Why do so many growth strategies fail to realize their aspirations, yielding either far less growth than expected or growth that generates no profits?¹ And how can senior managers mobilize their organizations to create growth that is both sustainable and profitable? Our research and work with a range of companies highlights two requirements for profitable growth. Each is challenging in itself. To attain both together is rare, but highly lucrative.

1. Build an engine of growth—an integrated, mutually reinforcing set of growth strategies designed to deliver continuously escalating levels of performance. To do so, management must focus on questions like "How do we get better and better over time?" and "How do we translate every improvement into still higher targets, stronger capabilities, and superior sources of customer value?" This is a dynamic view of growth, and forging a great growth engine takes strong management; "satisficers" need not apply.

2. Proactively identify and manage the frictional forces that restrict profitable growth. This means eliminating, or at least minimizing, growth-induced bottlenecks, of which there are two kinds: imbalances across processes (between product development and order fulfillment, say), and bottlenecks within processes (such as overloaded testing resources in product development). Close attention to controlling frictional forces is vital for at least two reasons: first, a growth engine that revs faster usually creates more friction; second, multiple performance-limiting frictional forces call for an integrated plan of attack.

Combining both of these strategic elements lays the foundation for achieving turbocharged profitable growth (Exhibit 1). Going aggressively down either path in isolation—focusing either on the engine or on the sources of friction—is likely to produce disappointing results. Without lubrication, a fast-revving engine will soon tighten up and seize, yielding unsustainable growth or even "boom-bust" behavior. Conversely, simply to remove friction releases little growth because the engine is too weak to power real improvements. Friction-focused approaches are also liable to shift a reigning bottleneck from one process to another rather than eliminate it entirely.

Fortunately, real-life success stories of turbocharged profitable growth do exist. Take Intel, which has built up an 80 percent market share in microprocessors for PCs over the past 15 years. One commentator even predicted that it could become the most profitable company in the world.² With 35 percent annual compound growth in after-tax profits, the company’s growth is certainly turbocharged (Exhibit 2). So what did Intel do?

First, it paid attention to three crucial processes in establishing its engine of growth:

• Devising top-performing delivery mechanisms. Intel invested heavily in microprocessor R&D and wafer fab capacity to cut commercialization cycle times for powerful new products such as Pentium. It achieved 12- to 18-month time-to-market advantages over its closest competitor. What made this an engine of growth was Intel’s premium pricing early in the product life cycle, coupled with its high market share and aggressive improvement targets. The result: ample revenues to reinvest in doing it all over again.
• Proactively shaping industry structure. After Intel has introduced a new-generation product, it drops prices on the old generation by 50 percent or more at the point when competitors are ready to launch their new products. In this way, it quickly relegates its rivals’ new products to old goods that command low prices. And the resulting modest profits limit competitors’ ability to invest in R&D and manufacturing capacity, allowing Intel to sustain its lead.
• Stimulating new market demand. Aware that producing ever mightier microprocessors can outstrip consumers’ need for computing power, Intel has built into its mandate multiple efforts to stimulate demand for greater microprocessor capacity. It has helped produce many of the Application Program Interfaces (API) that link computers to telephones and faxes; devised new standards for more powerful communications busses; and proposed standards to accelerate multimedia software programs.

Second, Intel has been equally assiduous in anticipating and removing friction. When the Pentium microprocessor came out, for example, the company soon noticed that many PC hardware OEMs had difficulty in designing around its more complex architecture. Market acceptance was thus inhibited by assimilation capacity—a clear threat to a growth engine that depended on rapid product introduction and ramp-up.

In response, Intel began supplying enabling components (chipsets and motherboards) to help PC OEMs accommodate the Pentium. Not only was a potential problem averted, but a source of friction was arguably converted into a new advantage. As more OEMs grew to depend on Intel solutions, the company’s role as a de facto industry standard setter expanded.

Intel has been far more focused than most companies on managing both engine and friction elements. Two further cases show the pitfalls of overemphasizing one or the other:

Strong growth engine but weak lubrication of frictional forces = unsustainable growth. One specialty chemical producer had an ambitious aim: to become the world industry leader from its solid position at number 3. It set clear growth targets and aligned managers’ incentives. First-year sales and profits rocketed; in the second year, however, they began to tail off. After three years, jubilation at reaching number 1 was subdued by the realization that profits had plummeted to a net loss, despite large gains in volume and market share.

What had happened? A set of frictional forces had taken over. First, in a technology- and service-intensive business, commitments to new customer programs outstripped the capacity of existing information systems to track and understand customer profitability. As a result, the quality of pricing and customer targeting decisions deteriorated.

Second, in their zeal to build position, the company’s marketing and technology organizations in the US, Europe, and Asia Pacific committed separately to new product grades that made their product slates progressively more individual. Product extensions stretched technological resources, and worldwide technology platforms gradually eroded. This fragmentation reinforced the trend toward unique regional products and manufacturing processes, setting a downward spiral in motion.

Third, sophisticated customers became adept at playing off hungry suppliers in price negotiations. Ultimately, the company’s neglect of these emerging frictional forces stopped a dynamic growth engine dead in its tracks, and a painful boom-bust period ensued.

Weak growth engine with regular lubrication of frictional forces = constrained growth. A telecommunications company facing deregulation saw that it needed to cut costs and grow revenues. After slashing staff numbers, it became the darling of Wall Street. It ran regular sales campaigns to boost revenues for new services such as voicemail and second line installation. Profits rose briefly, but then, despite strenuous efforts, refused to budge.

With hindsight, several lessons became clear to management. First, it had cut costs at the expense of training and by providing incentives for the most mobile, productive employees to take early retirement. Skill levels had fallen, limiting the company’s scope for revenue capture.

Second, sales campaigns were making system bottlenecks worse. The evidence was plain: declining accessibility to customer calls, high error rates in the face of expanding workloads, and an increase in missed appointments. As multiple sources of friction took over, the company’s growth engine stalled.

What message can we draw from these case histories? Put simply, that senior managers seeking profitable growth need to develop cohesive strategies to build their growth engine and understand and manage frictional forces. Not either; both. This process must be rooted in powerful insights into the drivers of customer satisfaction and a thorough understanding of competitive and industry dynamics. It must be regarded as a continuous effort, not a one-off planning event. Early success in building the growth engine will inevitably reveal new opportunities; equally, each step will expose and trigger new sources of friction.

The concepts of the growth engine and frictional forces are not only powerful, but easy to understand and communicate. They provide a basis for aligning an entire organization around the design of a profitable growth strategy. Companies embarking on such a strategy will find that the promise of economic gains and the sense of organizational excitement are palpable, reinforcing the prospects of still greater success. Winners will move boldly on both fronts. Losers will try narrow, cautious strategies that risk delivering neither growth nor profitability.