Good morning.
How can CFOs maintain a growth mindset during uncertain times?
That was the topic of discussion during Fortune’s The Emerging CFO virtual event on Wednesday, in collaboration with Workday (a CFO Daily sponsor). “I think the essence of the growth mindset is CFOs who have the ability to help their companies fire on multiple growth cylinders,” said Ishaan Seth, a senior partner at McKinsey, who participated in the event along with the CFOs of Adobe, e.l.f. Beauty, and TD Bank.
There are three aspects of a growth mindset, Seth told me during our discussion: growing the core businesses, which includes customer retention and acquisition; growing into adjacent businesses and products, geographies, or customer segments; and creating new breakout businesses.
The best growth leaders are “those who can help the company operate across all three of those at once," said Seth, global co-leader of McKinsey's banking practice and leader of the North American banking practice.
But how exactly is that done? McKinsey analyzed the growth of about 2,500 public companies, which included looking at 120 variables around financial statements and performance over 20 years, he said. The research, Seth said, pointed to five factors that enabled companies to "deliver outsized economic profit growth and market growth relative to their peers":
—Resource reallocation. "The threshold that matters is about 60% of your resources reallocated over a decade,” Seth said.
—M&A and portfolio refresh. About "two to four transactions per year, right—a programmatic steady clip," he said. But no single transaction that's over 30% of your market cap.
—Productivity and efficiency ahead of your peers. "You've got to be top quartile for that," he said.
—Technology and innovation. "Generating a return on that innovation ahead of your peers,” Seth said.
—Margin expansion through a product refresh.
Taking risks, choosing innovation
My colleague Geoff Colvin asked the CFOs how they operate with a growth mindset.
“We've had 17 consecutive quarters of net sales growth,” said Mandy Fields, SVP and CFO at e.l.f. Beauty, an Oakland, Calif.-based mass beauty company. “And in our Q4, we had, almost 80% sales growth.”
What's happened over those 17 quarters?
“We've increased our marketing investment over the last four years from 7% of net sales to 22% in our last fiscal year,” Fields said. “And a lot of that has been not being afraid to take risks. That’s a big part of a growth mindset.”
She continued: “I think about our entry into TikTok, for example. In 2019, not a lot of people were on TikTok. We took a risk at that time. We put dollars into that platform and were amazed by the engagement that we saw there.” The brand has become the most popular among Gen Zers.
Dan Durn, CFO and EVP of finance, technology services, and operations at Adobe, said consistent reinvention and customer engagement are vital.
“We're constantly looking at innovation," he continued. "There's a velocity within the company that's very relevant. And there's clarity around what we're going to innovate and grow organically. And then: How do we complement that in a smart fashion with inorganic growth?"
Durn pointed to Adobe's recent acquisitions of Frame.io and Workfront.
"These are great technologies that complement the core product positions we have in the way we serve customers,” Durn continued. “We're going to primarily be an organic, innovation-driven company, but we will complement from time to time.”
Durn also shared another perspective on a growth mindset. “My concept? Be constructively unreasonable,” which points to an exploration process that’s not always typical, and gets teams to "lean into problems and deliver more than they thought was possible," according to Durn. "When you think about innovation and bringing it to market, you can't Gantt chart innovation," he said. "At Adobe, we've got a greater than $200 billion [total addressable market] in front of us. Now the question is how do we unleash the capabilities and take advantage of those opportunities? And it puts people into the right mindset."
Xihao Hu, the CFO at TD Bank in the U.S., offered yet another perspective.
"We take advantage of, when we can, using our balance sheet to generate as much revenue, as much growth, as possible," Hu explained. "But at the same time, we’ve also learned that you can not rely upon the macro environment. Rates will eventually come down, and people predict a rate decline probably in the next year or so. We're constantly trying to get into innovative areas, such as products or back office innovation to trim out costs." For example, Hu said, in early May, TD Bank launched two credit card products "very different from what's existing in the market”—TD Clear and TD FlexPay.
“It's a tougher environment now when it comes to deposits, and TD is one of the biggest deposit takers in the whole country,” he said. “We actually are working on enhancing our strategies to make sure we not only defend our turf but can continue to speed up our customer acquisitions and retain the loyal customers.”
Sheryl Estrada
sheryl.estrada@fortune.com
