Indian CEOs are now, more than ever before, asking themselves the meaning of true value. What is it that some companies do differently that makes markets and stakeholders hail them as 'valuable'? The market values of many Indian companies have risen and fallen for no apparent reason and while some CEOs are satisfied with platitudinous answers-"The markets are unpredictable", or, more commonly, "It's not us"-some leaders do strive to find that magic ingredient that will keep their companies on the growth path.

As discussed in the first article of this series (See India's Best Managed Company, BT, October 27, 2002), we will try and address this concern drawing insights from our global study on value-building growth. Though our study revealed a wide variety of growth strategies, we identified five concepts that run across geographies, industries or companies. We call these the fundamentals of value-building growth.

Fundamental 1: Strong, successful
(value-building) growth is possible in any industry, in any region, and at any phase of a business cycle

The first fundamental of value-building growth is its universality. Put simply, there is no excuse for not growing. Value-growers can be found across regions, economic cycles and industries. By definition, companies will run the gamut from value-growers to under-performers. Value-growers represent 20 per cent of the companies studied in each region (Asia Pacific, Europe and North America). Across regions, they achieved an average annual revenue growth of 19 per cent and an average annual growth in shareholder value of 22 per cent in the 10-year timeframe of our study (See Revenue Growth Rates Of World Industries).

Companies in sluggish or smokestack industries often use these labels as an excuse for below-average growth, risk-averse behaviour and a fondness for the status quo. Listening to them, it becomes evident that they believe variables beyond their control-the state of the economy, the Russian or the Asian financial crisis, the unforeseen moves of the competition-are responsible for their performance, or lack of it. In short, it is understood that these companies are not supposed to grow.

Yet, our analysis shows that value-building growth can be achieved in all industries. There is a significant range of performance within industries that permits sufficient room for top performance even in slow-growth industries. Hence, value-growers can be found even in very mature industries such as precious metals (North America's Barrick Gold) and construction (Ireland's CRH). There is, as we've already said, no excuse for not growing.

The flip-side is also true. Notwithstanding the column space publications devote to eBay and other dotcom pioneers, our research shows that entry into a hot sector such as computer software, e-commerce or bio-technology does not automatically bestow upon a company the licence to print money-either by issuing shares or by someday turning a profit.

There are winners in every industry; and each has room enough for laggards. Value-building growth is no accident; it is the product of a conscious, constantly monitored process in which success breeds success and companies make their own luck.

Fundamental 2: Strong, stable growth is the decisive driver of share prices

Even today, most senior executives believe the strategy most likely to create outstanding shareholder value is a clear and single-minded focus on efficiency. Our analysis shows that being focused on efficiency did increase shareholder value of profit seekers-companies that put immediate profits above all else, even growth in revenues-at an average annual rate of 14.7 per cent over the 10-year time-frame of the study. In contrast, the shareholder value of value-growers increased at an average annual rate of 22.2 per cent in the same period, an indication that there is a value premium attached to growing a company's top-line. And a company's relative revenue growth and its relative growth in shareholder value show a strong correlation that only becomes stronger over time (See The Growth Matrix).

Profit-seekers run a significant risk by obsessing with efficiency. The risk of falling back toward underperformance is especially acute when a company brings a wave of cost-cutting to a close, or it completes a long and complicated merger integration, only to realise that it lacks new growth initiatives or new ways to turn. Investors punish profitable companies such as Dell Computers only when chances of future growth-not the profit-trend-look shaky.

Value-builders rarely ignore efficiency. They understand the role of growth and efficiency as strategic co-objectives, but they are also aware of how efficient a company can become before the inexorable law of diminishing returns sets in.

Not growing, or growing too slowly leads to brain drain and loss of shareholder confidence, and endangers a company's long-term survival. Our findings indicate that profit-seeking or simple growth (a focus on revenue growth, even at the risk of shareholder value erosion) strategies can only be transitional. In contrast to the 50 per cent of value-growers that managed stay in the 'value-building' quadrant (high revenue growth combined with high value growth) over the 10-year time-frame, only 26 per cent and 14 per cent of profit-seekers and simple-growers respectively were able to hold their relative positions over time. And although 30 per cent of profit-seekers successfully broke out to become value-growers, another 30 per cent fell behind as under-performers. Simple growers face an even higher risk with 63 per cent of the companies falling back to under-performance in the 10-year period.

Clearly, while growth is necessary for sustaining superior shareholder value creation, it is not sufficient. In fact, pure revenue growth can be dangerous since it can destroy value. Simple growers are, on average, even less rewarded by the stockmarket than slow-growers.

But CEOs should not pursue revenue growth simply because the mathematics works out the best. There is also considerable qualitative evidence that investors prefer companies with a record of solid long-term growth trend. Value-builders occupy the first nine spots on Fortune magazine's list of 'America's Most Admired Companies'. Some 26 companies on Fortune's list of the '100 Best Companies To Work For' are likewise value-builders.

Fundamental 3: Innovation, geographic expansion, and risk-taking fuel value-building growth

Companies that maintain (or reach) a position of value-building growth, do so by emphasising innovation, geographic expansion and risk-taking. They continuously redefine their markets and reinvent themselves-both through organic growth and through acquisitions.

Value growers take a 'core' approach. A closer look at how value-growers prosper shows that they focus on securing and stretching their core competencies. They avoid wide-scale diversification and draw the bulk of their revenues and profits by building on their core business. Nor do they divert funds from a successful business to bolster performance in others.

This does not imply that value-growers are one-product or niche companies; in fact, it is just the opposite. They build a range of products and services that rely both on breakthrough innovation and incremental improvements. This explains why value-growers do not cut back on R&D in tough times as a way to enhance their bottomlines. That appetite for innovation influences value-growers to invest, on an average, four times as much in white-space opportunities, as companies in other quadrants.

Geographic expansion is a key multiplier. Value-growers depend heavily on geographic reach for growth. Over the past decade, they have leveraged the opportunities offered by globalisation to their advantage. On an average, a third of their sales growth comes from international sales.

Value-growers are less inclined to grow with the market. They do not merely participate in markets; they consciously define, redefine and extend markets in which others just participate. Value-growers set trends instead of following them; break boundaries instead of respecting them.

What really matters is execution. Companies traditionally follow a combination of internal and external (M&A) growth. Till just the other day, most people believed that M&A, more than growth by organic means, was behind the performance of most successful companies.

Our analysis shows that all companies-including value-growers-achieve only 40 per cent of their growth from mergers and acquisitions. The rest is organic growth. Acquisitions do facilitate rapid revenue growth, but it takes significant management effort and appropriate post-merger integration processes to sustain the results of the merger over time. Consequently, regardless of the mix between internal and acquisitive growth, what really matters is execution, and this is where value-growers excel.

As a group, value-growers show no sign of preferring internal growth to growth through acquisitions. They do both well. The recent case of Alcoa, the world's largest aluminum company, exemplifies almost everything that value-growers do well. Despite a sharp downward trend in aluminum prices since 1995, the company pursued an aggressive programme to boost annual revenues and achieved a topline of $20 billion by the end of 2000 through geographic expansion and rapid growth of applications such as transportation. At the same time, it applied its Alcoa Business System to cut costs and improve efficiency. Alcoa grew internally as well as externally, most notable by acquiring US-based rival Alumax for $3.8 billion.

Value-growers have a stream of products and services in the pipeline based on incremental or breakthrough innovation. This helps them secure and expand their gains in terms of new customers and new geographic markets. Put simply, value growers create opportunities that bottomline-oriented profit-seekers and simple growers do not-and perhaps cannot-on a consistent basis.

Fundamental 4: Growth is spiral-shaped, not linear

Until now we have looked at the snapshots of value-growers. Their years of success in consistently generating top-line growth and ensuring superior share price performance have been condensed into a single dot in the matrix. The real interest, however, lies in tracing a company's movement within the portfolio over a period of several years.

One of the most intriguing aspects of our growth study is this analysis of the dynamics of growth performance (See How The Value Growers Moved). Looking at growth performance over time, it is apparent that most companies constantly migrate between the different quadrants. None of the 1,100 companies in our database was able to sustain value-building growth continuously for 10 years. In fact, only 9 per cent of them managed to sustain value-building growth for more than five years. The detailed analysis of growth and share price performance over time revealed that growth is anything but linear. Instead, we found that the growth evolves in a spiral.

The good news is that companies that have been value-building growers are likely to return to that group after a period of under-performance. The best value-builders seemed to follow a positive growth cycle. They successfully capture the advantages of their privileged positions for further growth and continue spiraling up. Even Microsoft, the poster child of shareholder value creation, did not always outperform its industry peers (See The Classic Case Of A Value Grower). One of the most valuable corporations of the world, GE, also fell well short of the goal of achieving value-building growth year after year. In fact, it spent less than half the last decade as a value-builder.

In periods of consolidation, value-building growers step back and realign their resources, strive to understand the market better, and redefine or refine their growth strategies for the next wave of growth. Nearly 53 per cent of value-growers became simple growers and less than 10 per cent became profit-seekers in such periods. This shows that value-builders are prepared to sacrifice their short-term profitability in order to maintain their growth momentum.

In other words, even in consolidation phases, these companies do not allow themselves to fall back into efficiency mode. They know that once the growth-engine slows down, it often takes years before it can be fired up again. In sharp contrast, when faced with a period of consolidation, profit-seekers usually shut down the growth engine and opt instead for a pure profit-oriented focus that involves heavy cost-cutting and aggressive belt-tightening to meet earnings targets.

Few companies exemplify this growth philosophy more than Home Depot. At the beginning of the nineties, the hardware retailer rode out an economic downturn by undertaking an aggressive geographic expansion, which made it a strong value-grower. As competition responded to Home Depot's redefinition of the market, the company experienced a period in which it pursued new initiatives and ideas in other areas to keep strong growth and ensure earnings, but saw its share price performance lag that of other retailers. The company's return to the position of a value-grower-which it occupies today-was accomplished in part through another wave of geographic expansion, this time beyond the US borders.

The pursuit of sustained top-line growth raises that question of magnitude: what should the speed and timing of growth be when a company enters and maintains its growth spiral? Our analysis clearly showed that value-growers avoid the dangerous yet alluring trap of "the more, the better". They know that the heavy-footed, aggressive approach of simple growers is neither productive nor sustainable. Every company has an optimal growth rate for long-term value creation. This growth rate is unique for every company and even increases for the best of the value-growers. Assessing your growth rate involves looking for symptoms of sub-optimal growth (too fast or too slow).

Fundamental 5: Value-building growth follows a specific pattern and can be learned

The idea of shifting an organisation's strategic emphasis towards growth and away from the bottomline oversimplifies a more complex issue. Questions such as what drives value-growers and what distinguishes them from other companies have no single clear-cut answer. Nonetheless, value-growers do have many things in common regardless of their region or industry.

Our research highlights some distinctive characteristics and behavioral patterns of value-building growers that set them apart from the rest of their peers (See The Most Important Growth Drivers). Value-building growers do things differently. Hence, in following them, developing the missing distinguishing growth drivers and adapting them to the specific scenario, companies can learn how to grow successfully. A company's growth arsenal-the tools and levers it uses to outperform its competitors-has three kinds of weapons: growth determination, stakeholder empathy, and an enabling business model.

One of the most distinctive characteristics of value-growers is that they actively steer and manage their growth with a balanced set of strong drivers, whereas less successful companies tend to be more passively reliant on environmental growth factors.

In our interviews with value-growers, most attributed 90 per cent of their growth to their ability to employ key internal factors in a balanced way. The small remainder they attribute to external factors, implying that they believe they can control their own destiny. In comparison, non-value builders attribute 44 per cent of their revenue performance to external, environmental factors. Many blame a changing market. A value-grower is more likely to change itself rather than blame the market (See Symptoms Of Sub-Optimal Growth).

The bumpy ride of Hennes & Mauritz, the Swedish fashion retailer, to the value-building quadrant shows that balance is not something a company establishes and then ignores. There is no such thing as autopilot on the way to value-building growth. This company leveraged its enabling business model-defined by core competencies in marketing, logistics, and sourcing-in order to make a successful transition to a much larger European market from the Swedish market.

Preparing for value-building growth

What must a company do to begin the upward spiral of value-building growth or to ensure and build on its position as a value-grower? The first crucial steps require understanding your position relative to competition and setting the right strategic direction for growth. Depending on the situation, the strategy for value-building growth will need to be orientated. For example:

Value-growers must pursue top performance, maintain stamina, redefine their businesses and markets, and continuously "push the envelope" even further.

Profit seekers need to make a clean break from the profit trap-cost-cutting and control-and refocus on market and growth-oriented investments. This begins by developing a vision and reassessing the company's culture and incentive system.

Simple growers typically need to refocus on core competencies while maintaining growth momentum.

Underperformers may need fundamental restructuring and strategic reorientation.

We aim to use our study of value-building growth in the Indian context to arrive at findings highlighting not only the best value-building companies, but also the common strategic threads that run through them.

research & inputs from Anshuman Maheshwary, business analyst, a.t. kearney.