Real Companies, Real Strategy, and Real Growth in Australia

Growth is not the exclusive right of the global behemoths or of the well-heeled media superstars. Lesser-known companies in Australia and around the world also have powerful growth stories to tell.

When "thought leaders" are asked about growth, they instinctively cite the same four or five companies. They love Apple, Amazon, Starbucks, and General Electric: mega-global behemoths with near-infinite power to attract talent, capital, and political goodwill. Listening to the conventional wisdom, you might think the only way to grow is to have billion-dollar investment programs pursuing multiple strategies under a celebrity CEO. Yet growth is not limited to the superstars. In fact, many of the largest companies in Australia and around the world are a fraction of the size of companies commonly profiled as case studies in growth (see figure 1). These are what we like to call "real companies"—versus the almost mythical status of the giants with their vast resources—and they are engaging in real growth based on real strategies.

Why Growth and Value Matter

In a unique growth study, we performed 5-, 10-, and 15-year analyses of revenue growth and total shareholder returns for the entire Australian Securities Exchange, identifying top performers on the ASX200. We also sat down with senior executives—together representing about 30 percent of ASX200 market capitalization—to discuss their growth performance. Many of these executives were leaders of ASX200 top performing firms. A number of poorer performers and several top private firms were included in our study to compare approaches and strategic moves that determine success or failure. (See appendix at the end of this article for names of companies in the study.)

Our analyses revealed that a company that grows both revenue and total shareholder returns (TSR) has less chance of exiting its industry by either failure or takeover.¹ Only four in 10 companies remained among the ASX200 for more than a decade. (Growth is a prerequisite for longevity and the manifestations of growth are both revenue and TSR.)

This study confirms and builds on the pioneering A.T. Kearney study, The Value Growers, first released in 2000 with follow-on analyses thereafter. The research framework places companies into one of four quadrants based on their revenue and TSR performance (see figure 2). Maintaining above-average growth in both for a decade distinguishes a small percentage of value growers.

How do real companies grow? The following offers 10 insights gleaned from our analyses and interviews, with each one considered a work in progress. Much like the scales that guide improvisational jazz, the insights outlined here should be viewed as parameters—to be refined further to the characteristics of individual markets and companies, and then used creatively to grow.

Insight 1. Where to compete matters more than you think

The decision about where to compete has a larger impact on overall growth performance than previously realized. Australian value growers obtain only 15 to 20 percent of their total revenue growth from market share gains (gains typically associated with superior operational performance) and 30 to 40 percent from catching growth escalators. They look for fast-growing markets and avoid the revenue treadmills—the slow-growth segments typically found in mature markets. Merely growing with the fast-growth segments (not necessarily faster) is the biggest contributor to their total revenue growth, with another 30 to 40 percent won from calculated mergers and acquisitions (M&A).

Australia's mining industry is perhaps the best-known growth escalator of the past decade. Yet escalators exist even in slow-growth mature industries, such as dairy milk. Although the sector experienced only a 2 to 3 percent growth rate over the past five years, flavored milk grew at 4 percent, iced coffee at about 11 percent, and certain iced coffee sub-segments at more than 20 percent. Value growers make it their job to find the growth escalators. We like to call this data-driven growth because the escalator-identifying market insights rely on intensive data analytics (see sidebar: Challenger Takes a Shrink-to-Grow Strategy).

Insight 2. Value growers make hard choices and earn the right to grow

Most value growers invest in building sound, profitable businesses that achieve a return on invested capital before aggressively chasing revenues. Put simply, they earn the right to grow. By comparison, profit seekers pursue returns on capital, typically through cost-efficiency measures, without commensurately increasing revenues. Simple growers raise revenues quickly, usually through mergers or acquisitions, but often suffer from poor returns on capital. And poor performers, saddled with stagnant markets or poor management, fail on both measures.

These differences in performance are grounded in different ways of thinking about implementation. Value growers focus more on making substantive hard choices about the allocation of their scarce resources to their growth ambitions. Their growth strategies tend to be longer term compared to the others, with horizons at up to 10 years or more. Thinking longer term creates an environment that can help shape other performance-enhancing factors such as building strategic capabilities, creating real differentiation, and managing risk and uncertainty.

(For more on this, see Where Have All the 10-Year Strategies Gone? in Executive Agenda, 2011 Q1/Q2.)

Insight 3. The right strategy and solid insights—not just leadership—make the difference

In exploring the main elements of a successful growth strategy, growth leaders rate having an A+ strategy as the most important (see figure 3). Growth is an outcome of strategy. Superior growth does not simply happen, even in desirable industries.

Both value growers and poor performers rate leadership as a main reason their growth strategies succeed. But poor performers rate leadership higher than better performers. That's likely because the better performers understand that leadership alone is insufficient—it needs to be underpinned by solid insights and the right mix of assets and competencies to drive growth. These in fact are among the criteria of an A+ strategy. Tellingly, poor performers also rate having a superior strategy as the weakest contributor to their overall growth success along with having the right mix of assets.

Two other factors are worth noting. First, leading companies tend to have a clearer, more ambitious, and explicitly communicated growth vision. The better the vision is communicated to the entire organization, the less ambiguity will exist about what the company is trying to achieve, and whether or not a specific initiative supports those objectives.

Second, they realize that their lofty growth visions must be relevant. Employees must derive meaning from the vision, or the impact will be limited.

A meaningful vision is clear and easy to communicate to a wider group. It forces the organization to commit. If the vision statement could be adopted by a competitor—or worse, a company in an entirely different industry—then it's time for the leadership team to go back to the drawing board.

We found three common pitfalls that erode meaning:

• Motherhood statements. Who could disagree with "deliver excellence in customer service"? Such wishy-washy endorsements could apply to any organization. A meaningful vision must be specific.
• Lack of commitment. If the vision doesn't commit the organization to a path, it isn't helpful. For example, saying you're going to be "a leading player" can mean anything.
• Absence of realism. It's a nice aspiration to set a goal of being number one—but is it realistic? Remember that the vision will serve as a motivator for the workforce for an extended time period. You might end up doing more harm than good if your vision is unachievable.

Insight 4. Focusing on your core matters, but how you leverage it is vital

All real companies focus on their core business. But there are many ways to grow and reinvent your core:

• Existing customers. Not surprisingly, all companies cite the importance of maintaining existing customers as key to growth.
• New customers. Leading growth companies have an explicit focus on acquiring new customers—typically in growth-escalator sectors.
• New products. Surprisingly, poorer performers place more importance on developing new products to drive growth. This may reflect the risky and expensive nature of product innovation or the prominence in the ASX200 of mining and finance—industries not known for breakout innovative product offerings.
• New channels. The need to exploit new channels gets only a moderate factor (about 3 out of 5) in determining growth paths.
• New regions. Leaders place slightly more importance on moving into new geographic regions than do followers. For example, educational provider Navitas successfully expanded its geographic presence on an incremental, learn-by-doing basis.
• New industries. Diversifying into unrelated adjacent businesses, integrating vertically, or pursuing completely new "breakout" areas are almost universally considered a lower priority when it comes to pursuing growth. One executive tells us, "To deliver a high TSR requires stability of earnings and therefore mild diversification only."
• New business models. Leading companies are more likely than followers to use innovative business models. Again, Navitas is a good example. The company moved from an asset-light business model of providing educational pathway programs to an asset-heavy model in which it owns and manages entire campuses on behalf of universities.

Insight 5. Many aspire to shape their industry—the few that succeed take a learn-by-doing approach

Companies often aspire to shape the direction of their industry through breakthrough products or technologies, innovative operations, or unique business models. Executing such a vision is an elite sport. The benefits of industry shaping are well known, as exemplified by—you guessed it—Apple's iPod, iPhone, and iPad. These growers challenge industry assumptions and shape them to their own advantage—and perhaps to the overall industry's advantage. Amazon's Kindle created a new e-reader market and left many rivals in a wide range of industries, from book sellers to consumer electronics makers, scrambling to catch up.

One lesson from our research is that many industries, not just the high-profile ones, can be profitably shaped. Even small players can shape an industry by adopting new and disruptive ways of doing business that threaten and influence the strategies of established players. SEEK, Australia's version of monster.com, entered the online job market in 1997 and quickly reshaped the industry with a revolutionary business model that charged employers rather than job seekers (see sidebar: At SEEK, Job Seekers Are King). Even so, few companies just dive in; most take a measured approach, preferring to learn by doing.

For poor performers, attempts to shape their industry tend to be larger "big bets" in the form of mergers and acquisitions or aggressive organic growth on multiple fronts. Although the better performers sometimes bet big or make revolutionary moves, these tend to come after a series of smaller bets that are built on sound strategy and considered a useful learning experience.

The biggest corporate growth stories rarely rely on reactive acceptance of (and adaptation to) current industry developments.

Insight 6. Value growers consider all sources of revenue growth

In the past, most successful companies favored organic growth, which contributed up to 60 percent of overall growth. The four quadrants—value growers, profit seekers, simple growers, and poor performers—combine the two types of organic growth (market share and fast-growth segments discussed in Insight 1) with M&A in remarkably different patterns (see figure 4). Our findings suggest that value growers propel growth from a balanced portfolio of organic industry growth in fast-growing industries (45 percent), organic market share gain (15 percent), and M&A (40 percent). Profit seekers grow almost exclusively organically (90 percent), while simple growers grow almost exclusively through M&A (80 percent) with organic growth split evenly between market share and fast-growing industries. Laggards grow organically, but mostly by increasing share in steadily shrinking industries (70 percent).

Insight 7. Growers understand, build, and exploit privileged assets

All organizations in our survey believe that their privileged assets—those unique, scarce, and hard-to-replicate resources that give them a structural advantage—most strongly contribute to their growth performance. In fact, of all assets and competencies researched, companies rate the existence of privileged assets the most decisive. The most important are brands, physical properties (such as superior store locations), and access to capital.

Top companies invest in their privileged assets. For example, job search engine SEEK (discussed in the sidebar, At SEEK, Job Seekers Are King), invests relentlessly in its brand, which is now one of the most recognized in Australia.

Insight 8. Focus on the fundamentals: corporate culture, leadership, and risk appetite

Distinct capabilities are integral to the success of a real company's core business. The capabilities most often referenced by our study participants are corporate culture, superior leadership, and risk appetite (see figure 5).

Lion, the large food and beverage company based in Sydney, studied the impact of its corporate culture on its overall growth. "With every measurable improvement in culture, our return on invested capital improved," explains CEO Rob Murray. "And with every measurable improvement in culture, our share price, when we were a public company, went up."² Likewise, a SEEK executive explains it this way: "We have invested a lot in being a really great place to work. We get better coordination, greater emphasis on teamwork, more transparency, and an ability to raise issues that can be resolved."

Interestingly, value growers rate culture and leadership twice as high as non-growers do, and they put more significance on proprietary methodologies.

All companies in our study rate risk appetite—knowing when and how to take a risk and how to manage it appropriately—as very important. Risk appetite might also be called opportunism; many of our growth leaders exhibit a willingness to make a quick decision to grab a unique opportunity but are disciplined enough to recognize when to walk away. For example, one executive explained how his company was poised for a massive acquisition during the boom of the 2000s, just prior to the global financial crisis. Yet the aggressive move stretched the firm's risk parameters, so the board terminated the deal. As a result, the company survived and prospered during the financial crisis, while its target was almost brought to its knees, saved only by the banks.

Insight 9. Growth requires agility and early detection of the right signals

After years of uncertainty, some organizations are developing capabilities for detecting and adapting dynamically to change. All growth companies in our research display superior adaptive capabilities. They rate faster decision making, flexibility, and superior early signal detection as significantly more important to their growth than do the lesser-performers. These skills help them foresee, respond to, and take advantage of changes and emerging escalator opportunities.

This finding has a consistent internal logic: It is only natural for companies that grow by identifying growth escalators to respond more quickly and get to market faster. "Our organization is nimble with a flat structure that makes decisions and executes changes very quickly," explains an executive with a value grower. Another says, "Flexibility, speed to market, and faster decision making have been important adaptive capabilities in our growth, allowing us to take first-mover advantage."

Adaptive capabilities are second-order skills that empower an organization's primary capabilities. So when primary brands or proprietary methodologies are also empowered to adapt to changing conditions, then growth is even more achievable. As business environments become more unpredictable, the ability to adapt may be a company's most important internal skill (see sidebar: Tabcorp Bets on the Internet and Wins).

Insight 10. Value growers are deliberate in managing a small number of growth initiatives

Growth companies manage their strategy implementation more deliberately than their competitors. They tend to have fewer projects, with about two-thirds having five or fewer "big initiatives"; they align the projects to value creation; and they are extremely disciplined in measuring and monitoring performance.

In a value grower's mind, two elements ensure a successful implementation: slicing the strategy into smaller parts, and launching a comprehensive and relevant communications plan aimed at both executives and those lower down in the organization. (For more on this, see Turning Strategic Vision into Action: It's a Mind Game in Executive Agenda, 2010 Q3/Q4.)

Real Conclusions for Real Companies: What to Do Differently

Our research finds several characteristics that all growth companies share, suggesting the following actions to improve growth prospects:

• Review your strategy to clarify where growth is really coming from: Are you taking advantage of a growth industry or sector, expanding market share, or making acquisitions?
• Use data analytics to manage your portfolio of growth escalators and treadmills.
• Think hard about how to acquire new customers using existing products before exploring others.
• Seek a true understanding of how privileged assets can increase value in your industry, and then of how you can exploit your unique privileged assets.
• Build your organizational competence for adaptability.
• Invest in your workplace culture; all growth companies cite culture as a means to significant results.
• Earn the right to grow by making an effective return on capital within your existing business before becoming fixated on revenue growth.
• Put five or fewer initiatives on your growth agenda—and measure and monitor them aggressively.

To grow, a company need not be a global behemoth. It needs only creative talent and a firm understanding of the guidelines that will produce growth. This, we discovered, is how real companies develop real strategies to capture real growth.

Appendix

After identifying the top performers in the ASX200, we further calibrated the list to focus on several well-known companies in Australia. We also identified relatively poor-performing companies to compare and contrast their approaches to the leaders' approaches. Lastly, we contacted a few well-respected private companies that, while not listed on the ASX, have superior market presence. Executives who participated in our interviews are from the following companies, in alphabetical order: Adelaide Brighton, BHP Billiton, Challenger, Echo Entertainment Group, Foster's Group, Incitec Pivot, McConnell Dowell Corporation, McDonald's Corporation, Navitas, Newcrest Mining, Orica, Origin Energy, SEEK, Seven West Media, Telstra Corporation, The Reject Shop, Toll Holdings, Treasury Wine Estates, Village Roadshow, and Westpac Banking Corporation.

Authors

Simon Mezger, partner, Melbourne

Maurice Violani, principal, Melbourne