CHAPTER 5

Principle Three: Growth to Growth

AT A GLANCE

WE ARE USED TO growing our companies by selling more stuff to more people. But how can we keep up with that strategy in the world of increasingly stressed raw materials? It’s time to make money by growing value and relevance. Stuff can wait.

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair.” These are the famous words with which Charles Dickens began his Tale of Two Cities. The world was approaching the end of the 18th century, and an entirely new idea was captivating minds and hearts all around. What if the fate of humankind was in its own hands?

“The idea that humanity could turn tables on economic necessity—mastering rather than being enslaved by material circumstances—is so new that Jane Austen never entertained it,” wrote Sylvia Nasar in her extraordinary book Grand Pursuit: The Story of Economic Genius.

The typical Englishman [of Austen’s times] was a farm laborer. According to economic historian Gregory Clark, his material standard of living was not much better than that of an average Roman slave…. Clark estimates that the British farm laborer consumed an average of only 1500 calories a day, one-third fewer than a member of a modern hunter-gatherer tribe in New Guinea or the Amazon…. Yet the typical Englishman was better off than his French or German counterpart…. In Jane Austen’s world everybody knew his or her place, and no one questioned it. A mere fifty years after her death, that world was altered beyond recognition.

Every time I reread these words, they never fail to shock me. From the days of Roman slaves to the era of my great-grandfather, the world stood still. And then, a new world was born. Jane Austen, who passed away in the summer of 1817, did not live to see this new world, where the quality of living of the absolute majority—now rigorously measured and monitored—improved beyond recognition. Nasar continued,

The late Victorian statistician Robert Giffen found it necessary to remind his audience that in Austen’s day wages had been only half as high and “periodic starvation was, in fact, the condition of the masses of working men throughout the kingdom fifty years ago”... It was the sense that what had been fixed and frozen through the ages was becoming fluid. The question was no longer if conditions could change but how much, how fast, and at what cost. It was the sense that the changes were not accidental or a matter of luck, but the result of human intention, will, and knowledge.¹

Today, we know this body of knowledge as economics.

Hard to believe? Saving the world’s poor and advancing the fate of the human race is hardly what comes to mind when one thinks of economists. (That might just be my mind, though.) But the original aspirations of the science are very clear: to be, as one of the greatest economists, John Maynard Keynes, put it, “the trustees, not of civilization, but of the possibility of civilization.”²

Somewhere, somehow, something went terribly wrong.

Here is what happened. In the effort to give the newborn field a solid scientific underpinning, the legendary economists of the late 19th century turned to physics to borrow some of the most modern equations of their time. The problem: the model they’d borrowed was proved wrong. Science historian Robert Nadeau explains:

Now legendary economists—William Stanley Jevons, Léon Walras, Maria Edgeworth and Vilfredo Pareto—developed their theories by adapting equations from 19th-century physics that eventually became obsolete…. The physical theory that the creators of neoclassical economics used as a template was conceived in… 1847 [by the] German physicist Hermann von Helmholtz. [He] formulated the conservation of energy principle and postulated the existence of a field of conserved energy that fills all space and unifies these phenomena. Later in the century James Maxwell, Ludwig Boltzmann, and [others] devised better explanations for electromagnetism and thermodynamics, but in the meantime, the economists had borrowed and altered Helmholtz’s equations.³

The approach used by the economists was simple and (let’s face it!) wildly unreasonable: they simply substituted economic variables for physical ones. Energy was replaced by a measure of economic well-being titled “utility”; potential and kinetic energy was substituted by the sum of utility and expenditure. A number of renowned physicists and mathematicians made it clear to the economists that there was absolutely no reason for making these swaps, but the economists left the criticism untouched and proceeded to claim that economics had now been transformed into a truly scientific and highly vigorous discipline.

As Scientific American put it, “The economist has no clothes”!⁴ Among the long list of assumptions made by the founders of neoclassic economics are a few crucial ones. They imagined the global market as a closed system, where natural resources, along with any potential damage to the natural environment, were set outside the boundaries of the system (the term externality might sound familiar). And more important: the mathematical models that have served as a foundation of modern economics assumed that there were absolutely no biological limits to economic growth. And thus the myth of never-ending, teeth-grinding, quarter-over-quarter growth was born.

But I am not here to debate the philosophy or theory of growth.

The debate on growth has been around for centuries. Indeed, the “to grow or not to grow” debate among scientists, politicians, and business leaders continues to this day. In the meantime, most of us wake up in the morning with a clear task at hand: growth! Full stop. No debate. Whether it is sales, productivity, or personal development, business today continues to measure its progress by growth—the growth of the bottom line, to be precise.

As a manager in Atlanta, Delhi, or Copenhagen, you might ask yourself, where does our growth come from? Whenever I ask this question in companies around the world, managers give me a clear and consistent answer: selling more. We are expected to sell more, day after day. Yet in a world constrained by every type of resource limitation, including landfill space, it is obvious that selling more stuff to more people as the primary growth model is rapidly becoming obsolete. Companies championing the Overfished Ocean Strategy have found another way.

By the Hour

We have all heard this tale: the economy does not stand still; it evolves over time. From agricultural to industrial to service economy and beyond, we are moving day after day. What is not being told as often, however, is that the shift from one type of economy to another is not as clear as it seems. More precisely, what we produce may stay the same. But what we sell changes dramatically.

Consider, for example, the 50-year-old story of Rolls-Royce. The name might ring a bell—after all, Rolls-Royce luxury cars are among the most recognizable brands. What the company makes most of its money on, however, is not cars—it’s engines (for planes, first and foremost).

The production of airplane and other power engines is, by any means, a function of the industrial economy. It is the most bricks-and-mortar (and a lot of metal) business you can imagine. And indeed, that is what the company produces. But it is not what the company sells.

In 1962, Rolls-Royce developed an innovative solution to support the Viper engine for one of the business jets. Named Power-by-the-Hour, it offers a complete engine and accessory replacement service on a fixed-cost-per-flying-hour basis. In essence, the company took a product and turned it into a service. As a result, both manufacturer and operator got a benefit by paying only for engines that performed well, while Rolls-Royce took control of all the maintenance revenues otherwise enjoyed by local maintenance providers, along with the entire end-of-life raw material, allowing for much easier reuse of the valuable resource.

In 2002, the signature Power-by-the-Hour service became part of a much-extended service offering: Rolls-Royce CorporateCare. Among new features are Engine Health Monitoring, which tracks on-wing performance using onboard sensors; the option to lease engines to replace an operator’s engine during off-wing maintenance, thereby minimizing downtime; and much more. Now, plane operators are able to manage the risk related to unscheduled maintenance events, making maintenance costs predictable. Rolls-Royce gets its engines back—turning line into circle and product into service—all while churning out the same old engines. In 2011, more than half of its annual revenues of £11.3 billion (about $17.5 billion US) came from services.⁵

Rolls-Royce’s example is not the only one in the industry. The Swedish company Volvo Aero does exactly the same—selling service of well-performing aircraft turbines instead of selling the engines themselves. The customer pays per turbine spins in the air, while Volvo takes over the maintenance of the engine, providing staff with strong knowledge and skills related to the specific engine’s functionality. It is a win for the customers, as the service makes it unnecessary for the flight carrier to hire specialist engineers to maintain the engines and optimized performance of the engines, leading to a reduction in fuel consumption. As a result, flight carriers save on costs for employees as well as fuel, and their engines emit less CO₂ as a result of fuel reduction. Volvo gets better revenues along with control of the engine for the entire life cycle.⁶

In the context of the collapsing linear economy, moving from products to all-around solutions becomes the easiest way to find and secure future growth. Selling safe and energy-efficient flight, rather than engines; clean surfaces, rather than chemicals; holes in the walls, rather than hammers and nails—the list goes on.

Mike Brown, former vice president of apparel giant Patagonia, spoke to Fast Company about the paramount importance of looking at your work as service in the context of rapid resource decline. Here is writer Charles Fishman making sense of that conversation:

“The cutting edge, the thing that is getting more traction, is the effort to sell services rather than products,” Brown says. It’s a shift in perspective that can transform a business. It’s IBM selling you computing services—server space, processing capacity—rather than actual computers. A company selling computers wants to sell as many servers as possible, without much regard for the power they consume or cooling they require; a company that sells computer services wants the most efficient, cool-running servers it can make. Companies that are able to turn their business inside out this way find that addressing sustainability issues can change from a burden or cost to an opportunity for efficiency and profit.⁷

The shift from products to services, Brown argues, requires a new way of looking at things, where a company would be driven to innovation and efficiency. If you are a chemical company that shifts from selling chlorine to selling disinfection, all of a sudden you are inspired to conserve chemicals, rather than push more of them to be used by the market; you have new reason to find ways to recover and recycle all raw materials. Fishman’s interview with Brown clearly sparked the writer’s imagination: Indeed, imagine what Nike might be like if it sold “shoe services”π 92

by subscription—the way Netflix rents movies—instead of shoes.

But selling services is just one road to a new kind of growth.

On Selling the Story

I was born in 1986, and our project has been around for barely a year. We are young, and our motto is “The young for the young!” We take underprivileged kids from the streets and teach them how to become cooks. The kids come to Ajdovscina, a small Slovene town, where we have a small restaurant, and learn aspects of economics, psychology, and cooking. We started out with seven young people from all over Slovenia, six of whom are now working. In the second class we have 12 kids. They still have two months until graduation, but two of them already have jobs.⁸

I met Matevz Slokar, founder of S Project, at a large pan-European meeting. Sandi Cesko, the president and CEO of Studio Moderna, the leading multichannel e-commerce and direct-to-consumer retail platform in Central and Eastern Europe (CEE), Russia, and Turkey, was to speak at the panel on innovation that I was moderating—and there was no question that the richest man in Slovenia was the main attraction for the hundreds of participants and journalists gathered. But after a few short remarks, Cesko asked a young man in the audience to stand up and tell his story. Suddenly, the entire auditorium woke up.

The great majority of projects similar to Slokar’s are set up as nonprofits, depending on European Union grants or private donations. In contrast, S Project is set up as a private business with a solid business model. In 2012, the company had one employee but managed to earn EUR 60,000 (about $80,000 US) in revenues. By the end of 2013, the company planned to employ 30 people and make EUR 700,000 in revenues. “Everything that we earn is plowed back into the S Academy. The first initiative was about cooking, but we are developing another one that will be called S Business. It will be a business school at which we will teach young adults age 18 to 25 how to set up a project like the S Project.”

So the expense side of S Project is very clear—teaching young adults—but what is the source of its revenues? What does it sell, exactly?

When the company started, it had no product. But it had something much more rare, much more difficult to find. S Project had a story. “When we set up the project, we did not have selling channels, and we did not have a product either,” said Slokar. “We sent out 100 e-mails to the largest Slovene companies. The chief executive officer of a company called Steklarna Hrastnik, with 750 employees, responded that he would like to help us but he had no idea exactly how. We told him that we could sell his products using our story. This story should increase the company’s profit.”

Figure 4. The Speak drinking glass’s story is the reason why it commands a premium price.

So the story got it all started. In collaboration with Steklarna Hrastnik designers, the S Project team designed a special kind of glass. Speak For A Higher Purpose is a rocking glass—it has a curved bottom that keeps it slightly off-balance. The glass also comes with a stabilizing base, and if turned upside down, it can be used as a candleholder.

“The vision of S Project which is looking for individuals who are apparently unreliable and unstable—however, put through S Academy, they are ‘stabilized’ and prepared for life on their own,” says the company site. S Project’s vision gave birth to the central idea for Speak glass: When you first look at it, “it is unstable and unusual. Fill it with content and it becomes reliable, unbreakable, different, and attractive. And when set on its base it is raised above the average.”⁹

According to Matevz Slokar, an ordinary glass of this kind would sell for around EUR 5. “With our story, it goes for EUR 20.” A gigantic leap in revenues without any additional resource used. That is a new kind of growth.

With the success of Speak glass, S Project got busy designing new collaborations. S Catering was a natural next step: getting catering jobs for large corporations in search of win-win solutions for business and society. And that is exactly how Slokar met Cesko.

Studio Moderna, the company that Sandi Cesko cofounded and has run since 1992, grew out of a single product: a back-pain-relief device named Kosmodisk, sold directly over the phone. By 2007 the company had grown into a multichannel retail operation present in 21 countries with about $70 million in sales—selling many more products to many more customers. And then the world financial crisis hit. By 2013, the company had scaled up by a factor of 10—all the result of organic growth—and had grown to employ over 6,000 people. How exactly did they pull it off?

“The world is definitely changing, dramatically. Economy is a way that we people are using resources to fulfill our desires.” Cesko speaks with remarkable precision and clarity.

This is a very simple explanation, farmer’s logic. And this has shifted in the history many times: from agricultural society to industrial to information, etc., etc. We are seeing this shift happening again. And it is bigger than ever before. And what is very important is that this shift is not driven by the typical forces that worked before, it is not driven by tangible assets, by machinery, by occupation of new territory. Instead, what matters is the intangibles: speed, relationships, the way you do business. Two things happened. One is that this change is not driven by the growth of economy as we know it. Economy was growing because the demand was bigger than supply. Second is that we have faced the limits of Mother Nature. The natural resources can no longer sustain the way we want to live.¹⁰

Tracking these fundamental changes, Studio Moderna started a careful business-model transformation more than a decade ago. First, it moved from seeing itself as a company selling products to a company selling services. Information and education became the center of attention, and products that had the most of it brought in the biggest revenues. But that was not enough. Cesko explains:

The financial crisis has brought one change in the thinking of especially the Western population. Two years ago, the CEO of Walmart, the largest retailer in the world, said that even the purchasing power comes back to the pockets of the customer; they won’t buy the same way as before. People, especially in the West, have enough stuff. Before, we were willing to buy the first car, then the second car, maybe the third car for the family; basic house, bigger house; one TV set; more and more. More is not anymore the key driving force that will make us commit. The new things are being born: it is not anymore about quantity, which is driving the world, but the quality. And the quality resides in our intangible assets. The role of the company is not to produce more and more stuff but to rethink the paradigm of how we work and how we live. In the past, we sold products. Today, we are selling services. But the global overcapacity, coupled with the resource crunch, means something new. We simply cannot possibly sell more and more stuff. Tomorrow, our capacity to sell will depend on our ability to stay relevant. We have to produce relevance.¹¹

Building relevance into everything a company makes is not an easy task. Studio Moderna’s partnership with S Project is one of many experiments aimed at making relevance happen. In April 2013, S Catering and S Academy served guests of Studio Moderna’s Dinner With A Purpose, which brought up an idea for a new collaboration. The multichannel retailer produces a large number of video programs for customers eager to learn healthier cooking techniques. The cook-ware used in the programs is sold through Studio Moderna’s channels, and now the company is partnering with S Project to produce the videos with underprivileged youths playing the central role. S Project also opened a new restaurant in Studio Moderna’s headquarters, and by August 2013 it was already serving 1,000 meals each day across all locations. With quality and price of food comparable to those of existing companies, what truly differentiates S Project is the added value of helping youth with every meal purchased. More projects in product development, leadership development, marketing, and beyond are in the works. Selling stories, selling meaning, selling relevance indeed.

WHAT ARE THE STORIES that define us in light of our customers, employees, and shareholders? And are these the stories we want to tell—and have others tell about us? If the answer to these questions is no, then you must start taking the actions that will replace the old stories. Your success depends on the honesty and integrity of your actions as well as on the emotional impact they make The cynicism created when the “stories” are proved to be false or misleading can be extremely damaging.

JOHN P KOTTER
AUTHOR, CONSULTANT, AND HARVARD BUSINESS
SCHOOL PROFESSOR

The Power of Why

“Why is Apple so innovative?” On the small stage of TEDxPuget-Sound, Simon Sinek speaks with barely contained passion.¹² The author of Start With Why: How Great Leaders Inspire Everyone to Take Action (New York: Portfolio, 2009), Sinek became a darling of the TED movement, and as I watch this talk on a hot Sunday afternoon in August 2013, 11,710,415 people have already viewed it before me. His talk, too, is about selling relevance.

Apple, Sinek asserts, is just another computer company. Like everyone else on the market, they have access to the same programmers, same consultants, same advertising agencies, and same media outlets. Yet somehow, time and again, they are more innovative than their competition.

For Sinek, the secret of Apple’s success is the same secret that drove the glory of Martin Luther King. While millions suffered the abuses of pre–civil rights America, it was King who led a movement that transformed the nation—and the world.

The Wright brothers, who pioneered powered human flight, also faced tough competition. Teams of professionals, many of whom were better qualified and better paid, failed to reach the goal. But somehow, it was the Wrights who managed to break through. Why is that? Sinek’s theory offers one possible explanation: what unites Apple, Martin Luther King Jr., and the Wright brothers is that they all thought, acted, and communicated in the same way—and in a way that was quite distinct from everyone else. This discovery is what Sinek calls the “golden circle”—and it is the very center of his TEDx talk.

Turning his back to the audience, Sinek picks up a marker and draws three circles nestling one inside the other. In the center, he writes the word “Why.” The next circle contains the word “How.” “What” is placed in the last, outer circle of the three.

The why, the how, and the what. According to Sinek, the golden circle explains why some organizations and some leaders are able to inspire while others fall flat on their faces. The secret, he argues, is simple: most people and organizations in the world know what they do and are able to speak about it rather clearly. Some people and organizations know how they do what they do—how they are able to differentiate themselves from others and deliver a unique value or utilize a unique process. Yet very few people and organizations know why they do what they do—and even fewer people are able to communicate clearly what is their reason for existence, the central reason for being, the belief that propels them forward—and deserves the attention of the world.

As the answer to the question of why is fuzzy for most people, it is easier to hide behind the rather clear answers to the questions of what and how. As a result, most of us communicate from the outside in—moving from what to how to why. Sinek illustrates:

If Apple were like everyone else, a marketing message from them might sound like this: “We make great computers [Sinek points at the “What” glowing in the outermost circle]. They’re beautifully designed, simple to use, and user-friendly [Sinek’s hand moves to the middle circle, pointing at the “How”]. Wanna buy one?” Meh… [He drops his hand, never reaching the “Why.”]

And the outside-in trajectory is the way most of us speak to the world. The majority of sales, marketing, and operations—and interpersonal relations—are built around what and how, with little, if any, attention paid to the issue of why. Here is our new SUV (what). It has a powerful motor and more legroom than any other model on the market (how). Here is a great new restaurant (what). It uses local ingredients and focuses on excellent meats (how). It is clear and understandable—but fails to inspire. Is there an alternative?

Here is how Apple actually communicates [Sinek’s hand reaches straight for the center circle with the “Why” waiting calmly in the middle]. “Everything we do, we believe in challenging the status quo. We believe in thinking differently. [He moves on to the second circle of “How.”] The way we challenge the status quo is by making our products beautifully designed, simple to use, and user-friendly. We just happened to make great computers [he finishes at “What”]. Want to buy one?” Totally different, right? All I did was reverse the order of the information.

Sinek’s passionate explanation is an invitation to consider what it is exactly that people buy from us. To put it simply, people don’t buy what we produce—but rather fall for why we do what we do. This approach explains why most people find it natural to buy a computer from Apple, a phone from Apple, an MP3 player from Apple—but we would find it harder to do so from other computer companies, whether Dell, Gateway, or HP. In fact, most of the attempts of other computer companies to follow Apple’s suite failed miserably. Gateway, Sinek asserts, came out with flat-screen TVs, which it has been making for years as computer monitors. Yet few got sold. Same goes for Dell’s efforts to push MP3 players and PDAs: the company has all the capabilities and assets to produce such products, yet few customers buy them. So why does Apple not have such a problem? For Sinek, the answer is simple: people fall not for what you do but for why you do it.

Simon Sinek’s theory of “why” is one way to look at the success of companies like S Project and Studio Moderna—companies that bet their future growth on selling the stories, selling relevance. In the world of limited resources, stuff is overrated. What matters is the ability to look at what you do. What matters is meaning—and the good news is that meaning comes in unlimited forms, with unlimited supply. It does, however, require significant skill and a carefully selected set of tools.

Building Your Tool Kit

Transition from one type of growth to another definitely involves a change of mind-set. A number of different theories, techniques, and approaches have been developed. They might look like a diverse if not an odd bunch, but it is all about trial and error: what works for your company and your industry might be completely irrelevant for another. Here are a few growth-to-growth tools you might consider for your own Overfished Ocean Strategy tool kit:

• I have referred to Trendwatching.com in nearly every chapter so far, as I really do like their unorthodox take on consumer trends. The company tracks a number of patterns in consumer behavior, along with different subpatterns and forces, and all the interconnections between them. The top-level report, which is usually produced once a year as a forecast for the year to come, gives you a big-picture view of what is going on. But dig into each trend and you will find plenty of data, sense making, and examples of business innovation turning the trend into a successful business model. “Localizasian,” “Pretail,” “Newism,” “Flawsome”—these are just a few of the trends on the recent list. You can find more at http://www.trendwatching.com/.

• Moving from product to service is a process that has been tried and tested for a long time. You can find new ideas from a movement that has become known as servitization. A simple Web search will offer you a range of conferences, videos, and articles on how it works. But to start you with clear routes in the right direction, the work of Soren Kaplan might come in handy. See his January 18, 2013, article, “How to Think About Turning Your Products Into Services,” on the Fast Company website.¹³

• While turning products into services is key, going beyond toward relevance and transformation is yet another step up. Among many changes professed to follow eras of the knowledge and service economies, the “experience economy” offers the most innovative takes on the same old routine. The idea of the experience economy is far from new, and a 1998 Harvard Business Review article solidified the approach as the next best thing. The authors used a birthday cake to demonstrate the entire economic progression from agricultural to industrial to service to experience. Baking a birthday cake at home using typical farm commodities, such as eggs, flour, and milk, was replaced by the industrial solution: a baking mixture was prepared for you and sold in a convenient, colorful box. The service economy took over—the entire baking service was provided by the store or a bakery shop—only to give way to professionally orchestrated birthday solutions—remarkable experiences (birthday cake included). What is noticeable is that each transition represents a giant leap in value. The authors explain: “Economists have typically lumped experiences in with services, but experiences are a distinct economic offering, as different from services as services are from goods. Today we can identify and describe this fourth economic offering because consumers unquestionably desire experiences, and more and more businesses are responding by explicitly designing and promoting them.”¹⁴ Experiments with the experience economy might offer you and your company ideas for discovering new opportunities for growth, without any new strain on your supply chain and a subsequent increase in costs. You might start your exploration with the article itself.

Until now, we have been focusing on Overfished Ocean Strategy principles that focus on the factors and forces outside of the company walls—growth being one of them. But to be successful “out there,” we must also get everything in order “in here,” helping the company itself to start working in a new way. The last two principles aim at exactly that: figuring out how the company should organize itself. Planning will be our first stop.