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

1. GRAŻYNA LEŚNIAK-ŁEBKOWSKA (PH.D)VALUE CREATING GROWTH Based on Th. Doorley III and J. Donovan „Value Creating Growth”, Jossey- Bass,1999; G. Deans and F.Kroeger „STRECH !”, Wiley&Sons,2004 Ch.Zook, J. Allen „Profit from the core. Growth strategy in an era of turbulence”, Bain&Co.2001 F. Kroeger, A. Vizjak, A. Kwiatkowski, Success in niches. 9 winning strategies to survive the merger endgame, Wiley, 2006 A.Vizjak „Competing against scale. The growrh cube for scale based competition”, AT Kearney, GV Zalozba, 2008 I. Jackson, J.Nelson „Profit with principles. Seven strategies for delivering value with values”, Currency Doubleday, 2004 WARSAW SCHOOL OF ECONOMICS 2010 E-mail: lebkowska@wemba.edu.pl mobile:+48 602 237 064

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

3. CONSTRUCTING A SUSTAINABLE CYCLE OF VALUE CREATION • Value 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 G.Leśniak-Łebkowska

4. COMPETING MODELS OF EQUITY VALUATION G.Leśniak-Łebkowska

5. Examples of growth creating or destroying value + If destroying value, Growth is exactly The wrong strategy Profitable revenue growth is well rewarded by the market and the only sustainable option in the long run 0 Releasing investment (shrinking) is unsustainable over the long term Increased asset productivity eventually levels out - Cost-of-Capital - + Return Source: Braxton Analysis G.Leśniak-Łebkowska

6. 4 Sources of an enterprise value OPTIMAL MARGINS OPTIMAL USE OF RESOURCES REVENUE GROWTH 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) G.Leśniak-Łebkowska

7. Thesis :Companies with near-fanatical focus on growthspectacularly 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) G.Leśniak-Łebkowska

8. High-growth companies perform; they create value everywhere that matters From 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 A.T.KEARNEY RESEARCH EVIDENCE G.Leśniak-Łebkowska

9. TakewayGrowth is a learned competence. Any and all can improve at it. 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 G.Leśniak-Łebkowska

10. Five foundations of the capability to grow Capability to grow G.Leśniak-Łebkowska

11. Growth is a high-performance engineDownseizing may lead to corporate anorexia! G.Leśniak-Łebkowska

12. Introduction toA.T.Kearney STRETCH model for 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 G.Leśniak-Łebkowska

13. THE POSSIBILITIES OF GROWTHcont’d MYTHS: • improving efficiency through cost reduction, reengineering, restructuring, operational excellence will 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 G.Leśniak-Łebkowska

14. THE POSSIBILITIES OF GROWTHbased on A.T Kearneyresearch on 29 thousandcompaniesdatabaseencompassing 98% of world market capitalizationover the period of 10 years + 1 thousandinterviewswithCEOsduringbriefings, coverage of 24 major industries in 34 countries plus morethan 80 deepin-depthcasestudies 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 G.Leśniak-Łebkowska

15. THE A.T.KEARNEY GROWTH MATRIXBASED 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 G.Leśniak-Łebkowska

16. THE A.T.KEARNEY GROWTH MATRIX G.Leśniak-Łebkowska

17. Research 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 G.Leśniak-Łebkowska

18. FOUNDATIONS OF VALUE • THE RISE IN SHARE PRICE STRONGLY LINKED TO LONG-TERM GROWTH AND 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. G.Leśniak-Łebkowska

19. THE MERGER ENDGAMES S-CURVEbased on researchsample of 29 thousandcompaniesCR3=market share of threelargestcompanies of the total marketHHi = Hirschman-HerfindahlIndex: the sum of the squared market shares of allcompaniesisgreaterthan 90%, the axislogaritmicallyplotted. 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. G.Leśniak-Łebkowska

20. 4 discretestages on the way to inevitable global consolidation • OPENING (little or no market concentration, first consolidations. Newly deregulated, start-up, spin-off subsidaries). Examples: railway, telecom, banks, insurance • 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 • 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 • 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 G.Leśniak-Łebkowska

21. BARRIERS TO GROWTHin the opinions of 953 senior leadersinvestigated by A.T Kearneyresearchersduring 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%) G.Leśniak-Łebkowska

22. THE 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. G.Leśniak-Łebkowska

23. CONT’D • 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 G.Leśniak-Łebkowska

24. THE STRETCH GROWTH MODEL STRETCH STRATEGY ORGANIZATION OPERATIONS REMOVE BOTTLENECKS AND BARRIERS CREATE HIGH PERFORMING COMPANIES EXPLOIT STRATEGIC LEVERS ACHIEVE EXTRAORDINARY GROWTH G.Leśniak-Łebkowska

25. PROFIT FROM THE COREBased on the book of Chris Zookwith 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 G.Leśniak-Łebkowska

26. PROFIT 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 G.Leśniak-Łebkowska

27. THREE MAIN ISSUES MANAGEMENT MUST FACE 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 G.Leśniak-Łebkowska

28. TO IDENTIFY YOUR CORE BUSINESS 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) G.Leśniak-Łebkowska

29. BUSINESS 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? G.Leśniak-Łebkowska

30. THE POWER ON FOCUSING ON THE CORE • 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 G.Leśniak-Łebkowska

31. KEY TRENDSIN BLURRING OF BOUNDARIES AND CREATION OF LARGER ARENAS OF RELEVANCE STRATEGICALLY AROUND 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 G.Leśniak-Łebkowska

32. 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 G.Leśniak-Łebkowska

33. MAJOR 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? G.Leśniak-Łebkowska

34. Underestimation of the growth potential from the 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 G.Leśniak-Łebkowska

35. TYPICAL UNDERESTIMATION OF THE CORE 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 G.Leśniak-Łebkowska

36. HOW COMPANIES ACQUIRE MARKET POWER AND INFLUENCE G.Leśniak-Łebkowska

37. THE ALCHEMY OF GROWTH: staircases and horizonsM.Baghai,S.Coley, D.White/McKinsey Co. Manage for profitability Replicate proven business model Test business model Seed growth options Create viable option Horizon 3 Build emerging business Horizon 2 Extend and defend Core businesses Horizon 1 G.Leśniak-Łebkowska

38. Success in niches. 9 winning strategies to survive the merger endgame • Research base: 32 thousand global value building growth companies publickly quoted + 660 thousand worldwide companies non quoted • Period: 1990-2005 G.Leśniak-Łebkowska

39. Consolidationschemetheses: • 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 G.Leśniak-Łebkowska

40. Global market structureat the endgame • Only 60 000 potential leaders of the global market: 50% quoted companies + 50% nichers • 600 000 „victims” G.Leśniak-Łebkowska

41. 9 winning niches: 270 playerssustaining VBG in allstages • 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) G.Leśniak-Łebkowska

42. Right time for specificniche • 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 G.Leśniak-Łebkowska

43. Thesescont’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 G.Leśniak-Łebkowska

44. 3 componentsof a prosperousnichedifferentiatingit from a market leader • Market segment • Value creation chain (base costs+segment costs) • Complexity: diversity, dynamics, innovativeness G.Leśniak-Łebkowska

45. Usefulideas • 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 G.Leśniak-Łebkowska