high-quality vehicles that truly delight the customer.”¹²

Unfortunately, most companies fail to translate their core purpose and values into meaningful actions that bring the corporate mission to life. In chapter 5, I noted that far too many companies can’t or don’t articulate their strategy clearly to their stakeholders. Or there is a serious disconnect between what senior executives say their business strategy and priorities are, and how employees are actually managed and incentivized to behave. This dissonance is almost certain to diminish employee engagement and productivity, detract from customer satisfaction, and undermine long-term business performance.

The 2015 Harvard Business Review (HBR) ranking of companies with the best long-term financial performance shows that the best performing CEOs have strongly aligned corporate capabilities, assets, incentives, and employee mindsets to execute strategies that reinforce their company’s core ideology and corporate mission. For example, I have already cited the management approaches of Amazon (#1) and Starbucks (#37) in this regard. Their financial performance rankings among 907 companies analyzed by HBR are shown in parentheses.¹³

Other examples abound. For example, consider FedEx, which ranked thirty-fifth on HBR’s list of companies with the best financial performance achieved by current CEOs. Like most companies, FedEx’s corporate vision is inspiring and compelling: “FedEx is committed to providing outstanding customer experience, to being a great place to work, a thoughtful steward of the environment, and a caring citizen in the communities where we live and work.”

FedEx’s corporate mission is genuine and actionable. Over his forty-five-year tenure, founder and CEO Fred Smith has relentlessly reinforced the corporate mission and instilled a clear understanding of corporate priorities across FedEx’s workforce of over 250,000 employees. As Smith explains:

You have to put your money where your mouth is. There isn’t a year that’s gone by where we haven’t invested an enormous amount into trying to make the service better. There have been some years when we could have taken the approach, “You know what? We’re not going to try to make the service better. Let’s just dial it back by 2 percent. Most people won’t notice that, and we can put another 2 percent to the bottom line.” We’ve never done that.

It’s also directly related to the culture we’ve tried to create. Ask any FedEx team member anyplace what the Purple Promise is, and they’ll tell you, “I will make every FedEx experience outstanding.”¹⁴

In addition to its track record of long-term profitable growth, FedEx has been consistently included on Fortune magazine’s lists of the World’s Most Admired Companies and 100 Best Companies to Work For.

For companies who have achieved long-term profitable growth like Amazon, Apple, Starbucks, and FedEx, mission statements expressing core ideology and corporate purpose are not just lip service; they serve as a North Star to guide all aspects of the evolving strategic, operational, and management priorities of these enterprises.

Stubbornness versus Flexibility

It seems incongruous, in an era where the pace of change in all aspects of business is shifting so rapidly, to advocate stubborn adherence to a company’s core ideology and purpose, which may have been established decades ago. But it is precisely because of, not despite, the rapidly changing business environment that a company needs an anchoring ideology to guide it.

As Jeff Bezos explains:

It helps to base your strategy on things that won’t change. When I’m talking with people outside the company, there’s a question that comes up very commonly: “What’s going to change in the next five to ten years?” But I very rarely get asked, “What’s not going to change in the next five to ten years?” At Amazon we’re always trying to figure that out, because you can really spin up flywheels around those things. All the energy you invest in them today will still be paying you dividends ten years from now. Whereas, if you base your strategy first and foremost on more transitory things—who your competitors are, what kind of technologies are available, and so on—those things are going to change so rapidly that you’re going to have to change your strategy very rapidly, too.¹⁵

Amazon’s overarching core value is a relentless commitment to superior customer service, whether it’s to someone seeking selection, low prices, and fast delivery on Amazon.com, or to a large corporation contracting for cloud storage and data analytics with Amazon Web Services. Amazon’s customer-centric core ideology has helped the company make many tough management decisions over the years. For example, many Amazon employees were understandably upset when the proposal to open up Amazon’s online store to third-party merchants first surfaced. Amazon’s merchandising managers feared such a move would help competitors on Amazon’s own website. In another example of a contentious issue, book publishers were anguished when Amazon first proposed replacing curated professional book reviews with user reviews— often negative— on its website.

In explaining Amazon’s decision-making approach, Bezos noted that “there’s an old Warren Buffett story, that he has three boxes on his desk: in-box, out-box, and too hard. Whenever we’re facing one of those too-hard problems, where we get into an infinite loop and can’t decide what to do, we try to convert it into a straightforward problem by saying, ‘Well, what’s better for the consumer?’”¹⁶

Another principle central to Amazon’s core values and to the strategic perspective advocated in my book is the virtue of patience. Companies who strive for long-term profitable growth need to have the patience to invest in products, technologies, and core capabilities that often take years to generate attractive returns. As Bezos notes:

[W]e are willing to plant seeds and wait a long time for them to turn into trees. I’m very proud of this piece of our culture, because I think it is somewhat rare. We’re not always asking ourselves what’s going to happen in the next quarter, and focusing on optics, and doing those other things that make it very difficult for some publicly traded companies to have the right strategy…. Every new business we’ve ever engaged in has initially been seen as a distraction by people externally, and sometimes even internally. They’ll say, “Why are you expanding outside of media products? Why are you going international? Why are you entering the marketplace business with third-party sellers?” We’re getting it now with our new infrastructure web services: “Why take on this new set of developer customers?” These are fair questions. There’s nothing wrong with asking them. But they all have at their heart one of the reasons that it’s so difficult for incumbent companies to pursue new initiatives. It’s because even if they are wild successes, they have no meaningful impact on the company’s economics for years. What I have found—and this is an empirical observation; I see no reason why it should be the case, but it tends to be—is that when we plant a seed, it tends to take five to seven years before it has a meaningful impact on the economics of the company.¹⁷

Summing up the pivotal role of a clear and enduring corporate vision in guiding corporate strategy, Bezos aptly advises to “be stubborn on the vision and flexible on the details.”¹⁸

Strategic Imperatives

Stubborn adherence to a guiding corporate ideology and flexibility in adapting a company’s ongoing strategy are the yin and yang of management effectiveness. In Chinese philosophy, the concept of yin and yang refers to how contrary forces are actually complementary.¹⁹ As applied to business, an enduring corporate mission and core ideology helps guide the direction and priorities of an ever-evolving business strategy to drive long-term profitable growth.

Throughout this book, I have advocated three imperatives underscoring effective strategy formulation:

1.    Continuous innovation, not for its own sake, but to deliver….

2.    Meaningful differentiation, recognized and valued by consumers, enabled by…

3.    Business alignment, where all corporate capabilities, resources, incentives, and business culture and processes are aligned to support a company’s strategic intent.

By delivering innovative and meaningfully differentiated products and services, companies can attract and retain satisfied customers at favorable prices, while making it hard for competitors to replicate their products and practices. These are the essential drivers of long-term profitable growth.

While this prescription for strategic imperatives appears deceptively straightforward, in practice it has proven difficult for most enterprises to execute, underscoring why so few companies can consistently outperform the market. In fact, as I noted in chapter 4, many observers have questioned whether long-term profitable growth is even a realistic goal, given the challenges presented by seemingly immutable forces in the marketplace:

The law of large numbers, which posits the obvious mathematical reality that as a company grows, the incremental revenue required to maintain above-market growth rates becomes ever larger.

The law of competition, which states that companies achieving above-average returns on invested capital will inevitably revert to the industry mean because superior returns will continue to attract new entrants until profit premiums have been competed away.

The law of competitive advantage, which invokes the properties of product life cycles that cause the sales and profit potential of all products to erode over time.

Proponents of intrinsic limits to sustained growth, like Malcolm Gladwell, believe that market leaders have inherent liabilities that make them vulnerable to brash upstarts. In Gladwell’s revisionist view of the biblical tale of David and Goliath, dim-witted and ponderous Goliath was actually the underdog in his battle against fearless, agile, and resourceful David.²⁰

But as applied to business, this viewpoint is not just flawed, but could become a self-fulfilling prophecy of corporate failure. If management believes that long-term above-market profitable growth is impossible, a logical response would be to protect and harvest current assets and customers for as long as possible. But such an approach—playing not to lose instead of playing to win—serves only to hasten the decline of incumbent market leaders. The biblical Goliath may have been a ponderous oaf, but CEOs in large enterprises don’t have to be. As numerous examples cited in this book attest, business Goliaths can continue to prosper if they maintain the core values, entrepreneurial spirit, and adaptability that led to their success in the first place.

Brand Equity

In chapter 7, I made the logical connection between the requirements for effective business strategy and brand strategy. As shown in figure 12.1, companies that continuously innovate to deliver meaningfully differentiated products and services can enhance brand equity by reinforcing their brand promise, sustaining mutual trust, and strengthening the symbolic identity that consumers associate with strong brands.

Companies that consistently execute the three pillars of effective business strategy—continuous innovation, meaningful differentiation, and business alignment—generally have the strongest brand equity and outpace their industry peers in delivering superior customer satisfaction. Table 12.1 displays a representative sample of companies who were rated highest in customer satisfaction in 2015 within their industry category, as measured by the American Customer Satisfaction Index.²¹ These companies have continued to strengthen their brands and serve customers well despite a decline in the average level of U.S. customer satisfaction in 2015, which plunged to its lowest level in nine years.²²

TABLE 12.1

Customer Satisfaction Leaders by Industry

Industry Sector	Leading Company	Leader Score*	Sector Lowest-Average Score*
Airlines	JetBlue	81	54–71
Autos and light trucks	Lexus	84	73–79
Cellular telephones	Apple	81	71–78
Consumer shipping	FedEx	82	75–81
Health and personal care stores	Kroger	81	75–81
Department and discount stores	Nordstrom	86	68–77
Hotels	Marriott/Hilton/Hyatt	80	63–75
Internet retail	Amazon	86	77–82
Personal computers	Apple	84	70–77
Specialty retail	Costco	84	75–79
Supermarkets	Trader Joe’s	85	71–76

* 0–100 scale

I’ve already mentioned many of these companies earlier in this book as exemplars of successful business and brand strategies. For example, JetBlue built its brand image on a founding corporate vision of “bringing humanity back to air travel.”²³ From the airline’s inception, consumers recognized and valued JetBlue’s innovative approaches to airline service: in-flight entertainment systems, luxurious leather seats with the most legroom room in the industry, premium snacks, and friendly cabin service.

But to renew its brand promise and maintain industry-leading customer satisfaction over the past sixteen years, JetBlue has continued to innovate and reinforce an organizational commitment to core brand values. For example, within the past year, JetBlue added the fastest onboard Wi-Fi, a new premium-class cabin on selected flights, and additional international and domestic routes. To remain true to its brand voice, JetBlue has continued to ensure that its five core values—safety, caring, integrity, passion, and fun—are embraced by each of its more than eighteen thousand employees. To do so, JetBlue holds biweekly orientation programs, where every new employee is personally greeted and trained by C-level executives. Ongoing training with top-level executive participation ensures the airline’s organizational mindset remains aligned with its core values, and supports its basis of competitive advantage. JetBlue’s strategy is committed to making all company employees ambassadors of the brand. As shown in figure 12.2, customers recognize and value the effort.

Figure 12.2   Business outcomes: Costco vs. Walmart and Target

Business Outcomes: Hitting the Bull’s-Eye of Long-Term Profitable Growth

The mutually reinforcing elements of effective business and brand strategy provide the basis to attract and retain customers and create competitive resilience, which positions leading companies to achieve long-term profitable growth. In its sixteenth year of operation, JetBlue’s revenue and operating profit growth significantly outpaced the U.S. airline industry average, and patient investors have seen their shareholder value over the past five years appreciate at a growth rate nearly three times higher than the index of all U.S. airline stocks.²⁴

As a final example of how all the elements of effective management combine to hit the bull’s-eye depicted in figure 12.1, consider how Costco has achieved exceptional long-term profitable growth and created value for all corporate stakeholders.

Corporate Mission

Costco’s mission statement is succinct, easy for all stakeholders to understand, and clearly focuses the company’s primary priorities on serving customers and employees. Reinforcing core values yields the desired outcome of rewarding shareholders.²⁵

Costco Mission

To continually provide our members with quality goods and services at the lowest possible prices.

In order to achieve our mission we will conduct our business with the following Code of Ethics in mind:

1.  Obey the law.

2.  Take care of our members.

3.  Take care of our employees.

4.  Respect our suppliers.

If we do these four things throughout our organization, then we will achieve our ultimate goal, which is to:

5.  Reward our shareholders.

As Costco explains:

•    Our members (customers) are our reason for being—the key to our success. If we don’t keep our members happy, little else that we do will make a difference.

•    Our employees are our most important asset…. We are committed to providing them with rewarding challenges and ample opportunities for personal and career growth…and pledge to provide our employees with competitive wages and great benefits.

•    Our suppliers are our partners in business, and for us to prosper as a company they must prosper with us. To that end, we strive to treat all suppliers and their representatives as we would expect to be treated if visiting their places of business.

•    Our shareholders are our business partners. We can only be successful so long as we are providing them with a good return on the money they invest in our Company. This, too, involves the element of trust. They trust us to use their investment wisely and to operate our business in such a way that it is profitable.²⁶

By clearly articulating the company’s purpose, priorities, and values, Costco’s mission statement serves as a guide to its ongoing strategy development.

Strategic Imperatives

Costco’s strategy embodies the three imperatives of continuous innovation to drive meaningful differentiation supported by aligned business practices, allowing it to deliver on its corporate mission “to continually provide our members with quality goods and services at the lowest possible prices.”

Costco’s strategy helps drive its competitive advantage. By relying on membership fees for over three-fourths of its operating profits, Costco is able to cap its price markups at half the level typically charged by Walmart, Target, and other big-box retailers. Costco is also in a position to offer lower prices by exploiting competitive cost advantages, driven in part by sharply limiting the number of brands and packaging sizes it carries (for example, four SKUs of toothpaste, versus sixty at Walmart).²⁷ Costco’s limited product variety enables it to increase its purchasing scale and bargaining power while reducing logistics, handling, and stockout costs. Costco also shuns virtually all forms of mass advertising and promotions, saving another 2 percent of revenue compared to other grocery chains and big-box retailers.

To enhance profit margins, Costco has been steadily expanding the number of categories covered under its private-label Kirkland brand, which currently accounts for over 20 percent of sales. Its overall assortment strategy generally skews toward higher-quality merchandise, which appeals to its upscale customer base. Costco members reportedly have twice the average income of Walmart shoppers, giving them the discretionary spending power to afford annual membership fees and to buy staple items in bulk. In summary, the key elements of Costco’s strategy are well suited to the needs of its target upscale market, fulfilling its enduring mission of consistently delivering a demonstrably superior consumer value proposition.

Costco’s strategy has also faithfully fulfilled its corporate mission to take care of its employees. The warehouse retailer pays its workers roughly twice the hourly wage of Walmart employees, and provides superior health-care coverage, retirement-account contributions, and vacation-time allowances.²⁸ In 2014, Costco ranked second (behind Google) as the company whose employees were most satisfied with their compensation, and sixteenth overall in Glassdoor’s ranking of Best Places to Work.²⁹ The company’s generosity toward workers has yielded significant business benefits. Relative to its parsimonious competitors, Costco employees are more engaged, productive, and loyal. This reflects Costco’s ability to attract and retain higher-caliber employees to deliver higher-quality service, while allowing the company to reduce the costs and operational problems associated with high turnover rates. Despite its higher wage rates and superior benefits, Costco generates nearly three times the sales per employee and 40 percent higher profits per employee than Walmart.³⁰

Brand Equity

By consistently delivering on its brand promise, Costco attracts and retains highly satisfied customers (see table 12.1), who trust and identify with the brand. Word-of-mouth referrals from customer evangelists have helped Costco boost its membership base. Despite its aversion to advertising and a recent increase in annual dues, Costco has grown its membership by 35 percent over the past five years and enjoys a 91 percent customer renewal rate in the United States.³¹ These are indicative validators of Costco’s exceptionally strong brand.

Hitting the Bull’s-eye

Costco is an exemplar that embraces all the requisites for long-term profitable growth illustrated in figure 12.1. From its inception, Costco established an actionable corporate mission that clearly articulated its purpose and customer- and employee-centric core values. While Costco has remained true to its founding vision, its strategy has evolved through continuous innovation to renew and strengthen its basis of meaningful differentiation. Costco’s business model is strongly aligned with the company’s core mission, helping to drive consistently strong business outcomes.

Costco has hit the bull’s-eye of long-term profitable growth. Figure 12.2 shows the growth in Costco’s revenues, operating profits, and shareholder value relative to its two primary competitors between 2010 and 2015. In addition to delivering exceptional returns to shareholders, Costco has also created considerable value for all its stakeholders—its customers, employees, and suppliers, and the growing number of communities in which it operates.

The holy grail of long-term profitable growth may be elusive, but it is not beyond reach. I hope this book will prove to be a useful guide for your quest.