Karl Moore: This is Karl Moore of the Desautels Faculty of Management at McGill University, Talking Management for The Globe and Mail. Today I am delighted to speak to Ranjay Gulati, who is a professor at the Harvard Business School.
Good afternoon, Ranjay.
Ranjay Gulati: Good afternoon, Karl.
KM: Ranjay, when we look at it, one of the things we are looking for is high growth – particularly in large firms. This is a huge challenge. What have you learned about high growth, particularly in larger firms?
RG: In particular, I think it is important to separate out organic growth from inorganic growth. Inorganic growth, through acquisitions, is an age-old proposition that is in the hip pocket of the toolkit of most CEOs.
The challenge, however, is organic growth, and organic growth driven profitably. How do I drive growth profitably becomes the challenge. One of the key challenges that many businesses – not all businesses – face is, how do you do that in markets that are becoming more competitive, more commoditized, if you will, because customers have more choices and more information, whether it's global competition, or even local competition, so you have a customer base that has more choices and more information.
You are trying to sell in that market, they are trying to drive down your prices, so there is a pressure on price, which puts pressure on your margins, and here you are, actually trying to grow your business in a profitable way. That becomes a huge challenge in organizations.
This is something that I have been looking at actually for the last decade. I started by looking at the recession, which was the 2008 recession, but I've come to realize that this is a systemic issue today in organizations as we operate in a more globally connected world.
KM: Absolutely, tremendously important – what are some of the practical management lessons you could pass on to C-Suite executives?
RG: It is interesting. In tackling these issues of trying to drive profitable growth, I think in some cases it is going back to business fundamentals. The businesses fundamentals that I have found, one of them, that is a key imperative, is how do I become more aligned and centric around my customers? It is about where you define yourself around your customers and problems. So the focus shifts from, "How can I create only unique products that I can push out the door," to "How can I engage my customers in meaningful conversations?"
Now I would use those conversations to create innovative products to create innovative services, but my emphasis has shifted and it sounds like the same thing – but it is actually different – to start what I call "inside-out," which is product first, to "outside-in," which is customer first, are two very different ways of thinking.
KM: So how do you actually go about doing this?
RG: So now you ask the real question, which is how do you go from rhetoric to reality?
I think this is a tricky issue because whenever you are working around a thing that is obvious or is a platitude – who is going to disagree about customer centricity? – it is really hard to turn that rhetoric into action. It is really tempting and seductive to fall into the trap of doing a lot of rhetoric and hope it leads to action. I think the challenge I've found is people start out with thinking that the problem is, "I don't know my customers and my market and it's an external issue and I need to do CRM," or" I need to hire more marketing professionals," and I have come to realize that the problem is much more internal: The way organizations are structured, the way they are incented and the way they are managed.
If you look at the way most organizations are oriented they are oriented around product, geography and function. Somehow in these three orientations, or axes, or anchors, the customer gets lost and so if I am oriented around geography, or product, or function, I tend to not really understand.
So the internal action that is happening is not optimized around what customers really want. So something as obvious as the fact that business should be there to serve and solve customer problems doesn't happen.