GRAŻYNA LEŚNIAK-ŁEBKOWSKA (PH.D) VALUE CREATING GROWTH

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GRAŻYNA LEŚNIAK-ŁEBKOWSKA (PH.D)GRAŻYNA LEŚNIAK-ŁEBKOWSKA (PH.D)

VALUE CREATING GROWTHVALUE CREATING GROWTH

Based on Based on Th. Doorley III and J. Th. Doorley III and J. Donovan „Value Creating Growth”, Jossey- Bass,1999; Donovan „Value Creating Growth”, Jossey- Bass,1999; GG.. Deans and F Deans and F..Kroeger „STRECH !”, Wiley&Sons,2004Kroeger „STRECH !”, Wiley&Sons,2004Ch.Zook, J. Allen „Profit from the core. Growth strategy in an era of turbulence”, Ch.Zook, J. Allen „Profit from the core. Growth strategy in an era of turbulence”, Bain&Co.2001Bain&Co.2001F. Kroeger, A. Vizjak, A. Kwiatkowski, Success in niches. 9 winning strategies to survive the F. Kroeger, A. Vizjak, A. Kwiatkowski, Success in niches. 9 winning strategies to survive the merger endgame, Wiley, 2006merger endgame, Wiley, 2006A.Vizjak „Competing against scale. The growrh cube for scale based competition”, AT A.Vizjak „Competing against scale. The growrh cube for scale based competition”, AT Kearney, GV Zalozba, 2008Kearney, GV Zalozba, 2008I. Jackson, J.Nelson „Profit with principles. Seven strategies for delivering value with values”, I. Jackson, J.Nelson „Profit with principles. Seven strategies for delivering value with values”, Currency Doubleday, 2004Currency Doubleday, 2004

WARSAW SCHOOL OF ECONOMICS 2010WARSAW SCHOOL OF ECONOMICS 2010

GLL

GG .Leśniak.Leśniak -- Łebkowska Łebkowska

VALUE-BUILDING GROWTHVALUE-BUILDING GROWTHA COMPANY IS A VALUE BUILDER WHEN IT OUTPERFORMS ITS A COMPANY IS A VALUE BUILDER WHEN IT OUTPERFORMS ITS PEERS BOTH IN REVENUE GROWTH AND IN THE CREATION OF PEERS BOTH IN REVENUE GROWTH AND IN THE CREATION OF

SHAREHOLDER VALUE.SHAREHOLDER VALUE.

What is and why the shareholder value relates to value-building growth?

• THE VALUE OF THE COMPANY IS WHAT THE MARKET WILL PAY FOR IT. IT COULD BE MEASURED BY A COMPANY’S STOCK PRICE WITH SOME ADJUSTMENTS FOR DIVIDENDS. (AMC: ADJUSTED MARKET CAPITALIZATION)

What drives value growth?• CURRENT EARNING STREAMS EXPLAIN AT MOST 20% OF A COMPANY

VALUE. THE REST IS ATTRIBUTABLE TO EXPECTED GROWTH OF PROFITS. THE EXTENT OF THESE AS-YET-UNREALIZED PROFITS DEPENDS, IN TURN, ON EXPECTED REVENUE GROWTH.

• EXPECTED PROFIT GROWTH COULD ARISE PARTLY FROM COST CUTTING BUT THERE IS LIMITED RATIONALITY IN COST CUTTING, IT MAY REFRAIN GROWTH BY REDUCING THE GROWTH POTENTIAL.

• UNLIKE GROWTH THROUGH COST CUTTING THE BOUNDARIES OF REVENUE GROWTH ARE VIRTUALLY NONEXISTENT!

G.Leśniak-Łebkowska G.Leśniak-Łebkowska

CONSTRUCTING A SUSTAINABLE CYCLE OF CONSTRUCTING A SUSTAINABLE CYCLE OF VALUE CREATIONVALUE CREATIONValue creation•Identification of opportunity•Strategy formulation•Operations

Rewards•Total compensation•Variable compensation(incentive) Measurement

•Free cash flow valuation•Economic Value Added•Cash flow return on investment


COMPETING MODELS OF EQUITY VALUATIONCOMPETING MODELS OF EQUITY VALUATION

Accounting (Earnings) Model

Discounted Cash Flow Model

Equity value Price/earnings ratio

X Earnings per share

Present value of future cash flows

Value drivers Determinants of accounting earnings and the price/earnings ratio

Determinants of firm future cash flows and the opportunity cost of capital


Examples of growth Examples of growth creating or destroying valuecreating or destroying value

DESTROYING VALUE

Failed market expansion

Poor acquisitions

(e.g. U.S. Airways)

INCREASING VALUE

Successful new product rollouts

(e.g. Microsoft, Apple)

RELEASING VALUE

Divestiture

(e.g. General Dynamics)

LIMITING VALUE

Improved productivity

(e.g. General Electric)

0

+

-

If destroying value,

Growth is exactly

The wrong strategy

Releasing investment (shrinking) is unsustainable over the long term

Profitable revenue growth is well rewarded by the market and the only sustainable option in the long run

Increased asset productivity eventually levels out

Cost-of-Capital-

+Return

Source: Braxton Analysis


4 Sources of an enterprise value4 Sources of an enterprise value

REVENUE GROWTH

OPTIMAL MARGINS

OPTIMAL USE OF RESOURCES

MANAGEMENT OF EXPECTATIONS

STRATEGIC PARADOX (DELOITTE@TOUCHE):

BOTH THE WINNERS AND LOSERS ADOPT A RADICAL TYPE OF STRATEGY BUT THE FIRST BASED IT ON THE RIGHT SCENARIO OF EXPECTED CHANGE, THE SECOND ON THE WRONG ONE. EVEN IF SCENARIO X SEEMS TO BE BETTER ONE HAVE TO BE PREPARED TO SWITCH FOR Y ANY TIME (CONTINGENCY PLANNING)


Thesis :Thesis :Companies with near-fanatical focus on growthCompanies with near-fanatical focus on growth

spectacularly outperform all othersspectacularly outperform all others

• For shareholders high-growth companies generate 5-10 times the returns of slow growth companies

• For customers high growth companies churn-out new products and services at nearly twice the”normal” rate

• For employees high growth companies are the most satisfying places to work and, incredibly, job satisfaction soars despite enormous pressure to keep pace

• For the economy: a small number of high growth companies are the job creating engines (in the 1995-99 a mere 200 companies, i.e.less than 2% of all public companies created 32% of all jobs)


A.T.KEARNEY RESEARCH EVIDENCEA.T.KEARNEY RESEARCH EVIDENCE

• High-growth companies perform; they create value everywhere that mattersFrom 2000 companies investigated in 1976-1996 only 1 in 7 sustained growth in 2 decades. From those that within the first decade fell out of the top tier only 1 in 3 managed to regain its high-growth status. So, once a company topples from the high-growth zone, it’ll find it very difficult to regain its stride. Besides to climb at the growth wall ($50billion in revenue/at 100 thousand employees) is extremely difficult (GE with Jack Welch). The growth pace usually slows down with the growth of employment and complexity of mgt system

• Growth is hard. It’s a daunting challenge that must be attacked aggressively


TakewayTakewayGrowth is a learned competence. Any and all can improve at it. Growth is a learned competence. Any and all can improve at it.

Three cornerstones of starting the GROWTH SYSTEM are needed:Three cornerstones of starting the GROWTH SYSTEM are needed:

Deep commitment and belief that growth is central to value creation

Strategy based on Valuable Formula (understanding what makes the products and services special and how this evolves over time)

Capability to sustain long-term growth (managing changes, contingencies, and potentialities; organizations’ ability to create, monitor and continually nurture five growth-supporting foundations


Five foundations of the capability to growFive foundations of the capability to grow

leadership

knowledge

processes

culture

architecture

Capability to grow


Growth is a high-performance engineGrowth is a high-performance engineDownseizing may lead to corporate anorexia!Downseizing may lead to corporate anorexia!

Tab. Payoff in Market Value for Growth

Compustat, braxton associates analysis (N=3,895 companies)

high

Revenue

Growth

low

>15% 23% 34% 34% 38%

10-15% 15% 19% 21% 23%

5-10% 10% 14% 16% 17%

<5% (1)% 5% 7% 15%

Company size by revenue

<$100m $100m-$1b

$1b-$10b >$10b


Introduction toIntroduction to A.T.Kearney STRETCH model A.T.Kearney STRETCH model

for a company growthfor a company growth

• Growth is still the mantra and mission of every company (refer to any company annual reports)

• The strategy and tactics for growth may change with every era, with changes in exogenous factors, but they are always rooted in daredevil strategy and solid execution

• 21st century companies have forgotten how to grow or are too risk-averse to make it happen

Graeme K.Deans

Fritz Kroeger


THE POSSIBILITIES OF GROWTHTHE POSSIBILITIES OF GROWTH

cont’dcont’d

MYTHS: • improving efficiency through cost reduction, reengineering, restructuring,

operational excellencewill reshape the company and foster growth

• Moreover the above are low risk actions while radical growth initiatives are always high risk operations

• Exogenous factors dominate and unable direct control over the company destiny

• Growth happens in innovative industries, in some regions, at some phases of a business cycle

• High barriers to growth differentiate the company ability to growth• Companies do not have direct control over their stock prices, their value

depends on investors expectations based on short term performance and optimistic/pessimistic expectations as to the future environment

• Concentration ratio differs from industry to industry, some industriess are slowly consolidating or unlikely to consolidate


THE POSSIBILITIES OF GROWTHTHE POSSIBILITIES OF GROWTHbased on A.T Kearney research on 29 thousand companies database encompassing 98% of world market based on A.T Kearney research on 29 thousand companies database encompassing 98% of world market

capitalization over the period of 10 years + 1 thousand interviews with CEOs during briefings, coverage of 24 major capitalization over the period of 10 years + 1 thousand interviews with CEOs during briefings, coverage of 24 major industries in 34 countries plus more than 80 deep in-depth case studiesindustries in 34 countries plus more than 80 deep in-depth case studies

RESEARCH FINDINGS:• the endless pursuit of top-line growth, determined to exploit the company

potential to generate long-term shareholder value is the new-way of thinking of top strategists

• Growth is possible in any industry, any region,any phase of the business cycle

• Growth is driven predominantly by 8 internal drivers, covering soft and hard factors, across operations, strategy and structure

• Strategic innovation is only one of many growth levers, most growth initiatives are low risk ones

• The barriers to growth are different for every company, so their paths to growth are equally unique

• Long-term growth is the decisive driver of stock prices, thus companies are in control of their own stock price destiny

• All industry consolidation follows a similar pattern including 4 distinctive stages:opening, scale, focus, balance & alliance

• Successful long-term strategy must master growth initiatives in each stage


THE A.T.KEARNEY GROWTH MATRIXTHE A.T.KEARNEY GROWTH MATRIXBASED ON RESERACHBASED ON RESERACH

• Q1 VALUE GROWERS

companies that outperform their peers in revenue and value growth to achieve the dominant position

• Q2 PROFIT SEEKERS

companies that have above-average value growth but are lagging behind in revenue growth

• Q3 SIMPLE GROWERS

companies that place a strong emphasis on revenue but don’t deliver on the value axis

• Q4 UNDERPERFORMERS

companies that are underperforming in revenue and in value growth


THE A.T.KEARNEY GROWTH MATRIXTHE A.T.KEARNEY GROWTH MATRIX

Q3

SIMPLE GROWERS

Q1

VALUE GROWERS

Q4UNDERPERFORMERS

?

Q2PROFIT SEEKERS

+


Research findings cont’dResearch findings cont’d

• Industry maturity vs mature management

• Strong and poor performers located in all regions

• Strong growth happens in all business cycle, not only during economic booms but also in downturns


FOUNDATIONS OF VALUEFOUNDATIONS OF VALUE

• THE RISE IN SHARE PRICE STRONGLY LINKED TO LONG-TERM GROWTHAND NOT TO OTHER FINANCIAL INDICATORS LIKE ECONOMIC VALUE ADDED(EVA), ECONOMIC EARNINGS(EE), CASH FLOW RETURN ON INVESTMENTS(CFROI)

• THE STRONG LONG-TERM CORRELATION EXISTS BETWEEN REVENUE GROWTH AND SHAREHOLDER VALUE GROWTH

• VALUE GROVERS EXECUTIVES SIGNIFICANTLY DIFFER FROM OTHERS IN THEIR MIND-SET: THEY FOCUS ON INNOVATION (CONTINUOUS PRODUCT IMPROVEMENT), RISK-TAKING (WHITE SPACE OPPORTUNITIES), AND AGGRESSIVENESS (BUILDING SCALE GLOBALLY NOT ONLY ON FAMILIAR MARKETS)

• THE GROWTH IS ACHIEVED THROUGH A COMBINATION OF INTERNAL (ORGANIC, INCREMENTAL) GROWTH AND EXTERNAL (M&A) GROWTH. EXTERNAL GROWTH IS NOT BETTER OR FASTER. 87% OF GROWTH RESULTS WERE DERIVED FROM INTERNAL ACTIVITIES, 13% FROM EXTERNAL DRIVERS.


THE MERGER ENDGAMES S-CURVETHE MERGER ENDGAMES S-CURVEbased on research sample of 29 thousand companiesbased on research sample of 29 thousand companies

CR3=market share of three largest companies of the total marketCR3=market share of three largest companies of the total marketHHi = Hirschman-Herfindahl Index: the sum of the squared market shares of all companies is greater than 90%, the HHi = Hirschman-Herfindahl Index: the sum of the squared market shares of all companies is greater than 90%, the

axis logaritmically plotted.axis logaritmically plotted.

For all industries it takes apx. 25 years to commence, deconsolidate, consolidate and balance out!

Speed consolidation does not differ much across industries! In the history: • Shipyards: 4 000 years to enter the phase of ballance&alliance• automotive industry: over 100 years for to reach the end of

scale stage, and only more 10-13 to reach the next one.


4 discrete stages on the way to inevitable 4 discrete stages on the way to inevitable global consolidationglobal consolidation

1. OPENING (little or no market concentration, first consolidations. Newly deregulated, start-up, spin-off subsidaries). Examples: railway, telecom, banks, insurance

2. SCALE (size begins to matter, major players emerge and lead consolidation.Concentration ratio in some industries may reach 45%). Examples: chemicals, airlines, utilities, automotive suppliers, restaurants, fast food, pharmaceuticals, breweries, paper, steel

3. FOCUS (successful players extend their core businesses, exchange or eliminate secondary units, continue to aggressively outgrow the competition). Examples: automotiveOEMs, food, toys, rubber&tyre, confection, truck&trailer

4. BALLANCE AND ALLIANCE (few players dominate, consolidation up to 90%, industry titans reign, from tobacco to automotive companies and engine producers. Large companies may form alliances with other giants to challenge the further growth). Examples: shipbuilders, distillers, aerospace suppliers, defence, tobacco, automatic controls, shoes, soft drinks


BARRIERS TO GROWTHBARRIERS TO GROWTHin the opinions of 953 senior leaders investigated by A.T Kearney researchers during 1999-2003 periodin the opinions of 953 senior leaders investigated by A.T Kearney researchers during 1999-2003 period

• STRATEGIC DEFICIENCY (28%)• ORGANIZATION&LEADERSHIP (26%)• OPERATIONAL&COMPETENCE GAPS (15%)• LACK OF CUSTOMER INTIMACY (11%)• UNATTRACTIVE REGULATORY ENVIRONMENT (9%)• ECONOMIC CYCLE –DOWNTURN ( 4%)• PRODUCT LIFECYCLE- DOWNWARD TREND (3%)• CULTURAL RESISTANCE (3%)


THE STRETCH GROWTH MODELTHE STRETCH GROWTH MODEL

• OPERATIONS: clean-up, focus on dramatic improvements in internal processes such as product development, sourcing, quality, delivery, customer service, sales and pricing

• ORGANIZATION: changes in organizational design, reconfiguration of value chain, adjustments in compensation, rewards and incentive systems

• STRATEGY: reinventing, redesigning, reshaping the core strategy and brand of the firm. Focusing on value proposition offered to customers, brand stretch, line extention.

• STRETCH: expanding the business frontier, ventures into new territories, breaking old barriers to create new products for new markets, new customer bases, new geographies.


• SUCCESSFUL COMPANIES APPLY SPECIFIC STRATEGIC AND OPERATIONAL IMPERATIVES THAT ARE DIFFERENT FOR EACH STAGE AND POSITION THEMSELVES AS VALUE GROWERS

• RELATIVE WINNERS: EXXON, ALCOA, JOHN DEERE, DIAGEO, PHILIP MORRIS, PROCTER&GAMBLE, GENERAL ELECTRIC, PFIZER

• LESS SUCCESSFUL COMPANIES: BAYER, DEUTSCHE BANK, GENERAL MOTORS, IBM, AT&T

CONT’DCONT’D


REMOVE BOTTLENECKSAND BARRIERS

CREATE HIGH

PERFORMING

COMPANIES

EXPLOIT STRATEGIC LEVERS

ACHIEVE

EXTRAORDINARY GROWTH

OPERATIONS

ORGANIZATION

STRATEGY

STRETCH

THE STRETCH GROWTH MODELTHE STRETCH GROWTH MODEL


PROFIT FROM THE COREPROFIT FROM THE COREBased on the book of Chris Zook with James Allen, Bain&Co.Inc., 2001Based on the book of Chris Zook with James Allen, Bain&Co.Inc., 2001

• After having examined and redesigned operations and organization (doing things right) you move to strategy and stretch choices (doing right things)

• The paradox: the better performing of your business units are likely to be those operating the furthest below their full potential

• The stronger your core business, the more opportunities you have both to move into profitable adjacencies and to lose focus


PROFIT FROM THE CORE CONT’DPROFIT FROM THE CORE CONT’D

• THE MANAGEMENT TEAMS THAT HAVE BEEN MOST SUCCESSFUL IN BUILDING A STRONG CORE BUSINESS AND THAT HAVE BENEFITED FROM ADJACENCY EXPANSION ARE ALSO THE MOST VULNERABLE TO INDUSTRY TURBULENCE

• STRATEGY-STRUCTURE RELATIONSHIPS ARE VITAL IN SUCCESFUL SHIFTS

• FROM FOCUS COMES GROWTH; BY NARROWING SCOPE ONE CREATES EXPANSION


THREE MAIN ISSUES MANAGEMENT MUST THREE MAIN ISSUES MANAGEMENT MUST FACE IN SEEKING PROFIT FROM THE COREFACE IN SEEKING PROFIT FROM THE CORE

• BUILD MARKET POWER AND INFLUENCE IN THE CORE BUSINESS OR IN A SEGMENT OF THAT BUSINESS

• HAVING DONE THAT, EXPAND INTO LOGICAL REINFORCING ADJACENCIES AROUND THE CORE

• SHIFT OR REDEFINE THE CORE IN RESPONSE TO INDUSTRY TURBULENCE


TO IDENTIFY YOUR CORE BUSINESS TO IDENTIFY YOUR CORE BUSINESS FIRST IDENTIFY THE 5 ASSETS:FIRST IDENTIFY THE 5 ASSETS:

• YOUR MOST POTENTIALLY PROFITABLE, FRANCHISE CUSTOMERS

• YOUR MOST DIFFERENTIATED AND STRATEGIC CAPABILITIES

• YOUR MOST CRITICAL PRODUCT OFFERINGS• YOUR MOST IMPORTANT CHANNELS• ANY CRITICAL STRATEGIC ASSETS THAT

CONTRIBUTE TO THE ABOVE (E.G. PATENTS, BRANDS, POSITION AT A CONTROL POINT IN A NETWORK)


BUSINESS DEFININGBUSINESS DEFINING

• WHAT ARE THE BOUNDARIES OF THE BUSINESS IN WHICH i PARTICIPATE, WHERE THOSE BIUNDARIES ARE „NATURAL” ECONOMIC BOUNDARIES DEFINED BY CUSTOMER NEEDS AND BASIC ECONOMICS? WHAT PRODUCTS, CUSTOMERS, CHANNELS AND COMPETITORS DO THESE BOUNDARIES ENCOMPASS?

• WHAT ARE THE CORE SKILLS AND ASSETS NEEDED TO COMPLETE EFFECTIVELY WITHIN THAT COMPATITIVE ARENA?

• WHAT IS MY OWN CORE BUSINESS AS DEFINED BY THOSE CORE CUSTOMERS, PRODUCTS, TECHNOLOGIES, AND CHANNELS THROUGH WHICH I CAN EARN A RETURN TODAY AND CAN COMPETE EFFECTIVELY WITH MY CURRENT RESOURCES?

• WHAT IS THE KEY DIFFERENTIATING FACTOR THAT MAKES ME UNIQUE TO MY CORE CUSTOMERS?

• WHAT ARE THE ADJACENT AREAS AROUND MY CORE, AND ARE THE DEFINITIONS OF MY BUSINESS AND MY INDUSTRY LIKELY TO SHIFT, CHANGING THE COMPETITIVE AND CUSTOMER LANDSCAPE?


THE POWER ON FOCUSING ON THE THE POWER ON FOCUSING ON THE CORECORE

• MOST COMPANIES SUSTAINING THE VALUE CREATION POSSESS ONLY ONE OR TWO STRONG CORES

• PRIVATE EQUITY COMPANIES OFTEN ACHIEVE THEIR GREATEST SUCCESS BY BUYING ORPHAN BUSINESSES FROM DIFFUSE CONGLOMERATES, THEREBY CREATING FOCUS

• SPIN-OFFS USUALLY CREATE BOTH FOCUS AND VALUE• DIVERSIFICATION IS ASSOCIATED WITH LOWER AVERAGE

VALUATIONS THAN ARE TYPICAL OF COMPANIES WITH FOCUSED CORES

• THE FEW COMPANIES THAT BECAME SMALLER AND STILL CREATED VALUE ARE THOSE THAT RESTRUCTURED TO FOCUS ON A STRONG CORE, OFTEN EVENTUALLY TO TURBOCHARGE THEIR GROWTH AGAIN


KEY TRENDSKEY TRENDSIN BLURRING OF BOUNDARIES AND CREATION OF IN BLURRING OF BOUNDARIES AND CREATION OF LARGER ARENAS OF RELEVANCE STRATEGICALLY LARGER ARENAS OF RELEVANCE STRATEGICALLY

AROUND THE COREAROUND THE CORE• OUTSOURCING AND THE DISINTEGRATION OF TRADITIONAL

VALUE CHAINS• INCREASED CUSTOMER MICROSEGMENTATION AND NEW,

MORE NARROWLY FOCUSED COMPETITORS• INCREASED COMPETITION AMONG DIFFERENT BUSINESS

MODELS RATHER THAN MERELY AMONG VESRSIONS OF THE SAME ONE

• DIGITAL CONVERGENCE BLURRING THE BOUNDARIES BETWEEN ALL INFORMATION BUSINESSES

• FORCES OF GLOBALIZATION BLURRING REGIONAL GEOGRAPHIC BOUNDARIES

• INCREASINGLY SOPHISTICATED SUPPLY CHAIN STRATEIES CAUSING COMPETITION BETWEEN SUPPLY CHAINS AS MUCH AS BETWEEN COMPANIES


KEY TYPES OF DECISIONS:KEY TYPES OF DECISIONS:

• THE CORE OR NONCORE AREA (GRAY AREA, BLURRING BOUNDARIES). Defining the area as noncore is as valuable as defining it as the core one. By taking the competitive arena off the agenda you focus the organization, liberate attention and resources for most important battles

• WITHOUT SUCH FOCUS organizations inherently tend to add segments and priorities. This is an especially costly tendency in successful businesses with a growing number of possible paths before them


MAJOR GRAY AREASMAJOR GRAY AREAS

• Do I need to expand my definition to include a new segment or technology? If so, do I need to add it? If so, how?

• Are any of the competitive dynamics in the gray area likely to affect the profit pool in my core business? If so, how, and how should I react?

• Are any of the competitors that are not currently threatening likely to make incursions into my core customers? If so, what should I do?

• Are there capabilities or types of skills that I need to bring inhouse now to be able to understand and, therefore, anticipate, some of the dynamics adjacent to my curent core?

• Are there partnerships or alliances I should forge to insulate and stabilize my economic position surrounding my core?


Underestimation of the growth potential from Underestimation of the growth potential from the corethe core

• Leads to underinvestments in the profitable core

• Setting the performance targets too low thus leading to undermanagement

• Abandoning the core prematurely for seemingly greener pastures


TYPICAL UNDERESTIMATION OF THE TYPICAL UNDERESTIMATION OF THE CORE DIMENSIONSCORE DIMENSIONS

• INCREASING THE RETURNS TO LEADERSHIP, LEADING TO HIGHER PROFITS (MARKET LEADERSHIP DRIVES INCREASING RETURNS)

• INFLUENCE OVER INVESTABLE FUNDS, LEADING TO COMPETITIVE ADVANTAGE

• INFLUENCE OVER THE EXTENDED INDUSTRY PROFIT POOL, LEADING TO ACCESS TO SUPERIOR PROFIT GROWTH OPPORTUNITIES IN ADJACENT BUSINESSES


HOW COMPANIES ACQUIRE MARKET HOW COMPANIES ACQUIRE MARKET POWER AND INFLUENCEPOWER AND INFLUENCE

CUSTOMER- BASED

CHANNEL-BASED

PRODUCT- OR CAPABILITY-BASED

CAPITAL-BASED

•Superior service and relationship (loyalty)•High switching costs•Superior information on behavior/needs•Business model built around new segment

•Channel dominance•Partnership with leading channel participants•Control point in a network

•Low-cost production•Superior/unique features•New-to-world products•Patents•Deep share of wallet

•High valuation, creating acquisition currency•Capital availability, allowing companies to outinvest competitors


THE ALCHEMY OF GROWTH: staircases and horizonsTHE ALCHEMY OF GROWTH: staircases and horizonsM.Baghai,S.Coley, D.White/McKinsey Co.M.Baghai,S.Coley, D.White/McKinsey Co.

Horizon 1Extend and defendCore businesses

Horizon 2Build emergingbusiness

Horizon 3Create viableoption

Seed growth options

Test business model

Replicate proven business model

Manage for profitability

Success in niches. 9 winning strategies Success in niches. 9 winning strategies to survive the merger endgameto survive the merger endgame

• Research base: 32 thousand global value building growth companies publickly quoted + 660 thousand worldwide companies non quoted

• Period: 1990-2005


Consolidation scheme theses:Consolidation scheme theses:

• Global consolidation endgame is inevitable and endangers all companies except from 3-4 liders of a specific market

• Nichers are also endangered except from those 3-4 on each market who managed to build global competitive advantage in a niche

• 80% of all plyers are the potential or already designated losers


Global market structure at the Global market structure at the endgameendgame

• Only 60 000 potential leaders of the global market: 50% quoted companies + 50% nichers

• 600 000 „victims”


9 winning niches: 270 players 9 winning niches: 270 players sustaining VBG in all stagessustaining VBG in all stages


•Regional niches•Targeted clients oriented (BMW, Four Seasons Hotels)•Specific product oriented +know how (Semperit)•Brand oriented (Porsche, Montblanc)•Speed consolidation leaders (Mittal Steel)•Innovation leaders (Logitec, Apple)•Cooperation consortia (KPMG)•Market fragmenters (IBM in concentrated IT, now service IT (EDS), PC (HP, Dell), Software (SAP, Microsoft), integrated circuits( Intel, AMD)•Contra-nichers (complementing the strategic profile of leaders (Karmann, Tuesday Morning Shops, United Drugs)

Right time for specific nicheRight time for specific niche

• 1. opening-scale• 2. opening-focus• 3. late opening-late focus• 4. scale-focus• 5. scale-early balance&alliance• 6. scale- early balance&alliance• 7. Scale-balance_alliance• 8. mid scale – endgame• 9. focus-balance&alliance


Theses cont’dTheses cont’d

• Endgame niches are to be distinguished according to consolidation stages

• Building consolidation endgame niches requires deep understanding of the merger endgame conduct - specific for each industry

• Window of opportunity shuts down – niches should be harvested or sold out


3 components 3 components of a prosperous niche differentiating it of a prosperous niche differentiating it

from a market leaderfrom a market leader

• Market segment

• Value creation chain (base costs+segment costs)

• Complexity: diversity, dynamics, innovativeness


Useful ideasUseful ideas

• Each industry has its point of gravity, where every 9 types of niche companies are mostly located

• Combinations/mixed forms are better to defend against leaders

• Bravety and great ideas how to use the company unique potential help to survive


Documents

GRAŻYNA LEŚNIAK-ŁEBKOWSKA (PH.D) VALUE CREATING GROWTH