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Copyright 1998 

Put Value Creation First
(If You Want to Grow Your Way to Greatness)

 Ken Favaro


"No company ever downsized its way to greatness." So goes the corporate mantra that emerged from the fatigue and disillusionment created by the reengineering and restructuring of the early Nineties. But no company ever grew its way to greatness either, without first learning how to make value creation 1 second nature to the entire organization. It has been shown time and again that putting growth first can destroy wealth at prodigious rates and, ironically, reduce a company's longer-term growth prospects. If you want to grow your way to greatness, put value creation first.

 Companies That Put Value Creation First

 Coca-Cola and Lloyds Bank are two examples from a handful of companies 2 that have made value creation drive their growth for over a decade. Enough time has now passed to observe the results and lessons.

 Coca-Cola was perceived to be a good, if somewhat struggling, company facing an increasingly mature home market when Roberto Goizueta became CEO in 1980. Although it had achieved 14% annual revenue growth over the previous ten years, its profitability had eroded and its shares had severely underperformed its peers'. So at a worldwide management conference in April 1981, Goizueta decided to focus his entire organization on putting value creation first. This transformed the company. Since 1980 it has nearly doubled its market share to almost 50% and nearly tripled its return on equity to just under 60% in 1997. Today Coca-Cola calls its profitable growth opportunities "infinite," and Goizueta's successor, Doug Ivester, is still putting value creation first.

 Lloyds Bank (now Lloyds TSB) was the smallest of the big four UK clearing banks when Brian Pitman became Chief Executive in 1983. At two critical Board meetings, he too decided to focus the entire company on putting value creation first 3. This led Lloyds down a very different path from its peers. Since 1983 it has nearly tripled its return on equity to well over 40% in 1997 while becoming the largest and fastest growing bank in the UK, if not the world. Today Lloyds' confidence that it can continue to deliver profitable growth has led it to declare a goal of doubling shareholder value every three years. Only a handful of companies worldwide - including Coca-Cola - have ever achieved this goal over a sustained period. Even fewer have had the courage to adopt it as their publicly stated ambition.

 Coca-Cola and Lloyds are the dominant, most profitable and fastest growing players in their respective markets because they put value creation first, not growth or size. There are two main reasons for this.

 Value Creation Tells You Where and How to Grow

 Understanding where, how and why value is created within your company and your markets is the best, most objective way to identify which of your activities and assets are distinctive enough to provide a platform for sustainable and profitable growth.

 By understanding value creation within their mix of businesses and within the entire beverage system, Coca-Cola's leaders discovered in the early 1980s that they were missing a major growth opportunity in their "mature" core business. This led them to significantly increase and refocus the company's marketing investment; to rapidly expand into new national markets; to acquire, consolidate and spin off bottling companies in order to create new, more powerful agents in their supply chain; and to reduce their participation in non-beverage businesses. In effect, they built a business model so distinctive that today they have an unassailable advantage in delivering superior profit growth.

 Similarly, Lloyds' management began to understand better than its competitors where, how and why value is created in the financial services market. They subsequently developed a better capability than their competitors to identify and selectively participate in the most profitable segments. As a result, Lloyds was the first big UK bank to organize around customer segments, to invest heavily in retail insurance, investment and mortgage services, to selectively participate in corporate banking, to effectively withdraw from investment banking and, as Pitman says, to stop "planting flags around the world."

 Coca-Cola, Lloyds and a handful of other companies have an advantage in deciding where and how to grow because they focus more intently than the competition on understanding the sources and drivers of value creation within their businesses and the broad markets in which they compete. This effectively gives them a better roadmap than their competitors for directing their capital and talent to the most profitable and sustainable growth opportunities.

 Value Creation Gives You the Capital and Talent to Grow

 Putting value creation first gives companies two advantages over their competitors in driving for profitable and sustainable growth: the first is capital and the second is talent.

 Successful value creators never suffer from a capital shortage. They can either generate sufficient capital internally to meet their investment needs, or attract the capital they need from the markets, which never stop looking for profitable investment opportunities.

 More importantly, though, companies that put value creation first will create over time a cadre of managers who have higher standards and better capabilities than the competition. In a world where nearly everyone faces abundant choices, the challenge for all businesses is to develop and sustain a uniquely attractive proposition for both customers and employees. But the hardest challenge is to do this in a way that also creates value. Holding your managers to this standard means continually asking, "What exactly do we do that's different from the competition, and how will this enable us to create value?" By instilling this discipline, you can make your people better managers and create an environment that attracts only people who adhere to the highest standards for business performance and personal achievement. In time this will give you more managerial talent than your competitors, enabling you to achieve higher levels of profitable and sustainable growth.

 Coca-Cola, General Electric and the Walt Disney Company have enormous bench strength for staffing their growth opportunities with management talent. It is no coincidence that all three put value creation first, and are not only the most profitable players in their respective markets but also the fastest growing.

 Value Creation Increases Your Capacity to Grow

 To consistently put value creation first requires leadership skills, discipline and perseverance. Our experience suggests the following: 

  • Be patient when it comes to growth, and impatient when it comes to creating value. Do not accept the criticism of "short-termism" -- turn it around: "the best way we can build our long-term growth potential is by putting value creation first." 
  • Be better than your competitors at understanding where, how and why value is created and destroyed within your markets and your company. This means by business unit, by product, by customer, by channel, by market, by technology, or by whatever "cut" will best reveal the truly distinctive capabilities and assets you have to drive profitable and sustainable growth. 
  • Share information widely within your management teams to build a shared sense of where you are good, bad and indifferent at creating value for customers and shareholders.
  • Promote, reward and celebrate managers who see growth as the outcome of a focus on value creation, and who consistently beat their competitors in creating value. 
  • Demand a higher standard from managers who put forward growth strategies based on arguments for "patient money," cross-subsidization, "critical mass," economies of scale or market leadership. These are often substitutes for thinking harder about how to be profitably different from the competition. Remember: 
    • It is human nature to underestimate the size of the (investment) hole and overestimate the size of the (profit) treasure. 
    • Low-return businesses can only sustain high growth levels by building distinctive capabilities and assets that enable them to deliver high returns, sooner or later. 
    • Cross-subsidization of products and services rarely pays. 
    • Economies of scale, even in high-volume industries, are more likely the result of success than its precursor. 
    • Market leadership means having the highest share of economic profit, not necessarily the highest share of volume, customers or capacity.
  • Make clear to the organization that capital is plentiful but expensive, rather than scarce and free. Talent, on the other hand, is the scarcest resource of all: concentrate and develop it where growth is most likely to create value.
  • Talk about value creation as much as growth when exhorting the troops. If you talk about being "world class," talk about it in terms of value creation -- because if "world class" means anything, it means world class at creating value.
If you put value creation first in the right way, your managers will know where and how to grow; they will deploy capital better than your competitors; and they will develop more talent than your competition. This will give you an enormous advantage in building your company's ability to achieve profitable and long-lasting growth.

 Ken Favaro 


  1. Creating value means earning a return on capital that exceeds the cost of capital over time; or alternatively, it means earning a positive economic profit where revenue less expenses and a capital charge is greater than zero. At the operating level, value is created by selling a product or service to a customer for a price that more than covers all of your costs, including the cost of capital, to support that customer relationship. 
  2. For more on companies that put value creation first, see "A Passion for Value," Marakon Commentary, Volume IV, Issue 3. 
  3. For example, Lloyds was the first among its banking peers to adopt explicit standards for return on equity and economic profit at both the corporate and operating levels. For more on economic profit, see "Beyond Performance Measurement: The Use and Misuse of Economic Profit," Marakon Commentary, August 1994.