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The most successful stock-market performers take a holistic approach to generating shareholder value, according to a recent report from The Boston Consulting Group (BCG).
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Balancing Act: Implementing an Integrated Strategy for Value Creation is the seventh in BCG's annual Value Creators series. The report analyzes five-year total shareholder return (TSR) in the period 2000-2004 at leading global companies in twelve major industries. The industries in the study posted returns ranging from 7 percent in travel and tourism and in utilities to -15 percent in technology. But the top ten performers in these industries racked up TSRs that were considerably higher — anywhere from 24 percent in media and entertainment to 70 percent in the automotive sector. This finding illustrates that there is no such thing as a disadvantaged industry. Every industry has top performers that vastly outperform the market average.
Balancing Act describes how these top performers take a integrated approach to value creation by optimizing their performance across three critical dimensions:
* Improvements in fundamental value (long the focus of traditional value management),
* Improvements in near-term valuation driven by investor expectations, and
* Improvements in the distribution of free cash flow to investors.
“Fundamental value, investor expectations, and free cash flow are integral parts of a dynamic value-creation system,” said Eric Olsen, global head of BCG's integrated financial strategy practice and a co-author of the report.
“Changes in any one area can have effects on the others. The basic challenge of value creation is to understand the linkages among these three components and manage the tradeoffs across the system, so that management actions are reinforcing rather than contradictory.”
In general, the best performers in this year's study successfully managed all three levers of value creation. There were only two industries – retail and technology — in which the top ten companies did not deliver positive returns in each area. By contrast, average-performing companies often posted excellent performance on one dimension, only to see those gains undermined by poor performance on other key dimensions of the system. In the pharmaceutical industry, for example, increases in fundamental value from healthy growth were offset by massive declines in valuation multiples.
“Value creation is a bit like walking a tight rope: it is very easy to lose one's balance and fall off on one side or the other,” explained coauthor Daniel Stelter, global leader of BCG's Corporate Finance and Strategy practice. “And yet, as any visitor to the circus will tell you, the skilled performer can do it — and, indeed, make it look easy. Achieving such a balancing act in value creation requires developing an integrated value-creation strategy that addresses these three dimensions of value creation in a comprehensive way.”
Balancing Act also describes a three-step process that companies can use to implement an integrated value-creation strategy. Using examples drawn from BCG client work, the report shows how companies can create a comprehensive TSR fact base, establish an appropriate TSR aspiration, and redesign key management processes in order to translate a value-creation strategy into a company's priorities and practices.
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