Growth Still Happens (Even in This Moribund Economy)
The best growth opportunities are in businesses that exploit the intangible assets you already have.
In my last two columns, I wrote about how companies can grow at a time when the economy wants to expand in a macro way — as the gross domestic product and consumer confidence index seem to suggest it does — but when individual businesses are hemmed in by all manner of micro obstacles. Mergers and acquisitions? A stratagem whose generally iffy odds are now longer than ever. Line extensions? Been done so often that consumers are bored stiff; evidence shows you’re increasingly likely to be pushing your own products off the shelf, rather than your competitors’. Globalization? What’s left — Paraguay? The Web? Give me (or if not me, your stock price) a break.
But here are two stories — connected, as it happens, and with a common management lesson. The first comes out of Siemens (SI), which long ago grew from Bavarian roots into one of the world’s megacorporations. In 1998, Heinrich von Pierer made one of those fortuitously timed acquisitions that makes a smart CEO thankful for dumb luck: He picked up the power-generation business of Westinghouse, which was disassembling itself, and joined it to Siemens’s own big power-generation division just before electricity deregulation produced a once-in-a-lifetime boom in the industry.
That boom is over now. Like archrival General Electric (GE), Siemens deeply wants the electricity business to keep producing outsize revenue, but the company knows it won’t achieve that goal by selling new turbines. The solution, both firms realize, is in expanding service. The same knowledge that forges generators and turbines can be sold again in the form of service contracts to maintain, repair, and upgrade them.
Siemens has encountered one problem, von Pierer told a group of us two weeks ago: “The former Westinghouse people understood this idea, but the Germans resisted.” They were into large, turnkey projects. In the grand tradition of engineers everywhere, they wanted to make new stuff; servicing last year’s product was for lesser minds. Von Pierer’s solution was simple, shocking, and successful. In what he calls a “reverse takeover,” he moved global headquarters for steam turbines to Orlando, Fla., along with responsibility for services for all fossil-fuel power-generation plants, and left the former Westinghousers in charge. (Group headquarters for power-generation, along with co-responsibility for gas turbines, remains in Erlangen, Germany.) Result: Services now bring in 30 percent of the group’s revenue, up from 18 percent just three years before.
In April, Motorola (MOT) made a different kind of intercontinental move that, by coincidence, also involves Siemens. Motorola and Siemens are, respectively, the number-two and number-three makers of mobile-phone handsets, after Nokia (NOK). There are three ways to make (or not make) money in mobile telephony: build networks and provide service, like Vodaphone () and VoiceStream (VSTR) do; make handsets; or make the silicon brain inside the handsets, which includes the integrated circuit and the software. In the industry’s short life, each sector in this trio has taken a turn in the spotlight. First the money was in handsets, then in infrastructure; now it’s moving into chips and software. Siemens happens to be big in infrastructure and handsets, mostly in Europe. Motorola’s big in handsets and circuits and software, mostly in North America. But the two recently struck a deal under which Motorola will provide its new i300 chips and software for Siemens’s phones, and possibly (no sooner than 2004) teach the German company how to make its own chips according to Motorola’s designs.
“This was a way for us to use our intellectual assets for both the merchant market as well as our own use,” explains Pete Shinyeda, a Motorola VP and general manager of its wireless and broadband systems. Motorola’s old strategy was to keep its knowledge to itself — Motorola chips for Motorola phones. That made sense when the phone was the “profit zone,” as Mercer Management consultant Adrian Slywotsky would put it. If a growing share of the profits is in the knowledge rather than in its housing, however, it behooves you to separate the two, uncorking a new revenue stream by selling the knowledge itself — in the form of a chip, or a chip design and the manufacturing know-how to build it. “This has redefined the competition,” Shinyeda claims — and boosted Motorola’s share of the handset-chip market significantly.
Between these two stories runs a common, golden thread. Every business — I don’t care if it’s proteomics or security-guard services — both uses and produces knowledge. You need a certain set of skills, and you draw on certain intellectual properties and know-how. You improve and create those capabilities in the ordinary course of business — you get better and learn new stuff. Sometimes knowledge is an almost incidental by-product — if you can make a turbine, you can take it apart and fix it. Sometimes knowledge is fungible — what you learn in making chips for yourself can be used to make chips for others or to teach them (for a price) how to make chips as you do. Either way, the knowledge you acquire and use in one line of business often can become the basis of another business as well.
In other words, there’s more than one way to make money from skinning a cat. Today growth opportunities won’t be found by simplemindedly “adding a service package” or “becoming a solutions provider” or “leveraging the power of your brand.” It’ll be found by looking deeply into your company to discover what intangibles you have — a knowledge base, a customer base, an installed base, whatever. Those might allow you to get to market quicker, acquire customers cheaper, or in some other way get an edge over your competitors. You can sell a turbine or a handset only once, but you can sell knowledge again and again, in different forms. Most people haven’t figured that out yet, but I’ve just let the cat out of the bag. Now go skin it.