Don’t Be Timid, Invest in Growth Now

Firms and their senior executives are in danger of spending too long in ‘wait and see’ mode at the moment. Economic data is at best contradictory and, at worst, causes complete decision paralysis. For example, shares fell sharply around the world yesterday morning after the Japanese government announced a smaller-than-expected $6.9 billion stimulus package, but ended in healthier shape after U.S. consumer sentiment was shown to be better than economists expected for August.

As we keep saying, including in this post on the need for strategists to build up their internal influence, one of the worst things firms can do at the moment is shrink away from investing in long-term growth bets. And we’re not saying this because it gives us a catchy counterintuitive headline but because there’s a large and compelling body of data that proves it’s the right thing to do, right now.

Intelligent Decision-Making

We set out to find large companies from across the world that managed to hit their growth targets and keep costs in check across multiple market cycles from 1990 to 2009. After stripping out financial services and utilities firms because of their fundamentally different revenue and cost structures, we isolated all companies that grew sales and margins for more than 50% of the 19 year period and did not experience a stall in sales growth between either 1990 and 2000 or 2001 and 2007.

This left us with our group of intelligent growth (IG) companies: 46 from the U.S. and 47 from Europe, the Middle East, and Africa. What’s interesting about the group is that, although we didn’t use shareholder return as a selection criterion, IG firms outperformed peer companies on this measure by an average of over 5%, including peers that had strong track records of either solely pursuing growth or solely containing costs.

The first thing to note about IG firms is that they don’t just react to a boom-and-bust business cycle but revise their strategy and their decision-making through four distinct phases (see chart 1).

Chart 1: The economy comes in four flavors, not two

IG firms are much better at identifying and responding to the ‘economic turning points’ between each phase than their peers which, as the data show, ensures they outperform throughout the economic cycle (see chart 2). And this teaches us that, right now, firms should be investing in growth to prepare for recovery.

Chart 2: Total shareholder return premium across the economic cycle

Five Lessons to Kick-Start Growth

Analysis of the IG companies raises five recommendations for this stage of the economic cycle that all managers would do well to note.

1. Be on the lookout for the next phase of the cycle: IG firms exhibit “cycle discipline.” This is the ability to react quickly and appropriately to economic cycle transition. For example, increasing balance sheet liquidity as the cycle peaks or making growth bets as the economy enters a growth period.
2. Use analytic resources to stay on top of capital deployment decisions: IG firms keep track of capital projects throughout the investment lifecycle. They are particularly good at killing underperforming assets quickly. CFO Executive Board clients should use this research to see how finance teams operate successful capital investment processes.
3. Waiting for certain growth is riskier than investing now: Early investments in the ‘trough’ phase of the economic cycle set IG firms up for sustainable and superior shareholder returns. Your firm’s treasury function should take an integrated approach to capital planning, as its position allows it to monitor capital supply intelligence (banking industry shifts, future funding availability) and capital demand requirements. Ensure that the CEO and board are fully appraised of shifting trends.
4. Shift resources to activities tied directly to sales growth: IG companies fine-tune their assumptions about the cost implications of changes in customer behavior, and earmark new investments only for areas with a clear connection to sales growth.
5. Forecast through your customers’ eyes: Balance macro and micro leading and lagging indicators when evaluating trends and triggers. Interact with your customers and “customers’ customer” to understand which indicators they track for their businesses. Corporate Strategy Board clients can use this comprehensive resource on business intelligence to help with gathering good information from customers.

Please contact me to discuss any of this further or leave a comment below.