The Business Times

Clearing the Hurdle to Growth

In today's turbulent business environment, CEOs are under constant pressure to find the next wave of growth for their companies.

By Edmund Lin and Chee-yuen Ng

Published on April 04, 2003
min read


In today's turbulent business environment, CEOs are under constant pressure to find the next wave of growth for their companies. Unfortunately, the odds are stacked against them: over 80 per cent of CEOs will forecast growth targets that they will never attain. Bain & Company has conducted proprietary research of over 8,000 public companies over the last seven years to identify companies that achieved profitable, sustainable growth. Over this period, only 11 per cent of these companies have grown revenue as well as earnings at more than 5 per cent annually, while also generating returns for equity holders above their cost of equity: we call these companies Sustained Value Creators (SVCs). In Singapore, the success rate is equally low—only five of 31 large public companies evaluated, using these same performance standards, can be considered SVCs. Importantly, the common denominator of the SVCs is a focus on a single core business. More than 80 per cent of SVCs in Asia are singularly focused on one core business. Properly defining your core business is critical—misdefining the core exposes a company to an array of risks—including overlooking key competitors, overextending resources and failing to differentiate its core. Still, the question remains of how additional growth can be achieved over and above what the core business will sustain. This growth can come from expanding into adjacencies to the core business. The dimensions for such growth can be new geographies, new value chain steps, new businesses, new channels, new products and new customer segments. However, the linkages from the adjacencies to the core must be considered carefully, as the probability of success drops the further a company moves from the core. On average only one in four adjacency expansion moves is successful. A useful framework for evaluating adjacency opportunities is the application of three specific filters: Degree of relatedness to the core business Industry attractiveness Potential to achieve dominant market leadership Degree of relatedness to the core business: As part of Bain's study of sustained value creators, we examined 181 companies that had made adjacent expansion moves. The key insight from this analysis was that companies who made adjacent moves into product, geography or customer areas had a success rate at least twice as high as those who expanded through channel, value chain or new business moves. The reasons for this are not surprising—strong management teams spent years learning and building on experiences in their core businesses to develop highly competitive cost structures, products, customer relationships and understanding of their competitors. These collective experiences become company 'assets' which can be leveraged in acquiring new customers, entering new geographies or launching new products. Each of these dimensions is considered a one-step adjacency from the core business. When companies pursue two-step adjacencies, business failure become 35 per cent more likely. Great Eastern Holdings is an example of a sustained value creator that has focused on one-step geographic expansion as their main avenue of growth whilst remaining highly focused on the core life assurance business. They have systematically expanded their insurance business into Malaysia, Indonesia and China over a period of 10 years. This core focus has seen Great Eastern's stock price overtake the ST Index as it shows consistent earnings even as other companies flounder. Industry attractiveness: Next, companies must focus on understanding underlying industry attractiveness. For example, it is quite common for Singapore companies and MNCs to seek geographical expansion into China for their core product line without sufficient due diligence on the profit pool. The beer business is a case in point. Several leading international beer brewers have aggressively entered the China brewery market in the last decade seeking to tap a large and growing consumer market. Many of these foreign brewers have either exited the China market or suffered significant losses. A map of the China beer industry profit pool would have revealed that while volumes were indeed high, the price points were low and resilient local competitors, with considerable excess capacity, pressured profits. These foreign brand breweries entered the market at an early stage when consumers were not discerning enough to pay premium prices for high quality foreign beer brands. Potential to achieve dominant market leadership: Finally, companies need to appropriately define and then measure their market share relative to their core competitors. Relative market share vs. competitors is a core driver of any company's economics. In industry after industry, market leaders earn consistently higher returns due to economies of scale and the ability to out-invest competitors. In many turbulent industries the appropriate definition of market share is becoming increasingly complex, and more fluid, given the impact of consolidation and globalisation. For example, the credit insurance industry was once dominated by national export credit agencies with no significant cross-border competitors. As such, domestic market share in one's home country was the appropriate market share metric and the key driver of a credit insurer's profitability. Following EU deregulation, a handful of leading European credit insurers privatised and successfully tapped the capital markets to fund an unprecedented series of acquisitions and international expansion. Today, the top four players hold 80 per cent market share of the global credit insurance market and these global giants leverage the economies of scale from IT investments, global credit risk management databases and development of truly cross-border product offerings for large scale multinational customers. In this fast-consolidating industry sector, returns are now driven by global, not domestic, market share. The limited size of the domestic market leads many Singapore companies to seek growth overseas. Coupled with increased competition due to FTA agreements and deregulation of key sectors, CEOs are under tremendous pressure to deliver on growth targets through potentially risky adjacency moves. By investing time and resources in understanding which of their products, customer segments and technologies form the core business, CEOs can define their companies' true basis of competitive advantage. Having properly defined the core business, a firm can further identify true sources of differentiation that will continue to create market power, as well as explore new business opportunities related to the core. It is this approach that will most likely enable a company to become a sustained value creator. Edmund Lin is a vice president and Chee-Yuen Ng is a manager in Bain & Company's Singapore office. Bain Book Profit from the Core Learn more about how companies can return to growth in turbulent times.

In today's turbulent business environment, CEOs are under constant pressure to find the next wave of growth for their companies. Unfortunately, the odds are stacked against them: over 80 per cent of CEOs will forecast growth targets that they will never attain. Bain & Company has conducted proprietary research of over 8,000 public companies over the last seven years to identify companies that achieved profitable, sustainable growth. Over this period, only 11 per cent of these companies have grown revenue as well as earnings at more than 5 per cent annually, while also generating returns for equity holders above their cost of equity: we call these companies Sustained Value Creators (SVCs).

In Singapore, the success rate is equally low—only five of 31 large public companies evaluated, using these same performance standards, can be considered SVCs. Importantly, the common denominator of the SVCs is a focus on a single core business. More than 80 per cent of SVCs in Asia are singularly focused on one core business. Properly defining your core business is critical—misdefining the core exposes a company to an array of risks—including overlooking key competitors, overextending resources and failing to differentiate its core.

Still, the question remains of how additional growth can be achieved over and above what the core business will sustain. This growth can come from expanding into adjacencies to the core business. The dimensions for such growth can be new geographies, new value chain steps, new businesses, new channels, new products and new customer segments.

However, the linkages from the adjacencies to the core must be considered carefully, as the probability of success drops the further a company moves from the core. On average only one in four adjacency expansion moves is successful. A useful framework for evaluating adjacency opportunities is the application of three specific filters:

Degree of relatedness to the core business
Industry attractiveness
Potential to achieve dominant market leadership

Degree of relatedness to the core business: As part of Bain's study of sustained value creators, we examined 181 companies that had made adjacent expansion moves. The key insight from this analysis was that companies who made adjacent moves into product, geography or customer areas had a success rate at least twice as high as those who expanded through channel, value chain or new business moves.

The reasons for this are not surprising—strong management teams spent years learning and building on experiences in their core businesses to develop highly competitive cost structures, products, customer relationships and understanding of their competitors. These collective experiences become company 'assets' which can be leveraged in acquiring new customers, entering new geographies or launching new products.

Each of these dimensions is considered a one-step adjacency from the core business. When companies pursue two-step adjacencies, business failure become 35 per cent more likely. Great Eastern Holdings is an example of a sustained value creator that has focused on one-step geographic expansion as their main avenue of growth whilst remaining highly focused on the core life assurance business. They have systematically expanded their insurance business into Malaysia, Indonesia and China over a period of 10 years. This core focus has seen Great Eastern's stock price overtake the ST Index as it shows consistent earnings even as other companies flounder.

Industry attractiveness: Next, companies must focus on understanding underlying industry attractiveness. For example, it is quite common for Singapore companies and MNCs to seek geographical expansion into China for their core product line without sufficient due diligence on the profit pool. The beer business is a case in point. Several leading international beer brewers have aggressively entered the China brewery market in the last decade seeking to tap a large and growing consumer market. Many of these foreign brewers have either exited the China market or suffered significant losses.

A map of the China beer industry profit pool would have revealed that while volumes were indeed high, the price points were low and resilient local competitors, with considerable excess capacity, pressured profits. These foreign brand breweries entered the market at an early stage when consumers were not discerning enough to pay premium prices for high quality foreign beer brands.

Potential to achieve dominant market leadership:
Finally, companies need to appropriately define and then measure their market share relative to their core competitors. Relative market share vs. competitors is a core driver of any company's economics. In industry after industry, market leaders earn consistently higher returns due to economies of scale and the ability to out-invest competitors.

In many turbulent industries the appropriate definition of market share is becoming increasingly complex, and more fluid, given the impact of consolidation and globalisation. For example, the credit insurance industry was once dominated by national export credit agencies with no significant cross-border competitors. As such, domestic market share in one's home country was the appropriate market share metric and the key driver of a credit insurer's profitability.

Following EU deregulation, a handful of leading European credit insurers privatised and successfully tapped the capital markets to fund an unprecedented series of acquisitions and international expansion. Today, the top four players hold 80 per cent market share of the global credit insurance market and these global giants leverage the economies of scale from IT investments, global credit risk management databases and development of truly cross-border product offerings for large scale multinational customers. In this fast-consolidating industry sector, returns are now driven by global, not domestic, market share.

The limited size of the domestic market leads many Singapore companies to seek growth overseas. Coupled with increased competition due to FTA agreements and deregulation of key sectors, CEOs are under tremendous pressure to deliver on growth targets through potentially risky adjacency moves. By investing time and resources in understanding which of their products, customer segments and technologies form the core business, CEOs can define their companies' true basis of competitive advantage.

Having properly defined the core business, a firm can further identify true sources of differentiation that will continue to create market power, as well as explore new business opportunities related to the core. It is this approach that will most likely enable a company to become a sustained value creator.

Edmund Lin is a vice president and Chee-Yuen Ng is a manager in Bain & Company's Singapore office.