There's growth, and then, there's growth. Many companies are obsessed with quarterly earnings, a fixation catalysed by the almost universal call to increase shareholder value, and reinforced by the intense scrutiny of hard-nosed investors and analysts. Such short-term focus can be fatal to a company. The temptation to downsize, re-engineer, or adopt other cost-cutting measures to meet market expectations can lull even seasoned managers into a profit trap. This may generate respectable shareholder returns in the short-run, but it will fail to exploit the company's potential to generate long-term shareholder value.

Nor is unbridled growth the key to value creation. The largest Korean chaebols, LG, Hyundai, and Daewoo (before it was broken up), were active in several industries in their quest for growth. Their revenues grew steadily; shareholder value did not.

Companies like German chemical and pharmaceutical giant Bayer have tried a mix of the two approaches. In the late 1980s, Bayer focussed on revenue growth and acquired companies in areas outside its core business. When this led to a loss of shareholder confidence and hindered access to capital, Bayer switched its focus to the bottomline. The company succeeded in reducing costs, but performance and motivation suffered. Faced with a shortage of growth opportunities, Bayer realised that neither simple revenue growth, nor aggressive profit-focus optimises shareholder value. Today, it is striving to balance the two by exploring growth opportunities in life sciences while keeping an eagle-eye on costs.

India Inc has witnessed both phases. First, the spate of diversifications of the late 1980s and the early 1990s, and then, the efficiency-at-all-costs drive of the late 1990s. Today, every Indian CEO understands the importance of value-building growth. It isn't easy, but grow their companies and add value they must. Capital, talent, and partners flock to companies that manage to achieve a balance between the two. Gone is the penny-pinching mindset that encouraged companies to rationalise everything including their ambitions; most CEOs recognise that it is impossible to 'shrink to greatness'.

A Strategic Balancing Act

Balance holds the key. When companies find the right balance between profit and growth as strategic co-objectives, they achieve what we refer to as value-building growth. By outperforming their peers in terms of growth while keeping an eye on the bottom line, the "value builders" create the greatest sustainable shareholder value over the long term. And that is what counts today, and will count in the future.

Companies like Alcoa, Citigroup, and Nokia have made great strides in cracking the growth code. The way in which these and a few other companies have developed, pursued and exploited their growth opportunities, provides us a useful perspective from which to grasp the basics of value-building growth. Forget regional differences or industry constraints, the strategies adopted by these companies have much in common with the courses charted by merchant sea captains.

Profit-seekers: Profit-oriented captains shuttle between safe, known ports and earn money by optimising their payload and exerting tight control over their expenditure on crew and equipment. They sometimes behave as if they have no need to change their compass settings. They see no new ports to sail toward, no frontiers to conquer, and no new worlds to discover, explore and map. They keep trying to make the same thing better.

Simple growers: Some captains, in contrast, see new ports everywhere they look. They pay less attention to the size of the load or its nature, even to the state of their crew. They simply focus on keeping the fleet of ships sailing to as many ports as possible. 'More' is the watchword, not 'better'.

Under-performers: Some captains make it to the port too late, with too little on board, or make the run with second-rate crews. They may turn a small profit, but they never have the best places to dock, the best access to shipping lanes, or the best connections in the right places. Neither more nor better works consistently.

value-builders: A fourth group of captains, however, decides to strike an uncompromising balance on all fronts. They secure the right payload from the best customers, manage their crew, and constantly adjust their mix of old, established ports and new ports with high potential. They combine more with better.

Companies that seek to maximise their profit by any means will have a hard time arguing their case before an astute board of directors. The mere optimisation of costs induced by a controller-driven mindset impedes growth in the short term. And if allowed to take root over a long period, this mindset creates an organisational culture that discourages risk-taking and inhibits growth.

At the other end of the spectrum, companies that grow for growth's sake encounter severe difficulties. There are countless examples of unhealthy and unsustainable growth. Nintendo, for instance, discovered that its efforts to grow bigger in the gaming industry didn't always translate into enhanced shareholder value.

Value-Building Growth

Recognising the importance of this issue, A.T. Kearney undertook a global initiative to investigate the characteristics of successful growth. Our analysis examined more than 1,100 companies worldwide over a 10-year period, covering 24 industries in 34 countries and including more than 80 in-depth case studies. In addition, we conducted over 50 interviews with CEOs and senior executives of leading companies, including Bayer, Ericsson, Federal Express, General Electric, Coca-Cola, Mitsubishi Chemical, Sprint, Norsk Hydro, and RWE.

The final analysis challenges traditional thinking about the way topline growth should be viewed and understood. To gain new insights about value-building growth, we developed a matrix showing four distinct growth types. Companies were categorised by their performance relative to industry average in terms of both revenue and shareholder value growth (See The Value Growth Matrix)

The value-builders achieve both above-average revenue growth and above-average growth in shareholder value over a long period. These companies constantly try to extend their advantage and push themselves further into the upper right of the matrix, trying to put as much distance as possible between themselves and the centre. They do this by consistently finding ways to stay ahead of their peers in the competition for growth opportunities, capital, and talent.

The profit-seekers show revenue growth rates below their industry average, although they still create significant shareholder value. The simple growers manage to outperform their peers in generating revenue, but over time the once-anticipated profits fail to follow. These companies rank below their industry peers in creating shareholder value. The under-performers are below average on both counts, revenue growth and shareholder value creation. They move in exactly the opposite direction as the value builders.

An exercise in positioning well-known transnationals in the growth matrix (See Global Companies: Growth Portfolio) throws up some interesting findings. It shouldn't surprise anyone that Microsoft is a clear value-builder. In a sector in which many companies have experienced rapid revenue growth and spawned legions of paper millionaires, Microsoft still outperforms its peers on a regular basis. If we were to combine industries within countries or regions, we see the emergence of clusters. These clusters mirror the economic development of a particular region, viewed over a defined time period. US-based technology companies like Dell and Microsoft, for instance, have continued to ring in double-digit growth rates and have run right through barriers that have caused other companies growth to slow down or stop.

A cluster of German conglomerates distinguishes the profit-seeking quadrant. Latecomers to the party, they have tried to make up for lost time by keeping their sights on year-end results. After World War II, German companies unfurled their sails and regained world leadership in many industries by focusing on innovation and geographic expansion. Now, their focus has shifted dramatically. Growth is a secondary priority for them, and has been for some time. They may have grown cautiously, but have watched much of their competitive advantage erode.

A few Korean chaebols will go down in history as illustrations of the damage simple growth can cause. In their efforts to grow revenues, these companies ran up huge debts that left them vulnerable to a whole range of financial and economic shocks.

Finally, the turbulent waters of the underperformers quadrant is home to a few Japanese carmakers and several Japanese financial institutions. These companies did indeed generate some revenue growth and shareholder value, but they consistently lagged behind their European and American peers in those areas.

The Fundamentals Of Value-Building Growth

Since growth is a complex phenomenon, we found a variety of growth strategies, some of them specific to the cultures and companies under study. Nevertheless, we could identify basic concepts that seem to hold true regardless of geography, industry, or company situation. In particular, we found five fundamentals of value-building growth (See The Fundamentals). We will discuss each of these in detail in our next article.

research & inputs from Anshuman Maheshwary, business analyst, A.T. Kearney.