Growth usually is seen in financial terms -- for good reason in the case of most businesses. If you're competing for capital in the financial markets, you probably have to grow profitably at 12 percent a year and have an operating return on assets of 16 percent a year. According to research by Columbia University Professor Larry Selden, that is what it takes to match the performance of the top quartile of companies in Standard & Poor's 500 stock index. Investment capital is necessary to fund new products and services, and to provide the financial incentives that top technical and management talent demands. But even in the overheated world of Internet start-ups, companies in the long run need growth and profitability. Without growth, the imagination, energy, and investment that companies need will dissipate; without profitability, growth is unsustainable.

Beyond the financial realities, however, growth is important for strategic and psychological reasons. The way you create a vibrant organization is to engage the creativity, energy, and commitment of every member of the enterprise. People need ongoing opportunities to use their skills, try new things, and stretch their limits. Those opportunities are necessary for people to be their best -- and are available in sufficient number only when your organization is growing.

A growth strategy is also the best path toward continual innovation. In education, for instance, there has been an explosion of new models and markets for learning, but most of that activity is happening outside of traditional universities -- in companies, in communities, on the Internet -- where the growth impulse is strongest. If universities don't grow and adapt, they will soon become marginal contributors.

How Growth Spurs Innovation

Trilogy Software, which develops sales and marketing systems for large companies, is charting its own route to growth, and creating powerful organizational innovations in the process. Joe Liemandt, its 32-year-old CEO, dropped out of Stanford University to launch the company in 1990. Today Trilogy has nearly 1,000 employees, and his personal stake is worth close to $1 billion.

Liemandt's growth strategy is simply to hire only star performers. He is successfully competing with Microsoft on campus to recruit the best software talent in the world. At the heart of his employee recruitment and development program is Trilogy University, modeled after General Electric's Crotonville management development center. (Liemandt's father worked at GE for many years, and Jack Welch is a close family friend.).

Through his father and Welch, Liemandt saw the impact of stretch objectives, professional development, and open dialogue on workplace performance. But Trilogy takes these beliefs to the limit. The head of Trilogy University, Danielle Rios, has shown that the kinds of programs developed at Crotonville can be pushed much further. Liemandt and Rios work with new college graduates from 8 a.m. until midnight for three months. The students' "action learning" assignment is nothing less than to develop the next generation of products for Trilogy. The program combines R&D and employee development, with weekly evaluations of students' values and performance.

The company hires only 1 in 15 of the people it interviews -- and invests $13,000 in every hire. Yet any recruit whose values or performance do not hold up during the three-month orientation is dismissed -- 6 percent of candidates washed out in a recent Trilogy U. class. And while growth is at the heart of Trilogy's culture, Liemandt does not pursue growth at any price. "We will slow growth down if we find that we're getting close to diluting the quality of our people," he says.

Broadening the Pond

Likewise, in 1995, GE Power Systems' Bob Nardelli drew scant comfort from the company's 50 percent share of the $20 billion market for power generation equipment. He saw that the market was stagnant and that deregulation was creating opportunities for new competitors. Nardelli used the acquisition of Italy's Nuovo Pignone not only to expand GE's presence in Europe, but also to enter new market segments in the oil and gas industry. Today GE Power Systems fishes in a $700 billion pond, encompassing the whole value chain of power generation and delivery, from the wellhead to the end user.

The key to such growth is to serve the new and existing needs of both new and existing customers (see figure). Organizations that satisfy themselves just with serving the current needs of current customers inevitably stagnate. The growth matrix suggests three alternative strategies: filling new needs for existing customers, existing needs for new customers, or new needs for a whole new set of customers. These strategies are simple to conceptualize but difficult to execute. They require you to search not just the external environment but the soul of your organization. New market needs can be identified by looking beyond your (and your industry's) current way of doing business, understanding how customers actually use your products or services, and anticipating changes in the market. New customers may be identified in terms of geography, demographic segment, or market segment.

By 1989, Reynolds and Reynolds based in Dayton, Ohio, had seen the effects of ill defined growth: 1980s-style conglomeration and overseas expansion had sapped its strength and focus. New CEO Dave Holmes believed growth was still the answer, but with a different approach. Working

Holmes supported growth with new planning, goal setting, communications, compensation, and training mechanisms. He also recruited executives from much bigger firms, including Motorola, Procter & Gamble, and Xerox, to bring "new genes" and fresh perspective for the founding-family shareholders who largely set the agenda. With its expertise in information systems management, the company has expanded the pond further to include a new set of customers -- physician groups and health care delivery systems.

Lessons from a Nonprofit

Focus: Hope in Detroit understands the growth matrix as well as any corporation. The organization was founded by Father William Cunningham and Eleanor Josaitis in response to the Detroit riots of 1968. The most pressing need they saw at the time was hunger -- malnourished infants lose as much as 20 percent of their brain power, which may never return. Focus: Hope's food distribution program became the model for the federal Women, Infant and Children program and now delivers food to 80,000 people a month.

Cunningham and Josaitis then stepped up the value chain and asked how to keep people off food lines. The answer, of course, pointed to a huge new need -- jobs. They scanned the environment and saw an opportunity to train machinists for Detroit's auto makers and suppliers. But they soon realized that their customers, the incoming students, often lacked the math and English skills to run complicated machines.

The Limits of Growth

Of course, growth carries certain risks and burdens. That was evident early in 1999 when the share price of Dell Computer dropped nearly 25 percent -- and brought other high-tech stocks with it -- because the company missed Wall Street's expectations for growth. (The company grew by "only" 38 percent from the prior year, not the 56 percent investors had come to expect.) That may seem like an extreme reaction, but when your stock trades at an astounding 100 times your per-share earnings, you have to deliver, or face severe consequences. Indeed, Compaq Computer encountered a similar decline, for similar reasons, several weeks later. The failure to meet investors' continuously rising expectations cost CEO Eckhard Pfeiffer his job -- despite years of phenomenal growth.

It is possible to buy growth through mergers and acquisitions, as we have seen in recent years. But that strategy, too, has its limits. Ford's acquisition of Volvo, for instance, adds several billion dollars to corporate revenues, but that by itself does little to help the people running the F-150 truck or Taurus businesses. They still have to grow their own organizations. Therefore Jacques Nasser, Ford's CEO, is driving for a behavioral shift that permeates the organization.

Role of Leadership

To add value to your assets, you need a vision of where you're taking the institution and a strategy for getting there. You have to paint a clear picture of your destination and the route. That may require a total transformation of the organization, especially when past practices and assumptions forestall growth.

• Ideas -- the products, services, markets, distribution channels, or customer segments that are going to be most important
• Values -- the behaviors and ideals that support those business ideas
• Emotional energy -- the drive, communicated to others, to create positive outcomes
• Edge -- an engagement in the business that allows leaders to make tough, yes-or-no decisions

All of these are essential to asking the right questions about the future and to formulating and implementing a growth strategy. A teachable point of view, grounded in an understanding of your mission, also helps you know when to say no to people, practices, and opportunities that no longer add value to the work of the organization.

The leaders of Focus: Hope, for instance, adhere to a clear point of view and mission each step of the way -- to provide intelligent, practical solutions to poverty and racism, and to respect the dignity of all people. They stay in touch with the needs of the marketplace and are constantly finding new opportunities to add value. Yet they say no to a lot of things. For example, casinos are coming into Detroit, promising to hire inner-city workers. The casinos asked Focus: Hope to train everyone from construction workers to card dealers. Focus: Hope declined, because it would have diverted their resources from the group's primary task. With the death of Father Cunningham in 1997, Focus: Hope also learned that with growth, an organization can flourish even after a leader is gone. Today their 40 managers are learning a disciplined, mission-based budgeting process that is helping them continue to grow the organization.