CHANGING THE WAY WE HANDLE CHANGE

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The Wall Street Journal reported recently that most businesses have downsized, cut payrolls, advertising budgets, etc., and have increased profits handsomely. That's the good news. The bad news is that most firms, according to WSJ, have lost their capacity to pursue and achieve quality business growth, perhaps forever.

With a persistent lack of quality growth, more advertising accounts are being put into review. Marketers are searching for the quick antidote to their chronic non-growth dilemma. To the detriment of future agency growth, quality business growth by clients will remain elusive.

Here's the dilemma: Marketers aren't growing old brands, or new brands, and they can't cut costs much more. They can't raise selling prices often and steeply without triggering a consumer revolt. To compound the problem, the financial community will not allow CEOs to invest money today to grow innovative profits for tomorrow.

Today's executive compensation system is unwittingly designed to reward lavishly the growth of easy profits while limiting the growth of quality profits.

Three things must change. Corporate America must change its attitudes about change; a new organizational structure must allow the benefits of change to happen; and its executive reward system also must change.

We must adopt a parallel accounting system that would over-compensate CEOs for achieving growth in innovative profits while under-compensating them for achieving easy profits through easy price hikes and easy downsizing.

If we're to change management attitudes towards change, new forces for change must be embraced. Today the early signs of future changes are usually invisible to most marketers. Yet almost everything of significance that will happen ten years out has its seeds in today's environment. One should practice Displacement in Time, stepping out ten years forward, then turning around to look back, to see and understand the present in different terms.

Nine out of 10 new products fail each year, according to Nielsen data, and we go on inventing new product failures by pitting new product managers against "old product" managers-managers who fear new product launches will cannibalize their profit base.

But what if a company splits itself into a "Today" and a "Tomorrow" company? The former uses its marketing resources, including R&D, to study, analyze and translate the forces of change in the most imaginative ways. It renews today's existing brand's strengths while gearing up to anticipate tomorrow's consumer needs. And the "Tomorrow" half would be charged with inventing imaginative new products, creative enough to eliminate each of the company's existing businesses.

Remember that Intel's Pentium "creatively destroyed" (a favorite Schumpeter term) every one of Intel's 286, 386 and 486 markets. CEO Andy Grove willingly and slowly destroyed every one of his "today" businesses by creating a new and bigger "tomorrow" business.

Our executive compensation system is another part of the non-growth problem. The current CEO pay-for-performance system, linked to earnings-per-share and P/E ratios, is not really about achieving growth in both innovative profits and repetitive profits.

Simply put, the more easy profits today's CEO can generate from easy price increases, cost reductions and the mortgaging of consumer franchises, the more that CEO is paid. Unfortunately, the more a CEO invests today to grow quality profits for tomorrow, the less that CEO is paid.

This must change if we are to achieve long-range, sustained quality growth.

Earnings per share and share price increases are in reality imperfect measures for determining a CEO's value to long-term growth of innovative profits.

Accounting today treats every dollar in the P&L statement as equal. However, the profit dollar derived from an easy price increase today is worth less to the future growth of a business than a profit dollar earned from having developed a new, loyal, heavy-user, repeat customer in the same year. The profit dollar coming from a simple price increase on the P&L is mercurial. But the dollar earned by creating a new heavy-user customer for an existing or new product becomes a quality profit dollar in that it keeps generating company profits during the new customer's life cycle.

Here is where a parallel accounting system will help. Determining what percentage of the customer base consists of loyal, heavy repeat users is objectively measurable through market research techniques, as are customer-switching patterns and why they occur. We can also measure the elasticity of the consumer franchise base along with image perceptions linked to constant price promotions, etc. These objective measures begin to define what is and what is not "innovative and/or repetitive profits."

A parallel system would break down the official P&L totals into two separate columns, Objectively Measured Quality Profits, and Objectively Measured Quantity Profits. We would retain our traditional accounting system for company tax filings, SEC requirements, annual reports, etc. But the parallel system would provide directors, compensation committee members, shareholders, pension fund managers and investment counselors with new insights into how to evaluate a CEOs net contribution to quality growth.

Parallel accounting also will serve as one of the Tomorrow tools that help hold ad agencies accountable for what they do best-grow the quality of the client's consumer franchise. Tomorrow agencies will be held accountable on two objectively measured criteria: (1) How well they help clients manufacture new quality customers at the most efficient cost, and (2) how well they help clients grow the ratio of innovative profits to repetitive profits, thereby enhancing equity values and P/E ratios. Our non-growth cycle can't continue once these changes take place.

Mr. Hillman is the head of Strategy Workshop Inc., a New York-based market research center.

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