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The Boston Consulting Group’s annual value creators report shows that many companies can fund far more growth than their traditional core markets can sustain.
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BCG: Successful value creation requires putting a careful spotlight on growth
After years of retrenchment and restructuring, many leading global companies are now focusing on growth. But not all companies that are growing successfully are delivering superior shareholder value, according to a new report from The Boston Consulting Group.
Spotlight on Growth: The Role of Growth in Achieving Superior Value Creation is the eighth in BCG’s annual Value Creators series. The report analyzes total shareholder return (TSR) at 1,056 global companies across fourteen major industries for the five-year period from 2001 through 2005. The most successful performers combined major improvements in sales growth with parallel improvements in margins, valuation multiples, and distributions of free cash-flow. By contrast, while many average-performing companies also grew significantly, the TSR achieved through growth was undermined by poor performance on these other dimensions of value creation.
“Senior executives are right to focus on growth, because it is critical to delivering above-average shareholder value over the long term,” said Eric Olsen, global head of BCG’s integrated financial strategy sector and a co-author of the report. “However, the relationship between growth and shareholder value is neither simple nor straightforward. Growth can destroy value just as easily as create it. And different types of investors value growth differently. Depending on a company’s investor mix and the type of growth it pursues, capital markets can end up punishing a company’s growth strategy rather than rewarding it.”
For many companies, the growth challenge is exacerbated by the fact that their internal sustainable growth rate is far higher than the forecasted growth rate for their industry. “Profits as a share of GDP are at record-high levels,” explained co-author Daniel Stelter, global leader of BCG’s Corporate Development practice. “Many companies find themselves in a situation where they can fund far more growth than their traditional core markets can sustain. As more and more companies compete over a limited set of growth opportunities, actually creating value from growth will become more difficult.”
Spotlight on Growth examines how senior executives can address this challenge. The report provides an analytical framework for making strategic tradeoffs across three key dimensions of value creation:
— Improvements in fundamental value (long the focus of traditional value management)
— Improvements in near-term valuation driven by investor expectations
— Improvements in the distribution of free cash-flow to investors
“Companies can’t think about growth in isolation,” said co-author Frank Plaschke, head of BCG’s Value Creators research team. “The ultimate impact of growth on a company’s total shareholder return will depend on the interaction between growth and the other dimensions of what is an integrated system of value creation.”
Using examples drawn from BCG’s client work, the report describes how companies can manage the critical tradeoffs around growth and set growth targets that successfully drive value creation.
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