Business Description
By Yuval Atsmon
To keep your company growing and adding value, focus on the core performance drivers. Look closely at the most spectacular examples of value creation and you will usually find they are concentrated in a single growth engine. Studying about 3,000 of the world’s largest companies, we have found that it is imperative to grow to survive.
Now, keep in mind that there’s asurvivor bias here. Companies that don’t grow are a lot more likely to fail to survive, therefore, it’s no surprise that almost all companies that survived from 2001to 2015 grew — 56% of them at least doubled over 10 years.
But a lot of this revenue growth didn’t translate to value creation, even more so for hyper-growers (many had ambitious M&A).
Of about 430 companies whose revenues rose by at least five timeswithin a decade, 210 had negative economic profit during 2011-15 in about half the cases despite having positive economic profit (the profit surplus above the company’s cost of capital) 10 years earlier, when they were much smaller. In all, of about 1,500 companies that had a return on invested capital (ROIC) close to their cost of capital during 2001-05, only 10% saw significantly higher ROIC during 2011-15.
We wanted to look deeper and understand if results would be different for individual business units (BU). We found sufficient data to analyse more than 1,200 BUs. Remarkably, the results were the same: chances of breakthrough improvement in economic profit over 10 years across the BUs was about 10%. This is not dumb luck.
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