In this post, I wanted to share an interesting piece about how strategic growth initiatives pay off written by Thomas Doorley, Chairman & CEO of Sage Partners, with his permission. Sage Partners has followed growth-value relationships since the publication of Value-Creating Growth (Doorley & Donovan) in 1999.
As we’ve clawed our way out of the global recession it is now time to reset the strategic agenda. In spite of continuing uncertainty about many elements of the economic landscape, e.g. the lack of growth in the Euro-zone, US economic policy and regulation, and sinking oil prices, it is time to refocus on how value gets created, namely, by growing. Sitting on cash and sending growth capital out to shareholders works in the short term, but the message it sends—“We don’t know what to do with the cash. You take it.”—compromises value creation. When CEO Meg Whitman announced her intention to split HP into two parts, she gave a charter to HP, Inc, the printer division, to generate cash and send it out to shareholders. In so doing she defined a liquidation strategy. While most CEOs are not as public and candid in their financial strategies as Meg Whitman, the result is similar.
In order to redirect strategic initiatives, to rebuild growth engines, there are two preconditions. First, CEOs have to believe growth pays. The facts say so. The results are consistent and staggering. For example, looking back over the past three years, at companies with market caps above $1Billion, the value of growth (as measured by TSR–total return to shareholders; the sum of growth of market value + dividends) is clear:
1) Companies growing at 10%+ grew TSR 1.6X the rate of those growing at the rate of GDP or slower;
2) The 10%+ companies grew TSR 4.5X the rate of no-growth companies;
3) The target rate for significant value acceleration for S&P 500 companies is 7% per year–not too high a bar.
When CEOs embrace these facts they can turn their attention to how to capture growth. This is not an easy task. It is especially challenging after a prolonged period of stagnation.
Second, CEOs must get their Boards to understand that to reset the growth agenda and rebuild growth capabilities will take time and resources. Not too long ago, a major technology company we know decided it would change itself from a commodity producer of me-too products with a low price/value proposition, into an Apple-Samsung like innovator. They took many of the right steps–they formed a team to figure out how innovation works, hired an innovation-consulting firm to help and invested substantial sums to retrain its people to be creative. They began a journey to become more innovative. However, they neglected to get their Board to buy in deeply and join the journey. As the timetable to show results began to slip, which is a common occurrence, the Board reacted badly, firing the CEO and disbanding the effort. This sad example underscores the need to ensure that the Board, which is wielding increasing influence these days, understands the goal, the effort required and is along on the journey. Any sharp shift in strategic focus requires an aligned Board.
Successful companies build a program to grow we call Opportunity Strategy & Oversight (OS&O). It begins with a deep belief that opportunity—its identification, nurturing and commercialization—is at the heart of value-creating growth. To be successful the organization must learn how to focus on opportunity as if it were an equal operating function, like marketing, manufacturing or finance. The opportunity game plan that is developed and executed flows through all layers of the organization:
1) The senior executives develop opportunity-seeking strategies that clarify those opportunities that align with strategic goals, competitive strategies and competencies;
2) Managers develop capabilities to create/identify, select, nurture, and commercialize opportunities;
3) Boards get involved as well by practicing active oversight of these strategies, capabilities and performance.
Done this way the program delivers results. Companies with a well-tuned opportunity game plan outperform their competitors without one.
A process to reboot begins at our first step, by making the case that growth pays for the enterprise. Understanding the magnitude of the payoff builds commitment to taking the journey. Each enterprise will have its own unique value of growth. In HP’s case bringing its growth toward the norm for companies with its level of profitability would generate more than $20 Billion of value.
Growth pays. An effective opportunity game plan is the proper course of action.
Thomas L. Doorley, III is Chairman Sage Partners, a Strategy & Governance advisory firm. www.sagepartners.net