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Roland Berger Strategy Consultants: International study shows seven strategic priorities for "outperformers" to boost growth, profit, and company value
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Munich (ots) - When the economy is in poor shape, forward-looking corporate strategies naturally have to apply selected, intelligent cost-cutting measures. However, a global study by Roland Berger Strategy Consultants found that it is also important to focus on creative growth. Why? Because only strong corporate growth goes hand in hand with sustainable, above-average profit and value growth. The study examined 1'700 companies worldwide. Of these, 441 form the top tier, the "outperformers", who increased their profit and value at above-average rates. During the period analyzed (1996-2001), this group saw sales leap by an average of 33.8 percent p.a., compared to the average of just 11.8 percent annual sales growth among the entire group of companies surveyed. Pre-tax profits for the leading group rose by 37.3 percent annually; the corresponding figure for the entire group of 1'700 companies was a mere 8.5 percent. At 23.6 percent p.a., the total shareholder return (the increase in stock price plus dividends) likewise easily outstripped the overall group average of just 17.3 percent p.a.
According to a statement made today by Roland Berger, Chairman and Global Managing Partner of Roland Berger Strategy Consultants, "Seven strategic priorities - which can be mixed and matched depending on the industry and the competitive environment - are of critical importance to above-average growth in sales, profit, and company value."
In its study, the international strategy consultancy analyzed 900 top-ranking European companies, the S&P 500, and the Nikkei 300.
This group of top-tier companies had outstanding results in other performance indicators, as well, thus further distinguishing itself from the other companies. The number of new jobs created each year increased annually by an average of 26.9 percent, for example, while other firms managed just 2.0 percent. The productivity of the top group rose by an average of 13.5 percent per year, compared to 3.3 percent among the other firms surveyed. All stakeholders profit from the significantly better performance of leading companies: customers, employees, investors, and society as a whole - through more taxes, investment, and additional jobs.
Seven strategic priorities for outperformers
"It takes rule-breaking growth strategies to create sustainable increases in a company's operating result and value. Top companies understand this," says Roland Berger. "We proved that their excellent growth in sales, profit, and company value was based on seven strategic priorities that can be fine-tuned according to the specific industry and competitive environment."
1. Innovation and Branding
Innovation is the most important growth strategy, as it keeps competitors at a distance. Companies need to master the "3S process". The innovation phase should be as short as possible (speed), gain high market share through "first mover effects", which then make it possible to achieve low unit costs and high margins through economies of scale.
Innovation leadership is based on both new products and new services. The Roland Berger analysis shows that focusing innovation projects and budgets on promising solutions is the key to coming up with the best idea in the context of global competition.
Innovation should also be secured through consistent branding. Only good ideas and strong brands create lasting competitive barriers and lead to sustained increases in earnings and value.
Nokia is a particularly successful example of top innovation performance. A strong customer focus in products and services helped the company become the market leader. Intel secured its long-term growth by driving faster innovations in the chip market. German premium automotive manufacturers succeeded in securing their leading position in the world through short innovation cycles combined with consistent branding.
2. Forcing new rules on others
"Introducing a new game" that competitors join later in order not to be crowded out of the market; this is a strategy many outperformers use effectively. Individual companies use these tactics to drive the market forward by interpreting existing strategic rules in a new way. The Internet, for example, gave rise to many innovative business models. However, successful examples can also be found in more traditional industries, such as no-frills airlines or innovative retail models like discounters or specialist retail chains.
This strategy can significantly boost growth and company value - if the "new game" can establish itself on the market and its inventor can reap and secure the first-mover advantage.
One such successful example is the VHS video standard introduced by JVC in the late 70s, which asserted itself in the market thanks to a smart licensing strategy and its user-friendly technology. Dell forced the international market for PC hardware to buy into its innovative business model: customized built-to-order PCs with very short delivery times at competitive prices. And, to cite a more recent example, Ryanair: much like its US counterpart South West Airlines, the low-cost carrier is beginning to aggressively change the European market with its cheap offers.
Globalization offers companies the opportunity to participate in the world market, which offers much faster growth than national GDPs: the sum of all global GDPs has risen some 60 percent since 1985, exports tripled, and foreign investment even increased eightfold. Players in this market face excellent prospects for above-average growth in revenues, profit, and shareholder value.
Companies that actively pursue globalization retain their customers by following them when they expand their operations to other countries, and win new customers in volume and growth markets. They achieve unit cost advantages by using the global differences between factor and locational costs, and improve their logistics positions. These companies also gain access to international know-how and are thus able to achieve innovative leads. Business formats are known to change when demand and competition move from a national level to the global stage.
Examples of companies that have successfully boosted growth through globalization are Ahold and Carrefour, the undisputed leaders in European retail, or Citigroup, the only retail bank that is successful on a global scale. These companies show how strategies for overcoming stagnating markets can be implemented with entrepreneurial spirit. Pursuing a global expansion strategy devised for long-term growth has made Vodafone the only truly global mobile operator.
4. A focused portfolio
Successful companies restructure and focus their portfolios to become global market leaders in target business segments. Non-core activities that do not offer the potential for reaching a leading position in the market are sold.
Only market leadership enables companies to achieve superior cost positions (economies of scale and scope) and realize optimum margins for investment and profit growth. From a leadership position, it is also possible to raise barriers to effectively fend off the competition. In the last decade, a number of companies in the US and Europe have shown how a cleverly focused portfolio can help overcome growth barriers and create new value.
RWE and e.on have consistently focused their portfolio on the international multi-utility business, while TUI is successfully concentrating on the tourism and logistics growth sectors.
5. Reducing vertical integration through outsourcing
Reducing vertical integration by focusing on core competencies creates, on the one hand, advantages in terms of specialization and experience, and on the other hand, superior unit cost positions and profit margins. Outsourcing - when coupled with organizational or virtual integration of all partners in the value chain - maximizes available capital and reduces unit costs. This frees up additional cashflow for innovation and growth.
"Outperformers" have recognized that the previously common practice of comprehensively integrating all stages of a company's value chain is not a path to growth. The future belongs to specialized product and service suppliers. This will fundamentally change the face of entire sectors, such as financial services providers. Roland Berger forecasts a reduction of vertical integration at banks in the next 10 years, from its current 80 percent down to 30 percent.
As an outsourcing partner in chip production for hardware manufacturers, Flextronics managed to increase its sales 100-fold within 7 years. Porsche has the least vertical integration of all automotive manufacturers, and thus achieved maximum profit.
6. Market presence and consolidation through M&As
Mergers and acquisitions ensure greater market shares, presence in new, usually global markets, and industry consolidation. This makes them major value drivers. Generally speaking, market consolidation is the basis for reducing capacity and, through better capacity utilization, optimizing costs for products and services. Those who gain leadership positions in this area achieve superior growth rates in sales, profit, and shareholder value.
Total Fina Elf's successful M&A earned it the unique standing of being the only continental European company in the Anglo-Saxon-dominated top tier of oil producers. Nestlé, too, made its way to a successful global position through M&As.
7. Networks, partnerships, and virtualization
Product and service-based networks and partnerships - with plenty of opportunities for virtual integration at a global level as a result of technological advances - enable outperformers to maximize available capital, access global expertise, and thus create additional growth resources. A global network allows all participants to benefit from a larger customer base.
In addition to creating partnerships in research and development (co-inventing) or along the value chain (advantages through better specialization), networks can also be used to bundle complementary and attractive offers. This boosts the partners' marketing and earnings power - as the Star Alliance clearly shows.
Puma offers a prime example of how to take optimum advantage of local competencies in a global, virtual network. SAP has created a unique network of services surrounding its software applications, thus safeguarding its position as market leader.
Companies set themselves apart from the global average only when they take targeted action to improve their growth position. Even in today's strained economic situation, it is advisable to rigorously pursue a dual strategy of intelligently cutting costs and focusing on creative growth. One of the key findings of the study was that merely cutting costs can boost profit and company value in the short term only. It takes rule-breaking growth strategies to generate sustainable increases in profit and value - even in times when the economy is weak.
"One rule for strategies, structures, and operations applies to all outperformers in all industries," says Roland Berger. "A company's ability to adapt must always be greater than the speed of changes in its environment. That is the basis of strategic and operational excellence and ensures the company's ability to survive the future."
Roland Berger Strategy Consultants
Roland Berger Strategy Consultants